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Edited Transcript of BEZ.L earnings conference call or presentation 22-Jul-16 10:59am GMT

Q2 2016 Beazley PLC Earnings Presentation

LONDON Sep 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Beazley PLC earnings conference call or presentation Friday, July 22, 2016 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Clive Washbourn;Head of Marine

* David Andrew Horton

Beazley plc - CEO & Executive Director

* Martin Lindsay Bride

Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director

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Conference Call Participants

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* Andrew James Ritchie

Autonomous Research LLP - Partner, Insurance

* Barrie James Cornes

Panmure Gordon (UK) Limited, Research Division - Insurance Analyst

* Benjamin Cohen;Canaccord Genuity Corp., Research Division

* John Anthony Leslie Borgars

Equity Development Limited - Analyst

* Jonathan Peter Phillip Urwin

UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst

* Kamran Hossain

RBC Capital Markets, LLC, Research Division - Analyst

* Nicholas Harcourt Johnson

Numis Securities Limited, Research Division - Analyst

* Philip Kett;Macquarie Research

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Presentation

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David Andrew Horton, Beazley plc - CEO & Executive Director [1]

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Good morning, ladies and gentlemen, to our interim results presentation. If we quickly look at the agenda, I'm going to give the usual high-level financials and a business overview. I'm then going to hand over to Martin, who'll go through the financials in a bit more depth, including investments, reserves and our capital position.

This half year, we have as a special guest star, Clive Washbourn, who heads our marine division. He was a special guest star back in 2009. It's his turn, so he's going to go into the marine book in a bit more depth, and then I'll come back with a crystal ball and try to determine what's actually going to happen from here on in, through the rest of the year and into 2017.

So you will have seen the high-level financials. Really pleased to announce a profit of just over $150 million. It's down 3% on last year. And if we go through the elements, we'll see why that is. It's great to be able to grow a bit. Growth is really tough. So we're up 2 %. Within that, our specialty lines business is up 17% year-on-year, and we continue to grow with our U.S. onshore platform, short-tail lines, especially catastrophe-exposed lines, it is very tough, and you will see decreases in our property and our marine division year-on-year. Combined ratio in line with the long-term average at 90%. Rate changes across our whole portfolio down 2%, but again, reductions in our short-tail lines of business and still rate-positive in our specialty lines business. Prior year reserves -- Martin will go through -- virtually the same year-on-year. Investment returns up a bit as yields track down and the value of our bond portfolio increased. Return on equity, I think, still pretty healthy at 19% post tax, annualized, and the interim dividend in line with our dividend policy of up between 5% and 10%, up 6% to 3.5p.

So from a business point of view, what has been going on? I think the main thing we want to highlight is the number of underwriters who joined us in the first half, which I think is a record for us in the first half of having 36 new underwriters, and that's spread quite broadly across the organization. So within the U.K. and within the U.S., but also Singapore and Paris, we've managed to add underwriters in the first half of the year.

A bit of stress, I think, in the insurance world at this point in time, which means we have the opportunities as some companies withdraw from lines of business to pick up underwriters. 1 or 2 have gone through M&A over the past 2 or 3 years, and again, we were able to pick up underwriters. We've highlighted a few here: the U.K. and international med mal group that joined us from Marketform earlier on this year, which was good; fine art and specie here in London; and expanding the environmental team as 1 or 2 carriers have withdrawn from our environmental in the U.S. Clive will also talk about 2 marine underwriters we added in Singapore at the beginning of the year, which has been great.

U.S. economy probably doing better than most other Western economies at this point, which is very good for our specialty lines business. So specialty lines continues to grow well within the U.S. We're also going to start now focusing on Europe. So prior to the Brexit vote on the 23rd of June, we had recruited Gerard, who is going to look at international specialty lines. Our specialty lines book, as you know, is mainly a U.S. book, and he's going to look at growing E&O, D&O and FI within Europe. We were also looking at, prior to the Brexit vote, the conversion of our Irish reinsurance company into an insurance company. That obviously takes a reasonable amount of time. That's subject to regulatory approval, but we've already started the project to convert the reinsurance company to an insurance company, because when Gerard joins us, he would like to write business both on Lloyd's paper and EU carrier paper.

Partnered with Munich Re. We've had a very long-term relationship with Munich Re, who've been a big supporter of us as a company, and we announced our $100 million cyber line. Again, as most people in the audience will know, our cyber business generally is mid- and small business, and we only write a small amount of large-risk business. And with the partnership with Munich Re, we're going to look at writing more large-risk business. And to highlight something which is obvious to everybody, the rating environment remains pretty challenging.

I will now hand over to Martin, who will go through the financials.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [2]

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Thank you very much, Andrew. Good morning, everyone. I'm Martin Bride, CFO of Beazley, and I'd just like to take you through a few finance KPIs and then talk briefly about investments, reserves and capital. So Andrew's already talked about our top line growth. Net written premiums grew slightly more strongly than that. There's really 2 aspects to that: On our short-tail areas, where we've actually been reducing our risk appetite due to the rating environment, more reinsurance is being been purchased; and then, our specialty lines business has actually purchased slightly less reinsurance despite the fact it is growing quite strongly. So that's what drove that.

In terms of the per-share statistics, there's obviously been quite a lot of volatility in the dollar-sterling exchange rate. So the dollar stats are very good. The sterling stats look absolutely fantastic, as you can see there, because unfortunately, sterling has weakened. So in dollars, we've managed to increase the net asset value per share by between 1% and 2% over the last 12 months, but shareholders have had 28.3p in dividends as well during that 12-month period. So we think that's a very good financial performance.

