- Lloyd’s of London syndicate manager easily beats analysts’ forecasts
- Strong premium growth and firm pricing were supplemented by good risk management
- FTSE 100 member raises earnings guidance for 2024
- Shares look cheap relative to a peer whose name has been the subject of bid chatter
“Investors could be forgiven for choosing to swerve exposure to those firms who run syndicates at Lloyd’s of London, especially after the early appearance of Hurricane Beryl, ongoing wars in Eastern Europe and the Middle East and a major cyber incident involving CrowdStrike and Microsoft, but Beazley is doing a great job of showing how those risks can be managed,” says AJ Bell investment director Russ Mould. “The FTSE 100 member manages seven Lloyd’s of London syndicates which specialise in areas such as cybercrime and executive risk, marine, political risk, catastrophe and property and its profits and share price are booming.
“Higher claims thanks to natural disasters, higher repair costs thanks to inflation and higher costs of capital are all undeniable challenges for non-life insurers (and reinsurers) such as Beazley as they seek the best risk-adjusted return from the Lloyd’s syndicates that they manage.
“But this combination is also restricting capacity in the insurance market at a time when demand is increasing. As a result, for those players strong enough and smart enough to withstand the storm, headline insurance rates are rising, and savvy specialists such as Beazley (and Lancashire, for that matter) are generating good profits, strong cash flow and high returns on equity as a result.
“Beazley even raised over $400 million in fresh cash from investors late in 2022 so it could rake in additional premiums for business covering property and cybersecurity in particular, to take advantage of the firm pricing environment.
“That strategy is now bearing fruit. Profits jumped sharply in 2023 and Beazley’s pre-tax income in the first half of 2024 all but doubled, an outcome that is well ahead of analysts’ expectations and one that outstrips the insurers’ annual earnings in every year bar one since its stock market flotation in 2002 – and that year was 2023.
Source: Company accounts. IFRS17 accounting standard introduced in 2023 so prior years not directly comparable.
“Gross premiums written rose by 7% in the first half of the year to lay the foundations for future earnings growth, at least if costs are controlled and carefully managed. In this respect, it is encouraging to see chief executive Adrian Cox raise guidance for Beazley’s combined operating ratio (COR) to around 80%.
Source: Company accounts
“The combined ratio adds together expenses and the sum of any claims losses and divides that total figure by the premium earned. A figure below 100% shows that an insurer is in the black, and the lower the number the higher the earnings, all other things being equal.
Source: Company accounts, management guidance for 2024E
“Strong profitability boosts net asset value, too, and Beazley’s tangible NAV per share jumped 34% year-on-year in the first half.
Source: Company accounts.
“That may help to underpin the valuation case for the FTSE 100 stock, too.
“At just over 700p a share, Beazley trades on 1.45 times its last stated tangible net asset value per share. The company is also expected to increase its dividend to around 15p per share (for 2.1% dividend yield) and is running a $325 million buyback, which takes the total cash yield (buyback plus dividend) to more than 8% (Beazley does not offer interim dividends, so one, final payment per year).
Source: Company accounts
“While nearly 1.5 times book value may be no absolute bargain, it looks very good in the context of Beazley’s lofty return on equity.
“It also represents a discount to the 1.65 times multiple of tangible NAV at which Hiscox trades – and in July Hiscox’s name was put in the frame for a potential bid from Italy’s Generali and Japan’s Sompo by the highly respected trade publication Insurance Insider.
“Even if investors do need to consider the different industry mixes and risk exposures that their managed syndicates run, that does suggest Beazley is still potentially good value, and this is an industry where waves of consolidation are by no means unusual. Amlin, Brit Insurance, Catlin and Novae were all taken over between 2015 and 2017, when business was booming and returns on equity were high, so a repeat is by no means impossible.”
