RBC downgrades Beazley on 'social inflation' costs in US
Beazley's scope to release reserves will be hampered by persistent social inflation in the US, Royal Bank of Canada analysts said as they reduced their price target and rating on the Lloyd's of London insurer.
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Social inflation is a trend for more litigation, bigger payouts and other changes in liability cases that increase costs for insurers, particularly in the US. Beazley has a relatively large exposure to these claims through its specialty lines division, RBC Capital Markets said.
Though the specialty division has an excellent record, based on superior risk selection and market insight, the company is likely to book potential losses conservatively in 2020. Beazley is well placed to benefit from rising prices but the full benefit will not be felt until 2021/2022, RBC said.
"With social inflation issues likely to persist in 2020, we expect Beazley to adopt a conservative approach to reserving," Kamran Hossain and his team wrote in a note to clients. "We now take a more cautious view on the combined ratio for 2020E with a reduced contribution from reserve releases."
As a result, RBC cut its target price for Beazley to 600p from 650p and downgraded its rating to 'outperform' from 'top pick'. Hossain said RBC continued to see Beazley as an attractive business but that near-term pressures prompted its downgrade.
At 1030 GMT, the shares were down 0.6% at 525p.