Beazley PLC

213800VTOMUWD41GIT122021-01-012021-12-31213800VTOMUWD41GIT122020-01-012020-12-31213800VTOMUWD41GIT122019-12-31ifrs-full:IssuedCapitalMember213800VTOMUWD41GIT122019-12-31ifrs-full:SharePremiumMember213800VTOMUWD41GIT122019-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800VTOMUWD41GIT122019-12-31ifrs-full:OtherReservesMember213800VTOMUWD41GIT122019-12-31ifrs-full:RetainedEarningsMember213800VTOMUWD41GIT122019-12-31213800VTOMUWD41GIT122020-01-012020-12-31ifrs-full:IssuedCapitalMemberiso4217:USDiso4217:USDxbrli:sharesiso4217:GBPxbrli:shares213800VTOMUWD41GIT122020-01-012020-12-31ifrs-full:SharePremiumMember213800VTOMUWD41GIT122020-01-012020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800VTOMUWD41GIT122020-01-012020-12-31ifrs-full:OtherReservesMember213800VTOMUWD41GIT122020-01-012020-12-31ifrs-full:RetainedEarningsMember213800VTOMUWD41GIT122020-12-31ifrs-full:IssuedCapitalMember213800VTOMUWD41GIT122020-12-31ifrs-full:SharePremiumMember213800VTOMUWD41GIT122020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800VTOMUWD41GIT122020-12-31ifrs-full:OtherReservesMember213800VTOMUWD41GIT122020-12-31ifrs-full:RetainedEarningsMember213800VTOMUWD41GIT122020-12-31213800VTOMUWD41GIT122021-01-012021-12-31ifrs-full:IssuedCapitalMember213800VTOMUWD41GIT122021-01-012021-12-31ifrs-full:SharePremiumMember213800VTOMUWD41GIT122021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800VTOMUWD41GIT122021-01-012021-12-31ifrs-full:OtherReservesMember213800VTOMUWD41GIT122021-01-012021-12-31ifrs-full:RetainedEarningsMember213800VTOMUWD41GIT122021-12-31ifrs-full:IssuedCapitalMember213800VTOMUWD41GIT122021-12-31ifrs-full:SharePremiumMember213800VTOMUWD41GIT122021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember213800VTOMUWD41GIT122021-12-31ifrs-full:OtherReservesMember213800VTOMUWD41GIT122021-12-31ifrs-full:RetainedEarningsMember213800VTOMUWD41GIT122021-12-31 Financial statements 131 Consolidated statement of profit or loss 132 Statements of comprehensive income 133 Statements of changes in equity 135 Statements of financial position 136 Statements of cash flows 137 Notes to the financial statements 208 Glossary 130 Beazley | Annual report 2021 www.beazley.com Notes 2021 $m 2020 $m Gross premiums written 3 4,6 18.9 3,5 63.8 Written premiums ceded to reinsurers (1 , 1 0 6 . 5) (6 46.8) Net premiums written 3 3 ,51 2 . 4 2 , 9 1 7. 0 Change in gross provision for unearned premiums (5 4 5 .0) (3 3 1 .7) Reinsurers’ share of change in the provision for unearned premiums 17 9 . 9 108 .1 Change in net provision for unearned premiums (365.1) (2 2 3 .6) Net earned premiums 3 3 , 1 47. 3 2,693.4 Net investment income 4 116 .4 1 8 8 .1 Other income 5a 28. 2 29. 8 Gain from sale of business 5b 5 4.4 – 19 9.0 2 1 7. 9 Revenue 3,346.3 2 ,91 1 . 3 Insurance claims 2 ,73 4 . 3 2,5 8 9. 3 Insurance claims recoverable from reinsurers (9 0 8 .1) (63 1.0) Net insurance claims 3 1, 826. 2 1 ,95 8. 3 Expenses for the acquisition of insurance contracts 3 8 21.8 73 8 . 9 Administrative expenses 3 28 3 .0 235. 5 Foreign exchange loss/(gain) 3 7. 2 (1 1 . 2) Operating expenses 1 ,112.0 963.2 Expenses 3 2,93 8. 2 2 , 921 . 5 Results of operating activities 408.1 (1 0 . 2) Finance costs 8 (38 . 9) (4 0 . 2) Profit/(loss) before income tax 369.2 (5 0. 4) Income tax (expense)/credit 9 (60 . 5) 4.3 Profit/(loss) for the year attributable to equity shareholders 3 0 8 .7 (46.1) Earnings/(loss) per share (cents per share): Basic 10 50.9 (8 .0) Diluted 10 50.3 (8 .0) Earnings/(loss) per share (pence per share): Basic 10 3 7. 0 (6 . 3) Diluted 10 36 .5 (6 . 3) Consolidated statement of profit or loss for the year ended 31 December 2021 131www.beazley.com Beazley | Annual report 2021 Financial statements 2021 $m 2020 $m Group Profit/(loss) for the year attributable to equity shareholders 3 0 8 .7 (46.1) Other comprehensive income/(expense) Items that will never be reclassified to profit or loss: Gain/(loss) on remeasurement of retirement benefit obligations 13.0 (2. 0) Income tax on defined benefit obligation (1.8) (0. 5) Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences (5 . 9) 2.8 Total other comprehensive income 5.3 0.3 Total comprehensive income/(loss) recognised 314 .0 (4 5 . 8) Statement of comprehensive income for the year ended 31 December 2021 2021 $m 2020 $m Company Profit for the year attributable to equity shareholders 37. 2 47.9 Total comprehensive income recognised 37.2 47.9 Statement of comprehensive income for the year ended 31 December 2021 132 Beazley | Annual report 2021 www.beazley.com Notes Share capital $m Share premium $m Foreign currency translation reserve $m Other reserves $m Retained earnings $m Total $m Group Balance at 1 January 2020 38.1 3.2 (94 . 1) 3 .6 1 ,6 74 . 5 1 ,62 5. 3 Total comprehensive income/(loss) recognised – – 2.8 – (4 8 . 6) (4 5 . 8) Dividends paid 11 – – – – (5 0 . 2) (5 0. 2) Issue of shares 21 – 2 .1 – – – 2.1 Equity raise 1 21 4.8 – – – 2 8 7. 8 292.6 Equity settled share based payments 22 – – – 2.8 – 2. 8 Acquisition of own shares in trust 21 – – – (1 3 . 6) – (1 3 . 6) Tax on share option vestings 9 – – – (5 . 4) 1. 2 (4 . 2) Transfer of shares to employees 22 – – – 3. 2 (2.7) 0.5 Balance at 31 December 2020 42.9 5.3 (91 . 3) (9 .4) 1,862.0 1 , 8 09. 5 Balance at 1 January 2021 42.9 5.3 (91 . 3) (9 .4) 1,862.0 1 , 8 09. 5 Total comprehensive income/(loss) recognised – – (5 . 9) – 31 9. 9 31 4 .0 Equity settled share based payments 22 – – – 11.0 – 11.0 Tax on share option vestings 9 – – – (3 . 9) – (3 . 9) Transfer of shares to employees 22 – – – (1 .7) 1.9 0.2 Balance at 31 December 2021 42.9 5.3 (9 7. 2) (4 . 0) 2, 183.8 2,130 .8 1 During the financial year ended 31 December 2020, the Group raised $292.6m through a share issuance via a cash box structure. Merger relief under the Companies Act 2006, section 612 was available, and thus no share premium was recognised. As the redemption of the cash box entity’s shares was in the form of cash, the transaction was treated as qualifying consideration and the premium is therefore considered to be immediately distributable and can be recognised within retained earnings. The funds raised are net of issuance costs. Statement of changes in equity for the year ended 31 December 2021 133www.beazley.com Beazley | Annual report 2021 Financial statements Statement of changes in equity for the year ended 31 December 2021 Notes Share capital $m Share premium $m Merger reserve 2 $m Foreign currency translation reserve $m Other reserves $m Retained earnings $m Total $m Company Balance at 1 January 2020 38.1 3.2 55.4 0.7 (9.3) 621.3 709.4 Total comprehensive income recognised – – – – – 47.9 47. 9 Dividends paid 11 – – – – – (50.2) (50.2) Issue of shares 21 – 2.1 – – – – 2.1 Equity raise 1 21 4.8 – – – – 287. 8 292.6 Equity settled share based payments 22 – – – – 2.8 – 2.8 Acquisition of own shares in trust 22 – – – – (13.6) – (13.6) Transfer of shares to employees 22 – – – – 3.2 (2.7) 0.5 Balance at 31 December 2020 42.9 5.3 55.4 0.7 (16.9) 904.1 991.5 Balance at 1 January 2021 42.9 5.3 55.4 0.7 (16.9) 904.1 991.5 Total comprehensive income recognised – – – – – 37. 2 37. 2 Equity settled share based payments 22 – – – – 11.0 – 11.0 Transfer of shares to employees 22 – – – – (1.7) 1.9 0.2 Balance at 31 December 2021 42.9 5.3 55.4 0.7 (7.6) 943.2 1,039.9 1 During the financial year ended 31 December 2020, the Group raised $292.6m through a share issuance via a cash box structure. Merger relief under the Companies Act 2006, section 612 was available, and thus no share premium was recognised. As the redemption of the cash box entity’s shares was in the form of cash, the transaction was treated as qualifying consideration and the premium is therefore considered to be immediately distributable and can be recognised within retained earnings. The funds raised are net of issuance costs. 2 A merger reserve was created through a scheme of arrangement on 13 April 2016, in which Beazley plc became the parent company of the Group. 134 Beazley | Annual report 2021 www.beazley.com Statements of financial position as at 31 December 2021 2021 2020 Notes Group $m Company $m Group $m Company $m Assets Intangible assets 12 123 .5 – 1 26. 3 – Plant and equipment 13 1 9. 2 – 1 9 .7 – Right of use assets 29 75 . 5 – 86.4 – Deferred tax asset 28 16 . 3 – 26 . 8 – Investment in subsidiaries 31 – 724.6 – 724.6 Investment in associates 14 0.6 – 0.3 – Deferred acquisition costs 15 47 7. 8 – 38 4.9 – Retirement benefit asset 27 1 8 .1 – 4.8 – Reinsurance assets 19, 24 2, 38 6. 4 – 1 , 6 8 4 .7 – Financial assets at fair value 16, 17 7, 2 8 3 . 5 – 6,36 2.0 – Insurance receivables 18 1,696. 1 – 1,467 .9 – Other receivables 10 6 .7 315.0 86.5 267. 9 Current income tax asset 11. 9 0.7 2 7. 9 1.9 Cash and cash equivalents 20 59 1.8 0.3 3 0 9.5 0.9 Total assets 12,80 7 .4 1,040.6 1 0 , 5 8 7.7 995.3 Equity Share capital 21 42. 9 42.9 42 . 9 42.9 Share premium 5.3 5.3 5.3 5.3 Merger reserve – 55.4 – 55.4 Foreign currency translation reserve (9 7. 2) 0.7 (91 . 3) 0.7 Other reserves 22 (4 . 0) (7.6) (9. 4) (16.9) Retained earnings 2,1 8 3 . 8 943.2 1,8 62.0 904.1 Total equity 2,130 .8 1,039.9 1 , 8 09. 5 991.5 Liabilities Insurance liabilities 24 8,8 7 1.8 – 7, 3 7 8 . 4 – Financial liabilities 16, 17, 25 5 5 4 .7 – 558. 5 – Lease liabilities 29 84. 3 – 9 0.1 – Deferred tax liability 28 – – 0.6 – Current income tax liability 24 . 5 – 1 6 .7 – Other payables 26 1 , 1 41 . 3 0.7 73 3 . 9 3.8 Total liabilities 10 , 676 . 6 0.7 8 ,7 7 8 . 2 3.8 Total equity and liabilities 12,80 7 .4 1,040.6 1 0 , 5 8 7.7 995.3 No income statement is presented for the parent company as permitted by Section 408 of the Companies Act 2006. The profit after tax of the parent company for the period was $37.2m (2020: $47.9m). The financial statements were approved by the Board of Directors on 9 February 2022 and were signed on its behalf by: D L Roberts Chair S M Lake Group Finance Director 9 February 2022 135www.beazley.com Beazley | Annual report 2021 Financial statements Statements of cash flows for the year ended 31 December 2021 2021 2020 Notes Group $m Company $m Group $m Company $m Cash flow from operating activities Profit/(loss) before income tax 369.2 36.4 (5 0 . 4) 46.1 Adjustments for: Amortisation of intangibles 12 20.5 – 1 6 .7 – Equity settled share based compensation 22 11.0 11.0 2. 8 2.8 Net fair value gain on financial assets 4 (4 5 . 8) – (8 3 .0) – Depreciation of plant and equipment 13 4. 9 – 3.2 – Depreciation of right of use assets 29 15 .0 – 1 3.0 – (Write back)/impairment of reinsurance assets recognised 6 (3 . 3) – 1 .1 – Increase/(decrease) in insurance and other payables 1,900.8 (3.1) 1,486.9 (12.5) (Increase) in insurance, reinsurance and other receivables (95 0 .1) (47.1) (78 2 .1) (268.7) (Increase) in deferred acquisition costs (92.9) – (3 4 . 2) – Financial income 4 (76 . 5) (40.0) (1 1 0 . 9) (55.5) Financial expense 8 38.9 3.6 40. 2 5.6 Income tax paid (2 2. 2) – (2 6 . 5) – Net cash from/(used in) operating activities 1 , 16 9.5 (39.2) 476 . 8 (282.2) Cash flow from investing activities Purchase of plant and equipment 13 (4 . 5) – (1 2 . 9) – Expenditure on software development 12 (1 7. 7 ) – (2 0 . 5) – Purchase of investments (7, 97 9 . 1) – (6,126.6) – Proceeds from sale of investments 7, 0 3 7. 1 – 5,443 .8 – Proceeds from sale of business 54.4 – – – Interest and dividends received 4 70 . 6 40.0 10 4. 3 55.5 Net cash (used in)/from investing activities (8 3 9. 2) 40.0 (61 1 . 9) 55.5 Cash flow from financing activities Acquisition of own shares in trust 22 – – (1 3 . 6) (13.6) Payment of lease liabilities 29 (1 2 . 8) – (1 5 . 3) – Equity raise 21 – – 292.6 292.6 Finance costs 8 (3 5 . 2) (3.6) (37.8) (5.6) Issuance of shares – – 2 .1 2.1 Dividend paid – – (5 0 . 2) (50.2) Net cash (used in)/from financing activities (4 8 . 0) (3.6) 17 7. 8 225.3 Net increase/(decrease) in cash and cash equivalents 282.3 (2.8) 4 2 .7 (1.4) Cash and cash equivalents at beginning of year 309.5 0.9 278 . 5 – Effect of exchange rate changes on cash and cash equivalents – 2.2 (1 1 .7) 2.3 Cash and cash equivalents at end of year 20 591 . 8 0.3 30 9. 5 0.9 136 Beazley | Annual report 2021 www.beazley.com Notes to the financial statements 1 Statement of accounting policies Beazley plc (registered number 09763575) is a company incorporated in England and Wales and is resident for tax purposes in the United Kingdom. The company’s registered address is 22 Bishopsgate, London, EC2N 4BQ, United Kingdom. The principal activity of the company and its subsidiaries (the ‘Group’) is to participate as a specialist insurer which transacts primarily in commercial lines of business through its subsidiaries and through Lloyd’s syndicates. The Group financial statements for the year ended 31 December 2021 comprise the parent company, its subsidiaries and the Group’s interest in associates. The financial statements of the parent company, Beazley plc, and the Group financial statements have been prepared and approved by the directors in accordance with UK adopted International Financial Reporting Standards (IFRS) and requirements of the Companies Act 2006. On publishing the parent company financial statements together with the Group financial statements, the company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual statement of profit or loss and related notes that form a part of these approved financial statements. In the current year, the Group have applied amendments to IFRS issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2021. The new effective amendments are: • Interest Rate Benchmark Reform (IBOR) – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) (effective date: 1 January 2021); and • IFRS 16: COVID-19-Related Rent concessions (2021). None of the amendments issued by the IASB have had a material impact to the Group. A number of new standards and interpretations adopted by the UK Endorsement Board (UKEB) which are not mandatorily effective, as well as standards and interpretations issued by the IASB but not yet adopted by the UKEB, have not been applied in preparing these financial statements. The Group does not plan to adopt these standards early; instead it expects to apply them from their effective dates as determined by their dates of UKEB endorsement. The Group is still reviewing the upcoming standards to determine their impact: • IFRS 9: Financial Instruments (UKEB effective date: 1 January 2018, deferred in line with implementation of IFRS 17); • IFRS 9: Amendment: Prepayment Features with Negative Compensation (UKEB effective date: 1 January 2019, deferred in line with implementation of IFRS 17); • IFRS 17: Insurance Contracts (IASB effective date: 1 January 2023); 1 and • IFRS 10 and IAS 28: Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (IASB effective date: optional). 1 1 Have not been endorsed by UKEB. Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 17 and IFRS 9 will have the most material impact on the financial statements’ presentation and disclosures. The accounting developments and implementation timelines of IFRS 17 and IFRS 9 are being closely monitored and the impacts of the standards themselves are being assessed and prepared for. A brief overview of each of these standards is provided below: • IFRS 17 will change the way insurance contracts are accounted for and reported. On initial assessment the major change will be on the presentation of the statement of profit or loss, with premium and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income and expense. Revenue will no longer be equal to premiums earned but instead reflect a change in the contract liability on which consideration is expected. The impact of the new standard is still being fully assessed but current indications are that the timing of profit recognition will be altered. Any change in profit recognition on transition to IFRS 17 will result in a one off transaction being reflected in equity. The Group are currently assessing the impact of IFRS 17 on several areas such as reserving strategy, operating model and data. The Group are also intending to start to review their reserve margin using IFRS 17 concepts such as confidence level rather than the current concept of holding reserves within a range above the actuarial estimates. 137www.beazley.com Beazley | Annual report 2021 Financial statements Notes to the financial statements continued 1 Statement of accounting policies continued During 2021, the Group continued to undertake a number of tasks in preparation for IFRS 17. These tasks included: • concluding on writing and presenting technical papers to governance committees of how the standard will be applied; • sourcing and landing the remaining data required for IFRS 17; • developing a calculation engine to allow the population of IFRS 17 results; • begin the recruitment of IFRS 17 target operating model resources; and • develop the working day timetable, control framework, target operating model and additional processes required to allow the effective operation of IFRS 17. Currently the project to implement IFRS 17 and IFRS 9 has made good progress during 2021. As was stated in the 2017 annual report, the Group chose to apply the temporary exemption permitted by IFRS 4 from applying IFRS 9: Financial Instruments. The Group qualifies for this exemption because, as at 31 December 2015, $5,040.7m or 95% of its total liabilities were connected with insurance. There has been no material change in the Group’s activities since 31 December 2015, therefore the exemption still remains. The Group has also disclosed information in relation to specific types of financial instruments to ensure the comparability with the entities applying IFRS 9. As such, fair values are disclosed separately for the Group’s financial assets which are managed and evaluated on a fair value basis and those which meet the solely payments of principal and interest (SPPI) test under IFRS 9. Beazley plc as a standalone company adopted IFRS 9 from 1 January 2018. However, as the standalone company has no financial investments the adoption had an immaterial impact on its financial statements. Below is a table outlining the fair value of assets which are managed and evaluated on a fair value basis and those which meet the SPPI test under IFRS 9. The information on credit exposures can be found in note 2 to the financial statements on page 160. The Group have made the decision not to restate prior year comparatives on adoption of IFRS 9, nor apply the overlay approach. On 25 June 2020, the International Accounting Standards Board (IASB) issued amendments to IFRS 17 Insurance Contracts, which included the deferral of the effective date of IFRS 17 and IFRS 9 (for qualifying insurers) to 1 January 2023. Financial assets managed and evaluated on a fair value basis 2021 $m 2020 $m Fixed and floating rate debt securities: – Government issued 4,008.1 2,723.7 – Corporate bonds – Investment grade 1,861.9 2,444.9 – High yield 402.3 251.1 Syndicate loans 37.9 40.6 Equity funds 209.6 203.2 Hedge funds 478.2 442.1 Illiquid credit assets 277.9 227. 9 Derivative financial assets 7.6 28.5 Total financial assets managed and evaluated on a fair value basis 7,283.5 6,362.0 Financial assets meeting the SPPI test Cash and cash equivalents 591.8 309.5 Other receivables 106.7 86.5 Total financial assets meeting the SPPI test 698.5 396.0 138 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued Basis of presentation The Group financial statements are prepared using the historical cost convention, with the exception of financial assets and derivative financial instruments which are stated at their fair value. All amounts presented are in US dollars and millions, unless stated otherwise. In accordance with the requirements of IAS 1 the financial statements’ assets and liabilities have been presented in order of liquidity which provides information that is more reliable and relevant for a financial institution. Going Concern The financial statements of Beazley plc have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Group’s current and forecast solvency and liquidity positions for the next 12 months from the date that the financial statements are authorised for issue. The Group’s business activities, together with the factors likely to affect its future development, performance, and position, are set out in the Strategic report contained in the Group’s Annual Report & Accounts. In addition, the risk report and financial review includes the Group’s risk management objectives and the Group’s objectives, policies and processes for managing its capital. In assessing the Group’s going concern position as at 31 December 2021, the Directors have considered a number of factors, including the current statement of financial position, the Group’s strategic and financial plan, taking account of possible changes in trading performance and funding retention, and stress testing and scenario analysis. This included, among other analysis, a best estimate forecast with scenario analysis covering the impact of reserve releases, attritional, large and catastrophe loss events alongside optimistic and pessimistic investment return scenarios. To further stress the financial stability of the Group, additional scenario testing was performed. This included modelling the breakeven capital requirements of our regulators and rating agencies, the impact of potential management actions to reduce the Group’s exposure to climate change-related risks, global events and counterparty credit risk, the occurrence of a number of high severity loss events impacting our underwriting platforms in 2022 and a reverse stress test scenario designed to render the business model unviable. The testing identified that even under the more severe but plausible stress scenarios, the Group had more than adequate liquidity and solvency headroom. As a result of the assessment, no material uncertainty in relation to going concern has been identified. As at its most recent regulatory submission, the Group’s capital ratios and its total capital resources are comfortably in excess of regulatory solvency requirements, and internal stress testing indicates the Group can withstand severe economic and competitive stresses. Based on the going concern assessment performed, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence over a period of at least 12 months from the date of this report and therefore believe that the Group is well placed to manage its business risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements. Part VII transfer On 30 December 2020, the Group transferred all relevant policies (and related liabilities) underwritten by the Group’s syndicates to Lloyd’s Insurance Company S.A. (‘Lloyd’s Brussels’), in accordance with Part VII of the Financial Services and Markets Act 2000. On the same date, the Group entered into a 100% Quota Share Reinsurance Agreement whereby Lloyd’s Brussels reinsured all risks on the same policies back to the Group. The purpose of these transactions were to ensure these policies could be serviced after Brexit on the 31 December 2020. Following the sanction of the scheme by the High Court on 25 November 2020, the scheme took effect on 30 December 2020 and the Group transferred the impacted EEA policies and related liabilities to Lloyd’s Brussels, together with cash of $229.2m. On the same date, under the Reinsurance Agreement, Lloyd’s Brussels reinsured the same risks back, together with an equal amount of cash of $229.2m. The combined effect of the two transactions had no economic impact for the Group, and accordingly there is no impact on the Group’s financial statements. 139www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued Use of estimates and judgements The preparation of financial statements requires the use of certain critical accounting estimates and judgements that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those on which management’s estimates are based. