Beazley PLC (LON: BEZ) is a London, United Kingdom-based holding company and was incorporated in the year 1986. The group is a specialist insurer in providing customers with the highest standard of claim and underwriting services worldwide. Through the market's trading licenses and Lloyd's broker network, Beazley is able to access a broad range of insurance and reinsurance businesses across the world. The company’s business is differentiated in five divisions: Specialty lines, Property, Marine, Reinsurance, and Political, accident & contingency. The customer base is widely discriminated by geography, by type, and by size. The group operates in the USA, Europe, and Worldwide and are leaders in many of the markets. From the current scenario, it is a mature insurance business through a well-diversified portfolio. The company is part of FTSE 250, FTSE 350, and FTSE All-Share Index.

Key Statistics



Top Shareholders

 

The current Chief Executive Officer is Andrew Horton, who joined Beazley in 2003. Ian Fantozzi holds the responsibilities of the Chief Operating Officer. Sally Lake holds the responsibilities of the Group Finance Director.
On 6^th February 2020, the company will announce the year-end results.

Key Products and Markets


(Source: Company Website)

The company’s insurance business mix is of around 87 per cent and reinsurance of approximately 13 per cent. Division wise category - Specialty Lines division (56%), including cyber & executive risk, underwrites environmental, management, and professional liability, with healthcare, lawyers, media, technology, architects and engineers, cyber, and business services, as well as officers and directors. The property division (16%) of the company, offers homeowners’, commercial, and engineering and construction property insurance. Its Marine business (11%) underwrites several marine classes, comprising of cargo, satellite, kidnap and ransom, energy, war, piracy, hull, and aviation risks. The company’s reinsurance segment (9%) focuses on the property per risk, aggregate excess of loss, casualty clash, pro-rata, and property catastrophe businesses. Political violence, terrorism, credit, and expropriation risks, as well as contingency and risks related to contract hinderances, are underwritten by the group’s Political, Accident & Contingency division (8%). This segment also underwrites personal accident, income protection, health, sports, and life risks.

Recent News

On 25^th November 2019, the company announced that the Beazley Employee Benefit Trust had purchased 5 pence each of 348,241 ordinary shares in the group on 22^nd November 2019 at a price of 529.74 pence.

Dividend

The board has declared a first interim dividend per share of 4.1 pence, an increase of 0.2 pence against the 3.9 pence in H1 FY18, in line with the strategy of delivering in the range of 5 per cent to 10 per cent dividend growth. The current annual dividend yield is 2.24 per cent. The final and total dividend record date is 28^th February 2020, and it will be paid on 30^th March 2020.

Trading Statement (as on 8^th November 2019)


(Source: Trading Statement, Company Website)

The company announced the trading update for the nine months ended 30 September 2019. For the first nine months of 2019, the gross premiums written surged by 12 per cent to $2,192 million as compared with the corresponding period of the last year, driven by the growth achieved in most of the businesses. The investments and cash for the nine months ended 30 September 2019 increased by 13 per cent to $5,657 million against the $5,012 million in 9M FY18. On a year to date basis, the net investment return increased to $215 million or 4 per cent. The premium rates on renewal business rose by 6 per cent.


(Source: Company Website)

