LONDON Sep 1, 2020 (Thomson StreetEvents) — Edited Transcript of Beazley PLC earnings conference call or presentation Thursday, July 23, 2020 at 10:00:00am GMT

Ladies and gentlemen, thank you for joining us for the Beazley Interim Results Call. My name is Chat, and I’ll be the coordinator for this conference. (Operator Instructions) I’d now like to hand over to Andrew Horton, EO, to begin the call. Please go ahead, Andrew.

Thank you. Good morning, everyone, and welcome to our half year results presentation. If I move on to — go through the disclaimer and move on to the third slide in the presentation, it’s going to be the usual Beazley half year presentation in a slightly unusual format as Sally and I are sitting here in the office for the first time since March 17.

We have a special guest star, who’s Richard Montminy, who’s our Head of Property, who’s based in New York. So Richard is joining us pretty early in the morning. I’m going to give you an overview and business update. I’ll then hand over the financials to Sally, who’ll go through the usual performance, investments, reserves and our capital position. Then we’re going to go into property in a bit more depth with Richard, and then come back for me to the outlook and then over to questions.

So if I go into the overview, I’ve got to say it’s probably the most unusual half year that I’ve been involved in at Beazley over the past 17 years because there’s so much going on. Obviously, we have working remotely from about March 17 when everybody within the company started working remotely. And fortunately, we’ve been working on remote working for a number of years, so technology and people seem to be in good shape. Talk about that a bit more in a second.

We’re in a hardening market and that’s been talked about quite a lot, but we have this unusual thing of a recession. So we’re in a hardening market into a recession, which means we’ve been taking some evasive action in some more recession-prone lines of business while trying to grow in the areas where we are seeing good rate increase, having seen rate decreases across a number of lines for a number of years.

We’ve also seen a bit of an investment rollercoaster and we’ll see our investment return is $83 million, but that was actually negative territory at Q1.

So growth premiums written are up 12% and that’s with rate increases of 11%. We’re seeing some good rate increases in our, what I would call, our more traditional lines, if Richard will accept that, in property and marine, but also good rate increases in D&O, an area we want to grow.

We’ve had a number of management discussions and Board discussions about gross premiums are only up 12% when we see rate on renewals up 11%. And therefore, why isn’t the growth more than that? And I think that’s linked into a couple of lines of business we withdrew from last year in marine, U.K. marine and the trucking business, and also the fact we’re taking some evasive action on the more recession-prone lines of business.

The loss is $13.8 million. And obviously, we’re bearing $170 million of COVID-19 claims, which we announced in April, and that number we’re still comfortable with. That’s delivered a combined ratio of 107%. Sally will go through the prior year reserve releases, which are at a much healthier level of $58.6 million compared with the $3.4 million last year. She’ll also take us through the — what’s happened on the investments.

And not surprisingly, we’re not declaring interim dividend because we mentioned that when we did the capital raise, raising the $292.6 million net of capital for growth in 2020, 2021 and beyond.

So a brief business update. Growth across 6 of our 7 divisions. The only division that didn’t grow was the reinsurance division. We didn’t see the rate increases across the reinsurance division over the past 2 years and the early part of this year to warrant growth. Although we have seen the reinsurance division’s rate increase start to pick up with the Florida renewals on the 1st of June and then onto renewals on the 1st of July.

The market facilities business, which we’ve talked about before, we’ve split out from our specialty lines division and that’s what’s created the seventh division, we only retain 10% of that. It’s mainly a third-party fee-generating business, which is relatively small at this point in time, so it’s not material to the overall group.

I mentioned we raised the capital and that was to fund planned growth opportunities both this year, next year and beyond, and Sally will go through our capital surplus in a bit more depth in a minute. And from a people change point of view, it’s quite nice just to announce 1 people change. We’ve had quite a few people changes over the past few years. And we’ve got Bethany Greenwood who joined us last autumn, taking over from Mike Donovan as Head of Cyber and Executive Risk. Great that she’s taken over. It’s also good that Mike is formally retiring at the end of the year. So there’s a reasonable amount of handover, and he’s going to be still involved in the company thereafter.

COVID-19, of course, has dominated a lot of things over the last quarter. As I mentioned, we’ve been successfully working with everyone from home. We are slowly opening the offices. We have opened in Singapore, Munich, Paris, London and Dublin, although we have very few people in the London office. You can normally fit 700 in. We’re operating at potentially 100 and I think about 20 is the maximum we’ve had in. So we are not forcing anybody back into the office if they don’t feel comfortable. We’ve opened the offices because some people are finding it difficult working from home.

We’ve managed to do new things, which has been great, over the last quarter. So we’ve recruited a new product recall team based out of the U.S., which is great, and also launching and growing our virtual care business. Not surprisingly, virtual care in this environment has taken off. There are more medical appointments taking place remotely, and we launched the product in the U.S. in 2017. We’ve launched in Europe and Canada over the past year or 2, and that product is really growing.

I mentioned the $170 million we announced in April is still a good number for us. So the event cancellation and other parts of the PAC division being $70 million; property, marine and reinsurance being $100 million. And we’re starting to determine work on what our liability plans will be. And Sally will go through that in a bit more depth in a minute. It’s very difficult to determine what the liability claims are because we’ve had very few so far. And it’s also going to be very difficult to determine what’s a COVID-19 claim and what is a COVID-19 recession caused claim.

And as I mentioned, we’ve been taking underwriting actions to try to minimize the potential of the recession. Luckily, the last recession is within living memory of Adrian, Sally and I. And therefore, we looked at those lines which were recession-exposed and have been working on some of those over the past couple of years because we believe the recession was on the horizon. And of course, COVID-19 has accelerated that. We’re ensuring we are trying to minimize and mitigate the impact of the recession on our book of business.

Right. I will now hand over to Sally, who will take you through the financials.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [3]

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Thank you, Andrew. Good morning, everyone. My name is Sally Lake, and I’m the Beazley Finance Director. As Andrew mentioned, I’m going to be taking you through investments, reserving with a particular focus on our liability business, and then finally, capital, before I hand over to Richard.

