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Investors could be forgiven for choosing to swerve exposure to those firms who run syndicates at Lloyd’s of London, especially as the appearance of Hurricane Beryl, a category five storm, so early in the season seems to confirm the worst fears of many meteorologists and ecologists when it comes to the issue of climate change.
Yet chatter in highly respected trade publication Insurance Insider that Italy’s Generali (G:MI) and Japan’s Sompo (8630:T) are both considering a bid for the FTSE 250 index constituent Hiscox (HSX) may only serve to highlight how cheap the specialist non-life insurers and Lloyd’s managers may be, despite the risks.
This in turn helps to reinforce our faith in long-term holdings Beazley (BEZ) and Lancashire (LRE).
Higher claims thanks to natural disasters, higher repair costs thanks to inflation, and higher costs of capital are all undeniable challenges for non-life insurers (and reinsurers) such as Beazley and Lancashire as they seek the best risk-adjusted return from the Lloyd’s syndicates they manage.
But this combination is also taking capacity out of the insurance market at a time when demand is increasing.
As a result, for those players strong enough and smart enough to withstand the storm, headline insurance rates are rising and savvy specialists are generating good profits, strong cash flow and high returns on equity as a result.
Such financial performance is not going unnoticed within the industry, even if stock market investors are relatively unmoved, given how Beazley trades on less than seven times forward earnings and Lancashire barely six times, for 2024.
Beazley is expected to return the equivalent of nearly 13pc of its stock market capitalisation, or some £600m, to its shareholders via dividends and buybacks this year.
Lancashire is forecast by analysts to pay out ordinary and special dividends that put it on a yield of almost 12pc. the FTSE 250 member has a long track record of supplementing regular payments with specials, having already done so on ten occasions since its 2005 listing, including in 2023.
Intriguingly, Hiscox is more expensive on an earnings basis, on nine times forward earnings, and comes with a lower “cash yield” of just over 5pc once you add up its forecast dividend payment and ongoing $150m share buyback scheme. That the more expensive stock is the one allegedly attracting attention can only serve to highlight the valuation of Beazley and Lancashire, especially if a predator does pounce for Hiscox.
However, investors do need to consider the different industry mixes and risk exposures that their managed syndicates run.