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

Ladies and gentlemen, welcome to your Beazley First Quarter Interim Statement Conference Call. [Operator Instructions] I'll now hand over to your host to begin. Please go ahead.

Thank you very much indeed, and welcome, everyone, to the 2022 Q1 Beazley IMS. Thank you for dialing in. I'll just start with a few comments and then hand over to some Q&A. So despite the war, we're pleased with our start to the year. We're pleased with the growth. We have indeed maintained the momentum that we built up last year and continue to put some new exposure on the books, which is positive. We had been guiding to mid-double-digit growth. And so the fact that we're ahead of that for Q1 is a good thing. And rate change is also above plan driven by cyber, as you can see, but also positive across all our divisions. As we note, rate change is moderating across some lines, and it is quite a dynamic market. So we're not formally updating our full year growth guidance, but we are pleased with how the year has started. The claims experience is also better than expected, which is also pleasing. And no doubt that has contributed, I think, to the rate change moderation across parts of the book as claims experience ultimately does drive pricing. We mentioned that cyber frequency continues to fall on both measures, premium and policy count and improvement from year-end, so from 60% to 65% by premium and 20% to 25% by policy count. But the statement of better claims experience is not driven by cyber. Rather, it's a broad improvement across the business, really reflecting the trends that we've been seeing in these last 4 quarters and then we discussed at year-end when we saw claims releases across all the divisions for the first time in a number of years. So all good there, I think. Moving on to investments. As we all know, it was a very lively quarter. We're quite pleased with the 1.2% loss. The team were very actively managing the portfolio through a period of a choppy equity market and rising yields. The $92 million is all mark-to-market losses. But we do look forward to taking advantage of the extra yield available, which was 2.3% as at the end of March, a little higher than that now. And we mentioned, I think, in the text that we've been using derivatives to manage duration. And as of today, we remain net very short. I thought I'd make a couple of comments on that. We use derivatives because that allows us to change disposition very quickly. It's not for capital management or any other purpose. And we are actively almost impatiently looking to put duration back on the books. And once we believe that yields have stabilized, we will do so. We've had a couple of goes. But each time they started rising again, so we had to go through once again. But we are hopeful we should be able to take advantage of that extra yield very soon. I'd like to say a few words about the war in Ukraine before moving on to Q&A. Tragically, it appears we're only at the beginning of what could be quite a drawn-out conflict. So I'd like to underscore that everything we've said and I'm talking about is based upon facts and the situation as is. So we haven't tried to predict what could happen as I think that's pretty much impossible to do. So the numbers that we're talking about today don't contemplate, for example, an invasion of Ukraine by Russia or any other escalation of the war. So we have made an assessment of our exposures. I say exposures because we haven't had that many claims yet. So we're looking at our aggregates and applying some loss factors on them to assess their potential impact on us. And that leads to the $50 million number that we referred to in the IMS. We list out the lines of business included in those numbers. And you can see that it's our first- rather than third-party business, which I think makes some sense. It also doesn't include cyber. And whilst there were concerns that this conflict would provoke increased hostile cyber activity, what has happened so far is that's been concentrated in the geographies impacted by the conflict, i.e., Ukraine and Russia. And actually, the level of cyber activity on our client base has diminished. And whilst we expect that to revert back at some point, to date, that hasn't happened. Notwithstanding that, of course, we continue to work very closely with governments to keep up to date with the latest intelligence on likely activity and ensure that we capture any new threats and work with our clients to mitigate those and continue, of course, to manage our portfolio gross and net so that our systemic exposure remains within risk appetite. We also have not included in that $50 million our assessment of aircraft stranded in Russia. Why not? Well, because mostly, it's an extremely complex and uncertain environment. And there are a number of different ways that loss could play out, each of which could drive a different outcome to us. However, what we can say is that none of those outcomes are material enough to warrant changing our full year guidance, which we hope gives some comfort as to their size. Are there scenarios somewhere that would change that? A couple, but they're very, very remote. For example, we have some exposure to Chinese-owned aircraft in Russia, which we have assumed are not at risk. And there were some policies with several of cancellation, which we have invoked. And we're not assuming that those would be successfully overturned, given the decades of market practice of working that way. What we have done in the assessment of our aviation exposure is to assume that they have or will be claims. Sanctions provision will not prevent payments of those claims, and they will fall either to the all-risk or war towers of insurance. And we've looked at the implications of that on our book, and that led to the conclusion that our year-end guidance would not be impacted. So the takeaways we'd like to leave with you are growth and rate changes better than expected. Claims activity has been better than expected, which has offset the exposures we have to the war, which means we're able to maintain our guidance on a full year combined ratio of around 90%. And although that war is a horrific human tragedy, in terms of the amount of our business impacted, it's relatively small. And the rest of it, the majority of our business is performing well to date. And with that, over to Q&A.