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable. Estimates which are sensitive to changes in future economic conditions could be impacted by significant changes in the economic and regulatory environment, such as COVID-19, climate change, US legislation and Brexit. Specific to climate change, since responses to it are still developing, it is not possible to consider all possible future outcomes when determining asset and liability valuations, and timing of future cash flows, as these are not yet known. Nevertheless, the current management view is that reasonably possible changes arising from climate risks would not have a material impact on asset and liability valuations at the year-end date. a) Estimates Estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Provision & claims The most critical estimate included within the Group’s financial position is the estimate for insurance losses incurred but not reported (IBNR), which is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24. This estimate is critical as it outlines the current liability for future expenses expected to be incurred in relation to claims. If this estimation was to prove inadequate then an exposure would arise in future years where a liability has not been provided for. The total estimate for insurance losses incurred but not reported gross of reinsurers’ share as at 31 December 2021 is $4,711.8m (2020: $3,855.3m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at 31 December 2021 is $3,313.8m (2020: $2,820.9m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24. The best estimate of the most likely ultimate outcome is used when calculating notified claims. This estimate is based upon the facts available at the time, in conjunction with the claims manager’s view of likely future developments. Another critical estimate within insurance liabilities is the estimation of an unexpired risk reserve (URR) for the expected value of net claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date which exceeds the unearned premium reserve. Any deficiency resulting from this liability adequacy test is recognised in the statement of profit and loss and additional liability as required is recognised as URR in the statement of financial position. In 2020, the Group recognised a loss due to this test and established a URR. If this estimation was to prove inadequate, the unexpired risk reserve provision could be understated. As at 31 December 2021 no URR provision has been included on either a gross basis (2020: $91.5m) or net of reinsurance basis (2020: $82.5m). Financial assets & liabilities Another critical area of estimation is the Group’s financial assets and liabilities. Information about estimation uncertainty related to the Group’s financial assets and liabilities is described in this statement of accounting policies and note 16: financial assets and liabilities (valuations based on models and unobservable inputs). Premium estimates Other critical estimates contained within our close process are premium estimates and the earning pattern of recognising premium over the life of the contract. In the syndicates the premium written is initially based on the estimated premium income (EPI) of each contract. Where premium is sourced through binders, the binder EPI is pro-rated across the binder period. This is done on a straight-line basis unless the underlying writing pattern from the prior period indicates the actual underlying writing pattern is materially different. The underwriters adjust their EPI estimates as the year of account matures. As the year of account closes premiums are adjusted to match the actual signed premium. An accrual for estimated future reinstatement premiums is retained. Premiums are earned on a straight-line basis over the life of each contract. At a portfolio level this is considered to provide a reasonable estimate for the full year of the pattern of risk over the coverage period. Notes to the financial statements continued 140 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued Estimation techniques are necessary to quantify the future premium on all syndicate business written and are commonly used within the Lloyd’s insurance market. The majority of the estimation arises within the binder and lineslip estimates where the premium amounts are dependent on the volume of policies that are insured under the binder/lineslip over the coverage period. In these cases underwriters estimate an initial premium volume and then adjust throughout the life of the binder/lineslip as and when new information becomes available. The process of determining the EPI is based on a number of factors, which can include: • coverholder business plan documents supplied prior to binding; • historical trends of business written; • current and expected market conditions for this line of business; and • life to date bordereaux submissions versus expectation. Due to the nature of the Lloyd’s business and the settlement patterns of the underlying business it is also not uncommon for some contracts to take a number of years to finalise and settle, and a receivable on the balance sheet remains. The amount of estimated future premium that remains in insurance receivables relating to years of account that are more than three years developed at 31 December 2021 is $15.4m (2020: $13.7m). Goodwill Another estimate used by Beazley is based on the key assumptions underlying the recoverable amounts used in assessing the impairment of goodwill. The key assumptions used in the preparation of future cash flows are: premium growth rates, claims experience, discount rates, retention rates and expected future market conditions as per note 12. Consolidation a) Subsidiary undertakings Subsidiary undertakings are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The Group has used the acquisition method of accounting for business combinations arising on the purchase of subsidiaries. Under this method, the cost of acquisition is measured as the fair value of assets given, shares issued or liabilities undertaken at the date of acquisition directly attributable to the acquisition. The excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired is recorded as goodwill. For all business combinations: (i) transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination, are expensed as incurred; (ii) in addition, any consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are recognised in profit or loss; and (iii) any contingent consideration is measured at fair value at the acquisition date. Equity financial investments made by the parent company in subsidiary undertakings and associates are stated at cost in its separate financial statements and are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired. Certain Group subsidiaries underwrite as corporate members of Lloyd’s on syndicates managed by Beazley Furlonge Limited. 141www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued In view of the several and direct liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, only attributable shares of transactions, assets and liabilities of those syndicates are included in the Group financial statements. The Group continues to conclude that it remains appropriate to consolidate its share of the result of these syndicates and accordingly, as the Group is the sole provider of capacity on syndicates 2623, 3622 and 3623, these financial statements include 100% of the economic interest in these syndicates. For the following syndicates to which Beazley is appointed managing agent, being syndicates 623, 6107, and 5623, for which the capacity is provided entirely by third parties to the Group, these financial statements reflect Beazley’s economic interest in the form of agency fees and profit commission to which it is entitled. b) Associates Associates are those entities over which the Group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the Group has between 20% and 50% of voting rights. Other factors that are considered when determining the existence of significant influence also include: • representation on the Board of directors or equivalent governing body of the investee; • participation in the policy-making process including participation in decisions about dividends or other distributions; • material transactions between the entity and the investee; • interchange of managerial personnel; or • provision of essential technical information. Investments in associates are accounted for using the equity method of accounting. Under this method the investments are initially measured at cost and the Group’s share of post-acquisition profits or losses is recognised in the statement of profit or loss. Therefore the cumulative post-acquisition movements in the associates’ net assets are adjusted against the cost of the investment. When the Group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition for the losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. Equity accounting is discontinued when the Group no longer has significant influence over the investment. c) Intercompany balances and transactions All intercompany transactions, balances and unrealised gains or losses on transactions between Group companies are eliminated in the Group financial statements. Transactions and balances between the Group and associates are not eliminated. Foreign currency translation a) Functional and presentational currency Items included in the financial statements of the parent and the subsidiaries are measured using the currency of the primary economic environment in which the relevant entity operates (the functional currency). The Group financial statements are presented in US dollars, being the functional and presentational currency of the parent and its main trading subsidiaries, as the majority of trading assets and insurance premiums are denominated in US dollars. b) Transactions and balances Foreign currency transactions are translated into the functional currency using average exchange rates applicable to the period in which the transactions take place and where the Group considers these to be a reasonable approximation of the transaction rate. Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at the period end of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss. Non-monetary items recorded at historical cost in foreign currencies are translated using the exchange rate on the date of the initial transaction. c) Foreign operations The results and financial position of the Group companies that have a functional currency different from the Group presentational currency are translated into the presentational currency as follows: • assets and liabilities are translated at the closing rate as at the statement of financial position date; • income and expenses for each statement of profit or loss are translated at average exchange rates for the reporting period where this is determined to be a reasonable approximation of the actual transaction rates; and • all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity. Notes to the financial statements continued 142 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued On disposal of foreign operations, cumulative exchange differences previously recognised in other comprehensive income are recognised in the statement of profit or loss as part of the gain or loss on disposal. Insurance contracts Insurance contracts (including inwards reinsurance contracts) are defined as those containing significant insurance risk. Insurance risk is considered significant if, and only if, an insured event could cause Beazley to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Net earned premiums a) Premiums Gross premiums written represent premiums on business commencing in the financial year together with adjustments to premiums written in previous accounting periods and estimates for premiums from contracts entered into during the course of the year. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions. For the year ending 31 December 2020, gross premiums written included a one off transfer of business written through the Group syndicates to Lloyd’s Brussels and subsequent inward reinsurance of business from Lloyd’s Brussels to reflect the Part VII transfer. The net impact of this transaction is nil. b) Unearned premiums A provision for unearned premiums (gross of reinsurance) represents that part of the gross premiums written that it is estimated will be earned in the following financial periods. It is calculated using the daily pro-rata method, under which the premium is apportioned over the period of risk. Deferred acquisition costs (DAC) Acquisition costs comprise brokerage, premium levy and staff-related costs (excluding performance related pay) of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is deferred at the reporting date and recognised in later periods when the related premiums are earned. Claims These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions for outstanding claims, claims incurred but not reported (IBNR) and claims handling provisions. The provision for claims comprises amounts set aside for claims advised and IBNR, including claims handling expenses. The IBNR amount is based on estimates calculated using widely accepted actuarial techniques which are reviewed quarterly by the Group actuary and annually by Beazley’s independent syndicate reporting actuary. The techniques generally use projections, based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced. For more recent underwriting years, attention is paid to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating provisions are that past experience is a reasonable predictor of likely future claims development and that the rating and business portfolio assumptions are a fair reflection of the likely level of ultimate claims to be incurred for the more recent years. Liability adequacy testing At each reporting date, liability adequacy tests are performed to ensure the adequacy of the claims liabilities net of DAC and unearned premium reserves. In performing these tests, current best estimates of future contractual cash flows, claims handling and administration expenses, and investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the statement of profit or loss and subsequently by establishing a URR provision for losses arising from liability adequacy tests. 143www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued Ceded reinsurance These are contracts entered into by the Group with reinsurers under which the Group is compensated for losses on contracts issued by the Group that meet the definition of an insurance contract. Insurance contracts entered into by the Group under which the contract holder is another insurer (inwards reinsurance) are included within insurance contracts. Any benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of balances due from reinsurers and include reinsurers’ share of provisions for claims. These balances are based on calculated amounts of outstanding claims and projections for IBNR and URR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the period and the current security rating of the reinsurer involved. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when a contract incepts. The Group assesses its reinsurance assets for impairment. If there is objective evidence of impairment, then the carrying amount is reduced to its recoverable amount and the impairment loss is recognised in the statement of profit or loss. Revenue Revenue consists of net earned premiums, net investment income and other income (made up of commissions received from Beazley service companies, profit commissions, managing agent’s fees and service fees). Profit commissions are recognised and earned as the performance obligations of the related contracts are met. Commissions received from service companies and managing agent’s fees are recognised as the services are provided, and therefore the performance obligations of the contracts are met. Dividends paid Dividend distributions to the shareholders of the Group are recognised in the period in which the dividends are paid, as a first interim dividend, second interim dividend or special dividend. The second interim and special dividends are approved by the Group’s shareholders at the Group’s annual general meeting. Plant and equipment All plant and equipment is recorded at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: Fixtures and fittings Three to ten years Computer equipment Three years These assets’ residual values and useful lives are reviewed at each reporting date and adjusted if appropriate. The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the statement of profit or loss. Intangible assets a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the fair value of the identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Goodwill has an indefinite life and is annually tested for impairment. Goodwill is allocated to each cash-generating unit (CGU, being the Group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net carrying amount of the relevant CGU exceeds its recoverable amount, being its value in use. Value in use is defined as the present value of the future cash flows expected to be derived from the CGU. In respect of equity accounted associates, the carrying amount of any goodwill is included in the carrying amount of the associate, and any impairment is allocated to the carrying amount of the associate as a whole. b) Syndicate capacity The syndicate capacity represents the cost of purchasing the Group’s participation in the combined syndicates. The capacity is capitalised at cost in the statement of financial position. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment by reference to the latest auction prices provided by Lloyd’s. Notes to the financial statements continued 144 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued c) Licences Licences have an indefinite useful life and are initially recorded at fair value. Licenses are allocated to each CGU for the purpose of impairment testing. Licences are annually tested for impairment and provision is made for any impairment when the recoverable amount, being the higher of its value in use and fair value, is less than the carrying value. d) IT development costs Costs that are directly associated with the development of identifiable and unique software products and that are anticipated to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include external consultants’ fees, certain qualifying internal staff costs and other costs incurred to develop software programs. These costs are amortised over their estimated useful life (three years) on a straight-line basis and subject to impairment testing annually. Amortisation commences when the asset becomes operational. Other non-qualifying costs are expensed as incurred. e) Renewal rights Renewal rights comprise future profits relating to insurance contracts acquired and the expected renewal of those contracts. The costs directly attributable to acquire the renewal rights are recognised as intangible assets where they can be measured reliably and it is probable that they will be recovered by directly related future profits. These costs are subject to an impairment review annually and are amortised on a straight-line basis, based on the estimated useful life of the assets, which is estimated to be between five and 10 years. Financial instruments Financial instruments are recognised in the statement of financial position at such time as the Group becomes a party to the contractual provisions of the financial instrument. Purchases and sales of financial assets are recognised on the trade date, which is the date the Group commits to purchase or sell the asset. A financial asset is derecognised when the contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred, together with substantially all the risks and rewards of ownership. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire, are discharged or are cancelled. a) Financial assets On acquisition of a financial asset, the Group is required to classify the asset into one of the following categories: financial assets at fair value through the statement of profit or loss, loans and receivables, assets held to maturity and assets available for sale. The Group does not make use of the held to maturity and available for sale categories. b) Financial assets at fair value through profit or loss Except for derivative financial instruments and other financial assets listed in policies (c), (f) and (g) below, all financial assets are designated as fair value through the statement of profit or loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the Group’s key management. The Group’s investment strategy is to invest and evaluate their performance with reference to their fair values. c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are carried at amortised cost less any impairment losses. 145www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued d) Fair value measurement Fair value is the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available as well as representing actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. Valuation techniques include using recent orderly transactions between market participants (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. These prices are monitored and deemed to approximate exit price. Where the Group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes a third-party market participant would take them into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When the transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss depending on the individual facts and circumstances of the transaction but before the valuation is supported wholly by observable market data or the transaction is closed out. Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are recognised in the statement of profit or loss when incurred. Financial assets at fair value through profit or loss are continuously measured at fair value, and changes therein are recognised in the statement of profit or loss. Net changes in the fair value of financial assets at fair value through profit or loss exclude interest and dividend income, as these items are accounted for separately as set out on the next page. e) Hedge funds, equity funds and illiquid credit assets The Group invests in a number of hedge funds, equity funds and illiquid credit assets for which there are no available quoted market prices. The valuation of these assets is based on fair value techniques as described above. The fair value of our hedge fund and illiquid asset portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid credit assets. These uncalled unfunded commitments are actively monitored by the Group and are disclosed in the notes 2 and 16 to the financial statements. The additional investment into our illiquid credit asset portfolio is recognised on the date that this funding is provided by the Group. f) Insurance receivables and payables Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. Insurance receivables are classified as ‘loans and receivables’ as they are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Insurance receivables are measured at amortised cost less any impairment losses. Insurance payables are stated at amortised cost. Notes to the financial statements continued 146 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued g) Other receivables Other receivables categorised as loans and receivables are carried at amortised cost less any impairment losses. h) Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses and foreign exchange gains and losses on financial assets and liabilities at fair value through the statement of profit or loss (as defined in accounting policy e). Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest is recognised on an effective rate basis for financial assets at fair value through the statement of profit or loss. The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment. Unrealised investment gains and losses represent the difference between the carrying value at the reporting date, and the carrying value at the previous period end or purchase value during the period. i) Borrowings Borrowings are initially recorded at fair value less transaction costs incurred. Subsequently borrowings are stated at amortised cost and interest is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method. Finance costs comprise interest, fees paid for the arrangement of debt and letter of credit facilities, and commissions charged for the utilisation of letters of credit. These costs are recognised in the statement of profit or loss using the effective interest method. In addition, finance costs include gains on the early redemption of the Group’s borrowings. These gains are recognised in the statement of profit or loss, being the difference between proceeds paid plus related costs and the carrying value of the borrowings redeemed. j) Other payables Other payables are stated at amortised cost determined according to the effective interest rate method. k) Hedge accounting and derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets, recent market transactions, and valuation techniques which include discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. Derivative assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and the parties intend to settle on a net basis, or realise the assets and settle the liability simultaneously. The Group has not designated any derivatives as fair value hedges, cash flow hedges or net investment hedges and therefore all fair value movements are recorded through profit or loss. l) Impairment of financial assets The Group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and a collective level. The Group assesses at each reporting date whether there is objective evidence that a specific financial asset measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. If there is objective evidence that impairment exists, the amount of the loss is measured as the difference between the asset’s carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognised in the statement of profit or loss. In assessing collective impairment, the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than those suggested by historical trends. 