The investment case for buying into a listed Lloyd’s of London insurer used to be straightforward. Consolidation, albeit glacial, was ensuring that they were a dying breed, so there was a reasonable chance that the underwriter you chose would be next on the list.
Moreover, the large amounts of capital that these companies must set aside to cover potential historical claims is almost never needed in full. That subsequently freed-up money, combined with the impressive amounts of cash that insurers accrue from selling policy premiums, meant that every few years or so a special dividend payout would arrive to keep the wolf from the door.
That’s not the case now. Mergers and acquisition activity among quoted underwriters has seized up; their market is heaving with new entrants, including hedge funds, keen to play at pricing risk; and a far less predictable weather cycle means that a rising tide of catastrophe claims regularly puts pressure on their balance sheets.
On this rather less-than-enticing stage stands Beazley, a highly diversified insurance player that its fans say has an investment case of its own. Founded in 1986 as Beazley, Furlonge & Hiscox, the group subsequently split through several management buyouts, culminating in 2001 and a listing for the independent insurer a year later. Its stock market listing, which valued it back then at £167.5 million, now gives it a worth of just under £3.3 billion and membership of the FTSE 250 index.
Its cheerleaders point to its diversity and efficiency. An established player in the United States, which vies with London for market dominance, it is also an active member of the Lloyd’s market, particularly marine and energy insurance and protection against cyber and political risks, as well as offering highly tailored cover for company executives.
With offices in other locations as well, including Australia, Canada, France, Germany and Spain, Beazley has an impressive ability to increase the amount of business it writes to take advantage of attractive increases in premium rates. During the first half of the year, for example, it increased its gross written premiums by 12 per cent to $1.48 billion.
However, a closer look at its interim figures gives an indication of the pressures that it and the wider market are under. The very high rate of claims that Beazley received, up a third to $834.1 million during the period, pushed its underwriting business back to break-even. The high claims level also meant that it was able to release only $3.4 million of its claims reserves, compared with $48.1 million at the same point the previous year. That ultimately limits the scope for special capital returns.
Beazley is a regular payer of special dividends and that it didn’t pay one last year for the first time in six years underscores the claims environment for an insurer traditionally less exposed than others to payouts against natural disasters. Claims against hurricanes, tornados, tropical storms and other such events have been running at historically high levels for two years. While a benign year may follow, the world’s increasingly hostile weather feels like a new reality that insurers, and their investors, must learn to live with.
Despite the unattractive backdrop, Beazley still reckons that it can increase its written premiums by a double-digit amount this year. This may be testament to its discipline, but doesn’t make the market’s burdens — of high claims, fluctuating rates and heavy competition — go away. Beazley’s shares, up 6p, or 1 per cent, at 628p, are valued at roughly 16.4 times forecast earnings and offer a dividend yield of just below 2 per cent. They are not for this observer.
ADVICE Avoid
WHY Diversified and efficient insurer, but operating in markets that at present are unattractive and risky
Keyword Studios
The annoying commuter on the opposite seat could well be playing a game on their mobile phone that’s been tested by Keywords Studios. That, or the company might have translated some of the wording, tested the game’s durability, set straight some cultural references for an international audience or perhaps created some of the artwork under contract from one of the big developers. Try not to hold that against Keywords if the fellow passenger deigns not to wear headphones.
Keywords Studios was established in 1998 as a provider of translation services to the software market. Having moved into video games in 2004, it stepped up a gear under Andrew Day, 55, who joined as chief executive in 2009, expanding first into Asia, then Montreal and Seattle, before listing on the London stock market in 2013.
Its strategy has been to expand rapidly via a combination of acquisitions and organic growth. The majority of its deals, which run at a rate of six to seven a year, have been of small start-up games services businesses costing about $5 million to $10 million each, although just over two years ago it spent $66.4 million buying VMC, a testing and support company based in North America. It has a debt facility of about £150 million that should mean it doesn’t have to tap its shareholders for additional cash in the foreseeable future. It also is beginning to reap the benefits of its strategy, lifting underlying revenue during the first half of the year by 17.3 per cent to €146.4 million, against overall top-line growth of 39.3 per cent.
This company has well and truly embedded itself with the world’s big games developers, from Sega and Activision to Nintendo. It is beginning to enjoy the fruits of its move into new business lines, too, with 113 of its 950 customers using three or more of its services, up from 99 at the end of June last year.
Unfortunately, its shares, 48p, or 4.2 per cent, up at £11.95, carry a racy tech market rating of 29.8 times consensus forecast earnings and a dividend yield of only 0.16 per cent. Otherwise a stone-cold “buy”, that has to be a deterrent for all but the truly committed.
ADVICE Avoid
WHY High-growth company whose valuation is a put-off