[Operator Instructions] We have our first question from Kamran Hossain from JPMorgan.

A couple of questions for me. The first one is just on, I guess, thinking about the guidance and kind of where you stand now versus where you stood at the full year results. I guess the full year results, you talked about around 90% combined ratio for 2022. You've absorbed the impact of kind of $50 million of claims from, I guess, the conflict, but the guidance is still the same. I guess the implication is that the lower combined ratio should be lower than 90%. How -- what's moved things so quickly since kind of early February and early May? So that's question one. Just also trying to think about what to bake into numbers for next year. The second question is on aviation and the stranded planes. Could you maybe give a little bit more detail on the kind of ground-up process that led you to kind of issue the statement that even if -- apart from a few very remote scenarios, the guidance will be unchanged. So I think it's been a key topic of discussion in the market in the last couple of months.

Yes. Okay. So the first one, essentially, what's happened is we've written a bit more business this year than we planned. The rate change is better than planned, and that's all helpful. And the claims experienced in the first quarter was also lower than we had planned for. And the combination of those 3 things on our financials essentially offsets the impact of the war that we had. And it's just simple. It's no more complex than that, Kamran. The ground-up process that we went through was essentially to look at our aggregates on the war on the all-risk side, assume that there is or will be a claim and that we will be able to pay it, discounting those remote scenarios that we talked about and then running that through our reinsurance program and figuring out what the net impact to us will be and running that against the tolerance of around 90%. And that's all within it. And I think what that tells you is perhaps our aggregates in aviation or risk and war aren't as big as they could have been.

We have our next question from Freya Kong from Bank of America.

If you're happy to reiterate the around 90% combined ratio target, that means potential aviation losses even if the range is wide shouldn't be too unpalatable. Is there any reason why you're not sharing this range today? And secondly, just on the rate slowdown in specialty lives, it looks like it's been quite meaningful. Could you give us some color on what's driven this bigger slowdown? And generally, how are you feeling about rate adequacy across the book versus the higher inflationary backdrop?

We're just pulling up the rate change information. What was the first question again, sorry?

If you're happy to reiterate the combined ratio guidance, why aren't you sharing the range?

Yes. So the -- that's a good question. I think it's because there are a number of different possible outcomes, and the numbers are different. And the situation is extremely complex, and no one is releasing those numbers yet because the range could be anywhere from 0 to something else. And because of that uncertainty, we didn't think it was terribly helpful to release a range. But we did want to give some comfort, and that sort of led us to the approach that we have. Rate change on specialty lines is down. I think that's mostly driven -- so it does vary. Again, it's very correlated to where the claims environment is going. As others have commentated, I think the area where competition has increased the most in specialty lines is across international D&O, which was very positive for most of last year towards the end of the year and into this year has got a bit more competitive. And that's probably the biggest factor.

And I'll just add that for the first time, we're showing you specialty lines excluding the digital business, which we've separated out, which is shown separately has a rate change of 90%. That's actually where some cyber business that is written was previously written within specialty lines. This and until the disclosure, and as you can see, overall, the rate change within digital, which needs to be included in that now is higher. And so we're splitting those as specialty lines look slightly lower than it would have done in its previous form, which is a secondary effect in addition to what Adrian just said.

Yes. Thank you, Sally. In terms of rate weight adequacy, which we also measure, we are fine with rate adequacy across the book pretty much. I can share with you that although overall we're ahead of expectations for premium, there are areas that we are under and areas that we are over. And they do correlate to where the rate change is stronger or weaker. So we are under budget in areas where rates are falling faster than we had anticipated or not increasing as much as we anticipated.

We have our next question from Tryfonas Spyrou from Berenberg.

Just a couple of questions from me. Could you please give us a sense of the gross to net premium development, given you had a higher cost gross premium this quarter? Would this have a proportionate impact on your net growth as well? And second question on cyber. Given the trends continue to be quite positive, has your plan or appetite for adding more exposure to the book changed at all since year-end?

I'll take the second question first because I think Sally is going to take the first question second. So the -- so yes, our cyber experience continues to be positive. I think part of that is because of the new ecosystem, which we rolled out, whatever it was, 18 months ago now. And we are getting more confident in that. I do think there has been an impact. Because of the war, there's a lot of cyber activity concentrated in Ukraine and Russia right now. So I do expect those trends to change back at some point. So I think there are some temporary trends there. And they continue to be new threats emerging all the time. So our central plan for cyber hasn't really changed this year, and we're comfortable with that. What we're really doing in cyber at the moment is figuring out what our 3-year plan is and what sort of business we want to have ultimately. And we'll share some more details about that in future calls. Do you want to take the first question?

