SIF Folio: Is Beazley A Turnaround Buy?

22nd Feb '22 by Roland Head

15 comments 1927 reads

Rest easy. After a fortnight of looking at dirty, old-school value stocks (tobacco and oil), this week’s stock does not involve toxic fumes of any kind.

Specialist insurer Beazley is a well-known FTSE 250 group that’s active in markets such as marine, property and business disruption insurance. The group also has a decent share of the fast-growing cyber insurance market, which I expect to become much larger and more valuable over the coming years. I’d guess that only a tiny fraction of companies are insured against cyber attack at the moment – this market can only expand.

Beazley has delivered excellent results for long-term shareholders since its 2002 flotation:

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Income investors have also benefited from Beazley’s consistent progress. Until 2020, the ordinary dividend had not been cut since the group’s flotation. Shareholders have enjoyed some decent special dividends, too.

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According to Beazley’s website, the firm’s shares have delivered a total return of 1,094% since its IPO. That’s equivalent to an annualised total return of 12.5% per year – around 50% higher than the UK long-term market average of c.8%.

Admittedly, the last few years have been more difficult. Prior to Covid, Beazley and some of its peers were facing weak insurance market conditions – too much capital chasing the same business. Profits slumped in 2018. The firm then reported a loss in 2020, as the pandemic lockdown triggered a surge of claims.

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My feeling is that these headwinds are now all moving into the past. The group’s 2021 results showed a return to profitability and a resumption of dividend payments. The 2020 equity placing means that Beazley should be well funded to deploy capital into a strengthening market.

Beazley’s share price has risen by 40% over the last year, but the stock’s high momentum score suggests the market may be expecting further gains.

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Beazley’s improved results have propelled the company into the results of my SIF stock-buying screen. This week I want to take a closer look. Have I missed the boat, or is there more to come from this long-running growth story?

Value: reasonable

ValueRank: 77/100

Beazley’s ValueRank of 77 suggests Stockopedia’s algorithms can see some value here. The certainly stock does score well on some counts:

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topvest

22nd Feb '22

Thanks for the article Roland - interesting. I topped-up a couple of times in the £3s and think Beazley has a very good long-term record. With the insurance market improving and the fact that these companies often move in an opposite way to other sectors in the market, I find them quite attractive at this point. I would put Beazley at the top of the pile of non-life insurers, albeit its a difficult area to assess. Conduit are quite interesting as well as they have no legacy issues, along with Lancashire and Hiscox (both as recovery stocks), but I feel Beazley are probably best of the pile. Unfortunately, Stockranks don't work very well for non-life insurers and banks.

greyster

Good article. Insurers are difficult to value on traditional metrics they have to hold excess capital due to regulations requiring them to be able to meet 1:200 year events. This tends to depress ROCE/ROE. They have good cashflow as they get the premium up front and subsequent claims can come 5, 10, 20 years later.

However, Beazley (LON:BEZ) do have an improving combined ratio, the triangulations in their last statement indicated they are normally in a position to release claims reserves, suggesting they reserve prudently in initial years, and importantly for the whole industry rates have hardened in recent years through greater underwriting discipline. Recent windstorms will also be a reminder not to reduce property or reinsurance rates.

Chart looks reasonable and I feel it is due another leg up. I hold and I am targeting a minimum of £6.

Good luck

Greyster

BnB

The flip side to Beazley's currently profitable and market-beating exposure to cybersecurity risk is a high level of vulnerability to claims of inordinate magnitude. All looks good until it suddenly isn't.

Rusty2

As long as they have enough Excess of Loss reinsurance they should be OK.

As long as they have enough Excess of Loss reinsurance they should be OK

Well they didn't have enough when Covid hit their Business Interruption line.

And the problem with cybersecurity claims is that there is insufficient historical data to assess risk - only the concern that the threats and impact keep multiplying apparently without ceiling. My bank went from recommending Beazley as a play on cybersecurity to recommending investors get out before they get stung.

Aargh Aitch

I haven't pulled the trigger yet, although I thought Beazley (LON:BEZ) had been on my radar for some time. Looking at my notes I see it was the January stockslam dial in that drew my attention to it.

I'm keen on having an insurer in my portfolio, they are a beguiling combination of cash up front (Rather than the usual 30 days) that helps create a cash float which only needs to be dipped into if a pre-agreed event occurs (Eerily similar to the gambling industry but without the whiff of Sulphur), combined with the heartening fact that the law prevents you from enjoying some activities: driving, owning a ship etc, unless you have an insurance policy in place. Engagingly insurers are terminally unfashionable to the crypto/ tech stock zealots which probably helps keep P/E's sensible.

The downside can be mitigated with reserves above the accepted threshold but real life has a nasty habit of being unpredictable. I'm old enough to remember waking up after the great storm of 1987, which came at around the same time as an Alaskan oil spill, a major hull loss with the Herald of Free Enterprise, a couple of air disasters and an oil platform exploding. The fall out from all that had a long tail that lashed some Lloyds syndicates into the 1990's. I'd be interested to know what the fall out from storms Dudley Eunice and Franklin are before I invest in an insurer, although this burning ship full of Audi's might be more relevant to Beazley than storm damage as they have a maritime operation.