So moving on to investment returns. A very strong performance in the first half of 2016. It's a slight double-edged sword, in that aspects of markets that have driven that more than anything else is interest rates going down after the Brexit vote, which has created capital gains in the bond portfolio but has made the future slightly more challenging for Stuart Simpson and his team. Notwithstanding that, delighted to have 1.4% return, so nearly 3% annualized. And we can hopefully continue to deliver very respectable returns in the future, albeit the -- got to suppose that they're going to be lower than what we've achieved in this first half in the short term.

The portfolio itself is really very stable. We have 80% to 85% of our assets in our core portfolio, and then capital growth assets spread across 2 or 3 different strategies. The only change that's occurred in the last 6 months is a little bit of a shift towards investment-grade credit, away from cash and governments within that core portfolio. There's been no change in risk appetite, simply changes in how we think it is best to apply it.

So moving on to reserve releases. Reserve releases are a very important part of Beazley's financial results because our approach is to reserve prudently, and then hopefully, to see reserve releases as we settle out claims. And this chart shows that the 2016 half year has had a very similar contribution from reserve releases to 2015 and, indeed, looks like it's very much in line with the 5-year trend.

Looking into the detail, there's less contribution from short-tail classes of business this half year than there was last half year, and conversely, a slightly higher contribution from the specialty lines business.

The next chart is our view of how strong the reserves on our balance sheet are. The importance of this chart is it's a lead indicator of whether or not the previous chart is likely to continue to look broadly the same as we go forward. And so Beazley's view is that the reserves on our balance sheet at the 30th of June have very similar levels of margin across our actuarial team's view, as they've had in the past. So our view is that we've got a consistent reserving strength on our balance sheet, and therefore, all other things being equal, those reserve releases will continue in the future at broadly similar levels.

Moving on to capital. First, an update on debt strategy. In 2006, Beazley issued a 20-year noncall 10 subordinated debt instrument, so that 10-year call date is almost upon us. It's in October 2016. And we'll be expecting to call that bond, which is what is normally done in bond markets. I've always said in presentations on capital that, really, the trigger for Beazley increasing leverage would be an opportunity to deploy more underwriting capital -- -- substantially more underwriting capital. And we are considering, as we call the existing bond, a new issuance of up to GBP 250 million in the second half of 2016.

And moving on to, therefore, our capital position. We do have a growth perspective in the amount of underwriting capital we think we can deploy. You can see the current position and the previous 30th of June position. We, for the first time, are giving a protected position at the year-end. We've got a first version of our 2017 business plan, and that's showing a reasonable increase in the amount of capital we think we can productively deploy. And our perspective is that whilst not quite at those levels, we do believe that there are going to be opportunities over the next 5 years to deploy a growing amount of underwriting capital.

As far as our dividend strategy is concerned, that remains unchanged. So we have had a dividend strategy of growing the base dividend between 5% and 10%, and the dividend the board have declared at this interim is completely in line with that. And then, to the extent that we generate excess capital, then the board will be -- remain to be very active in managing that capital and not allowing the company to build up unnecessary high capital buffers.

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Clive Washbourn;Head of Marine, [3]

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Good morning, everyone. I'm Clive Washbourn. I head up the marine and aviation team. The last time -- is it left click or right click? The last time I spoke to the analysts and for the road show was 2009. Now just try and imagine this. I had more hair. I didn't have the haunted look of an underwriter in a really tough market. Gordon Brown was the Prime Minister, and Michael Jackson had just died and had 37 of the top 100. And the most surprising thing of all, Manchester United actually won the Premiership. In the insurance business, actually, we had a fantastic year. There was very few catastrophes, and I think the Swiss Re said only 12,000 people died. 12,000, in my mind, is still quite a lot of people, but it was a great year.

And what did we have? We had a real marine business, where, just to quickly run through, energy being upstream, exploration and production, drilling rigs, fixed and mobiles; cargoes, self-explanatory; marine liabilities pertaining to ships and ports and et cetera; and the war being aviation and marine war, a lot of piracy in those days; and hull or machinery business. $265 million worth of business. A fantastic year. We made $74 million worth of profit. We had an 8% rate rise. Those were great heady days.

Obviously, we've moved on somewhat, and we're looking at this portfolio. Now $248 million. It's less income, but as you all know and as widely reported, a much more challenging environment. But what we've done, which for us, for our long-term growth to profitability of this company and for the shareholders, is that we've diversified the portfolio. So as you can see, in -- back in 2009, the main drivers, the energy and the hull, was about 80% of our income. Now it's only about 50%, and I'll come on to the sort of rate reductions in a minute. But in this period, we've diversified into both aviation and satellites. Again, challenging areas, but at the moment, both of those appear to be about an 80% loss ratio, so we're actually making a wee profit in a difficult time. Because you've heard me say before, what we try to do as a business is actually get the right people, because you never get the right people at the right time but if you get the right people over a period, you'll grow your business profitably and you'll have a very, very, very good business. And that's what we've tried to do.

Now it is challenging. Of course, it's challenging. It's written all over the papers. But why do we feel, as a business, optimistic? Well, firstly, this isn't new to us. We put this chart up just to show you that, actually, we've been through cycles before. Back in 2006, well, what a wonderful year that was, 9% rate increase. In '07, it was a 7% reduction, and a 6% reduction. And as I've just said for '09, we were up. So we've been up and down, and we've navigated those profitably. Yes, we've now hit a bit of -- I suppose you would describe as a bear run: 5% off '13, 6% off '14, 8% off '15. And I can tell you at the moment, it's about 7% off. So something around 26%, 27% less income. Well, I think all of us will know, it doesn't matter how talented you are. If you got 25%, 26% less premium, you're going to make less profit. But profit is still what we're going to achieve, and what we want to achieve.