147www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued m) Cash and cash equivalents Cash and cash equivalents consist of cash held at bank, cash in hand, deposits held at call with banks, cash held in Lloyd’s trust accounts and other short term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These investments have less than three months maturity from the date of acquisition. Cash and cash equivalents are measured at fair value through the profit and loss account. n) Unfunded commitment capital Unfunded committed capital arising in relation to certain financial asset investments is not shown on the statement of financial position as unfunded committed capital represents a loan commitment that is scoped out of IAS 39. Leases a) Right of use assets The Group recognises right of use assets at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right of use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right of use assets includes the amount of lease liabilities recognised, initial direct costs incurred, an estimate of any costs to be incurred at expiration of the lease agreements and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, recognised right of use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right of use assets are subject to impairment. b) Lease liabilities At the commencement date of the lease, the Group recognises a lease liability measured at the present value of the lease payments to be made over the lease term. In calculating the present value of lease payments, the Group uses the weighted average incremental borrowing rate at the lease commencement date. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. c) Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases of property (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as an expense in the profit or loss on a straight-line basis over the lease term. d) The determination of a lease term with renewal options within lease contracts The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for various additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affect its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy). Notes to the financial statements continued 148 Beazley | Annual report 2021 www.beazley.com 1 Statement of accounting policies continued Employee benefits a) Pension obligations The Group operates a defined benefit pension plan that is now closed to future service accruals. The scheme is generally funded by payments from the Group, taking account of the recommendations of an independent qualified actuary. All employees now participate in defined contribution pension arrangements, to which the Group contributes. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The pension costs are assessed using the projected unit credit method. Under this method the costs of providing pensions are charged to the statement of profit or loss so as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values the plans annually. The net pension obligation is measured at the present value of the estimated future net cash flows and is stated net of plan assets. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income. The Group also determines the net interest income/expense for the period on the net defined benefit asset/liability by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset/liability at the beginning of the annual period, taking into account any changes in the net defined benefit asset/liability during the period as a result of contributions and benefit payments. Consequently, the net interest on the defined benefit asset/ liability comprises: • interest cost on the defined benefit obligation; • interest income on plan assets; and • interest on the effect of the asset ceiling. Net interest income/expense is recognised in the statement of profit or loss. Past service costs are recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and the date when an entity recognises any termination benefits. For the defined contribution plan, the Group pays contributions to a privately administered pension plan. Once the contributions have been paid, the Group has no further obligations. The Group’s contributions are charged to the statement of profit or loss in the period to which they relate. b) Share based compensation The Group offers option plans over Beazley plc’s ordinary shares to certain employees, which includes the save-as-you-earn (SAYE) scheme. The grant date fair value of share based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share based payment awards with non-vesting conditions, the grant date fair value of the share based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. When the options are exercised and new shares are issued to cover SAYE vestings, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) with the excess amount going to share premium. For other plans, when no proceeds are received, the nominal value of shares issued is to share capital and debited to retained earnings. When the options are exercised and the shares are granted from the employee share trust, the proceeds received, net of any transaction costs, and the value of shares held within the trust, are credited to retained earnings. 149www.beazley.com Beazley | Annual report 2021 Financial statements 1 Statement of accounting policies continued Income taxes Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised respectively in other comprehensive income or directly in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the year end reporting date and any adjustments to tax payable in respect of prior periods. Deferred tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets are recognised in the statement of financial position to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Earnings per share Basic earnings per share are calculated by dividing profit or loss after tax available to shareholders by the weighted average number of ordinary shares in issue during the period. For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares such as share options granted to employees. Share options with performance conditions attaching to them have been excluded from the weighted average number of shares to the extent that these conditions have not been met at the reporting date. The shares held in the employee share options plan (ESOP) and treasury shares are excluded from both the calculations, until such time as they vest unconditionally with the employees. Provisions and contingencies Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources or economic benefits will be required to settle the obligation, and a reliable estimate of the obligation can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is most probable. Contingent liabilities are present obligations that are not recognised because it is not probable that an outflow of resources will be required to meet the liabilities or because the amount of the obligation cannot be measured with sufficient reliability. Notes to the financial statements continued 150 Beazley | Annual report 2021 www.beazley.com 2 Risk management The Group has identified the risks arising from its activities and has established policies and procedures to manage these items in accordance with its risk appetite. The Group categorises its risks into eight areas: insurance, strategic, market, operational, credit, regulatory and legal, liquidity and Group risk. The sections below outline the Group’s risk appetite and explain how it defines and manages each category of risk. The eight categories of risk have also been considered in the context of the company (Beazley plc). The following areas are applicable to the company: market, operational, regulatory and legal, and liquidity. The following disclosures cover the company to the extent that these areas are applicable. The symbol † by a table or numerical information means it has not been audited. 2.1 Insurance risk The Group’s insurance business assumes the risk of loss from persons or organisations that are directly exposed to an underlying loss. Insurance risk arises from this risk transfer due to inherent uncertainties about the occurrence, amount and timing of insurance liabilities. The four key components of insurance risk are underwriting, reinsurance, claims management and reserving. Each element is considered below. a) Underwriting risk Underwriting risk comprises four elements that apply to all insurance products offered by the Group: • cycle risk – the risk that business is written without full knowledge as to the (in)adequacy of rates, terms and conditions; • event risk – the risk that individual risk losses or catastrophes lead to claims that are higher than anticipated in plans and pricing; • pricing risk – the risk that the level of expected loss is understated in the pricing process; and • expense risk – the risk that the allowance for expenses and inflation in pricing is inadequate. We manage and model these four elements in the following three categories: attritional claims, large claims and catastrophe events. The Group’s underwriting strategy is to seek a diverse and balanced portfolio of risks in order to limit the variability of outcomes. This is achieved by accepting a spread of business over time, segmented between different products, geographies and sizes. The annual business plans for each underwriting team reflect the Group’s underwriting strategy, and set out the classes of business, the territories and the industry sectors in which business is to be written. These plans are approved by the Board of each underwriting entity and the Group and monitored by the underwriting committee. Our underwriters calculate premiums for risks written based on a range of criteria tailored specifically to each individual risk. These factors include but are not limited to financial exposure, loss history, risk characteristics, limits, deductibles, terms and conditions and acquisition expenses. The Group also recognises that insurance events are, by their nature, random, and the actual number and size of events during any one year may vary from those estimated using established statistical techniques. To address this, the Group sets out the exposure that it is prepared to accept in certain territories to a range of events such as natural catastrophes and specific scenarios which may result in large industry losses. This is monitored through regular calculation of realistic disaster scenarios (RDSs). The aggregate position is monitored at the time of underwriting a risk, and reports are regularly produced to highlight the key aggregations to which the Group is exposed. The Group uses a number of modelling tools to monitor its exposures against the agreed risk appetite set and to simulate catastrophe losses in order to measure the effectiveness of its reinsurance programmes. Stress and scenario tests are also run using these models. The range of scenarios considered includes natural catastrophe, cyber, marine, liability, political, terrorism and war events. One of the largest types of event exposure relates to natural catastrophe events such as windstorm or earthquake. With the increasing risk from climate change impacts the frequency and severity of natural catastrophes, the Group continues to monitor its exposure. Where possible the Group measures geographic accumulations and uses its knowledge of the business, historical loss behaviour and commercial catastrophe modelling software to assess the expected range of losses at different return periods. Upon application of the reinsurance coverage purchased, the key gross and net exposures are calculated on the basis of extreme events at a range of return periods. 151www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued The Group’s high level catastrophe risk appetite is set by the Board and the business plans of each team are determined within these parameters. The Board may adjust these limits over time as conditions change. In 2021 the Group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of † $520.0m (2020: $437.0m) net of reinsurance. This represents an increase of 19% in 2021. Lloyd’s has also defined its own specific set of RDS events for which all syndicates with relevant exposures must report. Of these the three largest, net of reinsurance, events which could have impacted Beazley in 2020 and 2021 are: † 2021 Lloyd’s prescribed natural catastrophe event (total incurred losses) Modelled PML 1 (before reinsurance) $m Modelled PML 1 (after reinsurance) $m Los Angeles quake (2021: $78bn) 737.6 265.2 San Francisco quake (2021: $78bn) 708.0 249.9 US Northeast windstorm (2021: $112bn) 560.4 231.5 2020 Lloyd’s prescribed natural catastrophe event (total incurred losses) Modelled PML 1 (before reinsurance) $m Modelled PML 1 (after reinsurance) $m San Francisco quake (2020: $78bn) 663.2 232.1 Los Angeles quake (2020: $78bn) 706.4 228.6 Gulf of Mexico windstorm (2020: $112bn) 642.8 216.0 1 Probable market loss. The tables above show each event independent of each other and considered on their own. Net of reinsurance exposures for the Los Angeles quake scenario have increased by 16% in 2021, whereas gross exposures have increased by 4%. The increase in net exposures is being driven by a change in reinsurance protections for the Specialty Lines and Political, Accident and Contingency divisions. The increase in the net San Francisco quake scenario is for the same reason but the impact has been less with gross exposures increasing by 7% and net by 8%. Windstorm exposures have increased in the US Northeast during 2021, which has resulted in the US Northeast windstorm scenario replacing the Gulf of Mexico windstorm scenario as being the third largest scenario for 2021. The net natural catastrophe risk appetite increased by 19% in 2021 to $520.0m from $437.0m in 2020, with the increase in appetite being shared across the Property & Reinsurance divisions. The net exposure of the Group to each of these modelled events at a given point in time is a function of assumptions made about how and where the event occurs, its magnitude, the amount of business written that is exposed to each event and the reinsurance arrangements in place. The Group also has exposure to man-made claim aggregations, such as those arising from terrorism, liability, and cyber events. Beazley chooses to underwrite cyber insurance within the Cyber & Executive Risk and Specialty Lines division using our team of specialist underwriters, claims managers and data breach services managers. Other than for affirmative cyber coverage, Beazley’s preference is to exclude cyber exposure where possible. To manage the potential exposure, the Board has established a risk budget for the aggregation of cyber related claims which is monitored by reference to the largest of seventeen realistic disaster scenarios that have been developed internally. These scenarios include the failure of a data aggregator, the failure of a shared hardware or software platform, the failure of a cloud provider & physical damage scenarios. Whilst it is not possible to be precise, as there is sparse data on actual aggregated events, these severe scenarios are expected to be very infrequent. Notes to the financial statements continued 152 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued The largest net realistic disaster scenario is currently just under $200m for the Group as at 31 December 2021. The reinsurance programmes that protect the Cyber & Executive Risk and Specialty Lines divisions would partially mitigate the cost of most, but not all, cyber catastrophes. Beazley also reports on cyber exposure to Lloyd’s using the three largest internal realistic disaster scenarios and three new prescribed scenarios which include a cloud provider scenario & a ransomware scenario. To manage underwriting exposures, the Group has developed limits of authority and business plans which are binding upon all staff authorised to underwrite and are specific to underwriters, classes of business and industry. In 2021, the maximum line that any one underwriter could commit the managed syndicates to was $150m. In most cases, maximum lines for classes of business were much lower than this. These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including dual sign-off for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits. Exception reports are also run regularly to monitor compliance. All underwriters also have a right to refuse renewal or change the terms and conditions of insurance contracts upon renewal. Rate monitoring details, including limits, deductibles, exposures, terms and conditions and risk characteristics are also captured and the results are combined to monitor the rating environment for each class of business. Binding authority contracts A proportion of the Group’s insurance risks are transacted by third parties under delegated underwriting authorities. Each third party is thoroughly vetted by our coverholder approval group before it can bind risks, and is subject to monitoring to maintain underwriting quality and confirm ongoing compliance with contractual guidelines. Operating divisions In 2021, the Group’s business consisted of seven operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk. 2021 Lloyd’s Worldwide Non-Lloyd’s US Non-Lloyds Europe Total Cyber & Executive Risk 24% 8% 1% 33% Marine 7% 1% – 8% Market Facilities 4% – – 4% Political, Accident & Contingency 6% 1% – 7% Property 13% – – 13% Reinsurance 5% – – 5% Specialty Lines 22% 3% 5% 30% Total 81% 13% 6% 100% 2020 Lloyd’s Worldwide Non-Lloyd’s US Non-Lloyd’s Europe Total Cyber & Executive Risk 19% 10% 1% 30% Marine 9% – – 9% Market Facilities 4% – – 4% Political, Accident & Contingency 7% 1% – 8% Property 13% – – 13% Reinsurance 5% – – 5% Specialty Lines 25% 5% 1% 31% Total 82% 16% 2% 100% 153www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued b) Reinsurance risk Reinsurance risk to the Group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 159. The Group’s reinsurance programmes complement the underwriting team’s business plans and seek to protect Group capital from an adverse volume or volatility of claims on both a per risk and per event basis. In some cases the Group deems it more economic to hold capital than purchase reinsurance. These decisions are regularly reviewed as an integral part of the business planning and performance monitoring process. The reinsurance security committee examines and approves all reinsurers to ensure that they possess suitable security. The Group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration of reinsurance contracts and monitors and instigates our responses to any erosion of the reinsurance programmes. c) Claims management risk Claims management risk may arise within the Group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the Group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The Group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’s broader interests. Case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability. d) Reserving and ultimate reserves risk Reserving and ultimate reserves risk occurs within the Group where established insurance liabilities are insufficient through inaccurate forecasting, or where there is inadequate allowance for expenses and reinsurance bad debts in provisions. To manage reserving and ultimate reserves risk, our actuarial team uses a range of recognised techniques to project gross premiums written, monitor claims development patterns and stress-test ultimate insurance liability balances. The Group aims to hold reserves within a range of 5-10% above the actuarial estimates, which themselves include some margin for uncertainty. The objective of the Group’s reserving policy is to produce accurate and reliable estimates that are consistent over time and across classes of business. The estimates of gross premiums written and claims prepared by the actuarial department are used through a formal quarterly peer review process to independently test the integrity of the estimates produced by the underwriting teams for each class of business. These meetings are attended by senior management, senior underwriters, and actuarial, claims, and finance representatives. 2.2 Strategic risk This is the risk that the Group’s strategy is inappropriate or that the Group is unable to implement its strategy. Where events supersede the Group’s strategic plan this is escalated at the earliest opportunity through the Group’s monitoring tools and governance structure. a) Senior management performance Management stretch is the risk that business growth might result in an insufficient or overly complicated management team structure, thereby undermining accountability and control within the Group. As the Group expands its worldwide business in the UK, North America, Europe, South America and Asia, management stretch may make the identification, analysis and control of Group risks more complex. On a day-to-day basis, the Group’s management structure encourages organisational flexibility and adaptability, while ensuring that activities are appropriately coordinated and controlled. By focusing on the needs of their customers and demonstrating both progressive and responsive abilities, staff, management and outsourced service providers are expected to excel in service and quality. Individuals and teams are also expected to transact their activities in an open and transparent way. These behavioural expectations reaffirm low Group risk tolerance by aligning interests to ensure that routine activities, projects and other initiatives are implemented to benefit and protect resources of both local business segments and the Group as a whole. Notes to the financial statements continued 154 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued 2.3 Market risk Market risk arises where the value of assets and liabilities or future cash flows changes as a result of movements in foreign exchange rates, interest rates and market prices. Efficient management of market risk is key to the investment of Group assets. Appropriate levels of investment risk are determined by limiting the proportion of forecast Group earnings which could be at risk from lower than expected investment returns, using a 1 in 10 confidence level as a practical measure of such risk. In 2021, this permitted variance from the forecast investment return was set at † $180m. For 2022, the permitted variance is likely to be modestly increased due to the higher level of investment assts. Investment strategy is developed to be consistent with this limit and investment risk is monitored on an ongoing basis, using outputs from our internal model. Changes in interest rates also impact the present values of estimated Group liabilities, which are used for solvency and capital calculations. Our investment strategy reflects the nature of our liabilities, and the combined market risk of investment assets and estimated liabilities is monitored and managed within specified limits. a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is US dollars and the presentational currency in which the Group reports its consolidated results is US dollars. The effect of this on foreign exchange risk is that the Group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities. The Group operates in four main currencies: US dollars, sterling, Canadian dollars and euros. Transactions in all currencies are converted to US dollars on initial recognition with any resulting monetary items being translated to the US dollar spot rate at the reporting date. If any foreign exchange risk arises it is actively managed as described below. In 2021, the Group managed its foreign exchange risk by periodically assessing its non-dollar exposures and hedging these to a tolerable level while targeting to have net assets that are predominantly denominated in US dollar. As part of this hedging strategy, exchange rate derivatives were used to rebalance currency exposure across the Group. Details of foreign currency derivative contracts entered into with external parties are disclosed in note 17. On a forward looking basis an assessment is made of expected future exposure development and appropriate currency trades put in place to reduce risk. The Group’s underwriting capital is matched by currency to the principal underlying currencies of its written premiums. This helps to mitigate the risk that the Group’s capital required to underwrite business is materially affected by any future movements in exchange rates. The Group also has foreign operations with functional currencies that are different from the Group’s presentational currency. The effect of this on foreign exchange risk is that the Group is exposed to fluctuations in exchange rates for US dollar denominated transactions and net assets arising in those foreign currency operations. It also gives rise to a currency translation exposure for the Group to sterling, euro, Canadian dollars, Singapore dollars and Australian dollars on translation to the Group’s presentational currency. These exposures are minimal and are not hedged. The following table summarises the carrying value of total assets and total liabilities categorised by the Group’s main currencies: 31 December 2021 UK £ $m CAD $ $m EUR € $m Subtotal $m US $ $m Total $m Total assets 904.3 248.8 501.9 1,655.0 11,152.4 12, 8 07. 