On Track in 2009 We Took Important Steps to Equip Our Underwriters to Capture Proﬁ Table Market Opportunities

Annual report and accounts and accounts Beazley plc | Annual report Beazley plc | Annual report and accounts 2009 2009 86 09

On track In 2009 we took important steps to equip our underwriters to capture proﬁ table market opportunities:

• Raised £150 million to develop our business at Lloyd’s and in the US • Acquired First State Management Group, Beazley plc increasing our US commercial property 2 Northwood Avenue Northwood Park presence Santry Demesne, Santry Dublin 9 • Redomiciled the group to Ireland Ireland Phone: +353 (0)1 854 4700 • Enhanced client and broker service through Fax: +353 (0)1 842 8481 targeted technology investments Registered Number: 102680 Annual report and accounts and accounts Beazley plc | Annual report Beazley plc | Annual report and accounts 2009 2009 86 09

On track In 2009 we took important steps to equip our underwriters to capture proﬁ table market opportunities:

Our business has diversiﬁ ed steadily over time and we have achieved a proﬁ t every year since inception in 1986.

86 87 88 89 9091 92 9394 95 96 97 98 99 00 01 02 0304 0506 07 08 09 £9.1m £13.5m £13.9m £14.7m £16.5m £24.0m £33.2m £67.6m £70.3m £85.6m £79.6m £78.3m £101.7m £134.0m £168.5m £299.7m £450.4m £700.4m £751.3m £816.0m £957.6m £959.8m £1,072.9m £1,351.4m Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross Managed gross premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums premiums

Lloyd’s Active UK windstorms European storms Lloyd’s Active Commercial Total Beazley Corporate capital Lloyd’s Beazley Recall, Marine Management Flotation raised members: US $3.5bn US $10bn members: Property syndicates’ introduced to Reconstruction Dedicated Contingency account buyout of £150m to set up £350.2m £402.3m £558.0m £745.1m £780.5m £875.7m £1,111.5m 28,242 26,539 account capacity Lloyd’s and Renewal established and Political Risk started minority Beazley Group plc Group share Group share Group share Group share Group share Group share Group share Capacity: Capacity: started introduced accounts started shareholders £8,291m £11,063m UK Bishopsgate US Northridge APUA, based European storms D&O Healthcare, Engineering Beazley MGA Beazley takes BICI begins Political Risk Raised £150m Syndicates: 370 Syndicates: 354 US hurricane explosion earthquake Lloyd’s Active in Hong Kong, US $12bn EPL and UK PI Energy, Cargo and started in US full ownership writing US & Contingency through rights Andrew US $750bn US $12.5bn members: forms a strategic accounts started and Specie Construction of APUA and admitted Group formed as issue to develop our business at Begin trading at US $17bn 13,062 partnership with accounts started account Beazley acquires renames it mid-market new division the ‘old’ 1958 Capacity: Beazley Furlonge Lloyd’s Active Lloyd’s and in started Omaha P&C Beazley Limited commercial the US. Lloyd’s building £9,994m members: SARS outbreak and renames property Acquisition of Acquisition in 1985 Syndicates: 167 Lloyd’s 3,746 in Asia it Beazley Expansion of Momentum Reconstruction Capacity: of First State US $3.5bn Insurance Construction & US hurricane Ike Underwriting Management Beazley Furlonge and Renewal £11,263m Company, Inc. Engineering team US $20bn Management. Group, Inc., a and Hiscox concluded Syndicates: 122 (BICI) into Singapore Accident & Life US underwriting established formed as a manager focusing and takes US 9/11 terrorist US hurricane Beazley opens new division on surplus lines commercial over managing attack Katrina new ofﬁ ce in property business Syndicate 623 US $20.3bn US $56.5bn Paris Beazley plc becomes the new Specialty lines Lloyd’s Active holding company and Treaty members: accounts started for the group, 2,211 incorporated in Capacity: Jersey and tax £14,788m resident in Ireland Syndicates: 65

Marine account started in 1999

Our business has diversiﬁ ed steadily over time and we have achieved a proﬁ t every year since inception in 1986.

Marine account started in 1999

Commercial Property Accident & Life formed account started APUA, based in as a new division in 1992 In 1986 Beazley Furlonge Hong Kong, forms a and Hiscox established strategic partnership and takes over managing with Beazley Furlonge Syndicate 623 in 1997 This year we established a local underwriting presence in the US Quick read Annual statement Performance by division Financial review Corporate governance Financial statements Contents: 2 Quick read 10 Annual statement Who we are, what we do, and how we’re doing 2 Financial highlights 3 Key performance indicators 8 Growth and diversification over time We saw an opportunity in 2009 to increase our catastrophe-exposed business at attractive premium rates 16 Chief executive Q&A Andrew Horton describes the trends, risks and opportunities that he foresees in 2010

18 Performance by division 24 Property Our cycle management approach helped us maximise Our commercial property business grew profitable opportunities while minimising volatility in 2009 both at Lloyd’s and, due to our acquisition of First State, in the United States 20 Marine The growth and profitability of our energy account contributed to a banner year for our marine division 26 Reinsurance In an excellent year for reinsurance, the team contributed £32.7m to pre-tax profits 22 Political risks and contingency A difficult year for political risk underwriters was balanced by a strong 28 Specialty lines performance from our terrorism team Experience paid dividends, as our underwriters achieved a 92% combined ratio in conditions that many casualty insurers found challenging

30 Operational update

32 Financial review 74 Financial statements 32 Group performance 74 Consolidated income statement 39 Balance sheet management 75 Statement of comprehensive income 44 Capital position 76 Statement of changes in equity 77 Balance sheet 45 Corporate governance 78 Cash flow statement 45 Investor relations 79 Notes to the financial statements 46 Risk management 120 Glossary 49 Corporate and social responsibility 52 Board of directors 54 Statement of corporate governance 58 Directors’ remuneration report 70 Directors’ report Beazley plc became the parent company of the Beazley group on 9 June 2009. Prior to this the parent company was Beazley Group plc. 72 Statement of directors’ responsibilities Accordingly, references to Beazley in these accounts shall mean Beazley plc or Beazley Group plc or the Beazley group, as the context requires. 73 Independent audit report Beazley Annual Report 2009 21 Quick read

Our vision is to become, and be recognised as, the highest performing specialist insurer.

For a quick and compressed version of this annual report, please read the next six pages. The annual statement and remainder of the report begin on page 10.

Highlights

Financial highlights • Profit before income tax up 15.5% to £100.7m (2008: £87.2m); underlying profit before income tax* up 259% to £147.3m (2008: £41m) • Return on our expanded equity base of 17% (2008: 16%); or 25% based on underlying profit* (2008: 8%) • Gross written premiums up 27% to £1,115.5m (2008: £875.7m) • Combined ratio of 90% (2008: 90%) • Rate increase on renewal portfolio of 3% (2008: 6% decrease) • Prior year reserve releases of £67.2m (2008: £72.8m) • Investment income increased to £56.1m, or 2.7% (2008: loss of £25.8m or 1.5%) • Second interim dividend of 4.7p taking full year dividend to 7.0p (2008: 6.6p), up 6%. *underlying profit comprises profit before income tax after the notional adjustment on foreign exchange on non-monetary items.

Delivery against our strategy • £150m raised and deployed primarily in short tail/catastrophe lines • We have integrated First State and our accident & life business (together generating premiums of £93m in 2009) • We have hired people and/or teams to grow marine professional liability, environmental, US accident & life, representations and warranties, energy and US builders’ risks • Syndicate 6107 supported by 3rd party capital established to increase line size on reinsurance account • Beazley’s redomicile to Ireland completed • Falcon Money Management successfully reduced our investment risk

Profit before tax Return on equity Underlying profit before Return on equity income tax* (based on underlying profit)

£ % £ % 100.7m 17 147.3m 25

2 www.beazley.com Combined ratio* (%) Gross premiums written (£m) Employee numbers Net assets per share (p)

100 1500 600 150 90 90 909090 90 000 550 85 88 88 500 490 15.6 13.5 80 1200 1,115.5 000 149 120 8.1 36 39 34 3935 400 126 60 900 875.7 90 6.2 104.0 106.9 105.5 780.5 745.1 300 83.6 Quick read Annual statement Performance by division Financial review Corporate governance Financial statements 40 600 60 54 51 56 5155 200 000 401 364 20 300 100 30 0 0 0 0

2006 2007 2008 2009 2006 2007 2008 2009 20092009 2008 2007 2006 2007 2008 2009 Expense ratio Claims ratio Underwriters Support & group Tangible Intangible

Combined Combinedratio* (%) ratio* (%) Gross premiumsGross writtenpremiums (£m) written (£m) Employee numbersEmployee numbers Net assetsNet per assetsshare (p)per share (p)

100 100 1500 1500 600 600 150 150 90 90 90909090 9090 909090 90 000 55000 0 550 85 888588 88 88 500 500 490 490 15.6 13.515.6 13.5 80 80 1200 1200 1,115.5 1,115.5 000 14009 0 149 120 1208.1 8.1 126 36 39 3634 393935 34 3935 400 400 126 106.9 60 60 900 900 875.7 875.7 90 6.2 90104.0 6.2106.9104.0105.5 105.5 780.745.5 1 780.5 745.1 300 300 83.6 83.6 40 40 600 600 60 60 54 51 5456 515155 56 5155 200 000200 40001 0 36404 1 364 20 300 30 20 300 100 100 30 0 0 0 0 0 0 0 0 2006 2007 2008 2009 2006 2007 2008 2009 20092009 2008 2007 2006 2007 2008 2009 Key2006 performance2007 2008 2009 indicators2006 2007 2008 2009 20092009 2008 2007 2006 2007 2008 2009 Expense ratio Expense Claims ratio ratio Claims ratio Underwriters Underwriters Support & group Support & group Tangible Ta ngible Intangible Intangible

Dividends per share (p) Return onCombined equity (%) ratio* (%) Investment Grossmix (£m) premiums written (£m) Earnings perEmployee share (p)numbers Net assetsCombined per share ratio*(p) (%) Gross premiums written (£m) Employee numbers Net assets per share (p) (based on underlying profit*) 000.01,994.2 100 10.0 30 100 2000 1500 30 60028.1 150 1500 600 150 4.0 27 90 90 909090 90 000 550 85 88 88 90 90 909090 90 85 88 88 000 550 85 88 88 25 15.6 490 15.6 25 80 25 500 490 80 13.5 1200 500 120 13.5 8.0 22 1600 1200 1,490.6 1,115.5 000 149 120 8.1 1,115.5 000 149 8.1 36 39 34 3935 126 36 39 34 3935 126 20 20 400 18.8 18.4 106.9 400 6.2 106.9 6.0 7.0 60 1200 900 875.7 16.7 90 6.2 60104.0 105.5 900 875.7 90 104.0 105.5 6.6 780.5 745.1 780.5 6.0 15 745.1 15 300 83.6 300 83.6 40 600 60 4.0 4.8 40 800 600 000 401 364 60 000 401 364 10 548 51 56 5155 10 200 54 51 56 5155 200 20 300 30 2.0 5 20 400 300 5 100 30 100 0 0 0 0 0 0 0 0 0 0 0 0 2006 2007 2008 2009 2006 2007 2008 2009 20092009 2008 2007 2006 2007 2008 2009 2006 2007 2008 2009 2006 200720062008200720092008 2009 2009 20082006 20072007 2008 2009 2006 2007 200920092008 20082009 2007 2006 2007 2008 2009 Interim and final Special Expense ratio Claims ratio Investment grade bonds Cash Underwriters Support & group Tangible Expense Intangible ratio Claims ratio Underwriters Support & group Tangible Intangible Hedge funds High yield bonds Equities Earnings per share remained at Net assets per share recovered a healthy level throughout the well in 2009, since the rights reporting periods, with a 3x issue and placing in the year at dividend cover for 2009. 86p per share.

Dividends perDividends share (p)per share (p) Return on equityReturn (%) on equity (%) InvestmentInvestment mix (£m) mixCombined (£m) ratio* (%)Earnings perEarnings share (p)perGross share premiums (p) written (£m) Employee numbers Net assets per share (p) (based on underlying(based on profit*)underlying profit*) 000.01,994.2000.01,994.2 10.0 10.0 30 30 2000 2000 100 30 3028.1 150028.1 600 150 4.0 4.0 27 27 90 90 90 90 85 888588 88 88000 550 85 88 88 25 25 15.6 8.0 25 25 1600 80 25 25 1200 500 490 120 13.5 8.0 22 22 1600 1,490.6 1,490.6 1,115.5 000 149 8.1 20 20 36 39 3420 3935 20 18.8 400 126 6.0 7.0 7.0 1200 60 18.890018.4 18.4 875.7 90 6.2 104.0 106.9 105.5 6.0 6.6 6.6 1200 16.7 16.7 780.5 6.0 6.0 15 15 15 15 745.1 300 83.6 4.0 4.8 4.0 4.8 800 800 40 600 000 401 364 60 10 10 8 8 54 51 5610 5155 10 200 2.0 400 20 300 30 2.0 5 5 400 5 5 100 0 0 0 0 0 0 0 0 0 0 0 0 2006 2007 2008 2009 2006 2007 2008 2009 2009 2008 2007 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2009 2008 2007 2006 2007 2008 20092006 2007 2008 20092006 2007 2008 2009 20092009 2008 2007 2006 2007 2008 2009 Interim and final Interim Special and final Special Investment grade Investment bonds grade Cash Expense bonds ratio Cash Claims ratio Underwriters Support & group Tangible Intangible Hedge funds Hedge High yieldfunds bonds High yieldEquities bonds Equities Dividends per share have grown Beazley has always delivered a positive Our combined ratio has Dividends per share (p) Return on equity (%) Investment mix (£m) Earnings perDividends share (p) per share (p) Return on equity (%) Investment mix (£m) Earnings per share (p) (based on underlying profit*) by 46% since 2006 (excluding return on equity to its shareholders (basedremained on underlying at 90% for profit*) the last the special dividend)000.01 and,994.2 by 17% – 2009 has 10.0seen a three-fold increase 30four years. 2000 000.01,994.2 30 10.0 30 2000 30 28.1 28.1 4.0 27 4.0 85 88 88 27 85 88 88 25 since 2007. from 2008 driven by the increased 25 25 25 8.0 25 1600 25 8.0 1600 22 1,490.6 underlying profits. The four year 22 1,490.6 20 20 20 20 18.8 18.4 7.0 18.8 18.4 6.0 6.6 7.0 1200 average16.7 return6.0 on equity is 20%.6.6 1200 16.7 6.0 15 15 6.0 15 15 4.0 4.8 * Underlying800 profit comprises profit before tax after the notional adjustment on 4.0foreign 4.exchange8 on non-monetary items. (See detailed explanation in note 3b to the 800 10 10 10 8 financial statements). 10 8 2.0 400 2.0 5 400 5 5 5 0 0 0 0 0 0 0 0 2006 2007 2008 2009 2006 2007 2008 2009 2009 2008 2007 2006 2007 20062008 20072009 2008 2009 2006 2007 2008 2009 2009 2008 2007 2006 2007 2008 2009 Interim and final Special Investment grade bonds Cash Interim and final Special Investment grade bonds Cash Hedge funds High yield bonds Equities Hedge funds High yield bonds Equities

Beazley Annual Report 2009 3

Dividends per share (p) Return on equity (%) Investment mix (£m) Earnings per share (p) (based on underlying profit*) 000.01,994.2 10.0 30 2000 30 28.1 4.0 27 85 88 88 25 25 25 8.0 22 1600 1,490.6 20 20 18.8 18.4 6.0 6.6 7.0 1200 16.7 6.0 15 15 4.0 4.8 800 10 8 10 2.0 5 400 5 0 0 0 0 2006 2007 2008 2009 2006 2007 2008 2009 2009 2008 2007 2006 2007 2008 2009 Interim and final Special Investment grade bonds Cash Hedge funds High yield bonds Equities Quick read continued

Who we are Why we exist Beazley is a specialist insurer committed Our vision is to become, and be to providing its clients with excellent recognised as, the highest performing underwriting and claims service specialist insurer. worldwide. To achieve this we have developed Operating since 1986, we are market the know-how to underwrite and leaders in many of our chosen lines of manage complex insurance for profit business, which include: which is embedded in our processes • Marine and enshrined within our culture and • Political and contingency risks approach to doing business. We apply • Property – commercial and private this know-how without exception to • Reinsurance – insurance of everything we do. insurance companies covering risks Just as importantly, we seek to maintain an such as hurricanes and other natural environment that makes working at Beazley catastrophes challenging and enjoyable. Combined with our focus • Specialty lines – indemnity on talent management, this has enabled Beazley to insurance mainly for professionals attract and retain people who rank among the best insurance professionals in the world. Beazley plc is the parent company of specialist Our open and collaborative culture means our clients insurance businesses with operations in Europe, the and brokers interact with entrepreneurial underwriters US, Asia and Australia. Beazley is a proud participant in who give straight answers and make fast decisions. the Lloyd’s market, the largest and oldest insurance market in the world. Through the Lloyd’s broker network For our shareholders, Beazley aims to deliver sector and the market’s trading licences, we are able to leading returns on equity with relatively low volatility. access a wide range of insurance and reinsurance The key to this performance over time is the balance business from around the world. Many of the lines of of Beazley’s portfolio across specialist classes driven business we underwrite, such as marine and energy by different cycles, enabling us to target an average insurance, political risks insurance, and contingency combined ratio of 90% across the insurance cycle, insurance, were pioneered at Lloyd’s. while achieving higher written premiums and assets under management per unit of capital than most of Beazley manages five Lloyd’s syndicates: syndicates our competitors. 2623 and 623 underwrite a broad range of insurance and reinsurance business worldwide; syndicate 3623 focuses on accident and health business; 3622 is a dedicated life syndicate; and 6107, our recently launched sidecar syndicate, writes reinsurance business. We also underwrite business directly in the US admitted market through Beazley Insurance Company, Inc., an admitted carrier licensed to write in all 50 states. In 2009 we incorporated an Irish reinsurer, Beazley Re Limited, which reinsures a proportion of the group’s business.

4 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

On the whole 2009 was a relatively benign year How we’re doing for claims and we achieved a 55% claims ratio In 2009 we achieved an excellent profit of £100.7m (2008: 56%). maintaining our record of unbroken profitability.

2009 2008 Movement Following a difficult 2008, global financial markets £m £m % stabilised in 2009. The group achieved an Gross premiums written 1,115.5 875.7 27 investment return for the year of £56.1m Net premiums written 848.0 740.4 15 (2008: a loss of £25.8m). Net earned premiums 836.7 683.1 23 Divisional performance Net investment income/(loss) 56.1 (25.8) n/a Beazley capitalised on an opportunity to deploy more Other income 12.5 10.1 24 capital in catastrophe-exposed classes of business in Revenue 905.3 667.4 36 2009. The property portfolio increased by 40%, helped by the acquisition of First State which added $93.9m Net insurance claims 473.0 401.1 18 of premium. Our core reinsurance account grew Acquisition and organically by 29% and the acquisition of Momentum administrative expenses 300.9 237.3 27 Foreign exchange loss/(gain) 21.9 (70.8) n/a Underwriting added a further £43.2m of premium. Our largest team, specialty lines, has grown its Expenses 795.8 567.6 40 premium by 18% in 2009 to £480.4m. Finance costs 8.8 12.6 (30) The marine and reinsurance divisions have performed Profit before income tax 100.7 87.2 15 particularly well in 2009 contributing profits before tax Underlying profit before of £47.2m and £32.7m respectively. Specialty lines income tax* 147.3 41.0 259 has also performed well with a profit of £74.4m. This has been the result of positive claims experience and Claims ratio 55% 56% – Expense ratio 35% 34% – an improved investment performance. The political Combined ratio 90% 90% – risks and contingency group incurred losses on the Rate increase/(reduction) 3% (6%) – trade credit book and showed a loss of £4.9m Investment return 2.7% (1.5%) – compared to a £21.0m profit in 2008. Finally our property group returned to profit in 2009, making a contribution of £6.7m. 2009 results The group reported a profit before income tax of £100.7mInsurance (2008:type £87.2m), a 15%Premium increase written on by 2008. Business by division Geographical Combined ratio We reported a record underlying claimprofit* settlement of £147.3m term distribution (2008: £41.0m). Gross premiums have increased in 2009 by 27% to £1.1bn. A number of factors have contributed to this increase; organic growth within our Lloyd’s business, the acquisitions of First State and Momentum Underwriting, and the effect of the stronger US dollar in 2009. We underwrite around 75% of our business in USInsurance dollars. 85% Short tail 52% Marine 15% Europe 15% Expense ratio 60% Reinsurance 15% Medium tail 48% Political risks and contingency 7% Worldwide 25% Column 1 40% Property 23% US 60% The group achieved a 90% combined ratio for the Reinsurance 12% fourth year in succession, emphasising the stability Specialty lines 43% of our diversified portfolio. * underlying profit comprises profit before income tax after the notional adjustment on foreign exchange on non-monetary items. (See detailed explanation in note 3b to the financial statements.)

Beazley Annual Report 2009 5 Quick read continued

Who runs Beazley How we behave Non-executive chairman Corporate governance Jonathan Agnew The board is accountable to the Andrew Beazley* Deputy chairman company’s shareholders for good governance. We describe below how Executive committee The Beazley executive committee manages the group. the principles identified in the revised Members of the executive committee are: Combined Code have been applied Andrew Horton* by the group. Chief executive officer and chair of the executive committee The board The board consists of a non-executive chairman, Martin Bride* Jonathan Agnew, together with six independent Finance director non-executive directors, of which Andy Pomfret is the Adrian Cox senior non-executive director, and seven executive Head of specialty lines directors, of whom Andrew Horton is chief executive. All six non-executive directors, who have been Nicholas Furlonge* appointed for specific terms, are considered by the Head of risk management and marketing board to be independent of management and free Jonathan Gray* of any relationship which could materially interfere Head of property with their independent judgement. Adrian Lewers Biographies of current board members appear on Head of political risks and contingency pages 52 and 53 of this report. These demonstrate the very broad range of business experience which the Neil Maidment* board members possess and which are essential to Chairman of the underwriting committee manage a business of this size and complexity. A well David Marock defined operational and management structure is in Chief operating officer place. Terms of reference exist for all board committees. The roles and responsibilities of senior executives Clive Washbourn* and key members of staff are clearly defined. Head of marine Corporate responsibility Non-executive directors We are an equal opportunities employer and make it George Blunden our policy to offer equal treatment to employees and Gordon Hamilton prospective employees, ensuring that all are treated Dan Jones fairly and with dignity and respect. We do not permit Padraic O’Connor unlawful discrimination of any kind against any person Andy Pomfret on the grounds of gender, race, nationality or ethnic Vincent Sheridan origin, age, disability, religious beliefs, sexuality, Company secretary marital status, working patterns or pregnancy. Sian Coope

*Denotes executive director of Beazley plc

6 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

How we’re rewarded About share ownership The executive remuneration policy is set Beazley is quoted on the London by the remuneration committee and is Stock Exchange. governed by these guiding principles: Analysis of shareholdings • Alignment to shareholder interests; Issued share capital as at 31 December and 2009: 533,825,796 ordinary shares • Performance of the group. owned by 857 share owners.

The committee’s work during 2009 included a Investor relations: change in the long term incentive plan (LTIP), as Beazley has a continuous program to address the approved by a special resolution at a general meeting needs of shareholders, investment institutions and in November 2009. This resolution further aligned analysts, supplying a regular flow of information about executive rewards to the long-term growth potential the company, its strategy and performance. Beazley’s of the company. website, www.beazley.com, provides current and historical financial information including trading Rewards at Beazley are centred around the following statements, news releases and presentations. incentive initiatives: • LTIPs – these represent performance linked share Analyst coverage: A number of analysts currently publish research notes options which are dependent on the group achieving on the group. In addition to research coverage from pre-defined financial targets; Numis, the company’s corporate broker, coverage is • Performance related pay (PRP) – is allocated provided by RBS, Fox Pitt Kelton, Credit Suisse, to underwriters based on the profitability of JP Morgan, Keefe Bruyette & Woods, KBC Peel Hunt, their portfolios; Noble & Company and UBS. • Enterprise bonus pool – this is a discretionary annual bonus determined by group performance and distributed both in cash and shares; and Share owners by Shareholding by typeShare of investorowners Combined ratio geography by type • Other share schemes – the group uses a number of other schemes to incentivise and retain staff through Mutual funds 40% Insurance 16% share ownership. Pensions 11% Inv trusts 15% Further details of the reward policy is set out on pages Retail 8% Directors 3% 58 to 69. Trading 2% Charities 2% Others 3%

UK 96% Source: Numis Securities Limited (DecemberOther individuals 2009) 40% Expense ratio 60% US 4% Employees 30% Column 1 40% Institutional Investors 30%

Beazley Annual Report 2009 7 Quick read continued

A growing and diversifying portfolio: Since Beazley’s Marine We participate in the insurance of establishment in 1986 – and particularly since 2001 – our approximately 13.5% of the world’s ocean-going tonnage and are the business has grown and diversified significantly. This chart prominent leader of voyage and tow shows the growth of gross written premiums for all business business in the London market. We insure 35% of the top 200 global oil managed by the group. The group share of this premium and gas companies and are a major lead for upstream energy clients. We was 82.5%, or £1,115.5 m, in 2009. have extensive experience insuring a wide variety of cargoes including project, fine art and specie.

Growth in managed gross written premiums by division £m

1,400

1,300

1,200

1,100

1,000

900

800

700

600

500

400

300

200

100

0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Managed GWP (£m) 9.1 13.5 13.9 14.7 16.5 24.0 33.2 67.6 70.3 85.6 79.6 78.3 101.7 Group Share – – – – – – – – – – – – –

8 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Political risks & contingency Property Reinsurance Specialty lines In addition to traditional lines such We’ve protected clients ranging from The reinsurance team specialises in Specialty lines comprises as contract frustration, expropriation Fortune 1000 companies to writing worldwide property professional liability and and credit, we insure a growing homeowners through 17 years of catastrophe; per risk; aggregate management liability risks number of businesses against natural and man-made catastrophes. excess of loss and pro-rata business; underwritten for clients on both a terrorism and political violence. In addition to the worldwide and casualty clash. More than 80% primary and excess basis in North Our contingency team is one of the commercial property business we of our top 20 clients have reinsured America, Europe and around the strongest in the London market. write at Lloyd’s, we also underwrite with us for 15 years or more. world. Our US clients are served both We specialise in event cancellation construction and engineering risks in Accident & life by our underwriters at Lloyd’s and by – writing everything from weddings Singapore; commercial property risks With an experienced team of leading our local US-based underwriters, to world cups. (both admitted and non-admitted) underwriters who have been together including our dedicated small locally in the US; as well as high since the early 1990s, our personal business team that focuses on the value homeowners risks in the US accident and specialty life business needs of smaller scale clients. and UK. is written on both an insurance and reinsurance basis and covers a number of niche classes, including sports disability. The business was acquired by Beazley in 2008.

1,400

1,300

1,200

1,100

1,000

Reinsurance 900

800

700 Specialty lines 600

500 Political risks & contingency 400

Marine 300

200 Property 100

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

78.3 101.7 134.0 168.5 299.7 450.4 700.4 751.3 816.0 957.6 959.8 1,072.9 1,351.4

– – – – – – 350.2 402.3 558.0 745.1 780.5 875.7 1,115.5

Beazley Annual Report 2009 9 Annual statement

Our performance in 2009 was a testament to the success of our underwriters in identifying profitable opportunities and in resisting the temptation to pursue business where premium rates failed to keep pace

Andrew Horton Jonathan Agnew with expected claims frequency. Chief executive Chairman

Beazley thrived in 2009, ending the year with a pre-tax Management Group Inc (First State), a leading profit of £100.7m (2008: £87.2m) on gross premiums underwriting manager specialising in surplus lines which rose 27% from 2008 to £1,115.5m. Underlying commercial property insurance. Judy Patterson and her profits* rose from £41.0m to a record £147.3m. After highly experienced team at First State now form the core accounting for an increase in the value of the US dollar of our surplus lines commercial property team in the US, relative to sterling during the year (three quarters of our which underwrote gross premiums of $93.9m in 2009. premium is denominated in dollars), our top line Capital raising deployed on premium growth in constant currency terms was 12.2%. market opportunities For the fourth year in succession, we achieved a We saw an opportunity in 2009 to increase our exposure combined ratio of 90%. to catastrophe exposed business at attractive premium The board is pleased to announce a second interim rates. Substantial claims from the previous year’s dividend of 4.7p (2008: 4.4p final dividend), bringing hurricanes Ike and Gustav (the former the third most the total dividend for the year to 7.0p, an increase of costly hurricane to insurers on record) pushed up 6% over 2008. premium rates for catastrophe exposed classes of insurance and reinsurance business. Our strong underlying profits* in 2009 delivered a return on equity of 25% (2008: 8%), a testament to In the spring, we raised £150m of additional capital the success of our underwriters in identifying profitable through a fully underwritten rights issue and placing. opportunities where these were to be found (most $75.0m of the proceeds were used to acquire and frequently last year in the marine, energy and capitalise the First State business. The balance was reinsurance markets), and in resisting the temptation used to increase our underwriting at Lloyd’s. to pursue business where in our view premium rates As expected, premium rates increased substantially in failed to keep pace with expected claims frequency. the classes of business we had targeted, with increases Our investment performance also recovered strongly, of 9% in our reinsurance business, 6% in our returning £56.1m following a loss in 2008. This was commercial property business, and 27% in our energy accomplished whilst de-risking the investment portfolio business. We utilised our new capital by writing an (moving a large portion of the portfolio into government additional £239.8m for the account of our reinsurance, bonds and government supported assets) which should property and marine divisions. Our marine division, which give us better protection against a severe market includes energy insurance, in particular had a banner downturn in future. year, with gross premiums up 14% and a combined ratio of 74%. Clive Washbourn, who leads the division, and During 2009 we began to see the benefit of two Paul Dawson, who heads our energy team, enjoy acquisitions. Momentum Underwriting Management widespread respect as highly experienced lead Limited, a London-based underwriting agency which we underwriters among brokers at Lloyd’s, the oldest acquired in 2008, was rebranded as Beazley’s accident and still the most important marine insurance market & life division and underwrote £43.2m in gross in the world. premiums. In the US, we acquired First State

* Underlying profit comprises profit before income tax after the notional adjustment on foreign exchange on non-monetary items. (See detailed explanation in note 3b to the financial statements.)

10 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Diversification is beneficial to an insurer as long as it is Claims experience not accompanied by loss of focus or dilution of expertise. In today’s environment, adroit underwriting is not enough We are – and are proud to be – a specialist insurer. to enable an insurer to win and hold on to profitable Across our business, we hire underwriters who really business. As recession took hold, our clients became understand the risks which they are assuming and are as ever more value conscious. Fortunately, our claims staff comfortable declining business as they are accepting it. demonstrated the value of the Beazley product when it Specialty lines remains our largest division, accounting was needed. For example, companies look to their for 43% of our gross premiums in 2009. In 2009, professional and management liability insurers when Adrian Cox and his team saw attractive growth they are the target of third party lawsuits. Time and opportunities in several areas whilst carefully managing again, our specialty lines claims team were able to the impact of recession on claims frequency in other show clients the value of having Beazley on their side. parts of our book. We continue to invest in high calibre claims Recession planning was fundamental to the strong 92% professionals both in London and in the US. Almost combined ratio achieved by specialty lines in 2009, but uniquely among major insurers, we have no “claims by no means all the lines in this account are exposed department”: our claims professionals work seamlessly to recessionary pressures. A good example is data with our underwriters in multi-disciplinary teams. We breach insurance, sometimes known as information believe this helps deepen their client understanding and security and privacy insurance. Beazley has played a their knowledge of the intent behind the insurance which leading role in the development of data breach our underwriters provide. insurance, which protects organisations handling Our claims experience in 2009 was as a whole very personally identifiable information (credit card numbers, positive, with a 55% claims ratio (2008: 56%). Across all social security numbers, health records, etc) from the lines of business we released £67.2m (2008: £72.8m) consequences of loss or theft of that information. from prior year claims reserves. While making these Mike Donovan leads our technology, media and business claims releases we still maintained our robust reserving services team which rode a powerful wave of demand for approach, holding increased margins over actuarial data breach insurance, helping the team to grow gross estimates to prior years. This point is explained further premiums by 34% to £60.6m in 2009. We believe we in the financial review (see page 36). will continue to capture a substantial share of the Specialty lines business is sometimes assumed to growing demand for data breach insurance, particularly be “long tail”, meaning that the full extent of claims from healthcare providers and from retailers, largely from a risk will often only become apparent long after through our new flagship product, Beazley Breach the risk has been underwritten. For our business, this Response. (To learn why, turn to page 29). is a misnomer. We believe our specialty lines business is “medium tail” with claims having to be notified during the policy period and we normally have clarity on the cost of claims within five years of notification.

Beazley Annual Report 2009 11 Annual statement continued

The consistency of our underwriting profits through recent years bears witness to the success of our cycle management strategy.

Our claims experience was not uniformly favourable in New investment management team 2009. After a number of years of highly profitable We are an underwriting-focused business and the underwriting, our political risks and contingency group primary objective of our investment team is to ensure (PCG) incurred claims on trade credit risks, particularly that the success of our underwriters is complemented those supporting bank letters of credit in emerging by a balanced level of investment risk. In 2009, we markets. In the third quarter of the year we accordingly transferred the management of our investments to a increased our reserves to cover these and potential new and highly experienced team led by the founder future claims. The negative impact on profit of increasing and CEO of the Falcon Money Management Group, these reserves in 2009 was £33m. We have taken the Michael Perotti. Beazley has a minority stake in Falcon, view that claims may continue at a high level into 2010 which will focus exclusively on the management of and these reserves provide for that eventuality. Beazley’s investments for its first two years before Taking a longer view, our political risks and trade credit accepting third party mandates. account has been very profitable for Beazley since its The team’s focus in the early months of 2009 was on inception in 1998. The business is uncorrelated with our de-risking our portfolio in order to provide confidence other lines and made particularly valuable contributions that any further turbulence in investment markets would to earnings in 2005 and 2008, years in which severe not impact on Beazley’s ability to capitalise on hardening hurricane seasons depressed returns from other short insurance markets. Falcon is now working to implement tail lines of business. our investment approach of combining a core fixed Consistent underwriting profitability shows income portfolio with a moderate allocation to capital the value of cycle management growth strategies through alternative investments. The consistency of our underwriting profits through After a disappointing 2008, our investments returned recent years bears witness to the success of our cycle a profit of £56.1m (2008: a loss of £25.8m) equating management strategy. Diversification plays an important to a 2.7% return, a satisfactory result for a portfolio part in this, but equally important is our underwriters’ which has a high proportion of sovereign guaranteed ability to respond quickly to opportunities and threats as securities. they arise. In making these calls, our underwriters rely on their own experience and that of the company as a whole through previous cycles. They are also supported by rich resources of proprietary and non-proprietary data.

