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

Good morning, and welcome to Beazley's 2024 Q3 Trading Update. I will now hand over to Chief Executive Officer, Adrian Cox. Please go ahead.

Thank you very much indeed. Good morning, everyone. I'm Adrian Cox, the Group CEO of Beazley. I'm here with Barbara Jensen, the Group CFO; and Sarah Booth, Head of Investor Relations. Thank you for dialing into the Q3 call. I'll give a few highlights, and then we'll go into Q&A. And Barbara and I will both be in that session. So I'm very pleased with how our business has navigated the claims environment we have had this year. Our commitment to disciplined underwriting and risk selection has meant that despite an active hurricane season and lots going on in the cyber world, we are on track to deliver the guidance we provided at our interim results in August. That guidance was for growth in the high single digits, rate change in the low single digits and undiscounted combined ratio of around 80%, a yield on our fixed income investments of 5%. So where are we at the end of 9 months? Well, gross and net growth are both 7%. The reason for that is we spent more on reinsurance than originally planned. We spotted in the summer an opportunity to increase significantly the amount of cyber catastrophe bonds and ILWs that we purchase. As we've been saying for a while, we are actively encouraging the development of this catastrophe market in order to be able to hedge our at scale, our cyber systemic risk. This is in line with our strategy. We see the ability to use cat bonds and ILW as part of the toolkit we need for that systemic exposure. And this is a subject that we discussed at the Capital Markets Day in October, where we did a deep dive into cyber. The slides remain available on the website if anyone is interested to dive into that. The hurricane season has been more active this year than it was in '23. But despite floods in Europe, hail in Canada and a number of storms and indeed tornadoes in the U.S., we're able to maintain our full year combined ratio guidance of around 80%. We have provided a little more detail on the two largest events, Hurricanes Helene and Milton. Between the two of them, noting that it is still early and losses will take a while to develop fully. We've given an estimate of between $125 million and $175 million. Our investment performance through the third quarter was very pleasing at $513 million or 4.7%. The average yield of our fixed income investments at the end of September is 4.3%, which I think supports a good outlook for investment returns. Our rate change for the 9 months is flat, which I think is consistent with the commentary that we gave at the half year. Looking at the divisions in a little more detail. Cyber Risks growth is down a tad from the first half, but we continue to grow well, particularly outside North America, although our new business is up generally. The market continues to be relatively competitive, particularly in Europe despite the increasing levels of cyber crimes, some severity issues on large businesses and CrowdStrike, which have not changed the market in quite the way it might have done, had it been a more significant event than it has turned out to be. Rate change for the year has remained unchanged from the interim, and we continue to be very bullish about the short- and long-term prospects for this class. Moving on to MAP. The team continues to grow well. But given the increased session to our third-party syndicate 623 income for the Beazley Group is still down a little 5% compared to 3% at the half. On a total managed basis, though, and so including the premiums that we ceded to the third-party syndicate, that team has grown 6% year-to-date. Rate change is steady at 2%. And I think the heightened geopolitical uncertainty and generally good economic prospects mean, we think demand for the products within MAP remains strong, and we feel quite confident about the continuing growth prospects in this division. On property risks, from a premium perspective, the third quarter is the lightest quarter for the Property division, but both growth and rate change have remained relatively stable from the half year. On Specialty, we continue in the same vein as we have mentioned for about seven quarters now, navigating the challenging conditions in the D&O market whilst growing in other smaller niche areas that have less exposure to social inflation internationally, our environmental book, our white labeling business, M&A and so on and so forth. That is beginning to pay off. And year-to-date, the division has caught up a little bit to down 1% for the 9 months as opposed to 3% at the half year. Rate change is at 1%. Lastly, I thought I'd give an update on the progress of our share buyback program. It completed at the end of September this year. As we get to the end of the year, we'll have a final view of the prospects for growth in 2025 as well as the amount of capital available, and we will assess whether we have excess capital to distribute. And if so, whether to renew the share buyback program or perform other capital management actions. Finally, I will note, as also mentioned at the interim results, it's likely that our growth next year will be slightly lower than this. So to conclude, again, we've delivered a strong quarter with contribution from both our underwriting teams and our investment teams on track to deliver our guidance for the full year. And with that, I will open up to Q&A. Thank you very much indeed for your time.

[Operator Instructions] We will now take our first question from Kamran Hossain of JPMorgan.

