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Lloyd’s of London insurer Beazley has suffered a $193mn first-half investment loss from the market downturn triggered by the Ukraine war, but upgraded its underwriting forecast in a boost to shares.
The insurer said the war had created a mix of “excess demand and supply constraints [which] impacted the financial markets, leading to an unusual trading environment”. That hit was the major reason why pre-tax profits fell nearly 90 per cent to $22mn.
But shares in the insurer jumped about 10 per cent in early trading in London as a result of a solid performance on the underwriting side. The insurer said this was due in part to a lack of big cyber and natural catastrophe-related losses, meaning Beazley was able to improve underwriting guidance for the full year.
The results, among the first in the insurer earnings season, demonstrated how a mix of inflation and weaker markets is putting a squeeze on sector profits. Beazley also increased its reserves in the half to reflect its expectations for the “increased levels and duration of inflation”.
“There are lots of risks out there that are higher, including macroeconomic conditions, inflation and recession, including geopolitical conditions, including the impact of climate change,” Beazley chief executive Adrian Cox told the Financial Times. “The difference between now and four years ago is that we are charging for it.”
Commercial insurance prices have risen in recent years as higher payouts in areas such as natural catastrophes, Covid-related claims and cyber attacks have forced insurers to reprice these risks.
That backdrop helped Beazley to post its best first-half combined ratio — claims and costs as a proportion of premiums — since 2015 at 87 per cent. The inflation hit to this number was offset by a drop in claims as well as cost efficiencies.
The company improved its guidance for the full year to a percentage in the high 80s, from the previous estimate of around 90 per cent. Analysts at RBC Capital Markets called the earnings numbers a “solid print”.
Insurers hold large investment portfolios to back potential payouts to customers, so swings in financial markets can have a big impact on their earnings.
Sovereign bond yields, which move inversely to prices, have risen sharply this year as financial markets adjust for a period of higher inflation and the economic impact of the war in Ukraine — dealing a mark-to-market hit to the insurer.
Cox told the FT that the insurer had used the sell-off as an opportunity to increase the duration of its assets to match those of its liabilities, which have a lifespan of about two-and-a-half years, in what is now a higher-yield environment.
Beazley did not change its estimate for Ukraine war-related claims, at $50mn after reinsurance recoveries, although that number does not include the potential payout for planes stranded in Ukraine.
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