Yes. Thank you. Thanks for the opportunity. So we don't update our net Q1 and Q3. So we'll give you more of an update at half year. That said, generally speaking, the vast majority of our net premium that the reinsurance that we buy is proportional. So I would generally say that growth is up, the netted -- the simple math would be that net was broadly in line. It won't work out like that perfectly, but that's how I would guide you to think about at the moment.

Very similar to last year as well in terms of ratio.

Exactly. Yes. So that's where we've guided you. We'll give you more of a full update at the half year. I think Adrian said earlier, we guided to double-digit growth this year. And then in the first quarter, we've seen obviously higher than our guidance. I wouldn't take the performance in the first 3 months to be an indication of what we're now expecting for the full year. I think it's very driven by the current cyber environment, which can change both ways very quickly. But I would think about gross net relationships in that way, and we'll give you more of an update at the half year.

We have our next question from Will Hardcastle from UBS.

First one just on the aviation. I guess the comment is really helpful, so thanks for that. But is there any potential on those remote scenarios you mentioned, those aggregate towers that you talked about could be exceeded? Or is that just not in any of those scenarios so that could happen? And the second one is can you help me, I am probably being really stupid here, I'm just trying to understand relative implications. And when that -- effectively when you get the balance back in the yield coming through the P&L. Is it -- do you have to then sort of wait for that to run through and duration come through? Or is it you take the derivative off, and you'd effectively bounce back to the 2.3% plus as of today upon that moment?

Thanks, Will. I'll do that first. The answer is the latter. So the reason we use derivatives is to enable us to move extremely quickly. And so yes, as soon as we feel yields are stabilized we will unwind those, and we'll get the benefit of the increased yield immediately, which we are impatient to do. Those are most scenarios that you described will have different levels of impact. We have discounted them because we think they are genuinely remote. But I -- and I wanted to share them with you so that we could all understand how remote those scenarios are because quite frankly, we are trying to learn from the experience that we had a couple of years ago when we perhaps didn't share as much detail on our assumptions behind our COVID losses as we could have done. We believe those scenarios are extremely remote, and you can make your own judgment as to that.

We have our next question from Nick Johnson from Numis.

A couple of questions, please. Firstly, on specialty lines. I'm just picking up on the earlier question about sort of change in rates in specialty lines. You talked a bit about rate adequacy and the competition in D&O. Just wondering if you can talk a bit about how you feel about the growth opportunity going forward in specialty lines. And also on specialty lines, just wondering if you have, at the moment, a rate change number for specialty lines in 2021 ex digital. That's the first question. And secondly on...

Let me get to that first because I'm forgetting the first question. So yes, you'll get year-on-year comparison at the half year. We can do that. And I forgot the first question...

Just the growth opportunity going forward as you compare to in specialty lines.

So there are 2 things going on generally. First, we always need to make sure that we manage market cycle discipline. And so as rates increase and then dissipates our enthusiasm for putting on new exposure and starting to shrink will change. And we've already started that. So our rate of growth in D&Os slowed right down as the rate change has moderated. And we will be very fast to act as the risk/reward changes, Nick. And so hopefully, you can rely on us to continue to exercise that sort of discipline. That having been said, the way that we're trying to construct our portfolio is to invest in areas with long-term demand growth. And that fundamentally still remains, right? So that's why you find the scenarios where industries are growing, you find us in the areas of environmental and health care and technology and so on and so forth because those are areas with long-term demand growth, which should enable us overall across the portfolio to maintain the sort of growth seen in specialty lines whilst being able to exercise top of the market cycle discipline. So I think our sort of long-term thesis for specialty lines and across most of the business actually remains unchanged.

Okay. Great. That's helpful. So the second question was on surplus capital. So I appreciate you don't publish the number at the Q1 stage, but just wondering if you could talk a bit about some of the moving parts in Q1. I'm thinking the higher yields and sort of slightly better pricing incremental positives and also obviously conscious of what, if any, impact the sort of mark-to-market losses have on the capital position?

Okay. Yes. So it's also slightly apples to oranges because, of course, result we're comparing IFRS and Solvency II. But broadly speaking, if rate change is better than expected, claims experience is better than expected. And we've written more business than we thought, which we think is profitable. That's broadly positive on a P&L perspective and from a capital perspective. You're right, rising yields gives us a mark-to-market loss, but on our Solvency II balance sheet, of course, we discount our liabilities. And so rising yields gives a bigger discount, which is also a tailwind. And so you -- we don't share numbers at Q1 and Q3, but you can see, I hope, that the winds are tailwinds rather than headwinds.

