When analysts at Jefferies tipped cyber insurance as “a significant growth opportunity”, they could hardly have imagined the international chaos that hit 8.5 million Microsoft Windows devices after the botched software update put out by Crowdstrike, the security company, last month.
In the event, Beazley was able to publish a chirpy assurance that the hiatus was not enough to alter its profits forecasts for this calendar year and the specialist insurer’s shares actually flipped up a few pence.
Indeed, the temporary meltdown was a useful free advert for the virtues of insuring against a recurrence, stimulating orders from spooked business owners. As the company’s website declares: “In the world of cyber threat, where rules don’t apply, we say Game On.” It certainly made no dent in the prediction of Adrian Cox, the chief executive, that “the cyber insurance market is expected to double over the next ten years”.
• Beazley shrugs off Crowdstrike outage as profits nearly double
Now he has taken the stock market by surprise with doubled interim pre-tax profits of $728.9 million, against $366.4 million a year ago, on the back of net insurance written premiums that were 10 per cent higher at $2.58 billion. Cox said “expertise in underwriting and active risk selection” had been the key drivers taking the profits growth so far in excess of the increase in premiums.
But there were also moves in the investment yield curve, different patterns in how claims were paid and one-off accounting changes. Under the International Financial Reporting Standards issued by the IFRS Foundation and the International Accounting Standards Board, with effect from last year IFRS 17 lays down a new form of income statement for insurance companies, known as the Insurance Finance Income/Expenses. That stipulates that any changes in insurance liabilities due to changes in financial assumptions (including any rates of interest) must be shown. Investors considering buying insurance company shares should familiarise themselves with this.
That is a long way of saying that, even though Beazley’s premiums should continue to expand by about a tenth this year, it would be wrong to assume that the annual pre-tax profit will double. Indeed, Peel Hunt sees the 2024 profit falling from $1.25 billion to $698 million and continuing to decline to $649 million for 2026.
Half the group’s business comes from underwriting policies at the Lloyd’s of London insurance market and it covers a wide range of risk, from aviation and space to media and entertainment, as well as financial institutions and healthcare. Another 40 per cent stems from the United States, mainly in high-risk property policies that could be demolished by weather, earthquakes, climate change or terrorism. The remaining 8 per cent is generated in Europe.
Demonstrating the company’s creative approach to product development, its regular insurance package includes not only risk assessment and management but also incident response services. Cox reckons that, as this is difficult to replicate and takes time to perfect, it forms an effective barrier to competition.
As with any general insurer, Beazley is, in a sense, a sophisticated bookmaker, taking bets on events that could be catastrophic for policyholders. That makes both its income and outgoings dependent to a large extent on phenomena outside its immediate control. The company combats this in two ways. It uses increasingly sophisticated data analytics to predict trends and gives its talented underwriters incentives to take or avoid risks at prices that will turn out to be profitable. It is, as Cox says, a dynamic market that is harder than ever these days to call. That makes money management as important as accurate underwriting. The company maintains robust reserves, actively deployed.
Apart from a dip last year, the shares have recovered well from the pandemic. In the nature of the business they will continue to be volatile, but fundamentally they are a wager on the ability of an experienced management to install effective systems and to hire a flow of talented individuals. In that light, the forward price-to-earnings ratio of about ten is fair without being wildly cheap and there is the likelihood of a steadily growing dividend that is more than adequately covered by earnings.
Advice Hold
Why The latest results have frothed up the share price in a well-managed company
James Fisher and Sons
It’s rare for a single deal to be hailed as transformative for a public company, but that’s how analysts have greeted James Fisher’s £90 million sale of RMSpumptools. The subsidiary, which specialises in underwater electrical pumps, subsea power cables and sensors, is being bought by ChampionX, an American oilfield technology specialist, and crucially £83 million of the price is in cash.
Yes, this does mean that Fisher was in a pretty parlous state financially, but a cash injection is little use without a worthwhile turnaround plan and a competent team to implement it. In this instance, the company seems to have both. The RMS sale is part of a move from capital-intense to capital-light operations in engineering design, inspection, monitoring, installation and maintenance in the oil and gas, marine, energy, shipping, defence, nuclear and offshore construction industries. Quite a list, and arguably overdue for streamlining.
Nearly two years ago Fisher brought in the French-born, United States-trained Jean Vernet as its chief executive. He had spent the previous decade in engineering.
Unveiling the group’s 2023 results, he said: “We are now one year into our transformation programme to build a stronger, more cohesive company. Despite a number of challenges early in the year, we have made good initial progress in building our leadership team, implementing our new operating model and deploying our focus and simplification agenda.” That boils down to engineering services in the “blue economy”, the trendy term for sea-centred activities.
For last year, Fisher’s underlying pre-tax profit halved to £8.3 million on sales £18.1 million higher at £496.2 million. Earnings per share fell from 22.3p to 11.4p and the dividend was passed again.
Under the banner “One James Fisher”, Vernet has brought a disparate range of operations into three divisions covering energy, defence and maritime transport. It remains to be seen whether that’s consistent with having outposts in the Middle East, the Asia-Pacific region, Africa, the Americas and Europe. Don’t expect immediate fireworks. Investec sees profits dipping for this year and next, but earnings per share hitting 21.1p for 2026, with a nominal 3p dividend.
Advice Hold
Why Boss’s blueprint needs more time to prove itself