A couple of questions for me. The first one is just on the, I guess, the Milton and Helene number combined. I was just interested in when you think about the development of the business, Ian, and compare it to maybe Ian, where you had a smaller property cat footprint. Are you surprised with the size of the loss? Maybe could you help us like think about how to scale one versus the other and whether actually this was surprisingly large or kind of in line with what you'd expected? Given the growth in the book, given the relative size of the two -- sorry, the one versus the two events, this year? Second question is on the cyber environment. I think, if we look at last year, U.S. was quite competitive, international may be less so. Can you maybe help us understand what that environment looks like at the moment, where the opportunities are in cyber? Because I think, at the CMD, you laid out some pretty exciting kind of market growth assumptions over the next couple of years.

Thank you, Kamran. So if you compare the loss activity of those two versus Ian, if you look at the midrange of the losses, which is about $150 million, that's about 2.5% of net insurance revenue. Our loss from Ian was just over 3% of net insurance revenue. And the reason for that is that the book has roughly doubled between Ian and now. So I think that shows that we've managed to successfully grow our property business, insurance and reinsurance without affecting the risk profile of the group overall. So we're relatively satisfied with the relative performance in those two sets of events. From a cyber perspective, we're encouraged that we're seeing more new business generally, as I mentioned. I think, brokers are more actively selling this year than perhaps they had last year. You mentioned the Capital Markets Day. We do believe that over the next 5 to 10 years, the cyber market will -- as prospects to grow up to $35 billion or $40 billion. That is unchanged. I think Europe has got a bit more competitive this year as the opportunity has become more obvious to more carriers, but we're relatively comfortable with where rates are overall at about minus 6%. And I think, the results that we produced at the half year show that we're producing a sort of margin on that business that we should be able to do. So I think, we're quite bullish about the opportunity to grow next year. If one separates the U.S. and international opportunity, I think the U.S. is -- the greenfield territory is more in the SME environment. Outside, it's probably more mid-market and large risk. So the growth will look a bit different, but we're quite bullish about the prospects overall.

And we will now take our next question from Will Hardcastle of UBS.

The first one is just any additional color that you can give on CrowdStrike? I know, you didn't give an estimate, but do we read into that, that's a relatively immaterial loss on a group level overall? And secondly, I'll give it a go, just thinking about the capital distribution potential in the context -- I guess, just framing it, thinking about the context of potentially similar earnings year-on-year, given you're reiterating those numbers today and the quantum of last year's buyback and the growth proposition year-on-year. I guess just any framing would be helpful.

Great. Super. Thank you, Will. Thanks for the questions. Yes, I think the our estimation of where CrowdStrike losses will end up is relatively immaterial for the group now. And we didn't mention it specifically really, because there was not much to say. Thinking about capital distribution, you may note that the wording we use to talk about capital was relatively similar to the wording we use to talk about capital this time last year. And I think it's because the situations are relatively similar. We have had a good year. We like to think about what to do about capital at the end of the year. The growth prospects with the market flattening out at this point in time, look a little bit more modest than they have been for the past few years. And so, if nothing happens between now and then, we'll likely be having the same sorts of conversations about capital requirements and capital availability that we did this time last year. But -- so we kind of wanted to point out the preconditions this year are pretty much the same as the preconditions last year, but there's still a bit of a way to go between now and the year-end. And we're in a very volatile world at the moment. And so the prospects for growth could change quite quickly. So we're just kind of laying out the context, noting that the real discussions will start in about 2, 3 months' time.

[Operator Instructions] And we will now move on to our next question from Ivan Bokhmat of Barclays.

My first question would be about the outlook for next year. Maybe you could try to quantify a little bit more this appetite for growth in 2025. Should we be thinking about still high single digits on an earned basis? Anything that would be different within the composition of that growth? The second question, I've had about the D&O and whether you are seeing any changes in that market. Do you anticipate any rates turn or any other drivers there? And the third one, perhaps a smaller question. I think it was reported in the press that you have stopped writing new business in the Healthcare segment around hospitals. Maybe you could try to give a little more color around that, how material is that for your top line and the business over there.

