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Buy Beazley Group INSURANCE companies, especially those associated with Lloyds of London, are not viewed as very sexy investments, except perhaps by those in the industry. Just over five years ago now, Beazley took early advantage of the changes that Lloyds, the home of insurance, had just undergone; and ambled, so to speak, from Lime Street to Throgmorton Street to float on the London stockmarket. Beazley was originally formed as a holding company of a group that included a Lloyd's managing agent of that name, and an underwriting subsidiary, the latter a recently-formed corporate member of Lloyd's. What arrested the attention of the cogniscenti was the name Syndicate 623, which already had a well-earned reputation as a quality underwriter of both insurance and reinsurance business across its four divisions - specialty lines, property, reinsurance and marine. That syndicate had returned a profit to members in every year of account since 1986. A.M. Best, which rates the participants in the industry, cites both its current and prospective operating performance as being excellent. The object of the flotation of course was to raise capital so as to reposition Beazley as an independent, integrated Lloyd's vehicle. The equity capital raised allowed its participation in the business of Syndicate 623. It seems strange now that the investment community didn’t give a warmer welcome than it did. Insurance is a complex business to be sure; and the very epitome of risk, you might think. Yet risk is central to almost all investment. The hundreds of years of experience, coupled with the ability of the industry to claw back its losses through increased premiums, are obvious pluses. Public companies operating at Lloyd’s also have the priceless benefit of being able to increase their operational gearing, and thus generate economies of scale, without the normal financial risks of so doing, by adding to the in-house underwriting capacity by the (traditional) management of Lloyds’ members funds (‘names’) – for traditional fees. But the main purpose of the move was to bring the business into the modern era. And this is what Beazley has accomplished in four years. The most recent figures for the company are the interims for the half year to June 2007, in which it reported The breakdown of business categories recorded there illustrates the way the company has evolved. Nearly half of that interim premium income was derived from high margin specialty lines*, both in the UK and the US. Professional liability business for architects and engineers grew particularly strongly, benefiting from investments in claims expertise and marketing, as well as a 20-year track record in the class. Beazley’s healthcare business has taken a significant step forward through the acquisition of a company focusing on the long-term health sector. That business wrote $20m in premiums in 2006. Marine and property insurance, comprised the bulk of the rest of the exposure with reinsurance accounting for less that 10% of premium income, which had increased by 10% to £434m; while net earned premiums rose by 29% to £290m. These interims were impacted by the devaluation of the dollar which, for the period in question had fallen in value against sterling by approximately 11%. But net earned premiums increased, thanks to Beazley’s share of the combined syndicate premiums written having risen from 70% in 2005 to 81% by 2007; and because reinsurance costs fell from £139m to £108m. The chief executive expects that most areas of business will see a continuation of the softening of rates that pitted his sector reporting at the interim stage; and he was adamant that his priority was to see profitability protected. The opportunities open to Beazley’s American business, the reserving strategy, the claims-management expertise, the growing investment balance and the experience of managing through previous insurance cycles... all of these things would help, he said. Cash and investment at the halfway stage amounted to £1.3 billion. Investment income increased to £33m in the first six months, representing an annualised investment return of 5.2%. It’s important to note that, within the specialty lines business, the ultimate level of claims for any one underwriting year becomes more certain with the efflux of time, and the corridor of uncertainty narrows significantly after four to six years. The majority of the releases in the first half of 2007 were from the 2003 and 2004 underwriting years; whilst the company was also able to lower reserves held for catastrophe business written in 2006. Lloyd’s insurers have not enjoyed the happiest of relationships with investors. The level and frequency of large-scale climatic events is an ever-present concern. Certainly Beazley was hit by the unusually severe 2005 hurricane season. Yet nobody really knows if this means more risk (2006 and 2007 were benign) – and even if it does, the business is there, and has to be profitable or there will be no insurance available – not a realistic possibility. Against that, the company has so much to commend it. Brokers expect earnings per share to surge from 16.8p in 2006 to 23.91p in 2007.A prospective p/e of 7, a PEG of 0.2 and a prospective yield of 5.7% for its 2007 accounts and 6.3% in 2008 are just too measly for Beazley. Business is booming in the States. It’s still only half way through a 5% share buy-back program, which will underpin the share price. The chart shows strong support at around 140p-150p, which should also limit the downside. Its last set of results exceeded market expectations. When it reports full-year results on 26 February, we wouldn’t be surprised if it surprised the market again. BUY. * ‘Specialty lines’ insurance is the segment of the insurance industry dealing with more difficult or unusual risks. Because of this, insurers participating in the specialty lines market have specialised expertise, and experience in underwriting and in rating insurance for a wide range of risks. These insurers usually work with brokers who are experienced in specialty lines insurance. An example of an unusual or difficult product is professional liability, and an example of a higher risk account would be a manufacturer of explosives. Key Data EPIC: BEZ TrendWatch is unique. It is the only publication that gives you complete listings of shares in uptrend and downtrend - vital information for investors and traders alike. Based on this, we make three fully researched share recommendations per fortnight. |
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