Why do we feel positive? Well, the income's not only being hit by the fact of rate reduction. But the industries we insure have been struggling. The shipping industry, probably bar tankers, the freight market, the ships are losing money. So that's always difficult. We're dropping values and dropping maintenance to continue to make us a good profit. And the oil and gas industry is absolutely driven by oil price, less than $50, all of the construction offshore development stopped, half the drilling rigs that are out looking for oil are laid off. All the supply boats and all the other offshore support vessels, all struggling. So that all has an effect on values and on premium and on our ability to grow. But within 1 to 3 years, all -- both the oil and gas business and the shipping business will begin to come back into a growth area and hopefully profitable. Like all supply-and-demand sectors, trying to predict exactly when they pick up is really difficult, but we know it will. So we just have to stick to what we know. We have a very high retention rate at the moment, the highest we've had in 5 years. And that is because as we've contracted our book to what we believe to be and identify as our core clients, we're holding on to the guys that are going to see us through this difficult marketplace.

Trying to call when rate rises would occur is difficult, but there is one thing that makes me sort of vaguely optimistic of that happening soon. What this chart basically shows is 30-or-so operations in Lloyd's, with their hull, cargo and marine liability gross incurreds running over 5 years. Now if you think that 15% expense ratio is probably an average expense ratio, anything over 85% and you're losing money. Well, as you can see from that, from there upwards, you're losing money. These are the people you're competing with. These are the people that are still reducing prices. In that, we have about a 72% gross incurred running over 5 years from '15 backwards. So we're not talking about what's going on, but we believe, as we're being pushed to give rate back, we can afford to do it for longer than everyone else. Now I don't like the idea of it's poker chips at the table and those that are left with one chip win, but it feels a little bit like that. I mean, for those that go in bookmakers [ph], my analogy is that guy in the corner on the fruit machine, he's poured coins in all afternoon and does not want to walk away. And that's what it feels like for most of these over there. They cannot make money, they haven't made money, but they don't want to walk away and let Beazley pick up all the profit -- well, Beazley and 1 or 2 of the others.

So what does that say? So I think it's going to change. But I hear in the market people moaning about the state of the market. It's always someone else's fault, et cetera, et cetera. The most important thing my guys know is, one, never get cocky about a business; and two, we always try to adopt an attitude which is, not literally, the market is always good. What does that mean? Whatever's happening, we're in command of our own destiny. You just got to keep going and looking for where we can add value or mix some value or have a little bit of differential to someone else and the rest of the market. So we've continued to actually invest across the cycle. Yes, it does contract your profit a little bit by buying an expensive people and going to expensive locations. But in the long term, and this business is about long-term growth, make no bones about it, you have to do this to keep growing your business. Lloyd's has become a much more tougher market to do business in, we've gotten out and looked for the business elsewhere. So we've put 2 new guys, local guys, not ex-pats who are having their last hurrah in Singapore, but 2 smart guys who are working hard to make money for us. And we will make money over a period of time. We've got a new pleasure craft and yacht operation. We started in a really small-scale way, but we're halfway through the year, they've done their budget for the year. Absolutely terrific. They're beginning to find all these little niche MGAs, which we can pick up, bolt into the account. And our regional books sort of settles about 65%. Yes, it's not big ticket, but it's very sticky business, and it makes us a nice profit and a great, great diversification for Beazley. We've got a new fishing vessel and small craft underwriter. Again, exactly the same. Set them a fairly modest budget this year. He's done it, which is terrific. Small, sticky business, where the actual operational efficiency is really important. And we have a fantastic IT department, which is really thinking ways of how we can beat the competition, not through rate, not by being beaten up by the brokers, but the fact that we can deliver these projects really efficiently. So small-ticket business, we're going to really try and push a greater emphasis on.

We bought Leviathan, which is an MGA, which does underwater streamers, ROVs and business like that. Yes, it's contracted at the moment because it's very, very associated and driven by offshore development. But as that takes off, we fully expect that to grow really aggressively. We've always written 60% of it. We now own 100%. We know the people. We understand the culture. Absolutely us. Niche business, long-term profit. I think it's made us something like $30 million or $40 million over the last 10 years, so a great acquisition for us.

And finally, we're continuing to analyze those countries which we are already in, like France, like America. We've never been onshore America, but we're looking at it very closely to make sure we're not missing a trip. And if we think it's important to go there and chime ph in to set the business before it comes over here and gets into the hands of the big brokers, then that's what we'll do.

So lots of really interesting things going on. Yes, it's not a great market, but it's not the best of times, it's not the worst of times. But we've got good people. We like the diversification that we have. We continue to look at different geographies and different types of business. And hopefully, when I come back in 7 years' time, we'll know probably -- Andrew would have probably retired in 7 years' time, I might come back with 2 or 3 new other products. But we're here. We're organized. Not one of our classes is losing money at the moment. We feel really enthusiastic about the future. Look, we have good times, we have bad times. There is no caulking ph us about what we're doing. We remain sort of healthily frightened by our business. It's a very, very, very volatile business, but we're focused. We continue to grow, and hopefully, we'll continue to make a reasonable contribution to this company's balance sheet. Thank you very much. Do I take questions now? No. Thank you.

