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

Good morning, everyone, and thank you for joining us for the Beazley Quarter 3 statement. I'm going to cover the key elements of our trading statement and then open up to Q&A. It's been a decent quarter, which has played out broadly as we flagged at the half year. We expected rate increases to moderate and they have, particularly on cyber, which we expected. And we expected growth rates also moderate, which they've done. We mentioned in our statement also that the frequency of our ransomware claims on our cyber book remains on a downward trajectory. We've been reporting this metric now since July 2020. So this is probably the last time we'll make mention of it in this format, given the fuller disclosure we've been -- we've had since we separated out the cyber risk division in our numbers. Whilst the cyber rates have moderated, they do remain significant, and we've been growing exposure, as we said we would, taking advantage of the new business opportunities we're seeing in that area. Our initial view of the impact of Hurricane Ian is about $120 million net of reinsurance. This means that our year-to-date cat losses are within the catastrophe margins that we hold, which I think is positive given the elevated size and frequency of losses throughout the world this year. And I think it speaks to the significant work we've been doing on our property risk portfolio over the last 5 years. And I think this leaves us more confidence to take advantage of the upcoming opportunity, which many carriers have been referring to in recent weeks. Market sentiment has moved materially in the property world, both insurance and reinsurance, and to a certain extent in the reinsurance world overall. And we believe that market conditions for the rest of the year and into 2023 are, broadly speaking, more favorable than we thought they would be in the summer, and that will be reflected in our business plan that we finalized at the end of the year. As we stated at our Capital Markets Day earlier this year, we'll continue to be dynamic on where we write premium, focusing on where pricing dislocation exists and targeting those areas with the best risk/reward. We've also highlighted in the statement a moderation of growth in specialty risks, which has been driven by D&O, where the risk/reward dynamics have changed here as the rate change has moderated. In fact, the rate decreases are now fairly common, and we've responded accordingly and have taken risk off the table. We continue to monitor inflation to ensure adequate pricing, and we remain cautious in areas where our product set is most exposed, for example, in hospital professional liability. The impact of inflation on our claims environment has been as expected, and pricing trends have remained positive and outpacing claims inflation in most lines of business. Whilst we're planning for the reinsurance world to be a challenging environment next year, as we've said before, properly priced reinsurance and the disciplined reinsurance market is positive for the insurance industry overall. And so we think the shift is a positive thing and should encourage disciplined behavior in the insurance industry as well. We do expect to pay more for our reinsurances next year, but given the strong relationships we have with a strong core panel of reinsurers, we're confident that our programs will retain their integrity in 2023. We've been indicating for the past 18 months or so that we are anticipating an opportunity across our property insurance and reinsurance books as the industry adjusts to taking account of climate change and with having a forward-looking of climate risk as recognizing there's a role for specialty insurance and property. That opportunity has emerged faster than we originally thought, which is a good thing, and it's something we will look to capitalize on. On the investment side, the volatile conditions in the first half of the year have persisted into the third quarter, driving the mark-to-market losses, which at the end of September, stands at just over 3.5%. This will have an impact on our full year P&L because of the way we have to account for losses but the extra yield, 4.6%, as at the end of September, will be a significant tailwind for us next year. I'll now pass over to Nadia to open up to Q&A.

And our first question today goes to Will Hardcastle of UBS.

Look, it looks like the high 80s reiteration, the combined ratio is very impressive actually, I think should drive some confidence here. How much of this is a continuation of the rate benefit, the underlying improvement that's giving you the confidence to do this? Versus I guess the reserve release strategy that happened at H1 relating to IFRS 17. Just as an understanding, was that a one-off moment that, that happened? Or could there be more of that in the second half? And then can you talk me through some of the extent of the capital deployment for the full year expected for the cat opportunity? You're actually giving a nice crafted message there, which has been a bit mixed from some players. It sounds like you're talking about reinsurance and insuring, I guess what's the binding constraint here for growth? Is it IBS exposures? And do you think like some that this is going to be quite broad-based?

Okay. So the first question first then about the high 80s guidance, so I think the A versus E in losses in the first half of the year was better than expected. And I mentioned that our cat activity year-to-date is within our cap margins. Having said that, Hurricane Ian was bigger than our Q3 cat margin. And so if you net those things off, our incurred claims in Q3 was also slightly better than expected, which kind of offset that, which meant that we could reiterate the high 80s guidance we gave at the half year. Does that make sense?