Just before we go into those, just a quick look at performance. Andrew has mentioned most of these areas. The one I wanted to mention in addition is to explain the difference between the very, very good gross premium written growth. And that’s actually a bit lower net, and that’s for 2 main reasons. Firstly, as we told the market earlier this year, we bought some additional reinsurance for specialty lines in CyEx and we — that also impacts this relationship between gross and net there.

Additionally to that, we also are paying reinstatement premiums for the clash reinsurance that we’re using to cover some of our event cancellation claims within the PAC division, and that also affects the difference. So they are the 2 main differences there. So I just wanted to point out those 2.

If I then move on to investments, and I think the first half of 2020 is definitely a game of 2 halves. It’s been very volatile and quite exciting at times. Now the overall number of $83 million does not tell the story of what Andrew, me and our CIO, Stuart Simpson, has lived through so far this year. We ended Q1 after a couple of really good months. March, as everybody knows, was a very challenging month, and we ended in a loss position for the first 3 months.

And then what happened? Well, in April, given what was happening in — with government intervention throughout the world, investment markets started to make a turn. And so we cautiously started adding some risk to our portfolio. And within doing that, we definitely remain cognizant that there was still a lot of risk of a second downturn. But despite that, we still were happy to add risk because we were seeing really good returns in some areas. And that led to a second quarter return of just under $140 million, adding up to the $83 million.

So where does that leave us? So if you look at our usual donuts, you can see that at the end of June, our portfolio was still in a relatively conservative place compared to the normal place that we are because we remain cautious about the possibility of a second economic downturn. So we have put some more risk back on, but we’re definitely not back to where we were in recent memory.

The other thing to note within our investments is that, given what’s happened with interest rates and throughout the world so far this year, our running yield on our core portfolio. And so the fixed income part is definitely yielding a lot less than it was at the beginning of the year, and the running yield is now just below 1%. So we’re not expecting as much income from that portfolio given that the yield is lower.

So moving on to claims releases, and we’re definitely seeing a return to a more normal release pattern in the first quarter. So you can see that we’ve released just under $60 million with specialty lines, cyber and executive risk and reinsurance contributing most significantly. Reinsurance, it’s worthy of note, they’ve definitely seen some positive movements within their past catastrophe estimates, which they’ve been able to reduce during the last 6 months. Property and PAC saw small strengthenings, but generally speaking, a total that we’re very happy with. So that’s what’s happened in the first half of the year. What do we think about the outlook going forward?

So on to one of my favorite graphs, and just to go back and remind everyone what we’re doing here — I’ll keep going. Just to remind everyone what this graph is aiming to do. So at Beazley, we have a consistent and prudent reserving strategy where we start by holding more claims than we expect to use. And then over time, as those claims crystallize, we start to release our claims margin as it appears.

Now to ensure that we are consistent, we compare this number to a bottom-up actuarial estimate to ensure that we’re having same levels of prudence over time. And when we do that comparison, as long as the difference between those 2 numbers is within the 5% to 10% corridor that we show here, then we’re happy. And as you can see, we’re pleased to see that a continuing positive picture remains here with the surplus at 7%.

Now it’s worth noting that over the last couple of years, we’ve been choosing to open specialty lines and cyber and executive risk higher, and that’s definitely paying off here. And one of the reasons we did that was that we were very aware of the risk of a recession going forward. So we’ve — that also places us in a good place for what’s currently happening.

Now I’ve got a couple of extra slides just to add a bit more context on the liability claims. So we thought it would be interesting to give a bit of context to how we think about reserving in our liability book, given the current situation that’s going on. And so as Andrew mentioned, Adrian, myself and Andrew, lived through the last recession. I was doing the reserving back then as well, so we not only lived through it, we were definitely part of the situation. So I think it’s worth looking at that. It’s not the same situation we were in at the moment, but I think that looking at what happened there and how we approached things might be helpful to give context to what’s happening at the moment.

And this graph is showing how the claims that we started with moved over time in the years that were troubled by the recession. And if I take 2008, we opened with a consistent strategy, as we’ve just spoken about, compared it to the actuarial, and we’re very happy with that number.

Now as I say, we hold a margin within that number. And then as those claims crystallize, we release any margin that’s available. Now as you can see, over time, we haven’t released a great deal of margin from 2008 because as those claims crystallized, they were actually higher than we expected them to be because during 2008, we weren’t fully aware of what the outcomes were going to be of the recession that followed it.

However, it’s worth noting that even though less reserve releases came and we weren’t able to take those numbers down significantly in 2008, more so in later years, we also did not need to strengthen our opening claims position, which I think is worthy to note. And that shows the benefit of having a reserving strategy like ours, where you start with more money than you expect to need and then wait to see how those claims emerge before you start taking any profit out of those years.

Upwards, forward. So the other thing that we wanted to mention is that in addition to continuing to reserve like that, we’ve also been buying some reinsurance for a while now that’s also relevant to this discussion. Now we’re very aware of systemic risks that businesses that we write have. And so in order to help protect against that, we’ve been doing two things. The first thing is, as Andrew mentioned, we’ve been actively amending how we underwrite our business in these areas because to remind everyone, all our business is written on a claims made form, and so any claims that come in the future will be based on underwriting that we’re doing now. So we have a great deal of control as to how much risk we take on going forward as we walk into a recession, and that’s a really important point.

In addition to that as well as reserving prudently, we also have some reinsurance that we’ve been buying since 2014. And what this reinsurance does is where our opening claims number needs to be increased because of what we’re seeing as claims come through, we actually have protection that kicks in soon after that number increases. And for 2020, that number is estimated to be around $10 million. So not a significant increase in order for that reinsurance to start reacting. After that point, we have about $140 million of cover based on — depending on how our premiums end up, of which 20% we take — we keep that risk and 80% is for our reinsurance partners.

So in summary, we’ve got a margin that we always hold, we’ve started re-underwriting where we think we need to given the situation, and then we also have this reinsurance in place should we need it as these claims emerge. And then finally, before I hand over to Richard, on to capital.

So as we’ve already mentioned to the market, we’ve done a number of capital actions this year. Firstly, we raised just under $300 million of equity back in May in order to support the growth that we’re seeing. And we also extended our banking facility from $225 million to $450 million, and we chose to post half of that at Lloyd’s to help our capital position.