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Locally underwritten US premiums

400 350 300 250 200 US $m 150 100 50 0 2005 2006 2007 2008 2009

Surplus business Admitted business

Redomiciliation to Ireland underwriters are part of cohesive global teams which In March 2009 we redomiciled our holding company to write risks of different types and sizes in accordance Ireland. Having reviewed our options, we concluded that with the preference of brokers and clients. In general, this move was in the best interests of our shareholders. London is a more attractive market for the larger and Ireland gives us a strong regulatory environment, has the more complex risks, while the smaller and simpler risks benefit of being part of the EU, and has a competitive (both admitted and non admitted) are underwritten tax regime. Our move resulted in a lower effective tax locally. But London-based brokers, with their strong and rate of 12% in 2009 (2008: 26%), a net profit impact well established US connections, also have access to of £14m. This rate included a one-off benefit of the many attractive niche markets for smaller scale risks. redomiciliation in 2009; our long-term effective tax For example, to launch our data breach insurance rate is expected to be approximately 18%. product for US physicians in December we partnered closely with a number of specialist Lloyd’s brokers. US and other international expansion Lloyd’s remains our preferred place to do business but Elsewhere in the world, we have established small offices we recognise the desire and ability of brokers and clients staffed by knowledgeable local underwriters, charged to place some risks, in business lines which we already with developing profitable niche business for the account know and like, in their local markets. In the US in of our Lloyd’s syndicates. In continental Europe, our particular, around 85% of the commercial lines insurance Paris office focuses on small scale professional liability market is not accessible from Lloyd’s because Lloyd’s risks, while our Munich office (profiled on page 27), is not licensed as an admitted insurer in most states. which opened in October 2008, targets reinsurance It was a desire to access this business which led us business that would not normally find its way to Lloyd’s. to establish a local presence in the US in 2005 – We are proud to be the first Lloyd’s-based insurer to a presence that contributed $370.7m to our gross establish a reinsurance office in Munich, the home premiums in 2009, up 38% from 2008. Although of Europe’s reinsurance industry. Andreas Bergler, a strong, this growth rate was lower than we had expected, former broker who heads our Munich office, has had primarily because premium rate rises on property a successful first year, writing £4.7m in gross premiums. business slowed in the second half of the year. We run our Lloyd’s and local US business in a way which is designed to minimise channel conflict for the brokers we work with. Our US underwriters and our Lloyd’s

Beazley Annual Report 2009 13 Annual statement continued

Developing broker relationships strategy that can support a far larger flow of profitable Wherever we do business, the quality of our broker business than we currently handle. Our broker relations relationships is fundamental to our success. These initiative will help make this happen, but we are also relationships are fostered daily by interactions between exploring other ways to scale up our distribution. We are our underwriters and the specialist brokers who handle aware that face to face contact with our underwriters as our preferred types of business. We know that these decision makers is a major attraction for many brokers in strong personal relationships are valued by our brokers the US, as it has always been in London. Our distribution because they ensure swift responses to clients’ needs – strategy will reflect this. “Straight Answers” is our marketing tagline in the US. We also see growth potential through our Lloyd’s However, as the scale and complexity of our brokers have syndicates in continental Europe, where demand for grown, we have identified a need for a more coordinated focused professional liability insurance expertise is approach to our relationships with many of our most often strong. important brokers. We have sought to understand these Enhancing broker and client service brokers’ business development goals and, within our High quality underwriting and claims service are central target markets, position ourselves as the insurer which to what Beazley offers, but they cannot be delivered by can most effectively help them achieve their goals. underwriters and claims staff alone. As the company Andrew Beazley has led our broker relations initiative grows, the infrastructure which supports its growth must in 2009 with a small team including King Flynn, our adapt and develop. David Marock, who was appointed head of broker relations in the US, and Chris Branch, chief operating officer in the summer of 2008, is our head of broker relations (who also leads our responsible for achieving this, as well as for our talent accident and life team) in the UK. Both King and management function, ensuring that we recruit the best Chris are former brokers. employees and give them the means to excel. Future growth opportunities In 2009, we made two major investments in systems Looking ahead, we have ambitions to grow both at which will enhance our broker and client service. Lloyd’s and in the US. At Lloyd’s we are underweight, Beazley Pro, our online trading platform for specialty relative to our overall scale, in a number of potentially lines in the US, came on stream in November, profitable lines. We will never “write for premium”, generating immediate time savings and reducing the regardless of profitability, but where market conditions potential for errors in policy documentation. Our new are favourable, we will be determined in our efforts to claims system, ClaimCenter, will support all phases grow our business. of claims handling for all Beazley lines of business In the US, the world’s largest insurance market by far, worldwide. Both Beazley Pro and ClaimCenter were our future growth will be supported by a distribution delivered by Philippe Mazas, our chief information officer, and his team on time and on budget.

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Risk management As we look back on 2009, the company’s employees We are proud of our record of 24 years of unbroken can take credit for a solid record of achievement in often profit. The expertise of our underwriters and the diversity tumultuous markets. Our business became more diverse, of our portfolio have clearly been important factors in and therefore more stable, with the growth of our non this, and a culture of strong risk management has played casualty business. The expertise of our underwriters in a critical role. In 2007 we became the first Lloyd’s identifying profitable opportunities was apparent across insurer to be rated as “strong” for enterprise risk our portfolio. The attractions of Beazley as a dynamic management by Standard & Poor’s and even now are place to work were once again evident in our low staff one of only a handful of insurers and reinsurers so rated. turnover throughout the organisation. This is something we will never take for granted, remembering that good Board update employees, like good clients, always have a choice. In December 2009 we announced that Dudley Fishburn, who had been a Beazley plc non-executive director Our vision is to become, and to be recognised as, the and chairman of the remuneration committee since highest performing specialist insurer. In 2009, we took November 2002, retired from the board. We’d like to many steps toward achieving this objective. take this opportunity to thank Dudley for his contribution to the group over the past seven years. He has been succeeded as chairman of the remuneration committee Jonathan Agnew Andrew Horton by Andy Pomfret who was first appointed as a non- Chairman Chief executive executive director in November 2002. Andy has 9 February 2010 been succeeded as chairman of the audit committee by Gordon Hamilton who was first appointed as a non-executive director in September 2006. George Blunden has been appointed as a non-executive director with effect from 1 January 2010. He will be subject to re-election by shareholders at the company’s annual general meeting in 2010. George has been a non-executive director of our managing agency, Beazley Furlonge Limited, since 1993.

Beazley Annual Report 2009 15 Q&A

Andrew Horton describes the trends, risks and opportunities that he foresees in 2010.

information but also health records – are expertise so it’s a natural extension for Q: Rates came off slightly at the a growing threat. Many US states now us. Also in London we’ve just hired an 1/1 renewals – do you see this trend have their own statutes on who needs underwriter to develop a range of continuing throughout the year? to be notified after a data breach, and offerings to support M&A transactions. when. While hackers are getting That’s not because we foresee a tidal A: We expect rates for reinsurance increasingly sophisticated, at least wave of M&A transactions, but because and other catastrophe-exposed lines of as much sensitive data is lost accidentally we think that the participants in deals will business such as energy and large scale through simple carelessness or through be more risk averse and will want to commercial property to continue to the acts of malicious employees. minimise their contingent liabilities, so soften. But rates in these lines are they’ll be buying more insurance. Until now, insurers have not been very coming off historic highs, so there are good at helping their clients handle data still profitable underwriting opportunities. breaches because they’ve focused mainly There has been a move by The average rates for our reinsurance Q: on the third party risk – what happens if business are more than twice what they London market companies, including you get sued? What companies really were in 2001 and more than 50% up on Beazley, to increase their reinsurance need is a broader response to the first 2005. In our specialty lines book, which exposure in recent years – is this a party exposures – the administrative and represents 40% of our premiums, we trend that is set to continue? reputational problems that a data breach expect to see a slight uptick in rates presents. That’s why we’re seeing a overall in 2010, driven by increasing There’s a trade off here that we great deal of interest in our Beazley A: claims frequency in certain lines and, look at very closely. Yes, reinsurance Breach Response solution that provides across the market, by depressed business has shown the strongest rate notification and credit monitoring services investment returns. increases. But with a growing for up to two million affected individuals. reinsurance account comes growing I think it’s this kind of creativity that volatility for your overall portfolio. In our Q: In a challenging rate insurers are going to have to business you can have too much of a environment, where are the growth demonstrate if they are to grow good thing and so we manage our opportunities in the insurance organically in the coming year. We’re catastrophe exposures very carefully. industry? excited about a number of opportunities. That said, we have a very successful We think there is significant scope to reinsurance account and we want to I do not see significant growth grow our specialist accident and health A: grow it. For this coming year, we have opportunities for the insurance industry business in the United States. We also established a sidecar syndicate at Lloyd’s as a whole in the coming year. There is think that as the US pulls out of to support our reinsurance underwriting. still excess capacity in the market. recession, demand for environmental That’s a syndicate backed by third party Growth in the developed economies, insurance and for construction and capital from Lloyd’s Names that writes a where most insurance is bought, will engineering insurance, known in the US share of our reinsurance business. This be anaemic at best. The opportunities as builders’ risk insurance, will grow. helps us in two ways. It boosts our line will be very much niche opportunities And we’ve got the teams on the ground size – in other words the size of each risk accessible to carriers with the relevant to write these risks. we can underwrite – so that we can track record and specialist In London, we’ve added a new team as really punch at our proper weight in the underwriting expertise. part of our marine division that will focus market. Before this, brokers were saying One that’s bearing fruit for us now is on the professional liabilities of port to us: ‘We love Beazley as a lead data breach insurance. In the United operators, ship charterers and others. underwriter, but can’t you write a States in particular, data breaches This is business that has not historically bigger line?’ And of course the second involving the loss of sensitive customer come to Lloyd’s. It straddles our marine attraction is that we earn fees and, information – usually financial and professional liability areas of we hope, profit commissions as the managing agency for the new syndicate.

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through insurance. We need to be But we expect them to learn from Q: You had a busy first year as constantly pushing at those boundaries. mistakes and not to make them twice. Beazley CEO. What are your Finally, I want us to continue the good So accountability is very important to biggest priorities in the year ahead? work that we have started to deepen our us and if you’re not willing to be broker relationships. We have excellent accountable for your actions and I see myself as having three main A: relationships already at the team level decisions, you probably don’t belong responsibilities as CEO. First, allocating and our task now is to ensure that we at Beazley. But if you are, you’ll find an capital wisely to achieve sustainable are systematically identifying new areas open and collaborative culture that will profitability across the group. Second, of mutual opportunity with our partner help you to succeed. The insurance nurturing and enhancing our skills base. brokers. market has a high degree of job mobility. And third, scaling our operations so that, But I like to think – and our retention as we grow, the service we offer our levels seem to bear me out – that clients and brokers gets even better – Q: Talented underwriters and people make careers at Beazley. and that’s not very common in the claims professionals have a broad It’s not just a job. insurance industry. range of employment choices My priorities for 2010 fit into this among specialist insurers. Why * underlying profit comprises profit before income tax after the notional adjustment on framework. First, I’d like us to continue should they choose Beazley? foreign exchange on non-monetary items. to expand our Lloyd’s business. We (See detailed explanation in note 3b to the intend to continue to grow in the US and A: I joined Beazley in 2003. Then financial statements.) we are looking for growth opportunities the company had 120 employees and in Europe, but Lloyd’s is our preferred we wrote £334m. Today we have almost location for writing business, wherever 670 employees, we wrote more than that business originates. I believe the £1.1bn last year, and we achieved a Lloyd’s model for assuming and record underlying profit*. We’ve grown syndicating risk in a highly capital across all our lines of business and, from efficient manner will continue to benefit a standing start in 2005, we’ve built a both clients and investors. We were one business in the US that wrote $371m of the biggest underwriters at Lloyd’s last last year. So people who join Beazley are year and I want Beazley to be a leader in buying into a success story. the continuing growth of Lloyd’s. The second reason, which I believe gives Second, we’re looking very closely at rise to this success, is about the sort of product innovation. This has always people we strive to attract and what we been a strength of Beazley but we need offer them. We are looking for to quicken the pace because our clients’ entrepreneurial individuals, self-confident needs are evolving ever more rapidly. If people with strong opinions who are not you look at the total universe of risks afraid to express them. They have the confronting businesses today, you can freedom to make mistakes because that see that only a very small proportion of is essential to an entrepreneurial culture. those risks can currently be transferred

Beazley Annual Report 2009 17 Performance by division

Our underwriters delivered a very strong underwriting result in 2009, particularly in our marine and reinsurance accounts.

Neil Maidment Chairman, Group underwriting committee

Marine Political risks and contingency

Clive Washbourn Adrian Lewers Head of marine Head of political risks and contingency

2009 2008 2009 2008 £m £m £m £m Gross premiums written 168.8 148.7 Gross premiums written 81.3 70.4 Net premiums written 145.8 128.2 Net premiums written 62.8 56.0 Results from Results from operating activities 47.2 18.1 operating activities (4.9) 21.0 Claims ratio 39% 49% Claims ratio 76% 26% Expense ratio 35% 36% Expense ratio 36% 36% Combined ratio 74% 85% Combined ratio 112% 62% Rate increase/(decrease) 8% (6%) Rate decrease (1%) (6%)

Combined ratio (%) Combined ratio (%)

125 125 112 100 100 85 36 75 74 75 36 62 35 76 50 50 36 49 25 39 25 26 0 0 2009 2008 2009 2008 Claims ratio Expense ratio Claims ratio Expense ratio

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Property Reinsurance Specialty lines

Jonathan Gray Patrick Hartigan Adrian Cox Head of property Head of reinsurance Head of specialty lines

2009 2008 2009 2008 2009 2008 £m £m £m £m £m £m Gross premiums written 251.2 179.2 Gross premiums written 133.8 70.2 Gross premiums written 480.4 407.2 Net premiums written 180.3 147.2 Net premiums written 115.1 58.0 Net premiums written 344.0 351.0 Results from Results from Results from operating activities 6.7 (10.7) operating activities 32.7 17.9 operating activities 74.4 7.3 Claims ratio 58% 67% Claims ratio 38% 39% Claims ratio 61% 62% Expense ratio 45% 40% Expense ratio 34% 27% Expense ratio 31% 31% Combined ratio 103% 107% Combined ratio 72% 66% Combined ratio 92% 93% Rate increase/(decrease) 6% (6%) Rate increase/(decrease) 9% (6%) Rate decrease (1%) (7%)

Combined ratio (%) Combined Combinedratio (%) ratio (%) Combined Combinedratio (%) ratio (%) Combined ratio (%)

Combined ratio (%) 150 Combined ratio (%) 150 150 Combined ratio (%) 150 150 150

125 125 125 103 107 100 100 100XX XX 100 100 100XX XX 100 100 100 40 92 93 45 XX XX XX XX XX XX XX 75 75 72 XX 75XX XX31 31 XX XX 66 XX XX XX XX 50 67 50 50 34 27 50 XX50 50 XX 50 50 XX XX 50 58 XX 61 XX62 XX XX XX XX 25 25 38 39 XX 25 XX XX XX XX XX 0 0 0 0 0 0 0 0 0 2009 2008 2007 20092006 2008 2007 2007200620092006 2008 2007 20072006 2006 2007 2006 Claims ratio Expense ratio Claims ratio Expense ratio Claims ratio Expense ratio Claims ratio Expense ratio Claims ratio ClaimsExpense ratio ratioExpense ratio Claims ratio ClaimsExpense ratio ratioExpense ratio Claims ratio Expense ratio

Beazley Annual Report 2009 19 Performance by division continued

Our combined ratio reduced to 74% in 2009, driven principally by reserve releases and low claims incidence.

Clive Washbourn Head of marine £ 168.8m Gross premiums written marine

The marine team has had an excellent year in 2009 Portfolio mix with gross premiums written of £168.8m compared to £148.7m in 2008, an increase of 14%. Our combined ratio has reduced to 74% (2008: 85%), driven principally by the reserve releases and low claims incidence in 2009. The claims ratio has fallen from 49% to 39%, whilst the expense ratio has fallen slightly from 36% to 35%. Clive Washbourn leads this division of highly experienced underwriters writing marine hull, Cargo 12% Liability 4% liability and cargo insurance, insurance covering war Energy 39% War 12% and terrorism for ships and aircraft and insurance for Hull & misc 33% worldwide energy business. The team has returned a profit every year since its formation in 1998. Gross premiums written Our marine hull and cargo books remain profitable 180 despite the impact the economic crisis has had on the 160 marine industry. A downturn in trade has meant lower 140 cargo volumes being shipped and a fall in ship values. 120 100 While this has directly impacted premiums in these

£m 80 classes, the continued profitability is testament to our 60 risk selection and underwriting experience. 40 20 Energy pricing has been favourable following hurricane 0 Ike, the biggest offshore hurricane on record to affect 2007 2008 2009 the energy book, with rate increases of 27%.

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renewable energy sources and are perceived as an Profitability has been and utilities make up the open-minded, flexible and aided by an absence of remainder. The majority expert underwriting team. hurricane losses during of income derives from risks The energy team is one of 2009 and benign loss located in North America, a few teams in the Lloyd’s frequency elsewhere in the Canada, Asia and the energy market where the book. Our 2008 hurricane North Sea. underwriting and claims losses, most notably in Our energy team, led by functions are fully integrated. hurricane Ike have developed Paul Dawson, has performed This enables the underwriting better than expected and the well relative to the Lloyd’s team to be proactive and balance of the portfolio has Energy market and consistently informed in their decision experienced some very since its formation in 2003. making through the close satisfactory run-off. The energy portfolio We believe this has been working relationship with the Some competitive consists of two main risk achieved through superior claims function. pressure may emerge during classifications. Upstream risk selection and the Pricing increases have 2010 with premium rates risks represent coverage combined 42 years expertise been favourable following contracting, although it for companies specialising of our three energy hurricane Ike which caused appears that in the wider in the exploration and underwriters. We lead around the highest number of losses energy market, some production of oil and gas; 30% of the risks we write. on energy structures on insurers’ portfolios have these risks comprise We pride ourselves on record to be damaged in the been impacted by an approximately 90% of the building relationships with Gulf. The energy portfolio increased loss frequency. business written. We write brokers and clients and achieved healthy rating This may serve to stabilise midstream risks to cover the specialise in insuring mid- levels – increases of 27% the market in the coming transportation or storage of sized companies where we compared to an 8% months. We are hopeful that oil and gas following its can make a difference. We decrease in 2008. Our gross improving commodity prices production (this comprises do a great deal of business premiums written increased for oil and gas will enhance approximately 5% of the by talking to empowered by 64% in 2009 to £55.1m buyer demand. book) and insurance of risk-managers of these firms (2008: £33.7m).

We recently announced our intention to open a new We anticipate seeing some of our lines under rating office in Oslo to service energy business for the pressure in 2010 – particularly hull and energy. syndicates at Lloyd’s. Hilde Thon, previously at brokers Despite this pressure, we will continue to use our Newman, Martin & Buchan, has been appointed expertise to search out and maximise profitable upstream energy underwriter at the new office. opportunities as they arise. War income has continued to grow during 2009 due to the increased pirate activity in a number of war zones, most visibly in the Gulf of Aden which caused a surge in demand for additional kidnap insurance resulting in an increase in gross written premiums of 86% to £27.2m in 2009. The percentage of business we lead has remained constant at around 55% and we renewed 74% of the 2008 portfolio in 2009. In Hong Kong we recruited a cargo underwriter to take advantage of regional opportunities, writing on a delegated basis through our coverholder Beazley Limited. We have also employed a new liability underwriting team to write marine professional indemnity, logistic liability and port authority business. This adds further diversification to the marine and overall Beazley portfolio, in addition to gaining some synergy with the small professional indemnity business of the specialty lines division.

Beazley Annual Report 2009 21 Performance by division continued

While we have restricted our risk appetite to certain types of political insurance, we continue to selectively underwrite risks of short duration and payment terms supporting trade in strategic or industry-critical goods. Adrian Lewers Head of political risks and contingency £ 81.3 m Gross premiums written political risks & contingency

Beazley’s political risks and contingency division (PCG) Portfolio mix comprises three teams. Our political risks team, led by Adrian Lewers, is a significant participant in the Lloyd’s subscription market, underwriting £32.1m in gross premiums in 2009 and leading 79% of the risks written. Our terrorism team, led by Tina Kirby, has grown steadily and profitably since 2001, when property insurers effectively created today’s terrorism market by excluding coverage for this peril from commercial property policies. In 2009, we wrote £33.6m in gross premiums for Contingency 21% Political 34% terrorism coverage, 55% of it as the lead underwriter. Terrorism 45% Finally, we are one of the largest underwriters of contingency insurance in the London market, covering cancellation risks ranging from “tier one” sporting Gross premiums written events, such as the Olympic Games, to small scale trade 80 shows and weddings. Our contingency team, led by 70 Chris Rackliffe, underwrote £15.6m in gross premiums 60 in 2009 and led 74% of its risks. 50 40 £m Our political team writes a variety of risks types covering 30 trade credit insurance, contract frustration and political 20 risk insurance protecting clients against force majeure 10 acts by governments, such as asset confiscation and 0 2007 2008 2009 nationalisation. Whilst other parts of the political account remained profitable, 2009 was a challenging year for our trade credit book, where a series of bank defaults generated a number of large loss notifications mainly in Ukraine, Kazakhstan and Bahrain.

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In our view, the broker’s without the need for direct The system has been principal focus should be contact with an underwriter. developed in collaboration on the needs of his or her Beazley insures a large with Beazley’s specialty lines clients – not on number of events, ranging team in the UK and it offers administrative back and forth from conferences and trade a range of professional with the underwriter. This is shows to sports and cultural indemnity covers as well particularly true of smaller events, both for cancellation as event-related covers. scale risks where speed of and for public and employers It is currently being made turnaround is critical to a liability risks. Beazley Access available to the regional broker’s profitability. For large differentiates itself by the UK offices of the major Beazley Access: scale and complex risks, range of event-related risks brokers with whom Beazley Making brokers’ face to face contact will that can be bound through does business. lives easier always be important, but for the system. smaller and more “Beazley is well known to standardised risks it will brokers in London as a highly often be unnecessary. experienced underwriter of With this in mind, contingency risks, offering Beazley’s contingency team broad and flexible cover and will launch a web-based substantial capacity,” said trading system in early Chris Rackliffe, head of 2010, known as Beazley the contingency team. Access, designed to help “We have sought to apply brokers handle small this experience to our online business more cost platform, enabling brokers effectively and efficiently. further afield to do business For a broad range of risks, with Beazley rapidly and the system permits brokers efficiently.” to obtain quotes and obtain policy documentation

As discussed in our third quarter interim management Our contingency business contracted slightly in 2009 as statement we set aside additional reserves to provide a result of the global economic downturn that reduced for this event. We have taken a view that the high trade show and exhibition activity. In addition we took a claims frequency observed in 2009 may continue into strong position early on in relation to swine flu, excluding 2010 and have factored this into our reserving estimate. this and other communicable diseases from our standard As a consequence, these reserves include a prudent event cancellation cover. The three members of our margin that may be released over time as the contingency team have been working together for more uncertainty reduces. than a decade. Whilst we have restricted our risk appetite to certain Fortunately, our contingency underwriters have other types of political insurance, we continue to selectively strings to their bow, notably an ability to price weather- underwrite risks of short duration and payment terms related cancellation covers that is second to none in the (up to 180 days) supporting trade in strategic or London market. We have access to real time climate industry-critical goods. We have also reinforced our data from more than 3,000 weather stations around coinsurance requirements to ensure that our clients, the world and plan to expand our weather-related be they banks, commodity traders or exporters, keep product offerings in 2010. some risks themselves. Our terrorism business performed well in 2009, despite a 4% decline in premium rates. This is a very service intensive account, with brokers valuing speed, flexibility and decisiveness from underwriters. We write a book that is well diversified geographically and are accordingly willing to write larger lines than some others in regions such as Iraq, Afghanistan and Mindanao in the Philippines.

Beazley Annual Report 2009 23 Performance by division continued

We specialise in writing complex, difficult risks that brokers often find hard to place. Our broker relationships are accordingly strong.

Jonathan Gray Head of property £ 251.2m Gross premiums written property

We insure a large and diverse book of property business, Portfolio mix ranging from mines, steel mills and major engineering projects to UK retail jewellers and high value homeowners in the US and UK. We led 62% of the business we underwrote at Lloyd’s in 2009 and took advantage of improving premium rates to grow our business in the US and internationally. The combined ratio for the year was 103% (2008: 107%). The benefits of our acquisition of First State and the benign

US admitted property 6% catastrophe losses will emerge from 2010. Engineering 4% Jewellers & homeowners 14% Since the establishment of Beazley’s property account in Commercial property 63% 1992, we have grown our business organically and that Small property business 13% remains our preferred path. But late in 2008 we were presented with an acquisition opportunity that was too Gross premiums written good to miss. First State is one of the oldest and most 300 270 respected insurers of surplus lines commercial property 240 insurance in the US. It was a business we knew very well, 210 having reinsured the portfolio for more than 15 years. 180 150 £m Negotiations proceeded swiftly and in April we were 120 90 delighted to welcome Judy Patterson and her highly 60 experienced team from First State to Beazley, forming 30 the core of a much enlarged surplus lines commercial 0 2007 2008 2009 property business in the US. Brokers and clients responded very positively to the acquisition, which significantly deepens our wholesale broker relationships in the US, particularly on the west coast. In 2009, our US underwriters wrote $102.8m in surplus lines commercial property premiums, up from $9.8m in 2008.

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Innovation is a subjective In London, Beazley is well matter. What is very familiar known as a lead underwriter to one industry or country for some of the largest and may be refreshingly new most complex engineering elsewhere. In establishing a projects, including the Laffan local presence in the US in refinery in Qatar. However, 2005, Beazley anticipated less than 10% of the London that the approach to book relates to US risks. The underwriting large scale risks focus of Colin and his team that had served it well for will be smaller scale projects Builders’ risk many years in London would that are not normally shown appear refreshingly new to London underwriters. when applied to smaller The team will focus on scale risks in the US. owners and contractors This anticipation proved engaged in construction correct and Beazley has in all areas of the US. built most of its $371 million At present the team is business in the US in quoting on non admitted this way. In the most recent risks for the account of example, Colin Rose, a Beazley’s Lloyd’s syndicates. senior underwriter on The team expects to be able Beazley’s construction and to write admitted risks for engineering team in London, the account of Beazley’s US moved to Chicago in insurance company from the November 2009. He was beginning of the second joined by Tom Warner, a quarter of 2010. highly experienced US underwriter hired from Allianz Global.

Predicting rate changes in our business is never easy. In Singapore, the local construction and engineering We expected at the end of 2008 that hurricanes Gustav account that Byran Lee and his colleagues have been and Ike would push rates for catastrophe business up building since 2006 continued to grow steadily. The substantially and this duly happened, but by April the Lloyd’s market enjoys remarkable access to property upward momentum had stalled and rates flattened in risks from around the world, but there is some profitable the second half of the year. Our US underwriters business that never leaves the local market. Byran’s therefore wrote less business than originally expected team has secured a share of this business for Beazley. in the second half. The same logic applies in the US where, with the For the larger business that we access through Lloyd’s, acquisition of First State and the creation of a builders’ the environment was more benign. At Lloyd’s, we were risk capability, our business matured significantly in able to take advantage of premium rate increases 2009. Mark Bernacki, who leads our business in the US, averaging 9% to grow our business. We specialise in and his team can now offer brokers a broad suite of writing complex, difficult risks that brokers often find hard underwriting capabilities, including surplus lines and to place. Our broker relationships are accordingly strong. admitted commercial property; high value homeowners’ insurance; transportation and contractors’ equipment Our Lloyd’s construction and engineering team had a insurance; and builders’ risk. Our admitted commercial difficult year as recession sapped demand for large property business, which we write for the account of our scale projects. However we see great scope for the US insurance company, Beazley Insurance Company, Inc., development of smaller scale business in the US, a made good strides in 2009, growing 45% to $23.7m. market where the skills that Hugh Phillips and his team have honed over many years are scarce. In December, In common with other teams, we believe excellent claims Colin Rose from our London team moved to Chicago service is a key differentiator and we deliver it. Across all to lead the development of our US construction and our business lines and geographies, Andrew Mitchell and engineering business, commonly known in the US as his claims professionals ensure that, when our clients’ “builders’ risk”. We see significant growth potential in need is greatest, they can rely on Beazley. this line.

Beazley Annual Report 2009 25 Performance by division continued

In 2009, the reinsurance team continued to reinforce Beazley’s position as a leader in the London market.

Patrick Hartigan Head of reinsurance £ 133.8 m Gross premiums written reinsurance

Reinsurance is a core and growing line of business for Portfolio mix Beazley. Sixteen of our top 20 clients have been with us for more than 15 years and our gross written premiums in 2009, at £133.8m, were up 91% on 2008. Adjusting for the effect of the strengthening dollar, in which 65% of our reinsurance business is denominated, the underlying growth rate was 16%. We plan to increase our premium again in 2010. More importantly, we have been growing profitably. Property catastrophe 77% More than two thirds of our book is catastrophe Casualty clash 1% Property risk/pro rata 18% reinsurance for natural and man-made perils so Misc 4% clearly the incidence of hurricanes and earthquakes does matter. Gross premiums written In 2009, our reinsurance team contributed £32.7m to 160 Beazley’s pre-tax profits. 140 120 The way a reinsurer writes these risks makes an 100 enormous difference to its long-term profitability. This 80 £m result has been in large measure attributable to strong 60 relationships with insurance companies – and with 40 teams within insurance companies – that we know well 20 and admire. In 2009 we were able to turn one of these 0 2007 2008 2009 long-term client relationships to even greater benefit for Beazley through the acquisition of First State, a managing general underwriter formerly owned by the Hartford, whose business we have reinsured for more than a decade.

26 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

In late July 2009, an establishing a presence unusually severe hail storm in Munich, the home of ravaged property along the Europe’s reinsurance industry. shores of Lake Geneva in Beazley’s underwriters in Switzerland, causing London would never have SwF 700m in insured been shown the type of highly damage. Moving north east, localised German, Swiss and the storm fell as rain in Austrian reinsurance business Germany, before freezing that Andreas Bergler, head again in the skies over of the Munich office, is now Raising our profile Austria, where hailstorm underwriting. in Munich Wolfgang, as it has been “We’re being quite named, inflicted a further cautious,” says Mr Bergler, E450m of damage, who joined Beazley from qualifying as one of the reinsurance brokers Benfield highest market losses ever. after a career that included Owing largely to Wolfgang, 12 years at Munich Re. Beazley’s Munich office has “We have written 56% of the seen a significant hardening business offered to us. We in reinsurance rates for can be selective because we Austrian cedants at 1 January are seeing a good spread of 2010 renewals, bucking the business.” In 2009, 53% of global trend for rate declines. Beazley’s gross reinsurance At E10m, the Munich office premiums related to North – opened in October 2008 American risks, while the – still writes a modest continental European share portfolio, and the Austrian was 16%. “Clearly,” says share is smaller still. But it Mr Bergler, “we have room illustrates the rationale for to grow.”

In August 2009, Patrick Hartigan was promoted to will share pari passu in all business written by the team leader of our reinsurance division, succeeding reinsurance team for the account of Beazley’s syndicates Neil Maidment, now chairman of the group’s 2623 and 623. We were pleased to be able to establish underwriting committee, who had led the division since the new special purpose syndicate at a time of intense 1996. Patrick joined Beazley as deputy underwriter on competition for Names’ capital within the Lloyd’s market. the reinsurance team in 2004. He has 18 years of We continue to view the Lloyd’s market as the world’s experience in the non life reinsurance market in both best place to write reinsurance business, with access underwriting and broking roles. to high quality business that is second to none. We are In 2009, the reinsurance team continued to reinforce seeing an increasing volume of business from markets Beazley’s position as a leader in the London market, outside the US and Europe, notably from the fast increasing the proportion of business led from 32% of growing economies of China and Brazil. Where these premium income to 38%. risks meet our rigorous technical standards, we will write them, forming the basis for long-term relationships of Our accident and life team has successfully integrated the kind we have established with US and European into Beazley and are delivering in line with our clients over the years. expectations. In particular, being in Lloyd’s has allowed them to underwrite business they had not previously been shown. This has contributed to the team achieving a very satisfactory gross premium written figure of £43.2m for 2009. For 2010, we have been able to increase our premium capacity supported by additional capital supplied by Lloyd’s Names through a new sidecar syndicate, 6107, that Beazley will manage. The sidecar syndicate’s Names

Beazley Annual Report 2009 27 Performance by division continued

Our underwriters are expert at developing profitable niches and, where required, niches within niches.

Adrian Cox Head of specialty lines £ 480.4m Gross premiums written specialty lines

The specialty lines division, led by Adrian Cox, is Portfolio mix Beazley’s largest division and includes many lines of business that we have been underwriting continuously since the company was founded in 1986. This experience paid dividends in 2009 as we achieved a 92% combined ratio in the face of market conditions that many insurers found very difficult. We focus on two classes of insurance and reinsurance: professional liability and management liability. We A&E 14% insure a wide range of professions, with particularly Healthcare 12% Lawyers 14% strong positions in the market for architects and Management liability 20% Miscellaneous E&O 3% engineers, lawyers, hospitals, and technology Technology media and business 14% companies. In the US we insure both large and small Treaty 7% PE RoW 8% firms; outside the US we focus more on small and PE US 8% mid-sized clients.

Gross premiums written Our management liability book comprises both directors’ 500 and officers’ (D&O) insurance and employment practices 450 liability (EPL) insurance, in both of which lines we rank 400 as the leading underwriter of US risks in the London 350 300 market. We insure both large and small clients out of 250 £m London and smaller clients locally in the US. 200 150 The market experienced a significant but short-term 100 dislocation early in 2009 as a number of major insurers 50 0 staggered under the weight of substantial investment 2007 2008 2009 losses and heavy losses from accounts exposed to the credit crunch, including financial institutions and guarantee business. As a specialist insurer that had retreated from the financial institutions’ D&O market as it heated up in 2004/5, we were well positioned. Our D&O business accordingly grew by 55% in the course of 2009, from £42.9m to £66.5m.

