Beazley Group Plc Full Year Update – 26 march 2015
Beazley Group was established in 1986 as a Lloyd’s market syndicate operating under the name of Beazley, Furlonge & Hiscox.
Today, Beazley Plc is a FTSE 250 listed specialist insurer in its own right, with a global reach. The group offers specialist risk insurance along with reinsurance services and a range of additional lines. It operates under a number of segments, which include; (Life, Accident and Death), (Marine), (Aviation), (Political Risk and Contingency), (Property), (Reinsurance) and (Specialty Lines).
2013 saw Beazley celebrate 28 years of profitable growth, which culminated in total managed gross premiums reaching $1.98 billion during the period. For the same year the group also achieved a return on equity of 21%, an industry leading combined ratio and paid dividends that when toted up, equated to a total yield for investors of almost 10%.
|Index||FTSE 250||Ticker||BEZG.L||Latest Close||292.00|
|52 Week High||310.35||52 Week Low||223.96||P/E (H)||11.18|
|Dividend Yield %||7.2||Dividend Cover||1.2||CEO:||David Horton|
|CFO:||Martin Bride||Previous Price Target||N/A||Current Price Target||260.00|
A strong performance from Beazley shares during Q1, although full year results could have been better
Since initiating coverage of Beazley Plc late last year, the shares have performed largely in line with expectations, realising both the projected 15% upside and downside from their 271.90 pence level in December.
The majority of the gains for the shares were notched up once into the new year, where they set new records for themselves in reaching highs of 319.52 pence in February. However, this out-performance was not to last as the passing of the group’s dividend record date In late February soon prompted a sharp correction in the shares.
We believe that this was in part the after effect of an “on consensus” full year financial performance, which saw both earnings per share and returns on equity reported lower for the 2014 period.
Beazley Plc Share Price / 8 Hour Intervals
Non Life Insurance Sector Share Prices / Beazley Plc (Black), Hiscox Ltd (Blue)
Full year results overview
The headline from Beazley’s full year results is that the group reported a 16% fall in profits for the period, which was accompanied by a higher combined ratio and the negative impact of adverse FX movements earlier in the year. However, this was partially offset by strong growth (92%) in investment income for the period.
The deterioration in the combined ratio was the result of a 14% up-tick in insurance claims at the group level as well as a moderate increase in expenses (+1%).
The consequence of the overall financial performance were that both earnings per share and returns on equity were lower for 2014 than in 2013.
In detail, earnings per share came in 22% lower at 26.1 pence for 2014, while the group return on equity also fell by 4%. The combined ratio rose from 84% in 2013 to 89% for the year ending in December 2014.
However, it was not all bad at Beazley in 2014 as the group’s largest insurance division (Specialty Lines) experienced a substantial increase in the total value of premiums written, while rates on renewals of existing business also held steady. This bodes well for the financial performance of the unit in future periods.
Positive signs from Specialty Lines
We wrote at length previously about how we saw substantial unlocked value in this particular business, as the proportion of total premiums it represents is significant, while the unit’s combined ratio has been rising steadily for quite some time now. The current combined ratio for specialty line is close to 100% (98%).
Looking at the numbers, this appears to be the result of the division’s expansion in North America and Europe where it has launched a number of new products including Beazley Breach Response (cyber risk) and the MyBeazley risk trading platform.
The expansion into these new product areas and the division’s growing presence in the US appear to have been the key drivers behind a further increase in expenses for the 2014 year, which was in turn the sole driver behind the deterioration in the unit’s combined ratio.
Looking ahead, it is likely that over the medium term the unit’s recent increase in net written premiums and its expansion into new areas will be able to contribute meaningfully toward group earnings, while at the same time helping to dilute or reduce the divisional combined ratio back to more reasonable levels.
Beazley Plc – outlook for earnings in 2015
Key to the group financial performance in 2015 will be, as always, its ability to control expenses along with its vulnerability to an increase in claims losses.
While at the group level, Beazley has been able to prevent any significant increase in expenses, claims losses are largely outside of its control. This forms the wildcard when it comes to the earnings outlook for the year ahead.
Assuming a stable performance in terms of claims losses we are optimistic when it comes to earnings in the current year, which means that consensus estimates for EPS (23.03 pence) could prove overly bearish.
This above consensus expectation is the result of strong premium growth in the specialty lines division and all small ticket areas of business in the US throughout recent periods which, in the absence of a sudden and sharp increase in claims losses, we believe will ultimately translate into a stronger performance at the group level.
Balance sheet, dividend and valuation
Gearing at Beazley remained steady at 35% in 2014, with borrowings comprised of various drawn and undrawn credit facilities which total $481.3 million.
Such a level of gearing is not unreasonable for a cash generative business such as Beazley and we note that such facilities provide the group with a surplus capital position in relation to both current and anticipated future regulatory requirements.
In terms of the dividend, total returns to shareholders were slightly lower in 2014 than they were in the previous year. This was as the group paid interim dividends totalling 9.3 pence per share and a special dividend of 11.8 pence per share.
While the interim dividends were moderately higher for the period, with 2.8 X cover, the return of surplus cash through the annual special dividend was 26% lower at 11.8 pence, which reflects the lower level of earnings per share for the period.
From a valuation perspective, we see Beazley Plc as close to being fairly valued. This is as the group currently trades at 292.00 pence per share, which is close to the fair value range of 299.00 – 322.00 returned by our model. (See – Balance sheet, dividend & valuation, Initiating Coverage: Beazley Plc 04 December 2014)
Despite this we note that the shares currently trade on a forward earnings multiple of 12.7 X consensus estimates for EPS in 2015, which compares well against the 16.5 X non life insurance sector average.
This indicates to us that we ourselves could also be under-optimistic in our analysis and that the shares may still surprise further on the upside during the months ahead.
On balance, we remain undeterred by the downturn in performance for 2014 as we continue to believe that, over the medium to longer term, Beazley will benefit from its leading position within core markets as well as a rising rate environment that should aid a recovery in investment returns.
However, at present, we feel that some form of positive news flow will be required if the shares are to challenge their earlier highs once again.
In the absence of this and taking into account the rapid acceleration that the shares have undergone since our last update, we can’t help but feel that a correction could be on the cards over the near term.
While from a valuation perspective there remains both upside and downside to Beazley’s current share price, and despite that we maintain our fair value estimate for the stock (299.00 – 320.00); today we assign a price target of 260.00 pence to the shares.
This implies 11% downside from the current level and reflects our belief that lower consensus earnings expectations for the year ahead, in addition to the absence of positive news flow, provide all of the necessary conditions for a gentle correction in the share price.
The next scheduled event of note for the group is the release of the interim management statement on 07 May. As always, we shall endeavour to keep all of our members up to date with the developments as they occur as well as at the time of the next release.
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