Beazley's underwriting trumps investment losses

Beazley’s (BEZ) half-year figures elicited a favourable response from the market, even though reported profits were down 87 per cent on the 2021 comparator.

The Lloyd’s of London insurer has been buffeted by what it describes as “an uncertain and complex risk environment”, exacerbated by “excess demand and supply constraints” brought about by the war in Ukraine. The conflict has intensified existing inflationary pressures linked to the global reaction to the pandemic. And it has also contributed to the growing risk-off sentiment in capital markets. The upshot is that the group was forced to book an investment loss of $193mn (£161mn), against a gain of $83.6mn at the 2021 half-year, hence the sharp contraction in net earnings.

Understandably, the conflict in Ukraine has had a disproportionate impact on the group’s marine, accident and political (MAP) risks division, where the combined ratio (claims and expenses as a proportion of premiums) came in at 98 per cent (86 per cent in 2021). A deteriorating underwriting performance, combined with losses on the investment portfolio, meant that MAP booked a pre-tax loss of $17.3m, compared with a profit of $55.6mn at the 2021 half-year mark.

Beazley isn’t the only entity feeling the pain due to falling asset prices and management has acted to bolster the group’s actuarial reserves to reflect projected increased levels and duration of inflation. Management notes that it has taken the same approach when considering capital as part of the Solvency II balance sheet.

Prudential moves are to be expected given that we can’t be sure about the duration of the inflationary period, but the market has given a vote of confidence in the underlying business. The reason for this is that Beazley has delivered the “best half-year combined ratio since 2015”. The seven percentage point decrease to 87 per cent points to increased underwriting profits and the insurer noted a premium rate change of 18 per cent on average across the business.

Beazley also recorded a 26 per cent jump in gross premiums in the six months through to June. Management did not declare a half-year dividend, but it indicated that it would consider a full-year payment depending on the overall performance. And it has guided for a full-year combined ratio in the high 80s “assuming an average claims experience”. A forward rating of 15 times consensus adjusted earnings is not prohibitive given the underwriting performance. Buy.

Last IC View: Buy, 501p, 10 Feb 2022