Yes, it does. I guess just trying to understand whether as well the IFRS 17 extra reserve release from H1, it's going to be a thing as well.

There's no IFRS 17 effect in the statement we made today, no.

That's great.

Looking on to the property opportunity next year, I think it's both reinsurance and insurance. We expect the reinsurance market to shift significantly at 1/1 and beyond for the reasons that we've outlined. I do think that, that will have an impact on the insurance world, and we've been sort of flagging for a little bit, I think that as the property insurance world adjusts to having to write for the changing risk environment that climate change has provided, that will give us as a specialty insurer more opportunity. I think that is hovering into view. I think the insurance market will adjust and give us an opportunity. I think the reinsurance opportunity is probably first.

And the next question goes to Kamran Hossain of JPMorgan.

The first question is just on, I guess, the outlook that you gave for growth at the first half result, which you talked about 2023 probably growing mid-teens. Given what's going on in the market, could you maybe give us a feel on whether you feel more confident, less confident? Obviously, reinsurance and buying is going to be more challenging, but just interested in whether kind of you see this as a net positive probably for top line for next year or whether it kind of rounds out or come nets off against each other. The second question is on cyber. Clearly, rates have kind of moderated a little bit from the first half. But I guess, at this point, we're seeing kind of rate on very, very, very strong rates this time last year. Are you seeing new money coming into that market yet? Just interested in kind of whether you are seeing increasing competition.

Yes. Thank you, Kamran. So first question, yes, so we did guide to mid-teens growth in the summer. I think given the shift we've seen in the property market, there's probably some upside to that moving into next year, if only because rates will be stronger in property reinsurance and insurance next year. So I think, yes, there is definitely upside to the mid-teens growth there. On the cyber side, we're still getting rate increases. And as we sort of mentioned in the statement that the frequency of cyber losses continues on its downward trajectory, which is all positive. I think we are seeing the market open up again a little bit on cyber, not necessarily new money to the marketplace, but the existing carriers also being a bit more positive about cyber than they were in the first quarter.

And the next question goes to Freya Kong of Bank of America.

Two questions, please. I guess asking Will's question from another perspective. To what extent have you seen better-than-expected claims experience that might be considered good luck or won't be repeated next year? I think you flagged some of that at H1? And secondly, I guess Beazley has remained fairly cautious towards property and reinsurance lines in the last few years. What is your overall view on rate adequacy now? And could you give us more color on how much capital you intend to deploy? And how this impacts your year-end capital ratio expectations?

Thank you. So what was the first question again, the first question?

How much was good luck in the number?

I guess how much was the better-than-expected A&E in the third quarter? Like I mean sometimes it's over sometimes it's under in A versus E. So I think it's good that we've been having better A than E for a few quarters now, but we can't expect it always to remain that way. So I guess it's a bit of both. In terms of our plans for next year, we've been flagging, as I've said, that we think property is an opportunity that is hovering into view. When you go back in our history, property used to be a bigger part of our portfolio than it has been for a while. And for the first 20 years of our existence, it was a jewel in our crown. And if property does become a specialty line again, we think it can be once more, and it appears that the conditions are appearing for us to be able to do that. So I do think there is potentially a strategic opportunity for us to grow our property franchise, both in London and onshore in the U.S. And I think that's going to emerge more quickly than we thought it would be, and that's very exciting.

And then impacts on capital or capital ratios?

Yes. I mean, so we signaled at the half year that we expected our capital surplus to be about 28%, which is 3 points above the range we'd like to be in, and we remain confident in that capital position. Our business plan for next year is with Lloyd's now, it's been approved, and we've got the capital to support that plan. We are seeing a significant opportunity in the property market, which we're well positioned for, and given the work we've done on that portfolio over the last few years.

Our next question goes to Andrew Ritchie of Autonomous.

I guess, Adrian, the first question, there's been a few carriers flag adverse D&O claims experience, particularly the 2019 and 2020 accident years. I mean, clearly, you're still running confidently, but I just wanted your perspective on that. Particularly, I'm contrasting that with there is a bit more claims experience emerging, but yet the market is softening. So just some perspective, your perspective on the sort of D&O claims/pricing situation. The other question was I appreciate what you're saying that property has been bigger in the past. Just when I look at your exposure in property lines by things like the realistic disaster scenario or even the in-loss versus equity. I don't see -- you seem to be already quite exposed. And therefore, I'm thinking is the strategy mostly to maintain the overall sort of net exposure but collect meaningfully higher prices? Or do you feel there's actually room to grow the net exposure? That's what I'm sort of questioning.

