Beazley plc (BEZ.L) Earnings Call Transcript & Summary

Hello, and welcome to the Beazley conference call. My name is Jas and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Andrew Horton, Chief Executive, to begin today's call. Thank you.

Thank you. Good morning, everybody. We put out a statement at 7:00 this morning, updating the market on our contingency claims. So to give a bit of background. When we estimated our COVID-19 losses at $170 million in April and then gave it a further update in July, stating that number was fine at that point in time, it has a certain estimate of when the world would return to some form of normality, especially in the event cancellation space. If you remember back in April, we set up $170 million: $100 million was property reinsurance and marine; and $70 million was through our political, accident and contingency division, the majority of that $70 million being for contingency. We also, I think, talked about our clash reinsurance program and our clash reinsurance program picks up an aggregation of events coming from the same cause. So the contingency division was using some reinsurance almost from the ground up for the clash reinsurance program. So our initial contingency losses, other than bearing a small amount for ourselves, we're going into the reinsurance program. So when we announced the $70 million, those were items that didn't fit into the reinsurance program at that time. But the gross number was somewhat larger than the $70 million. Now what we've seen, of course, since then is not a return to normality. We have a lot of exposure in the U.K. and the U.S. and with hindsight, I suppose, well, when we were in July, we thought the U.K. was definitely improving then, and we're seeing the U.K. moving backwards as far as COVID-19 and many events that were postponed in the springtime of this year starting to be canceled end of August, beginning of September. That has led us to review the future exposure and take a prudent, in my view, outlook on what's going to happen in the fourth quarter of this year. And then also looking into 2021, where we have exposure and determining an estimate of what is likely to be canceled in 2021, particularly on the conferencing, our book is split, virtually 50-50 between conferences and sporting events and generally sporting events have been going ahead, although not to the same extent as they would, but it minimizes or reduces the overall loss compared with the limit we put out. So we've now estimated a loss of about further $170 million, so it's now $340 million. Almost all of that $170 million extra is event cancellation, contingency losses. Remaining losses in the other lines of business are fine. Some small movements between them, but generally, that is holding. We've also put in the statement, if 2021 doesn't recover at all, what extra exposure do we have for the conference world, mainly these sporting events for the remainder of 2021, and that is the $50 million, if the world does not get any form of normality with the expectation of vaccines or anything else coming along in Q1 and Q2, to try to give an outer bound of what could actually take place during the year. We then obviously talked about our business planning for 2021 outside contingency. Although the contingency market, not surprising, is moving very rapidly at this point in time with good rate increases. The business generally is going well. Rates, the rate of rate increases continues to accelerate. So each month of the year, we see a higher rate than previous years, and that's why we put out the latest rate change for 2020 and, not surprising, that's feeding into our thought process for planning of 2021, with good growth in a number of business lines. As we mentioned at the half year, there were still some recession-prone lines, which we continue to focus on, and our view of those lines has not changed. The capital is in place for future growth. On the capital side, that's always an area we're focused on historically. We obviously -- Sally negotiated -- who's on the call with me, negotiated the $450 million letter of credit, so we have the other half of the letter of credit to use if needs be. No expectation or not planning to use it at this point. So it's not in our capital stack at the moment, we have that. And if we wanted further capital relief at some point in the future, we don't want to buy too much reinsurance, but there is plenty of reinsurers who would like to reinsure our book in 2021 as the market is moving very positively. So if we wanted further capital relief into 2021 and growth was greater than planned, we would look to our reinsurers as we did earlier on this year by doing a small-ish, quicker share of our specialty lines and executive risk book. That's what all I was going to cover, and I think it would be good to go over to questions.

[Operator Instructions] The first question comes from the line of Kamran Hossain from RBC.

The first question is just a clarification. The additional $170 million of claims, is that all in 2020? Or does some of that pull into 2021? And the second question is on, I guess, the capitalization. So eyeballing it, it feels like you're towards the lower end of your range. Have you seen anything concerning in Q3 cat season that's been pretty active so far? I assume not, given you haven't said anything, but is there anything that we should tie together with cash position and kind of hurricane or active cat season in Q3 so far to imply something on your capital position?

So Kamran, the first question, the $170 million is the number we expect to book in 2020. So this is a view of what we expect the losses to be, assuming a recovery, let's say, end of Q2, early Q3 next year. So that is the number we expect to book. It's an unaudited number, and I'm sure Sally will have conversations with the auditors over whether we're being too prudent or not prudent enough, but that is the number we're expecting to book at this point. And therefore, that's the number we've taken off our capital when determining our capital planning and supporting the 2021 plan. The $50 million, of course, is not something booking because this is not our central expectation, but this is our expectation if things don't improve over the late spring/summer next year of what sort of exposure we could have in the conference area, estimating the current level of limit being paid for conferences that are canceled, applied to some conferences and some sporting events going forward. And of course, that will not be booked this year because that's not our central expectation. That would be booked next year, if things don't improve. On the other areas, I mean, it would be great to give you an update on absolutely everything that's going on. But the catastrophes that are taking -- or have taken place or just finishing, it's difficult to estimate the impact on those at the moment. You can read from market reports, sort of the size of them. None are particularly large, the estimates of what the rating agencies or other agencies are coming out with at this point, but it was very difficult to update. And as we mentioned in the statement, our aim would be to update on that in our normal timing of the November statement. And there's no reason to give a further update at this point.

The next question comes from the line of Ben Cohen from Investec.

