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Buying these 2 stocks now could make you a million for retirement

Insurance companies Beazley (LSE: BEZ) and Hiscox (LSE: HSX) have produced enormous returns for investors over the past 10 years. 

Indeed, since 2007 shares in Beazley have produced a total annual average return of 14.8% while shares in Hiscox have returned 15.5% per annum on average. For some comparison, over the same period, the FTSE 100 has returned around 5.5% including dividends. 

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Based on these historical returns, and looking at the two companies’ outlooks, it seems to me that Beazley and Hiscox are great stocks to retire on. 

Room to grow

Shares in Beazley have charged higher over the past decade as the company has increased earnings steadily. And it looks as if this growth is set to continue as today the company reported that gross premiums written for the nine months ended 30 September rose 6% to $1,762m. 

Unfortunately, even though the value of premiums written is rising, the number of catastrophes this year will hold back Beazley’s profitability. According to today’s release, management expects the firm’s combined ratio for the full year — the sum of incurred losses and expenses divided by earned premiums — to be around 100%. A combined ratio of 100% or more indicates that an insurer is making a loss from underwriting operations. 

Insurance losses mean that analysts are expecting the company to report a decline in earnings per share of 57% this year. However, assuming there are no substantial losses during 2018, earnings are expected to recover next year. Based on estimates for 2018, the shares are trading at a forward P/E of 16. Considering Beazley’s historical returns, this valuation does not seem too demanding. 

The shares yield 2.4%, and the company has historically returned any additional capital to investors via special dividends. For example, for 2016 the company paid a special dividend 10p per share, equal to around 95% of the regular payout for the year. 

Takeover target 

Beazley’s peer Hiscox is another firm that I believe is a great long-term buy. Hiscox also operates within the insurance sector the company is expected to take a hit from 2017’s string of disasters. Earnings per share are projected to decline 76% this year before surging 161% for 2018. Based on these City figures, the shares are currently trading at a forward P/E of 18.4, which I once again believe is suitable considering the company’s historical performance. 

The firm also distributes any excess profit to investors via dividends. There was no special payout last year, but between 2012 and 2015 the company distributed 135p per share in additional profits, which works out at around 18% of the 2012 share price. 

There’s also a strong possibility that Hiscox and Beazley could be taken over by a larger business, as almost all of their listed peers have been during the past few years. The economics of the insurance sector means that in the current low-interest rate environment, scale is key and the sector has consolidated as a result over the past decade. Novae Group and Amlin plc are just two of the companies that have lost their independence, and there have been rumors that Beazley could be next.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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