So what’s happened since we did both of those things? So we’ve definitely continued to see the market moving, as Andrew has already mentioned, and we, therefore, feel more positive about our growth opportunities for the rest of the year and, very specifically, into 2021. And so as Adrian is spending time looking at the business plan, he’s definitely seeing more opportunity for growth than he was earlier within this — within the year.

What does that do to our capital? So because we talk about our capital number at the end of this year that is fully based around what we expect to grow next year. So when we’re looking at these numbers and seeing more availability of additional growth, the capital requirements are increasing. And that is true for both our Lloyd’s capital requirement and our U.S. admitted capital requirement as well. So both those numbers have increased since we’ve done our capital action, which is the reason that we did this. So we’re very happy that we’re able to see opportunities in order to deploy that capital.

The other thing that’s worth noting is within our Solvency II adjustments, we have started making allowances for liability claims on the back of COVID and recession because we think that’s a prudent thing to do. And so we have also made adjustments for that as well. So those 2 things together, along with the capital actions we’ve taken, lead us to a position of a surplus of 22% compared to our Lloyd’s economic capital requirement, which is right in the middle of our 15% to 25% target range. So we’re in a really good position to be able to capitalize on this market, and so we’re feeling really good about the opportunities ahead of us.

On that note, I will pause and pass over to Richard to tell you more about property.

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Richard Montminy, Beazley plc – Head of Property Division [4]

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Thank you, Sally. Good morning, everyone. Hopefully, all is — all are well. My name is Richard Montminy, and I lead the property business across Beazley. Being that I’ve been at Beazley a fairly quick 14 months. I thought it might be helpful to provide just a quick overview of my experience. Prior to coming to Beazley, my insurance career started about 30-plus years ago, with a fairly even split between the carrier and broker sides of the equation. Started my journey with various roles and responsibilities with FM Global. Then I moved over to Marsh and spent a solid 16-plus years in various roles there. And then the last 5 years before coming to Beazley, I was leading Zurich’s North American property team.

So with that, let’s — oops. Sorry, let me get to my slides. There we go. So let’s talk a little bit about the property group, and we’ll start with our property vision and strategy.

Our goal is to become and be recognized as the highest-performing specialist property insurer. And to achieve this, we feel that we consistently need to perform for some of our key stakeholders. One being our customers and brokers, and we need to continually provide relevant capacity products and services. The second being our investors and management. There, we need to provide sustainable, profitable growth. And last but not least, and of course, to accomplish both of the above, we need highly engaged colleagues.

So with this in mind, let’s get a little bit into our structure. So at Beazley, how we have the property structure, as you can see in the graphic, we perform — or we operate across 6 platforms, starting with London, of course. We cover Latin America through our office in Miami, Singapore, United States, Canada and China via the Lloyd’s China platform. And across these platforms, as you can see in the chart, we really divide ourselves up into 4 focus groups which have about 9 property businesses within them.

And to just give a little context around that. If you start on the right side, as you can see, we have commercial property, that makes up probably about 69% of our business right now. And that ranges from small and mid-market business up through the large unit and also inclusive of our U.S. high value homeowners team. And then as you work your way down the spectrum, we have 2 other, I would call, more specialized businesses, one being our jewellers, fine arts and specie team, they’re based mainly out of London; and then aligned with them, we have our U.K. homeowners’ team as well as a Swiss portfolio, and they make up about 15% of our overall portfolio. And then finally, we also have a delegated or a cover holder, if you will, business based out of London, aligned with — we also have a package, a small package team. We [wanted to] put those 2 units together, but the package does work across all of property and as well into our SL lines to help enable other business. But that makes up about a total of about 16% of our portfolio.

As I mentioned above, we need to grow profitably while providing relevant capacity, products and services. So to help us consistently do this, we need to focus on several areas. One being portfolio optimization. To do this, we look to provide our underwriters with enhanced tools that will enable them to make insightful decisions and — supported by analytics. By doing this, we’re able to better manage the effectiveness of our pricing terms, nat cat aggregates at both an account and a portfolio level. So it’s very important on how we manage the business there.

We also work actively with our key broker partners. And by proactively, I mean, we meet with them on a regular basis to discuss market dynamics approach, et cetera. But we’re also providing a consistent message to our key brokers on our appetite and access. And this focused solicitation clearly defines to our broker partners, our ability and desire for the business we want to write. And by doing this, we feel that our — by our soliciting the business that we want, we have higher hit ratios, and we’re really driving the portfolio that we want to have at the end of the day.

Also as mentioned above, our underwriters are key, and they need to be empowered. And we feel really by providing them with the enhanced tools and analytics, training and additional support as needed — one area of that to help them achieve this is we continue to constantly improve and enhance our rating tools. This is essential as providing them with this tool, it gives them the metrics and details available so the underwriters can make smart informed decisions around pricing, of course, how cap — cat is going to impact the book as well as the rating around it for pricing. This ultimately should result in better results and risk selection, which should drive the overall result of the portfolio.

Another area that we look at is that for the above to be — continue to be successful is really we need to have consistent improvement in tech and processes. Effective property underwriting is highly dependent on it, and we have ongoing initiative called Faster, Smarter Underwriting, which is bringing together some of the latest technologies so underwriters can make informed, insightful decisions. The key to this is really having real-time accurate data tools and analytics available for our underwriters, which enables them to enhance their decision-making and, of course, improve our underwriting performance.

And then finally, another component of our overall growth and success is really, we feel, important on the efficient use of capital. A recent example where we’ve done this in property is our large property team developed a consortium in London late last year, which enabled us to bring in various London and European markets to support us, which — the key there is it really helps Beazley become a key player for our key brokers in the London marketplace. In some cases, we’re a go-to-market in that regard because we can lead and provide, again, relevant consistent capacity for their programs and their customers.

