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Beazley prepared for its upswing

CYCLICAL STOCK OF THE YEAR: Beazley (BEZ)
January 5, 2012

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.

IC TIP: Buy at 134p
Tip style
Speculative
Risk rating
Medium
Timescale
Long Term
Bull points
  • Premium rates rising
  • Rapid return to underwriting profits expected
  • Owns most of its underwriting capacity
  • Impressive dividend yield
Bear points
  • 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.

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