28 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

businesses losing large insurance product in the only one call. With the help of volumes of sensitive customer classic sense – in other our legal and forensic experts data. The hacking risk has words a commitment to pay we will decide whether the been well documented, but a sum of money in breach is potentially harmful equally significant losses prescribed circumstances – to those whose data has been have resulted from malicious but a much broader solution lost or stolen and whether employees or simple to a complex threat. they need to be notified. human error. To provide a TransUnion Interactive will Insurance has not often comprehensive breach arrange call centre services been seen as a satisfactory response service, we brought as well as providing credit Beazley Breach remedy for data breaches together a group of experts monitoring. Response because – while it addresses with the know-how to help If, despite all these Data breach insurance – the risk of third party lawsuits organisations tackle data measures, lawsuits do occur, often known in the jargon of from aggrieved customers – it breaches. These included Beazley Breach Response the industry as network does little to provide practical privacy lawyers to address also provides up $10m of security and privacy assistance to firms that have the legal requirements of a insurance coverage to protect insurance – is a product that suffered a breach. In most breach; forensic experts to our client’s balance sheet. has taken some time to cases, the biggest risk that uncover what exactly Data breach insurance is come of age. In the United firms run is reputational – happened; notification now being cited by brokers as States, by far the biggest and a tardy or bungled specialists to print and mail the coming decade’s version market for the insurance, the response to a data breach letters to up to two million of employment practices first policies were can increase the reputational affected individuals; and liability insurance – a once-in- underwritten a decade ago. damage enormously. With TransUnion Interactive, a a-generation opportunity for Since then, awareness of this in mind, Beazley leading consumer credit insurers to offer a meaningful the risk posed by data underwriters developed a information company, to offer response to a major and breaches has increased radically different approach free credit monitoring to each growing new risk. In Beazley enormously. Scarcely a day in 2009. notified individual. Breach Response, Beazley goes by without headlines in The result, Beazley Breach In the event of a breach, a has developed a solution specialty lines US newspapers about major Response, is not an Beazley client need now make worthy of these expectations.

An important growth opportunity for Beazley came in our solution (see above). The word “solution” is overused technology, media and business services (TMB) team. in business, but in this case it is fully justified. Mike Donovan leads our TMB team that rode a powerful In 2009 we announced we would enter the wave of demand for data breach insurance, often known environmental risks insurance market. Environmental as network security and privacy insurance, in 2009. risks are complex and difficult to underwrite and have The team’s gross premiums grew by 34% to £60.6m the potential to give rise to complex claims. However, in 2009, a comparable growth rate to that achieved there is significant profit margin available for carriers by our A&E team in 2008. that succeed. This is exactly the kind of business that Our underwriters are expert at developing profitable plays to our strengths. We were delighted to welcome niches and, where required, niches within niches. John Beauchamp, a highly experienced environmental Some niches are large: Jerry Sullivan, who leads our risks underwriter, to our team in the US. Many existing architects and engineers’ (A&E) professional liability Beazley clients, both in the A&E arena and among our team, has turned a $3m book of business into a $72m property insureds, will benefit from this extension of book in four years. Others are small: Evan Smith, who our capabilities. is responsible for our miscellaneous healthcare book, We continue to invest in underwriting and claims talent is positioning Beazley as the go-to market for blood and on both sides of the Atlantic, including the talent we tissue banks in the US. need to develop new business opportunities. In London While our healthcare book (which also includes major at the end of the year we welcomed John McNally, who US hospitals and long-term care institutions) is relatively will help us build our representations and warranties protected from recessionary pressures, other lines are business (cover that facilitates mergers and acquisitions) more exposed. In 2009, as in 2008, we continued to and Michael Rieger-Goroncy, who will help us develop mitigate the impacts of recession that we foresaw on our offering to larger firms outside the US. two of our largest lines of business, A&E and professional liability for US lawyers and on our smaller EPL book. A specialist insurer delivers value to clients and brokers in large measure by constant innovation. We are proud of our track record of innovation, exemplified in 2009 by Beazley Breach Response, our flagship data breach

Beazley Annual Report 2009 29 Operational update

Beazley’s entrepreneurial culture has always required underwriters to think, not just like underwriters, but more broadly like capable businessmen and women.

David Marock Chief operating officer

Beazley has grown its premiums by more than 20% per Early in 2009 we took a hard look at how, as a company, annum over the past decade. Our ability to grow we manage for performance. Our goals were to ensure profitably in future will depend – as it always has – on that Beazley was recognised as: the quality of people we can attract to the company and • An excellent employer that top quality people wish the opportunities we can offer them. It will also depend to join; on the infrastructure that we put in place to ensure that, • A true meritocracy that supports, rewards, advances for our clients and brokers, bigger truly means better. and retains top performers; In the marketplace for talent, the Beazley brand remains • Having a highly motivated, loyal and productive staff; strong. Since the end of 2003, the number of London and based underwriting and claims staff has increased by • Possessing a deeply-ingrained, performance-driven more than 80%, from 57 to 104. Our in-house claims culture. staff in particular has grown significantly – from 13 to 33 We looked at all areas of the business, including our – over this period, as we see high quality claims service core values, compensation, career opportunities within as an important differentiator for Beazley. In the US, the group, and training and development. Beazley’s where our physical presence is more recent, we have entrepreneurial culture has always required underwriters nevertheless had great success in attracting exceptional to think, not just like underwriters, but more broadly like individuals: our US underwriting and claims staff now capable businessmen and women. As our business has numbers 121. grown in complexity, this has presented a growing Our non-hierarchical structure and entrepreneurial challenge and we have reviewed our approach to culture enable us to attract high calibre individuals who training to broaden the skills of our underwriters and are passionate about underwriting. In many cases, they other key employees. have been willing to move away from senior managerial For Beazley, attracting and retaining the best employees positions at other companies to focus at Beazley on is also about giving our people the tools to accomplish what they do best and enjoy most. their work in a manner that satisfies our clients and Finding and recruiting talent is a key priority that brokers. While our talented employees are the most receives close and continuous attention from our most critical source of our success, their remuneration is also senior employees. Under the leadership of Penny Malik, our biggest expense. So the more we can use technology our talent management team continually maps the intelligently to enhance their efficiency, the more talent in the markets we are interested in and we use competitive we become. This is the responsibility our network of contacts and our internal team to of Philippe Mazas and his IT team. approach the candidates we have identified. Retaining the right people is, of course, equally important and our voluntary turnover rate across the company in 2009 of 3.7% is encouraging.

30 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

We made important progress in this area in 2009, completing two major technology projects that will have wide ranging benefits for our clients and brokers, and will enhance the efficiency of our employees. We launched the first phase of Beazley Pro, a new system for underwriting and policy administration for our specialty lines business in the US. Beazley Pro will help our US underwriters manage their current workload more efficiently. The month after Beazley Pro went live, we completed implementation of Guidewire ClaimCenter® as the group’s new claims handling system. The web-based system will help ensure that superior claims service remains a key differentiator for Beazley as the company continues to grow, both at Lloyd’s and internationally. Finally, under the direction of Munira Hirji, who leads our commercial management team, we have made good progress in sourcing well located new office space for our growing staff in New York and San Francisco. We were able to take full advantage of property market conditions to negotiate leases on very attractive terms.

Beazley Annual Report 2009 31 Financial review | group performance

We have achieved a profit of £100.7m that is consistent with our record of unbroken profitability.

Martin Bride Finance director

Income statement 2009 2008 Movement £m £m %

Gross premiums written 1,115.5 875.7 27% Net premiums written 848.0 740.4 15%

Net earned premiums 836.7 683.1 23% Net investment income/(loss) 56.1 (25.8) n/a Other income 12.5 10.1 24% Revenue 905.3 667.4 36%

Net insurance claims 473.0 401.1 18% Acquisition and administrative expenses 300.9 237.3 27% Foreign exchange loss/(gain) 21.9 (70.8) n/a Expenses 795.8 567.6 40%

Finance costs 8.8 12.6 (30%) Profit before income tax 100.7 87.2 15% Underlying profit before income tax* 147.3 41.0 259%

Claims ratio 55% 56% – Expense ratio 35% 34% – Combined ratio 90% 90% –

Rate increase/(reduction) 3% (6%) – Investment return 2.7% (1.5%) –

* underlying profit comprises profit before income tax after the notional adjustment on foreign exchange on non-monetary items (see detailed explanation in note 3b to the financial statements).

Premiums Gross premiums written have increased in 2009 by 27% to £1,115.5m. A number of factors have contributed to this increase; primarily the deployment of new capital enabling organic growth at constant currency rates and the impact of the acquisitions of First State and Momentum Underwriting (12%), with the remaining 15% of growth arising as a result of a relatively strong US dollar in 2009. As anticipated, premium rates were up overall by 3% in 2009 driven by increases in our catastrophe exposed accounts following the 2008 hurricane activity.

32 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Insurance type Premium written by Business by division Geographical Combined ratio claim settlement term distribution

Insurance 85% Short tail 52% Marine 15% Europe 15% Expense ratio 60% Reinsurance 15% Medium tail 48% Political risks and contingency 7% Worldwide 25% Column 1 40% Property 23% US 60% Reinsurance 12% Specialty lines 43%

The balance of our business has continued to evolve providing further diversification by type of business and geographical location. Our accident and life business has made a strong start writing £43.2m and First State, now part of our US commercial property team, wrote $93.9m. In 2009 we also took advantage of the rating environment in a number of catastrophe lines of business such that overall, our short tail lines’ premium increased from 46% to 52%. Locally underwritten US business has continued to grow from $269.1m in 2008 to $370.7m in 2009. Beazley’s geographic reach has been further extended following the first full year of trading for our Munich and Brisbane offices, alongside the successful establishment of Beazley Re in Dublin. Diversification and maintaining a balanced portfolio of business by risk type, size and source remains an important approach to the continued delivery of consistent underwriting profit. The charts above highlight how we achieve diversification by product mix, geography and type of business. Premium retention rates Retention of business from existing brokers and clients is a key feature of Beazley’s strategy. It not only enables us to maintain a deep understanding of our clients’ businesses and requirements it also provides greater insight into the risks involved in each policy we write, enabling us to price risk most accurately to achieve profit. The table below shows our retention rates by division compared to 2008.

Retention rates* 2009 2008 Marine 74% 82% Political risks and contingency 64% 63% Property 76% 72% Reinsurance 90% 90% Specialty lines 83% 88% Overall 80% 79%

* based on premiums due for renewal in each calendar year

Beazley Annual Report 2009 33 Financial review | group performance continued

Cumulative renewal rate changes since 2001 (%)

220 200

180 160

140 120

100

80 0201 03 04 05 06 07 08 09 Underwriting year

Marine Political risk and contingency Property Reinsurance Specialty lines All departments

Rating environment Overall rates charged for business we renewed increased by 3% during 2009 (2008: a reduction of 6%). Significant rate increases were achieved by our catastrophe exposed lines of business following the hurricane activity of 2008. This is particularly evident for rates within our energy business (27% increase), catastrophe reinsurance business (8% increase) and commercial property business (9% increase). The benign catastrophe claims environment of 2009 and the increased capacity of reinsurers arising from retained profits is expected to cause a modest reduction in rates for these lines of business in 2010. Our specialty lines division has seen rates reduce overall by 1% in 2009 and has been subject to a number of conflicting market pressures. At the beginning of the year the expectation was that low investment returns and a reduction in available capital along with an active attempt by policyholders to diversify their exposure would create a positive rating environment. However, an aggressive pricing strategy by large US casualty carriers in an attempt to defend their portfolios countered the upward pressure on premium rates. This was coupled with a strong recovery in investment markets to some extent relieving the pressure on underwriting margins. Looking forward we believe there is still significant downside risk within investment markets with interest rates set to remain low in the short term and this, alongside reduced or negative underwriting margins for aggressively priced business by market participants, will lead to a rating improvement in 2010. Reinsurance purchased The group increased the amount it spent on reinsurance in 2009 to £267.5m (2008: £135.3m). Reinsurance is purchased for a number of reasons: • to mitigate the impact of catastrophes such as hurricanes; • to enable the group to write large or lead lines on risks we underwrite; and • to manage capital to lower levels.

The value of reinsurance purchased in 2009 has increased due to three main factors: • the devaluation of sterling against the US dollar. A large proportion of our reinsurance programme is in US dollars and we estimate the impact of retranslating 2008 reinsurance premium at 2009 exchange rates would result in an uplift of 13.2%; • the inclusion of the First State reinsurance programme (estimated impact £25.6m); and • additional reinsurance cover in our specialty lines surplus reinsurance programme where we have increased cover by lowering the amount of any loss retained by Beazley.

Looking ahead to 2010 our initial experience based on 1st January renewals is that market conditions have improved slightly, both in terms of moderate rate reductions, and in the terms and conditions available.

34 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Combined ratio The combined ratio of an insurance company is a common measure of its operating performance and represents the ratio of its total costs (including claims) to total premium income. Consistent delivery of operating performance across the market cycle is clearly a laudable aim for an insurer and Beazley’s combined ratio has held steady at 90% for the fourth consecutive financial year. It is worth pointing out that the calculation of the combined ratio for Beazley includes all claims and other costs to the group but excludes foreign exchange effects. We believe this represents the most transparent and useful measure of operating performance as it ensures that all of the costs of being in business are captured, whether directly linked to underwriting activity or not. Claims On the whole 2009 has been a relatively benign year for claims. There were no significant catastrophe losses occurring in the year. In keeping with Beazley’s reserving philosophy we will not start to release catastrophe margins for the 2009 underwriting year until mid 2010. The high volumes of claims within liability classes of business that many people predicted would occur as a result of the global recession have not materialised. Initially, 2009 saw claims frequency increase in a small number of specialty classes, notably EPL. Underwriting actions were taken to address this increase and we continue to monitor the impact of the recession and the economic downturn on our reserves. Overall, the cost of claims remains within our expectations and this is testament to the diverse nature of Beazley’s risk portfolio alongside the dedicated claims management capability within underwriting teams. Political risk losses As noted in our 2009 interim report and Q3 interim management statement, the business environment for our political risks team has been challenging. Throughout the course of the year we continued to see an increased number of claims on the political risks portfolio, resulting from exposure to trade finance losses and failed financial institutions in developing economies. The impact on profit of these losses in 2009 has been £33m.

Beazley Annual Report 2009 35 Financial review | group performance continued

Surplus in net reserves

% above actuarial best estimate 0 0403 05 06 07 08 09 Financial year

2008 hurricanes Losses arising from the 2008 US hurricanes developed much as expected in 2009. Of the reserves we established at 31 December 2008 for hurricanes Ike and Gustav we released £1.0m during the year. Reserve releases Beazley has a conservative reserving philosophy with initial reserves being set to include prudent margins which may be released consistently over time as and when the uncertainty reduces. Historically these margins have given rise to held reserves within the range 5-10% above the actuarial best estimate. Reserve monitoring is performed on a quarterly basis and involves a consultative process between the underwriters who take a detailed claim by claim view, and the actuarial team who provide statistical analysis. This process allows early identification of areas where claims reserves may need adjustment. The overall reserve strength has increased moderately due to the prudent position taken on the political risks and contingency account. During 2009 we were able to make the following prior year reserve adjustments across divisions, with the overall net impact being a release to the group.

2009 2008 £m £m

Marine 15.9 12.8 Political risks and contingency 2.2 11.6 Property (4.2) 3.8 Reinsurance 16.5 16.6 Specialty lines 36.8 28.0 Total 67.2 72.8 Releases as a percentage of net earned premiums 8.0% 10.7%

Reserve releases increased on specialty lines reflecting the continuing satisfactory development of the significant volumes of business underwritten between 2003-2006. The releases in 2009 came mainly from the 2004 and 2005 underwriting years, which seem, at this stage, to be following the profitable outcomes already experienced in the 2002 and 2003 years. The property account was affected by an adverse development on a large engineering claim and, as we have highlighted, the political risk and contingency releases were lower than previous years, as part of the increased claims provision on our trade credit book impacts prior years. Expenses Total expenses, including business acquisition and administrative costs, increased to £300.9m from £237.3m in 2008. The breakdown of these costs is shown below:

2009 2008 £m £m

Brokerage costs 171.2 148.9 Other acquisition costs 47.0 33.7 Total acquisition costs 218.2 182.6 Administrative costs 82.7 54.7 Total costs 300.9 237.3

Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premium they are down slightly from 22% to 20%. Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with accounting guidelines.

36 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Other acquisition costs comprise costs that have been identified as being directly related to underwriting activity (e.g. underwriters’ salaries and Lloyd’s box rental). These costs are also deferred in line with premium earning patterns. They have increased in 2009 due to the addition of new underwriting teams (First State, accident and life). Administrative costs comprise primarily IT costs, facilities costs, Lloyd’s central costs and other support costs. These increased in 2009 primarily as a result of the increase in staff bonus costs in line with increased profitability, an increase in charges levied by Lloyd’s arising from increased premiums, and non-capitalised transaction costs associated with the rights issue, acquisition of First State and redomiciliation to Ireland. Investment performance Following a tumultuous 2008 and a difficult first quarter, global financial markets stabilised and rallied during the subsequent part of 2009, resulting in the group achieving an investment profit for the year of £56.1m, or a return of 2.7%. (2008 loss of £25.8m; (1.5%)). The Falcon leadership team has worked during 2009 to establish Falcon Money Management Ltd (“Falcon”), an associate firm providing investment management services. Falcon is an FSA authorised investment management firm, comprising 12 highly experienced investment professionals. Falcon is aiming to enhance our investment returns whilst at the same time minimising risk. Initially, investment management and advisory services will be offered solely to Beazley and only at a later stage to third party institutional investors. Falcon’s approach to managing the assets will be to hold the bulk (80-90%), in a core portfolio of sovereign fixed income assets, or very short duration high quality credit. The mean duration of the portfolio is restricted to that of Beazley’s insurance liabilities. The balance will be invested in a diversified portfolio of alternative assets. Falcon’s benchmark is to deliver an absolute return equal to T-bills plus a margin which depends upon the capital growth asset allocation. During April 2009, Beazley commenced a de-risking programme to reduce the credit exposure in its portfolios and to increase the share of highly liquid and government-guaranteed investments. Towards the end of the year, we selectively increased our allocation to capital growth strategies, via investments in alternative assets. At 31 December 2009 the weighted average duration of our core portfolio was 8 months (31 December 2008: 9 months). The weighted average yield to maturity of our overall portfolio was 0.7% (31 December 2008: 3.4%). Our portfolio duration is currently short to protect against a sudden rise in interest rates. As a result, the outlook for next year remains challenging with interest rates close to all time lows. The table below details the breakdown of our portfolio by asset class:

31 Dec 2009 31 Dec 2008 £m % £m %

Cash and cash equivalents 505 22.2 444 22.2 Government, Agency and Supranational 980 43.2 593 29.7 AAA 523 23.0 286 14.3 AA+ to AA- 51 2.2 158 7.9 A+ to A- 45 2.0 314 15.8 BBB+ to BBB- 3 0.1 79 4.0 Core portfolio 2,107 92.7 1,874 93.9 Capital growth assets 167 7.3 120 6.1 Total 2,274 100.0 1,994 100.0

Beazley Annual Report 2009 37 Financial review | group performance continued

Comparison of returns – major asset classes Beazley group funds

Capital Growth 2,500 Portfolio 2,000

1,500

Core Portfolio £m 1,000

500

0 -£30m-£20m -£10m£0m £10m £20m £30m £40m £50m Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09

2008 2009 Group funds including funds at Lloyd’s Syndicate 2623

Comparison of return by major asset class:

31 Dec 2009 31 Dec 2009 31 Dec 2008 31 Dec 2008 £m % £m %

Core portfolio 43.8 2.4% (7.7) (0.4%) Capital growth assets 12.3 7.6% (18.1) (20.8%) Overall return 56.1 2.7% (25.8) (1.5%)

FX on non-monetary items As reported in previous annual and interim reports significant FX volatility arising from the translation of ‘non- monetary’ items exists under IFRS. This volatility is impossible to hedge, causing significant impact on the headline profit before tax. At the reporting date unearned premiums and deferred acquisition costs (the non-monetary items) are held on the group’s balance sheet and will be earned over the life of the policy extending into future reporting periods. Around 90% of the group’s premium is non-sterling denominated and the non-monetary items arising on this premium are required to be reflected at historic exchange rates, while the corresponding monetary items associated with the same risks such as cash received and claims reserves held are held at the closing exchange rate. To the extent that the historic and closing exchange rates differ when applied to these balances, an exchange gain or loss will be reflected in the income statement. This gain or loss will unwind in the subsequent accounting period as the non-monetary balances earn through to the income statement. The net impact of this effect over time is nil, but the income statements of two adjacent accounting periods can be distorted, as reflected by the large swings in foreign exchange gains/losses in 2008 and 2009. The loss of £46.6m recorded in 2009 is largely due to the unwinding of the £46.2m profit which arose in 2008 when the US dollar strengthened 28% and is not materially impacted by exchange rate movements during 2009. For this reason the group has, since the introduction of IFRS in 2005, sought to report this effect in as transparent a manner as possible by splitting out the impact on the face of the income statement. The underlying profit after the notional adjustment for the effect of FX on non-monetary items is a better reflection of performance. Tax As announced early in 2009, the group has established a new parent company (Beazley plc) and reinsurer (Beazley Re) that are tax resident in the Republic of Ireland. This is expected to reduce the ongoing tax rate incurred by the group to around 18%. The tax rate for 2009 was 12% which is lower than 18% due to the one off revaluation of deferred tax balances that were previously provided for at the higher UK rate of 28%. For further information on the group’s restructuring please refer to note 1 in the financial statements.

38 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Financial review | balance sheet management

Summary balance sheet 2009 2008 Movement £m £m %

Intangible assets 70.5 52.5 34% Investments and cash 2,274.3 1,994.2 14% Insurance receivables 309.3 287.8 7% Reinsurance assets 718.1 538.6 33% Other assets 133.4 124.4 7% Total assets 3,505.6 2,997.5 17%

Insurance liabilities 2,499.2 2,246.7 11% Borrowings 173.1 177.5 (3%) Other liabilities 214.7 160.6 34% Total liabilities 2,887.0 2,584.8 12% Net assets 618.6 412.7 50% Net assets per share 119.0p 122.5p (3%) Net tangible assets per share 105.5p 106.9p (1%) Number of shares * 519.6m 337.0m –

* excludes shares held in the employees’ share trust

Net tangible assets per share ended the year only marginally below their start point, improving strongly from the initially dilutive effect of our 9 for 19 rights issue at 86p. This demonstrates the attractiveness of the opportunities into which the capital raised was deployed. Intangible assets Intangible assets consist of goodwill on acquisitions £47.9m, purchased syndicate capacity £6.0m, US admitted licences £5.8m and capitalised expenditure on IT projects £10.8m. The increase in intangibles in the period is primarily due to the acquisition of First State which gave rise to £13.2m of goodwill, £1.1m on syndicate capacity and £6.9m on IT projects net of amortisation. The expenditure on IT projects primarily relates to new underwriting and claims systems in the US. Acquisition of First State Management Group First State was acquired from the Hartford Financial Services Group for total consideration of $34.0m. The transaction was structured in such a way that the total consideration paid was in respect of net assets acquired of $1.4m, pipeline profit in respect of in force policies assumed on completion of the transaction of $5.1m and $27.5m of goodwill. Prior to completion of the transaction it was agreed with third party capital providers on syndicate 623 that they would contribute $7.5m towards the cost of the transaction as syndicate 623 is a beneficiary of the business written by First State. This has been reflected as a reduction to the goodwill balance (giving net goodwill of $20.0m) and the contribution will be collected from third party names in instalments over the five underwriting years 2009 to 2013. Note 34 to the accounts sets out further information on the acquisition.

Beazley Annual Report 2009 39 Financial review | balance sheet management continued

Reinsurance debtor credit quality

AAA 4% AA+ 4% AA 53% AA- 33% A+ 4% A 2%

Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2009 was £309.3m, a growth of 7% over 2008. We continue to outsource the collection of our Lloyd’s premium broker balances to JMD Specialist Insurance Services Limited, which operates within the Lloyd’s market as specialist credit controllers. Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of £556.7m, and the unearned reinsurance premiums reserve of £161.4m. The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of £158.6m and an actuarial estimate of recoveries on claims that have not yet been reported of £398.1m. The group’s exposure to reinsurers is managed through: • Minimising risk through selection of reinsurers who meet strict financial criteria (eg. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs. medium tail). The chart above shows the profile of these assets (based on S&P rating) at the end of 2009; • Timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and • Regular monitoring of outstanding debtor position by our reinsurance security committee and credit control committees. We continue to provide against impairment of reinsurance recoveries, and at the end of 2009 we had provided £9.8m (2008: £9.0m) in respect of reinsurance recoveries. Other assets Other assets are analysed separately in the notes to the accounts. The largest items included comprise: • Deferred acquisition costs of £96.6m; • Deferred tax assets available for use against future taxes payable of £5.5m; and • Profit commissions receivable from syndicate 623 of £5.1m Insurance liabilities Insurance liabilities of £2,499.2m consist of two main elements being the unearned premium reserve (UPR) and gross insurance claims liabilities. Our unearned premiums reserve has increased by 19% to £544.5m, resulting from the increase in premiums written during the year. The majority of the UPR balance relates to current year premiums that have been deferred and will be earned in future periods. Current indicators are that this business is profitable. Gross insurance claims are made up of claims which have been notified to us but not yet paid and an estimate of claims incurred but not yet reported (IBNR). These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims have increased by 9% to £1,954.7m, primarily as a result of the increase in business written.

40 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Borrowings The group utilises two long-term debt facilities: • In 2006 we raised £150m of lower tier 2 unsecured fixed rate debt that is payable in 2026 and callable in 2016. The initial interest rate payable is 7.25% and the current carrying value of this debt is £161.9m; and • A US$18m subordinated debt facility raised in 2004. This loan is also unsecured and interest is payable at the US interbank offered rate (LIBOR) plus 3.65%. These subordinated notes are due in 2034. At the time of the £150m bond issue we entered into a derivative transaction, whereby we matched our investment and currency risk by swapping the sterling fixed rate loan into the equivalent of: • £108m of floating rate sterling loans; and • US$80m of floating rate US dollar loans. These items have been accounted for using hedge accounting for both the floating rate and currency elements of the transaction. In addition to these borrowings Beazley has a £100m syndicated short-term banking facility, managed through Lloyds Banking Group Plc. The facility is currently unutilised. Capital structure Beazley has a number of requirements for capital at a group and subsidiary level. Primarily capital is required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (FSA, Lloyd’s, Irish Financial Services Regulator, and the US state level supervisors). Further capital constraints come from rating agencies on a group wide basis and for Beazley Insurance Company, Inc. (BICI) and the Lloyd’s syndicates on a standalone basis. In both cases we aim to manage our capital to obtain a financial ‘A’ rating from the rating agencies. Beazley also holds a level of capital over and above its regulatory requirements and targets a level of surplus capital that would enable it to take advantage of new underwriting opportunities such as the acquisition of insurance companies or managing general agents (MGAs) whose strategic goals are aligned with our own. The group actively seeks to manage its capital base to target capital levels. Our preferred use of capital is to re-deploy it on opportunities to underwrite profitably. However there may be times in the cycle when the company will generate excess capital and not have the opportunity to deploy it. If such a point were reached the board would consider returning capital to shareholders. With effect from 1 January 2010 Beazley has taken the decision to match the group’s underwriting capital by currency to the principal underlying currencies of its written premiums. This will ensure that the group’s capacity to underwrite business would be unaffected by any future movements in exchange rates. To achieve this, the group has increased the US dollar component of its capital base by US$487m since the start of 2010 with an equivalent decrease in the sterling component.

Beazley Annual Report 2009 41 Financial review | balance sheet management continued

Our funding comes from a mixture of our own equity of £618.6m alongside £150m of tier 2 subordinated debt and $18m subordinated long-term debt and an undrawn banking facility of £100m mentioned above. In April 2009, the group raised £151.7m through a 9 for 19 rights issue and placing. This resulted in 183.1m shares being issued at an issue price of 86p. The following table sets out the group’s sources and uses of capital:

2009 2008 £m £m

Sources of funds Shareholders’ funds 618.6 412.7 Tier 2 subordinated debt 150.0 150.0 Long-term subordinated debt (US$18m) 11.2 12.5 779.8 575.2 Uses of funds Lloyd’s underwriting 492.2 360.8 Capital for US insurance company 68.9 77.1 561.1 437.9

Surplus 218.7 137.3 Unavailable surplus (46.1) (18.0) Fixed and intangible assets (78.2) (60.6) Available surplus 94.4 58.7

Individual capital assessment The group is required to produce an individual capital assessment (ICA) which sets out the amount of capital that is required to reflect the risks contained within the business. Lloyd’s reviews this assessment to ensure that ICAs are consistent across the market. In order to determine the ICA, we made significant investment in both models and process: • We use sophisticated mathematical models that reflect the key risks in the business allowing for probability of occurrence, impact if they do occur, and interaction between risk types. A key focus of these models is to understand the risk posed to individual teams, and to the business as a whole, of a possible deterioration in the underwriting cycle; and • The ICA process is embedded so that the teams can see the direct and objective link between underwriting decisions and the capital allocated to that team. This gives a consistent and comprehensive picture of the risk reward profile of the business and allows teams to focus on strategies that improve return on capital. The ICA has increased from £360.8m to £492.2m reflecting the increase in business Beazley is writing at Lloyd’s. Included within this are premiums resulting from the acquisition of First State and Momentum Underwriting Management, increased premium written for our existing line of business, particularly short tail catastrophe exposed lines and the effect of a strengthening of the US dollar since the ICA was previously calculated.

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Solvency II Solvency II is an EU-wide proposal on capital adequacy and risk management for insurers due to come into effect from October 2012. The central elements of Solvency II are: Pillar 1: Demonstrating adequate financial resources – quantification; Pillar 2: Demonstrating an adequate system of governance – risk assessment; and Pillar 3: Public disclosure and regulatory reporting requirements. The board has set two guiding principles for Solvency II, namely: • to develop a framework that can be used to inform management and assist with business decision making; and • to hold an appropriate and efficient level of capital for the agreed risk appetite through risk identification and mitigation. At Beazley, the strong risk management framework already embedded throughout the business means that Solvency II is an evolution rather than a new direction. A working group has been established to lead the implementation of Solvency II at Beazley and the gap analysis and implementation plan have been submitted to the regulators for review. Oversight and governance will be provided on behalf of the board by a management group comprising the group finance director, risk director and an underwriting team leader. A regular reporting schedule to the board has been established as Beazley recognises the importance of the implementation of Solvency II. However, it must be recognised that there is still uncertainty, not least because the full details of Solvency II implementation are yet to be confirmed. Whilst we plan to undertake a significant amount of work on Solvency II related activities during 2010, Beazley is well placed at this stage to ensure a successful implementation.

Beazley Annual Report 2009 43 Financial review | capital position

Group structure

Beazley plc

Beazley Re Ltd Beazley Group Ltd

Reinsurance Contract Beazley Underwriting Beazley Furlonge (Corporate Member) (Managing Agency) Beazley USA Management Capital

Syndicate 623 Beazley Insurance Third party Beazley USA Syndicate 2623 Company, Inc. capital Services, Inc. (Admitted Insurance providers (Service Company) Syndicate 3622 Company; A Rated) Syndicate 3623 Quota Share and Surplus Treaties Quota Share Syndicate 6107

Group structure During 2009 the group created a new holding company, Beazley plc, which is incorporated in Jersey and domiciled for tax purposes in Ireland. A new Irish resident reinsurance company, Beazley Re Limited, was also established and the former holding company Beazley Group plc was renamed Beazley Group Limited. The substantial bulk of the group’s capital resources are now held in Beazley Re. The group operates across both Lloyd’s and the US through a variety of legal entities and structures. The main entities within the legal entity structure are as follows: • Beazley plc – group holding company and investment vehicle; quoted on the London Stock Exchange; • Beazley Underwriting Limited – corporate member at Lloyd’s supplying capital to write business through syndicates 2623, 3622 and 3623; • Beazley Furlonge Limited – managing agency at Lloyd’s which writes business through the group’s five managed syndicates (623, 2623, 3622, 3623 and 6109); • Beazley Re Limited – reinsurance company that accepts reinsurance premium ceded by the corporate member, Beazley Underwriting Limited; • Syndicate 2623 – corporate body regulated by Lloyd’s through which the group underwrites its general insurance business excluding accident and life. Business is written in parallel with syndicate 623; • Syndicate 623 – corporate body regulated by Lloyd’s which has its capital supplied by third party Names; • Syndicate 6107 – sidecar syndicate writing reinsurance business on behalf of third party Names; • Syndicates 3622 and 3623 – corporate bodies regulated by Lloyd’s through which the group underwrites its accident and life insurance business; • Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US through the state of Connecticut. Licensed to write insurance business in all 50 states; and • Beazley USA Services, Inc. (BUSA) – managing general agent based in Farmington, Connecticut. Underwrites business on behalf of Beazley syndicates and BICI.

44 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Corporate governance | investor relations

Shareholding by type of investor

Mutual funds 40% Insurance 16% Pensions 11% Inv trusts 15% Retail 8% Directors 3% Trading 2% Charities 2% Others 3%

Source: Numis Securities Limited (December 2009)

We place great importance on communication with shareholders. The full report and accounts and the interim report are available to shareholders on the company’s website (www.beazley.com). Alternatively, shareholders can elect to receive a mailed copy of the accounts on request. The company responds to individual letters from shareholders and maintains a separate investor relations centre within the existing www.beazley.com website as a repository for all investor relations matters. Financial reporting for insurance companies can seem to be complex. In order to help shareholders and potential investors better understand the key drivers of the business and its prospects, we have endeavoured to provide increasing levels of transparency and explanation in our communications. As a result, in addition to enhancing the information contained in the annual and interim reports, the investor relations centre on the company website contains a substantial amount of relevant information for investors including key corporate data and news; presentations to analysts; information for the names’ syndicate 623; analyst estimates and a financial calendar. The website also gives investors the opportunity to sign up for an alert service as new information becomes available. There is a regular dialogue with institutional shareholders as well as general presentations after the preliminary and interim results. The board is advised of any specific comments from institutional investors to enable them to develop an understanding of the views of major shareholders. All shareholders have the opportunity to put questions at the company’s annual general meeting. The company’s shares are listed on the London Stock Exchange. Prices are given daily in newspapers including the Financial Times, The Times, the Daily Telegraph, the Daily Mail and the Evening Standard.