So as we look at 2020 year-to-date, it’s — the market has been very favorable. We expect premium growth to continue throughout the year. The rates have been strong. I fully expect the rates to remain strong in a double-digit capacity, which is good. The thing that I always try to remind people of is keep in mind that going into the ’17 and ’18, we had 5 years of reductions in the marketplace, which was — made the property marketplace quite tough. But coming out of ’18, as we started to see the market turning, and then in ’19, it’s — as many of you know, it’s really started to turn, which has been good.

Retention on our core business has been key and we continue to see that continuing to improve. When we look beyond, I think it’s important to keep in mind that we fully expect to see continued favorable terms, including pricing for the balance of this year and into ’21. We just have to, I think, be diligent around how we look at business. There is a lot of business being circulated in the marketplace, and the teams need to use all the tools and abilities that we have to, again, focus on the best risk selection and core business we want in the portfolio, which we’ve been, I think, having great success at. And I really feel that we’re going to start seeing the results start bleeding through the book as we continue to work forward.

So with that, I will pass it back to Andrew and — for the outline.

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David Andrew Horton, Beazley plc – CEO & Executive Director [5]

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Thank you, Richard. I will have a go at the outlook. I’ve got to say, I think the Beazley crystal ball is a bit clouded than it normally is. It’s quite difficult to determine what the outlook is going to be and that’s why the planning process at the moment. We know Adrian is leading a great planning process with all of our underwriters, claims and everybody else of trying to determine where the opportunities to grow are and where the opportunities to hold back are, and we’re putting a lot of thought into that.

But the view, and Richard touched on it, within property, is we believe rate momentum is going to continue. We’ve certainly seen that in the first 6 months of the year, that the rate increase each month is greater than the previous months. And our conversation within the market with brokers, it seems that this is going to continue into 2021. So we believe we can maintain the double-digit top line growth in 2020 and then into 2021. And that’s what uses up some of the capital that Sally talked about a few minutes ago. Aim is to try to mitigate the impact of COVID-19 as far as we can. So taking this action on our liability classes. Combined ratio for the year, we normally give guidance at this point in time. Assuming we have an average second half, whatever an average second half looks like, that will be around 100%. Lower investment return in the second half just based on the running yield of the portfolio. And a lot of other things, I’m sure, will happen other than the running yield, but based on the running yield, the portfolio should be a lower investment return in the second half. Great momentum, as I say, to continue.

And then this final point about the agile, nimble approach, and it’s on a number of levels. The people, fundamental to the success of the company over the past 3 decades. We continue to focus on the health and well-being of everyone. We need to manage that as well as we have done over the first 3 months of this unusual environment. And as the environment changes, of course, we’re surveying our people on health and well-being and their views about the future, and that’s important to us.

We’ve also done a couple of key appointments, I think, in the first half. One is a sustainability officer. Looking at the impact of climate change on the insurance sector and all things to do with ESG. So our sustainability officer will help us bring that all together. And also innovation. Rachel Turk in our corporate development is recruiting a couple of people on innovation. Innovation is important, and Lloyd’s has flagged it. They’re going to allow 2% of extra premiums next year on innovation without a formal approval process. And innovation is at the center of the success of Beazley over a number of years, and we need to continue to focus on that.

From a profit point of view, and that links to the innovation, we need to pivot our products to meet the changing world, and I just flagged here virtual events. I think the virtual element of events were sort of a tag on to our physical events and, of course, virtual event cancellation cover is just as important because many events are taking virtual in their cost of setting up those events. And there will be costs if they are canceled or don’t work or the technology doesn’t work, which is a key element for the virtual events.

And now on servicing. Service is incredibly important and has been important in the first half of the year both on underwriting and claims. And from the claims element, our aim is to be — to pay claims well, both COVID-19 claims and other claims because many of our insurers are under some form of financial distress. And we had an action in the first half of the year to ask people their time to support the claims team. Because not surprisingly, they’ve seen more claims related to COVID-19. And we wanted to ensure our claims service remained high. And I get good feedback from brokers, both Adrian and I have been on virtual tours of the U.S., talking to brokers. We get good feedback that our claims service and our claims offering is holding up well compared to the rest of the industry. So that is a good thing to do. And I think it will be an area on the back of which we can bring business in 2021.

So that’s the end of the presentation. We now go to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question today comes from Kamran Hossain from RBC.

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Kamran Hossain, RBC Capital Markets, Research Division – Analyst [2]

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I’ve got three questions. The first one is just on the capital surplus, and I guess the reduction from $35 million to $22 million, the $35 million being at the time of the placing. Could you maybe give us an idea of how much of that is kind of prudent that you’ve built in around recessionary claims or kind of additional COVID claims later on? And your ECR increased $100 million, the total decrease is probably something like $300 million. So is $200 million the right number for the recession claims?

The second question is on cyber. You didn’t make any mention of ransomware or not one that I could see. But then I apologize, my screens are a bit smaller these days. Could you maybe comment on frequency that some of your peers that I’ve talked to have definitely seen this as a bigger issue?

And the third question is, I guess, looking forward, 11% rate for the first half, far higher than that in the second quarter. I guess as we look to 2021 and perhaps beyond that, really, is the — is it a good bit to think that things have to be better than the long-term average in the coming years on the combined ratio?

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David Andrew Horton, Beazley plc – CEO & Executive Director [3]

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Sally, do you want to pick up the first element? And I’ll pick up the second two.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [4]

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Yes. I’m just writing it down, so I don’t forget. So yes, good question on the capital. So as you can see, we’ve increased both the ECR expectation. We’ve also increased BICI. BICI is slightly less capital efficient so — than the Lloyd’s at this point, and so what you’re seeing there is a bit of a capital strain caused by BICI as well. So those two things together are definitely part of the movement from $35 million to $25 million.

There are other things, other than the — some allowance for recession in COVID within there. So the allowances that we made, I think you mentioned $200 million, is not of that magnitude. It’s — there are other things in there. It’s not, I would say, significantly smaller than that. But it’s an evolving picture on a Solvency II basis. So it’s not as simple as those 2 things. There are other things going on there as well.

But the main story, I think, to focus on is the fact that we’re deploying the capital that we raised because the market continues to be a really good place to grow in.

