Beazley is a tough act to follow

It might be tempting to take the first-half results of Beazley, the first listed Lloyd’s insurer to report, as an indication of what to expect from its peers as they release their own numbers in the coming weeks. But Beazley’s performance could be the exception rather than the rule in several areas.

Such a strong set of results in what was an extremely challenging half for the whole industry could be a tough act to follow. Even when excluding its one-off $33.7m (£21.5m) foreign exchange gain, Beazley’s first half pre-tax profit surged 172% to $81.8m and its combined ratio was an enviable 89%.

By comparison, Brit, which filed its results five days later, posted a 12% increase in profit before tax and a combined ratio of 96.5%.

“I wouldn’t necessarily assume that everyone is going to produce double my forecast,” Keefe, Bruyette & Woods analyst Chris Hitchings says about Beazley’s first-half performance.

Careful approach

One of the main differentiating factors is Beazley’s cautious strategy of only releasing catastrophe reserves when the bulk of the premiums from the policy are earned. In the first half, this approach cushioned the company against losses from February’s earthquake in Chile, so much so that the reinsurance division’s losses from the event were entirely covered by prior-year reserves.

According to KBC Peel Hunt analyst Christian Stobbs, this feature will make Beazley’s “one of the stronger sets of results in the sector”. He adds: “The impact of the Chilean earthquake, which will be felt quite strongly by the Lloyd’s sector, is much less in terms of reported numbers for Beazley than other players in the sector.”

“No one else will benefit quite so much from covering their cat exposures from prior-year loadings,” agrees Hitchings.

Another is Beazley’s specialty book, which accounts for slightly more than 40% of the insurer’s business and is its largest division. By Beazley’s own admission, the segment faced a challenging first half, with increasing competition in most of the firm’s core lines. But it managed to confine rate decreases, which were 2% portfolio wide, to 1% in specialty lines. The specialty combined ratio improved to 93% in the first half of 2010 from 94% in the same period last year.

Not all good news

Not all of the differences are positive, however. While low investment returns are likely to be a theme for insurers the world over, given the continuing financial crisis and low interest rates, Beazley’s 0.5% annualised investment return is likely to be worse than most.

“Others, such as Amlin and Hiscox for example, should have stronger first-half investment returns because their capital strength enables them to carry more risk of volatility in their investment portfolios,” research analyst at Edison Investment Research Martyn King says.

“We are expecting an annualised return for everyone else of more towards 2% or 3%,” adds Stobbs.

Brit’s annualised investment return for the first half was 3.3%.

No returns on the horizon

Furthermore, investment returns do not affect all insurers equally. Some have higher investment gearings (the ratio of investments to net tangible assets), which means they investment results can have a greater bearing on their overall returns.

According to Edison Investment Research, Beazley’s investment gearing is 4.1%, compared with an average for its peer group of 3.1%. Only Brit and Chaucer have higher investment gearings. “Beazley’s investment return in the first half was 0.5%. Had it been 1%, it would have boosted pre-tax ROE 2%,” King says.

Those banking on an improved investment environment later in the year are likely to be disappointed. “While you are already seeing the effects of low investment returns kicking in, I believe second-half investment returns will be lower than the first, which has benefited from the rally in good-quality sovereign debt,” King says.

He added: “I expect there will be a fundamental reappraisal of the level of investment returns the market has forecast. Coming into this year, the sense was that conditions would improve and returns would pick up.”

Lancashire, Novae and Hardy will be the next Lloyd’s insurers to report, on 5 August, closely followed by Catlin on 6 August. Amlin and Hiscox report on 23 August, Chaucer on 26 August and Omega on 31 August.