In property division, the group saw a minor decline in premium, due to the decision to cease engineering business and writing construction in 2019. With this division excluded, growth in the property division stood at 7 per cent. In new specialty lines division, the company’s premium, including the market facilities business which contributed $34 million, increased by 24 per cent to $662 million. For this division, the underlying growth was 18 per cent, excluding market facilities. The company achieved a premium growth of 16 per cent in the newly created cyber & executive risk division. This increase was driven by the robust performance across the United States platform aided in the progress of this division, alongside a rate increase of 4 per cent. The group’s premium increased by 11 per cent to $204 million in political, accident & contingency division against the same period of the last year, due to the personal accident direct and life teams. In marine and reinsurance division, the company saw a slight surge in the premium of 5 per cent and 2 per cent respectively. The increase in both divisions was driven by the rate increase in 2019.
The group issued Tier 2 subordinated debt of $300 million in September 2019 from the subsidiary Beazley Insurance dac.The issuance of the subordinated debt will support the company in financing future progress. Beazley Ireland Holdings Ltd. also repaid its £75 million retail bonds in September 2019. In Q3 FY19, the company launched the financial lines and cyber products within Italy and the virtual care product in the United Kingdom. For the nine months of 2019, the preliminary estimate of the costs of typhoons Faxai and Hagibis and hurricane Dorian is around $80 million net of reinstatements and reinsurance premiums. On 30^th September 2019, the weighted average duration of the fixed income portfolio stood at 1.9 years.

Financial Highlights (for the period ended 30 June 2019, $ million)


(Source: Interim Presentation, Company Website)

In H1 FY2019, gross premium surged by 12 per cent to $1,483.6 millionas compared with the corresponding period of the last year, supported by rate increase averaging 5 per cent over the portfolio. Net premiums increased by 11 per cent to $1,225.50 million against the $1,105.3 million in H1 FY2018. The company attained a profit before tax of $166.4 million, an increase of 189 per cent from the previous year same period data. The combined ratio stood at 100 per cent against 95 per cent recorded in a year-ago period. In the first half of the year, the scale of claims had seen limited scope for reserve releases, which were $3.4 million as compared to $48.1 million on 30th June 2018. Net investment income stood at $170.3 million, an increase from the previous year same period data. In H1 FY2019, basic earnings per share increased to 26.4 cents against the 9.1 cents in H1 FY18. Net assets per share stood at 295.4 cents, an increase of 14.1 cents as compared to 281.3 cents in H1 FY18. Net tangible assets per share were 272.4 cents, an increase from the corresponding period of the last year data.

Key Performance Indicators
Gross Premiums Written


Gross premiums written tells about the total direct and assumed premium written by an insurer before deductions for ceding commissions and reinsurance. For the financial year 2018, the gross premiums written increased by 18 per cent to $2,615.3 million against the $2,343.8 million in FY17. From the year 2014, the company’s gross premiums written was up by 29 per cent.

Dividend Per Share


Dividend per share is the sum of stated dividends issued by a group for each ordinary share outstanding. The dividend per share increased by 0.6 pence to 11.7 pence in FY18 as compared with the previous year data. CAGR growth rate stood at ~5.91% in dividend per share over the period from FY14-FY18.

Return on Equity (ROE)


ROE tells about the financial performance of the company. In the financial year 2018, ROE stood at 5 per cent. Average five-year return on equity of 14 per cent.

Combined Ratio (%)



The combined ratio is the sum of total incurred losses and expenses and then divide by the earned premium. For the financial year 2018, the expense ratio was 39 per cent, and the claims ratio was 59 per cent.

Financial Ratios 

 

The reported loss ratio in H1 FY2019 surged by 6 per cent to 62 per centagainst 56 per cent reported last year for the same period. The reported expense ratio of 39.8 per cent for the H1 FY2019 stood higher than the industry median of 31.5 per cent. The reported combined ratio in H1 FY2019 increased by 5.4 per cent to 101.8 per cent from 96.4 per cent reported last year for the same period. Investment Ratio reported was 15.2 per cent for the first half of the financial year 2019, reflecting an increase of 14.4 per cent when compared with the last year data for the same period. Reserves for the first half of the Financial year 2019 stood at 3.7 per cent, which was lower than the industry median of 4.3 per cent. On leverage front, the debt-equity ratio stood at 0.26x, which was lower as compared to the industry median of 0.38x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance

Daily Chart as at December-02-19, before the market close (Source: Thomson Reuters)

On December 02, 2019, at the time of writing (before the market close, at 11:55 AM GMT), Beazley PLC shares were trading at GBX 529.50, down by 0.47 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 634/GBX 486.44. At the time of writing, the share was trading 16.48 per cent lower than the 52w High and 8.85 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 1,390,157.00; 30 days – 1,682,681.10 and 90 days – 1,457,665.53. The average traded volume for 5 days was down by 17.38 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.55, reflecting lower volatility as equated to the benchmark index. The outstanding market capitalisation was around £2.81 billion, with a dividend yield of 2.24%.