All risks are similar - there is a price to insure anything. Key is to whether the premiums are priced appropriately for the cyber risks covered.

All risks are similar

Good luck with that conviction. Whereas buildings can be effectively priced according to rebuilding expense and ships and cargo according to their replacement cost, cyber is a different kettle of fish with (to all intents and purposes) unlimited financial risk. Of course, Beazley can price to cover all possible risks or cap the available cover to limit their exposure but then no one will buy the insurance product, finding better value in a robust defence strategy. As I say, the lack of data makes it impossible to find the balance in such a rapidly evolving segment.

Good luck if you choose to invest.

Some things are higher risk than others. Some of the highest risks, have the highest rewards, because very few want to insure them, so they can control the rates. Some of the largest profits in Lloyds, were during gulf war, war rates for oil shipments were very high but the losses were very low. Lloyds covers most risks that some other markets won't touch. But new risks such as cyber do carry additional risks because it's new.

Yes, I agree that's why I said "As long as they have enough Excess of Loss reinsurance they should be OK". If they run out of cover then they will be in trouble. I will have to look into their exposure on cybersecurity. I would like to know, if they write Excess of Loss reinsurance on cyber, but that sort of information is difficult to find, outside the insurance market.

Harry Hindsight

Dear Roland

"After a fortnight of looking at dirty, old-school value stocks (tobacco and oil), this week’s stock does not involve toxic fumes of any kind".

When did making money become a crime. This ESG creep is insidious and mostly greenwash. But with no electricity or heating or Mr Wolf knocking on the door the perspective changes.

Suddenly small viruses are supplanted by big tanks, nukes and a serious armed force - so someone who smokes too much has perhaps moved down the list of worries.

Doug2b

Not really. I am looking at Beazley in terms of the actual tangible wealth that the business generates for its shareholders, relative to the current share price.
Beazley does write down intangibles, which is good to see. Add it all together and the tangible equity growth ‘appears’ to be 6% relative to market cap. M’star have the dividend at 2.66%, so I will go with that. Add the divi to the equity generation, appears to give a tangible surplus of c8.66% on the face of it.
But then we come to the share issuing, about 3.5% per annum dilution on average over the past 4 years.
You may feel that the share issuing is justified, sometimes it can be, I am not getting into that, but I do need to deduct the net share issuing from the tangible surplus, which end ends up at c5%.
Close to a fair price, neither a bargain nor over priced. Would I buy at this price? No, I am looking for clear bargains. Are you likely to lose your shirt or to lag the market at this price? No and probably not respectively.

Effortless Cool

23rd Feb '22

Beazley have been the class act in the quoted insurance sector for many years now, but BnB has hit the nail on the head - they are growing their cyber exposure at a rate of knots, and that is the main driver of renewal rate strength and GWP growth.

Cyber is a complex risk where the perils evolve over time - e.g. data theft to ransomware to whatever comes next - and is thus very hard (impossible?) to price accurately. The Cyber class as a whole had a terrible 2020, as widespread working from home created an environment in which ransomware crooks thrived. Rate increases have been extraordinarily high since then (50%+) and Beazley has quite reasonably decided that, notwithstanding the pricing challenges, this is the time to go big.

That does bring a meaningful exposure to a very large downside, however and, contrary to Rustbucket's belief, excess of loss reinsurance will only insulate against that risk to a limited extent.

The big concern on Cyber is the possible exposure to a 'catastrophe' type risk on a scale that hasn't occurred yet. For example, cybercriminals critically compromising the Windows operating system, with implications for all businesses relying on that or, alternatively, taking down AWS. What about terrorists using cyber techniques to take control of and shut down power stations across the whole of north-east USA? Aggregate loss cover is needed for protection against these eventualities. Do Beazley have that? If they do, how much do they have?

They are smart and are probably managing this risk as well as can be done, but it would be an area I would want to explore as a potential or actual shareholder.

Threepeat

Interesting article Roland

The answer to your headline at the moment is probably no. If you asked the same question back in May 2021 when the SP was languishing at 300p ish and the PEG was at a ridiculous low the answer is yes. Given the bashing the company took in the prior year its no wonder it was hugely denigrated

Given the enormous capital allocated to Cyber and Directors cover I was heartened to read that Beazley does a large amount of due diligence with regard to its client (or potential client) systems before it writes cover

Holder and buyers must be aware of the cyclical nature of insurance markets - Luckilyly we have a perfect antidote to a perfect storm with extra capital introduced and a hard premium market which probably won't last more than another 18 months (if that)

I will continue to hold (originally bought in 2013 and added in 2021

Benson

A pretty good reading of how to invest in the insurance market.

SIF Folio: Is Beazley a turnaround buy?

Value: reasonable

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Roland Head

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