Shares in Lloyd’s of London insurer Beazley (BEZ) have taken a big hit after the company said the impact of rising US interest rates on its bond portfolio had hurt its investment portfolio.
It also suffered rising claim costs, together contributing to a 64% drop in pre-tax profit to $57.5m in the first half of 2018.
News that finance director Martin Bride will retire in mid-2019 also added to the disappointment from the market with the share price falling 5.6% to 526p. He’s been in the job since 2009 and was the point of contact for investors.
‘Continued disappointing investment returns, from near 0% in the first quarter, will inevitably drive earnings downgrades for 2018, as rising US interest rates prompted capital losses on fixed income investments,’ says Jefferies analyst Philip.
‘Crucially though, Beazley's investments have a relatively short duration and are mostly held to maturity, so almost all will likely be redeemed at par and then reinvested at a higher reinvestment rate.’
Gross written premiums were up 15% at $1.32bn. This was driven by strong growth in the property division after rates rose sharply following ‘heavy catastrophe losses’ incurred by insurers last year.
Despite this, the combined ratio, which measures the proportion of claims to premiums, rose from 90% to 95%. A figure under 100% implies a profit so the lower the number, the higher the profitability.
Beazley hopes to achieve a combined ratio in the low to mid-nineties if the claims environment is reasonably in line with expectations.
Kett believes Beazley is on course with its growth ambitions, flagging the insurer beat forecast growth for premiums.
He says Specialty Lines reserve releases are fundamental to the company’s growth as 71% of the group’s value coming from this business alone. Reserve releases increased 17% in Specialty Lines.
‘We continue to believe that a premium is warranted on the basis that investors are getting almost the entire share price back in value from the Specialty Lines business, which continues to outperform,’ comments Kett.