4 Total liabilities (1,038.0) (236.1) (561.7) (1,835.8) (8,840.8) (10,676.6) Net assets (133.7) 12.7 (59.8) (180.8) 2,311.6 2,130.8 31 December 2020 UK £ $m CAD $ $m EUR € $m Subtotal $m US $ $m Total $m Total assets 737.6 213.9 420.4 1,371.9 9,215.8 10,587.7 Total liabilities (828.2) (203.0) (431.9) (1,463.1) (7,315.1) (8,778.2) Net assets (90.6) 10.9 (11.5) (91.2) 1,900.7 1,809.5 155www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued Sensitivity analysis Fluctuations in the Group’s trading currencies against the US dollar would result in a change to profit after tax and net asset value. The table below gives an indication of the impact on profit after tax and net assets of a percentage change in the relative strength of the US dollar against the value of sterling, the Canadian dollar and the euro, simultaneously. The analysis is based on information on net asset positions as at the balance sheet date. Impact on profit after tax for the year ended Impact on net assets Change in exchange rate of sterling, Canadian dollar and euro relative to US dollar 2021 $m 2020 $m 2021 $m 2020 $m Dollar weakens 30% against other currencies (45.3) (25.0) (64.0) (33.9) Dollar weakens 20% against other currencies (30.2) (16.7) (42.7) (22.6) Dollar weakens 10% against other currencies (15.1) (8.3) (21.3) (11.3) Dollar strengthens 10% against other currencies 15.1 8.3 21.3 11.3 Dollar strengthens 20% against other currencies 30.2 16.7 42.7 22.6 Dollar strengthens 30% against other currencies 45.3 25.0 64.0 33.9 b) Interest rate risk Some of the Group’s financial instruments, including cash and cash equivalents, certain financial assets at fair value and borrowings, are exposed to movements in market interest rates. The Group manages interest rate risk by primarily investing in short duration financial assets along with cash and cash equivalents. The investment committee monitors the duration of these assets on a regular basis. The Group also entered into bond futures contracts to manage the interest rate risk on bond portfolios. The following table shows the modified duration at the reporting date of the financial instruments that are exposed to movements in market interest rates. Duration is a commonly used measure of volatility and we believe gives a better indication than maturity of the likely sensitivity of our portfolio to changes in interest rates. Duration 31 December 2021 <1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m Total $m Fixed and floating rate debt securities 1,938.5 2,624.4 1,033.2 390.8 216.6 68.8 6,272.3 Syndicate loans – – 7.8 30.1 – – 37. 9 Cash and cash equivalents 591.8 – – – – – 591.8 Derivative financial instruments 7.2 – – – 0.3 – 7.5 Borrowings – – – – (249.2) (298.4) (5 47.6) Total 2,537.5 2,624.4 1,041.0 420.9 (32.3) (229.6) 6,361.9 31 December 2020 <1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m Total $m Fixed and floating rate debt securities 1,696.1 2,031.7 640.0 484.3 384.3 183.3 5,419.7 Syndicate loans – – – 8.2 32.4 – 40.6 Cash and cash equivalents 309.5 – – – – – 309.5 Derivative financial instruments 28.5 – – – – – 28.5 Borrowings – – – – – (5 47.1) (547.1) Total 2,034.1 2,031.7 640.0 492.5 416.7 (363.8) 5,251.2 Borrowings consist of two items. The first is $250m of subordinated tier 2 debt raised in November 2016. This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The second comprises $300m of subordinated tier 2 debt raised in September 2019. This debt is due in 2029 and has annual interest of 5.5% payable in March and September each year. Notes to the financial statements continued 156 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued Sensitivity analysis Changes in yields, with all other variables constant, would result in changes in the capital value of debt securities and syndicate loans as well as subsequent interest receipts and payments. This would affect reported profits and net assets as indicated in the table below: Impact on profit after income tax for the year Impact on net assets 2021 $m 2020 $m 2021 $m 2020 $m Shift in yield (basis points) 150 basis point increase (124.1) (138.4) (124.1) (138.4) 100 basis point increase (82.8) (92.3) (82.8) (92.3) 50 basis point increase (41.4) (46.1) (41.4) (46.1) 50 basis point decrease 41.4 46.1 41.4 46.1 100 basis point decrease 82.8 92.3 82.8 92.3 c) Price risk Financial assets and derivatives that are recognised in the statement of financial position at their fair value are susceptible to losses due to adverse changes in prices. This is referred to as price risk. Financial assets include fixed and floating rate debt securities, syndicate loans, hedge funds, illiquid credit assets, equity investments and derivative financial assets. The price of debt securities is affected by interest rate risk, as described above, and also by issuer’s credit risk. The sensitivity to price risk that relates to the Group’s hedge fund, syndicate loans, illiquid credit and equity investments is presented below. Listed investments that are quoted in an active market are recognised in the statement of financial position at quoted bid price, which is deemed to be approximate exit price. If the market for the investment is not considered to be active, then the Group establishes fair value using valuation techniques (refer to note 16). This includes comparison of orderly transactions between market participants, reference to the current fair value of other investments that are substantially the same, discounted cash flow models and other valuation techniques that are commonly used by market participants. Impact on profit after income tax for the year Impact on net assets 2021 $m 2020 $m 2021 $m 2020 $m Change in fair value of hedge funds, syndicate loans, equity funds and illiquid credit assets 30% increase in fair value 242.2 239.4 242.2 239.4 20% increase in fair value 161.5 159.6 161.5 159.6 10% increase in fair value 80.7 79.8 80.7 79.8 10% decrease in fair value (80.7) (79.8) (80.7) (79.8) 20% decrease in fair value (161.5) (159.6) (161.5) (159.6) 30% decrease in fair value (242.2) (239.4) (242.2) (239.4) 157www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued d) Investment risk The value of our investment portfolio is impacted by interest rate and market price risks, as described above. Managing the Group’s exposures to these risks is an intrinsic part of our investment strategy. Beazley uses an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic analysis of market risk. Beazley uses these outputs to assess the value at risk (VAR) of its investments, at different confidence levels, including ‘1 in 200’, which reflects Solvency II modelling requirements, and ‘1 in 10’, reflecting scenarios which are more likely to occur in practice. Risk is typically considered to a 12 month horizon. It is assessed for investments in isolation and also in conjunction with the present value of our liabilities, to help us monitor and manage market risk for solvency and capital purposes. By its nature, stochastic modelling does not provide a precise measure of risk, ESG outputs are regularly validated against actual market conditions, and Beazley also uses a number of other, qualitative measures to support the monitoring and management of investment risk. These include stress testing and scenario analysis. Beazley’s investment strategy is developed by reference to an investment risk budget, set annually by the Board as part of the overall risk budgeting framework of the business. The Solvency II internal model is used to monitor compliance with the budget, which limits the amount by which our reported annual investment return may deviate from a predetermined target, at the 1 in 10 confidence level. In 2021, this permitted deviation was set at † $180m. Additionally, a limit is specified for the net interest rate sensitivity of assets and liabilities combined and investments are managed to ensure that this limit is not exceeded. 2.4 Operational risk Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers or external events. There are a number of business activities for which the Group uses the services of a third-party company, such as investment management, IT systems, data entry and credit control. These service providers are selected against rigorous criteria and formal service level agreements are in place, and regularly monitored and reviewed. The Group also recognises that it is necessary for people, systems and infrastructure to be available to support our operations. Therefore we have taken significant steps to mitigate the impact of business interruption which could follow a variety of events, including the loss of key individuals and facilities. We operate a formal disaster recovery plan which, in the event of an incident, allows the Group to move critical operations to an alternative location within 24 hours. The Group actively manages operational risks and minimises them where appropriate. This is achieved by implementing and communicating guidelines to staff and other third parties. The Group also regularly monitors the performance of its controls and adherence to these guidelines through the risk management reporting process. Key components of the Group’s operational control environment include: • modelling of operational risk exposure and scenario testing; • management review of activities; • documentation of policies and procedures; • preventative and detective controls within key processes; • contingency planning; and • other systems controls. COVID-19 has caused a shift in the operational strategy of Beazley from an office based environment to a hybrid working environment. This has meant that internal processes, capability of people and systems had been put to the test. The Group have adapted to the changes in the operational environment and business processes have continued to be carried out. The Group continues to actively manage operational risks caused by COVID-19, while engaging in open communication with staff. The Group also continues to regularly monitor the performance of its controls through the risk management reporting process. Notes to the financial statements continued 158 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued 2.5 Credit risk Credit risk arises where counterparties fail to meet their financial obligations in full as they fall due. The primary sources of credit risk for the Group are: • reinsurers – reinsurers may fail to pay valid claims against a reinsurance contract held by the Group; • brokers and coverholders – counterparties fail to pass on premiums or claims collected or paid on behalf of the Group; • investments – issuer default results in the Group losing all or part of the value of a financial instrument or a derivative financial instrument; and • cash and cash equivalents. The Group’s core business is to accept significant insurance risk and the appetite for other risks is low. This protects the Group’s capital from erosion so that it can meet its insurance liabilities. The Group limits exposure to a single counterparty or a Group of counterparties and analyses the geographical locations of exposures when assessing credit risk. An approval system also exists for all new brokers, and broker performance is carefully monitored. Regular exception reports highlight trading with non-approved brokers, and the Group’s credit control function frequently assesses the ageing and collectability of debtor balances. Any large, aged items are prioritised and where collection is outsourced incentives are in place to support these priorities. The investment committee has established comprehensive guidelines for the Group’s investment managers regarding the type, duration and quality of investments acceptable to the Group. The performance of investment managers is regularly reviewed to confirm adherence to these guidelines. The Group has developed processes to formally examine all reinsurers before entering into new business arrangements. New reinsurers are approved by the reinsurance security committee, which also reviews arrangements with all existing reinsurers at least annually. Vulnerable or slow-paying reinsurers are examined more frequently. To assist in the understanding of credit risks, A.M. Best, Moody’s and Standard & Poor’s (S&P) ratings are used. These ratings have been categorised below as used for Lloyd’s reporting: A.M. Best Moody’s S&P Tier 1 A++ to A- Aaa to A3 AAA to A- Tier 2 B++ to B- Baa1 to Ba3 BBB+ to BB- Tier 3 C++ to C- B1 to Caa B+ to CCC Tier 4 D, E, F, S Ca to C R, (U,S) 3 159www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued The following tables summarise the Group’s concentrations of credit risk: 31 December 2021 Tier 1 $m Tier 2 $m Tier 3 $m Tier 4 $m Unrated $m Total $m Financial assets at fair value – fixed and floating rate debt securities 5,517.1 755.2 – – – 6,272.3 – syndicate loans 37.9 – – – – 37. 9 – equity funds – – – – 209.6 209.6 – hedge funds – – – – 478.2 478.2 – illiquid credit assets – – – – 277.9 277. 9 – derivative financial instruments – – – – 7.6 7.6 Insurance receivables 177.0 – – – 1,519.1 1,696.1 Reinsurance assets 1,829.4 – – – 557.0 2,386.4 Other receivables – – – – 106.7 106.7 Cash and cash equivalents 589.7 0.3 – – 1.8 591.8 Total 8,151.1 755.5 – – 3,157.9 12,064.5 31 December 2020 Tier 1 $m Tier 2 $m Tier 3 $m Tier 4 $m Unrated $m Total $m Financial assets at fair value – fixed and floating rate debt securities 4,813.6 606.1 – – – 5,419.7 – syndicate loans 40.6 – – – – 40.6 – equity funds – – – – 203.2 203.2 – hedge funds – – – – 442.1 442.1 – illiquid credit assets – – – – 227.9 2 27. 9 – derivative financial instruments – – – – 28.5 28.5 Insurance receivables – – – – 1,467.9 1,467.9 Reinsurance assets 1,684.7 – – – – 1,684.7 Other receivables 86.5 – – – – 86.5 Cash and cash equivalents 307. 2 0.8 – – 1.5 309.5 Total 6,932.6 606.9 – – 2,371.1 9,910.6 The largest counterparty exposure within tier 1 is $2,956.3m of US treasuries (2020: $2,326.0m). Financial investments falling within the unrated category comprise hedge funds and illiquid credit assets for which there is no readily available market data to allow classification within the respective tiers. Additionally, insurance receivables are classified as unrated, due to premium debtors not being credit rated. At 31 December 2021, $1.8m of cash and cash equivalents fell within the unrated category (2020: $1.5m). This is due to the Group transacting with a bank in the US that does not have an external credit rating. Insurance receivables are classified as unrated, due to premium debtors not being credit rated with the exception of the CRI accrual element. Additionally the Reinsurance share unearned premium provision is classified as unrated. Insurance receivables and other receivables balances held by the Group have not been impaired, based on all evidence available, and no impairment provision has been recognised in respect of these assets. Insurance receivables in respect of coverholder business are credit controlled by third-party managers. We monitor third party coverholders’ performance and their financial processes through the Group’s coverholder management team. These assets are individually impaired after considering information such as the occurrence of significant changes in the counterparties’ financial position, patterns of historical payment information and disputes with counterparties. Notes to the financial statements continued 160 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued An analysis of the overall credit risk exposure indicates that the Group has reinsurance assets that are impaired at the reporting date. The total impairment in respect of the reinsurance assets, including reinsurers’ share of outstanding claims, at 31 December 2021 was as follows: Total $m Balance at 1 January 2020 13.7 Impairment loss recognised 1.1 Balance at 31 December 2020 14.8 Impairment loss written back (3.3) Balance at 31 December 2021 11.5 The Group has insurance receivables and reinsurance assets that are past due at the reporting date. An aged analysis of these is presented below: 31 December 2021 Up to 30 days past due $m 30-60 days past due $m 60-90 days past due $m Greater than 90 days past due $m Total $m Insurance receivables 79.3 23.7 16.0 33.4 152.4 Reinsurance assets 55.6 16.7 9.9 81.9 164.1 31 December 2020 Up to 30 days past due $m 30-60 days past due $m 60-90 days past due $m Greater than 90 days past due $m Total $m Insurance receivables 52.3 21.6 8.4 30.6 112.9 Reinsurance assets 80.6 32.8 12.4 22.1 147.9 The total impairment provision in the statement of financial position in respect of reinsurance assets past due (being reinsurance recoverables due on paid claims) by more than 30 days at 31 December 2021 was $2.1m (2020: $3.0m). This $2.1m provision in respect of overdue reinsurance recoverables is included within the total provision of $11.5m shown in the table at the top of the page. The Group believes that the unimpaired amounts that are past due more than 30 days are still collectable in full, based on historic payment behaviour and analyses of credit risk. 2.6 Regulatory and legal risk Regulatory and legal risk is the risk arising from not complying with regulatory and legal requirements. The operations of the Group are subject to legal and regulatory requirements within the jurisdictions in which it operates and the Group’s compliance function is responsible for ensuring that these requirements are adhered to. 2.7 Liquidity risk Liquidity risk arises where cash may not be available to pay obligations when due at a reasonable cost. The Group is exposed to daily calls on its available cash resources, principally from claims arising from its insurance business. In the majority of the cases, these claims are settled from the premiums received. The Group’s approach is to manage its liquidity position so that it can reasonably survive a significant individual or market loss event (details of the Group’s exposure to realistic disaster scenarios are provided on page 151 to 152. This means that the Group maintains sufficient liquid assets, or assets that can be converted into liquid assets at short notice and without any significant capital loss, to meet expected cash flow requirements. These liquid funds are regularly monitored using cash flow forecasting to ensure that surplus funds are invested to achieve a higher rate of return. The Group also makes use of loan facilities and borrowings, details of which can be found in note 25. Further information on the Group’s capital resources is contained on pages 59 to 60. 161www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued The following is an analysis by business segment of the estimated timing of the net cash flows based on the net claims liabilities 1 balance held at 31 December: 31 December 2021 Within 1 year $m 1-3 years $m 3-5 years $m Greater than 5 years $m Total $m Weighted average term to settlement (years) Cyber & Executive Risk 365.6 589.8 248.5 93.1 1,297.0 2.2 Marine 133.8 123.7 41.8 20.9 320.2 1.8 Market Facilities 4.3 9.5 5.1 2.9 21.8 2.8 Political, Accident & Contingency 130.9 92.9 24.2 22.3 270.3 1.9 Property 207.4 156.1 38.7 20.6 422.8 1.6 Reinsurance 118.0 99.7 28.8 23.6 270.1 2.0 Specialty Lines 338.1 643.3 428.8 5 57. 3 1,967.5 4.0 Net claims liabilities 1,298.1 1,715.0 815.9 740.7 4,569.7 31 December 2020 Within 1 year $m 1-3 years $m 3-5 years $m Greater than 5 years $m Total $m Weighted average term to settlement (years) Cyber & Executive Risk 300.2 502.6 215.1 79.3 1,097.2 2.2 Marine 133.8 122.1 43.0 20.0 318.9 1.8 Market Facilities 4.7 5.2 1.5 1.3 12.7 2.1 Political, Accident & Contingency 178.0 123.6 29.3 29.6 360.5 1.9 Property 195.9 166.2 43.3 31.5 436.9 1.9 Reinsurance 110.9 94.1 27.6 23.3 255.9 2.0 Specialty Lines 297.6 539.6 357. 5 471.7 1,666.4 4.0 Net claims liabilities 1,221.1 1,553.4 717.3 656.7 4,148.5 1 For a breakdown of net claims liabilities refer to note 24. The following table is an analysis of the net contractual cash flows based on all the liabilities held at 31 December: 31 December 2021 Within 1 year 1-3 years 3-5 years Greater than 5 years Total Net claims liabilities 1,298.1 1,715.0 815.9 740.7 4.569.7 Borrowings 31.2 62.4 310.1 344.4 748.1 Lease liabilities 10.6 22.2 17.4 47.0 97. 2 Other payables 1,141.3 – – – 1,141.3 31 December 2020 Within 1 year 1-3 years 3-5 years Greater than 5 years Total Net claims liabilities 1,221.1 1,553.4 717.3 656.7 4,148.5 Borrowings 31.2 62.4 62.4 620.7 776.7 Lease liabilities 6.2 5.8 21.2 54.9 88.1 Other payables 733.9 – – – 733.9 The next two tables summarise the carrying amount at reporting date of financial instruments analysed by maturity date. Maturity 31 December 2021 <1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m Total $m Fixed and floating rate debt securities 1,675.6 2,316.7 953.5 706.8 361.9 257. 8 6,272.3 Syndicate loans – – 7.8 30.1 – – 37.9 Derivative financial instruments 7.6 – – – – – 7.6 Cash and cash equivalents 591.8 – – – – – 591.8 Insurance receivables 1,696.1 – – – – – 1,696.1 Other receivables 106.7 – – – – – 106.7 Other payables (1,141.3) – – – – – (1,141.3) Borrowings – – – – (249.2) (298.4) (5 47.6) Total 2,936.5 2,316.7 961.3 736.9 112.7 (40.6) 7,023.5 Notes to the financial statements continued 162 Beazley | Annual report 2021 www.beazley.com 2 Risk management continued 31 December 2020 <1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m Total $m Fixed and floating rate debt securities 1,620.5 1,899.3 562.5 422.8 445.5 469.1 5,419.7 Syndicate loans – – – 8.2 32.4 – 40.6 Derivative financial instruments 28.5 – – – – – 28.5 Cash and cash equivalents 309.5 – – – – – 309.5 Insurance receivables 1,467.9 – – – – – 1,467.9 Other receivables 86.5 – – – – – 86.5 Other payables (733.9) – – – – – (733.9) Borrowings – – – – – (5 47. 2) (547. 2) Total 2,779.0 1,899.3 562.5 431.0 477.9 (78.1) 6,071.6 Illiquid credit assets, hedge funds and equity funds are not included in the maturity profile because the maturity profiles of these asset classes cannot be determined with any degree of certainty. The Group makes additional interest payments for borrowings. Further details are provided in notes 8 and 25. 2.8 Group risk Group risk occurs where business units fail to consider the impact of their activities on other parts of the Group, as well as the risks arising from these activities. There are two main components of Group risk which are explained below. a) Contagion Contagion risk is the risk arising from actions of one part of the Group which could adversely affect any other part of the Group. For example, this could include actions taken by the US operations which adversely impact the UK operations or European operations, or vice versa. The Group has limited appetite for contagion risk and minimises the impact of this occurring by operating with clear lines of communication across the Group to ensure all Group entities are well informed and working to common goals. b) Reputation Reputation risk is the risk of negative publicity as a result of the Group’s contractual arrangements, customers, products, services and other activities. Key sources of reputation risk include operation of a Lloyd’s franchise, interaction with capital markets since the Group’s IPO during 2002, and reliance upon the Beazley brand in North America, Europe, South America and Asia. The Group’s preference is to minimise reputation risks but where it is not possible or beneficial to avoid them, we seek to minimise their frequency and severity by management through public relations and communication channels. 2.9 Capital management The Group follows a risk-based approach to determine the amount of capital required to support its activities. Recognised stochastic modelling techniques are used to measure risk exposures, and capital to support business activities is allocated according to risk profile. Stress and scenario analysis is regularly performed and the results are documented and reconciled to the Board’s risk appetite where necessary. The Group has several requirements for capital, including: • to support underwriting at Lloyd’s through the syndicates in which it participates, being 2623, 3623 and 3622. This is based on the Group’s own individual capital assessment. It may be provided in the form of either the Group’s cash, investments, debt facilities, or letter of credit; • to support underwriting in Beazley Insurance Company, Inc., Beazley America Insurance Company, Inc., and Beazley NewCo Captive Company, Inc. in the US; • to support underwriting in Beazley Insurance dac in Europe; and • to make acquisitions of insurance companies or managing general agents (MGAs) whose strategic goals are aligned with our own. 163www.beazley.com Beazley | Annual report 2021 Financial statements 2 Risk management continued The Group uses letters of credit (LOC) available under a syndicated short term banking facility led by Lloyds Banking Group plc to support Funds at Lloyd’s (FAL) requirements. Lloyd’s of London apply certain criteria to banks issuing LOCs as FAL, including minimum credit rating requirements and counterparty limits. Should any of the banks on the existing LOC facility breach Lloyd’s of London requirements, the Group might be asked to replace the LOC provided with alternative eligible issuer(s) and/or assets meeting Lloyd’s requirements. The creditworthiness of the counterparties on the facility is monitored by the Group on an ongoing basis. For more detail on the value of capital managed, please see pages 59 to 60. The Internal Model Solvency Capital Requirement is a dedicated quantitative review of syndicate models and it sets outs to be a key input to the Lloyd’s Internal Model. The Board’s strategy is to grow the dividend (excluding special dividend) by between 5% and 10% per year. Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities which may arise. At 31 December 2021, we have surplus capital of 27% of ECR (on a Solvency II basis), just above our preferred target range of 15% to 25% of ECR. 2.10 Company risk The company is exposed to the same interest rate and liquidity risk exposure experienced on its mutual borrowings with the Group. The Group’s exposure can be seen in sections 2.3b and 2.7. The company also experiences operational, regulatory and legal risks as defined in section 2.4 and 2.6. 3 Segmental analysis a) Reporting segments Segment information is presented in respect of reportable segments. These are based on the Group’s management and internal reporting structures and represent the level at which financial information is reported to the Executive Committee, being the chief operating decision-maker as defined in IFRS 8. The operating segments are based upon the different types of insurance risk underwritten by the Group, as described below: Cyber & Executive Risk This segment underwrites management liabilities such as employment practices risks and directors and officers, alongside cyber and technology, media and business services. Marine This segment underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, satellite, aviation, kidnap & ransom and war risks. Market Facilities This segment underwrites entire portfolios of business with the aim of offering a low cost mechanism for placing follow business within the Lloyd’s market. Political, Accident & Contingency This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated with contract frustration. In addition, this segment underwrites life, health, personal accident, sports and income protection risks. Property The Property segment underwrites commercial and high-value homeowners’ property insurance on a worldwide basis. Reinsurance This segment specialises in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and pro-rata business. Notes to the financial statements continued 164 Beazley | Annual report 2021 www.beazley.com 3 Segmental analysis continued Specialty Lines This segment underwrites a wide portfolio of business, including architects and engineers, healthcare, lawyers and environmental liability and international financial institutions. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Those items that are allocated on a reasonable basis are split based on each segment’s capital requirements which is taken from the Group’s most up to date business plan. The reporting segments do not cross-sell business to each other. There are no individual policyholders who comprise greater than 10% of the Group’s total gross premiums written. b) Segment information 2021 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Gross premiums written 1,515.6 376.5 198.2 322.8 586.5 226.1 1,393.2 4,618.9 Net premiums written 1,150.6 345.6 55.0 270.9 439.7 133.4 1,117.2 3,512.4 Net earned premiums 951.6 316.8 45.3 251.2 386.8 134.9 1,060.7 3,147. 3 Net investment income 31.9 8.3 0.6 8.1 15.0 7.6 44.9 116.4 Other income 4.1 1.1 (0.3) 1.9 6.9 0.6 13.9 28.2 Gain from sale of business – – – 54.4 – – – 54.4 Revenue 987.6 326.2 45.6 315.6 408.7 143.1 1,119.5 3,346.3 Net insurance claims 622.1 105.8 10.6 136.1 212.4 123.0 616.2 1,826.2 Expenses for the acquisition of insurance contracts 205.9 89.0 33.1 84.7 118.3 31.1 259.7 821.8 Administrative expenses 56.6 33.4 0.7 25.1 51.3 15.6 100.3 283.0 Foreign exchange loss 2.3 0.6 0.3 0.5 0.9 0.4 2.2 7. 2 Expenses 886.9 228.8 44.7 246.4 382.9 170.1 978.4 2,938.2 Segment result 100.7 97.4 0.9 69.2 25.8 (27.0) 141.1 408.1 Finance costs (38.9) Profit before income tax 369.2 Income tax expense (60.5) Profit for the year attributable to equity shareholders 308.7 Claims ratio 65% 33% 23% 54% 55% 91% 58% 58% Expense ratio 28% 39% 75% 44% 44% 35% 34% 35% Combined ratio 93% 72% 98% 98% 99% 126% 92% 93% Segment assets and liabilities Segment assets 3,953.7 761.8 339.8 698.3 1,351.1 814.1 4,888.6 12, 8 07. 4 Segment liabilities (3,253.6) (655.6) (316.9) (605.9) (1,086.5) (685.9) (4,072.2) (10,676.6) Net assets 700.1 106.2 22.9 92.4 264.6 128.2 816.4 2,130.8 Additional information Capital expenditure 7.3 1.1 0.2 1.0 2.8 1.3 8.5 22.2 Amortisation and depreciation (10.8) (2.5) (0.3) (1.4) (4.0) (2.0) (19.4) (40.4) Net cash flow 92.8 14.1 3.0 12.2 35.1 17.0 108.2 282.3 165www.beazley.com Beazley | Annual report 2021 Financial statements 3 Segmental analysis continued 2020 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Gross premiums written 1,020.1 337. 4 133.4 273.0 470.5 194.5 1,134.9 3,563.8 Net premiums written 864.6 309.4 37.3 227.1 389.9 126.9 961.8 2, 917.0 Net earned premiums 787. 2 297.1 27. 9 213.8 360.7 124.3 882.4 2,693.4 Net investment income 53.6 12.8 0.5 10.6 21.4 11.9 77. 3 188.1 Other income 2.8 1.7 0.1 4.1 5.1 1.7 14.3 29.8 Revenue 843.6 311.6 28.5 228.5 387. 2 137.9 974.0 2,911.3 Net insurance claims 557.7 160.5 8.3 354.1 291.3 86.8 499.6 1,958.3 Expenses for the acquisition of insurance contracts 180.0 82.2 19.3 75.9 105.4 32.0 244.1 738.9 Administrative expenses 54.4 25.1 1.9 23.1 36.4 12.2 82.4 235.5 Foreign exchange gain (3.3) (1.2) (0.1) (0.9) (1.5) (0.5) (3.7) (11.2) Expenses 788.8 266.6 29.4 452.2 431.6 130.5 822.4 2,921.5 Segment result 54.8 45.0 (0.9) (223.7) (44.4) 7.4 151.6 (10.2) Finance costs (40.2) Loss before income tax (50.4) Income tax credit 4.3 Loss for the year attributable to equity shareholders (46.1) Claims ratio 71% 54% 30% 166% 81% 70% 57% 73% Expense ratio 30% 36% 76% 46% 39% 35% 37% 36% Combined ratio 101% 90% 106% 212% 120% 105% 94% 109% Segment assets and liabilities Segment assets operational strategy of Beazley 2,909.9 707.4 182.5 786.3 1,216.7 734.1 4,050.8 10,587.7 Segment liabilities (2,389.8) (612.2) (170.7) (678.4) (966.0) (591.2) (3,369.9) (8,778.2) Net assets 520.1 95.2 11.8 107.9 250.7 142.9 680.9 1,809.5 Additional information Capital expenditure 8.5 1.6 0.2 1.8 4.1 2.3 11.2 29.7 Amortisation and depreciation (3.4) (2.2) (0.1) (0.7) (1.6) (0.9) (11.0) (19.9) Net cash flow 8.9 1.6 0.2 1.9 4.3 2.4 11.7 31.0 Notes to the financial statements continued 166 Beazley | Annual report 2021 www.beazley.com 3 Segmental analysis continued c) Information about geographical areas The Group’s operating segments are also managed geographically by placement of risk. UK earned premium in the analysis below represents all risks placed at Lloyd’s; US earned premium represents all risks placed at the Group’s US insurance companies, Beazley Insurance Company, Inc. and Beazley America Insurance Company, Inc; and Europe earned premium represents all risks placed at the Group’s European insurance company, Beazley Insurance dac. An analysis of gross premiums written split geographically by placement of risk and by reportable segment is provided in note 2 on page 153. 2021 $m 2020 $m Net earned premiums UK (Lloyd’s) 2,550.6 2,214.6 US (Non-Lloyd’s) 477.1 430.7 Europe (Non-Lloyd’s) 119.6 48.1 3,147.3 2,693.4 2021 $m 2020 $m Segment assets UK (Lloyd’s) 11, 267. 5 9,433.1 US (Non-Lloyd’s) 1,164.9 976.6 Europe (Non-Lloyd’s) 375.0 178.0 12,807.4 10,587.7 Segment assets are allocated based on where the assets are located. 2021 $m 2020 $m Capital expenditure Non-US 20.2 23.2 US 3.3 6.5 23.5 29.7 4 Net investment income 2021 $m 2020 $m Interest and dividends on financial investments at fair value through profit or loss 76.5 110.7 Interest on cash and cash equivalents – 0.2 Net realised gains on financial investments at fair value through profit or loss 79.8 46.3 Net unrealised fair value (losses)/gains on financial investments at fair value through profit or loss (34.0) 36.7 Investment income from financial investments 122.3 193.9 Investment management expenses (5.9) (5.8) 116.4 188.1 167www.beazley.com Beazley | Annual report 2021 Financial statements 5a Other income 2021 $m 2020 $m Commissions received by Beazley service companies 19.4 23.6 Profit commissions from syndicates 3.8 (0.5) Agency fees from syndicate 623 3.9 3.0 Other income 1.1 3.7 28.2 29.8 Profit commissions There is an agreement between syndicate 623 and Beazley Furlonge Limited (the managing agent) where the syndicate remunerates Beazley for writing business in parallel with syndicate 2623. As such, profitability of 623 is a performance criterion for this contract. The transaction price represents a fixed percentage on profit by YOA. No other variable considerations (for example: discounts, rebates, refunds, incentives) are attached. The value of a transaction price is derived at each reporting period from the actual profit syndicate 623 has made to date and therefore represents the most likely amount of consideration at the reporting date. Commissions received from service companies Commission is payable to the Group by syndicate 623 due to Group service companies writing business on behalf of the syndicate. While the commercial purpose of the contract is to pass business to syndicate 623, the remuneration is triggered by incurring expenses, irrespective of volume of business gained. The performance criterion is deemed to be the realisation of expenses. Other income The Group has received $0.1m of government grants relating to COVID-19 for wage relief for our Singapore employees (31 December 2020: $0.2m). These grants are deemed to be tax free in the hands of the employer. Under IAS 20: Government Grants, government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the related costs, for which it is intended to compensate, are expensed. 5b Gain on sale of business The Group has recognised a net gain on sale of $54.4m following the sale of the Beazley Benefits business, which provides group supplemental health benefits solutions through employers or affinity groups to employees. Beazley Benefits sits within the Political, Accident & Contingency segment in these financial statements. The sale was completed during 2021, and the transaction transferred the renewal rights on the business beginning effective 1 August 2021, the Minneapolis office lease, and the associated office furniture, fixtures and equipment. The transaction resulted in transfer of $0.1m of lease and other assets, and $0.1m of lease liabilities. The Group received closing proceeds of $56.7m and recognised closing costs of $2.3m. 6 Operating expenses 2021 $m 2020 $m Operating expenses include: Amounts receivable by the auditor 1 and associates in respect of: – audit services for the Group and subsidiaries 2.7 2.4 – audit-related assurance services 1.1 1.0 – other non-audit services 0.6 0.5 4.4 3.9 Impairment (write-back)/loss on reinsurance assets (3.3) 1.1 1 Other than the fees disclosed above, no other fees were paid to the company’s auditor. Notes to the ﬁnancial statements continued 168 Beazley | Annual report 2021 www.beazley.com 7 Employee benefit expenses 2021 $m 2020 $m Wages and salaries 199.1 179.6 Short term incentive payments 82.5 39.1 Social security 26.6 17.5 Share based remuneration 11.6 3.0 Pension costs 1 15.7 13.0 335.5 252.2 Recharged to syndicate 623 (48.5) (33.2) 287.0 219.0 1 Pension costs also include contributions made under the defined contribution scheme. Further information on the defined benefit pension scheme can be found in note 27. The average number of employees for 2021 was 1,617 (2020: 1,497). 8 Finance costs 2021 $m 2020 $m Interest expense on financial liabilities 35.2 37.8 Interest expense on lease liabilities 3.7 2.4 38.9 40.2 9 Income tax expense 2021 $m 2020 $m Current tax expense Current tax expense 64.0 12.9 Prior year adjustments (7. 5) (6.5) 56.5 6.4 Deferred tax expense Origination and reversal of temporary differences 4.4 (12.1) Impact of change in UK/US tax rates (0.6) (0.4) Prior year adjustments 0.2 1.8 4.0 (10.7) Income tax charge/(credit) 60.5 (4.3) 169www.beazley.com Beazley | Annual report 2021 Financial statements 9 Income tax expense continued Reconciliation of tax expense The weighted average of statutory tax rates applied to the (losses)/profits earned in each country in which the Group operates is 17.2% (2020: 2.0%), whereas the tax charged for the year ending 31 December 2021 as a percentage of (loss)/profit before tax is 16.4% (2020: 8.5%). The reasons for the difference are explained below: 2021 $m 2021 % 2020 $m 2020 % Profit/(loss) before tax 369.2 – (50.4) – Tax calculated at the weighted average of statutory tax rate 63.3 17. 2 (1.0) 2.0 Effects of: – non-deductible expenses 3.5 1.0 2.1 (4.2) – tax relief on remuneration 1.6 0.4 (0.4) 0.8 – over provided in prior years (7. 3) (2.0) (4.6) 9.1 – change in UK/US tax rates 1 (0.6) (0.2) (0.4) 0.8 Tax charge/(credit) for the period 60.5 16.4 (4.3) 8.5 1 The Finance Act 2021, which provides for an increase in the UK corporation tax rate from 19% to 25% effective from 1 April 2023 received Royal Assent on 10 June 2021. This tax rate change to 25% will increase the Group’s future current tax charge. It has also been reflected in the calculation of the deferred tax balances as at 31 December 2021 for relevant temporary differences expected to reverse on or after 1 April 2023. The Tax Act (the Tax Cuts and Jobs Act) was signed into law in the US in December 2017. The Tax Act includes base erosion anti-avoidance tax provisions (the “BEAT”). We have performed an assessment for our intra-group transactions potentially in scope of BEAT. The application of this new BEAT legislation is still uncertain for some types of transaction and we are keeping developments under review. With support from external advisors, we believe that the BEAT impact on the Group is not significant. For the year 2021 no amount was provided in the Group accounts for BEAT liabilities (for 2020 the Group provided $1.1m for BEAT tax). The ultimate outcome may differ and if any additional amounts did fall within the scope of the BEAT, incremental tax at 10% might arise on some or all of those amounts. The maximum exposure to BEAT can not be quantified as it would be subject to differing interpretations. Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profits or loss or other comprehensive income but directly debited or (credited) to equity: 2021 $m 2020 $m Current tax: share based payments – (1.2) Deferred tax: share based payments 3.9 5.4 3.9 4.2 10 Earnings/(loss) per share 2021 2020 Basic (cents) 50.9c (8.0)c Diluted (cents) 50.3c (8.0)c Basic (pence) 37.0p (6.3)p Diluted (pence) 36.5p (6.3)p Basic Basic earnings/(loss) per share are calculated by dividing profit after tax of $308.7m (2020: Loss $46.1m) by the weighted average number of shares in issue during the year of 606.0m (2020: 573.8m). The shares held in the Employee Share Options Plan (ESOP) of 3.2m (2020: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees. Notes to the ﬁnancial statements continued 170 Beazley | Annual report 2021 www.beazley.com 10 Earnings/(loss) per share continued Diluted Diluted earnings/(loss) per share are calculated by dividing profit after tax of $308.7m (2020: Loss $46.1m) by the adjusted weighted average number of shares of 614.3m (2020: 582.6m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the equity settled compensation schemes. The shares held in the ESOP of 3.2m (2020: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees. Further details of equity compensation plans can be found on note 23 as well as in the directors’ remuneration report on pages 95 to 113. 11 Dividends per share After careful consideration the directors have concluded that after a year’s hiatus, they propose an interim dividend of 12.9p for 2021 (2020: nil) which represents a 5% increase on the combined first and second interim dividends declared in 2019 of 12.3p. The dividend will be payable on 30 March 2022 to Beazley plc shareholders registered at 5.00pm on 18 February 2022. The company expects the total amount to be paid in respect of the interim dividend to be approximately £78m. These financial statement do not provide for the interim dividend as a liability. 12 Intangible assets Goodwill $m Syndicate capacity $m Licences $m IT development costs $m Renewal rights $m Total $m Cost Balance at 1 January 2020 72.0 10.7 9.3 87. 8 60.0 239.8 Other additions – – – 20.5 – 20.5 Foreign exchange gain – – – 0.9 1.3 2.2 Balance at 31 December 2020 72.0 10.7 9.3 109.2 61.3 262.5 Balance at 1 January 2021 72.0 10.7 9.3 109.2 61.3 262.5 Disposal – – – (10.4) – (10.4) Other additions – – – 17.7 – 17.7 Foreign exchange (loss)/gain – – – (1.1) 0.1 (1.0) Balance at 31 December 2021 72.0 10.7 9.3 115.4 61.4 268.8 Amortisation and impairment Balance at 1 January 2020 (10.0) – – (64.9) (42.7) (117.6) Amortisation for the year – – – (8.1) (8.6) (16.7) Foreign exchange loss – – – (0.6) (1.3) (1.9) Balance at 31 December 2020 (10.0) – – (73.6) (52.6) (136.2) Balance at 1 January 2020 (10.0) – – (73.6) (52.6) (136.2) Disposal – – – 10.4 – 10.4 Amortisation for the year – – – (12.4) (8.1) (20.5) Foreign exchange gain/(loss) – – – 1.3 (0.3) 1.0 Balance at 31 December 2021 (10.0) – – (74.3) (61.0) (145.3) Carrying amount 31 December 2021 62.0 10.7 9.3 41.1 0.4 123.5 31 December 2020 62.0 10.7 9.3 35.6 8.7 126.3 171www.beazley.com Beazley | Annual report 2021 Financial statements 12 Intangible assets continued Impairment tests Goodwill, syndicate capacity and US insurance authorisation licences are deemed to have indefinite life as they are expected to have value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but annually tested for impairment. For the purpose of impairment testing, they are allocated to the Group’s cash-generating units (CGUs) as follows: 2021 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Goodwill 1.5 2.3 – 29.6 24.9 0.8 2.9 62.0 Capacity 1.7 1.6 – 1.0 2.5 0.8 3.1 10.7 Licences 3.3 – – – 1.9 – 4.1 9.3 Total 6.5 3.9 – 30.6 29.3 1.6 10.1 82.0 2020 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Goodwill 1.5 2.3 – 29.6 24.9 0.8 2.9 62.0 Capacity 1.7 1.6 – 1.0 2.5 0.8 3.1 10.7 Licences 3.3 – – – 1.9 – 4.1 9.3 Total 6.5 3.9 – 30.6 29.3 1.6 10.1 82.0 Value in use is defined as the present value of the future cash flows expected to be derived from the CGU and represents recoverable amount for goodwill. It is estimated by discounting future cash flows sourced from financial budgets approved by management which cover specific estimates for a five year period. The key assumptions used in the preparation of future cash flows are: premium growth rates,combined ratios, retention rates and expected future market conditions. A discount rate, based on weighted average cost of capital (WACC) of 9% (2020: 7%) has been applied to projected future cash flows. This has been calculated using independent measures of the risk-free rate of return and is indicative of the Group’s risk profile relative to the market. The impairment test for goodwill confirms that no impairment is required. The Group has taken the following measures to ensure that the key assumptions used in deriving value in use for each CGU considers the potential adverse effects of these potential changes in economic and regulatory environments: • Projected combined ratio – The Group has used projected combined ratios consistent with its five year financial budgets. Sensitivity testing (a 2% increase in combined ratio for all classes and all years) has been performed to model the impact of reasonably possible changes in combined ratio to our base case impairment analysis and headroom. Within these ranges, the recoverable amounts remain supportable. • Future market conditions – to test the segment’s sensitivity to variances (including those caused by the factors listed above) from forecast profits, the discount rate has been flexed to 5% above and 5% below the central assumption. Within this range, the recovery of goodwill was stress tested and remains supportable across all CGUs. Headroom was calculated in respect of the value in use of all the Group’s other intangible assets. • Premium growth rates/Retention rates – The group has used a terminal growth rate of 0% (2020: 0%) to extrapolate projections beyond the covered five year period. Notes to the ﬁnancial statements continued 172 Beazley | Annual report 2021 www.beazley.com 12 Intangible assets continued The Group’s intangible assets relating to syndicate capacity is allocated across all CGUs. The fair value of syndicate capacity can be determined from the latest Lloyds of London capacity auctions. Based upon the latest market prices, management concludes that the fair value exceeds the carrying amount and as such no impairment is necessary. US insurance authorisation licences represent the privilege to write insurance business in particular states in the US. Licences are allocated to the relevant CGU. There is no active market for licences, therefore the recoverable amount is deemed to be the fair value. As described above, a WACC discount rate applied to projected future cash flows sourced from management approved budgets. Key assumptions are the same as those outlined above. Based upon all available evidence the results of the testing indicate that no impairment is required. 13 Plant and equipment Company Group Fixtures & fittings $m Fixtures & fittings $m Computer equipment $m Total $m Cost Balance at 1 January 2020 – 27.7 10.3 38.0 Additions – 9.2 3.7 12.9 Foreign exchange gain – 0.9 0.3 1.2 Balance at 31 December 2020 – 37.8 14.3 52.1 Balance at 1 January 2021 – 37.8 14.3 52.1 Additions – 3.8 0.7 4.5 Disposals – (9.7) – (9.7) Foreign exchange gain/(loss) – 0.7 (0.1) 0.6 Balance at 31 December 2021 – 32.6 14.9 47.5 Accumulated Depreciation Balance at 1 January 2020 – (21.1) (8.0) (29.1) Depreciation charge for the year – (1.9) (1.3) (3.2) Foreign exchange gain/(loss) – 0.1 (0.2) (0.1) Balance at 31 December 2020 – (22.9) (9.5) (32.4) Balance at 1 January 2021 – (22.9) (9.5) (32.4) Depreciation charge for the year – (2.3) (2.6) (4.9) Disposals – 9.7 – 9.7 Foreign exchange (loss) – (0.5) (0.2) (0.7) Balance at 31 December 2021 – (16.0) (12.3) (28.3) Carrying amounts 31 December 2021 – 16.6 2.6 19.2 31 December 2020 – 14.9 4.8 19.7 173www.beazley.com Beazley | Annual report 2021 Financial statements 14 Investment in associates Associates are those entities over which the Group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the Group has between 20% and 50% of voting rights. Group 2021 $m 2020 $m As at 1 January 0.3 0.1 Investment in CyberAcuView LLC 0.3 0.3 Investment in other associates – – Share of loss after tax – (0.1) As at 31 December 0.6 0.3 The Group’s investment in associates consists of: Country/region of incorporation % interest held Carrying value $m 2021 Falcon Money Management Holdings Limited (and subsidiaries) Malta 1 25% – Pegasus Underwriting Limited Hong Kong 3 33% – CyberAcuView LLC New York 4 13% 0.6 0.6 1 259 St Paul Street, Valletta, Malta. 2 221 West 6th Street, Suite 301, Austin TX 78701, USA. 3 Suite 126, 12/F Somptuex Central, 52-54 Wellington Street, Hong Kong. 4 106 W 32nd Street, New York. The CyberAcuView LLC Board is charged with governance over its affairs. The Board is composed of individuals who are selected by the investors. The Group has the ability to appoint a member to the Board of CyberAcuView LLC to represent the Group’s interest. As a result, the Group is deemed to have significant influence over CyberAcuView LLC and therefore this investment is recognised as an associate. The aggregate financial information for all associates (100%) held at 31 December 2021 is as follows: 2021 $m 2020 $m Assets 9.6 6.5 Liabilities 5.9 4.5 Equity 3.7 2.0 Revenue 4.7 4.3 (Loss)/profit after tax (0.7) 0.2 Share of total comprehensive income – – All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2021. Falcon Money Management Holdings Limited is an investment management company which also acts in an intermediary capacity. Notes to the ﬁnancial statements continued 174 Beazley | Annual report 2021 www.beazley.com 15 Deferred acquisition costs 2021 $m 2020 $m Balance at 1 January 384.9 350.7 Additions 914.7 773.1 Amortisation charge (821.8) (738.9) Balance at 31 December 477.8 384.9 16 Financial assets and liabilities 2021 $m 2020 $m Financial assets at fair value Fixed and floating rate debt securities: – Government issued 4,008.1 2,723.7 Corporate bonds – Investment grade 1,861.9 2,444.9 – High yield 402.3 251.1 Syndicate loans 37. 9 40.6 Total fixed and floating rate debt securities and syndicate loans 6,310.2 5,460.3 Equity funds 209.6 203.2 Hedge funds 478.2 442.1 Illiquid credit assets 277.9 227. 