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David Andrew Horton, Beazley plc - CEO & Executive Director [4]

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It's obviously a race to retirement taking place between Clive and myself. And I guess, we will be around in -- who will be around in 7 years' time when Clive comes around again. Right. Let me slip into the outlook. Let's look at the outlook.

So I think Clive has covered part of this from a marine point of view. The key to this chart, which we've shown several times before, is the dotted line. So the dotted line is the overall portfolio. This is a rate change on a risk-adjusted basis, so it takes into account the actual price change where the prices -- price differential, it also takes into account any terms and conditions changes. So on a risk-adjusted basis, the pricing of the portfolio has only just about dipped under 100%. And why is that? Because we try and rebalance the portfolio as much as we can while staying in all the lines of business we like. Because as Clive has touched on, we have invested heavily in underwriting talent that we haven't withdrawn from many things, but we have rebalanced.

And what have we been doing over the past few years? We've been growing the specialty lines business, which is the dark red line, which still shows an upward trajectory from 2011 onwards, sort of the end of the recession, so that is good. And other lines of business, as we can see, are under quite a lot of rating pressure, especially property and marine, which Clive was just talking about. So marine is the pale blue line, which has now gone to 80% -- just under 80% of what it was 3 years ago.

This is actually showing the premium growth. And again, I was sort of trying to show with this chart was how we hold back when the rating environment isn't that good, and then grow when it is good. So picking up the bottom line, which is the specialty line, if you can see, from 2008, 2011 actually shrinking the book slightly, and now is a good opportunity for growth. Now some of the growth within SL over that period of time has been the cyber book. And if you go back to 2008 and '09, we virtually wrote no cyber business. So that has helped that grow, but the rest of the book is also growing. It's harder to see within the other lines, but we have taken the opportunity of growing the property book when we acquired First State back in 2009. And as Clive's numbers showed, we were growing Clive's book for a number of years. The smaller ones are harder to see, but we also have shown growth in political risk and contingency and the reinsurance book and, of course, Life, Accident & Health, and they started with us back in 2008.

So what has that done by percentage? It -- all it's done, really, from '12 to '15, the end of last year, is move specialty lines up a bit, including cyber, so it's gone up 6 percentage points; and property and marine have given up 3 percentage points over that period of time. The aim, though, of these 2 charts is to show that we're still building a balanced portfolio. So even within the specialty lines, the balance of that portfolio has changed over those 3 years.

So I think we've covered this. Competitive pressures remain strong. I'm slightly concerned about mentioning the second bullet point, the return should be expected to reduce. Because Martin and I have been saying this now for almost 4 years, and generally, returns haven't reduced. But if you just take a simple view of life that we have got a 2% reduction across our whole portfolio this year and the previous year, and I think it was (inaudible) previous year, claims generally are quieter than they have been on a long-term average. We will expect our returns to full. And I think high-teens ROEs are unsustainable going forward.

Rate pressure, specifically on the short-tail catastrophe-exposed lines, expectation that is going to continue into the second half; hope that we are hitting close to the floor. There are some early signs we may be hitting the floor, but the rate of rate decreases has definitely reduced.

Continue to focus on our strategic initiatives. Our strategic initiatives include growing in Europe, as I've touched on, growing in the U.S., which we've been doing for the past 11 or 12 years, and looking at our Singapore operations to growing in Asia Pacific, remaining innovative and looking at innovation and focusing on some of the small business lines, which Clive talked about. Some of the smaller business lines where business tends to be stickier, it's difficult to grow materially the top line because you have to write a lot of it, but it's something we've been very successful at, and we have good initiative of, can we be more successful at that?

U.S. economy, as I touched upon, is stronger than most, and therefore, growth in the U.S. remains a key priority to us.

Attracting people. It's been great to attract 70 people in the first half of the year. Our aim is to continue to do that despite margin compression. The political and economic uncertainty, we're a major U.S. player and elsewhere. So I think we can weather any political uncertainty over the next 2 or 3 years, although, as I'd mentioned, EU growth or European growth, international growth, for us is really important, and we are investing in both people and organizing our platforms accordingly.

And specialty lines growth. It has been great to have 17% growth in 2016, and our expectation is that, that is going to continue for the foreseeable future into 2017 when we looked at early versions of the business plan.

We are now -- we're now open to questions. Clive?

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Questions and Answers

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David Andrew Horton, Beazley plc - CEO & Executive Director [1]

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Come and squeeze in.

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Kamran Hossain, RBC Capital Markets, LLC, Research Division - Analyst [2]

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It's Kamran Hossain from RBC. Three questions. First one, coming back to Martin's comments about capital in the business plan for next year. Obviously, you've got the 12% increase in capital requirements for next year. What does that mean in terms of the outlook for growth? I know you've mentioned that specialty's very exciting, but the half year, it's -- taking into account the reductions elsewhere, it's a 2% increase. So what does that mean for next year's premium? Secondly, if you -- do you know that you'll be getting on new money at the moment in the investment portfolio? And the third question is on the specialty lines combined ratios, it's come in at a pretty low level compared to history, say, 91%. Previously, that was kind of high 90s. Where do you see that being as a normalized level going forward?