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David Andrew Horton, Beazley plc – CEO & Executive Director [5]

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Okay. So let me pick up the ransomware. I mean I think we were one of the first companies to notice elevated ransomware. I find it always a bit frustrating that people don’t seem to notice what’s coming on the claims. And I think having a very big integrated claims and underwriting groups means that the — when claims see things, they tell the underwriters what’s going on.

So we see all elevated ransomware about 18 months ago, and we haven’t seen an elevation or further elevation in the first half of this year. It’s stayed at the same level that we’ve seen during 2019. Because it was this concern there will be more ransomware tax in this environment. We have not seen that yet.

On the rate increase, I’m not sure — hopefully, I’m answering the question. We do expect this momentum to continue into 2021 because it doesn’t seem to be anything at this point in time that’s likely to stop it. And it’s on the back of relatively poor profitability of the industry and a number of years of rate decreases across many lines. So I think on the back of that, we are expecting these rate increases to continue. And if we look at the property business that Richard was talking about, we’re still not at the level of catastrophe risk appetite we were willing to take five or six years ago on a smaller balance sheet. So we still think these lines have more momentum into next year.

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Operator [6]

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The next question we have today is from Andrew Ritchie from Autonomous.

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Andrew James Ritchie, Autonomous Research LLP – Partner, Insurance [7]

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Good to see everyone, albeit virtually. A couple of quick questions. So first of all, just to clarify on the capital requirement. Is all of the increased requirement, the projected requirements, growth? Or is there any reflection of, I think, Lloyd’s, the other day, was talking about capital planning, where they were going to increase the capital load to reflect low interest rates and some certainty on the outlook. So just to clarify, is it all sort of volume? Or is there some sort of coefficient of capital charge increase?

Second area, I wonder, Andrew, could you just update on underlying — I’m talking ex-COVID, if that’s possible, claims drivers? Obviously, you had a lot of discussion second half last year around so-called social inflation and all those factors. I guess some of that is on hold, probably just on hold. Maybe just give us a sense as to — you’re seeing anything new, emerging or where do you feel you are?

The only other two quick questions. On the liability, you said you’re $10 million below attachment, I thought the attachment was — sorry, the deductible was about $35 million. So that means you actually have seen some liability claims to date? Or am I misinterpreting that?

And the only other question would be on the property book. If I can ask a specific question on that. You gave a useful presentation. I’m curious to know, do you feel that the property pricing is adequately reflecting yet this sort of trend we’ve seen in secondary caps? I’m talking in storm hail, not the peak stuff, the secondary stuff, which has caused quite a lot of noise. Are we anywhere near price adequacy on that aspect yet?

——————————————————————————–

David Andrew Horton, Beazley plc – CEO & Executive Director [8]

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Okay. Andrew, thanks for those questions. Do you want to kick off with the capital, Sally?

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [9]

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Yes. I’ll do the capital in light and reinsurance question. So on the capital, that’s a really good question. We have an internal model and we’ve reflected the things that Lloyd’s are already talking about in their additional capital, in their thinking around needing additional capital within that. So all of that should be built in. We haven’t made any assumptions around them changing their usual capital load at this point because they haven’t clarified anything around that. But for a good example of why the — there’s more than just recession and growth going on is that, for example, discounting credit has reduced because in Solvency II, you can discount your reserves. And obviously, the interest rate by which we discount has significantly reduced. And so that’s another area. That’s another good example of where we’re seeing a change since we raised the capital back in May.

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David Andrew Horton, Beazley plc – CEO & Executive Director [10]

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I’ll just mention, there is a small load in BICI of growth. So outside the ECR.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [11]

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Yes. Yes. So one thing that does happen on the — BICI’s calculated due to their risk-based capital approach and it has various components. One that Andrew just referring to is you have a additional load if your growth rate is above a certain number, which we are, and so you do have an additional loading for that that’s worth noting, yes.

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Andrew James Ritchie, Autonomous Research LLP – Partner, Insurance [12]

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That’s in the U.S. RBC component review?

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [13]

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Yes, that’s a U.S. admitted, which is within the number there. But that’s one of the reasons why you’re seeing a significant shift in that number.

And on to the reinsurance. I’ve obviously confused you a little bit. The clash number, I think, is what you’re referring to. The reinsurance that we’re speaking about is not the clash cover, it’s in addition to the clash cover. So this is in the risk of getting too technical. It’s an aggregate excess of loss program that we buy in addition to the clash cover. It doesn’t have a deductible. The way it works is it starts to react above a certain claims ratio, which we’ve obviously estimated that to be kicking in at around $10 million in terms of dollars because I think dollars are the simple — to me, dollars are simpler, but it’s different to the clash. There are no deductible there.

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Andrew James Ritchie, Autonomous Research LLP – Partner, Insurance [14]

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And that’s on all liability lines, is it? What was the old specialty book or…

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [15]

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That covers the majority of specialty lines and cyber and executive risk. It’s — it doesn’t cover everything, but it covers the majority. And it definitely covers the things that we’re more worried about in situations like this, for good reason because we’ve all got — we’ve all lived through it.

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David Andrew Horton, Beazley plc – CEO & Executive Director [16]

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Andrew, I’m going to give you a sort of a relatively boring answer on the underlying claim drivers because we haven’t seen anything. So there is nothing new in the underlying claim drivers, excluding COVID-19. So there are no unusual trends, no different trends taking place in the first half. It’s sort of as we expected. So nothing unusual in that.

And then I’m going to hand over to you, Richard, on the adequacy. I think you’re asking with the adequacy of pricing for the noncat part of property.

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Richard Montminy, Beazley plc – Head of Property Division [17]

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I think, yes. Yes, Andrew. I think he was looking for the secondary cat pricing, if I understood the question right.

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Andrew James Ritchie, Autonomous Research LLP – Partner, Insurance [18]

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Exactly. Yes.

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David Andrew Horton, Beazley plc – CEO & Executive Director [19]

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Yes, sure.

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Richard Montminy, Beazley plc – Head of Property Division [20]

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And it’s a great question. And definitely, we are highly involved with it. We’ve enhanced our radar so the underwriters can pick up on locations and accounts that, for example with hail, that are exposed to hail, and we price for it. So we do price down to peril specifics.