9 Total capital growth assets 965.7 873.2 Total financial investments at fair value through statement of profit or loss 7,275.9 6,333.5 Derivative financial assets 7.6 28.5 Total financial assets at fair value 7,283.5 6,362.0 175www.beazley.com Beazley | Annual report 2021 Financial statements 16 Financial assets and liabilities continued Investment corporate bonds are rated BBB-/Baa3 or higher by at least one major rating agency, while high yield corporate bonds have lower credit ratings. Hedge funds are investment vehicles pursuing alternative investment strategies, structured to have minimal correlation to traditional asset classes. Equity funds are investment vehicles which invest in equity securities and provide diversified exposure to global equity markets. Illiquid credit assets are investment vehicles that predominantly target private lending opportunities, often with longer investment horizons. The fair value of these assets at 31 December 2021 excludes an unfunded commitment of $40.5m (2020: $49.3m). The amounts expected to mature within and after one year are: 2021 $m 2020 $m Within one year 1,409.4 1, 4 07.1 After one year 4,908.4 4,081.7 Total 6,317.8 5,488.8 Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, all $209.6m (2020: $203.2m) of equity funds could be liquidated within two weeks, $378.1m (2020: $267.7m) of hedge fund assets within six months and the remaining $100.0m (2020: $174.4m) of hedge fund assets within 18 months, in normal market conditions. Illiquid credit assets are not readily realisable and principal will be returned over the life of these assets, which may be up to 12 years. As noted on page 146 consideration is also given when valuing the hedge funds and illiquid credit funds to the timing of the latest valuations, and the impact of any significant market stress events. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2021 (2020: $nil). Financial liabilities 2021 $m 2020 $m Tier 2 subordinated debt (2026) 249.2 249.0 Tier 2 subordinated debt (2029) 298.4 298.1 Derivative financial liabilities 7.1 11.4 Total financial liabilities 554.7 558.5 The amounts expected to mature before and after one year are: Within one year 7.1 11.4 After one year 547.6 547.1 554.7 558.5 A breakdown of the Group’s investment portfolio is provided on page 56. A breakdown of derivative financial instruments is disclosed in note 17. The tier 2 subordinated debt (2029) was issued in 2019. Tier 2 subordinated debt (2026) was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms. The Group has given a fixed and floating charge over certain of its investments and other assets to secure obligations to Lloyd’s in respect of its corporate member subsidiary. Further details are provided in note 32. Notes to the ﬁnancial statements continued 176 Beazley | Annual report 2021 www.beazley.com 16 Financial assets and liabilities continued Valuation hierarchy The table below summarises financial assets carried at fair value using a valuation hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 – Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Included within level 1 are bonds, treasury bills of government and government agencies, corporate bonds and equity funds which are measured based on quoted prices in active markets. Level 2 – Valuations based on quoted prices in markets that are not active, or based on pricing models for which significant inputs can be corroborated by observable market data (e.g. interest rates and exchange rates). Included within level 2 are government bonds and treasury bills, equity funds and corporate bonds which are not actively traded, hedge funds and senior secured loans. Level 3 – Valuations based on inputs that are unobservable or for which there is limited market activity against which to measure fair value. The availability of financial data can vary for different financial assets and is affected by a wide variety of factors, including the type of financial instrument, whether it is new and not yet established in the marketplace, and other characteristics specific to each transaction. To the extent that valuation is based on models or inputs that are unobservable in the market, the determination of fair value requires more judgement. Accordingly the degree of judgement exercised by management in determining fair value is greatest for instruments classified in level 3. The Group uses prices and inputs that are current as of the measurement date for valuation of these instruments. If the inputs used to measure the fair value of an asset or a liability could be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group has an established control framework and valuation policy with respect to the measurement of fair values. Level 2 investments For the Group’s level 2 debt securities our fund administrator obtains the prices used in the valuation from independent pricing vendors such as Bloomberg, Standard & Poor’s, Reuters, Markit and International Data Corporation. The independent pricing vendors derive an evaluated price from observable market inputs. The market inputs include trade data, two-sided markets, institutional bids, comparable trades, dealer quotes, news media, and other relevant market data. These inputs are verified in their pricing engines and calibrated with the pricing models to calculate spread to benchmarks, as well as other pricing assumptions such as Weighted Average life (WM), Discount Margins (DM), Default rates, and recovery and prepayments assumptions for mortgage securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly. The Group records the unadjusted price provided and validates the price through various tolerance checks, such as comparison with prices provided by investment custodians and investment managers, to assess the reasonableness and accuracy of the price to be used to value each security. In the rare case that a price fails the tolerance test, it is escalated and discussed internally. We would not normally override a price retrospectively, but we would work with the administrator and pricing vendor to investigate the difference. This generally results in the vendor updating their inputs. We also review our valuation policy on a regular basis to ensure it is fit for purpose. For the year ended 31 December 2021, no adjustments have been made to the prices obtained from the independent sources. For our hedge funds and equity funds, the pricing and valuation of each fund is undertaken by administrators in accordance with each underlying fund’s valuation policy. For the equity funds, the individual fund prices are published on a daily, weekly or monthly basis via Bloomberg and other market data providers such as Reuters. For the hedge funds, the individual fund prices are communicated by the administrators to all investors via the monthly investor statements. The fair value of the hedge fund and equity fund portfolios are calculated by reference to the underlying net asset values of each of the individual funds. 177www.beazley.com Beazley | Annual report 2021 Financial statements 16 Financial assets and liabilities continued Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds. We identified that 78% (31 December 2020: 81%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise our hedge fund as level 2. Prior to any new hedge fund investment, extensive due diligence is undertaken on each fund to ensure that pricing and valuation is undertaken by an independent administrator and that each fund’s valuation policy is appropriate for the financial instruments the manager will be employing to execute the investment strategy. Fund liquidity terms are reviewed prior to the execution of any investment to ensure that there is no mismatch between the liquidity of the underlying fund assets and the liquidity terms offered to fund investors. As part of the monitoring process, underlying fund subscriptions and redemptions are assessed by reconciling the increase or decrease in fund assets with the investment performance in any given period. Level 3 investments The Group’s level 3 investments consist of illiquid credit assets and Lloyd’s syndicate loans. (i) Illiquid credit assets Within the Group’s level 3 investments we have a diversified portfolio of illiquid credit fund investments managed by third party managers (generally closed ended limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are predominantly in private and unquoted instruments and are therefore classified as level 3 investments. Closed-ended funds that are still in their investment period continue to draw down capital, whilst funds that are in their harvest period distribute capital as the underlying investments are realised. The valuation techniques used by the fund managers to establish the fair value of the underlying private/unquoted investments may incorporate discounted cash flow models or a more market based approach, whilst the main inputs might include discount rates, fundamental pricing multiples, recent transaction prices, or comparable market information to create a benchmark multiple. We take the following steps to ensure accurate valuation of these level 3 assets. A substantial part of the pre-investment due diligence process is dedicated to a comprehensive review of each fund’s valuation policy and the internal controls of the manager. In addition to this, confirmation that the investment reaches a minimum set of standards relating to the independence of service providers, corporate governance, and transparency is sought prior to approval. Post investment, quarterly capital statements are reviewed to ensure consistency between audited and unaudited valuations and compare the updated values to the estimated figures used in previous valuations in order to highlight and explain any discrepancies. Particular emphasis is placed on identifying assets that have been either marked up or down, as well as whether any specific assets are at particular risk due to prevailing economic/market conditions. The review also involves regular conversations with the managers and industry sources, particularly in times of market stress. Audited financial statements are received and reviewed on an annual basis, with the valuation of each transaction being confirmed. For the Group’s annual and interim accounts, we use the latest fund valuation statements, which are typically as at the previous quarter or month end. To ensure that values are materially correct at the reporting date, all fund managers are contacted to confirm whether there has been a material impairment to the fund valuations since the most recent valuation date. In the event that a manager confirms a material impairment since the latest valuation date, we would make a downwards revision to the value of our fund holding based on the manager’s assessment. Furthermore, during major stress events in public financial markets (defined as >10% fall in leveraged loan market indices during a calendar quarter), such as the macroeconomic uncertainty caused by COVID-19 in Q1 2020, we would consider adjusting the valuations of all level 3 fund holdings to account for material impairment in the valuation between the latest valuation date and the reporting date. The magnitude and breadth of any broader portfolio impairment would be dependent on the specific situation. (ii) Syndicate loans These are loans provided by our Group syndicates to the Central Fund at Lloyd’s in respect of the 2019 and 2020 underwriting years. These instruments are not tradeable and are valued using discounted cash flow models, designed to appropriately reflect the credit and illiquidity risk of the instruments. The syndicate loans have been classified as level 3 investments because the valuation approach includes significant unobservable inputs and an element of subjectivity in determining appropriate credit and illiquidity spreads within the discount rates used in the discounted cash flow model. There is no market in which the instruments can be traded. Notes to the ﬁnancial statements continued 178 Beazley | Annual report 2021 www.beazley.com 16 Financial assets and liabilities continued The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. 2021 Level 1 $m Level 2 $m Level 3 $m Total $m Financial assets measured at fair value Fixed and floating rate debt securities – Government issued 3,513.2 494.9 – 4,008.1 – Corporate bonds – Investment grade 802.8 1,059.1 – 1,861.9 – High yield 82.1 320.2 – 402.3 Syndicate loans – – 37.9 37.9 Equity funds 209.6 – – 209.6 Hedge funds – 478.2 – 478.2 Illiquid credit assets – – 277.9 277.9 Derivative financial assets 7.6 – – 7.6 Total financial assets measured at fair value 4,615.3 2,352.4 315.8 7,283.5 Financial liabilities measured at fair value Derivative financial liabilities 7.1 – – 7.1 Financial liabilities not measured at fair value Tier 2 subordinated debt (2029) – 334.6 – 334.6 Tier 2 subordinated debt (2026) – 279.0 – 279.0 Total financial liabilities not measured at fair value 7.1 613.6 – 620.7 2020 Level 1 $m Level 2 $m Level 3 $m Total $m Financial assets measured at fair value Fixed and floating rate debt securities – Government issued 2,637.8 85.9 – 2,723.7 – Corporate bonds – Investment grade 1,148.3 1,296.6 – 2,444.9 – High yield 103.0 148.1 – 251.1 Syndicate loans – – 40.6 40.6 Equity funds 203.2 – – 203.2 Hedge funds – 442.1 – 442.1 Illiquid credit assets – – 227. 9 227. 9 Derivative financial assets 28.5 – – 28.5 Total financial assets measured at fair value 4,120.8 1,972.7 268.5 6,362.0 Financial liabilities measured at fair value Derivative financial liabilities 11.4 – – 11.4 Financial liabilities not measured at fair value Tier 2 subordinated debt (2029) – 320.5 – 320.5 Tier 2 subordinated debt (2026) – 271.0 – 271.0 Total financial liabilities not measured at fair value 11.4 591.5 – 602.9 179www.beazley.com Beazley | Annual report 2021 Financial statements 16 Financial assets and liabilities continued The table above does not include financial assets and liabilities that are, in accordance with the Group’s accounting policies, recorded at amortised cost, if the carrying amount of these financial assets and liabilities approximates their fair values at the reporting date. Cash and cash equivalents have not been included in the table above; however, the full amount of cash and cash equivalents would be classified under level 1 in both the current and prior year. Tran sfers The Group determines whether transfers have occurred between levels in the fair value hierarchy by assessing categorisation at the end of the reporting period. The following transfers between levels 1 & 2 for the period ended 31 December 2021 reflect the level of trading activities including frequency and volume derived from market data obtained from an independent external valuation tool. 31 December 2021 vs 31 December 2020 transfer from level 2 to level 1 Level 1 $m Level 2 $m – Corporate Bonds – Investment grade 156.2 (156.2) – Government issued 39.7 (39.7) 31 December 2021 vs 31 December 2020 transfer from level 1 to level 2 Level 1 $m Level 2 $m – Corporate Bonds – Investment grade (418.3) 418.3 The values shown in the transfer tables above are translated at foreign exchange rate as at 31 December 2021. Level 3 investment reconciliations The table below shows a reconciliation from the opening balances to the closing balances of level 3 fair values. 2021 $m 2020 $m As at 1 January 268.5 216.6 Purchases 87.1 94.3 Sales (60.2) (56.9) Reclass from level 2 – 8.2 Realised gain 12.1 8.1 Unrealised gain/(loss) 8.3 (1.9) As at 31 December 315.8 268.5 Unconsolidated structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements. As part of its standard investment activities the Group holds fixed interest investments in high yield bond funds, as well as capital growth investments in equity funds, hedge funds and illiquid credit assets which in accordance with IFRS 12 are classified as unconsolidated structured entities. The Group does not sponsor any of the unconsolidated structured entities. The assets classified as unconsolidated structured entities are held at fair value on the statement of financial position. Notes to the ﬁnancial statements continued 180 Beazley | Annual report 2021 www.beazley.com 16 Financial assets and liabilities continued As at 31 December the investments comprising the Group’s unconsolidated structured entities are as follows: 2021 $m 2020 $m High yield bond funds 402.3 251.1 Equity funds 209.6 203.2 Hedge funds 478.2 442.1 Illiquid credit assets 277.9 227. 9 Investments through unconsolidated structured entities 1,368.0 1,124.3 Apart from a relatively small exposure to high yield bond funds, our unconsolidated structured entity exposures fall within our capital growth assets. The capital growth assets are held in investee funds managed by asset managers who apply various investment strategies to accomplish their respective investment objectives. The Group’s investments in investee funds are subject to the terms and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets. All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption of investments in high yield bond funds, asset backed securities, equity funds and hedge funds ranges in frequency from daily to semi-annually. The Group did not sponsor any of the respective structured entities. These investments are included in financial assets at fair value through profit or loss in the statement of financial position. The Group’s maximum exposure to loss from its interests in investee funds is equal to the total fair value of its investments in investee funds and unfunded commitments. Once the Group has disposed of its shares in an investee fund, it ceases to be exposed to any risk from that investee fund. As described in note 2 to the financial statements, the Group monitors and manages its currency exposures to net assets and financial assets held at fair value. Currency exposures The currency exposures of our financial assets held at fair value are detailed below: 2021 UK £ $m CAD $ $m EUR € $m Subtotal $m US $ $m Total $m Financial assets at fair value Fixed and floating rate debt securities 465.0 341.4 – 806.4 5,465.9 6,272.3 Syndicate loans 37. 9 – – 37. 9 – 37. 9 Equity funds – – – – 209.6 209.6 Hedge funds – – – – 478.2 478.2 Illiquid credit assets 0.5 – 39.8 40.3 237.6 277. 9 Derivative financial assets – – – – 7.6 7.6 Total 503.4 341.4 39.8 884.6 6,398.9 7,283.5 2020 UK £ $m CAD $ $m EUR € $m Subtotal $m US $ $m Total $m Financial assets at fair value Fixed and floating rate debt securities 15.1 248.6 – 263.7 5,156.0 5,419.7 Syndicate loans 40.6 – – 40.6 – 40.6 Equity funds – – – – 203.2 203.2 Hedge funds – – – – 442.1 442.1 Illiquid credit assets 3.2 – 34.6 37. 8 190.1 227.9 Derivative financial assets – – – – 28.5 28.5 Total 58.9 248.6 34.6 342.1 6,019.9 6,362.0 The above qualitative and quantitative disclosure along with the risk management discussions in note 2 enable more comprehensive evaluation of Beazley’s exposure to risks arising from financial instruments. 181www.beazley.com Beazley | Annual report 2021 Financial statements 17 Derivative financial instruments In 2020 and 2021 the Group entered into over-the-counter and exchange traded derivative contracts. The Group had the right and the intention to settle each contract on a net basis. The assets and liabilities of these contracts at 31 December are detailed below: 2021 2020 Derivative financial instrument assets Gross contract amount $m Market value of derivative position $m Gross contract amount $m Market value of derivative position $m Foreign exchange forward contracts 317. 8 7.3 623.7 28.5 Bond futures contract 522.7 0.3 – – 840.5 7.6 623.7 28.5 2021 2020 Derivative financial instrument liabilities Gross contract amount $m Market value of derivative position $m Gross contract amount $m Market value of derivative position $m Foreign exchange forward contracts 351.4 (7.1) 287.0 11.0 Bond futures contract 141.2 – 288.8 0.4 492.6 (7.1) 575.8 11.4 Foreign exchange forward contracts The Group entered into over-the-counter foreign exchange forward agreements in order to economically hedge the foreign currency exposure resulting from transactions and balances held in currencies that are different to the functional currency of the Group. Bond futures positions The Group entered in bond futures transactions for the purpose of efficiently managing the term structure of its interest rate exposures. A negative gross contract amount represents a notional short position that generates positive fair value as interest rates rise. 18 Insurance receivables 2021 $m 2020 $m Insurance receivables 1,696.1 1,467.9 1,696.1 1,467.9 These are receivables due within one year and relate to business transacted with brokers and intermediaries. All insurance receivables are classified as loans and receivables and their carrying values approximate fair value at the reporting date. Insurance receivables in respect of coverholder business are credit controlled by third-party managers. We monitor third-party coverholders’ performance and their financial processes through the Group’s coverholder management team. These assets are individually impaired after considering information such as the occurrence of significant changes in the counterparties’ financial position, patterns of historical payment information and disputes with counterparties. Notes to the ﬁnancial statements continued 182 Beazley | Annual report 2021 www.beazley.com 19 Reinsurance assets 2021 $m 2020 $m Reinsurers’ share of claims 1,840.9 1,320.4 Impairment provision (11.5) (14.8) 1,829.4 1,305.6 Reinsurers’ share of unearned premium reserve 557.0 379.1 2,386.4 1,684.7 The total impairment provision in the statement of financial position in respect of reinsurance assets past due by more than 30 days at 31 December was $2.1m (2020: $3.0m). This 2.1m provision in respect of overdue reinsurance recoverables is included within the total provision of $11.5m. Further analysis of the reinsurance assets is provided in note 24. 20 Cash and cash equivalents Group 2021 $m 2020 $m Cash at bank and in hand 591.8 309.5 Company 2021 $m 2020 $m Cash at bank and in hand 0.3 0.9 21 Share capital 2021 2020 No. of shares (m) $m No. of shares (m) $m Ordinary shares of 5p each Issued and fully paid 609.2 42.9 608.9 42.9 Balance at 1 January 608.9 42.9 529.7 38.1 Issue of shares 0.3 – 79.2 4.8 Balance at 31 December 609.2 42.9 608.9 42.9 On 19 May 2020, the Group successfully completed the placing of new ordinary shares in the capital of the company. A total of 78,501,420 new ordinary shares of five pence each in the capital of the Group were placed at a price of 315 pence per Placing Share. A total of 13,085 Subscription Shares were subscribed through the Subscription. The placing raised total net proceeds of $292.6m. The Placing Price of 315 pence represented a discount of 4.95 per cent to the closing share price of 331.4 pence on 18 May 2020. The Placing Shares and the Subscription Shares being issued together represented approximately 15 per cent of the existing issued ordinary share capital of Beazley prior to the Placing and Subscription. This equity was raised through a cash box structure. Pre-emptive rights were not considered with the placing, however prior to issuance, senior management consulted with approximately 85% of existing shareholders (calculated by voting rights) who were given the option to participate. The shares issued are classified as ordinary shares and carry the same voting rights as previously issued ordinary shares. 183www.beazley.com Beazley | Annual report 2021 Financial statements 22 Other reserves Employee share options reserve $m Employee share trust reserve $m Total $m Group Balance at 1 January 2020 35.6 (32.0) 3.6 Share based payments 2.8 – 2.8 Acquisition of own shares held in trust – (13.6) (13.6) Tax on share option vestings (5.4) – (5.4) Transfer of shares to employees (17.0) 20.2 3.2 Balance at 31 December 2020 16.0 (25.4) (9.4) Share based payments 11.0 – 11.0 Tax on share option vestings (3.9) – (3.9) Transfer of shares to employees (6.1) 4.4 (1.7) Balance at 31 December 2021 17.0 (21.0) (4.0) Employee share options reserve $m Employee share trust reserve $m Total $m Company Balance at 1 January 2020 1.0 (10.3) (9.3) Share based payments 2.8 – 2.8 Acquisition of own shares held in trust – (13.6) (13.6) Transfer of shares to employees (17.0) 20.2 3.2 Balance at 31 December 2020 (13.2) (3.7) (16.9) Share based payments 11.0 – 11.0 Transfer of shares to employees (6.1) 4.4 (1.7) Balance at 31 December 2021 (8.3) 0.7 (7.6) The merger reserve is shown within the statement of changes in equity as a separate category and as such has been excluded from the other reserves note. The employee share options reserve is held in accordance with IFRS 2: Share-based payment. For more information refer to note 23.2. More information on the employee share trust reserve is included in note 23. Notes to the ﬁnancial statements continued 184 Beazley | Annual report 2021 www.beazley.com 23 Equity compensation plans 23.1 Employee share trust 2021 2020 Number (m) $m Number (m) $m Movements in employee share trust reserve Balance at 1 January 3.7 25.4 4.8 32.0 Additions – – 2.0 13.6 Transfer of shares to employees (0.6) (4.4) (3.1) (20.2) Balance at 31 December 3.1 21.0 3. 