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David Andrew Horton, Beazley plc - CEO & Executive Director [3]

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(inaudible) I'll kick off, and then you can fill in all the bits of that answer. So the growth for next year is an interesting one because we're in the early parts of planning for 2017. So I think the element, which we've covered this morning, which we're more certain of is, especially lines growth, in our view, is definitely going to continue into 2017. With the way we've gone about distribution in the U.S., adding underwriters on both sides of the Atlantic and the fact this side of the business is going to continue to grow. So we're comfortable about that. On the short-tail lines, as I mentioned, we're hoping we're hitting a bit of a floor, and therefore, the reductions we're seeing in the short-tail lines, we're hoping, are not going to repeat. And at not rate but actually premium reductions. And therefore, overall growth next year, we feel more comfortable out than growth this year. Because we started this year with this 5% to 10% growth target for 2016, and hope we can still get close to 5%. But what we've found in the first half is that short-tail lines are under more pressure. Although the rates have gone down virtually in line with what expected, we've actually shed more business than we thought. So growth is expected to be greater into 2017 than '16. I want to put a caveat on that we're still going through the business planning process, and we're only halfway through this year. So as we get closer to the end of the -- I mean, when we get to the end of the year, we'll get to -- I'll give more comfort on that. On the SL combined ratio, I'll do that, and then you can (inaudible) on your money. On the combined ratio, yes, our combined ratio has come down for a couple of reasons. One is we're actually opening the book at a lower loss ratio, lower, yes, claims ratio than we were. If you remember what we did in -- I think it started in 2010, we started opening the SL book at a higher loss ratio because we realized in the recession we're going to pick up more claims. We feel it's now a better book, and we've come out of the recession, so we're now bringing the opening loss ratio down a bit. We're talking about 1% or 2%?

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Unidentified Company Representative, [4]

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Yes?

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David Andrew Horton, Beazley plc - CEO & Executive Director [5]

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Down. We're also writing more cyber, which we opened at a lower loss ratio anyway, so we opened a medium-tail book of SL at a certain loss ratio rate, and we opened cyber at a low loss ratio because it has performed better. And as you can see, from the years, we've been -- the historic years, we've been writing -- we're starting to see reserve releases come through again when we've had a period of relatively low SL reserve releases. So if you plotted that chart back to 2006, you'd see SL reserve releases being quite high, then dropping during recession, and now we feel they're coming back. So where would you expect? We expect the SL combined ratio to be in the low 90s.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [6]

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Yes. They did also achieve a modest expense ratio improvement, which, hopefully, if they can continue to grow where they have been, they may be able to continue to achieve a little bit of improvement there. As far as the running yield on new money is concerned, I've got Stuart right in my line of sight, so if I say the wrong thing, he'll correct me. On the core portfolio, I would say that we're getting about 70 basis points of credit spread and about 50 basis points of duration. So about 120 basis points in total.

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division - Analyst [7]

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Nick Johnson from Numis. Two questions. First of all, there's a press release out the other day from you guys saying that the data breach of BBR data breaches has increased, I think, from 600 to 900 in the first half of this year. Just wondered whether that was within expectations, or has there been any change in loss ratio assumptions within that or was it just a function of the growth in the business? And then, secondly, just to follow up on Kamran's question, really. The statements says that you anticipate near double-digit growth in capital over the next 5 years. Just wondered if you could elaborate on whether -- or how much of that is down to business growth and how much is down to perhaps change in the capital ratio you envisage for the portfolio?

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David Andrew Horton, Beazley plc - CEO & Executive Director [8]

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Okay. So the data breach is, I think, is in line with expectations, so the book continues to grow. There's nothing unusual in the amount of breaches. And if you remember, I don't know how many years ago, it's 2 years ago, when we said we dealt with 1,000 breaches. 2 years later -- and that was (inaudible) 2,000. 2 years later, we got to 3,000 breaches. So not surprising we're dealing with more and more breaches as we're writing more and more policies. And the book does continue to grow, and we support that by recruiting more people who are looking after our data breaches. We have the group out of Philadelphia who manage our data breaches. So there's nothing unusual in it. And generally, the product is performing well. And because there are more breaches, people tend to buy more product. Just to take a quick step back, our cyber book tends to be a mid-market and small cyber book rather than large. So the data breaches we manage are for those mid- and small-size clients. What was the second question?

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division - Analyst [9]

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The second question is on capital (inaudible) press.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [10]

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Okay, capital. Yes. So I mean, I think we have 2 scenarios in our medium-term planning, Nick. There's -- one end of the scenario is capital and premium grow together. And then the other is that the capital probably outstrips premium growth by about 2%. And we don't know the exact mix of our portfolio over that 5-year period. It's obviously going to depend upon market circumstances in the different markets. So the -- if capital grows at 10%, to take a figure, then for that to happen, premiums need to be growing in high single digits.

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Andrew James Ritchie, Autonomous Research LLP - Partner, Insurance [11]

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It's Andrew Ritchie from Autonomous. Three questions. Martin, can you just remind us what -- you talk in the press release about using more of your debt capacity. What -- just remind us what you think your debt capacity is. And the nature of any debt issuance. I'm assuming it's going to be very similar to what you've got in place already. Secondly, on the target capital coverage, I mean, given you talk about low returns going forward, it's very hard -- it could be very hard after a large event to regenerate capital. It's going to be harder than after previous events. Do you think it's more prudent that you stay at the upper end of that target capital coverage in the current environment? Or maybe even consider to remain above that? Just a comment on what's the appropriate level in today's environment. And the third question is just on marine. So the question for you, you thought you're going to miss out. There's been an awful lot of talk about how bad pricing is for years. And there's been also a lot of talk about how claims have been for years, and there's been lots of surprises in the claims front, particularly in the cargo area. Not for Beazley, I'm talking for the market as a whole. So why is it that pricing is still falling? I mean, who is bringing new capacity to this market? And what are the attractions for that new capacity? Because it's always been the market that threatens to get better, and it never seems to, at least in the last 3 or 4 years.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [12]

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Shall I tackle debt capacity first? So currently, I think our leverage is in the high teens. In 2006, when we first issued debt, we had leveraged about 50%, so debt was about 50% of equity. So the board doesn't have any fixed maximum limit. So we certainly feel if you look at our peer group, debt leverage of below 20% is quite low. We would expect to be in the mid-20s, mid- to high 20s if we do execute upon the 2 things that we've highlighted at this phase. And then going forward, we'll just need to take each year as we go in terms of what is the financing requirements and how will that be met between equity and debt. As a Finance Director, I'm quite keen to borrow money in this environment. There's a lot of it about and it's relatively cheap. So but clearly, the confidence in our balance sheet is key in an insurance group. So we also need to factor that in.

