Beazley underwriting result dented, but pricing drives higher growth target

Specialist Lloyd’s focused insurance and reinsurance player Beazley has reported its results for the first-half of the year, revealing dented underwriting profits due to continued impacts from catastrophes and loss creep, but much improved pricing that should flow through over the course of the year ahead.

As first to report, of those operating in the Lloyd’s of London marketplace, insurance and reinsurance firm Beazley always receives a deal of scrutiny with today’s results set to drive discussions about what to expect from others over the coming few weeks.

Beazley has reported pre-tax profit of $166.4 million, three times the $57.5 million reported a year ago, with annualised return on equity of 19% and a 12% increase in gross premiums underwritten.

Andrew Horton, Chief Executive Officer, commented on the results, “Beazley achieved strong premium growth of 12% in the first half of the year. Claims concentrated largely in our marine and reinsurance divisions drove our combined ratio to 100%, but premium rates have adjusted accordingly and margins in many lines of business now look healthier than they have in some years. We expect to achieve double digit growth over the full year, while continuing to reserve prudently.

“Our investment return was 3.3% for the first half of 2019, with nearly all asset classes performing strongly. Investment returns are expected to be lower in the second half of the year.”

A storming set of headline figures for sure, but with a combined ratio of 100% across classes underwritten and as high as 140% in its reinsurance business, the underwriting result is break-even at best and here reserve releases couldn’t help as much as the company likely would have appreciated.

Beazley had been expected to report reserve strengthening by most of the analysts, that had an expectation reinsurance related losses would drive it to harden reserves for catastrophe losses such as typhoon Jebi.

But Beazley actually managed to squeeze out $3.4 million of prior year releases, however it also admitted that reserve strengthening was part of the driver for the poor underwriting performance during the period.

Beazley’s excess reserve position fell to 5.2% from 5.6% at the end of 2018 as a result of this, but the company hopes to rebuild strength in its reserves over the coming months.

Horton continued, commenting on performance, “Beazley grew strongly in the first half of 2019. Gross premiums rose 12% to $1,483.6m (2018: $1,323.8m), supported by rate rises averaging 5% across our portfolio. Buoyed by a strong investment return, we achieved a pretax profit of $166.4m (2018: $57.5m) but our underwriting result was impacted by reserve strengthening in our shorter tail classes as well as continuing to open our medium tail classes at a higher loss ratio. Our combined ratio was 100% (2018: 95%).

“The scale of claims we have seen has limited our scope for reserve releases, which were $3.4m in the first half of the year (2018: $48.1m). With cumulative rate rises of 8% across our business in the past two years and double digit rate rises in many lines of business, we see an opportunity for prudent profitable growth that should make larger releases possible in years to come.”

Reinsurance, specialty lines and marine business were all unprofitable, with combined rations of one hundred or greater.

Reinsurance business particularly suffered at Beazley, as the company dealt with continued increases in claims from events including typhoon Jebi.

“We are in business to pay claims and have continued to provide steadfast support to our clients around the world, including in Japan where losses from typhoon Jebi – one of two major storms to hit the country last year – continued to rise. This impacted our reinsurance division, along with poor experience on the aggregate excess of loss policies to which we have since reduced our exposure significantly,” Horton explained.

But the result of higher losses and claims in the insurance and reinsurance industry has been seen to be higher pricing as a result and Beazley has benefited from this and taken the opportunity to grow its book considerably as a result.

Horton explained, “Gross premiums rose 12% to $1,483.6m (2018: $1,323.8m), supported by rate rises averaging 5% across our portfolio.

As he commented on rebuilding reserves, Beazley has now experienced cumulative rate increases of roughly 8% across two years, providing it with a much higher performing book of business that should deliver better profits on the underwriting side, once the loss creep hangover from prior years is dealt with.

In fact, Beazley has been surprised by higher than anticipated rate increases it seems, as pricing moved above where the company had been expecting it to be.

“The past nine months have seen a material change in sentiment in our market as heavy claims in numerous lines of business have driven prices higher. In September last year, our 2019 business plan envisaged rate rises well below what we have actually seen in the first half of the year,” Horton said. “We accordingly see opportunities for growth in lines of business such as marine and aviation, as well as property, where margins now look healthier than they have been for some years. Within the Lloyd’s market, upward pressure on rates has been boosted by the market-wide initiative to remediate lines of business that had underperformed for several years.”

Given these better rates, Beazley plans to continue to grow its book, with the United States and also catastrophe exposed underwriting business both seen as targets for the firm.

Horton said, “We now write over a billion dollars locally in the US with a well recognised brand and a critical mass of expert underwriters and claims professionals in key cities. In all the main lines of business we transact in the US we see considerable scope for further growth.

“The second main category of growth opportunity in our business is market dependent, driven by firming premium rates. This is commonly catastrophe-exposed business and the relatively high incidence of catastrophe losses in the past two years has pushed premium rates sharply higher. We thus see greater opportunities for prudent growth in these lines than was the case six months ago.”

Interestingly, the company admits that it has depleted reserves somewhat, which will dent performance for a time until it can rebuild them, due to slower and lower releases being made.

“The scale of the losses that we, in common with the broader market, have incurred over the past two years means that below average reserve releases will continue this year, impacting our full year combined ratio which we expect to be in the high nineties,” Horton explained.

This could be a trend for others in the market, perhaps in the mid-sized tier of insurance and reinsurance firms, where reserves have become something of a tool for smoothing profit from quarter to quarter.

Analysts have been saying for years now that there is a risk reserves get depleted when the next major losses occur and that this could have a short to mid-term influence on profitability in the sector.

It will be interesting to see just how much of an influence reserves have over the coming year or two, as this could also stimulate greater capital management and reinsurance buying, to offset the evaporation of the reserve buffer for some.

But for the multi-line specialists, like Beazley, the opportunities to rebuild this buffer should be ample, as long as the loss environment remains conducive and no issues emerge in any longer-tailed lines.

Horton is positive on the ability of Beazley to capitalise on what appears to be better than expected market conditions, with the company now raising its expectations for growth.

“At the end of last year, we were envisaging premium growth in the high single digits during 2019. The improving rating environment we have seen since then has led us to conclude that double digit growth should be attainable this year,” he said.