Valuation Methodology
Method 1: Price to Book Value Approach (NTM)



To compare Beazley PLC with its peers, Price/Book Value multiple has been used. The peers are RSA Insurance Group PLC (NTM Price/Book Value was 1.46), Hiscox Ltd  (NTM Price/Book Value was 2.23), Direct Line Insurance Group PLC (NTM Price/Book Value was 1.57), Hastings Group Holdings PLC (NTM Price/Book Value was 1.78), Lancashire Holdings Ltd (NTM Price/Book Value was 1.69), Sabre Insurance Group PLC (NTM Price/Book Value was 2.77), and Admiral Group PLC (NTM Price/Book Value was 7). The Average of Price/Book Value (NTM) of the company’s peers was 2.64x (approx.).

Method 2: Price to Earnings Approach (NTM)


To compare Beazley PLC with its peers, P/E multiple has been used. The peers are Phoenix Group Holdings PLC (NTM P/E was 25.50), Hiscox Ltd (NTM P/E was 20.75), Personal Group Holdings PLC (NTM P/E was 15.50), and Sabre Insurance Group PLC (NTM P/E was 16.83). The Average of P/E (NTM) of the company’s peers was 19.65x (approx.).

Growth Prospects and Risk Assessment

The company is well-positioned to continue to grow in several markets such as healthcare, cyber, and environmental liability across the years. The company is seeing solid demand from the financial sector companies for a variety of complimentary insurance covers in Europe, Asia, and Latin America. In the financial year 2019, the company had seen the double-digit growth, due to the improving rating environment. In the future, the company is planning to expand the United States business. The company transact in the United States and see considerable opportunity for the upcoming growth in all the key lines of business. The group is highly exposed to exogenous factors which can severely affect its performance. The potential for a rise in frequency and severity of claims due to climate change can reduce the group's performance.

Changing market dynamics, along with a continued programme of investment in digital capabilities augur well for the group's future growth.The impact of Brexit on the UK economy could impact the company’s operations. The market cycle risk of a systematic mispricing of the medium tailed specialty lines business could arise due to a change to the supply and demand of capital, companies using incomplete data to make decisions, and changes in the United States tort environment. There is some more risk that could impact the financial performance of the company - Natural catastrophe risk, non-natural catastrophe risk, reserve risk, single risk losses, market risk, operational risk, credit risk, liquidity risk, and climate change risk.

Conclusion

The company continues to see a robust, double-digit premium increase across the business, due to the organic progress and rate rise across several lines of business. The group has continued to experience heightened claims activity with the exposure to calamities in the third quarter of 2019, which is expected to be $80 million net of reinsurance and reinstatement premium.

The company’s investment team has provided another robust performance in the third quarter of 2019, bringing the net investment income to 4 per cent or $215 million on a year to date basis. In the financial year 2019, the company is anticipating combined ratio in the range of 100%-102%, assuming normalised claims levels for the rest of the year 2019.

Beazley PLC witnessed a CAGR growth of ~5.14% in total revenue over the period of FY14-FY18 while total premiums earned recorded a stellar CAGR growth of ~5.88% during the same period.

Based on the decent fundamental prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 529.50 (as on 2^nd December 2019) with lower double-digit upside potential based on 2.64x NTM Price/Book Value (approx.) on FY19E book value per share (approx.) and 19.65x NTM P/E (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters (TR). Currency exchange rate taken for 1 USD = 0.774163 GBP.

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