7 (25.4) The shares are owned by the employee share trust to satisfy awards under the Group’s deferred share plan, retention plan, one-off share incentive plan and long term incentive plan (LTIP). These shares are purchased on the market and carried at cost. On the third anniversary of an award the shares under the deferred share plan are transferred from the trust to the employee. Under the retention plan, on the third anniversary, and each year after that up to the sixth anniversary, 25.0% of the shares awarded are transferred to the employee. The deferred share plan is recognised in the statement of profit or loss on a straight-line basis over a period of three years, while the retention share plan is recognised in the statement of profit or loss on a straight-line basis over a period of six years. 23.2 Employee share option plans The Group has a long term incentive plan (LTIP), one-off share incentive plan, deferred share plan, retention plan and save-as-you- earn (SAYE) plan that entitle employees to purchase shares in the Group. The terms and conditions of the grants are as follows: Share option plan Grant date No. of options (m) Vesting conditions Contractual life of options LTIP 10/02/2021 2.4 Five year’s service + NAV + minimum shareholding requirement 10 years 11/02/2020 1.3 12/02/2019 1.2 13/02/2018 0.9 08/02/2017 1.2 LTIP 10/02/2021 2.4 Three year’s service + NAV + minimum shareholding requirement 10 years 11/02/2020 1.3 12/02/2019 1.2 SAYE (UK) 30/03/2021 1.8 Three years’ service N/A 30/03/2020 0.2 01/04/2019 0.2 04/04/2018 0.3 SAYE (US) 02/06/2021 0.1 Two years’ service N/A 01/06/2020 0.2 SAYE (Others) 30/03/2021 0.2 Two years’ service N/A Total share options outstanding 14.9 Vesting conditions In summary the vesting conditions are defined as: • two years’ service – an employee has to remain in employment until the second anniversary from the grant date; • three years’ service – an employee has to remain in employment until the third anniversary from the grant date; and • NAV – the NAV growth, after adjusting for the effect of dividends, is greater than the risk-free rate of return plus a premium per year. 185www.beazley.com Beazley | Annual report 2021 Financial statements 23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 95 to 113. The total gain on directors’ exercises of share-option plans during the period was nil (2020: £0.5m). The number and weighted average exercise prices of share options are as follows: 2021 2020 Weighted average exercise price (pence per share) No. of options (m) Weighted average exercise price (pence per share) No. of options (m) Outstanding at 1 January 63.5 13.6 50.7 14.6 Forfeited during the year 58.0 (5.8) 60.2 (3.1) Exercised during the year 25.0 1 (0.3) 84.7 2 (2.0) Granted during the year 80.9 7.4 84.4 4.1 Outstanding at 31 December 80.7 14.9 63.5 13.6 Exercisable at 31 December – – – – 1 The weighted average share price at the date of exercise of these options was 366.2p. 2 The weighted average share price at the date of exercise of these options was 537.5p. The range of exercise prices for options outstanding at the end of the year was £0 to £4.56 (2020: £0 to £4.56). The weighted average remaining contractual life for the outstanding options at end of the year was 1.87 years (2020: 1.69 years). The share option programmes allow Group employees to acquire shares of the company. The fair value of options granted is recognised as an employee expense with a corresponding increase in the employee share options reserve. The fair value of the options granted is measured at grant date and spread over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. The following is a summary of the assumptions used to calculate the fair value: 2021 $m 2020 $m Share options charge to employee share options reserve 11.6 2.8 LTIP Weighted average share price (pence per option) 366.6 595.5 Weighted average fair value (pence per option) 367.0 595.5 Weighted average exercise price (pence per option) – – Average expected life of options 4.3yrs 4.5yrs Expected volatility 36.4% 22.1% Expected dividend yield – – Average risk-free interest rate 0.4% 1.4% SAYE Weighted average share price (pence per option) 348.7 393.2 Weighted average fair value (pence per option) 95.0 79.6 Weighted average exercise price (pence per option) 287.8 346.6 Average expected life of options 3.3yrs 3.2yrs Expected volatility 36.6% 29.1% Expected dividend yield 3.2% 3.4% Average risk-free interest rate 0.4% 0.3% The expected volatility is based on historic volatility over a period of at least two years. Notes to the ﬁnancial statements continued 186 Beazley | Annual report 2021 www.beazley.com 24 Insurance liabilities and reinsurance assets 2021 $m 2020 $m Gross Claims reported and loss adjustment expenses 1,6 27.4 1,507.3 Claims incurred but not reported 4,771.7 3,855.3 Unexpired risk reserve – 91.5 Gross claims liabilities 6,399.1 5,454.1 Unearned premiums 2,472.7 1,924.3 Total insurance liabilities, gross 8,871.8 7,378.4 Recoverable from reinsurers Claims reported and loss adjustment expenses 371.4 262.2 Claims incurred but not reported 1,458.0 1,034.4 Unexpired risk reserve – 9.0 Reinsurers' share of claims liabilities 1,829.4 1,305.6 Unearned premiums 557.0 379.1 Total reinsurers' share of insurance liabilities 2,386.4 1,684.7 2021 $m 2020 $m Net Claims reported and loss adjustment expenses 1,256.0 1,245.1 Claims incurred but not reported 3,313.7 2,820.9 Unexpired risk reserve – 82.5 Net claims liabilities 4,569.7 4,148.5 Unearned premiums 1,915.7 1,545.2 Total insurance liabilities, net 6,485.4 5,693.7 The gross claims reported, the loss adjustment liabilities and the liabilities for claims incurred but not reported are net of recoveries from salvage and subrogation. 24.1 Movements in insurance liabilities and reinsurance assets a) Claims and loss adjustment expenses 2021 2020 Gross $m Reinsurance $m Net $m Gross $m Reinsurance $m Net $m Claims reported and loss adjustment expenses 1, 507. 3 (262.2) 1,245.1 1,263.7 (223.7) 1,040.0 Claims incurred but not reported 3,855.3 (1,034.4) 2,820.9 3,196.6 (845.1) 2,351.5 Unexpired risk reserve 91.5 (9.0) 82.5 – – – Balance at 1 January 5,454.1 (1,305.6) 4,148.5 4,460.3 (1,068.8) 3,391.5 Claims paid (1,718.5) 378.9 (1,339.6) (1,671.1) 404.7 (1,266.4) Increase in claims Arising from current year claims 2,911.5 (875.5) 2,036.0 2,698.2 (646.8) 2,051.4 Arising from prior year claims (177. 2) (32.6) (209.8) (109.8) 16.7 (93.1) Net exchange differences (70.8) 5.4 (65.4) 76.5 (11.4) 65.1 Balance at 31 December 6,399.1 (1,829.4) 4,569.7 5,454.1 (1,305.6) 4,148.5 Claims reported and loss adjustment expenses 1,6 27.4 (371.4) 1,256.0 1, 507. 3 (262.2) 1,245.1 Claims incurred but not reported 4,771.7 (1,458.0) 3,313.7 3,855.3 (1,034.4) 2,820.9 Unexpired risk reserve – – – 91.5 (9.0) 82.5 Balance at 31 December 6,399.1 (1,829.4) 4,569.7 5,454.1 (1,305.6) 4,148.5 187www.beazley.com Beazley | Annual report 2021 Financial statements 24 Insurance liabilities and reinsurance assets continued b) Unearned premiums reserve 2021 2020 Gross $m Reinsurance $m Net $m Gross $m Reinsurance $m Net $m Balance at 1 January 1,924.3 (379.1) 1,545.2 1,598.7 (269.4) 1,329.3 Increase in the year 4,618.9 (1,122.8) 3,496.1 3,563.8 (655.7) 2,908.1 Release in the year (4,070.5) 944.9 (3,125.6) (3,238.2) 546.0 (2,692.2) Balance at 31 December 2,472.7 (557.0) 1,915.7 1,924.3 (379.1) 1,545.2 24.2 Assumptions, changes in assumptions and claims reserve strength analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures. A formal internal peer review process is then undertaken to determine the reserves held for accounting purposes which, in totality, are not lower than the actuarially established figure. The Group has a consistent reserving philosophy, with initial reserves being set to include risk margins which may be released over time as uncertainty reduces. Actuarial assumptions Chain-ladder techniques are applied to premiums, paid claims and incurred claims (i.e. paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on historical patterns. The selected development factors are then applied to cumulative claims data for each underwriting year that is not yet fully developed to produce an estimated ultimate claims cost for each underwriting year. Chain-ladder techniques are most appropriate for classes of business that have a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular class of business, or for underwriting years that are still at immature stages of development where there is a higher level of assumption volatility. The Bornhuetter-Ferguson method uses a combination of a benchmark/market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims observed to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique has been used in situations where developed claims experience was not available for the projection (e.g. recent underwriting years or new classes of business). The expected loss ratio method uses a benchmark/market-based estimate applied to the expected premium and is used for classes with little or no relevant historical data. The choice of selected results for each underwriting year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or combinations of techniques have been selected for individual underwriting years or groups of underwriting years within the same class of business. As such, there are many assumptions used to estimate general insurance liabilities. Notes to the ﬁnancial statements continued 188 Beazley | Annual report 2021 www.beazley.com 24 Insurance liabilities and reinsurance assets continued We also review triangulations of the paid/outstanding claim ratios as a way of monitoring any changes in the strength of the outstanding claim estimates between underwriting years so that adjustments can be made to mitigate any subsequent over/(under) reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years. Where significant large losses impact an underwriting year (e.g. first-party COVID-19 losses, the events of 11 September 2001, the hurricanes in 2004, 2005, 2008, 2012, 2017, 2018 and 2019, the typhoons in 2018 and 2019, or the earthquakes in 2010, 2011 and 2017), the development is usually very different from the attritional losses. In these situations, the large loss total is extracted from the remainder of the data and analysed separately by the respective claims managers using exposure analysis of the policies in force in the areas affected. Further assumptions are required to convert gross of reinsurance estimates of ultimate claims cost to a net of reinsurance level and to establish reserves for unallocated claims handling expenses and reinsurance bad debt. b) Major assumptions The main assumption underlying these techniques is that the Group’s past claims development experience (with appropriate adjustments for known changes) can be used to project future claims development and hence ultimate claims costs. As such these methods extrapolate the development of premiums, paid and incurred losses, average costs per claim and claim numbers for each underwriting year based on the observed development of earlier years. Another assumption used within insurance liabilities is the estimation of an unexpired risk reserve (URR) for the expected value of net claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date which exceeds the unearned premium reserve. Throughout, judgement is used to assess the extent to which past trends may or may not apply in the future; for example, to reflect changes in external or market factors such as economic conditions, public attitudes to claiming, levels of claims inflation, premium rate changes, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures. c) Changes in assumptions As already discussed, general insurance business requires many different assumptions. The diagram below illustrates the main categories of assumptions used for each underwriting year and class combination. Further information on the calculation of loss reserves and the risks associated with them is provided in the risk disclosures section in note 2. The risks associated with general insurance contracts are complex and do not readily lend themselves to meaningful sensitivity analysis. Given the range of assumptions used, the Group’s profit or loss is relatively insensitive to changes to an individual assumption used for an underwriting year/class combination. The Group’s profit or loss is potentially more sensitive to a systematic change in assumptions that affect many classes, such as judicial changes or when catastrophes produce more claims than expected. The impact of an unreported event could lead to a significant increase in the Group’s loss reserves. The Group believes that the loss reserves established are adequate, however a 20% increase in estimated losses would lead to a $1,279.8m (2020: $1,090.8m) increase in gross loss reserves and a $913.9m (2020: $829.7m) increase in net loss reserves. The Group uses a range of risk mitigation strategies to reduce such volatility including the purchase of reinsurance. In addition, the Group holds capital to absorb volatility. 189www.beazley.com Beazley | Annual report 2021 Financial statements 24 Insurance liabilities and reinsurance assets continued d) Claims reserve strength analysis The estimation of IBNR reserves for future claim notifications is subject to a greater degree of uncertainty than the estimation of the outstanding claims already notified. This is particularly true for the Specialty Lines and executive risk business, which will typically display greater variations between initial estimates and final outcomes as a result of the greater degree of difficulty in estimating these reserves. The estimation of IBNR reserves for other business written is generally subject to less variability as claims are generally reported and settled relatively quickly. As such, our reserving assumptions contain a reasonable margin for prudence given the uncertainties inherent in the insurance business underwritten, particularly on the longer tailed Specialty Lines and executive risk classes. Since year end 2004, we have identified a range of possible outcomes for each class and underwriting year combination directly from our internal model (previously our individual capital assessment (ICA)) process. Comparing these with our pricing assumptions and reserving estimates gives our management team increased insight into our perceived reserving strength and the relative uncertainties of the business written. To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims development by the seven segments – Cyber & Executive Risk, Marine, Market Facilities, Political, Accident & Contingency, Property, Reinsurance and Specialty Lines. The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables for both ultimate gross claims and ultimate net claims. The top part of the table illustrates how the Group’s estimate of the claims ratio for each underwriting year has changed at successive year ends. The bottom half of the table reconciles the gross and net claims to the amount appearing in the statement of financial position. While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The Group believes that the estimate of total claims liabilities as at 31 December 2021 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate. Notes to the ﬁnancial statements continued 190 Beazley | Annual report 2021 www.beazley.com 24 Insurance liabilities and reinsurance assets continued Gross ultimate claims 2011 ae % 2012 % 2013 % 2014 % 2015 % 2016 % 2017 % 2018 % 2019 % 2020 % 2021 % Cyber & Executive Risk 12 months 71.6 71.0 66.0 64.3 61.9 59.5 61.1 61.8 73.2 65.8 24 months 71.8 71.3 66.2 64.3 61.9 61.4 62.3 72.0 78.7 – 36 months 69.1 71.1 63.6 59.0 58.5 56.8 61.5 73.4 – – 48 months 65.5 69.0 65.1 54.1 58.3 56.6 64.0 – – – 60 months 63.5 66.4 69.8 56.0 59.5 57.4 – – – – 72 months 61.1 62.9 68.4 57.5 57.6 – – – – – 84 months 60.6 63.0 69.1 58.5 – – – – – – 96 months 59.4 63.5 69.7 – – – – – – – 108 months 59.5 63.6 – – – – – – – – 120 months 62.0 – – – – – – – – – Marine 12 months 56.1 56.7 57.7 56.7 59.5 68.0 61.9 60.1 57.8 52.9 24 months 46.4 52.1 46.9 54.0 70.2 62.4 68.1 56.8 52.1 – 36 months 34.7 44.4 47.2 47.3 65.4 61.6 66.2 47. 9 – – 48 months 32.1 42.7 46.8 45.4 63.9 58.0 63.3 – – – 60 months 31.4 42.1 55.8 43.3 62.4 55.0 – – – – 72 months 30.6 41.5 53.0 42.7 62.1 – – – – – 84 months 29.9 40.3 51.9 42.2 – – – – – – 96 months 29.7 39.3 52.4 – – – – – – – 108 months 29.8 39.2 – – – – – – – – 120 months 29.9 – – – – – – – – – Market Facilities 12 months – – – – – – 66.3 72.9 76.6 72.0 24 months – – – – – – 66.3 72.8 73.7 – 36 months – – – – – – 55.1 68.7 – – 48 months – – – – – – 55.2 – – – 60 months – – – – – – – – – – 72 months – – – – – – – – – – 84 months – – – – – – – – – – 96 months – – – – – – – – – – 108 months – – – – – – – – – – 120 months – – – – – – – – – – Political, Accident & Contingency 12 months 60.0 59.5 59.7 60.5 61.9 58.2 59.4 57.0 111.4 57.3 24 months 56.0 50.9 52.4 59.9 55.8 50.0 55.4 143.9 120.0 – 36 months 53.0 46.4 48.5 58.5 50.8 46.8 92.4 143.8 – – 48 months 50.5 45.4 51.3 59.3 49.4 49.8 97. 4 – – – 60 months 47.4 47.1 52.5 55.7 47.9 47.3 – – – – 72 months 46.6 46.8 53.5 54.6 45.2 – – – – – 84 months 45.6 46.6 54.3 54.6 – – – – – – 96 months 45.7 46.2 54.7 – – – – – – – 108 months 45.6 45.7 – – – – – – – – 120 months 45.1 – – – – – – – – – 191www.beazley.com Beazley | Annual report 2021 Financial statements 24 Insurance liabilities and reinsurance assets continued Gross ultimate claims 2011 ae % 2012 % 2013 % 2014 % 2015 % 2016 % 2017 % 2018 % 2019 % 2020 % 2021 % Total Property 12 months 56.1 54.9 53.2 54.9 58.9 72.3 63.4 53.2 67. 9 58.0 24 months 47. 3 48.9 47.7 49.0 68.4 88.5 63.5 63.4 73.0 – 36 months 39.6 45.6 41.3 45.9 71.3 91.3 65.4 53.9 – – 48 months 36.5 45.6 40.6 44.8 71.8 91.4 64.2 – – – 60 months 35.9 45.5 39.6 43.7 71.8 91.1 – – – – 72 months 35.3 47.3 40.2 45.9 71.4 – – – – – 84 months 35.2 46.6 39.7 45.6 – – – – – – 96 months 36.5 47.0 40.0 – – – – – – – 108 months 37.6 47. 2 – – – – – – – – 120 months 37.5 – – – – – – – – – Reinsurance 12 months 62.8 58.6 61.3 65.8 68.4 122.5 99.0 101.5 79.9 115.1 24 months 37.1 44.8 33.3 33.7 41.8 117.6 125.0 69.2 80.5 – 36 months 31.7 42.3 30.7 25.7 40.6 129.4 123.5 68.6 – – 48 months 30.6 41.1 27.6 25.5 41.4 132.1 118.4 – – – 60 months 30.9 38.1 27.4 25.3 40.7 131.0 – – – – 72 months 30.6 37.9 26.9 25.1 40.3 – – – – – 84 months 30.6 37.0 26.9 24.4 – – – – – – 96 months 30.3 36.9 27.0 – – – – – – – 108 months 30.3 36.8 – – – – – – – – 120 months 28.6 – – – – – – – – – Specialty Lines 12 months 74.9 74.6 69.8 69.3 67.6 65.9 68.5 66.9 68.3 65.7 24 months 75.0 74. 2 69.5 69.9 67.5 66.0 69.0 68.6 69.6 ` 36 months 73.6 73.9 65.8 68.2 65.4 66.0 65.9 60.9 – – 48 months 73.9 69.4 61.7 67. 4 64.0 62.1 61.6 – – – 60 months 70.2 64.2 58.0 69.3 60.7 64.4 – – – – 72 months 69.1 62.1 55.7 78.2 61.8 – – – – – 84 months 68.7 61.4 53.9 82.8 – – – – – – 96 months 71.0 60.0 54.7 – – – – – – – 108 months 72.2 58.1 – – – – – – – – 120 months 72.2 – – – – – – – – – Total 12 months 64.6 63.7 62.1 62.5 63.3 70.1 66.7 64.8 73.0 65.8 24 months 58.3 59.3 55.8 58.4 62.9 71.1 69.6 74.2 75.5 – 36 months 53.3 56.5 52.7 54.5 60.7 71.1 71.2 69.8 – – 48 months 51.4 54.5 51.7 52.7 60.1 69.8 70.1 – – – 60 months 49.5 52.5 53.2 52.8 59.2 70.0 – – – – 72 months 48.4 51.5 52.1 55.6 58.5 – – – – – 84 months 48.0 51.0 51.7 56.9 – – – – – – 96 months 48.5 50.6 52.2 – – – – – – – 108 months 49.1 50.1 – – – – – – – – 120 months 49.3 – – – – – – – – – Estimated total ultimate losses ($m) 7,9 01 .7 866.2 915.9 998.0 1,146.9 1,255.4 1,710.5 1,874. 5 2,162.5 2,726.3 2,925.3 24,483.2 Less paid claims ($m) (7,740.5) (787.3) (833.3) (917.7) (942.8) (1,020.7) (1,222.1) (1,201.8) (961.9) (706.6) (100.7) (16,435.4) Less unearned portion of ultimate losses ($m) – – – – – – – (8.7) (137. 5) (1,502.5) (1,648.7) Gross claims liabilities ($m) 161.2 78.9 82.6 80.3 204.1 234.7 488.4 672.7 1,191.9 1,882.2 1,322.1 6,399.1 Notes to the ﬁnancial statements continued 192 Beazley | Annual report 2021 www.beazley.com 24 Insurance liabilities and reinsurance assets continued Net ultimate claims 2011 ae % 2012 % 2013 % 2014 % 2015 % 2016 % 2017 % 2018 % 2019 % 2020 % 2021 % Cyber & Executive Risk 12 months 68.2 66.5 63.2 60.4 59.2 57.9 58.3 59.9 71.9 64.1 24 months 68.5 66.7 63.8 60.4 59.2 59.0 60.6 68.1 69.2 – 36 months 65.6 65.1 62.4 56.0 56.2 55.5 62.5 67.7 – – 48 months 60.2 62.2 61.4 50.3 56.3 55.9 63.8 – – – 60 months 60.1 59.5 65.9 51.6 55.2 54.5 – – – – 72 months 57.5 56.9 65.0 49.8 53.4 – – – – – 84 months 57.0 56.4 65.6 50.7 – – – – – – 96 months 55.9 56.3 66.3 – – – – – – – 108 months 56.3 56.4 – – – – – – – – 120 months 58.9 – – – – – – – – – Marine 12 months 55.2 56.1 56.5 56.6 56.6 57. 4 59.3 56.5 54.2 50.9 24 months 45.8 53.2 48.5 52.4 62.4 61.3 67.6 55.2 49.9 – 36 months 37.1 47. 3 46.6 47.0 61.4 61.7 68.6 46.6 – – 48 months 34.6 45.8 45.7 46.5 61.9 59.5 64.7 – – – 60 months 33.6 45.2 46.9 45.2 60.5 57.0 – – – – 72 months 32.9 44.6 45.0 44.7 60.0 – – – – – 84 months 32.5 42.5 44.3 43.9 – – – – – – 96 months 32.3 42.3 44.5 – – – – – – – 108 months 32.4 42.3 – – – – – – – – 120 months 32.5 – – – – – – – – – Market Facilities 12 months – – – – – – 36.5 24.6 28.3 27.3 24 months – – – – – – 36.5 24.2 27.6 – 36 months – – – – – – 30.3 23.9 – – 48 months – – – – – – 21.8 – – – 60 months – – – – – – – – – – 72 months – – – – – – – – – – 84 months – – – – – – – – – – 96 months – – – – – – – – – – 108 months – – – – – – – – – – 120 months – – – – – – – – – – Political, Accident & Contingency 12 months 58.7 59.0 57. 3 58.0 60.7 57.2 58.6 56.2 91.0 56.5 24 months 53.8 52.4 50.8 56.9 54.6 49.4 54.5 112.2 89.3 – 36 months 51.5 49.0 46.4 56.3 51.0 46.0 82.1 112.3 – – 48 months 48.0 46.5 50.6 55.6 48.8 46.6 88.3 – – – 60 months 44.9 46.5 50.9 52.9 47. 5 44.6 – – – – 72 months 44.0 46.6 51.8 52.2 45.4 – – – – – 84 months 43.5 46.7 52.2 51.2 – – – – – – 96 months 43.9 46.6 51.2 – – – – – – – 108 months 43.7 46.2 – – – – – – – – 120 months 43.6 – – – – – – – – – Property 12 months 59.4 56.2 54.6 55.0 57. 5 76.1 64.4 56.4 67.9 58.4 24 months 53.0 56.1 51.5 50.6 69.5 93.6 66.9 66.2 76.7 – 36 months 46.4 52.2 44.8 47. 2 71.3 95.6 68.1 57.6 – – 48 months 41.5 50.5 43.3 45.0 70.8 93.5 66.1 – – – 60 months 40.9 50.3 42.4 44.8 69.9 94.4 – – – – 72 months 40.4 52.0 43.5 46.5 70.0 – – – – – 84 months 40.1 52.1 43.0 45.3 – – – – – – 96 months 41.7 52.4 42.6 – – – – – – – 108 months 42.5 52.0 – – – – – – – – 120 months 41.7 – – – – – – – – – 193www.beazley.com Beazley | Annual report 2021 Financial statements 24 Insurance liabilities and reinsurance assets continued Net ultimate claims 2011 ae % 2012 % 2013 % 2014 % 2015 % 2016 % 2017 % 2018 % 2019 % 2020 % 2021 % Reinsurance 12 months 66.6 56.3 58.7 61.7 61.8 105.2 87. 3 87. 5 86.3 92.9 24 months 44.7 51.7 37.9 34.8 39.5 93.9 100.6 70.3 87. 5 – 36 months 38.3 47.9 34.1 25.0 39.1 104.9 98.5 71.6 – – 48 months 36.6 46.6 31.5 24.6 40.6 108.3 92.7 – – – 60 months 36.9 43.0 31.2 24.8 41.6 108.1 – – – – 72 months 36.6 42.7 30.7 25.1 41.2 – – – – – 84 months 36.6 41.9 30.7 24.4 – – – – – – 96 months 36.2 41.8 30.9 – – – – – – – 108 months 36.2 41.7 – – – – – – – – 120 months 34.2 – – – – – – – – – Specialty Lines 12 months 71.3 70.4 67.0 65.0 65.0 63.7 66.0 64.8 65.2 63.4 24 months 71.4 69.9 66.6 65.8 65.0 63.6 67.1 64.9 64.9 – 36 months 70.0 70.0 64.1 63.2 61.1 63.5 64.1 57.7 – – 48 months 68.4 64.1 59.1 58.5 56.9 58.2 59.0 – – – 60 months 65.8 59.2 55.8 58.8 52.0 59.5 – – – – 72 months 66.0 57.6 54.5 62.7 52.5 – – – – – 84 months 65.9 57. 5 52.8 67. 3 – – – – – – 96 months 67.1 56.3 53.8 – – – – – – – 108 months 67.9 54.7 – – – – – – – – 120 months 68.1 – – – – – – – – – Total 12 months 63.8 61.9 60.4 59.8 60.6 65.8 63.4 61.7 69.0 61.6 24 months 58.3 60.1 56.1 56.6 60.9 67.6 66.1 68.9 68.6 – 36 months 53.9 57.3 52.8 52.8 58.8 67.6 68.1 64.4 – – 48 months 50.8 54.3 51.3 49.8 57.5 65.7 66.4 – – – 60 months 49.4 52.1 51.4 49.7 55.5 65.2 – – – – 72 months 48.7 51.5 50.8 50.5 54.7 – – – – – 84 months 48.4 50.9 50.4 51.4 – – – – – – 96 months 48.8 50.6 50.7 – – – – – – – 108 months 49.2 50.1 – – – – – – – – 120 months 49.4 – – – – – – – – – Estimated total ultimate losses ($m) 5,810.4 715.5 779.5 832.0 874.3 990.6 1,340.1 1,482.1 1,678.0 1,990.9 2,120.0 18,613.4 Less paid claims ($m) (5,658.8) (658.5) (711.2) (769.4) (773.1) (845.7) (984.9) (970.4) (756.0) (529.3) (90.2) (12,747.3) Less unearned portion of ultimate losses ($m) – – – – – – – (5.3) (97. 