We have our next question from Faizan Lakhani from HSBC.

First one, I just wanted to understand, in practice, how do we associate cyber and it's war exclusion? I understand that one, you've got to actually plan to firstly a war, but then also attributed to someone who is acting as a state actor. How does that really happen in practice? Do you need approval from foreign agencies? That would be helpful. And the second is on inflation. We've seen a growing trend of increasing inflation, particularly in the U.S. and potential risk of escalating wage inflation. What does that mean for your potential exposure in lines like health care liability and D&A?

Yes. Good question, good question. So -- and we've talked about inflation for a while now. And inflation shouldn't be a problem for an insurance company like us, provided that we can spot it and we're allowed to price for it. And so we're very active in building in inflation assumptions right across the business from how we budget as a business for our own costs but also in our capital model, in our reserving and in our pricing. And so we've been very proactive in making sure that we update inflation assumptions as the world changes. One of the good things that we have and one of the reasons why our liability business is our claims made business rather than written on a currents form is because it allows us to adjust things like inflation much more quickly, right, because we're not having to -- because on a currents form, you could be paying claims on things that occur 15 years ago and you don't get a chance to reprice it. On a claims made form, of course, you get to update your pricing much more regularly. So provided you can change your pricing and provided you're factoring it in, inflation shouldn't be a problem. The issue comes when you either don't spot it coming or the market doesn't allow you to price for it properly. Fortunately, the way the market is currently, we have been able to spot it, and we are able to price for it.

But in terms of the reserving...

Sorry?

In terms of reserving, what are the assumptions in terms of what are you expecting for inflation forward-looking versus -- and how has that changed?

So we put in a load across certain classes last year to increase in inflation. What we're doing Q1 this year is actually increasing those loads because we think it's going to last for longer than we did do this time last year or in Q3 last year because of the events that have happened this year. The particular load varies by product, by geography, by class, but we have updated them in Q1 because quite frankly, the war has meant that we think it's going to last longer and be slightly more pernicious than we did in Q3 last year. Moving on to the cyber question. You're right. In order for the war clause to trigger, there needs to be a war, which there is. And it needs to be attributed to one of the warring parties, which is a complex and resource-intensive process. And generally speaking, it needs the sort of capabilities of a nation state to do. What we've seen so far this year with the way the Western governments are treating this conflict is to do that attribution and to call out Russia when -- in advance when they think they're about to do something. And we -- the messages we've been getting from government is that if there are hostile cyber attacks from Russia, they will do the work to attribute to those attacks. Having said that, if they're unable to do so or there's increased activity which we can't attribute to the war, they will absolutely be covered. And what we've said to our clients is, we will treat each issue we have independently and depending on facts. And so there may or may not be cyber activity which gets caught by the war exclusion.

We have our next question from Andrew Ritchie from Autonomous.

First question, I'm still having a bit of a head spin on the derivatives. I see what you're doing. But if I forget -- so this year, I'm assuming those derivatives sort of run off naturally anyway. So I would sort of plug in the higher yield in '23. Maybe there's going to be derivative noise for '22. So that's the first question. Second question, just on cat exposure, not nat cat, you were sort of being quite thoughtful about that at the year-end. I think obviously, property has grown, but reinsurance hasn't. What in aggregate has your net cat kind of positioning done combining the 2 sort of cat-exposed lines year-to-date? I guess the other question I had on the claims environment. I suppose my question is, is there a danger of declaring victory sort of too early because there seems to be different opinions as to where the claims are still slightly unnaturally suppressed. I'm talking here claims ex Ukraine. There's a lot of uncertainty in the economic environment. Some of the specialty lines could be vulnerable to a sort of recession-type scenario. So I guess I'm just curious as to your view, the danger we get a bit carried away and actually, this is still -- it's a bit early to be that relaxed on the claims environment.