The other area we also attack things like hail and some of these other secondary cat perils is through our terms, and we actually have been doing well in that regard as looking for a different deductible structure, i.e., percentages, as hail has become more and more prevalent across the industry, as you’re aware of.

Case in point, this year, there’s been the hail season, so to speak, if you want to call it that. We’ve actually been able to significantly reduce our hail losses that we’ve seen in the past through the use of deductibles in better terms. So it’s a great question, and we are on top of it from that regard.

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Andrew James Ritchie, Autonomous Research LLP – Partner, Insurance [21]

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But it sounds — I guess I’m just trying to understand the industry, either a whole more committed to dealing with pricing this risk, which kind of wasn’t really — didn’t seem to be priced at all even a year ago or a couple of years ago.

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Richard Montminy, Beazley plc – Head of Property Division [22]

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I mean you’re probably right in that regard. I think having worked in other shops as well, I think it’s been on everybody’s radar screen to pick up things like hail because it became more and more of an issue. And like I said, I think people have been pricing for it for a while, but I think it used to just be buried in with the AOP deductible. And really what the industry has turned to slowly, I think some of us, like Beazley, we’ve jumped on a quicker — have gone to a different structure just to attack and get rid of the small frequency losses, i.e., through percentage deductibles. It’s kind of like what we do with windstorm and earthquake, et cetera.

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Operator [23]

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The next question is from Ben Cohen from Investec Bank.

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Benjamin Cohen, Investec Bank plc, Research Division – Analyst [24]

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I just had 2 questions, please, if you can hear me. The first was on the COVID-19 casualty claims. I just wonder if you could say more about what notifications you’re actually getting. And does your outlook for sort of 100% combined ratio for this year assume that you would take all COVID-19 casualty claims in 2020?

The second thing I wanted to ask was your outlook for top line growth for the year as a whole, does that assume any impact of a sort of recessionary headwind on volumes? And indeed, did you see anything that’s worth calling out from that in the first half of the year?

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David Andrew Horton, Beazley plc – CEO & Executive Director [25]

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Okay. So the COVID-19 casualty claims, I mean we — they’re going to come through over a period of time, Ben. So we’re not going — it’s unlikely we’re going to see lots of them happen all at once. And the time to settle casualty claims, as you know, takes quite some time. So we’re expecting these are going to come through over a period of time and will also settle over a period of time.

So our 100% does assume we’ll book whatever we need to book in that line. And as Sally mentioned, the held loss ratio is relatively conservative. And we only have a $10 million deterioration before reinsurance kicks in anyway. So it shouldn’t have a meaningful P&L impact if we did see a large enough deterioration to have to move the held loss ratios. So the 100%, yes, it does take account of that. We haven’t seen very much yet. So it’s very difficult to answer the first question because we haven’t actually seen many COVID-19 casualty claims yet. So I think that question, we’ll be able to answer better at the end of the year than we can now.

The top line growth for the full year, it’s a combination of seeing this underlying growth in property with the rate increases Richard was talking about and similar increases in marine and increases in some other lines of business such as D&O and the reinsurance business looking a bit healthier than it was. And of course, we’ve seen increases in contingency offset by the recession-prone lines where we are pulling back. And the top line growth we’re talking about of jumping double-digit takes all of those into account, and we feel pretty comfortable when looking at those, we can achieve that.

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Operator [26]

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The next question is from Andreas van Embden from Peel Hunt.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division – Financials Analyst [27]

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I just had 3 questions, please. First of all, on your investment portfolio, you mentioned you were taking on no risk again in the second quarter now, so that drove high-yield exposures that sort of increased at $269 million. I just wondered whether this was an active investment back into high yield. Or whether this was driven by sort of fallen angels from the BBB or higher classes?

My second question is on casualty reserving, just in terms of your loss picks. I appreciate that you’ve been sort of decreasing your loss picks in the past few years. I just wondered whether you would comment, whether you’d continue to increase those loss picks during the first half of 2020.

And my final question is, I noted in your release, you’ve implemented a 60-day premium pause for your clients and also some suspension of policies. I just wondered whether this could lead to some increases in your impairment assumptions on policyholder receivables. I saw that insurance receivable sort of default assumptions had already increased in the first half. Is it just a coincidence? Or linked to those 60-day premium pauses and all the actions you’re taking to support your clients?

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David Andrew Horton, Beazley plc – CEO & Executive Director [28]

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Sally, will start with — talk on the high yield? So, go on.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [29]

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Yes. No, please.

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David Andrew Horton, Beazley plc – CEO & Executive Director [30]

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No, no, no. So I wasn’t sure exactly what we were looking at on the high-yield front. So we’re not seeing an increase in high yield because we’ve got downgrades of the investment grade. So we definitely haven’t seen that if that was part of the question, Andreas, which I think it was.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [31]

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I think it’s just one of the ways that we’ve chosen to increase our risk from where we were at Q1. So I wouldn’t read anything specifically into that other than that. I know Stuart is definitely thinking very deeply about the level of liquidity and the risk that he’s adding. So he’s adding where he’s able to change quite quickly. So I don’t think there’s anything significant to add to that…

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David Andrew Horton, Beazley plc – CEO & Executive Director [32]

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And I think our high-yield and equity exposure as at the end of June is less than what it was at the end of December. So he took it down in the first quarter, and he’s brought it back a bit, but it’s still lower than where we ended last year.

On the loss picks. The loss picks being higher. We wanted to use — one of the challenges we have of comparing them year-on-year is the mix of the business is different. And because we put some cyber, the cyber within CyEx and there is some small risk cyber within specialty lines, it often looks as though the overall loss ratio is coming down.

So we feel we — excluding that, we’re increasing the loss picks on the more traditional, people call that specialty lines over the years, and we’ll be maintaining that into 2020. But overall, it looks like it’s coming down because the cyber part of the proportion is larger.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [33]

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Yes. So we — our 2020 view at this point is consistent with the previous couple of years.