Okay. Andrew, thank you for those questions. On the D&O products, so yes, we have seen in the Q3 results some carriers talk about adverse development on the '18, '19 and '20 accident years actually. And I think we've been saying consistently that the drivers of heightened claims activity which we started to flag so 2016, 2017 have not gone away. And so we expect a period of elevated claims across much of our liability business, including D&O, and that is persisting and it's manifesting itself. The reasons for the D&O market softening, I think, are quite particular. And it's essentially because the flow of new business into the D&O market stopped abruptly when Ukraine was invaded. And I think that's had a particular impact on demand and supply, which has been frustrating and disappointing, which is why we've taken some risk off the table, and we're writing significantly less D&O than we planned to at the beginning of the year because we believe remains an elevated risk, and we need the pricing to reflect that. And so if these trends persist, Andrew, we'll take more risk off the table because we absolutely don't think that the claims environment for D&O is any better than it was in years '18 to '20. On the property side, I do think there is a strategic opportunity for us, which we will look to build on. We will make sure -- and as we do that, we manage our capital position as prudently as we always have done and make sure that we're not exposing our shareholders to outsize risk in any part of our -- in any one of our key risks, cyber casualty or property and we'll make sure that we do that. But I do believe there's a -- both a near-term and a strategic opportunity for us in property insurance and reinsurance.

And sorry, just to be clear, that's to grow exposure as well as obviously collect the higher prices, so it's more than just collecting the higher prices for the same exposure?

Yes, we're looking at that. And if we can grow our exposure in a prudent way, Andrew, we absolutely will do. Yes.

And our next question goes to Derald Goh of RBC.

A couple of questions, please. The first one is just going back to cyber. Can you confirm that you're still on track to write $1.3 billion for the full year? Because if I look at the third quarter probably would have expected a bit more, but maybe there's a bit of seasonality in there. And also for the cyber growth in 2023, is it fair to say that this growth in property cat is actually diversified to your cyber exposure growth as well? Second question is just on reserving. So I guess, as you conduct a year-end review, missed your expectations where this inflation or not continue as expected? And maybe all the other claims come in a bit better than expected as well. Do you see an opportunity to maybe increase any excess loadings? Or do you feel that you're pretty comfortable with the loadings that you've already added to at the half year?

Okay. Right. On the cyber side, yes, our cyber growth is slow a little bit in Q3 as we thought it would, if only because rates are coming off a bit. Will we come in at the $1.3 billion? Don't know yet. We have quite a big fourth quarter in cyber. So a lot of it depends on how that goes. So it might be a bit under. It might be a bit over. I really don't know yet, but it won't be a million miles off. And you're right, if there is an opportunity to grow our property franchise, that does provide, apart for anything else, the opportunity in a good healthy diversified specialty business and will help the other parts of the book to grow as well, which is a positive thing. We look at inflation every quarter. So as we complete our third quarter review, we will update our inflation assumptions and our recession loads and all the other loads that we put on in the light of what claims trends we've seen in the last 3 months. We haven't finished that process yet, but it's something we do every quarter. And in this dynamic environment, I think that's the right thing to do.

And the next question goes to Nick Johnson of Numis.

Two questions, please. Firstly, on specialty, so obviously, you're saying that the growth slowed in the third quarter. Just wondering, is that all D&O? Just wondering if you could just talk a bit about what the growth conditions are like in specialty and other parts of that segment. And sort of how confident you're feeling about the growth outlook in specialty given price increases seem to be slowing. That's the first question. And secondly, on property growth. Just wondering if you're -- are you seeing that the opportunity there is mainly in cat-exposed property or is -- do you think there'll be a more broad-based opportunity so sort of non-cat property as well?