Great. Thanks, Ivan. Thank you for the questions. So I'll go through those in turn. What we said at the half year about prospects for growth for next year as we saw it then, was that in sort of broad terms, instead of growth -- expected growth being in the high single digits, they're more likely to be in the mid-single digits. I don't think anything has happened between then and now to change that. And I think the fact that rates are flat year-to-date is a proof point of that or a data point for that. As I said a couple of minutes ago, though, we do live in a very volatile era. So things can change quite quickly. But as we sit here today, that's -- there's nothing that has happened that sort of changes that macro perspective. D&O, there's been increasing conversations around rates beginning to flatten out. We are seeing some signs of that in some cases, but the market remains competitive. So we're not -- we haven't banked in any change to D&O next year as far as our planning is concerned. And nothing has happened yet to change our risk appetite. So we're continuing to be quite constrained on that D&O book. I think for things really to change either we need significant loss emergence from more recent accident years and/or the financial markets to really open up and put more demand into the system, and neither of those have happened yet. We've got quite a large healthcare book. A relatively small part of that is hospitals. And that book in itself is about 1/4 of the size it was at its peak. So from a premium perspective, you won't notice it at all. We've been saying for a while that the hospitals business for us is right at the crucible of where we see social inflation. Because you've got large institutions that are typically targets for the plaintiff bar, that can cause severe or catastrophic bodily injuries, which is the sort of thing that jury has reacted to. And unfortunately, that market for a long time now has not adjusted its underwriting to contemplate that dramatic increase in exposure. So we announced a few weeks ago at the big healthcare conference, ASHRM, that we wouldn't be writing any new business and our renewal business will be restricted to key long-term clients only, which is a relatively negligible amount of business. It's a shame. We've been in that market now for over 20 years, and we -- Healthcare is a big segment for us. But we could not see a way through it at the moment. We need some things to change quite significantly for that business to become more attractive again.

And we will now move on to our next question from Nick Johnson of Deutsche Numis.

Please can I ask three questions, if that's okay. Firstly, on pricing. So you're saying that for the 9 months as a whole, pricing is flat for the portfolio year-on-year, and it was plus 1% for the first 6 months. Just wondering what the pricing change was for business actually written in Q3 year-on-year? So just trying to understand what the go-forward pricing environment is like based on Q3 experience? Second question is on investments. Very nice to see a strong third quarter. So yields were down in the third quarter, but they're now heading back up. Just wondered if you've taken any portfolio actions to lock in some of the gains on investments that you saw in Q3. Remembering a few years ago that you, I think, proactively put in place some hedging when yields were moving. And then thirdly, sorry, it's an IFRS 17 question. In the first half, there's a big positive effect from cash flow timings. Just wondering if you've seen anything similar in the third quarter, I suppose, positive or negative versus assumptions on cash flow timings?

I'm delighted that I'm only going to answer one of those. So we give a breakdown in the IMS of pricing movements by division. And it's relatively marginal up and down both ways. I think as we think about pricing into 2025, essentially, one of the things we'll be doing is thinking about what we expect rates to do per division, and we'll be changing the business mix according to that and the relative risk reward. So I think, we'll be able to give more guidance about what we expect overall rates to look like as we get towards the end of the year. But broadly speaking, we're expecting to be -- we're expecting for rates to be up a little bit or down a little bit, but it's very low single digits either way, I would expect.

Yes. And if I take your question on the investments, Nick, yes, it's correct. We've seen a downwards move in yields in this particular quarter. We haven't, as such, been taking any derivative actions in terms of locking in certain profits. But bear in mind, we have approximately 90% of our investment portfolio being liable or assets that are matching our liabilities. Hence, you would see those two net out in terms of movements. In terms of portfolio changes, otherwise, what we've also been doing, I would say, in this particular quarter is to take off a little bit of risk. But in general, no derivatives to do any particular transactions on locking in profits. As said, we are very much focused on the matched profile of our investments, hence, the big proportion actually having a counter effect when it comes to our liabilities. When it comes to the IFRS 17 question, we don't give out any sort of details when it comes to the cash flow patterns in this particular quarter. But again, when looking at the effect on the discounting, obviously, you will see that there is a discounting benefit, which will be smaller in the third quarter than it would have been in the second quarter where we discussed this somewhat. So what you should be focusing on going forward is that the reduction of the unwinding of the discounting effect will probably be somewhat lower than what you saw in the first half year, if rates remain as they are. But let's see how it moves from here.

And we will now move on to our next question from Andreas van Embden of Peel Hunt.

I just had one question around your casualty book. I just wonder whether you could sort of talk around your -- the assumptions you're making across your initial loss picks and any changes in your reserving assumptions. I'm hearing there's an acceleration of social inflation in the U.S., across the U.S. casualty books, particularly across liability, general liability and commercial auto. I appreciate you're not exposed to all of these classes, but could you just sort of indicate whether you're seeing this acceleration in Q3 and whether you are sort of setting aside more against your casualty book in the third quarter and plan to do so in Q4 as well?

Great. So there's been nothing since the half year. No. I think, we had some conversations at the half year about our initial loss picks for our liability business in '24 versus '23. And we are -- we did get more cautious when we made our initial loss picks, because we don't see social inflation going away. It is relatively concentrated for us. We do see social inflation really being geared towards individuals and small businesses suffering egregious or harm or bodily injury, which, as you noticed mostly in things like general liability, umbrella, excess casualty and auto, which we don't write. So I think for us, the main area is healthcare and of that, the most extreme is in hospitals, which we've already discussed. And as you read some of the third quarter statements that have come out, there is more -- there are more adjustments being made, particularly in those areas. But we haven't had to update any of our assumptions since the half year. No.

