- Lloyd’s of London syndicate manager increases prices
- Cyber and property show fastest growth in premiums
- Catastrophe claims within expectations
“At a time of sticky inflation, investors will always be on the look-out for companies that have the sort of pricing power that helps them to defend, or even boost, profits, and non-life insurer Beazley’s first-quarter update unveils an average increase in premium rates on renewals of some 10%,” says AJ Bell investment director Russ Mould. “Improved investment returns, helped by higher yields on government bonds and no change in catastrophe claims expectations mean that the FTSE 100 firm continues to expect a healthy increase in profits this year.
“Beazley manages seven Lloyd’s of London syndicates which specialise in areas such as cybercrime and executive risk, marine, political risk, catastrophe and property.
“Heavy losses for less disciplined, and less skilful, underwriters mean capacity has come out of the market to strengthen the hand of those who remain. Beazley even raised over $400 million in fresh cash from investors late in 2022 so it could rake in additional premiums for business to take advantage of the firm pricing environment.
“This plan is already bearing fruit. Gross premiums written rose by 12% year-on-year in the first quarter to $1.4 billion, boosted by price increases and strong demand in the areas of property and cybercrime in particular. The latter did well despite ongoing debate over war exclusions for cybercrime, where interpretation of what is meant by ‘war’ and ‘armed conflict’ is a hot issue when it comes to whether cover can be offered or not.
“The Q1 out-turn beat analysts’ forecasts and underpins expectations of a 15% increase in gross premiums written to $6.1 billion for the full year. This is in line with management’s guidance for a ‘mid-teens’ growth rate.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts
“A second positive factor is the improved investment return on Beazley’s $9.1 billion portfolio. In 2022, the rate of return was minus 2% for a $180 million loss, as unrealised, mark-to-market losses on government bond holdings more than offset the benefit of higher yields, thanks in turn to rising interest rates. In 2023 to date, Beazley has eked out a $104 million gain for an investment return of plus 1.2% compared to a $92 million loss and a return of minus 1.2% in the first three months of 2022.
“Finally, management seems confident in the quality of its underwritten policies. Catastrophe claims are coming in no worse than expected, so exposure for 2022’s Hurricane Ian, for example, is still seen as costing no more than $120 million net of reinsurance.
“Chief executive Adrian Cox is therefore leaving guidance for the combined ratio for 2023 unchanged, with the result expected to reach the ‘high eighties’ percent. In the non-life business, a combined ratio of less than 100% means the insurer is in profit and a figure above it means the insurer is in loss.
“These three factors – strong premium growth, improved investment return and disciplined underwriting – means the analysts’ consensus has pre-tax profit soaring to $896 million in 2023, against $191 million last year (when Russia, Hurricane Ian and mark-to-market – paper – losses on bond holdings cut profits by $350 million) and then hitting the $1 billion mark in 2024.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
“Events could yet take a hand but the stock trades on barely seven times forecast earnings and comes with a yield of around 2.5%, based on analysts’ forecasts, while Beazley’s long-term record of increased gross premiums and dividends belies the year-to-year volatility of its target markets.”
Source: Company accounts, Marketscreener, consensus analysts’ forecasts