Share price performance

280 260 240 220 200 180 160 140 120 100 80 Dec Dec Dec Dec Dec Dec Dec Dec Feb 2002 2003 2004 2005 2006 2007 2008 2009 2010 Beazley FT350 Non life FTSE All share Source: Bloomberg

There are currently nine analysts publishing research notes on the group. In addition to research coverage from Numis, the company’s corporate broker, coverage is provided by RBS, Fox Pitt Kelton, Credit Suisse, JP Morgan, Keefe Bruyette & Woods, KBC Peel Hunt, Noble & Company and UBS. Financial calendar 5 March 2010 Dividend record date 24 March 2010 Annual general meeting 30 March 2010 Second interim dividend payment 23 July 2010 Interim announcement 23 July 2010 Interim dividend announcement

Beazley Annual Report 2009 45 Risk management

Beazley’s risk management culture is integral to the way we run our business. This has resulted in Beazley receiving a ‘Strong’ Standard and Poor’s rating for risk management, ranking our practices in the top 15% of companies rated by them. Nicholas Furlonge Director, risk management

What does risk management mean for Beazley? At Beazley, we operate an enterprise wide risk management culture that is integral to the way we run our business. Our business is based on controlled and informed risk taking across a diverse range of specialist classes of insurance. Our risk appetite allocation methodology is clearly understood and articulated to ensure that where appropriate it is fully utilised to give maximum reward. Our framework is centred on the following principles: • Transparency – to ensure all risks are clearly understood, measured and controlled by setting limits and monitoring against these; • Accountability – the organisational structure ensures all risks are owned by appropriate individuals and everyone takes responsibility for managing their risks; and • Culture – to promote a risk aware culture and to ensure that every decision we take is based upon an evaluation of risk versus reward. This strong culture of risk management has resulted in Beazley receiving a “Strong” Standard and Poor’s rating for risk management, which ranks our practices in the top 15% of companies rated by them. Risk governance and reporting The board of directors (the “board”) has the responsibility for defining the group’s risk appetite, with key individuals and committees accountable for day-to-day management of risks and controls. Regular reporting and active participation by the risk management team in all board meetings and senior management committees ensures that risks are monitored and managed as they arise. In addition, Nicholas Furlonge, director of risk management, directly represents the risk management team on the board, which further demonstrates the importance Beazley has placed on the risk management function. 2009 year in review The risk management and actuarial teams were combined to further increase our focus on the management of insurance risk across the group. This combined group enables us to more accurately analyse both the quantitative impact and effectiveness of key underwriting and operational controls and help us to focus our attention on those controls that really matter. The combination of the risk management and actuarial functions has specifically benefited the development of an industry leading individual capital assessment (ICA) framework. Risk management has been able to take credit for the strength of internal business controls in the ICA. For example specialty lines implemented a comprehensive set of underwriting controls that were recognised in the ICA model. In addition, risk management uses the ICA output to allocate capital, target classes of business and policies with high returns on capital and as a tool to help target consistent reserve strength across years and classes.

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Managing the cycle Market cycle risk is characterised by the periodic rise and fall in insurance prices and is driven largely by changes in supply and demand rather than the actual cost of cover. The cycle varies between a soft market where insurance is readily available and premium rates fall as a result of increased competition and a hard market, where clients find insurance coverage more difficult to obtain and rates rise and terms and conditions become more restrictive. Our focus on managing market cycle risk lies at the heart of our underwriting philosophy and this is demonstrated by our strong and consistent trading record. On a day-to-day basis, market cycle risk is managed in the following ways: • Cascaded peer review and underwriter challenge – monitoring of individual risks against limits allocated to each underwriter and performing a “second pair of eyes” check to ensure that there is sufficient oversight of the whole portfolio and that it remains in line with the business plan; • Business planning – transitioning the portfolio of business to ensure a sufficiently diverse range of good quality products, whose profitability is aligned to the correct position in the cycle. During a hard market we maximise profits by targeting growth on the best opportunities available and in a soft market we focus our portfolio on less volatile business; • Reserving – having a clear view of the underlying profitability of individual products with transparent links to capital allocation; and • Rate adequacy and benchmark pricing – quantitative monitoring of risks to ensure that we are charging appropriate premiums for the risks we are taking.

Catastrophe risk Catastrophe risk is assessed both in terms of modelled losses and the risk of losing more than expected through poor exposure management. Our portfolio is analysed for classes of business where accumulations of losses can result from a single or a series of large catastrophic events. Catastrophe risk is managed through: • Risk appetite setting and monitoring of exposures – risk appetite limits are defined in the business planning process and set by the board and calculated on a probabilistic basis using vendor catastrophe models. We acknowledge the uncertainty present within these models and therefore also monitor deterministic output using Lloyd’s realistic disaster scenarios (RDSs) and our aggregate position to stress test our book. Risk appetite is set based upon the impact on earnings and capital, whilst being mindful of potential opportunities that exist following the event; and • Individual risk monitoring – in certain classes of business we model the impact of individual property locations to our overall exposure prior to quoting to ensure we are not creating accumulations of risk and to ensure we are receiving an appropriate minimum premium on catastrophe exposed business.

Beazley Annual Report 2009 47 Risk management continued

Asset risk Asset risk is viewed as the risk arising from adverse changes in the value of our income from assets and changes in exchange rates and interest rates. Through setting comprehensive investment guidelines via the investment committee and monitoring against these, reviewing the performance of the investment managers and stress testing our investment portfolio, we can assess if our overall risk and return targets are being met. To minimise the risk of an event impacting both our claims liabilities and our investment portfolios, we endeavour to limit investments in areas which correlate with our insurance portfolios. Liquidity risk Liquidity risk is the risk that we do not have sufficient financial resources to meet our obligations as they fall due. Strategically, we seek to maintain sufficient liquid assets or assets that can be liquidated at short notice and without capital loss to meet our expected cash flow requirements. Our RDSs are stress tested on a regular basis. Credit risk Our exposure to credit risk is mitigated by vetting all of our key counterparties before trading with them. Performance is closely monitored and managed through our committee structure. We consider our key counterparties to be reinsurers and brokers as outlined below: • Reinsurers – exposure monitored by the reinsurance security committee and ratings assigned to each reinsurer according to internally agreed criteria; and • Brokers – robust broker approval process underpinned by Lloyd’s registration process. Operational risk Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers or from external events. The group actively manages operational risks and minimises them where appropriate by implementing and communicating guidelines to staff and other third parties. The impact of control failure is quantified and compared to the effectiveness of these controls to allow us to see where our attention should be focussed. The quantitative impact of operational risk, and those controls designed to mitigate those risks, are captured in the ICA process so that there is a clear link between operational risk and its financial impact on the business. Emerging risk identification We employ specialist teams to support our underwriters to help identify external trends and issues. Using this research improves our underwriting risk selection, allows us to avoid markets in decline and improves our claims management capabilities. An example of the business’s emerging risk process is our recession plan, which sets out the underwriting actions required in the light of the recent downturn in the economy. Specific risks were identified by class of business and the portfolio was adjusted and specific underwriting actions were taken to mitigate negative impacts. Internal audit and compliance Our internal audit and compliance teams work closely with the risk management team and the business to co-ordinate activity, avoid duplication and deliver a targeted risk-based approach. In addition to the linking of risk management and actuarial and the specific controls that are imbedded within the business, these functions create three lines of defence against risks facing Beazley.

48 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Corporate and social responsibility

We constantly consider the ethical implications of how we operate in our day-to-day business, putting policies and procedures in place that reflect our commitment to our corporate, social and environmental responsibility.

In continuing to build Beazley as a premier risk-taking business, we take our corporate, social and environmental responsibility seriously. We constantly consider the ethical implications of how we operate in our day-to-day business and put policies and procedures in place that reflect our commitment. We also recognise the regulatory and reputational risks associated with ethical practice and adhere closely to the Association of British Insurers (ABI) guidelines published in October 2001 on the disclosure of listed companies’ social responsibility policies and endeavours. Intrinsic to our culture is an ethical approach to business conducted by and towards all our stakeholders, including management, staff, clients, suppliers and shareholders. The values that form the essence of our brand and our working culture are professionalism, integrity, effectiveness and dynamism. We have appointed Nicholas Furlonge as the group sponsor of our corporate and social responsibility programme. Our code of ethics comprises the staff handbook, the handling of personal data, whistle blowing and financial crime policies. We have a conflicts of interest policy which provides clear guidance to staff on areas such as inducements and handling sensitive data. Corporate responsibility We are an equal opportunities employer and make it our policy to offer equal treatment to employees and prospective employees, ensuring that all are treated fairly and with dignity and respect. We do not permit unlawful discrimination of any kind against any person on the grounds of gender, race, nationality or ethnic origin, age, disability, religious beliefs, sexuality, marital status, working patterns or pregnancy. We are committed to taking positive action to ensure that all employees, whether full-time or part-time, receive equality of opportunity in recruitment, training, development, promotion and remuneration. We strive to ensure the health, safety and welfare of our employees and anyone else who may be affected by our operations. Employees are expected to take reasonable care for their own health and safety at work as well as those of others, and to co-operate with management to create a safe and healthy working environment. All employees and contractors are subject to induction, training and supervision in aspects of health and safety and additional training in ergonomics and fire safety awareness is provided to all employees. All health and safety matters are communicated via notice boards, email memos, the intranet and via safety representatives. Overall responsibility for health and safety at Beazley rests with the chief operating officer of the group, David Marock. We believe that the knowledge and skills of our employees are a key element of organisational success and therefore invest in training and development. We ensure that this is accessible by everyone and recognised as a shared responsibility between individual employees and the organisation. Responsibility for the provision of training and development at Beazley sits with the head of talent management, Penny Malik. Employees are kept informed of developments in business through our internal communications including formal company-wide briefings that occur twice a month, team meetings and an information-rich intranet. We are proud of our working culture that ensures we achieve our aim to attract, reward and retain talented staff in competitive markets and support and develop them as they strive to perform to an excellent standard.

Beazley Annual Report 2009 49 Corporate and social responsibility continued

Social responsibility We encourage employee involvement in a range of community programmes. Nicholas Furlonge is the chairman of the Lloyd’s Community Programme (LCP) Management Board in London, and encourages staff to involve themselves in helping pupils in schools in the Tower Hamlets area, one of the most deprived areas in the country. Beazley is involved in two schemes on a weekly basis – Reading and Number partners. Currently we have 12 volunteers participating in total in what is proving to be a very successful scheme. In addition to the Reading and Number Partner schemes in 2009, as part of the LCP we participated in the Lloyd’s Games at Mile End stadium, facilitating a day of sporting activities attended by 500 pupils from the Tower Hamlets area and a number of individuals were involved in cricket and football coaching. We also sent volunteers to a school in Hackney to participate in the Inspire scheme, to help students develop a variety of skills such as teamwork, communication and problem solving, what it means to write a CV, a covering letter and the ‘do’s and don’ts’ of interviews. Charity The group made charitable donations during the year ended 31 December 2009 of £53,017 (2008: £67,112). The group’s charity budget is managed by a charity committee chaired by Jonathan Gray and consideration is given to a wide range of activities, particularly where members of staff are engaged in fund raising activities. For example, several members of our staff raised over £5,000 competing in the London Marathon, and over £1,500 in the annual JP Morgan Chase Challenge. Also, our annual Christmas card is distributed electronically to over 20,000 key clients and contacts, giving them the opportunity to indicate the charity that they wish us to support. As previously reported, we run a payroll-giving scheme in the UK in association with the Charities Aid Foundation. By the end of December 2009, 8% of staff had joined the scheme, donating £34k annually to approximately 30 different charities. No political donations were made by the group in either the current or prior reporting period. Environmental responsibility In 2009 Beazley created a consolidated global facilities and procurement team to bring focus and consistency to the way we source goods and services and manage our global facilities. Beazley is committed to achieving best practices in all of the areas of our business and where there may be an impact on the environment we strive to make environmentally responsible choices, whenever possible. In the procurement area we have adopted the following best practices: • In all requests for proposals (RFP) over $25K for the procurement of commodities we request and evaluate as part of the proposal information on each supplier’s “green” and environmentally responsible initiatives in the manufacture and delivery of their products; • We carefully evaluate and compare each supplier’s “green” initiatives and will give appropriate weighting to the quality and consistency of a supplier’s programs when making an award; • Once a supplier has been awarded a contract, we track and monitor the supplier’s green initiatives to ensure that they are maintaining the standards and programs represented in the RFP; and • In 2010 we will begin to track and report on the percentage of Beazley spend that is attributable to green/ sustainable commodities.

50 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

In the facilities area we actively promote, support and encourage environmentally aware behaviour, including: • Use of video conferencing versus flying or driving to meetings; • Use of recycled paper supplies; • Use of glass versus paper products; • Use of recycling bins; • Motion detectors are fitted in the London office and will be fitted in all new offices to ensure electricity usage is kept to a minimum; and • All new offices are designed to ensure that environmentally friendly materials and products are utilised, whenever feasible. We understand that it is important to set targets, measure and report progress against these and in 2010 Beazley will be establishing appropriate goals regarding usage of recycled and sustainably grown paper designed to further demonstrate our commitment to the environment and we will be reporting on these goals in 2010. The 2008 carbon footprint for Beazley’s London office was measured by Scott Wilson in April 2009. A greenhouse gas (GhG) protocol was applied and data collected on the GhG scopes. Beazley’s emissions are: scope 1 (vehicles and buildings) 5%; scope 3 (business travel and commuting) 76% and 18% respectively. The total emissions for the Beazley London office for 2008 were 2,043.84 kgCo2 representing a per capita head amount of 5.86 kgCo2. A baseline for carbon emissions has now been established. A second GhG report will be commissioned in April 2010 and we will then look at appropriate ways of reducing and offsetting our carbon footprint which we will be tracking and reporting on during 2010. In 2007, we signed up to the ClimateWise principles and we continue to monitor our progress against these. The principles are: lead in risk analysis; inform public policy making; support climate awareness amongst our customers; incorporate climate change into our investment strategies; reduce the environmental impact of our business; report and be accountable. Where more appropriate (for example, informing public policy and incorporating climate change into our investment strategies) we will be placing reliance on the activities of Lloyd’s ClimateWise team. This team has worked with us to enhance the measurement and reporting of our activities during 2009. Our focus in 2009 has been towards our own environmental impact and in measuring our London carbon footprint. Compliance with the ClimateWise principles is subject to annual independent review, which in 2009 was conducted by Forum for the Future.

Beazley Annual Report 2009 51 Board of directors

Executive directors

Andrew Horton Andrew Beazley Martin Bride Andrew Horton (aged 47) was Andrew Beazley (aged 56) is the Martin Bride (aged 46) is group appointed the chief executive on deputy chairman of the company fi nance director having joined 1st September 2008. Previously having been chief executive Beazley in 2009. Martin has he was fi nance director and he since 1986. Andrew is a 25 years’ experience in the joined the board in June 2003. co-founder of Beazley Furlonge insurance industry with more Prior to that, he was UK chief Limited. He has 33 years than half of those as a fi nance fi nancial offi cer at ING and was experience at Lloyd’s. director. He trained as a general deputy global chief fi nancial insurance actuary before offi cer and global head of pursuing a career in the fi nance for the equity markets composite insurance sector division of ING Barings, having with Aviva and Zurich Financial held various fi nancial positions Services. His experience spans with ING Barings since January personal and commercial lines 1997. He qualifi ed as a general insurance, the London chartered accountant with Market, life insurance and asset Coopers and Lybrand in 1987. management in both the UK and France.

Nicholas Furlonge Jonathan Gray Neil Maidment Clive Washbourn Nicholas Furlonge (aged 59) Jonathan Gray (aged 56) is the Neil Maidment (aged 47) is the Clive Washbourn (aged 49) is is responsible for the risk head of the group’s property chairman of the underwriting the head of the group’s marine management of the Beazley division. Jonathan has 34 years committee and has responsibility division. Clive has 24 years’ group. He is a co-founder of of experience at Lloyd’s, joining for the political risks and experience in the marine Beazley Furlonge Limited, and Beazley in 1992. He is an active contingency group and accident insurance industry and actively has 36 years experience at underwriter in his area of and life division. Neil has 25 underwrites marine hull, marine Lloyd’s and is a non-executive expertise, open market years of Lloyd’s experience. He liability and marine war risks. director of the Lloyd’s Franchise commercial property risks. joined Beazley in 1990 and is He is a member of the LMA Board. He is also the Chairman the active underwriter for the Marine Committee, the of the Lloyd’s Community managed syndicates. LMA Underwriting and the Claims Programme Management Board Committee and is the chairman and a director of the LMA. He is of the Joint War Committee. also responsible for marketing and ceded reinsurance.

52 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Non-executive directors

Jonathan Agnew Andy Pomfret Gordon Hamilton Dan Jones Jonathan Agnew (aged 68) is Andy Pomfret (aged 49) was Gordon Hamilton (aged 64) Dan Jones (aged 58) retired in the chairman of the company. appointed chief executive of retired as a senior audit partner 2003 as the vice-chairman for Jonathan was formerly a managing Rathbone Brothers Plc in 2004, in Deloitte & Touche LLP after Marsh, Inc., responsible for director of Morgan Stanley and having held the position of more than 30 years, principally non-North American operations, subsequently the chief executive fi nance director since 1999. involved with listed multi-national strategic planning, and mergers/ of Kleinwort Benson. He has been Prior to that, he held positions company audits and major acquisitions, based in London. the chairman of Limit plc, Gerrard at Peat, Marwick, Mitchell & Co forensic assignments. He is In 2006 he re-entered the Group plc, and Nationwide (now KPMG) and Kleinwort currently a non-executive director broking business as the chief Building Society. He is currently Benson. of a number of companies executive for the broking chairman of Ashmore Global including the listed South African operations of Fred A. Moreton & Opportunities Limited, The group, Barloworld Limited, and Co., a Salt Lake City-based Cayenne Trust plc and LMS Capital is a member of the Financial regional fi nancial services plc and is a senior independent Reporting Review Panel (FRRP). concern focusing on the western director of Rightmove plc. He was United States. a member of the Council of Lloyd’s and of Lloyd’s Market Board from 1995 to 1999.

George Blunden Padraic O’Connor Vincent Sheridan George Blunden (aged 57) was Padraic O’Connor (aged 60) is Vincent Sheridan (aged 61) is appointed on 1 January 2010. currently chairman of the Irish currently chairman of the Truelife He retired as senior vice Stock Exchange, chairman of Group and a non-executive president and director from Hewitt Associates in Ireland and director of FBD Holdings Ltd. AllianceBernstein Ltd in a non-executive director of a He retired as Chief Executive of December 2009. He had number of companies including Vhi Healthcare in 2008 and prior previously held positions in Union ACC Bank. Between 1999 and to that was Group Chief Executive plc; SG Warburg Securities and 2002 he served as non- of the Norwich Union Insurance Seccombe, Marshall and executive chairman of ACC Group in Ireland for 10 years Campion plc. Bank and prior to that he held from 1991 to 2001. He is a a series of senior positions at past president of the Institute of NCB Group Limited. Chartered Accountants in Ireland and a former Director of the Irish Stock Exchange.

Beazley Annual Report 2009 53 Statement of corporate governance

Application of principles of good corporate governance There is, and historically there has been, throughout the company and the group, a commitment to high standards of corporate governance. The directors continue to develop procedures which ensure that, where the board considers it appropriate, the Beazley group will comply with the Combined Code on corporate governance. Compliance with code provisions The board confirms that the company and the group have, save for the composition of the board, complied with the provisions set out in the Combined Code for the year ended 31 December 2009. The board has demonstrated its commitment to increase the number of non executives on the board in 2009 with the appointment of Padraic O’Connor and Vincent Sheridan, bringing the total to seven, equalling the number of executive directors. Dudley Fishburn stepped down from the board on 31 December 2009 and George Blunden has been appointed effective 1 January 2010. The board is accountable to the company’s shareholders for good governance and the statements set out below describe how the principles identified in the revised Combined Code have been applied by the group. The board The board consists of a non-executive chairman, Jonathan Agnew, together with six independent non-executive directors, of which Andy Pomfret is the senior non-executive director, and seven executive directors, of which Andrew Horton is chief executive. All six of the non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgment. Martin Bride joined Beazley in April 2009 as the group finance director and was appointed to the board on 5 May 2009. Biographies of current board members appear on pages 52 and 53 of this report. These indicate the high level and wide range of business experience that are essential to manage a business of this size and complexity. A well defined operational and management structure is in place and terms of reference exist for all board committees. The roles and responsibilities of senior executives and key members of staff are clearly defined. The full board meets at least five times each year and more frequently where business needs require. The board has a schedule of matters reserved for its decision including, inter alia: strategic matters; statutory matters; approval of financial statements and dividends; appointments and terminations of directors, officers and auditors; appointments of committees and setting of terms of reference; review of group performance against budgets; approving the risk management strategy and risk appetite; approving material contracts; and determining the authority levels within which management is required to operate. There is an agreed principle that directors may take independent professional advice if necessary at the company’s expense, on the basis that the expense is reasonable. This is in addition to the access which every director has to the company secretary. The secretary is charged by the board with ensuring that board procedures are followed. To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. The composition of and appointments to the board of both executive and non-executive directors are considered by the nomination committee. The recommendations of the nomination committee are ultimately made to the full board, which considers them before any change is made. The remuneration committee considers any remuneration package of executive directors before it is offered to a potential appointee. The members of the audit, remuneration and nomination committees are set out on pages 55 and 56. Any director appointed by the board during the year is required, under the provisions of the company’s articles of association, to retire and seek re-election by shareholders at the next annual general meeting. The articles also require that each director retires and seeks re-election at an annual general meeting at least once in any three-year period. The company has adopted Beazley Group plc’s (the former holding company of the Beazley group) retirement by rotation policy. Full details of directors’ remuneration and a statement of the company’s remuneration policy are set out in the directors’ remuneration report on pages 58 to 69. The members of the remuneration committee and the principal terms of reference of the committee appear on page 58.

54 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Meetings with non-executive directors The chairman holds meetings as required with the non-executive directors without the executive directors being present. Board performance evaluation In accordance with the requirements of the Combined Code, the board undertook a formal and rigorous evaluation of its own performance and that of its committees in 2009 and the issues identified and recommendations from the evaluation are being implemented. Individual attendance by directors at regular meetings of the board and of committees The number of meetings of Beazley Group plc (the former holding company of the Beazley group) and Beazley plc has been combined when determining the individual attendance by directors. In addition to the 5 regular board meetings, there were a further 7 meetings to finalise the various corporate transactions that took place in 2009. Attendance of these meetings was generally high.

Board Audit Remuneration Nomination

No. of No. of No. of No. of Director meetings No. attended meetings No. attended meetings No. attended meetings No. attended

J G W Agnew 5 5 – – – – 3 3 A F Beazley 5 4 – – – – – – M L Bride 4 4 – – – – – – J D Fishburn 5 4 8 6 6 5 3 2 N H Furlonge 5 5 – – – – – – J G Gray 5 5 – – – – – – A G K Hamilton 5 5 8 8 6 6 3 3 D A Horton 5 5 – – – – – – D Jones 5 5 5 4 6 4 3 3 P J O’Connor 4 4 – – 4 4 – – N P Maidment 5 5 – – – – – – A D Pomfret 5 5 8 8 6 5 3 3 V J Sheridan 4 4 4 4 – – – – C A Washbourn 5 4 – – – – – –

Dan Jones was appointed to the audit committee on 12 February 2009, Vincent Sheridan was appointed to the audit committee and Padraic O’Connor was appointed to the remuneration committee on 9 June 2009. On 1 January 2010 George Blunden was also appointed to the audit committee and the nomination committee. In 2008 we reported attendance at the investment committee. This was re-constituted from 1 January 2009 and now forms part of the executive management committees. Board committees The company has established properly constituted audit, remuneration and nomination committees of the board. Audit committee The audit committee currently comprises Gordon Hamilton (committee chairman from 1 January 2010), Vincent Sheridan, Dan Jones and George Blunden. Andy Pomfret was the chairman of this committee until 31 December 2009 when he assumed the chair of the remuneration committee. Dudley Fishburn was also a member and attended meetings until his resignation on 31 December 2009. The committee regularly meets without any executive management being present and the committee holds regular meetings with the head of internal audit, and with the external auditor.

Beazley Annual Report 2009 55 Statement of corporate governance continued

The committee’s main objectives are, inter alia: to monitor the integrity of the company’s financial statements and any other formal announcements relating to the company’s financial performance; review significant financial reporting judgments contained in them, before submission to and approval by, the board, and before clearance by the external auditors; review the company’s internal financial controls and the company’s internal control and risk management systems; approve the appointment or termination of appointment, of the head of internal audit and monitor and review the effectiveness of the company’s internal audit function; and review the arrangements by which employees of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The committee also reviews any matters raised by the auditors and internal audit. The chief executive, the finance director, and the risk management director are invited to attend part of each meeting of this committee. The audit committee received presentations during the year on a number of matters including US underwriting activities, the new investment arrangements and risk management. The external auditors are invited to attend meetings regularly. The auditors have unrestricted access to the members of the audit committee, and the committee ensures that meetings are used as an open avenue of communication between compliance, internal audit, the external auditors and the board. The committee receives regular updates and monitors the status of actions taken by management to address issues raised by both external and internal audit. Risk management provides reports to the audit committee on the risk assessment and the self-certification from risk owners of the operating effectiveness of internal controls. The audit committee undertakes a regular appraisal of its performance in relation to best practice. Findings of this review are formally reported to the board. In respect of any firm of external auditors and consulting actuaries which may be appointed by any group company, the audit committee is also responsible for recommending their appointment and termination; recommending their terms of reference; receiving regular reports, independent of management where necessary; determining their independence; monitoring their performance; and approving their fees. Following a recommendation from the audit committee, the board has adopted a policy in relation to the provision of non-audit services by the auditors. The objective is to ensure that the provision of such services does not impair the external auditor’s objectivity. The policy specifically disallows certain activities to be provided by the auditor such as bookkeeping and accounting services, internal actuarial service and executive remuneration services. The policy requires pre-approval for all other material services such as due diligence assistance, tax services and advice on accounting and audit matters. The aim is to limit the total spend on non-audit services to a maximum of the annual audit fee unless it is deemed to be in the shareholders’ interest from an efficiency and effectiveness point of view. The split between audit and non-audit fees for the year under review is disclosed on page 97. All of these are considered by the audit committee not to affect the auditors’ independence or objectivity. The committee’s terms of reference are published on the company’s website. Remuneration committee The remuneration committee comprises Andy Pomfret (who was appointed chairman from 1 January 2010 following Dudley Fishburn’s retirement), Dan Jones, Gordon Hamilton and Padraic O’Connor. The work of the remuneration committee is covered further in the directors’ remuneration report on pages 58 to 69. Copies of executive directors’ service contracts and the terms and conditions of appointment of the non-executive directors are available for inspection at the company’s office during normal business hours. The terms of reference of the remuneration committee are published on the company’s website. Nomination committee The nomination committee consists of Jonathan Agnew as the chairman, together with George Blunden, Andy Pomfret, Gordon Hamilton and Dan Jones. George Blunden joined the committee on 1 January 2010. Dudley Fishburn left this committee following his resignation from the company on 31 December 2009. It meets as required and makes recommendations to the board on all board appointments, including the selection of non-executive directors. During 2009 the nomination committee carried out the search for two additional non executive directors. Independent external advisors were engaged to support the search which resulted in the nomination committee recommending the appointment of Padraic O’Connor and Vincent Sheridan. The terms of reference of the nomination committee are published on the company’s website.

56 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Shareholder communication The company places great importance on communication with shareholders. The full report and accounts and the interim report will be available from www.beazley.com and upon request, will be mailed to shareholders and to other parties who have an interest in the group’s performance. The company responds to individual letters from shareholders and maintains a separate investor relations centre within the existing www.beazley.com website as a repository for all investor relations matters. There is regular dialogue with institutional shareholders as well as general presentations, attended by executive directors, after the preliminary and interim results. The board is advised of any specific comments from institutional investors to enable them to develop an understanding of the views of major shareholders. All shareholders have the opportunity to put forward questions at the company’s annual general meeting. The company has the authority within its articles to communicate with its shareholders using electronic and website communication and to allow for electronic proxy voting. Audit and internal control The respective responsibilities of the directors and the auditors in connection with the accounts are explained on pages 72 to 73, and the statement of directors on going concern on page 70. The board confirms that there is a continuous process for identifying, evaluating and managing any compliance issues and significant risks faced by the group. The internal capital assessment process maps risks to capital requirements through review and challenge and sign-off by the board. The directors are responsible for the group’s system of internal control and for reviewing its effectiveness. However, such a system can only provide reasonable, but not absolute, assurance against material misstatement or loss. The system is designed to manage rather than eliminate the risk of failure to achieve business objectives within parameters set by the board. The key procedures that the directors have established to ensure that internal controls are effective and commensurate with a group of this size include the day-to-day supervision of the business by the executive directors. Other internal control procedures and reviews for effectiveness by the board include: Preparation of standard monthly, quarterly and periodic reporting as prescribed by the board for review by the various group committees; review of financial, operational and compliance reports from management; and review of any significant issues arising from the external audits. Further information on the role of the audit committee is set out above. The committee, on behalf of the board, approves the internal audit project plan and any subsequent changes. Internal audit reports directly to the audit committee, whose terms of reference include approving the appointment or termination of appointment, of the head of internal audit and monitoring and reviewing the effectiveness of the company’s internal audit function. In 2009 the audit committee was involved in the recruitment of a new head of internal audit to replace the existing member of staff who transferred to the US to head up our US compliance function there. The new head of internal audit joined the company in January 2010. Further information on risk management at Beazley is contained on pages 46 to 48.

Beazley Annual Report 2009 57 Directors’ remuneration report

Andy Pomfret Chairman, remuneration committee

This report has been prepared by the remuneration committee (the committee) of Beazley plc and approved by the board of Beazley plc. The report complies with The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. Beazley plc became the parent company of the Beazley group on 9 June 2009. Prior to this the parent company of the group was Beazley Group plc. The information provided in the directors’ remuneration report represents those amounts recorded under Beazley Group plc from 1 January 2009 to 8 June 2009, and for Beazley plc from 9 June 2009 to 31 December 2009. Section headings marked § indicate the information in that section that has been audited. Remuneration committee The committee consists of four non-executive directors and during the year the members included Dudley Fishburn as chairman (resigned 31 December 2009), Andy Pomfret (appointed chairman 1 January 2010), Dan Jones, Gordon Hamilton and Padraic O’Connor (appointed 9 June 2009). The board views each of these directors as independent. The committee met six times during the year. The terms of reference of the committee are available on the company’s website. During the course of the year the committee considered, in addition to normally reviewed items, the proposed LTIP amendments, a review of the FSA draft code on remuneration, a review of incentive arrangements and the remuneration policy for the group. The committee also approved adjustments to share incentive grants arising from the rights issue and the amendments to the share plans proposed at the AGM in April and at the general meeting in November. The committee has oversight of remuneration policy. The main aim of the policy is to ensure that management and staff are remunerated fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel. The intention is to set packages at competitive levels and there is a significant element of performance-related pay, with the performance conditions ensuring that executive directors’ interests are aligned to the business objectives of the company as well as delivering enhanced shareholder returns. The structures of our packages supports the meritocracy, an important part of Beazley’s culture. When formulating the on-going remuneration policy, regard was taken of the various new guidelines that have been published over the last year including the FSA’s Code of Practice requirements (although Beazley is not directly subject to them), the draft Walker review as well as new guidelines by institutional shareholders. The committee believes the company is adopting an approach which is consistent with and takes account of the risk profile of the company. The committee considers the individual remuneration packages of the deputy chairman, chief executive, executive directors and executive committee members. It also has oversight of the salary and bonus awards of individuals outside the executive committee who are either direct reports of executive committee members or who have basic salaries over £200,000 as well as the overall bonus pool and total incentives paid by the company. The committee receives advice from a variety of sources. Hewitt New Bridge Street are the committee’s remuneration advisors and advise on ongoing issues. The committee also calls on specialist advice from a variety of additional sources including Bluefin Advisory Services Limited for benefits and pensions advice, Watson Wyatt publications for salary data and Equiniti for employee share incentives matters. None of the advisors have any other connection with the company. In addition, input was received by the committee during the year from the chief executive, head of talent management and the company secretary. However, no individual plays a part in the determination of their own remuneration. Remuneration policy statement The key elements of the company’s remuneration policies are: • To remunerate management and staff fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel; • To set base salaries to reflect the individual’s roles and responsibilities. These are reviewed annually;

58 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

• That performance-related remuneration is an essential motivation to management and staff and should be structured to ensure that executives’ interests are aligned with shareholders; • That individual rewards should reflect the group objectives but be dependent on the profitability of the group as well as take account of the operational risks; • That reward potentials should be market competitive although internal promotions may be set below market packages with the view to increasing them to the market rate over time; and • That executives’ pay should include an element of downside risk by having shareholdings and deferred shares. The general philosophy underlying the reward strategy for executive directors is the same as that applied to all other employees. Pay and employment conditions elsewhere in the company and data on comparable positions in other similar organisations are taken into consideration when determining executive directors’ remuneration. The talent management function has an input into the design of the remuneration arrangements. Risk management, through the group actuary, is involved in setting business plans for the underwriting units. These business plans are used in determining bonus targets for underwriters and underwriting risk is taken into account when setting performance targets. In line with our peer group within the Lloyd’s market, there are no upper limits on the amounts payable to individuals under short- term incentives. The committee has considered whether it is appropriate to set an upper limit and has agreed that such a limit would adversely affect the company’s competitive position and would not be in the interests of shareholders. The incentive payments, which comprise short-term incentive payments and share incentive plans, are awarded on a discretionary basis, and are determined by the committee in respect of performance of both the individual and the company. As the return on equity (excluding the impact of foreign exchange on non-monetary items) of the group has improved this year, the committee reflected this in the incentive awards made to directors. Individual aspects of remuneration The main elements of the remuneration package payable to each executive director comprise basic salary, short-term incentive payments, pension contributions, long-term share-based incentives and other benefits. A summary of the key elements of short and long term remuneration across the company is as follows:

Element Objective Conditions

Base salary To recognise responsibilities None. Reviewed annually Benefits To provide basic benefit cover None. Reviewed annually Pension To provide funding for retirement Defined contribution or salary supplement based on salary Enterprise bonus To link cash reward to company return A minimum group return on equity is achieved. Apart from on equity the LTIP this is the only bonus pool that executive directors participate in Deferred shares To defer a proportion of enterprise bonus in shares Vesting dependent on continued employment for three years Profit related pay plan To align underwriters’ reward with the profitability Profit to be achieved on the relevant underwriting of their account account as measured at the 33 month point and later. Executive directors do not participate in this plan Support bonus plan To align staff bonus with individual performance Participation is limited to staff members not on the and achievement of objectives executive or in receipt of profit related pay bonus. Executive directors do not participate in this plan Retention shares To retain key staff Full vesting dependent on continued employment over six years LTIP To align the senior management team to the From 2010 vesting based on NAV performance and out-performance of the group by setting stretching continued employment performance targets, which in turn should lead to enhanced shareholder returns Staff underwriting To align underwriters to the results of Deferred bonuses at risk from underwriting results their syndicate (voluntary arrangement)

Beazley Annual Report 2009 59 Directors’ remuneration report continued

Salary § The committee reviews salaries annually taking into account levels in comparable positions in other similar financial service companies. It also considers the performance of the group and individual as well as the average salary increase for employees across the whole group. The annual salary reviews take place in December of each year, with new salaries effective from 1 January. Following salary freezes in 2008 and 2009, the committee has decided that there should be salary increases for 2010 for some executive directors to ensure that salaries remain competitive in relation to the roles performed. In this respect the salaries of Andrew Horton, Jonathan Gray, Neil Maidment and Clive Washbourn were increased to reflect respective market positioning, development in their roles and increased responsibilities. From May 2009 executive directors received fees in respect of their role as directors in Beazley plc. The annualised salaries and fees for 2009 and 2010 are as set out below:

2009 2009 2010 2010 2009 Executive Total 2010 Executive Total Directors’ fee salary base salary Directors’ fee salary base salary £ £ £ £ £ £

A F Beazley* 50,000 250,000 300,000 50,000 250,000 300,000 M L Bride** 50,000 200,000 250,000 50,000 200,000 250,000 N H Furlonge 50,000 205,000 255,000 50,000 205,000 255,000 J G Gray 50,000 235,000 285,000 50,000 250,000 300,000 D A Horton 50,000 300,000 350,000 50,000 350,000 400,000 N P Maidment 50,000 210,000 260,000 50,000 250,000 300,000 C A Washbourn 50,000 210,000 260,000 50,000 250,000 300,000

*Andrew Beazley’s salary was reviewed by the committee in June and adjusted from 1 July 2009 to reflect his new role and responsibilities as deputy chairman reducing from £450,000 to £300,000.

