Beazley should buy more reinsurance to protect its shareholders: Jefferies

Analysts from Jefferies said they would advise specialty insurance and reinsurance firm Beazley to look to securing additional reinsurance capital, over other funding sources such as another equity raise, after the firm reported escalating losses and given the active levels of catastrophe loss activity seen.

Beazley recently reported a doubling of the estimated cost of its claims from the COVID-19 pandemic, as they rose from $170 million to $340 million.

The company had already raised equity capital earlier this year, so it could respond to opportunities created by the pandemic’s impacts across insurance and reinsurance markets.

But now, analysts from Jefferies highlight that Beazley’s capital adequacy has been put under the microscope by its escalation of pandemic losses, leading them to recommend reinsurance capital as a solution.

They say that Beazley’s Lloyd’s Economic Capital Ratio is adequate but low, having fallen to between 112% and 115% on the updated loss estimates, which now sits at or marginally below the group’s minimum target capital adequacy.

“In our view, this leaves Beazley with adequate but not comfortable levels of capital and makes 4Q 2020 catastrophe losses a far more material concern,” Jefferies analyst team explained.

In order to offset concerns over capital adequacy, at a time when the market implied cost of equity has risen, Beazley should look to reinsurance.

“Management have proven willing to use this to reduce capital requirements and thereby improve capital adequacy. Though buying further reinsurance now would be costly (reinsurance prices are rising) and cede away attractive business, this option avoids permanent dilution for shareholders,” the analysts explained.

Adding that, “The reinsurance can always be commuted, or not renewed, at a later date, thereby recapturing the business.”

The analysts believe that Beazley should secure reinsurance soon and that “announcing additional reinsurance purchases at the 3Q 2020 results would be the ideal outcome for shareholders.”

Given the third and fourth quarter results of 2020 may see catastrophe related claims outweighing further impacts from the pandemic, as we explained earlier today, buying additional reinsurance to share or cap losses may be a cost-effective way for Beazley to secure its capital adequacy at this time, despite hardening reinsurance pricing.

Buying reinsurance now, out of sync with the renewal cycle and offering capacity providers a chance to deploy capital before the key January 2021 renewal season, may also result in better pricing and terms than waiting and upsizing a January reinsurance buy.

ILS funds in particular may look favourably at a chance to deploy capital right now, given some have inflows and fresh commitments coming from their investors.

As a result, should Beazley consider catastrophe reinsurance as an area it should boost, the ILS market could be an efficient source of this, despite market conditions.

Could a catastrophe bond be an option? A way to lock in additional reinsurance on a multi-year basis in advance of the renewals and perhaps on better terms as a result?

Perhaps, but that might go against the analysts advice of looking to recapture the premiums flows from the business in the near future. Although, if treated as additional capacity for growth, locking in a cat bond now may actually be strategically sound, if Beazley could move quick enough.