So do you think the issues are really confined to these areas and there's no spillover effect into the book you're writing?

I don't think the -- I don't think the exposure to our book has changed since the interims that caused us either to adjust our underwriting or adjust our reserving, no. So things haven't got worse. They've just got down, but the level of inflation is continuing as it has been. I think, we've been reacting consistently for the last 7 or 8 years on this.

And we will now move on to our next question from Derald Goh of RBC.

First one, could you maybe talk about your expectations for the property renewal next year in both E&S and reinsurance? And maybe just tag on to that also kind of your risk appetite for property risk in both. And the second question, could you maybe speak for deployment year-to-date that you've done compared to plan? I guess, I'm thinking about you've taken out more cyber reinsurance. Does that mean that actually you've deployed less capital? I guess, it could be the, it's kind of like the second part to that is, I'm also thinking about the flexibility -- I guess, the capital flexibility that you have for 2025.

Okay. Thinking -- so I didn't quite get the second part of your first question, but I'll attempt to answer the first part, and then maybe you could answer the second part again. So you'll see on the rate change that our property team continue to get a little bit of rate. We're expecting -- we're not expecting conditions next year for property insurance to change a great deal. We still see business moving from the admitted market into the E&S market. So continuing to promote business into the market that we operate. I think, the opportunity to be more likely to be in the mid-market to SME than the large ticket business. And so our business mix may change a little next year, and we may get more in the U.S. and less in London that reflects that change in business, but we still see a good and expanding opportunity on the insurance side. For reinsurance, I think, before the hurricane season really got going, there was some discussion about changes in structure and price reductions. I think, the commentary for that has adjusted a little bit, more flat and maybe some specific adjustments in the Southeast and parts of Europe. I think our expectations for 1/1 are relatively flat for the reinsurance business overall. As we think about cyber, the main reason for us buying the increased reinsurance was because we could and we're trying to encourage growth in that catastrophe market and bring different pools of capital into the cyber reinsurance business. It does give us more optionality going forward, both in terms of how we hedge our cyber business and therefore, how fast we want to -- we were able to grow the cyber business. And it does give us a little bit more capital flexibility. We haven't done it, though, for the capital flexibility in and of itself. So that will not impact particularly how we think about excess capital or uses of capital, but it does give us more options in terms of how we manage our business mix and how we manage the cyber opportunities. So it wasn't really done for capital purposes. It was done for more strategic reasons, although there are some capital benefits to it.

Yes. And I guess, just for completeness, this comment about capital flexibility is not just at a cyber level, but also at a group level, right? Because presumably, you might have some benefits to, I don't know, your diversification or the whole capital?

Exactly. Yes. So the three peak risks we have for capital are cyber, our U.S. specialty risk business and property. And the fact that we're effectively hedging the tail risk for cyber helps that diversification absolutely and just gives us a bit more optionality.

And we will now take our next question from Abid Hussain of Panmure Liberum.

Two questions, if I can, please. The first one is on growth. Just wanted to check my understanding. If pricing remains stable in the property cat lines in particular, do you feel you're able to grow that book into that environment? Or do you need to see growth elsewhere across the total book in order to remain balanced and diversified across the group? That's the first question. And then the second question is on your reinsurance book. What proportion of the property cat reinsurance book is quota share versus excess of loss? I'm really asking the question because your overall losses for Helene and Milton seemed a little bit light. I'm just trying to understand why that was.

Got it. So I think, if prices stay where they are on the property book overall, we will be able to grow next year. And I think, there'll be growth on both the reinsurance side and the insurance side. One of the reasons why we brought those teams together in the first place was to allow us to deploy capital actively where the risk reward was better. And so we'll continue to shift that around a bit as to sort of match where conditions are. But I think there's opportunity for growth in both those -- across property in both divisions. When we look at the reinsurance book in totality, on the property side, it is by far the bulk of it is property cat XL. There are a very small number of quota shares in there, but it is de minimis really. So it's mostly an excess of loss business.

There are no further questions in queue. I will now hand it back to Adrian for closing remarks.

Great stuff. Well, it's good to be able to have another quarter where we've delivered in line with our guidance. We're trying to rebuild our track record. And hence doing what we say we're going to do. Thank you very much indeed for your time and your questions, and enjoy the rest of the day. Thanks so much indeed.