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Andrew James Ritchie, Autonomous Research LLP - Partner, Insurance [13]

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And the nature of the insurance [ph]?

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [14]

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We're going to look at everything. So we -- there's no -- obviously, the debt markets are quite active at the moment, so we will look at senior debt. We have some senior debt and some subordinated debt, so we're going to look at all options. And obviously, once we've decided, we'll communicate. But at this stage, we just need to see what looks like the most attractive and appropriate option for us. The -- so your second question was on target capital buffers and the ease to recapitalize post an event. I mean, certainly, our view about our capital is we carry a buffer, and we also have a backup program with an LOC. I think, potentially, future growth rates is just as important as anything you're thinking about what capital to -- what capital buffer to carry. We -- as a franchise, we've always thought about balancing our portfolio, coming onto your scenario of a big event. We've always thought about balancing our portfolio such that we have a relatively good performance in a year where there's a big event and therefore, to the extent that we need to access capital, are able to do so. That's essential to how we run the company. We have been reducing our catastrophe risk appetite, I'd like to stress, for the last 3 or 4 years because of the rating environment. And so it's -- putting aside anything other than a 1-in-1,000-year event, we should not get an outcome where a natural catastrophe event creates a really, really major loss for Beazley.

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David Andrew Horton, Beazley plc - CEO & Executive Director [15]

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That the third question. Clive's going to talk briefly about the marine division generically. You're not going to talk about specific competitors.

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Andrew James Ritchie, Autonomous Research LLP - Partner, Insurance [16]

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The question was around why the market never seems to get better.

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Clive Washbourn;Head of Marine, [17]

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Yes, absolutely. See, that previous chart was heavily censored. I'd love to give an eloquent answer to your question, but I think there's a whole variety of things going on. In the past, where we used to have clear delineation between aviation syndicates and nonmarine syndicates and marine syndicates, in those sectors, if they went really wrong, the results were focused on those teams very, very quickly and on those managements to turn things around. Now we have these big diversified companies. And if you take -- the marine figures I was showing you does not include energy. So you could have your marine division doing that. But if your energy is making money, and if you put within your, say, your marine division, which we don't, your terrorism, if those high-severity, low-frequency businesses do all right, it masks what's going on. I think there is still an attitude the grass is greener, and we've done it. We looked at aviation. We then looked at satellite to diversify our book. So people -- capital (inaudible) make some money, and then they set up a new syndicate. They all think they've always got the best people. We're also being really stressed by the P&I Clubs. The P&I Clubs are the shipping mutuals. And as they wanted to diversify the products to their ship owners, they've come into Lloyd's and started syndicates. Now Lloyd's is acting [ph] through the door, like putting their capital up, and they're playing. Some of them have loss ratios greater than 200%. So I don't know why they want to play this game, but I assume that if they don't -- if they're not in insurance, they would've all been to chocolate-making or running sports shops. But at the moment, they're wedded to being insurance. I don't think there's a -- really a simple answer. I think what has exaggerated what's going on is and I'm really not clear enough to understand why. We have seen a lower frequency of loss, certainly in the shipping business. And the energy business, we haven't had a major windstorm. So everything has sort of accelerated the desire to be in this sector, but we've not had the big bangs and you know what's going to happen is that this really low rating environment. And just to give you a dramatic example of that, our energy book at the top, we were $126 million. Next year, we're going to write just over $40 million, and our exposure isn't that much different. So along comes the bang ph or the frequency goes up to where it was, then I think you'll have people looking at where they're putting their capital and saying, "Actually, this game's a bit tough for us." But at the moment, like I really cannot really understand why they want to play in this sector. It's difficult, and it will shred capital very quickly if it goes back to normalized claims activity. So I hope that's answered it.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [18]

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Jonny Urwin from UBS. I just wondered a bit around Accident, Life -- Life & Health. So growth slowed right down there from GOEP [ph] perspective. I mean, I think we were sitting here this time last year, and you guys were talking a bit about medical gap insurance and how that might be the next $100 million line. Is that still the case? Or has that changed?

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David Andrew Horton, Beazley plc - CEO & Executive Director [19]

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No, we have seen that gap medical does continue to grow in the U.S., so just -- we have some health (inaudible) breaks down to 3 books (inaudible), London book, which we acquired in '08; Australia; and the U.S. The U.S. is new and continues to grow, which is good. The main reason the premiums have not moved up is we lost a major account in Australia. And that was a reasonably sizable amount of money to us. It wasn't that profitable to us, therefore, it doesn't have a material impact on the overall numbers. But does have an impact on the top line.

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Jonathan Peter Phillip Urwin, UBS Investment Bank, Research Division - Director and Equity Research Insurance Analyst [20]

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And secondly, just thinking about the cyber market. I mean, some people are saying it might grow threefold over the next sort of 3, 4 years. Obviously, you guys have got decent market share in there already. And you always say you don't want to do too much of one thing. I mean, how do you think about your market share going forward if we do get the level of growth expected in cyber? Will you pull back a little bit?

