Beazley starts to rebuild

After a horrible 2020, the outlook for speciality insurer Beazley (BEZ) now looks clearer and more positive than at any point since the onset of the pandemic.

Better-than-expected growth across all key policy lines in the six months to June meant pre-tax profits smashed consensus forecasts by 52 per cent.

Such mismatches with analyst expectations are not uncommon in a sector which derives most of its income from a highly complex game of probability. Indeed, Beazley has beaten annual consensus forecasts for earnings per share on all but two occasions since it floated in 2003, with an average beat of 17 per cent. Day traders, mark next February in your diaries.

This time around, the drivers of a strong set of interim results were telegraphed well in advance, which suggests the market is yet to regain confidence following some poor recent expectation management around the claims environment.

Rates climbed across the board – and especially in cyber & executive risk and specialty lines, Beazley’s largest two lines by gross premiums – and helped to push operating profits to a healthy $188m (£137m), compared with just $4.3m in the first half of 2020.

Markets helped, too. On the face of it, chief executive Adrian Cox’s description of a 1.2 per cent investment return for the half-year as “strong” seems generous, though this should be seen in the context of the super-low yields on a bond-focused asset portfolio.

So why no dividend? Analysts at Peel Hunt suggested the decision to push back a return to distributions reflects caution about the pace and force of a post-pandemic reopening, and a further $50m in potential Covid-19-related claims. For its part, Beazley sounds comfortable with this estimate.

As ever, shareholders must place faith in this call, and the wider competency of risk management. So far in 2021, Beazley says cyber and our reputational risk policy lines have been bolstered “by incorporating AI and scanning tools to identify threats before they cause havoc”. Like so much in insurance investing, such pronouncements are all-but unverifiable.

Investors can at least point to a positive trend in the handling of cybersecurity claims. A focus to tackle “the underlying causes of losses” has resulted in a 20 per cent drop in ransomware claims frequency by policy count on business written since last October. That helped pushed the division’s combined ratio to 98 per cent, from 101 per cent for FY2020.   

Peel Hunt expects the group-wide combined ratio to hit 94.7 per cent in 2021, and 88.9 per cent in 2022, leading to adjusted earnings of 29.5¢ and 56.7¢ per share, respectively.

Managing so-called social inflation will be a challenge in the coming year, though steps to move capital toward better-performing lines have already been taken. That bodes well for the step up in earnings and the dividend. Buy.

Last IC View: Buy, 348p, 5 Feb 2021