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Personally, I adopt the same investment approach for my Self-Invested Personal Pension (SIPP) as I do for my Stocks and Shares ISA. Usually, this involves looking at the pros and cons of investing in certain members of the FTSE 100, whose names are more familiar to me.
However, until recently, I must admit I knew very little about Beazley (LSE:BEZ), the specialist insurer. But it caught my eye after it announced a record-breaking pre-tax profit for 2024 of $1.42bn. That’s a healthy 13% increase on the previous year.
And it comes against a backdrop of an increasing number of environmental disasters, which can be costly to insurers.
Doomsday?
Investors who saw the Financial Times over the weekend (28-29 June) could be forgiven for wanting to avoid the sector. In fact, readers might want to stop investing altogether.
Under the headline: ‘Crash: How the Next Financial Crisis Starts‘, Pilita Clark describes a scenario in which a series of US climate-related natural disasters results in insurers massively increasing their premiums to help recover some of their enormous losses. In the states experiencing the most extreme weather, they withdraw all cover to homeowners.
A cash-strapped government then steps in and offers ‘cheap and cheerful’ policies, which insure less for more. Without adequate insurance, mortgages start to disappear. The property market then crashes and banks incur huge losses before — eventually — collapsing. The rest of the world then follows.
Unlike previous global crises, this one’s been caused by environmental factors.
Challenging times
The likelihood of such a series of nightmarish events becoming a reality is fiercely debated. However, with the planet continuing to warm, the risk of catastrophic weather-related disasters remains an increasing risk to the insurance industry.
For example, the eventual cost to Beazley of Hurricanes Helene and Milton is expected to be $125m-$175m. It’s estimated that the January 2025 wildfires in California will result in the insurer paying claims of around $80m.
By contrast, Beazley’s keen to point out that it has no claims exposure from President Trump’s tariffs.
But the insurer’s investment portfolio is vulnerable to the global economic slowdown that the import taxes could cause. Although three-quarters of its cash is invested in debt securities — both government and corporate bonds — these are not immune to a market downturn.
Onwards and upwards
But investors appear to have shrugged off these concerns. Over the past 12 months – since July 2024 – the share price is up 38%. And it’s more than doubled over the past five years.
This could be due to the group’s impressive return on equity. Since 2014, it’s averaged 15.5%. And this includes the pandemic of 2020, the only year in the company’s 39-year history that it reported a loss.
Beazley’s margin — as measured by the combined ratio — is also healthy. This calculates an insurer’s total costs (claims and expenses) as a percentage of earned premiums.
For 2024, the group’s ratio was 79%. This was an improvement of four percentage points on 2023. According to an October 2024 report in the Insurance Times, the ratio for the UK’s top 50 insurers was 102.2%, which implies that premiums are not covering costs.
Therefore, in my opinion, the business looks to be in good shape and it could be a stock for investors to consider. However, they should be mindful of the sector-specific risks.