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David Andrew Horton, Beazley plc - CEO & Executive Director [21]

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I don't think we'll necessarily pull back, but I think the markets has gotten massive potential to grow. So even in the U.S., if you look at it by various sectors, most people would argue it's up between 20% and 50%. So there's still up to 80% of certain sectors are not buying it, and then we've got the whole European and rest of world opportunity, where the EU, early on this year, did say, in 2 years' time that if you have a cyber breach, you are going to report it to your regulator, and I believe that, in 2 years' time, there is going to be a much bigger European opportunity than there currently is, which is good. So I think we can just keep our market share. I'm not exactly sure what it is, but we're one of the major markets in the -- in U.S. and the whole market's just going to grow, and we can grow with it. If we have access and our balance sheet can't cope with it, then we need to think of maybe buying more reinsurance or other ways that actually continue to write it ourselves but putting it on somebody else's balance sheet, which also works well.

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Benjamin Cohen;Canaccord Genuity Corp., Research Division, [22]

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It's Ben Cohen at Canaccord. On the issue of sort of laying off risk, is there any change or likely change looking into 2017 in terms of the reinsurance buying or use of third-party capital, given the pressure on prices? The second question was just in terms of the business in Europe. How much business do you actually write in Continental Europe? And outside of the sort of the cyber piece, how will your business look to differentiate? And can you set out any target there? And the third thing I wanted to ask was just in terms of dollar strength relative to sterling. Is that going to give you any material benefit to your sort of cost income ratios, expense ratios?

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David Andrew Horton, Beazley plc - CEO & Executive Director [23]

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Okay. So from the RI point of view, at this point in time, there's no major change to the RI programs for 2017. Minor changes may be the point that we may buy more cyber cover, more reinsurance to cover. If we can write more cyber and we can't cope with them with our balance sheet, we may buy some more reinsurance for that, but we need to go to the detail planning. And the other potential area we may buy RI is if we want to reduce our net cap exposure into 2017 and still retain the business. So we would lay that off to the reinsurance. Because whereas we're reducing that cap exposure, which, Martin mentioned, we've done it 2 ways, one is dropping exposure and the second is buying more reinsurance, and we may continue to do that if we believe natural catastrophe is not in a good -- as good next year as it is this year. The Europe point of view, we don't actually give specific premiums, but we normally talk about the fact that we hit our total 100% portfolio. About 6% is -- of that is the U.K., and about 6% is European business.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [24]

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I think in terms of differentiating in those markets, Ben, we intend to bring our specialist high-quality products where there's need in those markets and go with our normal formula of really good people, really good service. And that's how we're approaching.

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David Andrew Horton, Beazley plc - CEO & Executive Director [25]

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Yes. So Paris now has political risk. It has health care. We'll have health care, cyber. So we've gone with specialist products. We're not trying to hit head-to-head with AXA writing -- property: NGL, EL and so on. The mainstream lines, property and casualty. So we're going with very specific lines of business and some professional indemnity.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [26]

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On the question of cost, yes, roughly 2/3 of Beazley's cost base is a sterling cost base. So for a company that reports in dollars, there is going to be a tailwind, but obviously, exchange rates can go in 2 directions. So we'll be continuing to focus very intensely on trying to make our cost base as efficient as possible.

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Barrie James Cornes, Panmure Gordon (UK) Limited, Research Division - Insurance Analyst [27]

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It's Barrie Cornes from Panmure Gordon. Just one question, please. Specialty lines seems to be going very well. Rate increases going through. Is it an area where, perhaps, you need to be far -- put more capital to that, in which case, might there be some impact on return of capital to shareholders later on in the year as a result of that? I'm not saying it's a bad thing, but is that an area perhaps you ought to be concentrating on?

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David Andrew Horton, Beazley plc - CEO & Executive Director [28]

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Barrie, the -- when we look at special dividends, because that's where you talk about return of capital, which is where we've returned capital in previous years, we tend to look at that towards the end of the year when we have a more definitive position on the 2017 plan. We've got through the North Atlantic winter storm season, which can have an impact on profits, and we have a better idea of what this year's profitability is because there's still uncertainty as to where the investment yields are going to be. What we're trying to flag is we are going to use more capital for growth than historically we have done. So by default, there is going to be potentially less surplus capital unless our Solvency II profits are super brilliant between now and the end of year. And if they are, we will continue down our special dividend route. If they're not, we'll be deploying -- we won't have as much to deploy the more we -- the increase we need into growth. So we're not trying to flag anything other than we are using -- we are going to be using more capital into 2017 with some certainty to fund future growth.

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Philip Kett;Macquarie Research, [29]

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Philip Kett from Macquarie. Two quick questions on the reserves. Firstly, on the specialty lines. I see that reserve releases have more than doubled. I was wondering if you could give us a bit more color on that. And then, secondly, on the marine reserves, I see there's been some reserve strengthening, in particular, for the 2013 years and before. And my understanding, this was quite short-tail business, so I was quite surprised to see reserve strengthening there. I was wondering if you could talk more about what's caused this. Thank you.

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David Andrew Horton, Beazley plc - CEO & Executive Director [30]

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You want to tackle the marine first, Clive?

