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Beazley’s Cox: We are anxious to start growing in cyber again

Adrian Cox2.jpg

Beazley is keen to return to growth in cyber after curtailing exposures as part of remediation efforts, but the company needs “a little more confidence” that both the actions the carrier has taken and the way the market is moving is generating results, according to CEO Adrian Cox.

As this publication has reported extensively, the cyber market is in the midst of deep remediation to address mushrooming attritional loss ratios as a result of a surge in ransomware claims – and is therefore offering up very limited capacity to new business. As one of the market leaders in the class, the actions of Beazley are closely scrutinised.

Speaking to Insurance Insider for the first time as CEO, Cox noted that his firm was “anxious” to resume growth and address client need but the volatility of the class meant it was a decision which could not be rushed.

Beazley has dropped cyber exposures to around 2019 levels to remediate its portfolio. But it has also made risk management a major focus, working with clients to improve their cyber hygiene. This is geared not only towards addressing current vulnerabilities to ransomware, but also to futureproof them against new threats.

Beazley presentation charts July 23 2021

The work on building that “cyber ecosystem” is now largely complete, Cox said.

“You need acceptance that this [approach] is viable and that [it] is bought into by clients and brokers, and early feedback on that is good,” he explained.

“We then need this to become accepted market practice. And then we also need to prove that it is working, not only for current suite of threats, but also future threats which emerge. The final piece is the macro environment – is it safe enough from a risk management perspective to start growing again?”

There is evidence that other insurers are moving in the same direction as Beazley, and “all speaking the same language”, the CEO added.

Early numbers show some positive results from Beazley’s approach. On business written since autumn, cyber claims frequency is 20% lower by policy count, and 50% lower when compared to premiums, but Cox said more data was needed.

“There is desire to grow exposures again, but it is such a volatile class we need a little more confidence,” he pointed out, adding that it was “frustrating” as there is so much demand for the product.

In a wide-ranging interview with this publication, Cox also:

  • Described the unexpected departure of Andrew Horton as “quite traumatic”, particularly amid a wider changing of the guard in the senior levels of the company

  • Talked about the fight to restore investor confidence and show the carrier remains the “Beazley of old”, with a plan to reestablish the investment thesis for the firm

  • Said Beazley was already adjusting pricing models for the effect of financial inflation, and warned that the transition to a higher rate of inflation would prove to be the most painful aspect for (re)insurers

  • Set out ambitions for the US business, and explained how Beazley had resisted challenges around channel conflict and talent acquisition

Cox has now been in the CEO role at Beazley – a firm he has worked at for over two decades – since 1 April.

In speaking to his publication, he admitted that former CEO Andrew Horton’s decision to leave and take up the CEO role at QBE had been unexpected for many at the firm, and although he had been primed for the top job he hadn’t expected to be assuming it quite so soon.

Adrian Cox career timeline.jpg

“It took a while for us to get used to the idea [of Horton leaving]… and say our goodbyes in remote way in 21 days,” Cox said. “That was actually quite traumatic.”

However, it did encourage the staff to pull together and Horton’s departure “certainly got the competitive juices flowing”, he added.

The new CEO noted that his predecessor’s departure had added to a “changing of the guard” at Beazley following the retirement or moving on of a number of senior, long-serving staff – including Martin Bride, Neil Maidment and Clive Washbourn.

Beazley selected departures ID 6 Sep.jpg

However, there is also new blood which has come in to invigorate the business, he continued, pointing to new COO Troy Dehmann, who joined from HSBC to replace Ian Fantozzi – who has moved to lead a new digital business. The process to find a new CUO to replace Cox’s former role is also well underway.

The leadership team is now regrouping and focusing on “really trying to capitalise on the market we are in, trying to put 2020 behind us, and start to rebuild some investor confidence with short- and long-term plans for the future”, Cox explained.

“It was good we had a decent first half, the onus is on us to do that again, and show people we are the Beazley we recognise of old, rather than the one we saw in 2020.”

Cox has publicly admitted that his firm made “missteps” in 2020 – including a doubling in its first-party Covid-19 loss estimate to $370mn, four months after a £247mn ($342mn) capital raise.

In 2020, the company also reported its poorest full-year underwriting performance in its history. Its share price has taken a hit and is now trading around a third lower than what it was at the beginning of 2020.