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David Andrew Horton, Beazley plc – CEO & Executive Director [34]

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Yes. And the premium pause, I think we are thinking about taking an impairment assumption through the premium pause because if we’re giving people longer terms to pay the premium, we will have to put an impairment assumption in. I think we’ve got one in, and we’ll be continuing to put one in for the full year. It’s not a particularly large number at the moment because it hasn’t been in place for that long. We haven’t seen a massive amount of — what’s the word? Not redemption.

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Richard Montminy, Beazley plc – Head of Property Division [35]

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Process?

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [36]

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Default?

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David Andrew Horton, Beazley plc – CEO & Executive Director [37]

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[Stopping policies].

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Richard Montminy, Beazley plc – Head of Property Division [38]

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Translations.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [39]

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Translations. Yes.

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David Andrew Horton, Beazley plc – CEO & Executive Director [40]

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Sorry, did you miss that? Or did you hear that?

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division – Financials Analyst [41]

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Yes — no, I got that.

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Operator [42]

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The next question is from Paris Hadjiantonis from Exane BNP Paribas.

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Paris Hadjiantonis, Exane BNP Paribas, Research Division – Research Analyst [43]

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Three questions from my side. Firstly, I’m trying to understand better what the message is on liability reserving. So basically, what you’re saying is that if you’re right, you got the reserves right and, over time, you should be able to release some. But I mean does that mean that we might have to wait a bit longer? So does that mean that in the near term, reserve releases are actually lower than they were historically for the liability lines?

The second is on the reinsurance you’re buying. There are a number of different effects there. You’re buying more. You have paid that reinstatement premiums and probably you are paying more as well given where the price is going. I’m just — I just want to see how much the cost of reinsurance has gone up for you. Is it in line with a wider market? Or do you benefit from the good track record that you have?

And the last question relates to property. So I’m just trying to grasp what the expectations on growth are. Rate increases are up 15%, and you’re guiding for growth of about 15% going forward. So more or less, you’re not really growing volume, you are growing with the rate on that line of business.

So if you can just clarify that. And also, I think in the slide, you’re saying something along the lines, 15% growth. I am just — want to make sure that you don’t imply 15% growth for full year ’20 because H1 was more or less flat.

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David Andrew Horton, Beazley plc – CEO & Executive Director [44]

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Richard, why don’t you pick up on the property question first, if that’s okay?

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Richard Montminy, Beazley plc – Head of Property Division [45]

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Sorry. Yes. I mean it’s a good question. I mean rate has been the driver. I think that what kind of gets a little bit lost in the shuffle as we start off the year continuing to improve the portfolio. so the teams have been strictly focused on making sure that we retain the business we want to retain, get new business into the portfolio that we feel is aligned with our thinking around appropriate pricing in terms and conditions so it’s more sustainable over the long run. So we’ve been kind of trading out the portfolio, if you will. And that, coupled with the rate increases that we’re seeing as the year has worn on, you’re right, we’re probably roughly flat.

When I — when we look at the year-over-year growth, we still feel that we’ll be somewhere around that 10 to 15 plus, give or take, percent range because we do see the second half of the year as being probably a higher growth rate than we saw in the beginning of the year. I mean it’s a tough question because of the — also then being thrown on top, not to get too technical with it, our cap management and how we’ve been managing the cap through the cycle of the first 6 months of the year. Does that help? I mean…

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Paris Hadjiantonis, Exane BNP Paribas, Research Division – Research Analyst [46]

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It does help.

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David Andrew Horton, Beazley plc – CEO & Executive Director [47]

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Okay. So taken reverse order. Are we paying more for reinsurance? I think we do benefit from having strategic reinsurance partners and a good track record. On the whole, we’re not paying a lot more for our reinsurance. If we are impacting the reinsurance programs and we’ve definitely impacted the clash reinsurance program, it’s highly likely we will end up renewing with a reasonable rate increase because the ones that are impacted, we are taking — we’re getting — we’ll be paying higher rates. But I think generally, for our property business and our buying the retro program for our reinsurance business and our marine business because they performed relatively well compared with the market average, we do benefit from that.

And then on the reserve releases, it’s always an interesting one of a longer to wait or not because, in theory, everything else being equal and holding good reserve strength, it should come through proportionally. But Sally, I don’t know if you want to add anything to that.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [48]

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Yes. So it’s, again, coming back to the fact that it’s too early to see what the overall impact is going to be and the fact that we’re doing a lot of underwriting action, the — if you look — the other thing that I would add is that if you look back at 2008, and again, I’ll say it again, this is not 2008, this is 2020, but if you look back where the claims were impacted, you definitely saw a reduction in reserve releases from and the specialty lines as it was division back then, but it took a number of years to come through. Because if you remember, the way that we reserve specialty lines and CyEx is that we hold our reserves and then start releasing them after we begin the release, is really 3 years is the earliest time we’d release and then they slowly come through after that.

So for example, the reserve releases we’re reporting here are from years like 2017. So it takes time for that to come through. But again, we — currently, we don’t know how much they’ll be either. So we’re going to have to wait a little bit longer for more clarity on that.

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Operator [49]

——————————————————————————–

The next question is from Ming Zhu from Panmure.

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Ming Zhu, Panmure Gordon (UK) Limited, Research Division – Analyst [50]

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Just 3 questions, please. Your investment return going forward, you’ve guided — you said your fixed asset currently yielding around 0.8%. If you will keep the same strategy going forward, is there any guidance you could give from 2021, please?

And my second question is seeing 11% rate increase across the book and you expect the rate momentum to continue. And just how much of that is because of COVID-19? I’m trying to figure out if it’s a non-COVID year, normal year, how much that would be, please.

And my third question is on the letter of credit, the $225 million, which you’re currently using as a liquidity. And if you were to meet, let’s say, we have a normal second half, you were to meet all your targets, and what’s your plan around that, please?

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [51]

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Okay. So looking at 2021. If I knew that answer, I would be very happy. It’s too — in my opinion, it’s really too early to give much more than the fact that interest rates are pretty low at the moment. And I think the general expectation is that they will remain low for a while.

Obviously, in addition, you have the volatility around as well. So I think I would struggle to really add anything to the fact that we’re relatively cautious and our running yield is 0.8%.

