Insurers suffered hefty losses during 2011 from claims associated with a stream of costly catastrophes - events such as earthquakes in Japan and New Zealand, tornadoes in the US and floods in Australia and Thailand. In which case, investors might be inclined to give the insurance sector a miss. But to do so would risk missing a big opportunity. That's because the insurance cycle is driven by precisely such catastrophes - as losses mount, underwriters are forced to raise their premiums to rebuild their reserves, which, longer-term, means a return to hefty profits. Evidence is mounting that losses are proving big enough to trigger rising premiums; at least that's true for catastrophe-related business lines. And Lloyd's insurer Beazley looks best placed to benefit from this cyclical upswing.
- Premium rates rising
- Rapid return to underwriting profits expected
- Owns most of its underwriting capacity
- Impressive dividend yield
- Weak investment return
- Hit by catastrophe claims
Beazley has suffered its fair share of catastrophe-induced pain. At the half-year stage, it reported losses comprising a $154m (£99m) hit from the New Zealand and Japanese earthquakes, a $29m loss from US tornado-related claims and a $23m hit from claims arising from business linked to Libya. Those losses were confirmed as unchanged with November's third-quarter trading update. That left Beazley reporting a half-year combined ratio (of claims to premiums) of 108 per cent, meaning it made underwriting losses. Management also said that there had been further losses in the seocnd half from hurricane Irene and flooding in Thailand.
But Beazley's combined ratio, whilst loss-making, still looks healthier than the ratios being reported by many insurers. Take Amlin, for instance, its half-year combined ratio came in at a painful 122 per cent, while rival Hiscox's ratio wasn't much better at 117 per cent.
What's more, unlike some of its peers, Beazley is set to return to underwriting profitability fairly soon. Broker Numis Securities forecasts a profitable 99 per cent combined ratio by end-2011 and expects that to improve to a thoroughly attractive 88 per cent for 2012 when the broker also reckons that pre-tax profits will soar to $229m and net tangible assets will finish the year at 143p.
"Beazley's performance is, compared with its peers, relatively strong this year," says Sarah Lewandowski, an analyst at broker Peel Hunt. And, as Beazley owns 81 per cent of its managed syndicate capacity, most of those profits will benefit its shareholders, not Lloyd's Names.
BEAZLEY (BEZ) | ||||
|---|---|---|---|---|
| ORD PRICE: | 134p | MARKET VALUE: | £694m | |
| TOUCH: | 133-134p | 12-MONTH HIGH: | 139p | LOW: 108p |
| DIVIDEND YIELD: | 6.2% | PE RATIO: | 6 | |
| NET ASSET VALUE: | 124p | COMBINED RATIO: | 108% | |
| Year to 31 Dec | Gross premiums ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 1.62 | 187 | 34.8 | 6.6 |
| 2009 | 1.75 | 158 | 28.9 | 7.0 |
| 2010 | 1.74 | 251 | 42.1 | 10.0† |
| 2011* | 1.68 | 71 | 11.0 | 7.9 |
| 2012* | 1.79 | 229 | 35.7 | 8.3 |
| % change | +7 | +223 | +225 | +5 |
*Numis Securities estimates Normal market size: 8,000 Matched bargain trading Beta: 0.7 †Includes 2.5p special dividend £1=$1.55 | ||||
Of course, that recovery reflects the fact that premium rates are firming fast as the cyclical upswing gets underway. Beazley is already beginning to feel the benefits. In November, its management reported that premium rates on renewals grew 1 per cent overall in the first nine months of 2011 and that, for 2012, rates are expected to rise by between 5 per cent and 10 per cent. Management also thinks rates will rise most on catastrophe-related lines, which Beazley mostly underwrites in its property and reinsurance units, which, in aggregate, generate about 35 per cent of gross premiums.
Growth could also receive a boost from acquisitions. Indeed, Beazley confirmed last month that it was in talks to buy rival Hardy Underwriting – that move follows the group's unsuccessful attempt to buy Hardy for 350p a share a year or so ago.
However, today's ultra-low interest rate environment makes for fairly anaemic investment returns - management reported an annualised return in November of just 1 per cent. Even that is not the worst return around. Amlin reported a mere 0.4 per cent return with its third-quarter trading update. Beazley's portfolio looks safely invested, too, in high quality bonds and cash.
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A prospective dividend yield of nearly 6 per cent, based on 2011's likely pay-out, is attractive, too. That's not the best yield in the sector, but it's certainly not the worst. Shares in Hiscox, in comparison, yield just 4.7 per cent, based on Numis's end-year estimates.