**Martin Bride joined on 27 April 2009 and was appointed to the board on 5 May 2009.

Benefits § Benefits include private medical insurance for the director and his immediate family, permanent health insurance, death in service benefit at four times annual salary, travel insurance, health-club membership, season ticket, car parking and the provision of either a company car or a monthly car allowance. Pensions § The company provides pension entitlements to directors that are defined benefit in nature. Future service accruals ceased on 31 March 2006 for the Beazley Furlonge Limited Final Salary Pension Scheme. Only base salary is pensionable. Details of the entitlements of those who served as directors during the year are as follows:

Increase in Transfer value Transfer value Transfer value Increase in Accrued accrued benefits Increase in of (A) less of accrued of accrued transfer value benefit at excluding accrued benefits directors’ benefits at benefits at less directors’ 31 Dec 2009 inflation (A) including inflation contributions 31 Dec 2009 31 Dec 2008 contributions £ £ £ £ £ £ £

N H Furlonge 153,394 14,151 14,151 312,915 3,391,856 2,617,080 774,776 J G Gray 27,982 0 0 0 608,126 486,657 121,468 N P Maidment 32,273 0 0 0 472,030 360,235 111,795 CA Washbourn 15,107 0 0 0 236,963 182,972 53,991

The transfer basis used in the above calculations is yet to be ratified by the trustees. The trustees are expected to agree the new transfer value regime basis in February 2010. In general the transfer values have increased during the year because inflationary expectations increased. The increase in accrued benefits in respect of N H Furlonge relate to the crystallisation of minimum pension underpin. The pension benefits for directors and staff are now provided by way of a defined contribution scheme arranged through Fidelity, which is non-contributory. The company contributes 15% of salary for directors. Andrew Beazley and Nick Furlonge do not participate in this plan but, instead, receive a salary supplement in lieu of pension. No other pension provisions are made. The normal retirement age for pension calculation purposes is 60 years. A spouse’s pension is the equivalent of two-thirds of the member’s pension (before any commutation) payable on the member’s death after retirement.

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Enterprise bonus pool § The pool is calculated as a percentage of profit subject to a minimum group return on equity target. The proportion of profit allocated to the pool increases as higher returns on equity are achieved. The targets set reflect the expectations of returns on equity:

Pre tax Post tax Enterprise Year underlying profit underlying ROE pool

2009 £134m 21% £14.4m 2008 £50m 10.7% £3.9m 2007 £131m 28.8% £18.3m

This approach better aligns the interests of directors and staff with shareholders and ensures that bonuses are affordable. The pool is calculated based on the post tax return for the financial year having adjusted for the proposed enterprise pool payments. The calculation uses the underlying profit which excludes the charges or credits that arise from the IFRS foreign exchange adjustments on non-monetary items. The enterprise bonus pool may be awarded in cash and deferred shares and covers discretionary bonuses for executive directors (this is the only cash bonus plan they participate in), discretionary performance related bonus for underwriters (in addition to the profit related pay plan) and is used to enhance the support bonus plan when group performance warrants. The employer’s national insurance contribution is charged to the enterprise pool. The proportion of this pool allocated among executive directors is at the discretion of the committee, taking into account the individual’s contribution and the performance of their division (if appropriate). In determining the award levels for 2009, as the group’s post tax return on equity (excluding the impact of foreign exchange on non-monetary items) had increased compared with 2008, the enterprise bonus pool was larger than in 2008. In the past the committee had discretion to pay part of the enterprise pool in deferred shares that vest after three years subject to continued employment. The committee has formalised the arrangement from 2009 and depending on the level of bonus a specified percentage will be paid in deferred shares, which vest after three years subject to continued employment. Deferral will range from 0% for low bonuses to 35% of bonuses at stretch performance. Given the bonuses earned for 2009, 25% of the executive directors’ awards will be in shares with exception of Andrew Beazley. The committee believes that this level of deferral, along with the LTIP awards, results in a substantial portion of the package being deferred for at least three years. Underwriter bonus plan – profit related pay plan § Underwriters participate in a profit related pay plan based upon the profitability of their underwriting account. No executive directors participate in the profit related pay plan. The objective of profit related pay is to align the interests of the group and the individual through aligning underwriter’s reward to the long-term profitability of their portfolio. Profit related pay is awarded irrespective of the results of the group and is capped at a maximum of 150% of salary. Underwriters that have significant influence over a portfolio are offered this arrangement. There is no automatic eligibility. This bonus is awarded as cash and is based upon a fixed proportion of profit achieved on the relevant underwriting account as measured at the 33 month point and later. Any movements in prior years are reflected in future year payments as the accounts develop after the 33 month point. For long-tail accounts the class is still relatively immature at the 33 month stage and therefore payments will be modest. They will receive further payouts in years 4, 5 and 6 (and even later) as the account matures. Therefore each year they could be receiving payouts from multiple years of account. If the account deteriorates as it develops any payouts are “clawed back” through reductions in future profit related pay bonuses. The fixed proportion is calculated based upon profit targets which are set through the business planning process and reviewed by a committee formed of executive committee members and functional specialists including the group actuary and the head of talent management. Underwriting risk is taken into account when setting profit targets. In addition to profit related pay underwriters are also eligible to receive a discretionary bonus, based upon performance, from the enterprise bonus pool. A proportion of this bonus may be paid in deferred shares, which vest after three years subject to continued employment. Support bonus plan § Employees who are not members of the executive and who do not participate in the underwriters’ profit related pay plan participate in a discretionary bonus pool. This pool provides the employees with a discretionary award of an annual performance bonus that reflects overall individual performance including meeting annual objectives.

Beazley Annual Report 2009 61 Directors’ remuneration report continued

A proportion of this award may also be dependent on the group’s return on equity and therefore allocated from the enterprise bonus pool. A proportion of this bonus may be paid in deferred shares, which vest after three years subject to continued employment. Share plans §

Retention shares The retention plan is now only used in exceptional circumstances to ensure key individuals have an adequate retention package and it forms part of an individual’s bonus in respect of performance and/or service over one financial year. In future, individuals participating in the LTIP will not be able to receive retention plan awards (including new executive directors prior to receiving their first LTIP award). The retention plan is operated on a discretionary basis with awards vesting at 25% per annum over years three to six. Share incentive plans The company’s long-term, share-based incentives include a long-term incentive plan (LTIP), a save-as-you-earn scheme (SAYE) and a Section 423 US savings-related share option plan, which are detailed below. The company also has two further share-based incentives: a tax-approved and an unapproved option plan, however no options have been granted under these plans since 2005. The share plans permit 10% of the company’s issued share capital to be issued pursuant to options/LTIP awards in a 10-year period. Since November 2002, 2.5% of this allowance (2008: 2.6%) has been allocated for option and LTIP awards. The long-term incentive plan (LTIP) Participation in the LTIP is restricted to employees and full-time executive directors of the company. Participants are selected on a discretionary basis and receive awards of free shares in the form of a nil-cost option, thus, no exercise price is payable. The options will normally be exercisable, subject to meeting the performance conditions set out below and provided that the participant continues in the employment of the company at that date, between the third and tenth anniversaries of grant. Dividends do not accrue on ordinary shares prior to vesting. A general meeting was held on 6 November 2009 at which the amendments to the plan were approved. The key features of the plan are: • Annual awards are made to senior management; • The maximum annual limit under the LTIP was increased to 200% of salary. For 2010, the CEO will receive an award of 200% of salary and the other executive directors 150% of salary; • All participants in the LTIP will be expected to build a shareholding in Beazley equal to their annual award level e.g. 200% of salary for the CEO. They will have three years to build up this shareholding from the date of grant of the first awards under the amended plan; • From 2010, 50% of the award will be measured over three years and 50% of the award will be measured over five years. Awards will vest at the end of the relevant performance period; • From 2010 awards, performance will be measured solely by net asset value per share (NAVps) performance in excess of the risk-free rate (RFR) (see targets below). The company decided to use a sole NAVps target as this is a key measure of the company’s financial performance and strong, sustained NAVps performance should in turn lead to enhanced shareholder returns; and • The committee currently intends to impose the same conditions as are described above for awards made after 2010. Performance conditions for awards from 2010 onwards:

NAVps performance % of award vesting

NAVps < RFR +10% p.a. 0% NAVps = RFR +10% p.a. 25% NAVps = RFR +15% p.a. 100% NAVps between RFR +10% and 15% p.a. Sliding scale between 25% and 100%

2009 and earlier LTIP awards: For awards made in 2009 and earlier the key features of the plan are: • Annual awards are made to senior executives; • The maximum annual limit is 100% of salary; • Performance is measured over three years; • For 2006 to 2009 awards performance is based 50% on NAVps performance in excess of the risk-free rate and 50% on TSR growth compared with that of members of a comparator group; and • There were different performance conditions for shares worth up to 50% of salary (‘basic shares’) and shares worth more than 50% of salary (‘additional shares’).

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‘Basic shares’ – shares worth up to 50% of salary

NAVps performance % of NAV award vesting Relative TSR growth % of TSR award vesting

NAVps < RFR + 5% p.a. 0% Below median 0% NAVps = RFR + 5% p.a. 100% Median 25% Upper quartile rank 100% Between median and upper quartile rank Sliding scale between 25% and 100%

‘Additional shares’ – shares worth more than 50% of salary

NAVps performance % of NAV award vesting Relative TSR growth % of TSR award vesting

NAVps < RFR + 5% p.a. 0% Below 75% 0% NAVps = RFR +10% p.a. 100% Above 90% 100% NAVps between RFR + 5% and 10% p.a. Sliding scale between Between 75% and 90% Sliding scale between 0% and 100% 0% and 100%

The companies in the comparator group for the TSR element are:

2006 2007 2008 2009

Alea • Amlin • • • • Atrium Underwriting • • Brit Insurance Holdings • • • • Catlin Group • • • Chaucer Holdings • • • • Hardy Underwriting • • • • Highway Insurance Holdings • • • Hiscox • • • • Kiln • • Lancashire Holdings • • Novae • • • • Wellington Underwriting •

Details of entitlements under this plan, which are all subject to the above performance conditions, for directors who served during the period, are set out in the next table. In 2009 awards over shares worth £200,000 were made to each of the executive directors which included awards of additional shares (i.e. over 50% of salary) which were made as exceptional awards. The LTIP awards that were granted in March 2006 met the performance criteria in part and 50% of the awards vested in March 2009. The results are independently calculated by Hewitt New Bridge Street and verified by the committee. Total shareholder return: The graph shows Beazley’s performance, measured by TSR, compared with the performance of the FTSE 350 Non-Life Insurance Index and the FTSE All-Share Index, also measured by TSR. Beazley is a constituent of both these indices. The graph illustrates the movement of Beazley’s TSR, assuming dividends are reinvested on the ex dividend date, against that of the indices for the five year period to 31 December 2009. Total shareholder return (£) Source: Thomson Financial

250

200

150

100

0 31 Dec 04 31 Dec 05 31 Dec 06 31 Dec 07 31 Dec 08 31 Dec 09 This graph shows the value, by 31 December 2009, of £100 invested in Beazley plc on 31 December 2004 compared with the value of £100 invested in the FTSE 350 Non-Life Insurance. Beazley plc FTSE 350 Non-life insurance index FTSE All share index

Beazley Annual Report 2009 63 Directors’ remuneration report continued

The share option plan The company operates a HMRC approved plan and an unapproved plan. Participation in the plan is restricted to employees and full-time executive directors of Beazley group and participants are selected on a discretionary basis. All options granted under this plan have vested. It is the committee’s intention to only grant options under this plan in exceptional circumstances and no options have been granted since 2005. SAYE scheme A HMRC approved SAYE scheme was launched in May 2003 for the benefit of UK-based employees. The scheme offers a three-year savings contract period with options being offered at a 20% discount to the share price on grant. Monthly contributions are made through payroll deduction on behalf of participating employees. Options may be exercised early in the event of an employee’s death or retirement, certain other cessations of employment and certain Beazley group change in control events. Savings-related share option plan for US employees The Beazley plc savings-related share option plan for US employees permits all eligible US-based employees to purchase shares of Beazley plc at a discount of up to 15% to the shares’ fair market value. The plan is designed to comply with the terms of Section 423 of the US Internal Revenue Code and is similar to the SAYE scheme operated for UK-based Beazley employees. Participants elect to participate by entering into a savings contract under which the participant agrees to have a portion of his or her compensation withheld in a savings plan for the purpose of exercising options granted under the plan. The maximum amount of compensation that may be withheld each month under all savings contracts for any participant may not exceed $500. After a two-year period, participants may exercise their options to purchase Beazley shares at the exercise price. The shares purchased are non-transferable for at least 12 months following exercise. Unexercised options lapse twenty-seven months after the date on which the options were granted. Beazley staff underwriting § Traditionally, Lloyd’s underwriters contributed their personal capital to syndicates in which they worked. With the move to corporate provision of capital, individual membership of Lloyd’s has declined significantly. The committee feels that having personal capital at risk in the syndicate is an important part of the remuneration policy and provides a healthy counterbalance to incentivisation through bonuses and long-term incentive awards. The company has operated the Beazley Staff Underwriting Plan for this purpose since 2004 and executive directors and other selected staff are invited to participate through bonus deferral with an element of their cash incentives “at risk” as capital commitments. These capital commitments can be lost in full if underwriting performance is poor. The group funds the initial capital for the participants in the scheme. The initial capital outlay is then reimbursed by individual bonus deferral. The aim is for individuals to fund their capital within three years. To date over 100 employees of the group have committed to put at risk £4.2m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £3.9m has already been deferred from the bonuses awarded. The following directors participated in syndicate 623 through Beazley Staff Underwriting Limited:

2008 year of 2009 year of 2010 year of Total bonuses account account account deferred underwriting underwriting underwriting and at risk capacity capacity capacity £ £ £ £

A F Beazley 200,000 454,545 283,661 300,000 M L Bride – – – 400,000 N H Furlonge 132,000 300,000 283,661 400,000 J G Gray 132,000 300,000 283,661 400,000 D A Horton 132,000 300,000 283,661 400,000 N P Maidment 132,000 300,000 283,661 400,000 C A Washbourn 132,000 300,000 283,661 400,000

64 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Details of individual emoluments and compensation § The emoluments in respect of qualifying services and compensation of each person who served as a director during the year were as follows:

Salary Staff supplements Total for 12 Total for 12 Enterprise Staff underwriting Notional in lieu months to Personal months to Salary Enterprise deferred underwriting deferred dividend of pension 31 December pension 31 December & fees1 cash bonus shares distribution2 bonus3 on shares4 Benefits contribution 2009 contribution 20087 £ £ £ £ £ £ £ £ £ £ £

J G W Agnew 105,000 – – – – – – – 105,000 – 75,000 A F Beazley 375,000 400,000 – 77,876 – 17,567 85,336 6 179,521 1,135,300 – 1,008,864 M Bride 166,667 300,000 100,000 – – – 7,642 – 574,309 25,577 – J D Fishburn 58,000 – – – – – – – 58,000 – 49,000 N H Furlonge 255,000 300,000 100,000 39,066 – 5,296 17,646 124,340 841,348 – 599,073 J G Gray 285,000 375,000 125,000 20,876 – 11,268 22,340 – 839,484 43,134 512,506 A G K Hamilton 50,000 – – – – – – – 50,000 – 42,000 D A Horton 350,000 750,000 250,000 39,066 – 78,660 16,002 – 1,483,728 52,500 782,021 D L Jones 50,000 – – – – – – – 50,000 – 42,000 N P Maidment 260,000 600,000 200,000 20,876 – 8,627 23,354 – 1,112,857 39,000 582,026 P O’Connor 42,035 – – – – – – – 42,035 – – A D Pomfret 66,000 – – – – – – – 66,000 – 56,000 V J Sheridan 30,973 – – – – – – – 30,973 – – C A Washbourn 260,000 750,000 250,000 20,513 – 78,796 11,258 – 1,370,567 39,271 733,208 Total 2,353,675 3,475,000 1,025,000 218,273 – 200,214 183,578 303,861 7,759,601 199,482 4,481,698

Payments to former Executive Directors: J G Rowell5 349,330 96,781

1 Other than for the chairman, fees include fees paid for chairmanship of the audit and remuneration committees and for the role of senior independent director. 2 This is the return on a voluntary investment which is at risk. 3 The directors defer bonus entitlements to support their underwriting through Beazley Staff Underwriting Limited. The scheme was fully capitalised by the directors for the 2009 participation and therefore no element of bonus was deferred. 4 The notional dividend is a cash bonus equal to dividends the directors would have received during the vesting period of the deferred and retention shares. The payment of these notional dividends to directors during the 12 months to 31 December 2008 was not disclosed in the remuneration report for that period. The figures in the column showing the total remuneration for the 12 months to 31 December 2008 have therefore been adjusted from those contained in the remuneration report for that period to include the notional dividends paid to directors during that period. This is so that the aggregate figures in this table for the year ended 31 December 2008 and the year ended 31 December 2009 are shown on a consistent basis. 5 The payments were in respect of participation in the staff underwriting scheme and notional dividends in respect of his deferred and retention shares which vested in 2009. The payment for the staff underwriting scheme represents his final payment under the scheme and includes £236,050 of previously announced deferred bonuses and £113,280 as a commutation for profits due for the 2007 and 2008 years of account and interest due on his deferred bonuses. 6 This payment includes medical expenses which were paid to him during the year ended 31 December 2009. The medical expenses paid to Andrew Beazley during the year ended 31 December 2008 were not disclosed in the remuneration report for that period. The figures in the column showing the total remuneration for the year ended 31 December 2008 have therefore been adjusted from those contained in that remuneration report for that period to include the medical expenses paid to Andrew Beazley during that period. This is so that the aggregate figures in this table for the year ended 31 December 2008 and the year ended 31 December 2009 are shown on a consistent basis. 7 The figures in this column have been adjusted from the same figures contained in the remuneration report for the year ended 31 December 2008 in the ways described in notes 4 and 6 above so that they are prepared consistently with the aggregate figures in the above table for the year ended 31 December 2009. Martin Bride’s recruitment arrangements § On 27 April 2009 the company agreed to grant Martin Bride conditional free share awards over a total of 350,000 shares. The awards were made under Listing Rule 9.4.2R(2) to facilitate Mr Bride’s recruitment and were made in lieu of long-term share incentives forgone upon joining. Awards over 150,000 shares and 200,000 shares were granted on terms substantially similar to the terms of the Beazley retention plan and the Beazley deferred share plan respectively. The 150,000 shares will vest in four equal tranches on each of the third, fourth, fifth and sixth anniversaries of the date of grant and the 200,000 shares will normally vest in full on the third anniversary of the date of grant.

Beazley Annual Report 2009 65 Directors’ remuneration report continued

Directors’ share scheme interests § Details of share scheme interests of those directors who served during the period are as follows: Closing share Rights At 31 price on date Earliest date Scheme At 31 Dec 2008 issue Awarded Exercised Lapsed Dec 2009 Ex. price of exercise of exercise Expiry date

A F Beazley Deferred UK 03 Mar 08 90,361 3,984 – – – 94,345 Nil – 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 140,186 6,182 – – – 146,368 Nil – 13/03/2010 13/04/2010 LTIP 03 Mar 08 120,481 5,313 – – – 125,794 Nil – 03/03/2011 03/03/2018 LTIP 13 Mar 07 140,186 6,182 – – – 146,368 Nil – 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil – 16/02/2012 16/02/2019 LTIP 21 Mar 06 133,698 5,896 – 69,797 69,797 – Nil 101.75 21/03/2009 21/03/2016 SAYE 2006 10,083 444 10,527 – – 88.88 108.00 01/07/2009 Retention 21 Mar 05 74,910 3,303 – 39,106 – 39,107 87.00 88.00 21/03/2008 – Retention 21 Mar 06 222,831 9,826 – 77,552 – 155,105 87.00 88.00 21/03/2009 – C A Washbourn SAYE 2009 – – 13,071 – – 13,071 Nil – 17/04/2012 17/10/2012 Deferred UK 03 Mar 08 120,481 5,313 – – – 125,794 Nil – 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 105,140 4,636 – – – 109,776 Nil – 13/03/2010 13/04/2010 ESOS UNAPP 29 Mar 04 23,320 1,028 – – – 24,348 Nil – 29/03/2007 29/03/2014 LTIP 03 Mar 08 126,506 5,578 – – – 132,084 Nil – 03/03/2011 03/03/2018 LTIP 13 Mar 07 147,196 6,491 – – – 153,687 Nil – 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil – 16/02/2012 16/02/2019 LTIP 21 Mar 05 144,641 6,378 – – – 151,019 Nil – 21/03/2008 21/03/2015 LTIP 21 Mar 06 90,181 3,976 – – 47,078 47,078 Nil – 21/03/2009 21/03/2016 Retention 04D Dec 06 1,000,000 44,100 – 261,025 – 783,075 98.46 99.55 04/12/2009 – Retention 21 Mar 05 63,674 2,808 – 33,241 – 33,241 87.00 88.00 21/03/2008 – Retention 21 Mar 06 120,241 5,302 – 41,847 – 83,696 87.00 88.00 21/03/2009 – D A Horton SAYE 2009 – – 13,071 – – 13,071 Nil – 17/04/2012 17/10/2012 Deferred UK 03 Mar 08 100,602 4,436 – – – 105,038 Nil 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 119,158 5,254 – – – 124,412 Nil 13/03/2010 13/04/2010 LTIP 03 Mar 08 75,301 3,320 – – – 78,621 Nil 03/03/2011 03/03/2018 LTIP 13 Mar 07 70,093 3,091 – – – 73,184 Nil 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil 16/02/2012 16/02/2019 LTIP 21 Mar 06 88,476 3,901 – 46,188 46,189 – 92.8750 94.25 21/03/2009 21/03/2016 Retention 09 Oct 07 1,000,000 44,100 – – – 1,044,100 Nil 09/10/2010 – Retention 21 Mar 05 63,674 2,808 – 33,241 – 33,241 87.00 88.00 21/03/2008 – Retention 21 Mar 06 117,968 5,202 – 41,056 – 82,114 87.00 88.00 21/03/2009 –

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Closing share Rights At 31 price on date Earliest date Scheme At 31 Dec 2008 issue Awarded Exercised Lapsed Dec 2009 Ex. price of exercise of exercise Expiry date

J G Gray SAYE 2009 – – 13,071 – – 13,071 Nil 17/04/2012 17/10/2012 Deferred UK 03 Mar 08 103,012 4,542 – – – 107,554 Nil 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 119,158 5,254 – – – 122,412 Nil 13/03/2010 13/04/2010 LTIP 03 Mar 08 108,433 4,781 – – – 113,214 Nil 03/03/2011 03/03/2018 LTIP 13 Mar 07 105,140 4,636 – – – 109,776 Nil 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil 16/02/2012 16/02/2019 LTIP 21 Mar 06 101,506 4,476 – 52,991 52,991 – Nil 98.00 21/03/2009 21/03/2016 Retention 21 Mar 05 56,183 2,477 – 29,330 – 29,330 87.00 88.00 21/03/2008 – Retention 21 Mar 06 135,341 5,968 – 47,102 – 94,207 87.00 88.00 21/03/2009 – M L Bride Deferred Plan 27 Apr 09 – – 200,000 – – 200,000 Nil 27/04/2012 27/05/2012 LTIP 27 Apr 09 – – 100,000 – – 100,000 Nil 27/04/2011 27/04/2019 Retention Plan 27 Apr 09 – – 150,000 – – 150,000 Nil 27/04/2012 – N H Furlonge SAYE 2009 – – 13,071 – – 13,071 Nil 17/04/2012 17/10/2012 Deferred UK 03 Mar 08 60,240 2,656 – – – 62,896 Nil 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 70,093 3,091 – – – 73,184 Nil 13/03/2010 13/04/2010 LTIP 03 Mar 08 60,240 2,656 – – – 62,896 Nil 03/03/2011 03/03/2018 LTIP 13 Mar 07 70,093 3,091 – – – 73,184 Nil 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil 16/02/2012 16/02/2019 LTIP 21 Mar 06 70,781 3,121 – 36,951 36,951 – 92.875 94.25 21/03/2009 21/03/2016 Retention 21 Mar 05 18,727 825 – 9,776 – 9,776 87.00 88.00 21/03/2008 – Retention 21 Mar 06 70,781 3,121 – 24,633 – 49,269 87.00 88.00 21/03/2009 – N P Maidment Deferred UK 03 Mar 08 102,409 4,516 – – – 106,925 Nil 03/03/2011 03/04/2011 Deferred UK 13 Mar 07 119,158 5,254 – – – 124,412 Nil 13/03/2010 13/04/2010 LTIP 03 Mar 08 60,240 2,656 – – – 62,896 Nil 03/03/2011 03/03/2018 LTIP 13 Mar 07 70,093 3,091 – – – 73,184 Nil 13/03/2010 13/03/2017 LTIP 16 Feb 09 – 8,647 196,078 – – 204,725 Nil 16/02/2012 16/02/2019 LTIP 21 Mar 06 68,487 3,020 – 35,753 35,754 – 92.8750 94.25 21/03/2009 21/03/2016 SAYE 2006 10,083 444 10,527 – – 88.88168 99.00 01/07/2009 01/01/2010 Retention 21 Mar 05 56,183 2,477 – 29,330 – 29,330 87.00 88.00 21/03/2008 – Retention 21 Mar 06 91,317 4,027 – 31,781 – 63,563 87.00 88.00 21/03/2009 –

LTIP awards mid-market price at 21 March 2006 was 116p (Source: Bloomberg) LTIP awards mid-market price at 13 March 2007 was 142p (Source: Bloomberg) LTIP awards mid-market price at 3 March 2008 was 166p (Source: Bloomberg) LTIP awards mid-market price at 16 February 2009 was 102p and at 27 April 2009 was 101p (Source: Bloomberg) The market price of Beazley ordinary shares at 31 December 2009 was 99p and the range during the year was 86p to 130p.

Beazley Annual Report 2009 67 Directors’ remuneration report continued

Service contracts § The company has service contracts with executive directors. It is company policy that such contracts contain notice periods, from the company or employee, of not more than twelve months. Details of the contracts currently in place for executive directors are as follows:

Date of contract Unexpired term* Notice period Provision for compensation

A F Beazley 1 July 2009 n/a 12 months Nil M Bride 9 June 2009 n/a 12 months Nil N H Furlonge 9 June 2009 n/a 12 months Nil J G Gray 9 June 2009 n/a 12 months Nil D A Horton 9 June 2009 n/a 12 months Nil N P Maidment 9 June 2009 n/a 12 months Nil C A Washbourn 9 June 2009 n/a 12 months Nil

*The unexpired term is not applicable as each of the executive director’s contract is on a rolling basis. In May 2009 the directors were issued with new service contracts following the redomiciliation to Ireland. The service contracts remain with Beazley Management Limited. The directors also have appointment letters as directors of Beazley plc from May 2009. Subject to the notice requirements described above, there is no provision in the service agreements for compensation to be payable on early termination of the contract. The company will normally phase any payments of compensation which will also be subject to negotiation and mitigation. Non-executive directors § The fees of non-executive directors, other than the chairman, are determined by the board. The fees for the chairman are determined by the board, following a recommendation from the remuneration committee. When setting fee levels consideration is given to levels in comparable companies for comparable services in addition to the time commitment and responsibilities of the individual director. No non-executive director participates in the company’s incentive arrangements or pension plan. Non-executive directors are appointed for fixed terms, normally for three years, and may be reappointed for future terms. Non- executive directors are typically appointed through a selection process that assesses if the candidate brings the desired competence and skills to the group. The board has identified several key competencies for non-executive directors to complement the existing skill-set of the executive directors. These competencies are as follows: • Insurance sector expertise; • Asset management skills; • Public company and corporate governance experience; • Risk management skills; and • Finance skills. Every two years a review of the fees and other income payable takes place and was last carried out by the board in December 2008. Details of the non-executive directors’ terms of appointment and their fees for 2010 are set out below:

Commencement date of current Current appointment Other annual fees letter Expires fees*

J G W Agnew (£) 105,000 20 Mar 2009 31 Dec 2011 – A D Pomfret (£) 50,000 20 Mar 2009 31 Dec 2010 14,000 D L Jones (£) 50,000 20 Mar 2009 31 Dec 2011 – A G K Hamilton (£) 50,000 20 Mar 2009 31 Dec 2011 10,000 G P Blunden (£) 50,000 1 Jan 2010 31 Dec 2012 – V J Sheridan (€) 60,000 9 Jun 2009 31 Dec 2011 – P O’Connor (€) 60,000 13 Mar 2009 31 Dec 2011 –

* Other fees relates to the additional fee payable to A D Pomfret in respect of his chairmanship of the remuneration committee and as senior independent director and to A G K Hamilton in respect of his chairmanship of the audit committee.

68 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Directors’ interests in shares § Details of the ordinary shareholdings of the directors who held office during the year are as follows:

Shareholding as a percentage of the total issued ordinary Number of ordinary Number of ordinary share capital shares held as at Rights Options Options Shares Shares shares held as at as at 1 Jan 2009 issue exercised sold purchased sold 31 Dec 2009 31 Dec 2009

J G W Agnew 135,000 63,947 – – 15,000 – 213,947 0.04% A F Beazley 2,867,322 358,967 196,982 – – – 3,423,271 0.64% M Bride – – – – 65,000 – 65,000 0.01% J D Fishburn 15,714 7,443 – – – – 23,157 0.00% N H Furlonge 1,413,556 236,944 71,360 32,209 – – 1,689,651 0.32% J G Gray 2,403,649 11,290 129,423 57,336 – – 2,487,026 0.47% D A Horton 392,879 188,270 120,485 53,133 61,891 – 710,392 0.13% N P Maidment 3,082,629 187,211 107,391 42,610 – – 3,334,621 0.62% A D Pomfret 16,500 7,815 – – – – 24,315 0.00% C A Washbourn 12,736 6,032 228,715 75,088 – – 172,395 0.03% A G K Hamilton 10,000 7,991 – – 20,000 – 37,991 0.01% D L Jones 90,000 – – – – – 90,000 0.02% V J Sheridan – – – – 20,000 – 20,000 0.00% P O’Connor – – – – 30,000 – 30,000 0.01%

With a total of 533,825,796 issued shares at 31 December 2009 the directors held 2.31%. G P Blunden’s shareholding at the date of appointment on 1 January 2010 was 107,156. Executive director’s other interests N H Furlonge holds a non-executive appointment with the Lloyd’s franchise board. He was appointed to this role on 4 February 2008. He receives a fee of £55,000 per annum in respect of this appointment. Annual general meeting A resolution will be proposed at the forthcoming annual general meeting to be held on 24 March 2010 to approve this directors’ remuneration report. I am keen to encourage an ongoing dialogue with shareholders. Accordingly, please feel free to contact me, if you would like to discuss any matter arising from this report or on remuneration issues generally, either by writing to me at the company’s head office or by email through Sian Coope at [email protected] By order of the board Andy Pomfret Chairman of the remuneration committee 9 February 2010

Beazley Annual Report 2009 69 Directors’ report

The directors have pleasure in presenting their report and the audited financial statements of the group for the year ended 31 December 2009. Principal activity Beazley plc is the ultimate holding company for the Beazley group, a global specialist risk insurance and reinsurance business operating through its managed syndicates 2623, 6107, 3623, 3622 and 623 at Lloyd’s in the UK and BICI, a US admitted carrier in the US. Beazley plc became the parent company of the Beazley group on 9 June 2009. Prior to this the parent company of the group was Beazley Group plc. The details provided in this report represent information relating to Beazley Group plc from 1 January 2009 to 8 June 2009, and for Beazley plc from 9 June 2009 to 31 December 2009. Review of business A more detailed review of the business for the year and a summary of future developments are included in the annual statement on pages 10 to 17 and the financial review on pages 32 to 44. Results and dividends The consolidated profit before taxation for the year ended 31 December 2009 amounted to £100.7m (2008: £87.2m). The directors announce a second interim dividend of 4.7p (2008 final dividend: 4.4p) per ordinary share. This, when taken with the interim dividend of 2.3p (2008: 2.2p) per share, gives a total ordinary dividend of 7.0p per share for the year ended 31 December 2009 (2008: 6.6p). Directors The directors of the company at 31 December 2009, who served during the year and to the date of this report, were as follows: Jonathan Geoffrey William Agnew (non-executive chairman) David Andrew Horton (chief executive) Andrew Frederick Beazley (deputy chairman) Martin Lindsay Bride (group finance director) – 5 May 2009 John Dudley Fishburn (non-executive director) – resigned 31 December 2009 Nicholas Hill Furlonge (director) Jonathan George Gray (director) Alexander Gordon Kelso Hamilton (non-executive director) Daniel Lawrence Jones (non-executive director) Neil Patrick Maidment (director) Padraic Joseph O’Connor (non-executive director) – 13 March 2009 Andrew David Pomfret (non-executive director) Vincent Joseph Sheridan (non-executive director) – 9 June 2009 Clive Andrew Washbourn (director) George Blunden was appointed a non-executive director effective 1 January 2010. The company has adopted Beazley Group plc’s (the former holding company of the Beazley group) retirement by rotation policy. Accordingly, Jonathan Gray, Gordon Hamilton and Dan Jones retire by rotation and, being eligible, offer themselves for re-election at the forthcoming annual general meeting. George Blunden, Martin Bride and Vincent Sheridan, who were appointed by the board since the last annual general meeting, retire inaccordance with the articles of association and, being eligible, offer themselves for re-election at the forthcoming annual general meeting. Details of directors’ service contracts and beneficial interests in the company’s share capital are given in the directors’ remuneration report on pages 58 to 69. Biographies of directors seeking re-election are set out on pages 52 and 53. Corporate governance The company’s compliance with corporate governance is disclosed in the corporate governance statement on pages 54 to 57. Going concern The directors have prepared these accounts on a going concern basis, as they are of the opinion that the company and group will be able to pay its debts as and when they fall due. After reviewing the group’s budgets and medium-term plans, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future.