I wanted to ask 2 things. Firstly, on the size of the contingency loss. I just wonder if you could give a bit more detail in terms of your timing on the visibility of the increase in the loss. It didn't seem to me that you had flagged the quantum of the potential downside. Indeed, I think it sounded from previous disclosures that you were sort of indicating that you had substantial reinsurance protection in place. So I just wonder if you could talk more about that and about the reinsurance protection. The second question was, could you actually quantify where you see yourselves now in terms of your sort of Solvency II-like capital, I think you gave 122% at the half year looking forward. How much impact? Where do you see it being now given maybe stronger growth, but presumably weaker capital?

Okay. Yes. So the visibility of -- when you say the visibility of loss, from our point of view, we -- as I say, we started seeing things being canceled towards the end of August when U.K. and other parts of the world were not improving and in fact going backwards. So we started seeing that, and that's why we're having the update now. And in July, we didn't have that. Then we've got to -- on the reinsurance cover, we did talk about the clash reinsurance cover and the clash reinsurance cover is more a bottom-up reinsurance cover rather than excess of loss. So it doesn't kick in when you've got that many losses. It kicks in relatively low on our retention. Our retention on the clash reinsurance is about $25 million. So we bear the first $25 million and then it goes into the reinsurance program. And then after the reinsurance program is used up, it then starts coming back to us. So we -- so the contingency events for the first 6 months, most of which, a fair chunk of which were going into the clash reinsurance program. And I think that's why the contingency loss was relatively small. Now perhaps we could have explained that more clearly. But that's in effect, the way the clash reinsurance actually works. And then after the clash reinsurance has been utilized, there is no further reinsurance in place, and therefore, everything comes back to us, net. So when we're looking forward, we're looking forward every event cancellation that we incur, comes back to us or is in our P&L account. So that's how the reinsurance works. Just as an aside, the clash reinsurance program does have a reinstatement. So reinstate any other event. So if there was a cyber event or any other event that took place in the same calendar year, the reinsurance program is fully loaded with nothing being utilized. And that's one of the costs we incur. So as a contingency team, we use up the [ compliant way ], whereas the contingency uses up the cash program. It also has a cost of reinstatement of the program within our estimated loss because we have to pay the reinsurers for the reinstatement. So that's on the reinsurance. On the capital, the capital forecasting, Solvency II capital is not a straightforward thing. And that's why when we went to the Solvency II world, we increased the old buffer from 10% to 15% to 25% because it's more volatile. In relatively straightforward terms, the simple calculation would be to take the 22%, take the $170 million post-tax off it, and you will end up at the bottom end of our range in simple terms. And obviously, it has more elements to that. But the 22%, when we stated that type of number, it was already capitalizing the expected growth for 2021. So this is our capital number at the end of the year, assuming the growth we had planned. That hasn't fundamentally changed. So that capital is in place for the growth, both on our Lloyd's platform and in our U.S. admitted carrier, which also needs more capital for growth at the end of the year. So that's covering the capital requirements of 2021 within that number.

The next question comes from the line of Iain Pearce from Credit Suisse.

Just 2 for me. Since the half year, have you had any changes in the Lloyd's capital model with increased capital loading? Or is that still operating on the same basis when we're looking forward? And then in terms of growth for next year, you talked about double-digit growth expectations. Is that mainly rate-driven? Or do you expect to be growing volumes as well as right in that double digit number?

Okay. I'll hand over to Sally. I don't think the Lloyd's capital model has changed. We, of course, use our own internal capital model and Lloyd's approve what we actually do. But Sally, I don't think there's been any change in how Lloyd's assessed our capital model, has it?

No, no. But the numbers that we gave at half year, as Andrew said, allow for the business plan that we...

Yes, submitting.

Next year. But no, there's no kind of regulatory or Lloyd's changes coming through on that. No.

No. And on the second -- what's the second question? I forgot to note it down.

Rate and volume.

The rate and volume. That's a great question, and I'll say it's one of my favorite topics internally, the rate and volume. So if -- when we're looking at the double-digit growth next year, we're not expecting the rate to go up as high as this year. So we're expecting single digit, mid-single-digit rating increase at this point in time, and then the rest is volume. So it's going to be a combination because now we believe it's worth taking on more exposure, having seen 2 to 3 years of rate increases, we think the year is as good a year, if not better than this year, to take on more exposure. So our view is, yes, we will be taking on more exposure. That's why we need to put more capital up for that.

The next question comes from the line of Andrew Ritchie from Autonomous.

So just to clarify, on the clash cover, I appreciate the event -- the contingency losses are kind of one event. And obviously, you've reinstated it, should there be losses from the other books. But is there not a reinstatement for 2021, because some of these losses are 2021? So I'm puzzled why there's no protection on that basis on these losses are from a different accident year or is that not how...

No. But we're ensuring mainly on an underwriting year, Andrew, and therefore, they're being written into a specific underwriting year and the reinsurance protections covering the year much are underwritten rather than the accident year in which they are earning.

Okay. Okay. And then the second question, given that some of your contingency book has renewed and all this business was written pre-COVID? Or pre any -- because once COVID became a known issue...

Since March, no new exposures given. Now some events are written a year or 2 in advance of when they take place because some of these events take quite a lot of organizing and therefore buy it. So for example, if you look at the Qatar World Cup and things like that, are written several years before, and 1 or 2 of the large conferences are written 1 or 2 years before. The majority of the exposure is in the year in which we're writing it. So we have -- most of the exposure is between April to March, but there are some things that buys on a multiyear basis or buys in advance of that.

Got it. Understood. And to the extent it's all related to the same underwriting year is treated as...

Yes. In 1 year, [ described like that. ]