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David Andrew Horton, Beazley plc – CEO & Executive Director [52]

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I think if we were looking — we’re estimating 2021 and coming up with a number, I’d put it 0.8% in for the fixed income, and I’d put in on usual 5% or 6% for the risk assets, which is what we try to achieve. And if you did a weighted average of the 5% to 6% on 10% to 15% and 0.8% on the rest, you’d end up with what we will probably be budgeting for our investment return in 2021. 11% rating increase, interestingly, caused by COVID-19, I haven’t really thought about it. I mean if COVID-19, I think, because the industry is going to be bearing the losses, and therefore, it’s not that we’re making much profit this year gives further momentum that it needs to make profit at some point. But I’m not sure we can allocate much of the — much of COVID-19 to the 11% rate increase. I think the market needed the rate increase before COVID-19 ever came along.

And when we did our Q1 rate increase, we’re already getting 8%, and we haven’t locked down for a quarter. So I think the COVID-19 losses have just given further momentum to a market that needed to turn and get rate increase. So it’s quite hard to determine going forward what that would be underlying. I don’t think we think of it like that.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [53]

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The middle — there was a middle question.

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David Andrew Horton, Beazley plc – CEO & Executive Director [54]

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I think that was it.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [55]

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Have we covered everything there, Ming, or have we missed one there?

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David Andrew Horton, Beazley plc – CEO & Executive Director [56]

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The letter of credit.

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Ming Zhu, Panmure Gordon (UK) Limited, Research Division – Analyst [57]

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Sorry, so it’s the letter of credit.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [58]

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Letter of credit, okay. So well, the great thing about a letter of credit is that it’s a very flexible tool, which is why we like it. And so it really just depends on the experience over the next 6 months, but it’s definitely something that I’m very keen to utilize as and when it’s appropriate to do that.

So the current capital ratio that we’ve got there assumes that we think at $225 million — well, it’s based on having $225 million posted. And obviously, depending on how the growth goes, how the business planning ends up because it’s still a very live situation there. Once we get more along that process, we’ll be looking at our surplus and depending on where that sits, we’d look to either remain where we are or change the amount depending on what — where we end up. So we’ll keep looking at it as we go through the year, I think. But it’s definitely something we’re planning to use to some extent going forward.

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Operator [59]

——————————————————————————–

We have a question from Iain Pearce of Crédit Suisse.

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Iain Pearce, Crédit Suisse AG, Research Division – Research Analyst [60]

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Just 2 quick ones from me. I’m just trying to understand some of the steps that have been taken outside of the sort of reinsurance things that you’ve talked about to insulate some of the recessionary risk in the book, particularly on sort of the claims side. And then linked to the sort of economic sensitivity, you’ve been flagging opportunities in sort of marine, cargo, aviation lines. I’m just wondering if you could talk to us a little bit about the volume versus pricing aspects you’ve seen. And if you started to see any headwinds in terms of volume in those lines because of sort of the impact of the wider economic environment.

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David Andrew Horton, Beazley plc – CEO & Executive Director [61]

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So there’s lot of definitely issues on the aviation front, isn’t there, with very few planes flying? So we’ve been in aviation for a number of years now, and we hoped this was going to be the year of them growing quite considerably. So there’s definitely an impact on the volume in aviation. So it probably won’t grow as much as we thought, but it is being better-rated, as it should be. So there’s definitely that issue.

The cargo world at the moment, I think we’ve seen a reasonable amount of capacity withdrawn. So there may be issues with less cargo in the world. But there’s a real amount of underwriting capacity come out. And certainly at Lloyd’s, there’s been pressure on capacity because a lot of cargo underwriters haven’t made any money over a number of years.

So we’ve seen one or two competitors withdraw, which gives us some opportunity, and that applies to the wider marine world where we’ve got, I think, one of 3 marine books that’s actually made money over a 5-year period, and Lloyd’s continues to put pressure on capacity. And if Lloyd’s is not making that much money, other carriers also aren’t. So I think we benefited from that, which is good.

I wasn’t — I didn’t really understand the first question about recessionary impacts. Can you explain that again to me?

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Iain Pearce, Crédit Suisse AG, Research Division – Research Analyst [62]

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Just you’re talking — yes, sure. You’re talking about some steps that have been taken to try and limit some of the claims impact and sort of recession-proof the book cost on the claims side. I’m just wondering sort of what those steps are, and if there’s potentially any knock-on effect on premiums?

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David Andrew Horton, Beazley plc – CEO & Executive Director [63]

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Okay. Yes, there’s definitely a knock-on effect on premiums because the main action we’re taking is not writing the business or putting a rate increase that will either cover it or potentially as the business will move away from us. So yes, so we’ve taken a view that certain lines of business, especially employment practice liability, is more recession-prone. And therefore, we’re taking a view that we’re going to write less of it using the areas which we think are most recession-prone within it. But these are the things that we — we had a good recession view in the last recession, and we’ve been working on this for a number of years because we’re expecting recession to come. So we’re just implementing our plans more rapidly than we thought we needed to.

So it does — that does have an impact on premiums. That’s what I was trying to convey. That although people are trying to get us to say, is this a traditional hard market or not, it’s very difficult to say it’s traditional hard market because in a traditional hard market, if there ever is such one, every line of business, rates are going up at the same time. And we’ve got a situation where there’s a lot of lines of business where rates are going up, and we think there’s opportunity there.

You’ve got the contrast of that as a recession, which has 2 impacts. First of all, there is recession-prone lines where claims will rise. And secondly, insurers that want to spend that much money on their insurance going forward, they’re trying to reduce their cost. So you’ve got a hard market going into a recession, which is an unusual situation to be in.

Are we there on the questions?

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Operator [64]

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We have no further questions.

——————————————————————————–

David Andrew Horton, Beazley plc – CEO & Executive Director [65]

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Brilliant. Well, thank you, everybody, for joining us today virtually. And hopefully, at some point in the not too distant future, we’ll see you live. Live, live.

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Sally Michelle Lake, Beazley plc – Group Finance Director & Executive Director [66]

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Thank you. Have a good day, everyone.

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Richard Montminy, Beazley plc – Head of Property Division [67]

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Thank you.