70 www.beazley.com Quick read Annual statement Performance by division Financial review Corporate governance Financial statements

Supplier payment policy The company and group’s policy for the year ending 31 December 2009, for all suppliers, is to fix terms of payment when agreeing the terms of each business transaction, to ensure the supplier is aware of those terms and to abide by the agreed terms of payment. The group had an average 50 days, purchases included in trade creditors at 31 December 2009 (2008: 50 days). Corporate, social and environmental responsibility The company’s corporate, social and environmental policy is disclosed on pages 49 to 51. No political donations were made by the group in either of the current or prior reporting period. Financial instruments and risk management Further information on reinsurance, borrowings and financial instruments is contained in notes 16, 18 and 24 to the financial statements. Substantial shareholdings As at 3 February 2010, the board had been notified of, or was otherwise aware of, the following shareholdings of 3% or more of the company’s issued ordinary share capital:

Number of ordinary shares %

Invesco Perpetual 97,277,130 18.2 Jupiter Asset Management 49,868,518 9.3 Aberforth Partners 34,173,023 6.4 Legal & General Investment Management 24,304,988 4.6 Standard Life Investments 23,068,832 4.3 BlackRock 21,711,610 4.1 Fidelity Investments 18,974,219 3.6 Dimensional Fund Advisors 18,568,303 3.5 Ignis Asset Management 18,453,683 3.5 JPMorgan Asset Management 16,895,789 3.2

Annual general meeting The notice of the annual general meeting to be held at 12.00 noon on Wednesday, 24 March 2010 at 2 Northwood Park, Santry, Dublin is set out in the circular to shareholders. At 8 February 2010 there are outstanding options to subscribe for 6.3m ordinary shares pursuant to employee share schemes, representing 1.2% of the issued share capital. If the authority to purchase shares were exercised in full, these options would represent 1.2% of the enlarged issued share capital. Auditors A resolution to re-appoint KPMG Audit plc as auditors will be proposed at the forthcoming annual general meeting. Disclosure of information to auditors The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of that information. By order of the board S A Coope Company secretary 2 Northwood Park Northwood Santry Dublin 9 9 February 2010

Beazley Annual Report 2009 71 Statement of directors’ responsibilities in respect of the annual report and the financial statements

The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations. The directors are required to prepare group and parent company financial statements for each financial year. They are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. The directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. The directors are responsible for the preparation of the directors’ report and corporate governance statement. The directors have also elected to prepare a directors’ remuneration report on a voluntary basis and corporate governance statement. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK and Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

D A Horton Chief executive officer 9 February 2010

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Independent auditors’ report to the members of Beazley plc

We have audited the group and parent company financial statements (the ‘’financial statements’’) of Beazley plc for the year ended 31 December 2009 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Company Cash Flow Statements, the Consolidated and Parent Company Statements of Changes in Equity, and the related notes. These financial statements have been prepared under the accounting policies set out therein. In addition to our audit of the financial statements, the Directors have engaged us to audit certain information in the Report of the Remuneration Committee (the information that has been audited is highlighted within the report). The directors have decided to prepare the report (in addition to that required to be prepared) as if the Company were required to comply with the requirements of Schedule 8 to the UK Companies Act 2006, The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) and as if the Company were a continuation of the previous holding company Beazley Group plc. This report is made solely to the Company’s members, as a body, in accordance with Article 110 of the Companies (Jersey) Law 1991 and, in respect of the separate opinion in relation to the Directors’ Remuneration Report, on terms that have been agreed. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and, in respect of the separate opinion in relation to the Directors’ Remuneration Report and reporting on corporate governance, those matters that we have agreed to state to them in our report, and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU are set out in the Statement of Directors’ Responsibilities on page 72. Our responsibility is to audit the financial statements and the part of the Directors’ Remuneration Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the Companies (Jersey) Law 1991 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation. We also report to you whether the part of the Report of the Remuneration Committee to be audited has been properly prepared as if the Company were required to comply with the requirements of Schedule 8 to the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410). We also report to you whether in our opinion the information given in the Directors’ Report is consistent with the financial statements. The information given in the Directors’ Report includes that specific information presented in the annual statement and financial review that is cross referred from the Business Review section of the Directors’ Report. In addition we report to you if, in our opinion, the company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read the other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Directors’ Remuneration Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s and company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Directors’ Remuneration Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Directors’ Remuneration Report to be audited. Opinion In our opinion: • the group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the group’s affairs as at 31 December 2009 and of its profit for the year then ended; • the parent company financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies (Jersey) Law 1991, of the state of the parent company’s affairs as at 31 December 2009; • the financial statements have been properly prepared having regard to the Companies (Jersey) Law 1991 and, as regards the group financial statements, Article 4 of the IAS Regulation; • the part of the Directors’ Remuneration Report which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the Companies Act 2006 The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 , as if those requirements were to apply to the company; and • the information given in the Directors’ Report is consistent with the financial statements. KPMG Audit Plc Chartered Accountants 8 Salisbury Square, London EC4Y 8BB 9 February 2010

Beazley Annual Report 2009 73 Consolidated income statement for the year ended 31 December 2009

2009 2008 Notes £m £m

Gross premiums written 3 1,115.5 875.7 Written premiums ceded to reinsurers (267.5) (135.3) Net premiums written 3 848.0 740.4

Change in gross provision for unearned premiums (62.1) (53.4) Reinsurer’s share of change in the provision for unearned premiums 50.8 (3.9) Change in net provision for unearned premiums (11.3) (57.3)

Net earned premiums 3 836.7 683.1

Net investment income/(loss) 4 56.1 (25.8) Other income 5 12.5 10.1 68.6 (15.7)

Revenue 905.3 667.4

Insurance claims 641.8 522.1 Insurance claims recoverable from reinsurers (168.8) (121.0) Net insurance claims 3 473.0 401.1

Expenses for the acquisition of insurance contracts 3 218.2 182.6 Administrative expenses 82.7 54.7 Foreign exchange loss/(gain) 21.9 (70.8) Operating expenses 322.8 166.5

Expenses 3 795.8 567.6

Results of operating activities 109.5 99.8

Finance costs 8 (8.8) (12.6) Profit before income tax 100.7 87.2

Comprises: Underlying profit* 3 147.3 41.0 Notional adjustment on foreign exchange on non-monetary items 3 (46.6) 46.2

Income tax expense 9 (12.3) (22.8) Profit for the year attributable to equity shareholders 88.4 64.4

Earnings per share (pence per share): Basic 10 18.4 18.8 Diluted 10 17.8 18.0

* underlying profit comprises profit before tax after the notional adjustment on foreign exchange on non-monetary items (see detailed explanation in note 3b to the financial statements).

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Statement of comprehensive income for the year ended 31 December 2009

31 December 31 December 2009 2008 £m £m

Group Profit after income tax 88.4 64.4 Other comprehensive income: Change in net investment hedge 7.6 (20.1) Foreign exchange translation differences (15.3) 31.7 Total other comprehensive income (7.7) 11.6 Total comprehensive income recognised 80.7 76.0

31 December 2009 Statement of comprehensive income for the period ended 31 December 2009 £m Company Profit after income tax 5.7 Other comprehensive income: Foreign exchange translation differences – Total other comprehensive income – Total comprehensive income recognised 5.7

Beazley Annual Report 2009 75 Statement of changes in equity for the year ended 31 December 2009

Other Retained Share capital reserves earnings Total Notes £m £m £m £m

Group Balance at 1 January 2008 18.4 223.1 157.1 398.6

Total recognised income for year – 11.6 64.4 76.0 Dividends paid 11 – – (35.4) (35.4) Issue of shares 20,21 0.1 0.8 – 0.9 Equity settled share-based payments 21 – 4.6 – 4.6 Acquisition of own shares in trust 21 – (7.1) – (7.1) Purchase of treasury shares 21 – (24.9) – (24.9) Balance at 31 December 2008 18.5 208.1 186.1 412.7

Total comprehensive income recognised – (7.7) 88.4 80.7 Dividends paid 11 – – (26.8) (26.8) Issue of shares 20,21 9.1 141.6 – 150.7 Equity settled share based payments 21 – 5.2 – 5.2 Acquisition of own shares in trust 21 – (3.9) – (3.9) Cancellation of treasury shares 20,21 (0.9) 0.9 – – Transfer on scheme of arrangement and reverse acquisition 21 – (358.4) 358.4 – Balance at 31 December 2009 26.7 (14.2) 606.1 618.6

Other Retained Share capital reserves earnings Total Statement of changes in equity for the period ended 31 December 2009 Notes £m £m £m £m Company Balance on incorporation at 9 June 2009 – – – –

Transfer on scheme of arrangement and reverse acquisition 21 26.7 (22.1) 494.4 499.0 Total comprehensive income recognised – – 5.7 5.7 Dividends paid 11 – – (11.9) (11.9) Issue of shares 20,21 – 0.3 – 0.3 Equity settled share based payments 21 – 2.8 – 2.8 Acquisition of own shares in trust 21 – (2.6) – (2.6) Balance at 31 December 2009 26.7 (21.6) 488.2 493.3

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Balance sheet as at 31 December 2009

2009 2008 Group Company Group Company Notes £m £m £m £m

Assets Intangible assets 12 70.5 – 52.5 – Plant and equipment 13 7.7 0.3 8.1 – Investment in subsidiaries – 491.6 – – Investment in associates 14 0.9 0.9 – – Deferred acquisition costs 15 96.6 – 91.5 – Deferred income tax 28 5.5 – 6.8 – Financial investments 16 1,769.1 – 1,550.6 – Derivative financial instruments 25 5.8 – 2.7 – Insurance receivables 17 309.3 – 287.8 – Reinsurance assets 18,23 718.1 – 538.6 – Retirement benefit asset 27 1.0 Other receivables 15.9 0.5 15.3 – Cash and cash equivalents 19 505.2 – 443.6 – Total assets 3,505.6 493.3 2,997.5 –

Equity Share capital 20 26.7 26.7 18.5 – Other reserves 21,22 (14.2) (21.6) 208.1 – Retained earnings 606.1 488.2 186.1 – Total equity 618.6 493.3 412.7 –

Liabilities Insurance liabilities 23 2,499.2 – 2,246.7 – Borrowings 24 173.1 – 177.5 – Other payables 26 179.7 – 115.7 – Deferred income tax 28 21.8 – 37.1 – Current income tax liabilities 13.2 – 7.8 – Total liabilities 2,887.0 – 2,584.8 – Total equity and liabilities 3,505.6 493.3 2,997.5 –

The financial statements were approved by the board of directors on 9 February 2010 and were signed on its behalf by:

J G W Agnew, Chairman M L Bride, Finance director

Beazley Annual Report 2009 77 Cash flow statement for the period ended 31 December 2009

2009 2008

Group Company Group Notes £m £m £m

Cash flow from operating activities Profit before tax 100.7 5.7 87.2 Adjustments for: Amortisation of intangibles 1.4 – 3.5 Equity settled share based compensation 5.2 – 3.4 Retranslation of overseas net assets 3.6 – (5.6) Net fair value (gains)/losses on financial assets (6.6) – 38.1 Depreciation of plant & equipment 3.1 – 2.6 Transfer of shares to employees – – 1.2 Increase in insurance and other liabilities 316.5 – 775.4 Increase in insurance, reinsurance and other receivables (201.5) (0.5) (276.4) Increase in deferred acquisition costs (5.0) – (9.5) Financial income (40.5) – (65.1) Financial expense 8.8 – 12.6 Income tax paid (21.5) – (26.2) Contribution to pension fund (1.0) – (0.9) Net cash from operating activities 163.2 5.2 540.3

Cash flow from investing activities Purchase of plant and equipment 13 (3.1) (0.3) (3.5) Purchase of syndicate capacity 12 (1.1) – (0.5) Acquisition of subsidiary (net of cash acquired) 12 (14.8) (491.6) (9.4) Purchase of investments (6,267.5) – (2,873.1) Expenditure on software development 12 (6.9) – (3.3) Proceeds from sale of investments 6,055.5 – 2,415.7 Investment in associate (0.9) (0.9) – Interest and dividends received 40.6 – 65.1 Net cash used in investing activities (198.2) (492.8) (409.0)

Cash flow from financing activities Proceeds from issue of shares 150.5 499.5 0.8 Purchase of treasury shares – – (24.9) Acquisition of own shares in trust 21 (3.9) – (7.1) Interest paid (8.8) – (12.6) Dividends paid 11 (26.8) (11.9) (35.4) Net cash used in financing activities 111.0 487.6 (79.2)

Net increase in cash and cash equivalents 76.0 – 52.1 Cash and cash equivalents at beginning of year 443.6 – 358.3 Effect of exchange rate changes on cash and cash equivalents (14.4) – 33.2 Cash and cash equivalents at end of year 19 505.2 – 443.6

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Notes to the financial statements

1 Statement of accounting policies Beazley plc is a company incorporated in Jersey and domiciled in Ireland. The consolidated financial statements of the group for the year ended 31 December 2009 comprise the parent company and its subsidiaries and the group’s interest in associates. Both the financial statements of the parent company, Beazley plc, and the consolidated financial statements of the group have been prepared and approved by the directors in accordance with IFRSs as adopted by the EU (‘Adopted IFRSs’). The following accounting policies apply to both the group and parent company unless otherwise indicated. These consolidated financial statements have been prepared on the basis of adopted IFRSs in issue that are effective or available for early adoption at 31 December 2009. Based on these adopted IFRSs and interpretations, the directors have applied the accounting policies, as set out below. The following new and amended standards have been adopted by the group during the period IFRS 7 ‘Financial instruments – Disclosures’ (amendment) – effective 1 January 2009. The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on earnings per share. IAS 1 (revised). ‘Presentation of financial statements’ – effective 1 January 2009. The revised standard requires the group to present in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. As the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. The following new standards and interpretations released by the International Accounting Standards Board (IASB) have not been early adopted but are expected to be of relevance to future financial years. None of these are expected to have any significant impact on the future consolidated financial statements of the group: IFRS 5 (amended) Non-current Assets Held for Sale an Discontinued Operations IFRS 9 “Financial Instruments” (not yet endorsed) IAS 24 (revised) “Related Party Disclosures” IAS 27 (amended) “Consolidated and Separate Financial Statements” IAS 32 (amended) “Financial Instruments: Presentation – Classification of Rights Issue” IAS 39 (amended) “Financial Instruments: Recognition and Measurement – Eligible Hedged Items” Revised IFRS 3 “Business Combinations (2008)” incorporates the following changes that are likely to be relevant to the Group’s operations: • The definition of a business has been broadened, which may result in more acquisitions being treated as business combinations. • Contingent consideration will be measured at fair value, with subsequent changes in fair value recognised in profit or loss. • Transaction costs, other than share and debt issue costs, will be expensed as incurred. • Any pre-existing interest in an acquiree will be measured at fair value, with the related gain or loss recognised in profit or loss. • Any non-controlling (minority) interest will be measured at either fair value, or at its proportionate interest in the identifiable assets and liabilities of an acquiree, on a transaction-by-transaction basis. Revised IFRS 3, which becomes mandatory for the Group’s 2010 consolidated financial statements, will be applied prospectively and therefore there will be no impact on prior periods in the Group’s 2010 consolidated financial statements. The principal accounting policies applied in the preparation of these financial statements are set out below. The policies have been consistently applied to all periods presented, unless otherwise stated. New holding company Beazley plc was incorporated in Jersey on 20 February 2009 under the Jersey Companies Law as a public company limited by shares and with registered number 102680. With effect from 9 June 2009, under a scheme of arrangement involving a share exchange with the members of Beazley Group plc, the company became the new holding company of the Beazley group of companies. Throughout the period from incorporation to 9 June 2009 Beazley plc was a shell company with no material revenues and assets and did not constitute a ‘business’ as defined by IFRS 3 Business combinations. Consequently, due to the relative values of both companies, the shareholders of Beazley Group plc immediately before the share exchange acquired, in effect, 100 per cent of the share capital of Beazley plc on completion of the transaction. In order to appropriately reflect the substance of the transaction outlined above, the new holding company has been accounted for using the reverse acquisition principles outlined in IFRS 3. Consequently, Beazley Group plc is deemed to be the acquirer for accounting purposes and the legal parent company, Beazley plc is treated as a subsidiary whose identifiable assets and liabilities are incorporated into the group at fair value.

Beazley Annual Report 2009 79 Notes to the financial statements continued

1 Statement of accounting policies continued The Group’s consolidated financial statements are issued in the name of the legal parent company, Beazley plc. However, as a consequence of applying reverse acquisition accounting, the results for the year period ended 31 December 2009 represent a continuation of the consolidated activities of the Beazley group of companies. The consolidated balance sheet at 31 December 2009 reflects the issued share capital and reserves of Beazley plc. The comparative figures are those of Beazley Group plc as originally reported for the relevant period. The comparative figures for the financial year ended 31 December 2008 are extracted from the statutory accounts of Beazley Group plc for that financial year. Those accounts have been reported on by the company’s auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 237(2) of 237 (3) of the Companies Act 1985. Basis of presentation The consolidated financial statements are prepared using the historical cost convention except that investments and derivative financial instruments are stated at their fair value. All amounts presented are stated in sterling and millions, unless noted otherwise. Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions 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. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in notes 2 and 23 (on risk management, insurance liabilities and reinsurance assets). Consolidation a) Subsidiary undertakings Subsidiary undertakings, which are those entities in which the group, directly or indirectly, has the power to exercise control over financial and operating policies so as to obtain benefits from their activities, have been consolidated. They are consolidated from the date on which control is transferred to the group and cease to be consolidated from the date on which control ceases. The group has used the purchase method of accounting for the acquisition of subsidiaries. Under purchase accounting, the cost of acquisition is measured as the fair value of assets given, shares issued or liabilities undertaken at the date of acquisition plus costs 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. Financial investments made by the parent company in group undertakings are stated at cost 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. In view of the several 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 have been included in the financial statements. b) Associates Associates are those entities in 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. Investments in associates are accounted for using the equity method of accounting. Under this method, the group’s share of post-acquisition profits or losses is recognised in the income statement. 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 have been eliminated. Transactions and balances between the group and associates are not eliminated. Foreign currency translation a) Functional and presentation 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 consolidated financial statements are presented in sterling, which is the group’s presentation currency.

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1 Statement of accounting policies continued b) Transactions and balances Foreign currency transactions are translated into the functional currency using average exchange rates applicable to this period and which the group considers 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 income statement. Non-monetary items recorded at historical cost in foreign currencies are translated using the exchange rate on the date of the initial transaction. c) Group companies The results and financial position of the group companies that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities are translated at the closing rate ruling at the balance sheet date; • income and expenses for each income statement are translated at average exchange rates for the reporting period; and • all resulting exchange differences are recognised as a separate component of equity. The exchange differences on disposal of foreign entities are recognised in the income statement 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 an insurer 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. Financial guarantees provided by the parent company to subsidiaries are treated as insurance contracts under IFRS 4. 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. b) Unearned premiums A provision for unearned premiums (gross of reinsurance) represents that part of the gross premiums written that is estimated will be earned in the following financial periods. It is calculated using the daily pro-rata method where the premium is apportioned over the period of risk. Deferred acquisition costs (DAC) Acquisition costs comprise brokerage, premium levy and staff-related costs of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is deferred at the balance sheet 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. 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, regard is given 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 balance sheet 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 as well as investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the income statement initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (“unexpired risk provision”).

Beazley Annual Report 2009 81 Notes to the financial statements continued

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 and 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 with 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, 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 due. 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 income statement. Revenue Revenue consists of net earned premium, net investment income, profit commissions earned and managing agent’s fees. Managing agent’s fees are recognised as the services are provided. Profit commissions are recognised as profit is earned. Dividends paid Dividend distribution to the shareholders of the group is recognised in the period in which the dividends are approved by the shareholders in the group’s annual general meeting. Plant and equipment All plant and equipment is recorded at cost less accumulated depreciation. 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 value and useful lives are reviewed at each balance sheet date and adjusted if appropriate. The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstance 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 income statement. 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 (being the group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net present value of the forecast future cash flows is insufficient to support its carrying value. On transition to IFRS at 1 January 2004, any goodwill previously amortised or written off was not reinstated. 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 balance sheet. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment by reference to the expected future profit streams to be earned by Syndicate 2623 and provision is made for any impairment. c) Licences Licences have an indefinite useful life and are shown at fair value. Licences are annually tested for impairment and provision is made for any impairment when the net present value of future cash flows 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. Other non-qualifying costs are expensed as incurred. Financial instruments Financial instruments are recognised in the balance sheet at such time that the group becomes a party to the contractual provisions of the financial instrument. 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 cancelled. 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.

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1 Statement of accounting policies continued The fair value option in IAS 39 has been used to eliminate measurement or recognition inconsistency that would result from measuring assets or liabilities or recognising gains or losses on them on different bases. Financial assets On acquisition of a financial asset, the group is required to classify the asset into the following categories: financial assets at fair value through the income statement, loans and receivables, held to maturity and available for sale. The group does not make use of the held to maturity and available for sale classifications. Financial assets at fair value through income statement This category has two sub-categories: financial assets held for trading and those designated at fair value through the income statement at inception. Trading assets are those assets which are acquired principally for the purpose of selling in the short term, or which are held as part of a portfolio in which there is evidence of short-term profit taking or if it is designated so by management. Derivatives are classified as held for trading unless they are designated as hedging instruments. A financial asset is designated as fair value through the income statement upon initial recognition if it is managed and its 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. Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on 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 and represent 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 arm’s length transactions between knowledgeable, willing parties (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. 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 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 not later than when the valuation is supported wholly by observable market data or the transaction is closed out. Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking 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. Upon initial recognition, attributable transaction costs are recognised in the income statement when incurred. Financial assets at fair value through the income statement are measured at fair value, and changes therein are recognised in the income statement. Net changes in the fair value of financial assets at fair value through the income statement exclude interest and dividend income. Hedge funds The group participates in a number of hedge funds and related financial instruments for which there are no available quoted market prices. The valuation of these hedge funds is based on fair value techniques (as described above). The fair value of our hedge fund portfolio is calculated by reference to the underlying net asset values (NAV’s) of each of the individual funds. Consideration is also given in valuing these funds to any restriction applied to distributions, the existence of side pocket provisions, and the timing of the latest available valuations. 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. These 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 provision for impairments. Insurance payables are stated at amortised cost.

Beazley Annual Report 2009 83 Notes to the financial statements continued

1 Statement of accounting policies continued

Other receivables Other receivables principally consist of prepayments, accrued income and sundry debtors and are carried at amortised cost. Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses and foreign exchange gains and losses on financial assets at fair value through the income statement. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest is recognised on an accruals basis for financial assets at fair value through the income statement. The realised gains or losses on disposal of an investment is the difference between the proceeds and the carrying value of the investment. Unrealised investment gains and losses represent the difference between the carrying value at the balance sheet date, and the carrying value at the previous period end or purchase value during the period. 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 income statement over the period of the borrowings using the effective interest method. Finance costs comprise interest payable, fees paid for the arrangement of debt and letter of credit facility and commissions charged for the utilisation of letters of credit. These costs are recognised in the income statement using the effective interest method. Other payables Other payables are stated at amortised cost. 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 re-measured at their fair value. 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. The best evidence of fair value of a derivative at initial recognition is the transaction price. The group designates certain derivatives as cash flow hedges or net investment hedges. The group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedging transactions. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are being used in hedging transactions are expected to be and have been highly effective in offsetting changes in fair values or cash flows of hedged items. a) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity. The gain or loss relating to any ineffective portion is recognised immediately in the income statement within “net fair value gains/(losses) on derivative financial instruments”. If the derivative expires or is sold, terminated, exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognised in equity remains in equity until the forecast transaction affects the income statement. If the forecast transaction is no longer expected to occur, then the hedge accounting is discontinued and the balance in equity is recognised immediately in the income statement. b) Fair value hedges When a derivative is designated as a hedge of the change in fair value of a recognised asset or liability or a firm commitment, changes in the fair value of the derivative are recognised immediately in the income statement together with the changes in the fair value of the hedged item that are attributable to the hedged risk. If the derivative expires or is sold, terminated, exercised, or no longer meets the criteria for fair value hedge accounting, or the designation is revoked, hedge accounting is discontinued. Any adjustment up to that point, to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life. c) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement within “net fair value gains/(losses) on financial investments” through the income statement. Gains and losses accumulated in equity are included in the income statement on disposal of the foreign operation. Impairment of financial assets The group assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets 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 or group of financial assets that can be reliably estimated.

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1 Statement of accounting policies continued 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 income statement. Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, bank overdrafts and other short-term highly liquid investments with maturities of three months or less from the date of acquisition. Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made for operating leases are charged to the income statement on a straight-line basis over the period of the lease. 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 a defined contribution pension funded by the group. 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 like 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 income statement 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 pension obligation is measured at present value of the estimated future net cash flows and is stated net of plan assets. Actuarial gains or losses arising subsequent to 1 January 2004 are accounted for using the ‘corridor method’. Actuarial gains or losses that exceed 10 per cent of the greater of the fair value of the plan assets or the present value of the gross defined benefit obligations in the scheme are recognised in the income statement over the average remaining working lives of employees participating in the scheme. 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 income statement in the period to which they relate. b) Share-based compensation The group offers option plans over the group’s ordinary shares to certain employees, including the SAYE scheme, details of which are included in the directors’ remuneration report. The group accounts for share compensation plans that were granted after 7 November 2002. The cost of providing share-based compensation is based on the fair value of the share options at grant date, which is recognised in the income statement over the vesting period of the share options and a corresponding entry is recognised in reserves. The fair value of the share options is determined using the Black Scholes method. When the options are exercised, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and share premium. Income taxes Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at balance sheet 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 balance sheet date. Deferred tax assets are recognised in the balance sheet 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 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. The shares held in the employee share options plan (ESOP) 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 of 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 virtually certain. 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 if the amount of the obligation cannot be measured with sufficient reliability.

Beazley Annual Report 2009 85 Notes to the financial statements continue

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 six areas: insurance, credit, market, liquidity, operational and group risk. The sections below outline the group’s risk appetite and explain how it defines and manages each category of risk. 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. 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, geography and size. The annual business plans for each underwriting team reflect the group’s underwriting strategy, and set out the classes of business, the territories in which business is to be written and the industry sectors to which the group is prepared to expose itself. These plans are approved by the board and monitored by the monthly 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 the 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 (RDS). 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 aggregation 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 include natural catastrophes, marine, liability, political, terrorism and war events. One of the largest types of event exposure relates to natural catastrophe events such as flood damage, windstorm or earthquake. 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 probable maximum loss (PML). 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. 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. Currently, the group operates to catastrophe risk appetite for a probabilistic 1 in 250 year US event of US$510m net of reinsurance. 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 events which impact Beazley are:

2009 2008 Modelled PML Modelled PML Modelled PML Modelled PML (before (after (before (after reinsurance) reinsurance) reinsurance) reinsurance) Lloyd’s prescribed natural catastrophe event $m $m $m $m

San Francisco quake (US$78bn, 2008: US$74bn) 695.0 239.8 480.3 204.4 Gulf of Mexico windstorm (US$112.5bn, 2008: US$113bn) 456.0 236.5 418.0 189.8 Florida Pinellas windstorm (US$125.0bn, 2008: US$119bn) 493.3 237.3 387.7 172.5

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, where and the magnitude of the event that occurs, the amount of business written that is exposed to each event and the reinsurance arrangements in place.

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2 Risk management continued 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 2009, the normal maximum gross PML line that any one underwriter could commit the managed syndicates to was US$100m. 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 rigorous monitoring to maintain underwriting quality and confirm ongoing compliance with contractual guidelines. Operating Divisions In 2009, the group’s business consisted of five operating divisions. The following table provides a breakdown of premiums written by division and also provides a geographical split based on placement of risk.

UK US 2009 (Lloyd’s) (Non Lloyd’s) Total

Marine 16% – 16% Political risks and contingency 9% – 9% Property 15% 3% 18% Reinsurance 8% – 8% Specialty lines 36% 13% 49% Total 84% 16% 100%

UK US 2008 (Lloyd’s) (Non Lloyd’s) Total

Marine 14% – 14% Political risks and contingency 7% – 7% Property 15% 7% 22% Reinsurance 13% – 13% Specialty lines 32% 12% 44% Total 81% 19% 100% 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 separately below. The group’s reinsurance programmes compliment the underwriting team 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 (RSC) 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, 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’ broader interests. Prompt and accurate case reserves are set for all known claims liabilities, including provisions for expenses.

Beazley Annual Report 2009 87 Notes to the financial statements continued

2 Risk management continued

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 experienced actuarial team uses a range of recognised techniques to project gross premiums written, monitor claims development patterns and stress test ultimate insurance liability balances. An external independent actuary also performs an annual review to produce a statement of actuarial opinion for reporting entities within the group. 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, actuarial, claims, and finance representatives. 2.2 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 – whereby reinsurers may fail to pay valid claims against a reinsurance contract held by the group; • Brokers and intermediaries – whereby counterparties fail to pass on premiums or claims collected or paid on behalf of the group; and • Investments – whereby issuer default results in the group losing all or part of the value of a financial instrument. 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. 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

The following tables summarise the group’s entire concentrations of credit risk:

Tier 1 Tier 2 Tier 3 Tier 4 Unrated Total 31 December 2009 £m £m £m £m £m £m

Deferred income tax 5.5 – – – – 5.5 Financial investments 1,599.0 3.3 – – 166.8 1,769.1 Derivative financial instruments 5.8 – – – – 5.8 Insurance receivables – – – – 309.3 309.3 Reinsurance assets 718.1 – – – – 718.1 Other receivables 15.9 – – – – 15.9 Cash and cash equivalents 412.6 – – – 92.6 505.2 Total 2,756.9 3.3 – – 568.7 3,328.9

Tier 1 Tier 2 Tier 3 Tier 4 Unrated Total 31 December 2008 £m £m £m £m £m £m

Deferred income tax 6.8 – – – – 6.8 Financial investments 1,366.0 63.0 – 1.0 120.6 1,550.6 Derivative financial instruments 2.7 – – – – 2.7 Insurance receivables – – – – 287.8 287.8 Reinsurance assets 537.4 – – – 1.2 538.6 Other receivables 15.3 – – – – 15.3 Cash and cash equivalents 441.9 – – – 1.7 443.6 Total 2,370.1 63.0 – 1.0 411.3 2,845.4

The valuation methodology of the financial investments are described in the accounting policies. The carrying amount of financial assets at the balance sheet date represents the maximum credit exposure.

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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 provision made in respect of these assets at 31 December 2009 totals £9.8m (2008: £9.0m). Insurance receivables, financial assets and all other asset 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. We are not aware of any items which are past due or potentially impaired. The group has insurance receivables and reinsurance assets that are past due but not impaired at the reporting date. An aged analysis of insurance receivables that are past due but not impaired is presented below: Greater than Up to 30 days 30 – 60 days 60 – 90 days 90 days past due past due past due past due Total 31 December 2009 £m £m £m £m £m

Insurance receivables 5.0 1.5 0.4 1.6 8.5 Reinsurance assets 1.8 2.1 2.9 7.3 14.1

Greater than Up to 30 days 30 – 60 days 60 – 90 days 90 days past due past due past due past due Total 31 December 2008 £m £m £m £m £m

Insurance receivables 6.2 2.9 0.9 1.4 11.4 Reinsurance assets 0.1 1.8 0.8 2.9 5.6

These assets have been individually impaired after considering information such as the occurrence of significant changes in the counterparty’s financial position, pattern of historical payment information and disputes with counterparties. The group has developed processes to formally examine all reinsurers before entering into new business arrangements. New reinsurers are approved by the RSC, which also reviews arrangements with all existing reinsurers at least annually. Vulnerable or slow-paying reinsurers are examined more frequently. 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 investments 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. 2.3 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 (RDS) are provided on page 86). This means that the group maintains sufficient liquid assets, or assets that can be translated 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 24. Further information on the group’s capital resources is contained on page 41. The sources and uses of funds table on page 42 shows the level of surplus capital that the group currently holds. This is the surplus over expected working capital and regulatory capital requirements and represents a buffer that could be used to meet unforeseen costs or take advantage of new opportunities. The following is an analysis by business segment of the estimated timing of the net cash flows based on the claims liabilities balance held at 31 December 2009: Weighted Within Greater than average term 1 year 2-3 years 4-5 years 5 years Total to settlement 31 December 2009 £m £m £m £m £m (years)

Marine 57.7 53.2 17.8 1.3 130.0 1.6 Political risks and contingency 29.4 30.5 18.3 1.6 79.8 1.9 Property 77.7 52.5 10.1 4.0 144.3 1.4 Reinsurance 48.7 43.7 12.7 1.9 107.0 1.5 Specialty lines 206.8 383.6 243.2 103.3 936.9 2.6 Net insurance liabilities 420.3 563.5 302.1 112.1 1,398.0

Beazley Annual Report 2009 89 Notes to the financial statements continued

2 Risk management continued Weighted Within Greater than average term 1 year 2-3 years 4-5 years 5 years Total to settlement 31 December 2008 £m £m £m £m £m (years)

Marine 61.0 57.6 19.7 1.7 140.0 1.6 Political risks and contingency 20.6 22.3 12.6 2.0 57.5 1.9 Property 79.6 53.0 9.7 3.7 146.0 1.3 Reinsurance 46.8 40.8 10.1 1.4 99.1 1.5 Specialty lines 187.9 361.7 238.3 105.7 893.6 2.6 Net Insurance liabilities 395.9 535.4 290.4 114.5 1,336.2

The following table is an analysis of the net cash flows based on all the liabilities held at 31 December 2009:

Within Greater than 1 year 2-3 years 4-5 years 5 years Total 31 December 2009 £m £m £m £m £m

Net Insurance liabilities 420.3 563.5 302.1 112.1 1,398.0 Borrowings – – – 173.1 173.1 Other payables 193.6 – – – 193.6 Deferred income tax – 21.8 – – 21.8 Current income tax liabilities 13.2 – – – 13.2

Within Greater than 1 year 2-3 years 4-5 years 5 years Total 31 December 2008 £m £m £m £m £m

Net Insurance liabilities 395.9 535.4 290.4 114.5 1,336.2 Borrowings – – – 177.5 177.5 Other payables 115.7 – – – 115.7 Deferred income tax – 37.1 – – 37.1 Current income tax liabilities 7.8 – – – 7.8

2.4 Market risk Market risk arises where the value of assets and liabilities changes as a result of movements in foreign exchange rates, interest rates and market prices. Foreign exchange risk The group is exposed to changes in the value of assets and liabilities due to movements in foreign exchange rates. The group deals in four main currencies, US dollars, UK sterling, Canadian dollars and Euros. Transactions in all other currencies are converted to UK sterling on initial recognition and revalued at the balance sheet date. In 2009, the group managed its foreign exchange exposure by projecting forward US dollar profits for each calendar year and selling one twelfth of the expected amount each month. The amounts sold are periodically validated against actual exposure and additional ”top up” trades of US dollars are made if required. The foreign exchange exposure to Canadian dollars and Euros is closely monitored by the group and a similar approach will be taken to manage the risk as our exposure grows in the future. With effect from 1 January 2010 Beazley has taken the decision to match the group’s underwriting capital by currency to the principal underlying currencies of its written premiums. This will ensure that the group’s capacity to underwrite business would be unaffected by any future movements in exchange rates. To achieve this, the group has increased the US dollar component of its capital base by US$487m since the start of 2010 with an equivalent decrease in the sterling component. The group also has investment in foreign subsidiaries with functional currencies that are different from the presentation currency. This gives rise to a currency translation exposure to US dollars, Hong Kong dollars and Singapore dollars, although the exposures to Hong Kong dollars and Singapore dollars are minimal. The US dollar translation exposure is managed by borrowing funds denominated in the same currency.

