Beazley set for rapid recovery

With hefty claims arising from Japan's earthquake and tsunami - as well as from other catastrophes, such as floods in Australia, earthquakes in New Zealand and tornadoes in the US - the world's insurers have had a tough first half. But the odd thing about insurance companies is that big losses aren't really so disastrous. Sure, their profits suffer in the short term as claims are paid, but losses also mean that insurers can hike their premiums to rebuild their reserves - and that means a better outlook for longer-term profits. Lloyd's insurer Beazley looks well-placed to take advantage of that.

Certainly, Beazley hasn't avoided the short-term pain associated with catastrophes. In the first half of 2011, it suffered underwriting losses and, all told, made a pre-tax loss of $24.2m (£15m). That reflected a total expected loss from catastrophe related claims in Australia, New Zealand and Japan of $154m. Management also expects a further $29m hit from US tornado-related claims and a $23m loss from business linked to Libya.

But City analysts think Beazley has coped better than most. "We see these results as an impressive outcome in the circumstances and one that we expect to gradually look even better as peers report inferior results," say analysts at broker Numis Securities. What's more, assuming that the sector doesn't suffer any further costly catastrophes in the second half, then Beazley's bosses expect underwriting activities to return to profit. Beazley also owns 81 per cent of its managed syndicate capacity, so most underwriting profits will benefit its shareholders rather than Lloyd's names.

The return to profitability will also be helped by the fact that the catastrophe effect is already beginning to boost premium rates. Beazley reckons that rates have hardened by up to 60 per cent in its international reinsurance book, a business that's directly exposed to catastrophes. Meanwhile, Beazley's US re-insurance rates are increasing by 5-10 per cent.

Admittedly, it's a different story in classes that are less exposed to catastrophe, such as marine business. But even there rates look stable. It's possible that growth prospects could receive a boost from acquisitions, too. True, Beazley's attempt to buy for 350p a share failed in December, but management remains keen to do appropriate deals where possible.

Less bullishly, Beazley's investment return, given today's ultra-low interest-rate environment, is nothing to shout about. Its book is focused on high-quality bonds and cash. That leaves the investment portfolio with a low-risk profile, but it also means a low return; the annualised investment return was just 1.1 per cent in the first half of 2011. In contrast, some rival Lloyd's players are prepared to include more risk in their portfolios in order to bolster returns. Take , 9 per cent of its book is in equities with another 2 per cent in property and, with it first-quarter trading update in May, it reported a 0.6 per cent investment return, suggesting an annualised return of around 2.4 per cent.