UK Edition
We may be on to something with Beazley, the insurer: we have a 15pc paper gain so far and there could be more to come.
Last week’s first-half results may not have looked pretty, as the “non-life” specialist’s pre-tax income fell by 87pc and return on equity was just 1pc.
However, the damage was done by “mark-to-market” losses on the investment portfolio, thanks primarily to rising yields on its government bond holdings, a risk that this column considered in its initial analysis in May.
Look through that accounting detail and the picture is much, much rosier.
Chief executive Adrian Cox declared a 26pc increase in gross premiums written, 21pc growth in tangible net asset value per share and the best “combined ratio”, a measure of profitability, for a half year since 2015 across the seven syndicates it manages on the Lloyd’s of London market.
In the non-life business, a combined ratio of less than 100pc is good news as that means underwriting losses and expenses are less than premiums written – in other words, the insurer is making a profit.
Beazley’s combined ratio in the first half was 87pc, better than the FTSE 250 company’s initial guidance for the whole year of around 90pc. Cox is even upgrading that guidance to the high 80s percentage range for 2022.
That points to strong momentum in underlying underwriting margins, even allowing for potential exposure across its political violence, trade credit, marine and especially its aviation book of business, where Beazley may face claims against leased aircraft stranded in Russia.
The company still believes that an estimate of $50m (£41m) in losses, net of reinsurance, is about right for that exposure.
Despite that, and the risk of a recession, analysts expect pre-tax profits to more than double next year, thanks to the groundwork laid last year and this.
Another key feature to watch is the company’s ability to raise prices across its specialist areas of cybercrime and executive risk, marine, political risk, catastrophe and property.
The first-half jump in gross premiums written featured an 18pc average price increase. That is a pace that outstrips even inflation.
Management will decide on the dividend only at the full-year stage early next year, but a continuation of the first half’s trends in the last six months of this year would suggest that analysts are on the right track with their estimates of a 6pc increase to around 13.7p a share, a figure almost three times covered by earnings.
Even if a forecast dividend yield of 2.6pc for 2022 may not jump off the page, that forecast jump in profits in 2023 leaves the shares trading on about six times forecast earnings.
If analysts are in the right sort of area there, the shares could look cheap indeed and Beazley could still prove to be a bargain. Keep buying.
Questor says: buy
Ticker: BEZ
Share price at close: 537p
Update: SSE
A 54pc capital gain, on paper at least, and more than 300p per share in dividend payments represent a strong return on our first study of SSE just under four years ago.
The utility has the potential to keep providing healthy total returns for patient portfolio builders, especially after management’s reaffirmation of (twice-raised) earnings guidance for this year in a trading update last week.
Following the sale of its more volatile consumer-facing arm for £500m in 2020, SSE is a specialist in offshore and onshore wind farms and has a large energy transmission and distribution business for good measure.
The FTSE 100 company has resisted calls from activist investor Elliott for a full break-up. However, it has raked in a cash windfall from the sale of investments in Scotia Gas Networks, and has begun the disposal of a 25pc stake in SSEN, its grid business.
The cash raised will help to fund a £12.5bn investment in clean energy projects, which could put the company at the heart of the energy security story while reaffirming its environmental, social and governance credentials.
SSE could spark further positive portfolio returns for readers. Hold.
Questor says: hold
Ticker: SSE
Share price at close: £17.40
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.