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2 Risk management continued The following table summarises the carrying value of total assets and total liabilities categorised by currency:

US $ CAD $ EUR E Subtotal UK £ Total 31 December 2009 £m £m £m £m £m £m

Total assets 2,568.9 84.0 194.4 2,847.3 658.3 3,505.6 Total liabilities (2,409.3) (54.3) (179.0) (2,642.6) (244.4) (2,887.0) Net assets 159.6 29.7 15.4 204.7 413.9 618.6

US $ CAD $ EUR E Subtotal UK £ Total 31 December 2008 £m £m £m £m £m £m

Total assets 2,439.4 81.3 204.8 2,725.5 272.0 2,997.5 Total liabilities (2,337.9) (55.4) (164.2) (2,557.5) (27.3) (2,584.8) Net assets 101.5 25.9 40.6 168.0 244.7 412.7

The net assets have been stated excluding the effect of the cross-currency swap explained in note 25. Sensitivity analysis Fluctuations in the group’s main trading currencies would result in a change to net asset value. The table below gives an indication of the impact on net assets of a % change in the relative strength of sterling against the value of the US dollar, Canadian dollar and Euro, simultaneously. The analysis is based on the current information available and our assumptions in performing this analysis are: • the analysis includes an estimate of the impact on our foreign borrowings and cross currency swaps; and • the impact of foreign exchange on non-monetary items will be nil. Impact on profit after tax for the year Impact on net assets 2009 2008 2009 2008 £m £m £m £m

Sterling weakens 30% against other currencies 26.5 13.0 49.0 30.9 Sterling weakens 20% against other currencies 17.6 8.0 32.7 20.0 Sterling weakens 10% against other currencies 8.8 4.3 16.3 10.3 Sterling strengthens 10% against other currencies (8.8) (4.3) (16.3) (10.3) Sterling strengthens 20% against other currencies (17.6) (8.6) (32.7) (20.6) Sterling strengthens 30% against other currencies (26.5) (13.0) (49.0) (30.9)

Interest rate risk Some of the group’s financial instruments, including financial investments, cash and cash equivalents and borrowings, are exposed to movements in market interest rates. The group manages interest rate risk by primarily investing in short duration financial investments and cash and cash equivalents. The investment committee monitors the duration of these assets on a regular basis. The following table shows the average duration of the financial instruments. 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 <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total 31 December 2009 £m £m £m £m £m £m £m £m

Debt securities 1,000.8 436.9 129.8 9.1 25.6 – – 1,602.2 Cash and cash equivalents 505.2 – – – – – – 505.2 Derivative financial instruments – – – – – 5.8 – 5.8 Borrowings – – – – – (161.9) (11.2) (173.1) Total 1,506.0 436.9 129.8 9.1 25.6 (156.1) (11.2) 1,940.1

Duration <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total 31 December 2008 £m £m £m £m £m £m £m £m

Debt securities 1,013.2 179.0 132.4 60.0 30.6 14.3 0.4 1,429.9 Cash and cash equivalents 443.6 – – – – – – 443.6 Derivative financial instruments – – – – – 2.7 – 2.7 Borrowings – – – – – (165.0) (12.5) (177.5) Total 1,456.8 179.0 132.4 60.0 30.6 (148.0) (12.1) 1,698.7

Beazley Annual Report 2009 91 Notes to the financial statements continued

2 Risk management continued The next two tables summarise the carrying amount of financial instruments exposed to interest rate risk by maturity at balance sheet date.

Maturity <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total 31 December 2009 £m £m £m £m £m £m £m £m

Debt securities 735.4 636.8 163.7 4.7 0.4 46.6 14.6 1,602.2 Cash and cash equivalents 505.2 – – – – – – 505.2 Derivative financial instruments – – – – – 5.8 – 5.8 Borrowings – – – – – (161.9) (11.2) (173.1) Total 1,240.6 636.8 163.7 4.7 0.4 (109.5) 3.4 1,940.1

Maturity <1 yr 1-2 yrs 2-3 yrs 3-4 yrs 4-5 yrs 5-10 yrs >10 yrs Total 31 December 2008 £m £m £m £m £m £m £m £m

Debt securities 767.1 185.1 180.1 106.2 40.7 69.8 80.9 1,429.9 Cash and cash equivalents 443.6 – – – – – – 443.6 Derivative financial instruments – – – – – 2.7 – 2.7 Borrowings – – – – – (165.0) (12.5) (177.5) Total 1,210.7 185.1 180.1 106.2 40.7 (92.5) 68.4 1,698.7

The group makes interest payments for borrowings and derivative financial instruments. Further details are provided in notes 24 and 25. Sensitivity analysis The group holds financial assets and liabilities that are exposed to interest rate risk. Changes in interest yields, with all other variables constant, would result in a loss of capital on debt securities and a change in value of borrowings and derivative financial instruments. This will affect net assets as indicated in the below table:

Impact on profit after income tax for the year Impact on net assets 2009 2008 2009 2008 £m £m £m £m

Shift in yield (basis points) 150 basis point increase (17.1) (18.7) (17.1) (18.7) 100 basis point increase (11.4) (12.6) (11.4) (12.6) 50 basis point increase (5.7) (6.3) (5.7) (6.3) 50 basis point decrease 5.7 6.3 5.7 6.3 100 basis point decrease 11.4 12.6 11.4 12.6

Price risk Debt securities, equities and hedge funds that are recognised on the balance sheet at their fair value are susceptible to losses due to adverse changes in prices. This is referred to as price risk. Investments are made in debt securities, equities and hedge funds depending on the group’s appetite for risk. These investments are well diversified with high quality, liquid securities. The investment committee has established comprehensive guidelines with investment managers setting out maximum investment limits, diversification across industries and concentrations in any one industry or company. Listed investments are recognised on the balance sheet at quoted bid price. If the market for the investment is not considered to be active, then the group establishes fair value using valuation techniques. This includes using recent arm’s length market transactions, reference to 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.

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2 Risk management continued Sensitivity analysis The market price of debt securities have an inverse relationship to interest yields. Sensitivity analysis on interest yields is provided above. At 31 December 2009, the fair value of hedge funds recognised on the balance sheet was £166.8m (2008: £102.6m) and the fair value of equities recognised on the balance sheet was £nil (2008: £18.1m). If the fair value of the group’s hedge fund and equity portfolios were to change, then the overall pre-tax impact on net assets would be impacted as indicated in the below table:

Impact on profit after income tax for the year Impact on net assets 2009 2008 2009 2008 Change in fair value of equity and hedge fund portfolios £m £m £m £m

30% increase in fair value 41.0 29.7 41.0 29.7 20% increase in fair value 27.4 19.8 27.4 19.8 10% increase in fair value 13.7 9.9 13.7 9.9 10% decrease in fair value (13.7) (9.9) (13.7) (9.9) 20% decrease in fair value (27.4) (19.8) (27.4) (19.8) 30% decrease in fair value (41.0) (29.7) (41.0) (29.7)

2.5 Operational risk Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers or from 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, 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: • ICA 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. 2.6 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 four main components of group risk which are explained below. Strategic This is the risk that the group’s strategy is inappropriate or that the group is unable to implement its strategy. There is no tolerance for any breach of guidance issued by the board, and where events supersede the group strategic plan this is escalated at the earliest opportunity through the group’s monitoring tools and governance structure. 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 the US, Europe 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.

Beazley Annual Report 2009 93 Notes to the financial statements continued

2 Risk management continued

Management stretch 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, US, Europe 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. 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: 1 To support underwriting at Lloyd’s through syndicates 2623, 3623 and 3622. This is based on the group’s own individual capital assessment. This may be provided in the form of either the group’s cash and investments or debt facilities; 2 To support underwriting in Beazley Insurance Company, Inc. in the US; and 3 To make acquisitions, such as the First State Management Group, Inc. in 2009, of insurance companies or MGAs whose strategic goals are aligned with our own. The capital structure section of the financial review along with the individual capital assessment ands olvency ll sections on pages 41 to 43 provide further background to the group’s management of capital.

3 Segmental analysis a) Reporting segments Segment information is presented in respect of reportable segments. This is based on the group’s management and internal reporting structures and represents the level at which financial information is reported to the Board, 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: Marine This segment underwrites a broad spectrum of marine classes including hull, energy, cargo & specie and war risks. Political risks and contingency This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated with contract frustration. Property The property segment underwrites commercial, high-value homeowners and engineering property insurance on a worldwide basis. Reinsurance This division specialises in writing property catastrophe, property per risk, aggregate excess of loss and pro-rata business. It also includes our newly acquired accident and life insurance team. Specialty lines This segment mainly underwrites professional lines, employment practices liability, specialty treaty, directors’ and officers’ liability and healthcare. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The reporting segments do not cross-sell business between each other and there are no individual policy holders that comprise greater than ten per cent of the group’s total gross premiums written. b) Underlying profit Underlying profits are based on profit before income tax after the notional adjustment for foreign exchange differences on non-monetary items. Foreign exchange differences on non-monetary items have been separately disclosed as management believes this provides a fairer representation of the operating ratios of the business. Without this notional adjustment the operating divisions results would be distorted by the mismatch arising under IFRSs whereby unearned premium reserve, reinsurers’ share of unearned premium reserve and deferred acquisition costs (DAC) are treated as non-monetary items and claims reserves are treated as monetary items. Non-monetary items are carried at historic exchange rates, while monetary items are translated at closing rates. This imbalance creates volatility in our accounts which cannot be hedged as the mismatch is not monetary in nature. Finance costs and taxation are not allocated to operating segments as these items are determined by entity level factors and do not relate to operating performance.

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3 Segmental analysis continued c) Segment results

Political risks & Total reportable Marine contingency Property Reinsurance Specialty lines segments Unallocated Total 2009 £m £m £m £m £m £m £m £m

Segment results Gross premiums written 168.8 81.3 251.2 133.8 480.4 1,115.5 – 1,115.5 Net premiums written 145.8 62.8 180.3 115.1 344.0 848.0 – 848.0

Net earned premiums 152.8 71.9 173.5 97.1 363.9 859.2 (22.5) 836.7 Net investment income 5.4 2.6 6.9 4.1 37.1 56.1 – 56.1 Other income 1.5 0.7 4.0 1.1 5.2 12.5 – 12.5 Revenue 159.7 75.2 184.4 102.3 406.2 927.8 (22.5) 905.3

Net insurance claims 59.1 54.7 101.5 36.8 220.9 473.0 – 473.0 Expenses for the acquisition of insurance contracts 42.5 18.3 56.9 21.6 82.4 221.7 (3.5) 218.2 Administrative expenses 11.8 7.5 20.6 11.9 30.9 82.7 – 82.7 Foreign exchange (gain)/ loss (0.9) (0.4) (1.3) (0.7) (2.4) (5.7) 27.6 21.9 Expenses 112.5 80.1 177.7 69.6 331.8 771.7 24.1 795.8

Segments result 47.2 (4.9) 6.7 32.7 74.4 156.1 (46.6) 109.5 Finance costs (8.8) (8.8) Profit before income tax 147.3* 100.7

Income tax expense (12.3) Profit after income tax 88.4

Claims ratio 39% 76% 58% 38% 61% 55% Expense ratio 35% 36% 45% 34% 31% 35% Combined ratio 74% 112% 103% 72% 92% 90%

*Underlying profit comprises profit before income tax after the notional adjustment on foreign exchange in non-monetary items (see detailed explanation in note 3b to the financial statements). Segment assets and liabilities Segment assets 519.7 424.6 564.8 301.1 1,694.2 3,504.4 1.2 3,505.6 Segment liabilities (384.3) (270.2) (488.1) (187.2) (1,457.2) (2,887.0) – (2,887.0) Net assets 135.4 54.4 76.7 113.9 237.0 617.4 1.2 618.6

Additional information Capital expenditure 0.8 0.7 14.9 0.7 8.6 25.7 – 25.7 Depreciation 0.2 0.1 1.2 0.7 2.2 4.4 – 4.4 Net cash flow 13.1 8.2 8.2 9.3 22.8 61.6 – 61.6

The unallocated segment assets relate to the foreign exchange adjustment to non-monetary items. This adjustment is not allocated by segment.

Beazley Annual Report 2009 95 Notes to the financial statements continued

3 Segmental analysis continued Political risks & Total reportable Marine contingency Property Reinsurance Specialty lines segments Unallocated Total 2008 £m £m £m £m £m £m £m £m

Gross premiums written 148.7 70.4 179.2 70.2 407.2 875.7 – 875.7 Net premiums written 128.2 56.0 147.2 58.0 351.0 740.4 – 740.4

Net earned premiums 127.4 55.0 157.8 55.9 316.8 712.9 (29.8) 683.1 Net investment income (2.9) (0.3) (2.8) (1.7) (18.1) (25.8) – (25.8) Other income 1.5 0.6 2.7 0.7 4.6 10.1 – 10.1 Revenue 126.0 55.3 157.7 54.9 303.3 697.2 (29.8) 667.4

Net insurance claims 61.8 14.4 105.2 21.8 197.9 401.1 – 401.1 Expenses for the acquisition of insurance contracts 37.8 13.8 53.8 10.5 71.0 186.9 (4.3) 182.6 Administrative expenses 8.2 6.0 9.1 4.6 26.7 54.6 0.1 54.7 Foreign exchange (gain)/loss 0.1 0.1 0.3 0.1 0.4 1.0 (71.8) (70.8) Expenses 107.9 34.3 168.4 37.0 296.0 643.6 (76.0) 567.6

Segments result 18.1 21.0 (10.7) 17.9 7.3 53.6 46.2 99.8 Finance costs (12.6) (12.6) Profit before income tax 41.0* 87.2

Income tax expense (22.8) Profit after income tax 64.4

Claims ratio 49% 26% 67% 39% 62% 56% Expense ratio 36% 36% 40% 27% 31% 34% Combined ratio 85% 62% 107% 66% 93% 90%

*Underlying profit comprises profit before income tax after the notional adjustment on foreign exchange in non-monetary items (see detailed explanation in note 3b to the financial statements). Segment assets and liabilities Segment assets 408.5 354.3 483.4 221.5 1,495.0 2,962.7 34.8 2,997.5 Segment liabilities (333.2) (309.4) (435.6) (149.0) (1,357.6) (2,584.8) – (2,584.8) Net assets 75.3 44.9 47.8 72.5 137.4 377.9 34.8 412.7

Additional information Capital expenditure 0.2 0.6 0.6 0.2 4.6 6.2 17.9 24.1 Depreciation 0.3 0.1 1.2 0.2 2.7 4.5 – 4.5 Net cash flow 16.3 8.4 15.0 10.8 34.8 85.3 – 85.3

b) Geographical segments The group’s operating segments are managed geographically by placement of risk. UK earned premium in the analysis below represents all risks placed at Lloyd’s and US earned premium represents all risks placed at the group’s US insurance company, Beazley Insurance Company Inc. An analysis of earned premium split geographically by segment is provided in note 2 on page 87.

2009 2008 £m £m

Net earned premiums UK (Lloyd’s) 813.3 664.7 US (Non-Lloyd’s) 23.4 18.4 836.7 683.1 Segment assets UK (Lloyd’s) 3,249.4 2,785.1 US (Non-Lloyd’s) 256.2 212.4 3,505.6 2,997.5

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3 Segmental analysis continued Segment assets are allocated based on where the assets are located. Capital expenditure 2009 2008 £m £m

UK (Lloyd’s) 25.7 24.1 US (Non-Lloyd’s) – – 25.7 24.1

4 Net investment income 2009 2008 £m £m

Investment income at fair value through income statement 40.6 65.1

Realised gains/(losses) on financial investments at fair value through income statement 14.8 (49.5)

Net fair value gains/(losses) on financial investments through income statement 6.6 (38.1)

Investment management expenses (5.9) (3.3) 56.1 (25.8)

5 Other income 2009 2008 £m £m

Profit commissions 5.1 5.0 Agency fees 1.0 1.0 Other income 6.4 4.1 12.5 10.1

6 Operating expenses 2009 2008 £m £m

Fees payable to the company’s auditor for the audit of the group’s annual accounts 0.2 0.2 Fees payable to the company’s auditor and its associates for other services: – Audit of the company’s subsidiaries 0.3 0.2 – Tax services – 0.1 – Fees in respect of rights issue and redomiciliation to Ireland 0.2 – – Actuarial services 0.1 0.1 – Other services 0.4 0.2 Operating leases 4.0 2.4

7 Employee benefit expenses 2009 2008 £m £m

Wages and salaries 46.5 34.6 Short-term incentive payments 22.3 10.5 Social security 5.7 4.4 Share-based remunerations 5.2 4.7 Pension costs* 3.8 3.0 83.5 57.2 Recharged to syndicate 623 (8.3) (7.8) 75.2 49.4

* Pension costs refer to the contributions made under the defined contribution scheme, further information on the defined benefit pension scheme can be found in note 27.

Beazley Annual Report 2009 97 Notes to the financial statements continued

8 Finance costs 2009 2008 £m £m

Interest expense 8.8 12.2 Arrangement fees – 0.4 8.8 12.6

9 Income tax expense 2009 2008 £m £m

Current tax expense Current year 29.1 20.7 Prior year adjustments (2.2) (0.7) 26.9 20.0 Deferred tax expense Origination and reversal of temporary differences (17.2) 3.0 Prior year adjustments 2.6 (0.2) (14.6) 2.8 Income tax expense 12.3 22.8

Profit before income tax 100.7 87.2 Tax calculated at Irish rate (2008: UK rate) 12.6 24.9 Rates applied 12.5% 28.5%

Effects of: – Tax rates in foreign jurisdictions 4.5 0.2 – Retranslation of deferred tax balances on redomiciliation (7.3) – – Non-deductible expenses 0.3 1.5 – Tax relief on share-based payments – current and future years 1.8 (2.9) – Under/(over) provided in prior years 0.4 (0.9) Tax charge for the period 12.3 22.8

The effective tax rate was 12.2% (2008: 26.1%).

10 Earnings per share 2009 2008

Basic 18.4p 18.8p Diluted 17.8p 18.0p

Basic Basic earnings per share are calculated by dividing profit after tax of £88.4m (2008: £64.4m) by the weighted average number of issued shares during the year of 479.5m (2008: 342.6m). The shares held in the Employee Share Options Plan (ESOP) have been excluded from the calculation, until such time as they vest unconditionally with the employees.

Diluted Diluted earnings per share are calculated by dividing profit after tax of £88.4m (2008: £64.4m) by the adjusted weighted average number of shares of 497.4m (2008: 358.7m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the SAYE, retention and deferred share schemes. The shares held in the ESOP have been excluded from the calculation, until such time as they vest unconditionally with the employees.

11 Dividends per share The second interim dividend of 4.7p (2008: 4.4p) per ordinary share, will be payable on 30 March 2010 to shareholders registered at 5.00pm on 5 March 2010 in respect of the six months ended 31 December 2009. These financial statements do not provide for the second interim dividend as a liability. Together with the interim dividend of 2.3p (2008: 2.2p), this gives a total dividend for the year of 7.0p (2008: 6.6p).

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12 Intangible assets Syndicate IT development Goodwill capacity Licences costs Total £m £m £m £m £m

Cost Balance at 1 January 2008 15.5 4.4 4.6 8.0 32.5 Acquired through business combinations 17.9 – – – 17.9 Other additions – 0.5 – 3.3 3.8 Foreign exchange gain 3.8 – 1.8 – 5.6 Amounts written off (1.3) – – – (1.3) Balance at 31 December 2008 35.9 4.9 6.4 11.3 58.5

Balance at 1 January 2009 35.9 4.9 6.4 11.3 58.5 Acquired through business combinations 14.8 – – – 14.8 Other additions – 1.1 – 6.9 8.0 Foreign exchange loss (2.8) – (0.6) – (3.4) Balance at 31 December 2009 47.9 6.0 5.8 18.2 77.9

Amortisation Balance at 1 January 2008 – – – 3.8 3.8 Amounts written off during the year – – – – – Amortisation for the year – – – 2.2 2.2 Balance at 31 December 2008 – – – 6.0 6.0

Balance at 1 January 2009 – – – 6.0 6.0 Amortisation for the year – – – 1.4 1.4 Balance at 31 December 2009 – – – 7.4 7.4

Carrying amount 31 December 2009 47.9 6.0 5.8 10.8 70.5 31 December 2008 35.9 4.9 6.4 5.3 52.5

Impairment tests Goodwill, syndicate capacity and 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. They are allocated to the group’s cash generating units (CGUs) as follows:

Political risks and Specialty Marine contingency Property Reinsurance Lines Total 2009 £m £m £m £m £m £m

Goodwill 1.4 0.6 15.0 18.6 12.3 47.9 Licences – – 1.2 – 4.6 5.8 Capacity 0.9 0.5 1.4 0.5 2.7 6.0 Total 2.3 1.1 17.6 19.1 19.6 59.7

Political risks and Specialty Marine contingency Property Reinsurance Lines Total 2008 £m £m £m £m £m £m

Goodwill 1.5 0.7 1.7 18.6 13.4 35.9 Licences – – 1.6 – 4.8 6.4 Capacity 0.9 0.4 1.0 0.4 2.2 4.9 Total 2.4 1.1 4.3 19.0 20.4 47.2

Beazley Annual Report 2009 99 Notes to the financial statements continued

12 Intangible assets continued When testing for impairment, the recoverable amount of a CGU is determined based on value in use. Value in use is calculated using projected cash flows based on financial budgets approved by management covering a three year period taking into account historic growth rates and expected future market conditions. A discount rate of 9% (2008: 6%) has been used to discount the projected cash flows. The same discount rate has been applied to all operating segments as these segments all undertake underwriting activities supported by the same capital base. The discount rate of 9% is the group’s weighted average cost of capital. It has been calculated using independent measures of the risk free rate of return and the group’s risk profile relative to the risk free and market rates of return. The impairment test has been performed assuming the group’s operating segments are the cash generating units to which the intangible assets have been allocated. The test indicated that there is significant headroom in respect of the value in use of all the group’s intangible assets, and it is not expected that any realistic change in market conditions would give rise to an impairment.

13 Plant and equipment Company Group

Fixtures Fixtures Computer & fittings & fittings equipment Total £m £m £m £m

Cost Balance at 1 January 2008 – 8.2 1.8 10.0 Additions – 1.0 1.4 2.4 Foreign exchange gain – 0.8 0.3 1.1 Balance at 31 December 2008 – 10.0 3.5 13.5

Balance at 1 January 2009 – 10.0 3.5 13.5 Additions 0.3 2.0 1.1 3.1 Foreign exchange loss – (0.4) (0.2) (0.6) Balance at 31 December 2009 0.3 11.6 4.4 16.0

Accumulated depreciation Balance at 1 January 2008 – (2.2) (0.6) (2.8) Depreciation charge for the year – (1.5) (0.8) (2.3) Foreign exchange loss – (0.2) (0.1) (0.3) Balance at 31 December 2008 – (3.9) (1.5) (5.4)

Balance at 1 January 2009 – (3.9) (1.5) (5.4) Depreciation charge for the year – (1.7) (1.5) (3.2) Foreign exchange gain – 0.2 0.1 0.3 Balance at 31 December 2009 – (5.4) (2.9) (8.3)

Carrying amounts 31 December 2009 0.3 6.2 1.5 7.7 31 December 2008 – 6.1 2.0 8.1

14 Investment in associates 2009 2008 £m £m

As at 1 January – 1.3 Acquisition of subsidiary – (1.3) Acquisition of associate 0.9 – As at 31 December 0.9 –

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14 Investment in associates continued On 8 October 2009, the group acquired 25.0% of the ordinary share capital of Falcon Money Management Holdings Limited. Summary of the financial information of the associate (unlisted) – 100%

Country of Assets Liabilities Equity Profit incorporation £m £m £m £m

2009 Falcon Money Management Holdings Limited (and subsidiaries) Malta 2.6 1.8 0.8 –

The company was incorporated in 2009.

15 Deferred acquisition costs 2009 2008 £m £m

Balance at 1 January 91.5 82.0 Additions 223.3 192.1 Amortisation charge (218.2) (182.6) Balance at 31 December 96.6 91.5

16 Financial investments 2009 2008 £m £m

Financial investments at fair value through income statement Equity securities-listed – 18.1 Hedge funds 166.8 102.6 Debt securities – Fixed interest 1,230.2 1,089.8 – Floating interest 372.1 340.1 Total financial investments at fair value through income statement 1,769.1 1,550.6

Current 734.0 795.2 Non-current 1,035.1 755.4 1,769.1 1,550.6

A further breakdown of the group’s investment portfolio is provided on pages 37 and 38. As noted on page 83 consideration is also given when valuing these funds to any restriction applied to distributions, the evidence of side pocket provisions and the timing of the latest valuations. The adjustment to the underlying net asset value of the funds as a result of these considerations was nil at 31 December 2009 (2008: nil). The group has given a fixed and floating charge over 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. Fair value measurement 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 and treasury bills of major G-8 government and government agencies. 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, exchange rates). Included within Level 2 are non-G8 government bonds and treasury bills, corporate bonds, asset backed securities and mortgage backed securities. Level 3 – Valuations based on inputs that are unobservable or for which there is limited market activity on which to measure fair value.

Beazley Annual Report 2009 101 Notes to the financial statements continued

16 Financial investments continued 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 market place, 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 judgment. Accordingly the degree of judgment 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. Included within Level 3 are investments in capital growth assets such as hedge funds. The table below analyses financial instruments measured at fair value at 31 December 2009, based on the level in the fair value hierarchy into which the financial instrument is categorised: Level 1 Level 2 Level 3 Total £m £m £m £m

Government and Government Agencies 893.7 79.9 – 973.6 Other fixed income (core portfolio) – 628.7 – 628.7 Capital Growth assets – – 166.8 166.8 Total assets at fair value 893.7 708.6 166.8 1,769.1

The table below shows the movement in level 3 assets during the year: £m

Level 3 balance at 1 January 2009 102.6 Purchases 124.3 Settlements (72.4) Fair value gains reflected in the income statement 12.3 Level 3 balance at 31 December 2009 166.8

There were no transfers between fair value hierarchies during the year.

17 Insurance receivables 2009 2008 £m £m

Insurance receivables 309.3 287.8 309.3 287.8

These are receivable within one year and relate to business transacted with brokers and intermediaries. All insurance receivables are designated as loans and receivables.

18 Reinsurance assets 2009 2008 £m £m

Reinsurers’ share of claims 566.5 461.7 Impairment provision (9.8) (9.0) 556.7 452.7 Reinsurers’ share of unearned premium reserve 161.4 85.9 718.1 538.6

Further analysis of the reinsurance asset is provided in note 23.

19 Cash and cash equivalents 2009 2008 £m £m

Cash at bank and in hand 155.3 124.4 Short-term deposits 313.8 212.9 Overseas deposits 36.1 106.3 Cash and cash equivalents 505.2 443.6

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20 Share capital 2009 2008 No. of No. of shares (m) £m shares (m) £m

Ordinary shares of 5p each Authorised 700.0 35.0 450.0 22.5 Issued and fully paid 533.8 26.7 369.5 18.5

Balance at 1 January 369.5 18.5 367.1 18.4 Issue of shares 164.3 8.2 2.4 0.1 Balance at 31 December 533.8 26.7 369.5 18.5

On 3 April 2009 the group raised £150m of additional equity capital net of fees was raised. This was achieved through a fully underwritten 9 for 19 rights issue and a placement. 21 Reserves Foreign Employee Employee currency share share Share Merger translation options Treasury trust premium reserve reserve reserve shares reserve Total £m £m £m £m £m £m £m

Group Balance at 1 January 2008 234.8 1.6 (2.5) 5.0 (5.1) (10.7) 223.1

Issue of shares 0.8 – – – – – 0.8 Share-based payments – – – 4.6 – – 4.6 Acquisition of own shares held in trust – – – – – (7.1) (7.1) Purchase of treasury shares – – – – (24.9) – (24.9) Foreign exchange translation differences – – 11.6 – – – 11.6 Transfer of shares to employees – – – (1.2) – 1.2 – Balance at 31 December 2008 235.6 1.6 9.1 8.4 (30.0) (16.6) 208.1

Issue of shares 141.6 – – – – – 141.6 Share-based payments – – – 5.2 – – 5.2 Acquisition of own shares held in trust – – – – – (3.9) (3.9) Cancellation of treasury shares (29.1) – – – 30.0 – 0.9 Foreign exchange translation differences – – (7.7) – – – (7.7) Transfer of shares to employees – – – (3.2) – 3.2 – Transfer on scheme of arrangement and reverse acquisition* (347.8) (5.8) 4.3 (9.1) – – (358.4) Balance at 31 December 2009 0.3 (4.2) 5.7 1.3 – (17.3) (14.2)

The above movements in reserves are stated net of any related taxation. * As part of the scheme of arrangement, described in note 1 of the financial statements, the reserves of the group were consolidated and transferred to retained earnings, at which point they became distributable reserves of the group.

Employee Employee share share Share Merger options trust premium reserve reserve reserve Total £m £m £m £m £m

Company Balance on incorporation at 9 June 2009 – – – – –

Transfer on scheme of arrangement and reverse acquisition – (22.1) – – (22.1) Issue of shares 0.3 – – – 0.3 Share-based payments – – 2.8 – 2.8 Acquisition of own shares held in trust – – – (2.6) (2.6) Transfer of shares to employees – – (1.2) 1.2 – Balance at 31 December 2009 0.3 (22.1) 1.6 (1.4) (21.6)

Beazley Annual Report 2009 103 Notes to the financial statements continue

22 Equity compensation plans

22.1 Employee share trust 2009 2008 Number (m) £m Number (m) £m

Costs debited to employee share trust reserve

Balance at 1 January 12.6 16.6 8.4 10.7

Additions 4.2 3.9 5.1 7.1 Transfer of shares to employees (2.6) (3.2) (0.9) (1.2) Balance at 31 December 14.2 17.3 12.6 16.6

The shares are owned by the employee share trust to satisfy awards under the group’s deferred share plan and retention plan. 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 employees. Under the retention plan, on the third anniversary, and each year after that, 25.0% of the shares awarded are transferred to the employees. The deferred share plan is recognised in the income statement on a straight-line basis over a period of three years, while the retention share plan is recognised in the income statement on a straight-line basis over a period of six years. 22.2 Employee share option plans The group has a long term incentive plan (LTIP), approved share option plan, unapproved share option plan, phantom share option and SAYE that entitle employees to purchase shares in the group. In accordance with these plans, options are exercisable at the market price of the shares at the date of the grant. 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 21/03/2005 0.4 Three years’ service + NAV + TSR comparator 10 years 21/03/2006 0.2 21/03/2007 0.7 21/03/2008 0.6 16/02/2009 1.6 27/04/2009 0.1 Approved share option plan 29/03/2004 0.1 Three years’ service + NAV 10 years

Unapproved share option plan 29/03/2004 0.1 Three years’ service + NAV 10 years 06/12/2004 0.1 SAYE (UK) 13/04/2007 0.3 Three years’ service n/a 18/04/2008 0.1 01/07/2009 1.6 SAYE (US) 18/04/2008 0.1 Two years’ service n/a 15/05/2009 0.3 Total share options outstanding 6.3

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. NAV The NAV growth is greater than the risk-free rate of return plus a premium per year. TSR comparator The group’s TSR growth is compared with that of members of the comparator group over a three-year period starting with the year in which the award is made. Further details of equity compensation plans can be found in the directors’ remuneration report on pages 58 to 69.

