Beazley's shares slide after pre-tax profit flatlines

When you’re trading at 27 times earnings, investors expect a lot of growth. This might explain why shares in Beazley (BEZ) dropped 7 per cent in early trading after it posted a flat pre-tax profit and a drop in earnings per share.

The reaction looked a bit harsh, as perhaps shown by the  fact the shares closed flat on the day. Numis blamed the insurer’s profit drag on "an IFRS 17 timing technicality, whereby the risk adjustment in reserves is front-loaded and premium income recognition is weighted to H2 to match risk profile seasonality". The broker said it expected Beazley to meet its full-year targets "assuming the property effect normalises at full-year as indicated”.

While pre-tax profit for the period might not have shown it, Beazley’s property business did very well. Premiums there grew by 65 per cent, driven in part by US growth, while its cyber security arm grew its premiums by 14 per cent. 

One look at what is happening in Florida tells you all you need to know about the pace of property insurance premium growth. The increase in extreme weather events – such as hurricanes – has increased the amount Beazley can charge to ensure Americans’ homes (the US . It also increases the amount homeowners are willing to pay as fewer insurers are willing to take the risk.

Such risk could ultimately hurt Beazley if reinsurance rates rise higher still, but the company is not overly fussed. Even in the event of “a number of high severity loss events” relating to climate and other global risks, it said it would still have “more than adequate liquidity and solvency headroom”.

As for the growth in its cyber security premiums, this reflects a different rising global risk: cyber crime and cyber terrorism. The market has been concerned about policy wordings, and how exemptions and liabilities are defined by Lloyd's. But the underlying trend is clear: the threat is becoming much more tangible, and the move could signal a wider shift in attitudes from other companies.

There was growth on the balance sheet, too. On a restated basis, net asset value (NAV) per share jumped by over a fifth. This is good news for Beazley, which considers NAV per share a “central key performance indicator”.

Overall, we remain positive on the company, helped by the continuing fall in the combined ratio, estimated at 84.9 per cent on a discounted basis, according to FactSet consensus. Buy.

Last IC View: Buy, 613p, 2 March 2023