Beazley’s third-party capital an EPS upside. Opportunity in cyber: Jefferies

London headquartered insurance and reinsurance group Beazley has an opportunity in the cyber underwriting space to bring in third-party capital and this could deliver an additional upside to its earnings per-share, analysts at Jefferies have said.

Following a management presentation, a range of equity analysts have opined on Beazley, with the cyber underwriting prowess of the company one area of focus.

Another area is the growing use of third-party capital at Beazely, both within its more traditionally backed Lloyd’s of London syndicates, as well as its market facilities such as the Smart Tracker special purpose arrangement (SPA) syndicate 5623 and ESG syndicate-in-a-box that count more insurance-linked securities (ILS) type investors within their capital providers.

Beazley told the various analyst teams that its target for cyber insurance underwriting is to bring in roughly $1.3 billion in gross premiums in full-year 2022.

That represents a massive 60% or more increase on last year, with significant price increases being seen in the cyber insurance space a primary driver, which means Beazley also believes it will be able to keep its risk exposure within appetite.

Calling this forecast “remarkable growth”, analysts at Jefferies said that the key driver is the re/insurers flagship Beazley Breach Response (BBR).

This product offers both cyber insurance capacity to Beazley clients, as well as cyber risk management and breach or hacking response services.

By bundling these protection, risk management and response products together Beazley hopes to both better manage its own exposures (protecting its capacity by encouraging better risk management), through proactive assistance for cyber insurance clients, so ultimately reducing its exposure when any peak cyber loss events occur.

“We expect that this is one of Beazley’s more profitable Cyber products, given that a key objective is to reduce the risk of future claims,” Jefferies analyst team said. Adding that, “Strong growth in BBR could therefore have a positive mix impact on earnings.”

The cyber insurance market has seen premiums skyrocketing and one of the drivers of that is how the cyber reinsurance and also retrocession market has been behaving.

Capacity has proven to be limited, while risk appetites are also reduced, so availability of reinsurance and retro has become a driver of primary rates, given insurers are unable to protect their own balance-sheet surplus as much as they would like to.

Reducing the risk profile and concentrations of their cyber insurance portfolios is one way insurers can manage this, with added-value cyber risk management service provision a growing area of focus, effectively training clients to be more cyber risk-aware.

Jefferies analyst team also noted that these added-value cyber services can be drivers of fee income.

“Beazley’s cyber business also generates fee-based income which is free of underwriting risk,” the analysts said. “Whilst this only makes a small contribution to earnings now, we expect that this will likely grow over time.”

But with Beazley’s already established ability to work closely with third-party reinsurance capital partners, Jefferies team believes there could be an opportunity in cyber here as well.

“There is also the possibility for Beazley to use third party capital – which could effectively leverage the fee-based earnings generated by risk management services offered by Beazley,” the analyst team wrote.

Further explaining, “This would allow Beazley to grow top-line whilst keeping net exposure within risk appetite, and would also likely offer EPS and ROE upside.”

For investors looking at cyber risk as a potential source of insurance and reinsurance-linked returns, a kind of ILS investment, partnering with a cyber underwriter that already embeds risk management and protection services into its core cyber insurance offering would be considerably more attractive than purely sitting as a reinsurance or retrocession provider to the cyber underwriting market.

The Jefferies analysts have rightly spotted a number of things here, the fact investors are interested in cyber as a potential ILS asset, that ILS investors want to work with trusted underwriting partners for any less-typical class of reinsurance business, that Beazley’s added risk management focus in its cyber products is also an attractive feature, and finally that Beazley can benefit through leveraging third-party investor appetite to grow its cyber underwriting book even further, while earning fees and managing exposures at the same time.