Thanks, Nick. So specialty risks, the reason for the slowdown is predominantly D&O. It's not only D&O, but it's predominantly D&O and the rate reductions we've seen in D&O have contributed to the -- mostly to the lower rate change that we've posted. Specialty risk remains a diversified book in and of itself. There's lots and lots of products in there. And as we look back over the last 12 years-ish, it's been a strong driver of growth for the group. I think it's encouraging actually that there are other parts of the book now, which are growing stronger than that because it shows the benefits of a diversified business overall. There are lots of products within specialty risks, which continue to grow strongly, environmental insurance, for example. But the D&O is a reasonable chunk of that, and it's providing some headwinds at the moment, which is fine because we've got lots of other stuff to do. When we look at the property book, one of the things that we have been concentrating on these last few years is to get a better mix of cat-exposed and less cat-exposed business. And I think as we grow, if there is an opportunity to grow the franchise more strategically over the next 3 to 5 years, we make sure that we have a good mix of business that is kind of exposed and lots of stuff that's got more of a fire risk, a traditional fire risk to it. So yes, good spot.

And the next question goes to Ashik Musaddi of Morgan Stanley.

Just a couple of questions I have. So first of all, just first of all, like, if I think about next year, I mean, you would most likely be continuing to grow in cyber and you would most likely pick up a bit of extra growth in property cat reinsurance. And if I understand correctly, these 2 businesses, the attritional is definitely much better than 90%. So how do we think about the combined ratio for next year? I agree it's too early for -- to get a guidance, but just direction of travel. Is it fair to say that the attritional for next year should be better than the attritional for this year just because you would have more proportion of cyber and property cat into that mix basically? So that's the first question I have. The second question is -- actually, this one is just good.

Great. Thank you. You're right. We're not going to provide any guidance for combined ratios next year. But I think directionally, if we were giving guidance at the half year that we expect growth to continue in the mid-teens in 2023, that should imply some confidence in our business and the fact that we think the combined ratio should be at or better than our long-term target of 90, right? And if we're guiding that, that's -- there's probably some upside to that into 2023, that should provide some guidance that we remain confident that our combined ratio should meet or beat our long-term hurdle rates. But I can't give any more guidance to that, I'm afraid.

And our next question goes to Abid Hussain of Panmure Gordon.

Two questions, if I can, please. First, just two questions. So firstly, coming back to the property book, I'm afraid. Just wondering if you can give us any more color on the outlook of rates or the indication of rates that you're seeing in that market. Some indications that we've seen sort of what it's in the sort of 20% to 30% range, which are quite bullish. Just wondering if you're seeing something similar. And then just sticking with the property book, how much headroom do you have in terms of PMLs? Or put it another way, can you write more than 15% without increasing your PMLs. So if you could just give a little bit more color on that, please? And then secondly, just coming back to your cyber book. I'd imagine you want to keep your total book beyond cyber diversified. So I just want to get a sense of is there a limit in your mind to how much cyber should make up of your -- of all lines of the total book. So any thoughts on how you think about business mix would be helpful.

Okay. Thank you very much indeed. So on the property side, it's quite difficult to predict what we think is going to happen to the overall rates next year. On the reinsurance side, we've been hearing commentary from the mid-20s to 50s and higher as well as a significant change in attachment points and the like. I do think that the reinsurance market will go through a structural change at 1/1, and that will have an impact on the property insurance book. And we're kind of updating our assumptions for rate change now. But I -- we haven't come to the conclusion of that. So I can't give any guidance for rate change for property next year at the moment, unfortunately. Can we write more than we currently do as a percentage of the whole? I hope so. I think so. As I said to Andrew earlier in the call, if we can grow our exposure base in a prudent way and make sure that our PMLs remain within tolerance, we absolutely will do. And as we get to the year-end, we'll provide more guidance as to what that looks like for next year. On the cyber side, we have said that we will write more cyber these next couple of years. Whilst that market goes through its structural change, we have a long-term target that we had historically of not being more than 15% of any one product, but we'll tolerate a short-term elevated position, which I think we'll maintain in cyber for a little bit. But over the medium term, that should come back down to within the normal averages.

And our next question goes to Faizan Lakhani of HSBC.

My first is on -- you mentioned a comment about reinsurance going up in property and potentially seeing through a broader reinsurance market. I understand you are a net beneficiary of improving rate. But given that you are relatively underweight in property, is there a risk of the higher reinsurance rate having a less benefit or impact to your sort of book? And just going to the second one, again, coming back to your -- that you made around the combined ratio and the comfort that you have around that. If I put the question in a different way, what would cause you to sort of become more pessimistic on a combined ratio, stripping out any sort of one-off large events next year? I mean if you were to see a step change in social claims inflation, is that sufficiently factored into your thinking on combined ratio? And my third question is a relatively short one. When I look at the -- we don't have the full detail, but when I look at sort of the retained earnings potentially in Q3 and Q4 post dividends, it appears that your leverage will probably remain around the same level where it was at the half year. Are you comfortable running into that with that same level next year?

