Investors wanting to hold a FTSE 100 specialist insurance business could do well following the Beazley(LSE: BEZ) share price.
But on 7 September 2023, the stock dropped more than 6% in one day. So what’s going on?
Owning insurance company shares can lead to a volatile ride because of the cyclical nature of the industry. However, the release of the half-year results report caused a downward reaction from the stock.
Steady figures
The figures are quite good. Half-year profit before tax came in broadly in line with the equivalent period a year ago. And net tangible assets per share rose by 19%. Although earnings per share dropped back by 6%.
Beazley said it’s on track to deliver its full-year guidance. City analysts have pencilled in an advance in normalised earnings of more than 300% for 2023. And a double-digit percentage uplift the following year.
However, it looks like the valuation is up with events. With the share price near 514p, the forward-looking earnings multiple for 2024 is just over five. And the price-to-tangible book value is around 1.9.
Those figures may look modest at first glance, but there are risks in the business that arguably should keep investors’ animal spirits in check.
Beazley is a market leader in its business lines including professional indemnity, cyber liability, property, marine, reinsurance, accident, life, political risks and contingency business.
And whereas it’s great the enterprise has grown so large, the situation also means the company is exposed to the risks in each industry – literally! And we only need to look at the recent outcomes for Direct Line to see how risks can bite an insurance company.
Declining profitability
Meanwhile, the share price has declined by around 25% since March 2023. One reason for that could be the firm’s combined ratio. The figure has risen into the 80s after being in the 70s in 2022.
The combined ratio is a good indicator to watch. It measures the profitability of insurance businesses. And it’s worked out by taking the sum of incurred losses and expenses and dividing them by the earned premium. If the figure is presented as below 100, the insurance operations have been profitable.
So it looks like operations are becoming less beneficial to the bottom line of the accounts. That’s because a figure in the 80s means lower profitability than one in the 70s.
However, chief executive Adrian Cox was upbeat in the report. There’s been “significant” growth in the North American property business. And there’s momentum in cyber insurance operations across Europe. The company’s platform strategy and capital position have been “important drivers” in delivering Beazley’s“ambitious” growth targets, Cox said.
There’s no doubt the business has been knocking its earnings out of the park recently. But when earnings are high for any business with cyclical influences, there’s often increased risk of a price fall.
So I see the recent easing of the share price and the lowering of the valuation as a rational move by the market.
However, at some point, the value characteristics of the business will become compelling again. So there may be an opportunity for investors to make similar gains on the stock as they did from the lows in 2021.
For the time being though, I’m watching from the sidelines.