Beazley share price ID 6 Sep.png

Cox said one of his major priorities as CEO was to “reestablish the investment thesis” for Beazley.

“It’s very important that what we do absolutely aligns with what we say we are about,” he said. “You can put out your business plans with all your ambitions and goals – and people will love all that and believe all that and get excited about it, but you have to show it in the numbers.”

He added: “I am quite keen that we are not seen as a market cycle play, there should be more to a specialty insurance carrier than whether it’s a hard market or a soft market.”

Pricing cycles and inflation

Cox acknowledged that investors and analysts alike had voiced concerns that capital constraints have stopped Beazley from maximising the hard market opportunity.

“I don’t think that is true,” he said. “And I also think there is still opportunity next year.”

The executive has previously said Beazley’s portfolio is “85% positive, 15% defensive”. The 85% contains classes where the firm is actively pursuing opportunity, and the remainder is where the firm is taking a more defensive stance due to concerns around the profitability of trading conditions.

“[That split] is about as good as it gets for us,” Cox noted. “And on the defensive side there are things we are genuinely worried about – such as social inflation in the US.”

Unpicking that 15%, around 12 points of that is due to concerns around the claims environment, and the remaining three about rate, Cox said.

When questioned about the impact of financial inflation on the claims environment, Cox said: “We absolutely have in our business plan next year that inflation is here to stay – we are not going to go back to 2%. There doesn’t appear to be the evidence to support why it will go back.”

Inflation is here to stay – we are not going to go back to 2%. There doesn’t appear to be the evidence to support why it will go back

Cox said Beazley was adjusting for inflation in its pricing models now, which would feed through into quoted pricing as soon as the work was done. Inflation could provide a tailwind to this current pricing cycle, he added.

However, Cox took a stance contrary to a number of other market observers that an inflation rate of around 4% would severely challenge underwriting businesses.

Inflation running at around 4% is “not that bad” as it also generates claims inflation offsets, such as asset price growth and improved investment income, the executive explained.

“When we model it out, the painful piece is the transition from 1% to 4%, when you are at 4% you can manage it. It’s that transition piece we are doing a lot of work on.”

Success in the US

Part of Cox’s strategy as CEO is to push Beazley deeper into its chosen markets, rather than target further geographical expansion.

One of those markets is the US, where Beazley has its own admitted paper and wrote around $1.2bn of premium last year. The growth in the US operation consistently outpaces that of the wider group, Cox noted.

Beazley has had a presence in the US since 2004, focusing on small- and mid-market business.

Historically, Lloyd’s businesses' experience of setting up in the US has not always been easy. Challenges can include an increasingly siloed approach to group underwriting and the potential for internal conflict between underwriting teams – while competing for talent against the likes of Chubb, Travelers or AIG can also pose issues.

When questioned on why so many firms struggle in the US, Cox admitted that it “took longer than we thought to be accepted as part of the local market rather than a satellite office of a Lloyd’s syndicate.”

He said: “I think the big temptation for companies when go into other markets is to try to change the way they do things, to fit in with the way things are done over there.

“What we have done – and US brokers have told us as much – is that we have stuck to what we have been good at.”

Beazley went onshore in the US to access business it couldn’t in London, Cox explained. And while that is largely true, he said there were still areas of overlap.

I think we have shown that [running a successful US unit] is something you can manage if you do it properly, and you can grow over here as well as over there

The firm works to avoid channel conflict and by organising the business by product, he continued, with underwriters both sides of the Atlantic working to one P&L and being rewarded on the same results.

“That reduces people competing with each other.”

Addressing the talent question, Cox said Beazley has proactively strived to set itself out as an “underwriting shop” which empowers underwriters.

“One of the things we do is we are very open with the IP that we have, so when we are putting together new products, thinking about how we evolve the underwriting, drawing up business plans and looking at quarterly reserving we engage all the underwriters in that process,” he explained.

“That’s quite different to most US companies, where IP is held carefully at the centre and the field underwriters are told what to do.”

In Beazley’s experience, this empowered approach helps retain talent, Cox continued. “Having a slightly different set up has enabled us to build that reputation and that brand – and the past 10 years or so it has been fairly easy to attract people.”

He added: “I think we have shown that [running a successful US unit] is something you can manage if you do it properly, and you can grow over here as well as over there.”

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