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Clive Washbourn;Head of Marine, [31]

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It is generally a short-tail business, but we actually do both onshore and offshore construction business. And construction can be anything out to 5 or 6 years. And what we've done is we have 2 or 3 very large potential claims in the marketplace, of which most of we don't think our layer is going to be impacted. But we decided to be prudent to put away some IBNR at this half year on those potential claims. So that's really the beefing up of the prior years from our point of view. But just to rest -- to allay your fears, we are still on budget to make a reasonable profit for the whole year. We just decided to be prudent at the beginning of the year with these losses. Now if they don't come through, they -- there will be a nice release again. But no, we're not looking at our prior years and thinking, goodness me, we've stripped the barrel out or we've got the numbers wrong. We've just taken a very prudential approach to particular segment at this particular time.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [32]

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Thank you, Clive. (inaudible) might have to intervene there on marine reserve releases for the second half. Hopefully, we do reserve prudently, so that remains our theme across the business. As far as SL, the specialty lines business (inaudible), as I think Andrew alluded to, there was a period in 2003, 2006, of almost extraordinary profitability for that business that, going back 4 or 5 years, generated very significant reserve releases in Beazley. Then the recession prior -- years 2008 through 2011, where the SL premiums didn't grow because we were having to manage a much more difficult environment in the U.S. economy, in particular. And whilst we have made acceptable profits during those periods, we believe -- reserve releases were much lower, and then potentially, we are hopefully emerging into a better environment for the specialty lines business, which is why Adrian Cox and his team have been growing it since 2012. And you're starting to see that come through in the reserve release picture. The other thing we have is this growing cyber book, which is a much more important part of the specialty lines portfolio than it used to be, which does have a short-tail element. And so that will also be a feature potentially of reserve releases from specialty lines division as we go forward of -- either more or less release from that product, depending upon the outcome of a particular year.

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John Anthony Leslie Borgars, Equity Development Limited - Analyst [33]

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John Borgars, Equity Development. Could you comment on your view of how much rate pressure will come from having 3 dividends out of 6 with higher expense ratios than [ph] claims ratios? It looks as if the bulk of them are making more -- getting more out of it than the premium payers ph .

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David Andrew Horton, Beazley plc - CEO & Executive Director [34]

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Sorry, John, the question was, are we going to be able to pressure the combined ratio because of direction [ph]?

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John Anthony Leslie Borgars, Equity Development Limited - Analyst [35]

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You would -- do you expect to see more pressure put on premium rates in (inaudible)...

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David Andrew Horton, Beazley plc - CEO & Executive Director [36]

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Yes, so quickly I'll answer -- yes, we definitely expect on our planning. Our planning assumption for -- in 2017 is continued pressure on the short-tail lines, less pressure than we probably have seen in the past few years, so then the rate or rate reduction will slow. We definitely see pressure from brokers who are under pressure to generate extra revenue, where they may want to charge more commission. So we have 2 lots of pressure. One is the actual price comes down; and the second is the brokerage goes up. And that one possibly potentially hits claims ratio and then it hits expense ratio, and I think we've done a pretty good job of being relatively robust on the pressure from extra brokerage. What we're trying to do as a company, which is ongoing, is be in lines of business where brokers and clients really want us and need us. And if you're in those lines, there is less pressure from a commission point of view than if you're just another me-too player. Nick. Nick.

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division - Analyst [37]

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Sorry, just a follow-up. It is again on the capital subject. Obviously, we're in danger of belaboring the point. But in terms of the capital buffer, it's 42%, I think it was, is way above the 15%, 25% guidance or target range. Could you just give us your thoughts around that? Are you of a mind just to change the target range? Or is it a case that you expect the buffer to come down as you use some of that capital to fund growth? Or alternatively, is it an area which you think will be -- where capital could come down more practically by returning it to shareholders?

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [38]

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I don't see any particular change in the range. Debt issuance, if we do execute on that debt strategy, that sort of comes in lumps, so to speak. We will clearly have far more capital at the end of the year and a much bigger percentage than the 15% to 25% range. And so I think I will need to find a new way of communicating the board's thoughts on equity capital versus debt capital.

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David Andrew Horton, Beazley plc - CEO & Executive Director [39]

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I think the challenge -- it's a great point, because the challenge with the range, isn't it, is if we believe, and our long-term plan believes we're going to get specialized growth for a number of years rather than just 1 year, we can't just have that -- we can't just live by 1 year at a time when we've got a 3- to 4-year, 5-year plan of growth. So we may -- you may see us sitting above the range because we believe we're going to grow for the next 2 years rather than come down in the range and just hope nothing goes wrong and we do deliver a reasonable term which can fund [ph] the growth. Because if we don't, we'll have problems growing. So you will have that issue of a short-term issue versus a medium-term plan that says growth opportunities are good.

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division - Analyst [40]

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Yes, but I was just wondering how to square that with the comments in answer to Barrie's question about what you do with the profits. Are -- you're saying you may retain more to fund growth, but then you've got the option of reducing the buffer as well to fund growth and debt. Just wondering how those stack up together.

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David Andrew Horton, Beazley plc - CEO & Executive Director [41]

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Yes. There isn't an answer to it, other than we look at both the short-term position at the end of the year and see what we actually need and what excess we've got over our central scenario, and we look at the medium-term plan over what we think we're going to need over a 3-, 4-, 5-year period. We also have the issue, which we've raised before, that under the Solvency II, generally things are more volatile, and that's why we increased the buffer in the first place.

Brilliant. It is good to see everybody. Thank you very much indeed for coming this morning.

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Martin Lindsay Bride, Beazley Insurance Designated Activity Company - Group Finance Director & Executive Director [42]

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Yes, thank you.