Yes. No, please don't take what we are saying as a sign that we are relaxed on the claims environment. So let's go to the 3 points one by one, Andrew. Yes, I think your assumptions on derivatives are broadly correct. So I would put in the actual year for 2023. We'll try to get that as soon as we can in 2022, and we are able to do so very quickly once we decide that it's safe to do so. The claims environment -- to come to your third question. Second, the claims environment, we said at year-end, didn't we, that we are in a period of elevated risk across great chunks of our portfolio. There is inflation there, which we price for. There is spatial inflation, which is definitely manifesting itself as the courts reopen in the U.S. and across the world. And climate change is making natural catastrophe risk even more complex. The difference between now and 3 or 4 years ago is that those issues are recognized by the market. And therefore, we are allowed to underwrite to them and price for them in a way that we weren't 4 years ago. And I think what we're seeing in our claims development is evidence that we have been able to underwrite for that period for the environment of elevated risk. And hopefully, we will be able to continue to do that successfully. Your second question was?

On just the nat cat positioning?

Yes. So we have -- yes, so I think, again, at year-end, we showed you what our risk appetite had done as a percentage of net earned premium across the years. And we said we will continue to moderate that this year. That is true. And so we continue to have a -- be quite restrained on our nat cat risk appetite. That hasn't changed since year-end. I think, again, we were slightly disappointed with the property reinsurance market at 1:1. And so we have written less than we had thought that we would do. The property reinsurance market continues to evolve quite quickly, actually. And so there may be a bit more opportunity for us in the year-end and that we make a bit of a lost ground, but we have not put any more. We have not increased our risk appetite as a result of that. It remains where it was at year-end.

We have our next question from Freya Kong from Bank of America.

So just a follow-up on the assumptions in your aviation range. So one of the assumptions is that policies that have been canceled cannot be overturned. How confident are you that your policy cancellations will stick, given likely legal challenges coming from the leasing companies? And in a worst-case scenario where these don't stick presumably in the war market, could this still be contained by the reinsurance that you have?

We're very confident that those inclusions will hold because they were on the back of decades of market practice, and it's the way that the war market works. You can buy war cover in 2 different ways, right? You can go to the marine, aviation war markets, and you can buy it very competitively priced, knowing that if war does break out, the policies are canceled, and you have to renegotiate them or you can go to the political risk and political violence world and buy noncancelable war coverage, but it's more expensive. And so customers have a choice of markets to go to according to how they want to structure their coverage, and both markets have worked very successfully for decades. So we remain -- we are very confident that the structure of the policy has worked. We just wanted to share mostly because of the experience we had a couple of years ago when we didn't share our assumptions the sorts of assumptions that we have made. And we do remain very confident in those. And if for some wildly remote reasons they don't hold up, our losses will be bigger.

We have our next question from Ben Cohen from Investec.

I just wanted to, firstly, just to follow up on the comments that you made, Adrian, in answer to an earlier question about, I suppose, whether cyber activity has sort of remained concentrated in Russia and Ukraine and therefore, hasn't sort of been impacting your clients as much. I just wonder to the extent to which you sort of can kind of quantify that benefit in the first quarter separate to the sort of remediation work and the pricing benefits that you've been getting through? And I guess then the degree to which your assumptions going forward, how quickly you think that, that would normalize. And well, I'll leave it there. Sorry, I don't have a follow-up on something else.

Okay. I think that's very difficult to unpack, Ben. I think the message that we were trying to give was that there were some concerns at the beginning of the year that one of the attack vectors that Russia would use as part of its strategy with Ukraine was broad-based cyberattacks. That hasn't happened. We have noted more activity, as I mentioned, in Russia and Ukraine. I don't think it's -- we haven't tried to unbundle those 2 things at all. And -- but we do note the fact that it's happening. And we have to expect that at some point, that's going to change again, and we just have to remain vigilant. And that's why, frankly, we haven't changed our plans for cyber this year.

And sorry, just to be clear, just so I'm not misinterpreting it. Are you suggesting that there has been this displacement? Or have I got that wrong? Is it just that frequency elsewhere is better because of pricing and things just haven't got worse because of Russia, Ukraine?

I -- so I can tell you we've noticed more activity in Russia and Ukraine, and that kind of makes sense. I can tell you that our frequency continues to go down even, and we have been preparing it to go up. And I can't unbundle it any further than that, Ben.

We have our next question from Will Hardcastle from UBS.

It's a really good margin. Just there's no mention of catastrophe losses outside of Russia, Ukraine here. Is there anything you can say what can -- perhaps remind us of what size of loss there has to be in order to be disclosed?

Yes. I mean, we've had -- so the sort of main things in Q1 were some winter storms in Europe and some -- and in Australia. We have a small exposure in Australia, very little in Europe, all of which is well, well within the cat margin that we have in Q1. And we were disclosing anything that caused us to change our guidance, and none of that is anywhere near it.

[Operator Instructions]

All right. Well, thank you very much indeed, everyone, for dialing in. Good to talk to you all, and we look forward to doing so again at the half year. Thank you very much indeed.