Midas extra: Beazley, BPI & Diploma

By Joanne Hart for The Mail on Sunday
Updated: 05:47 EDT, 15 January 2010

Midas Extra

Beazley

Market confidence is significantly more robust than it was in the summer but an element of caution – or even realism – remains. Many companies are nervous about next year, worrying that higher taxes and fears about unemployment will impede spending by consumers and businesses alike.

Fear and caution are bad breeding grounds for most industries but not for the insurance sector. In this industry, the more people feel uncertain about the future, the more they try and protect themselves against bad things happening to them, their families and their businesses.

Beazley is a particular type of insurer. It does not insure homes or cars. Its products never feature on price comparison websites. In fact, it is not involved in so-called personal lines (insurance for consumers) at all. nstead, Beazley focuses on highly complex insurance, where there is not much competition from other players and where rates are agreed after extensive negotiation between the company's underwriters and its customers, largely insurance brokers.

Almost half Beazley's business comes from professional indemnity insurance products, where people such as architects, lawyers and accountants insure themselves against being sued by their clients.

This type of insurance has expanded hugely over the past decade and Beazley is a market leader in Britain. But the company is also involved in property and marine insurance, life assurance and reinsurance, as well as political risk business – insurance against terrorism.

Just over half its premiums are written for American customers, 21% for Europeans and the rest for firms scattered across the world. Insurance can seem like an impenetrable business but companies are principally judged on two criteria – how clever they are at pricing premiums so they do not end up paying huge amounts in unforeseen claims and how good they are at investing the premium income they receive until it is needed to pay claims.

Beazley is pretty good at both. The company employs three people whose job is to spot global trends so they can advise Beazley to withdraw from certain areas or become more involved in others. Before the sub-prime mortgage crisis in America, for example, they advised Beazley to reduce the amount of business it did around US property. The group also stayed away from the financial sector as it plunged into crisis but re-entered after the credit meltdown when there were some highly profitable opportunities.

On the investment side, Beazley is relatively conservative, which is particularly important as professional indemnity claims can take years to sort out so the company has to make sure it does not squander the premium income it has received.

Beazley is not immune to the recession – low interest rates affect investment performance and difficult times in shipping and construction have affected business in these areas. Nonetheless, the amount of money made from underwriting should increase by more than 65% to around £75 m in 2009 and investment income should move from a £26 m loss in 2008 to a £59 m profit this year.

Core pre-tax profits should show a massive gain therefore, from £16.4 m to £135 m and the dividend is forecast to rise from 6.6p to 7.3p.

Midas verdict: Beazley shares were more than 180p at the beginning of 2008 and they are now 107p. Concerns have been raised about rising claims in professional indemnity insurance and some analysts also believe that premium rates across the board will not rise as quickly next year as they have done in recent years. Beazley's job, however, is to price risk effectively and it is confident about the future. For investors, the company looks a pretty strong bet. If the stock rises, that will be all to the good. And if it remains around current levels, the yield is highly attractive.