9) (1,193.1) (1,296.3) Net claims liabilities ($m) 151.8 57.0 68.3 62.6 101.2 144.9 355.2 511.7 916.8 1,363.7 836.5 4,569.7 Notes to the ﬁnancial statements continued 194 Beazley | Annual report 2021 www.beazley.com 24 Insurance liabilities and reinsurance assets continued Analysis of movements in loss development tables We have updated our loss development tables to show the ultimate loss ratios as at 31 December 2021 for each underwriting year. The impact of amounts reported in respect of the unexpired risk reserve are embedded within the loss ratios presented. Cyber & Executive Risk The 2019 and 2020 underwriting years have strengthened in response to cyber ransomware activity. However, as these years are recovering under aggregate excess of loss reinsurance programmes, the impact is reduced net of reinsurance. The 2018 underwriting year has increased in response to greater than expected claims development within executive risk. Marine Improvements have continued across underwriting years as the risks expire. Market Facilities The loss development tables are presented gross of acquisition costs. Due to the Market Facilities division being significantly reinsured and this reinsurance being ceded net of acquisition costs, the net of reinsurance loss development values are much lower than those gross of reinsurance. The improvements on the 2019 and 2020 underwriting year arise as the risk expires. Political, Accident & Contingency 2021 South African civil unrest events have impacted the 2020 underwriting year. Due to the benefit of reinsurance, the impact is less pronounced net of reinsurance. The COVID-19 claims within the contingency class have undergone a partial re-allocation across underwriting years resulting in the increase seen on the 2018 underwriting year. Property The 2020 underwriting year has been impacted by weather related events in the US during 2021. The improvement on the 2019 underwriting year occurs due to expiry of risk. Reinsurance The 2021 underwriting year has been impacted by weather related events in the US and Europe, and the impact is less pronounced net of reinsurance. Favourable developments across established catastrophe events have led to releases on older underwriting years. Specialty Lines The 2015 year continues to see claims development in excess of expectations, predominately driven by the heathcare book. Other underwriting years continue to improve as the risk expires. 195www.beazley.com Beazley | Annual report 2021 Financial statements 24 Insurance liabilities and reinsurance assets continued Claim releases The below table analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by segment and underwriting year. Beazley’s reserving policy is to maintain catastrophe reserve margins either until the end of the exposure period or until catastrophe events occur. Therefore margins have been released from prior year reserves where risks have expired during 2021. The below table has been prepared on an underwriting year of account basis, whereas the net loss development tables on pages 193 to 194 have been prepared on an accident year basis in relation to our US admitted business. However, in aggregate the net release or strengthening is consistent. Reserve releases during the year totalled $209.8m (2020: $93.1m). The net of reinsurance estimates of ultimate claims costs have improved on the 2020, 2019 and 2018 and earlier underwriting years, with releases of $28.6m, $97.6m and $83.6m respectively. Our Marine, Property and Specialty lines all saw large releases on the 2019 underwriting year. Cyber & Executive Risk saw a strengthening on the 2019 underwriting year of $19.4m driven by the Cyber book. The movements shown on 2018 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years. 2021 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Current year 642.6 156.6 11.7 147.1 252.7 141.8 683.5 2,036.0 Prior year – 2018 underwriting year and earlier (30.8) (18.1) (0.1) 2.6 (8.9) (10.6) (17.6) (83.6) – 2019 underwriting year 19.4 (26.4) (0.2) (10.0) (28.1) (3.0) (49.4) (97.6) – 2020 underwriting year (9.0) (6.3) (0.9) (3.6) (3.4) (5.1) (0.3) (28.6) (20.4) (50.8) (1.2) (11.0) (40.4) (18.7) (67.3) (209.8) Net insurance claims 622.2 105.8 10.5 136.1 212.4 123.1 616.2 1,826.2 2020 Cyber & Executive Risk $m Marine $m Market Facilities $m Political, Accident & Contingency $m Property $m Reinsurance $m Specialty Lines $m Total $m Current year 553.3 169.4 9.2 358.7 295.7 107. 5 5 57.6 2,051.4 Prior year – 2017 underwriting year and earlier (28.3) (9.8) – (2.2) 2.1 2.4 (47.3) (74.7) – 2018 underwriting year 26.7 1.9 (0.6) (1.9) 3.7 (3.0) (20.7) (2.3) – 2019 underwriting year 6.0 (1.0) (0.3) (0.5) (10.2) (20.1) 10.0 (16.1) 4.4 (8.9) (0.9) (4.6) (4.4) (20.7) (58.0) (93.1) Net insurance claims 557.7 160.5 8.3 354.1 291.3 86.8 499.6 1,958.3 Notes to the ﬁnancial statements continued 196 Beazley | Annual report 2021 www.beazley.com 25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: Carrying value Tier 2 subordinated debt (2029) $m Tier 2 subordinated debt (2026) $m Total $m Balance at 1 January 2021 298.1 249.0 547.1 Amortisation of capitalised borrowing costs 0.3 0.2 0.5 Balance at 31 December 2021 298.4 249.2 547.6 Fair value Tier 2 Subordinated debt (2029) $m Tier 2 subordinated debt (2026) $m Total $m Balance at 1 January 2021 320.5 271.0 591.5 Change in fair value 14.1 8.0 22.1 Balance at 31 December 2021 334.6 279.0 613.6 Carrying value Tier 2 subordinated debt (2029) $m Tier 2 subordinated debt (2026) $m Total $m Balance at 1 January 2020 297.9 248.9 546.8 Amortisation of capitalised borrowing costs 0.2 0.1 0.3 Balance at 31 December 2020 298.1 249.0 547.1 Fair value Tier 2 Subordinated debt (2029) $m Tier 2 subordinated debt (2026) $m Total $m Balance at 1 January 2020 318.6 276.8 595.4 Change in fair value 1.9 (5.8) (3.9) Balance at 31 December 2020 320.5 271.0 591.5 The fair values of the subordinated debt and the tier 2 subordinated debt are based on quoted market prices. In November 2016, the Group issued $250m of subordinated tier 2 notes due in 2026. Annual interest, at a fixed rate of 5.875%, is payable in May and November each year. In September 2019, the Group issued $300m of subordinated tier 2 notes due in 2029. Annual interest, at a fixed rate of 5.5% is payable in March and September each year. Under the facility $450.0m may be drawn as letters of credit to support underwriting at Lloyd’s, and up to $225m may be advanced as cash under a revolving facility. The cost of the facility is based on a commitment fee of 0.4725% per annum and any amounts drawn are charged at a margin of 1.35% per annum. The cash element of the facility will expire on 23 July 2023, whilst letters of credit issued under the facility can be used to provide support for the 2021, 2022 and 2023 underwriting years. As at 31 December 2021 $225m has been drawn down under the facility and placed as a letter of credit as Funds at Lloyd’s (FAL). All of the above borrowings are subject to covenants. 197www.beazley.com Beazley | Annual report 2021 Financial statements Notes to the ﬁnancial statements continued 26 Other payables Group 2021 $m 2020 $m Reinsurance premiums payable 660.2 393.9 Accrued expenses including staff bonuses 229.8 172.1 Other payables 47. 2 57.3 Due to syndicate 623 – – Due to syndicate 6107 81.2 51.9 Due to syndicate 5623 122.9 58.7 1,141.3 733.9 Company 2021 $m 2020 $m Other payables 0.7 3.8 0.7 3.8 All other payables are payable within one year of the reporting date. The carrying value approximates fair values. 27 Retirement benefit obligations 2021 $m 2020 $m Present value of funded obligations 56.9 64.8 Fair value of plan assets (75.0) (69.6) Retirement benefit (asset) in the statement of financial position (18.1) (4.8) Amounts recognised in the statement of profit or loss Interest cost 0.9 1.2 Expected return on plan assets (0.9) (1.2) – – Beazley Furlonge Limited operates a defined benefit pension scheme (‘the Beazley Furlonge Limited Pension Scheme’). The scheme provides the following benefits: • an annual pension payable to the member from his or her normal pension age (60th birthday) of generally 1/60th of final pensionable salary for each year of pensionable service up to 31 March 2006; • a spouse’s pension of 2/3rds of the member’s pension payable on the member’s death after retirement; • a lump sum of four times current pensionable salary for death in service at the date of death; and • a pension of 2/3rds of the member’s prospective pension at the date of death, payable to the spouse until their death. This pension is related to salary at the date of death. The scheme is administered by a trust that is legally separated from the Group. The trustees consist of both employee and employer representatives and an independent chair, all of whom are governed by the scheme rules. The scheme exposes the Group to additional actuarial, interest rate and market risk. Contributions to the scheme are determined by a qualified actuary using the projected unit credit method as set out in the scheme rules and the most recent valuation was at 31 December 2021. According to the Schedule of Contributions, the Group expects to contribute approximately $1.4m in each of the next two years. 198 Beazley | Annual report 2021 www.beazley.com 27 Retirement benefit obligations continued Trustees obligations Under section 222 of the Pension Act 2004, every scheme is subject to the Statutory Funding Objective (SFO), which is to have sufficient and appropriate assets to cover its technical provisions, which represent the present value of benefits to which members are entitled based on pensionable service to the valuation date. This is assessed at least every three years using assumptions agreed between the Trustees and the employer as set out in the Statement of Funding Principles produced in accordance with the Occupational Pensions (Scheme Funding) Regulations 2005 (OP(SF)R 2005) Regulation 6. The Trustees written Statement of Funding Principles is dated 29 January 2021 and it sets out their policy for securing that the SFO is met (that the scheme will have sufficient assets to cover its technical provisions). In accordance with the OP(SF)R 2005 Regulation 5(2) trustees have chosen the Defined Accrued Benefit Method, a variant of the projected unit credit method where accrual has ceased. The most recently completed Actuarial Valuation of the Scheme was carried out at 1 January 2020 including a valuation carried out in accordance with the Pensions Protection Fund (Valuation) Regulations 2005 and with appropriate section 179 guidance and assumptions issued by the Board of the Pension Protection Fund. A recovery plan was agreed between the Trustees and the employer on 29 January 2021 in accordance with OP(SF)R 2005 Regulation 8. These arrangements were formalised in a schedule of contributions which the scheme Actuary certified on 29 January 2021 in accordance with OP(SF)R 2005 Regulation 9. During 2021 a decision was made to move the plan assets out of equities and to reinvest in quoted corporate bonds and index linked securities. The rationale for this was to protect the scheme’s funding position and provide protection against movements in interest rates and expected inflation. The Trust Deed provides Beazley with an unconditional right to a refund of surplus assets assuming the full settlement of plan liabilities in the event of a plan wind-up. Furthermore, in the ordinary course of business the Trustee has no rights to unilaterally wind up, or otherwise augment the benefits due to members of, the scheme. Based on these rights, any net surplus in the UK scheme is recognised in full. 2021 $m 2020 $m Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 64.8 54.7 Interest cost 0.8 1.1 Actuarial gain/(loss) – Financial assumptions (4.0) 8.5 Benefits paid (2.8) (1.5) Foreign exchange (gain)/loss (1.9) 2.0 Balance at 31 December 56.9 64.8 2021 $m 2020 $m Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 69.6 60.1 Expected return on plan assets 0.9 1.2 Actuarial gain 8.1 6.3 Employer contributions 1.3 1.4 Benefits paid (2.8) (1.5) Foreign exchange (loss)/gain (2.1) 2.1 Balance at 31 December 75.0 69.6 Plan assets are comprised as follows: Equities – 69.5 Corporate bonds 3.4 – Index linked securities 70.0 – Cash 1.6 0.1 Total 75.0 69.6 199www.beazley.com Beazley | Annual report 2021 Financial statements 27 Retirement benefit obligations continued The actual gain on plan assets was $9.0m (2020: gain of $7.5m). 2021 $m 2020 $m Principal actuarial assumptions Discount rate 1.9% 1.3% Inflation rate 3.8% 3.3% Expected return on plan assets 1.9% 2.9% Future salary increases 3.8% 3.3% Future pensions increases 1.9% 1.3% Life expectancy for members aged 60 at 31 December 90 years 89 years Life expectancy for members aged 40 at 31 December 91 years 91 years At 31 December 2021, the weighted-average duration of the defined benefit obligation was 22.6 years (2020: 22.5 years). Sensitivity analyses Changes in the relevant actuarial assumptions would result in a change in the value of the funded obligation as shown below: 31 December 2021 Increase $m Decrease $m Discount rate (0.5% decrease) 7.4 – Inflation rate (0.3% decrease) – (3.7) Future salary changes (0.5% decrease) – (0.5) Life expectancy (1 year increase) 2.8 – 31 December 2020 Increase $m Decrease $m Discount rate (0.5% decrease) 8.0 – Inflation rate (0.3% decrease) – (3.2) Future salary changes (0.5% decrease) – (0.5) Life expectancy (1 year increase) 2.7 – The sensitivity analyses above have been determined based on a method that extrapolates the impact on the defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The sensitivity analyses are based on a change in a significant assumption, keeping all other assumptions constant. The sensitivity analyses may not be representative of an actual change in the defined benefit obligation as it is unlikely that changes in assumptions would occur in isolation from one another. Notes to the ﬁnancial statements continued 200 Beazley | Annual report 2021 www.beazley.com 28 Deferred tax 2021 $m 2020 $m Deferred tax asset 16.3 26.8 Deferred tax liability – (0.6) 16.3 26.2 The movement in the net deferred income tax is as follows: Balance at 1 January 26.2 21.5 Income tax (credit)/charge (4.0) 10.7 Amounts recorded through equity (5.7) (5.4) Foreign exchange translation differences (0.2) (0.6) Balance at 31 December 16.3 26.2 Balance 1 Jan 21 $m Recognised in income $m Recognised in equity/OCI $m FX translation differences $m Balance 31 Dec 21 $m Plant and equipment 0.1 (1.3) – – (1.2) Intangible assets (1.5) 1.0 – – (0.5) Underwriting profits 25.3 (11.1) – – 14.2 Deferred acquisition costs (7. 5) (0.3) – – (7. 8) Tax losses carried forward 6.3 3.3 – – 9.6 Share based payments 7.0 (0.4) (3.9) (0.1) 2.6 Other (3.5) 4.7 (1.8) – (0.6) Net deferred income tax account 26.2 (4.1) (5.7) (0.1) 16.3 Balance 1 Jan 20 $m Recognised in income $m Recognised in equity/OCI $m FX translation differences $m Balance 31 Dec 20 $m Plant and equipment 0.7 (0.6) – – 0.1 Intangible assets (1.9) 0.4 – – (1.5) Underwriting profits 15.5 9.8 – – 25.3 Deferred acquisition costs (7.6) 0.1 – – (7.5) Tax losses carried forward – 6.3 – – 6.3 Share based payments 14.3 (1.3) (5.4) (0.6) 7.0 Other 0.5 (4.0) – – (3.5) Net deferred income tax account 21.5 10.7 (5.4) (0.6) 26.2 Deferred tax assets of $9.6m (2020: $6.3m), relating to tax losses, which depend on the availability of future taxable profits, have been recognised. The Group has concluded that, notwithstanding the impact of the COVID pandemic, it is probable that the deferred tax assets will be recovered using the estimated future taxable profits based on the approved business plans. The losses can be carried forward indefinitely and have no expiry date. The Group has no unrecognised tax losses as at 31 December 2021 (2020: nil). 201www.beazley.com Beazley | Annual report 2021 Financial statements 29 Leases Leases as lessee (IFRS 16) The Group leases offices, IT equipment and motor vehicles. The leased offices are in several locations and the leases of large offices such as London and New York typically run for a period of 10 years with an option to renew the lease after that date or continue on a rolling month by month basis. Lease payments are renegotiated as agreed in the lease contracts. During 2020, the Group entered into a new office lease agreement with 22 Bishopsgate, London which resulted in the recognition of a right of use asset of $35.8m and lease liability $35.8m. Additionally the group extended the office lease agreement Plantation Place South, London up to 31 May 2021 resulting in recognising a right of use asset of $0.6m and $0.6m liability. This was due to delays in completion of the new London office. Information about leases for which the Group is a lessee is presented below. Right of use assets Right of use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment. Offices $m IT equipment $m Motor vehicles $m Total $m Balance at 1 January 2021 69.5 16.8 0.1 86.4 Depreciation charge for the year (10.6) (4.3) (0.1) (15.0) Additions of right of use assets 3.0 – 0.1 3.1 Dilapidation provision recognition 3.1 – – 3.1 Foreign exchange loss (1.6) (0.5) – (2.1) Balance at 31 December 2021 63.4 12.0 0.1 75.5 Lease liabilities Offices $m IT equipment $m Motor vehicles $m Total $m Balance at 1 January 2021 73.3 16.7 0.1 90.1 Lease payments (8.0) (4.7) (0.1) (12.8) Interest on lease liabilities and dilapidation provison 7.5 0.5 – 8.0 Additions to lease portfolio 1.0 0.0 0.1 1.1 Foreign exchange loss (1.7) (0.4) – (2.1) Balance at 31 December 2021 72.1 12.1 0.1 84.3 Right of use assets Offices $m IT equipment $m Motor vehicles $m Total $m Balance at 1 January 2020 35.2 0.6 0.1 35.9 Depreciation charge for the year (9.4) (3.5) (0.1) (13.0) Additions of right of use assets 40.9 17.3 – 58.2 Disposals of right of use assets 0.2 1.5 0.1 1.8 Foreign exchange gain 2.6 0.9 – 3.5 Balance at 31 December 2020 69.5 16.8 0.1 86.4 Notes to the ﬁnancial statements continued 202 Beazley | Annual report 2021 www.beazley.com 29 Leases continued Lease liabilities Offices $m IT equipment $m Motor vehicles $m Total $m Balance at 1 January 2020 38.8 0.5 0.1 39.4 Lease payments (11.4) (3.8) (0.1) (15.3) Interest on lease liabilities 2.0 0.4 – 2.4 Additions to lease portfolio 41.1 18.7 0.1 59.9 Foreign exchange gain 2.8 0.9 – 3.7 Balance at 31 December 2020 73.3 16.7 0.1 90.1 Amounts recognised in profit or loss 2021 $m 2020 $m Leases under IFRS 16 Interest on lease liabilities (3.7) (2.4) Depreciation (15.0) (13.0) Income from sub-leasing right of use assets 0.1 0.1 Expenses relating to low value leases (5.1) (0.3) Expenses relating to short-term leases (0.1) (0.1) Total recognised in profit or loss (23.8) (15.7) Extension options Some property leases contain extension options exercisable by the Group before the end of the non-cancellable contract period or the option to continue with the lease on a monthly rolling basis. The Group reassess whether it is reasonably certain to exercise the options if there is a significant event or changes in circumstances within its control. Leases as lessor The Group sub-leases leased property, which is classified as a investment asset. The Group recognised $0.1m in 2021 ($0.1m 2020). The sub-lease contract ends in 2022. 203www.beazley.com Beazley | Annual report 2021 Financial statements 30 Related party transactions The Group and company have related party relationships with syndicates 623, 6107, 5623, its subsidiaries, associates and its directors. 30.1 Syndicates 623, 6107 and 5623 The Group received management fees and profit commissions for providing a range of management services to syndicates 623 and 6107 which are all managed by the Group. In addition, the Group ceded portions or all of a group of insurance policies to syndicates 6107 and 5623. The participants on syndicates 623, 6107 and 5623 are solely third party capital. Details of transactions entered into and the balances with these syndicates are as follows: 2021 $m 2020 $m Written premium ceded to syndicates 257.3 148.6 Other income received from syndicates 28.6 22.9 Services provided 45.8 33.4 Balances due: Due from syndicate 623 1.8 18.2 Due to syndicate 6107 (81.2) (51.9) Due to syndicate 5623 (122.9) (58.7) 30.2 Key management compensation 2021 $m 2020 $m Salaries and other short term benefits 25.6 10.6 Post-employment benefits 0.6 0.6 Share based remuneration 2.7 0.5 28.9 11.7 Key management include Executive and Non-Executive Directors and other senior management. The total number of Beazley plc ordinary shares held by key management was 2.8m. Apart from the transactions listed in the table above, there were no further related party transactions involving key management or a close member of their family. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 95 to 113. 30.3 Other related party transactions At 31 December 2021, the Group had purchased services from Falcon Money Management Holdings Limited of $2.7m (2020: $2.3m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis. Notes to the ﬁnancial statements continued 204 Beazley | Annual report 2021 www.beazley.com 31 Parent company and subsidiary undertakings Beazley plc, a company incorporated in England and Wales and resident for tax purposes in the United Kingdom, is the ultimate parent and the ultimate controlling party within the Group. The following is a list of all the subsidiaries in the Group as at 31 December 2021: Country/region of incorporation Ownership interest Nature of business Functional currency Beazley plc direct investment in subsidiary ($m) Beazley Ireland Holdings plc Jersey 100% Intermediate holding company USD 724.6 Beazley Group Limited England 100% Intermediate holding company USD Beazley Furlonge Holdings Limited England 100% Intermediate holding company USD Beazley Furlonge Limited England 100% Lloyd’ managing agents GBP Beazley Investments Limited England 100% Investment company USD Beazley Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Management Limited England 100% Management company GBP Beazley Staff Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Solutions Limited England 100% Insurance services GBP Beazley Underwriting Services Limited England 100% Insurance services GBP Beazley Corporate Member (No.2) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.3) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.6) Limited England 100% Underwriting at Lloyd’s USD Beazley Leviathan Limited England 100% Underwriting at Lloyd’s GBP Beazley Canada Limited Canada 100% Insurance services CAD Beazley Insurance dac Ireland 100% Insurance and reinsurance company USD Beazley Solutions International Limited Ireland 100% Insurance services EUR Beazley Underwriting Pty Ltd Australia 100% Insurance services AUD Beazley Newco Captive Company, Inc. USA 100% Special Purpose Financial Captive USD Beazley USA Services, Inc. USA 100% Insurance services USD Beazley Holdings, Inc. USA 100% Holding company USD Beazley Holdings, Inc. Digital LLC USA 100% Insurance services USD Beazley Group (USA) General Partnership USA 100% General partnership USD Beazley Insurance Company, Inc. USA 100% Underwriting admitted lines USD Beazley America Insurance Company, Inc. USA 100% Underwriting admitted lines USD Lodestone Securities LLC USA 100% Consultancy services USD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD Lodestone Security Limited England 100% Consultancy services GBP Beazley Labuan Limited Malaysia 100% Insurance services USD 724.6 Please see page 206 for registered addresses. 205www.beazley.com Beazley | Annual report 2021 Financial statements 31 Parent company and subsidiary undertakings continued The following is a list of Group registered office locations: Address City Postcode Country/region United Kingdom and Continental Europe 22 Bishopsgate London EC2N 4AJ England 2 Northwood Avenue Dublin D09 X5N9 Ireland 22 Grenville Street Saint Helier JE4 8PX Jersey North America 1209 Orange Street Wilmington, Delaware 19801 USA 2711 Centerville Road Suite 400** Wilmington, Delaware 19808 USA 30 Batterson Park Road Farmington, Connecticut 06032 USA 160 Greentree Drive, Suite 101**** Dover, Delaware 19904 USA 55 University Avenue, Suite 550 Toronto, Ontario M5J 2HJ Canada Asia 138 Market Street, 03-04 Capita Green Singapore 048946 Singapore 36/F., Tower Two, Times Square, 1 Matheson Street, Causeway Bay Hong Kong – Hong Kong Kensington Gardens, No. I1317, Lot 7616, Jalan Jumidar Buyong Labuan 87000 Malaysia Australia Level 15, 1 O’Connell Street Sydney NSW 2000 Australia 32 Contingencies Funds at Lloyd’s The following amounts are held in trust by Lloyd’s to secure underwriting commitments: As at 31 December 2021 $m As at 31 December 2020 $m As at 31 December 2019 $m Financial assets at fair value and cash 1,603.5 1,563.3 1,702.8 Letters of credit (‘LOC’) 225.0 225.0 – Total Funds at Lloyd’s 1,828.5 1,788.3 1,702.8 The funds are held in trust and can be used to meet claims liabilities should syndicates fail to meet their claim liabilities. The funds can be only used to meet claim liabilities of the relevant member. Since 2020, $225m under the Group’s syndicated short term banking facility has been utilised as letters of credit placed as Funds at Lloyd’s (FAL) to provide capital support for the Group’s underwriting at Lloyd’s. Letters of credit issued under the facility are uncollateralised. See Note 25 Borrowings for further details on banking facility. Other than the letters of credit these balances are included within financial assets at fair value and cash and cash equivalents on the statement of financial position. Notes to the ﬁnancial statements continued 206 Beazley | Annual report 2021 www.beazley.com 33 Foreign exchange rates The Group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into US dollars, being the Group’s presentational currency: 2021 2020 Average Year end spot Average Year end spot Pound sterling 0.73 0.76 0.78 0.73 Canadian dollar 1.25 1.27 1.34 1.27 Euro 0.84 0.88 0.88 0.81 34 Subsequent events There are no events that are material to the operations of the Group that have occurred since the reporting date. 207www.beazley.com Beazley | Annual report 2021 Financial statements

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