I'll answer the last question first. So yes, we are. And on the property side, so there's a -- if we think about the reinsurance dynamic, there's an opportunity for us on our inwards reinsurance book, which I think we'll capitalize on. The plan that we've submitted into Lloyd's on the property insurance book does contemplate us paying more for our reinsurance and also increasing our retentions because we think that's going to happen overall, but it still provides a very positive business plan overall. So I think as we said before, a healthy reinsurance market ultimately is good for everyone. On the combined ratio side, what will cause us to change our mind? I think either a period of adverse A versus E or some danger signals of red flags that the claims environment has some exposure to it that we needed to adjust to. As I've mentioned a few times, I think, we take a close look at inflation and the impact of having on our claims every quarter and make those adjustments and then compare those adjustments to the prices that we're getting. And as we've -- and throughout this year, we still remain confident that the prices do contemplate adequately the levels of inflation that we're seeing in most parts of our book. There are parts, particularly within bits of specialty risks, where we don't think that makes sense, and we're taking risk off the table there. But overall, I think our combined ratio, we are comfortable with.

And our next question goes to Ivan Bokhmat of Barclays.

I've got 3 small questions. The first one, on the Hurricane Ian loss, I was wondering if you could maybe give a little bit of color of the $120 million. Can you indicate how much was in your D&O book? Sorry, in your D&F book and how much was in the reinsurance portfolio? The second question, a little more broad, I suppose, a bunch of large reinsurers are still carrying substantial COVID IBNRs. I was just wondering if you could give some high-level thoughts about what do you think about the recoverable for you? Are you -- have you already received all that you believe you were due? I mean there's been a bunch of court decisions also in the past last quarter. So maybe you could give a little bit of color on that. But the final question, very minor. Just wondering if you think that the letters of credit in the current higher interest rate environment is still an appropriate tool to use for capital management.

Yes. Okay. So the split of the loss between the various splits of our book, we don't disclose the split. Sorry, so I can't help you there. Apologies for that. On COVID IBNR, do we still have some IBNR for COVID? Yes. But as we've talked about the last past of our COVID loss are around -- were from our event cancellation business, and that's pretty much done now. So our COVID -- remaining COVID liabilities are relatively small now, and so no particular reinsurance issue. Do we believe that the LOC strategy remains an integral part of our capital strategy? Yes, we do. As with all things, if the cost changes, we'll do the cost both analysis and adjust accordingly. But LOCs are an intrinsic part of the Lloyd's market and how they're capitalized and like most people in the Lloyd's market, they will -- there's no reason why it shouldn't remain a part of what we do. But like everything, we'll take a look at the costs as and when they renew.

And our next question is a follow up from Derald Goh of RBC.

Two quick follow ups, please. The first one, can you give us a sense of the capital requirement for each dollar premium between property cat versus specialty or cyber? And secondly, could you also remind us what are the external reinsurance structures that you have in place and if they all renew at 1/1 or are they a bit more spread out across the year?

Okay. I'm going to disappoint you on your first question. No, we can't. We don't disclose that. I do apologize. On the second question, what sort of reinsurance do we buy? Broadly, there's sort of 3 components, 4 components to our reinsurance strategy. We buy reinsurance to give us the line size we need so that we have the firepower that we need within the markets that we're in. We buy catastrophe reinsurance to manage peak risks, and we buy some aggregate reinsurance to manage frequency. And then the fourth part is we partner with reinsurers to -- on lines of business where we can manufacture more business than we want to keep on our own balance sheet and help them to optimize on net business mix. Do they all renew 1/1? No, we buy at 1/1, one fall and some in the summer. And our plan for next year, as I said before, contemplates the engine reinsurance market that we see.

We have no further questions. I'll hand you to Adrian for any closing remarks.

Thank you, Nadia. Well, thank you very much indeed for dialing this morning, everyone. I hope that was useful. Any other further follow-up questions, please contact Sarah Booth, and enjoy the rest of the Friday and have a good weekend.