The insurance business can be a challenging sector to understand. However, it can also be a highly profitable business if done right. Indeed, billionaire Warren Buffett has made the bulk of his fortune in the insurance industry.
Strength-to-strength
One of the most successful insurance group’s trading in London today is Beazley (LSE: BEZ). Over the past decade, this company has gone from strength to strength.
Management has used the group’s experience in the UK market to expand around the world. And this has produced tremendous returns for shareholders. Over the past decade, the stock has yielded a total annual return of 21%. That’s enough to return an initial investment of £1,000 into around £9,000.
What’s more, it doesn’t look as if the business is going to slow anytime soon.
Growth returns
Since 2016, Beazley has been in a holding pattern. Insurance rates collapsed between 2015 and 2017, which made it harder for companies like Beazley to earn a decent return. However, this started to change in 2017 and 2018 when several large catastrophes inflicted heavy losses on the sector.
We can see just how much of an impact these low rates had on Beazley by looking at its combined ratio, which measures an insurance company’s profitability.
A ratio above 100% indicates the business is paying out more in expenses and claims than it receives in income (insurance premiums). A ratio below 100% tells us that the organisation is making a positive return.
Between 2012 and 2016, Beazley’s combined ratio was below 90%. That’s extremely impressive. But since then, the company has struggled, with the combined ratio exceeding 100% for the past three years.
Nevertheless, with insurance rates increasing, management expects the combined ratio to return to the mid-90s in the near term. To put it another way, 2020 could be the year that Beazley returns to growth.
Income potential
On top of this growth potential, the stock also looks attractive from an income perspective. Management is targeting dividend growth of 5-10% per annum over the long term.
Recent trading updates from the business show it’s on track to meet this forecast in the current year. Current figures imply the shares have a dividend yield of 2.2%, which looks attractive in the current interest rate environment.
Margin of safety
From a valuation perspective, shares in Beazley appear to offer a margin of safety at current levels. The stock is trading at a price-to-earnings (P/E) ratio of 14.3 and a PEG ratio of 0.7, that metric suggests the shares offer growth at a reasonable price.
While insurance can be an unpredictable business, rising rates across the industry suggest Beazley seems to be on track to report impressive growth for 2020. As such, now could be the time for value-seeking investors to snap up a share of this global group, as it capitalises on the growing market after several years of preparation.