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22 Equity compensation plans continued The number and weighted average exercise prices of share options are as follows:

2009 2008 Weighted Weighted average average exercise exercise price (pence No. of options price (pence No. of options per share) (m) per share) (m)

Outstanding at 1 January 37.6 5.0 33.8 6.9 Rights issue 26.9 0.3 – – Forfeited during the year 23.4 (1.4) 25.8 (0.7) Exercised during the year 37.4 (1.2) 33.5 (2.4) Granted during the year 39.7 3.6 47.6 1.2 Outstanding at 31 December 35.7 6.3 37.6 5.0 Exercisable at 31 December – 0.9 – 0.8

The share option programme allows 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 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, except where forfeiture is due to the share option achieving the vesting conditions. The following is a summary of the assumptions used to calculate the fair value:

2009 2008 £m £m

Share options charge to income statement 5.2 4.7

Weighted average share price (pence per option) 114.4 123.8 Weighted average exercise price (pence per option) 35.7 37.6 Weighted average expected life of options 5.5yrs 5.6yrs Expected volatility 25.0% 25.0% Expected dividend yield 4.0% 4.0% Average risk-free interest rate 4.2% 4.3%

The expected volatility is based on historic volatility over a period of at least two years. 23 Insurance liabilities and reinsurance assets 2009 2008 £m £m

Gross Claims reported and loss adjustment expenses 552.0 497.3 Claims incurred but not reported 1,402.7 1,291.6 Gross claims liabilities 1,954.7 1,788.9 Unearned premiums 544.5 457.8 Total insurance liabilities, gross 2,499.2 2,246.7

Recoverable from reinsurers Claims reported and loss adjustment expenses 158.6 109.4 Claims incurred but not reported 398.1 343.3 Reinsurers share of claims liabilities 556.7 452.7 Unearned premiums 161.4 85.9 Total reinsurers’ share of insurance liabilities 718.1 538.6

Beazley Annual Report 2009 105 Notes to the financial statements continued

23 Insurance liabilities and reinsurance assets continued 2009 2008 £m £m

Net Claims reported and loss adjustment expenses 393.4 387.9 Claims incurred but not reported 1,004.6 948.3 Net claims liabilities 1,398.0 1,336.2 Unearned premiums 383.1 371.9 Total insurance liabilities, net 1,781.1 1,708.1

The gross claims reported, the loss adjustment liabilities and the liabilities for claims incurred but not reported are net of expected recoveries from salvage and subrogation. 23.1 Movements in insurance liabilities and reinsurance assets

a) Claims and loss adjustment expenses 2009 2008 Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m

Claims reported and loss adjustment expenses 497.3 (109.4) 387.9 302.0 (89.1) 212.9 Claims incurred but not reported 1,291.6 (343.3) 948.3 785.6 (191.3) 594.3 Balance at 1 January 1,788.9 (452.7) 1,336.2 1,087.6 (280.4) 807.2

Claims paid (411.2) 96.5 (314.7) (276.7) 62.0 (214.7)

Increase in claims – Arising from current year claims 690.0 (149.8) 540.2 631.5 (157.6) 473.9 – Arising from prior year claims (48.2) (19.0) (67.2) (109.4) 36.6 (72.8) – Reinsurance to close 37.7 (11.9) 25.8 66.4 (20.4) 46.0

Net exchange differences (102.5) (19.8) (122.3) 389.5 (92.9) 296.6 Balance at 31 December 1,954.7 (556.7) 1,398.0 1,788.9 (452.7) 1,336.2

Claims reported and loss adjustment expenses 552.0 (158.6) 393.4 497.3 (109.4) 387.9 Claims incurred but not reported 1,402.7 (398.1) 1,004.6 1,291.6 (343.3) 948.3 Balance at 31 December 1,954.7 (556.7) 1,398.0 1,788.9 (452.7) 1,336.2

b) Unearned premiums reserve 2009 2008 Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m

Balance at 1 January 457.8 (85.9) 371.9 384.3 (72.9) 311.4

Increase in the year 1,115.5 (267.5) 848.0 875.7 (135.3) 740.4 Release in the year (1,053.3) 216.7 (836.6) (822.3) 139.2 (683.1) Net exchange differences arising in overseas subsidiary 24.5 (24.7) (0.2) 20.1 (16.9) 3.2 Balance at 31 December 544.5 (161.4) 383.1 457.8 (85.9) 371.9

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23 Insurance liabilities and reinsurance assets continued

23.2 Assumptions, changes in assumptions and sensitivity a) Process used to decide on assumptions

The peer review reserving process Beazley uses a quarterly dual track process to set its reserve: • The actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs. The most appropriate methods are 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 specific reserve estimates for identified claims and utilise their detailed understanding of the risks underwritten to establish an alternative estimate of ultimate claims cost which are 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 also commissions an annual independent review to ensure that the reserves established are reasonable. 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 (i.e. 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. 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 adjustment can be made to mitigate any subsequent over or under reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years. Where a significantly large loss impacts an underwriting year (e.g. the events of 11 September 2001 and the hurricanes in 2004, 2005 and 2008), its development is usually very different from the attritional losses. In these situations, the large loss 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 groups 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. Throughout, judgement is used to assess the extent to which past trends 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.

Beazley Annual Report 2009 107 Notes to the financial statements continued

23 Insurance liabilities and reinsurance assets continued

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 combinations.

Marine Political risks and contingency Premium rate change Property Claims inflation Classes Reinsurance Mix of business Specialty lines Reporting patterns Settlement patterns Judicial decisions Professional judgment Assumptions

Underwriting years

1993 1994 ... 2008 2009

Given the range of assumptions used, the group’s profit or loss is relatively insensitive to changes to a particular assumption used for an underwriting year/class combination. However, 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 group uses a range of risk mitigation strategies to reduce the volatility including the purchase of reinsurance. In addition, the group holds additional capital as ICA. The net of reinsurance estimates of ultimate claims costs on the 2008 and prior underwriting years has improved by £65.9m during 2009 (2008: £72.8m). This movement has arisen from a combination of better than expected claims experience coupled with small changes to the many assumptions reacting to the observed experience and anticipating any changes as a result of the new business written. d) Sensitivity 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 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 classes. Since year end 2004, we have identified a range of possible outcomes for each class and underwriting year combination directly from our ICA process. Comparing these with our pricing assumptions and reserving estimates gives our management team increased clarity into our perceived reserving strength and 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 five segments – marine, political risks and 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 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 balance sheet. 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 2009 are adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.

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2002ae 2003 2004 2005 2006 2007 2008 2009 Gross ultimate claims % % % % % % %

Marine 12 months 59.4 62.4 82.4 57.1 57.8 69.0 55.8 24 months 45.1 65.2 80.0 42.8 60.0 65.2 36 months 39.0 62.3 70.4 32.8 50.5 48 months 36.2 61.8 68.5 29.1 60 months 35.8 60.7 66.2 72 months 35.7 56.2 84 months 34.9 Political risks and contingency 12 months 59.1 67.5 61.0 57.7 57.2 57.5 61.1 24 months 36.3 55.5 38.1 36.2 38.7 67.9 36 months 31.6 52.2 28.4 33.0 56.4 48 months 28.6 37.8 25.2 43.1 60 months 31.0 36.8 18.1 72 months 25.1 34.8 84 months 24.2 Property 12 months 50.9 65.4 87.2 58.6 58.4 71.1 54.0 24 months 37.6 65.2 84.0 44.6 56.6 66.0 36 months 34.8 65.8 82.5 43.6 54.5 48 months 34.2 63.9 87.5 51.0 60 months 33.8 64.4 87.0 72 months 33.9 63.1 84 months 35.0 Reinsurance 12 months 58.6 87.5 196.1 52.4 59.6 60.0 60.7 24 months 34.1 81.6 187.7 25.1 26.4 51.2 36 months 28.4 76.4 186.2 24.8 21.9 48 months 28.6 73.9 179.1 23.2 60 months 25.5 72.0 175.3 72 months 25.5 71.0 84 months 24.4 Specialty lines 12 months 72.9 72.8 72.1 72.6 72.8 72.2 72.8 24 months 70.2 71.3 72.1 72.7 72.5 72.2 36 months 68.8 67.6 69.8 72.7 72.5 48 months 60.1 64.5 66.5 72.7 60 months 53.3 59.5 62.9 72 months 52.4 58.4 84 months 50.5 Total 12 months 63.0 69.5 90.5 63.0 63.5 68.7 63.2 24 months 52.6 69.1 87.7 53.2 59.2 67.7 36 months 49.4 66.5 84.1 50.8 58.1 48 months 44.9 63.5 82.5 52.5 60 months 41.5 61.0 79.6 72 months 40.9 59.2 84 months 40.1 Total ultimate losses (£m) 1,212.9 301.2 510.9 755.5 565.0 681.2 786.3 875.3 5,688.3 Less paid claims (£m) (1,025.3) (222.8) (378.5) (547.6) (240.5) (268.3) (154.0) (26.0) (2,863.0) Less unearned portion of ultimate losses (£m) – – – – – (9.7) (64.1) (384.4) (458.2) Gross claims liabilities (100% level) (£m) 187.6 78.4 132.4 207.9 324.5 403.2 568.2 464.9 2,367.1 Less unaligned share (£m) (35.6) (14.9) (25.2) (39.5) (61.7) (75.1) (101.5) (58.9) (412.4) Gross claims liabilities, group share 152.0 63.5 107.2 168.4 262.8 328.1 466.7 406.0 1,954.7

Beazley Annual Report 2009 109 Notes to the financial statements continued

23 Insurance liabilities and reinsurance assets continued

2002ae 2003 2004 2005 2006 2007 2008 2009 Gross ultimate claims % % % % % % %

Marine 12 months 55.4 58.1 55.5 54.0 55.0 61.3 54.4 24 months 44.8 53.1 48.8 42.1 56.3 57.2 36 months 40.1 48.6 42.6 32.9 49.4 48 months 39.1 47.8 39.5 31.4 60 months 39.0 46.6 39.0 72 months 39.2 44.3 84 months 38.0 Political risks and contingency 12 months 56.7 64.1 63.4 56.2 55.4 55.9 58.8 24 months 37.4 58.0 46.5 40.3 39.1 75.6 36 months 34.8 53.9 35.9 37.4 55.1 48 months 32.9 40.7 30.3 46.9 60 months 35.0 40.3 24.1 72 months 27.2 35.8 84 months 25.6 Property 12 months 48.7 59.7 64.9 61.3 61.1 67.3 53.7 24 months 41.6 60.9 62.1 49.3 59.7 67.3 36 months 39.2 60.3 58.4 47.8 58.9 48 months 38.6 58.6 61.2 51.5 60 months 38.2 58.4 61.8 72 months 38.2 57.5 84 months 39.7 Reinsurance 12 months 60.2 88.5 152.9 54.3 55.2 67.1 55.4 24 months 39.3 85.5 131.8 36.7 30.5 56.7 36 months 33.8 82.2 127.4 34.7 25.2 48 months 34.5 76.1 117.5 32.4 60 months 31.6 72.9 111.3 72 months 31.6 71.3 84 months 30.2 Specialty lines 12 months 68.7 69.8 69.3 68.6 69.7 70.2 69.9 24 months 67.3 68.5 69.3 68.7 68.8 70.2 36 months 66.0 65.8 67.5 68.6 68.8 48 months 57.9 62.2 64.0 68.6 60 months 52.8 57.0 58.9 72 months 50.9 53.7 84 months 49.0 Total 12 months 60.1 65.8 73.1 62.1 63.0 66.3 61.1 24 months 53.0 65.3 68.7 54.4 59.2 66.9 36 months 50.5 62.7 65.0 51.8 58.7 48 months 46.4 59.3 62.3 52.4 60 months 43.8 56.4 59.1 72 months 42.7 53.9 84 months 41.9 Total ultimate losses (£m) 635.3 254.5 380.1 439.6 441.3 582.8 642.0 662.9 4,038.5 Less paid claims net of reinsurance (£m) (568.8) (192.3) (282.6) (283.3) (204.9) (241.7) (142.3) (20.3) (1,936.2) Less unearned portion of ultimate losses (£m) – – – – – (12.8) (46.1) (339.7) (398.6) Net claims liabilities (100% level) (£m) 66.5 62.2 97.5 156.3 236.4 328.3 453.6 302.9 1,703.7 Less unaligned share (£m) (12.6) (11.8) (18.5) (29.7) (44.6) (60.9) (83.5) (44.1) (305.7) Net claims liabilities, group share (£m) 53.9 50.4 79.0 126.6 191.8 267.4 370.1 258.8 1,398.0

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Analysis of movements in loss development tables We have updated our loss development tables to show the ultimate loss ratios as at 31 December 2009 for each underwriting year.

Generally, the claims experience has been less than an average year, particularly given the low incidence of natural catastrophes and the relatively stable claims frequency on our specialty lines classes.

Following a review of the hurricane claims, we have partially released reserves held on hurricanes Katrina and Ike. This illustrates our reserving philosophy of establishing cautious initial reserves with reductions over time as the uncertainty reduces. The level of paid claims for the 2004, 2005 and 2008 hurricanes has now reached 96%, 93% and 50% of the updated estimate of ultimate claims costs respectively.

Marine All years have exhibited a stable or reducing trend. This team continues to report profitable loss ratios on all underwriting years despite the significant impact that the 2005 and 2008 hurricanes had on the energy market.

Political risks and contingency As highlighted during this year, the ultimate claims on the 2006, 2007 and 2008 underwriting years have increased as a result of the deterioration in the claims environment of our political class, particularly from trade credit related contracts. Nevertheless, the claim estimates announced in our third quarter 2009 interim management statement have remained robust through the fourth quarter. We continue to monitor claim frequency on a calendar month basis as an early indicator for future development.

Property The late development on the 2003 underwriting year, albeit of relatively low quantum, has arisen from an unexpected court ruling on our homeowners account.

The increase in ultimate claims on the 2006 underwriting year arose on our engineering class from a fire at a desulphurisation plant. It has taken some time to gain access to the site in order to establish an appropriate reserve.

The reduction in gross ultimate loss ratio on the 2008 underwriting year without a corresponding net reduction has arisen from premium movements rather than changes to the claims. Whilst the gross premium has increased, increases to reinsurance premiums has resulted in a relatively unchanged net premium.

Reading across the top row of the loss development table, we note that the initial ultimate loss ratio for the 2009 underwriting year is less than that initially established for prior catastrophe-free years. This has arisen because the introduction of First State has improved the portfolio level ultimate loss ratio.

Reinsurance All years have continued to reduce. The reserves for hurricanes Katrina and Ike have been reassessed and reduced during 2009. For hurricane Katrina this is a continuation of the release made in 2008 and for hurricane Ike this is the first release from the cautious estimates initially established.

The accident & life business is included in this team on the 2009 underwriting year. Whilst it is too early to make any releases, the claims development to date has been in line with or better than that experienced historically by the team.

Specialty lines The trend of consistent releases across underwriting years has continued.

The improvement of the 2004 underwriting year has continued and the gap to the 2003 underwriting year has closed slightly. We have mentioned in previous commentaries that the differential between 2004 and 2003 was partially caused by the timing of the reduction in uncertainty on 2004 which we expected to unwind over time.

We continue to take a more conservative view on the 2006 underwriting year by not releasing reserves at 31 December 2009. However, the incurred claims development continues to track prior underwriting years.

The 2007 underwriting year has seen early incurred development from a small number of large losses. We have observed that the development of this underwriting year has stabilised during 2009 as the development has been more in line with prior underwriting years during this period. Despite this stabilisation we have continued to maintain our initial loss ratios.

The early claims experience of the 2008 and 2009 underwriting years continues to be in line with the 2006 & prior underwriting years.

Beazley Annual Report 2009 111 Notes to the financial statements continued

23 Insurance liabilities and reinsurance assets continued

Claim releases The table below analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by department and period.

Political risks Marine & contingency Property Reinsurance Specialty lines Total 2009 £m £m £m £m £m £m

Current year 75.0 56.9 97.3 53.3 257.7 540.2 Prior year – 2006 and earlier (7.0) (4.6) 5.8 (7.2) (36.8) (49.8) – 2007 year of account (8.8) 3.8 (1.6) (3.1) – (9.7) – 2008 year of account (0.1) (1.4) – (6.2) – (7.7) (15.9) (2.2) 4.2 (16.5) (36.8) (67.2) Net insurance claims 59.1 54.7 101.5 36.8 220.9 473.0

Political risks Marine & contingency Property Reinsurance Specialty lines Total 2008 £m £m £m £m £m £m

Current year 74.6 26.0 109.0 38.4 225.9 473.9 Prior year – 2005 and earlier (2.3) (5.8) 2.1 (6.0) (27.2) (39.2) – 2006 year of account (10.5) (1.1) (3.5) (0.3) – (15.4) – 2007 year of account – (4.7) (2.4) (10.3) (0.8) (18.2) (12.8) (11.6) (3.8) (16.6) (28.0) (72.8) Net insurance claims 61.8 14.4 105.2 21.8 197.9 401.1

24 Borrowings

The carrying amount and fair values of the non-current borrowings are as follows: 2009 2008 £m £m

Carrying value Subordinated debt 11.2 12.5 Tier 2 subordinated debt 161.9 165.0 173.1 177.5

Fair value Subordinated debt 11.2 12.5 Tier 2 subordinated debt 118.8 116.8 130.0 129.3

The fair value of the borrowings is based on quoted market prices. When quoted market prices are not available, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity. The discount rates used in the valuation techniques are based on the borrowing rates. In November 2004, the group issued subordinated debt of US $18m to JPMorgan Chase Bank, N.A (JPMorgan). The loan was unsecured and interest was payable at the US London interbank offered rate (LIBOR) plus a margin of 3.65% per annum. The subordinated notes are due in November 2034. In October 2006, the group issued £150m of unsecured fixed/floating rate subordinated notes that are due in October 2026 with a first callable date of October 2016. Interest of 7.25% per annum is paid annually in arrears for the period up to October 2016. From October 2016, the notes will bear annual interest at the rate of 3.28% above LIBOR. The notes were assigned a credit rating of BBB- by S&P’s rating services.

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24 Borrowings continued

The group entered into a cross currency swap transaction with Lloyds Banking Group and JPMorgan in October 2006. In exchange for £42.3m the group received US$40m from each party which will be finally exchanged on termination of the contract, being October 2016. Lloyds Banking Group charges interest at US three-month LIBOR plus 2.25%, while JPMorgan charges interest at US three-month LIBOR plus 2.23%. As part of the agreement, the group receives interest at 7.25% from both parties. There is an option, exercisable by both parties, to terminate the swaps in October 2011 and annually thereafter until October 2016. The group also entered into an interest rate swap transaction with Lloyds Banking Group and JPMorgan in October 2006. Under this agreement, the fixed interest rate of 7.25% on the balance of £107.7m (£53.8m from each party) is exchanged for floating interest rate of UK LIBOR plus 2.24% with Lloyds Banking Group and UK LIBOR plus 2.23% with JPMorgan. This agreement terminates on 17 October 2016 with an optional early termination in October 2011 and annually thereafter, exercisable by both parties. In addition to these borrowings we operate a £100m syndicated short-term banking facility, managed through Lloyds Banking Group. The facility was successfully renegotiated for three years in July 2008 if funds are drawn the charge is 1.25% above UK LIBOR; letters of credit raised against the facility are charged at 1.25%. At the end of 2008, no drawings had been made against this facility.

25 Derivative financial instruments

The group uses fair value interest rate hedges and net investment hedges to manage some of its exposures. The group entered into derivative financial instruments to manage this risk.

2009 2008 £m £m

Fair value Interest rate swap 13.5 16.7 Cross currency swap (7.7) (14.0) 5.8 2.7 a) Fair value hedges As described in note 24, the group has hedged its fixed rate borrowing using fixed-to-floating interest rate swaps. In 2009, the hedge was effective and therefore the group did not recognise any gain or loss in the income statement in respect of the hedge. The loss on the hedging instrument, being the interest rate swap, was £3.2m in the period. This was matched by a gain of £3.2m arising on the revaluation of the £150m borrowing. b) Hedge of net investment in foreign entity The group’s US dollar denominated borrowing along with the cross currency swap are designated as a hedge of the net investment in the group’s US subsidiaries. The foreign exchange loss of £7.6m on translation of the borrowing and currency swap at the balance sheet date was recognised in “foreign currency translation reserve”. This offsets the gain or loss on translation of the net investment in the group’s US based subsidiaries. In 2009, the hedge was effective and therefore the group did not recognise any gain or loss in the income statement in respect of the hedge.

26 Other payables 2009 2008 £m £m

Reinsurance premiums payable 117.0 54.8 Accrued expenses including staff bonuses 41.0 30.4 Other payables 13.3 11.9 Amounts due to subsidiaries – – Deferred consideration payable on acquisition of MGAs 8.4 8.5 Due to syndicate 623 and associates – 10.1 179.7 115.7

All other payables are payable within one year of the balance sheet date other than deferred consideration which is payable after one year.

Beazley Annual Report 2009 113 Notes to the financial statements continued

27 Retirement benefit obligations 2009 2008 2007 2006 2005 £m £m £m £m £m

Retirement benefit obligations – – 0.9 1.9 2.9 Present value of funded obligations 15.4 10.3 17.5 16.0 14.1 Fair value of plan assets 12.9 10.0 15.5 13.4 10.1 Experience gains/(losses) on scheme liabilities 0.3 1.1 0.1 (1.3) (0.2)

Beazley Furlonge Limited operates a defined benefit pension scheme (“the Beazley Furlonge Limited Pension Scheme”) providing benefits based on final pensionable pay, with contributions being charged to the income statement so as to spread the cost of pensions over employees’ working lives with the company. The contributions are determined by a qualified actuary using the projected unit method and the most recent valuation was at 31 December 2009. Pension benefits

Amount recognised in the balance sheet 2009 2008 £m £m

Present value of funded obligations 15.4 10.3 Fair value of plan assets (12.9) (10.0) 2.5 0.3 Unrecognised actuarial losses (3.5) (0.3) (Asset)/liability in the balance sheet (1.0) –

The asset in the pension scheme arose due to a prepayment of £1.0m in 2009.

Amounts recognised in the income statement Current service cost – – Interest cost 0.6 1.0 Expected return on plan assets (0.6) (0.9) – 0.1

Movement in present value of funded obligations recognised in the balance sheet Balance at 1 January 10.3 17.5 Current service cost 0.3 – Interest cost 0.6 1.0 Actuarial losses/(gains) 4.2 (8.2) Balance at 31 December 15.4 10.3

Movement in fair value of plan assets recognised in the balance sheet Balance at 1 January 10.0 15.5 Expected return on plan assets 0.6 0.9 Actuarial gains/(losses) 1.3 (3.0) Employer contributions 1.0 0.9 Benefits paid – (4.3) Balance at 31 December 12.9 10.0

Plan assets are comprised as follows: Equities 8.4 6.9 Bonds 4.5 3.1 Total 12.9 10.0

The actual gain on plan assets was £1.9m (2008: £2.2m loss).

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27 Retirement benefit obligations continued 2009 2008 £m £m

Principal actuarial assumptions Discount rate 5.7% 6.2% Inflation rate 3.7% 2.7% Expected return on plan assets 5.9% 5.3% Future salary increases 6.5% 5.5% Future pensions increases 3.2% 2.3% Life expectancy 88 years 84 years

28 Deferred income tax 2009 2008 £m £m

Deferred income tax asset 5.5 6.8 Deferred income tax liability (21.8) (37.1) (16.3) (30.3)

The movement in the net deferred income tax is as follows:

Balance at 1 January (30.3) (29.5) Income tax charge 14.6 (2.8) Foreign exchange translation differences (0.6) 2.0 Balance at 31 December (16.3) (30.3)

Balance Recognised Recognised Balance 1 Jan 09 in income in equity 31 Dec 09 £m £m £m £m

Plant and equipment (0.1) 0.2 – 0.1 Intangible assets (0.3) (0.2) – (0.5) Other receivables 0.1 – – 0.1 Trade and other payables 2.3 (0.5) – 1.8 Underwriting profits (39.1) 15.8 – (23.3) Tax losses 6.8 (0.7) (0.6) 5.5 Net deferred income tax account (30.3) 14.6 (0.6) (16.3)

Balance Recognised Recognised Balance 1 Jan 08 in income in equity 31 Dec 08 £m £m £m £m

Plant and equipment 0.3 (0.4) – (0.1) Intangible assets (0.7) 0.4 – (0.3) Other receivables 0.2 (0.1) – 0.1 Trade and other payables – 2.3 – 2.3 Underwriting profits (34.1) (5.0) – (39.1) Retirement benefit obligations 0.3 (0.3) – – Tax losses 4.5 0.3 2.0 6.8 Net deferred income tax account (29.5) (2.8) 2.0 (30.3)

The group has recognised deferred tax assets on unused tax losses to the extent that it is probable that future taxable profits will be available against which unused tax losses can be utilised, as supported by financial projections.

Beazley Annual Report 2009 115 Notes to the financial statements continued

29 Operating lease commitments

The group leases land and buildings under a non-cancellable operating lease agreement. The future minimum lease payments under the non-cancellable operating lease are as follows:

2009 2008 £m £m

No later than 1 year 3.5 2.5 Later than 1 year and no later than 5 years 12.2 9.5 Later than 5 years 4.7 3.0 20.4 15.0

30 Related party transactions

The group and company have related party relationships with syndicate 623, its subsidiaries, associates and its directors.

30.1 Syndicate 623 Beazley Furlonge Limited, a wholly owned subsidiary of the group, received management fees and profit commissions for providing a range of management services to syndicate 623 in which the corporate member subsidiaries participated. The value of the services provided and the balances with the syndicate are as follows:

2009 2008 £m £m

Services provided: Syndicate 623 12.7 13.6

Balances due: Due from/(to) syndicate 623 4.9 (10.1)

30.2 Key management compensation 2009 2008 £m £m

Salaries and other short-term benefits 9.7 6.5 Post employment benefits 0.4 0.3 Share-based remuneration 2.6 2.3 12.7 9.1

Key management include executives and non-executive directors and other senior management. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 58 to 69. 30.3 Other related party transactions At 31 December 2009, the group had a balance payable to the associate (Falcon Money Management Limited) of £0.1m (2008: £nil) and purchased services from the associate of £1.9m (2008: £nil) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis.

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31 Parent company and subsidiary undertakings

Beazley plc is the ultimate parent and the ultimate controlling party within the group. The following is a list of all the subsidiaries:

Country of Ownership incorporation interest Nature of business

Beazley Group Limited England 100% Intermediate holding company Beazley Furlonge Holdings Limited England 100% Intermediate holding company Beazley Furlonge Limited England 100% Lloyd’s underwriting agents BFHH Limited England 100% Dormant Beazley Investments Limited England 100% Investment company Beazley Corporate Member Limited England 100% Underwriting at Lloyd’s Beazley Dedicated No.2 Limited England 100% Underwriting at Lloyd’s Global Two Limited England 100% Underwriting at Lloyd’s Beazley Underwriting Limited England 100% Underwriting at Lloyd’s Beazley Management Limited England 100% Intermediate management company Beazley Staff Underwriting Limited England 100% Underwriting at Lloyd’s Beazley Solutions Limited England 100% Insurance services Beazley Corporate Member No. 2 England 100% Dormant Beazley Corporate Member No. 3 England 100% Dormant Deltaland Limited England 100% Dormant Beazley Finance Limited England 100% Intermediate holding company Beazley Dedicated Limited England 100% Underwriting at Lloyd’s Beazley Capital Management Limited England 100% Investment services Beazley Underwriting Services Limited England 100% Insurance services Beazley DAS Limited England 100% Dividend access scheme Beazley Re Limited Ireland 100% Underwriting at Lloyd’s Beazley Underwriting Proprietary Limited Australia 100% Insurance services Beazley USA Services, Inc. USA 100% Insurance services Beazley Holdings, Inc. USA 100% Holding company Beazley Group (USA) General Partnership USA 100% General partnership Beazley Insurance Company, Inc. USA 100% Underwrite admitted lines Beazley Limited Hong Kong 100% Insurance services Tasman Corporate Limited England 100% Underwriting at Lloyd’s Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s

32 Contingencies

32.1 Funds at Lloyd’s The following amounts are subject to a deed of charge in favour of Lloyd’s to secure underwriting commitments:

Underwriting Underwriting Underwriting year year year 2010 2009 2008 £m £m £m

Company Debt securities and other fixed income securities 492.2 494.4 360.8 492.2 494.4 360.8

32.2 Financial guarantee The parent company has provided a financial guarantee in favour of its subsidiary Beazley Insurance Company, Inc. which unconditionally guarantees the payment of amounts due to third party reinsurers in the event of the inability of the subsidiary company to meet its obligations.

Beazley Annual Report 2009 117 Notes to the financial statements continued

33 Foreign exchange rates

The group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into the group’s presentation currency: 2009 2008 Average Year end spot Average Year end spot

US dollar 1.57 1.61 1.85 1.44 Canadian dollar 1.78 1.69 1.96 1.77 Euro 1.12 1.13 1.26 1.03

34 Business combinations

34.1 Acquisition of business portfolio On 1 April, the group acquired an underwriting agent from Hartford Financial Services Group, Inc. which specialises in US commercial property underwriting. This business has now been integrated and forms a part of Beazley’s core US operations and does not report results on an independent basis. The acquisition had the following effect on the group’s assets and liabilities:

£m

Consideration paid Cash paid 21.1 Direct costs relating to the acquisition 0.8 Consideration paid 21.9

Fair value of net assets on acquisition

Fixed assets 0.3 Other receivables 6.5 Other payables (5.9) Pipeline profits acquired 3.2 Contribution receivable from syndicate 623 4.6 Goodwill 13.2 Consideration paid 21.9

Other than the goodwill arising on acquisition, no other significant intangible assets formed part of the assets acquired.

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34.2 Beazley Re Limited On 2 June 2009, the group acquired 100% of the share capital of Beazley Re Limited.

£m

Consideration paid Cash paid – Direct costs relating to the acquisition 1.6 Consideration paid 1.6

Fair value of net assets on acquisition Fixed assets – Other receivables – Other payables – Goodwill 1.6 Consideration paid 1.6

35 Events after the balance sheet date

There are no events that are material to the operations of the group that have been announced since the balance sheet date.

Beazley Annual Report 2009 119 Glossary

Admitted carrier Deferred acquisition costs (DAC) An insurance company licensed by a particular US state, monitored by Costs incurred for the acquisition or the renewal of insurance policies the state for financial stability, covered by the state’s guaranty fund, and (e.g. brokerage, premium levy and staff related costs) which are subject to the state’s regulations for licensed insurance companies. capitalised and amortised over the term of the contracts.

Aggregates/aggregations Earnings per share (EPS) – Basic/Diluted Accumulations of insurance loss exposures which result from Ratio, in pence, calculated by dividing the consolidated profit after underwriting multiple risks that are exposed to common causes of loss. tax by the weighted average number of ordinary shares issued, excluding shares owned by the group. For calculating diluted earnings Aggregate excess of loss per share the number of shares and profit or loss for the year is The reinsurer indemnifies an insurance company (the reinsured) for adjusted for all dilutive potential ordinary shares like share options an aggregate (or cumulative) amount of losses in excess of a specified granted to employees. aggregate amount. Excess per risk reinsurance A.M. Best A form of excess of loss reinsurance which, subject to a specified A.M. Best is a worldwide insurance-rating and information agency limit, indemnifies the reinsured company against the amount of loss whose ratings are recognised as an ideal benchmark for assessing in excess of a specified retention with respect of each risk involved in the financial strength of insurance related organisations, following a each loss. rigorous quantitative and qualitative analysis of a company’s balance sheet strength, operating performance and business profile. Beazley Expense ratio Group plc obtained an A rating, while Beazley Insurance Company, Ratio, in percent, of the sum of expenses for acquisition of insurance Inc., received a rating of A. contracts and administrative expenses to net earned premiums.

Binding authority Facultative reinsurance A contracted agreement between a managing agent and a coverholder A reinsurance risk that is placed by means of a separately negotiated under which the coverholder is authorised to enter into contracts of contract as opposed to one that is ceded under a reinsurance treaty. insurance for the account of the members of the syndicate concerned, subject to specified terms and conditions. Gross premiums written Amounts payable by the insured, excluding any taxes or duties levied Capacity on the premium, including any brokerage and commission deducted This is the maximum amount of premiums that can be accepted by a by intermediaries. syndicate. Capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general. Hard market An insurance market where prevalent prices are high, with restrictive Catastrophe reinsurance terms and conditions offered by insurers. A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the reinsured company for the amount of loss in excess Horizontal limits of a specified retention with respect to an accumulation of losses Reinsurance coverage limits for multiple events. resulting from a catastrophic event or series of events. Incurred but not reported (IBNR) Claims These are anticipated or likely claims that may result from an insured Demand by an insured for indemnity under an insurance contract. event although no claims have been reported so far.

Claims ratio International accounting standards (IAS)/International financial Ratio, in percent, of net insurance claims to net earned premiums. reporting standards (IFRS) Standards formulated by the IASB with the intention of achieving Combined ratio internationally comparable financial statements. Since 2002, the Ratio, in percent, of the sum of net insurance claims, expenses for standards adopted by the IASB have been referred to as International acquisition of insurance contracts and administrative expenses to net Financial Reporting Standards (IFRS). Until existing standards are earned premiums. This is also the sum of the expense ratio and the renamed, they continue to be referred to as International Accounting claims ratio. Standards (IAS).

Coverholder/managing general agent International accounting standards board (IASB) A firm either in the United Kingdom or overseas authorised by a An international panel of accounting experts responsible for managing agent under the terms of a binding authority to enter into developing IAS/IFRS. contracts of insurance in the name of the members of the syndicate concerned, subject to certain written terms and conditions. A Lloyd’s broker can act as a coverholder.

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Lead underwriter Retrocessional reinsurance The underwriter of a syndicate who is responsible for setting the terms The reinsurance of the reinsurance account. It serves to ‘lay-off’ risk. of an insurance or reinsurance contract that is subscribed by more than one syndicate and who generally has primary responsibility for Risk handling any claims arising under such a contract. This term may variously refer to: a) the possibility of some event occurring which causes injury or loss; Line b) the subject matter of an insurance or reinsurance contract; or The proportion of an insurance or reinsurance risk that is accepted by c) an insured peril. an underwriter or which an underwriter is willing to accept. Sidecar syndicate Managing agent Syndicate designed to provide additional capacity to another A company that is permitted by Lloyd’s to manage the underwriting of syndicate. They operate by purchasing a portion or all of a group of a syndicate. insurance policies, typically catastrophe exposures. They have become quite prominent in the aftermath of Hurricane Katrina as a vehicle Managing general agent (MGA) to add risk-bearing capacity, and for investors to participate in the An insurance intermediary acting as an agent on behalf of an insurer. potential profits resulting from sharp price increases.

Medium tail Short tail A type of insurance where the claims may be made a few years after A type of insurance where claims are usually made during the term of the period of insurance has expired. the policy or shortly after the policy has expired. Property insurance is an example of short tail business. Net assets per share Ratio, in pence calculated by dividing the net assets (total equity) by Soft market the number of shares issued. An insurance market where prevalent prices are low, and terms and conditions offered by insurers are less restrictive. Net premiums written Net premiums written is equal to gross premiums written less outward Stamp capacity reinsurance premiums written. The volume of business measured in gross written premiums net of acquisition costs underwritten by the group through its managed Provision for outstanding claims syndicates at Lloyd’s of London. Provision for claims that have already been incurred at the balance sheet date but have either not yet been reported or not yet been fully Surplus lines insurer settled. An insurer that underwrites surplus lines insurance in the US. Lloyd’s underwriters are surplus lines insurers in all jurisdictions of the US Rate except Kentucky and the US Virgin Islands. The premium expressed as a percentage of the sum insured or limit of indemnity. Total shareholder return The increase in the share price plus the value of any dividends paid Reinsurance to close (RITC) and proposed during the year. A reinsurance which closes a year of account by transferring the responsibility for discharging all the liabilities that attach to that year of Treaty reinsurance account (and any year of account closed into that year) plus the right A reinsurance contract under which the reinsurer agrees to offer and to buy any income due to the closing year of account into an open to accept all risks of certain size within a defined class. year of account in return for a premium. Unearned premiums reserve Retention limits The portion of premium income in the business year that is Limits imposed upon underwriters for retention of exposures by the attributable to periods after the balance sheet date is accounted group after the application of reinsurance programmes. for as unearned premiums in the underwriting provisions.

Return on equity (ROE) Ratio, in percent calculated by dividing the consolidated profit after tax by the average total equity.

Designed and produced by The Team www.theteam.co.uk Beazley Annual Report 2009 121 122 www.beazley.com Timeline

Our business has diversiﬁ ed steadily over time and we have achieved a proﬁ t every year since inception in 1986.

Marine account started in 1999

Our business has diversiﬁ ed steadily over time and we have achieved a proﬁ t every year since inception in 1986.

Marine account started in 1999

On track In 2009 we took important steps to equip our underwriters to capture proﬁ table market opportunities: