After a tough 2016, Neil Woodford may be smiling today. Shares of Lloyds insurer Beazley (LSE: BEZ) a holding in Mr Woodfords Equity Income Fund rose by 9% this morning, after an impressive set of results.
Its Beazleys biggest one-day gain since 2008. In my view, todays results highlight the attractions of these specialist insurance stocks for investors. And Mr Woodford isnt the only noted investor with a significant commitment to insurers.
Invest like Buffett
Billionaire investor Warren Buffett has always praised the cash-generation qualities of well-run insurance companies.
Earlier this year, Mr Buffett demonstrated his continuing interest in the insurance business by agreeing a $10bn re-insurance deal with US giant AIG. Buffetts insurance firm Berkshire Hathaway will take on a maximum liability of $20bn, in return for a one-off payment of $10.2bn.
The deal is expected to be profitable for Berkshire. I wouldnt bet against Mr Buffett pursuing other insurance-related investments in the future. So could Beazley and fellow Neil Woodford pick Lancashire Holdings (LSE: LRE) tempt him to buy?
Strong results in a soft market
Beazley said this morning that the net value of policies written during the year rose by 8% to $1,854m. This helped to generate a 3% increase in pre-tax profit, which rose to $293.2m. Measured in the groups reporting currency of US dollars, post-tax earnings were broadly flat at 48.6 cents per share.
However, the weakness of the pound against the US dollar meant that Beazleys earnings received a serious boost when converted into pounds. Measured in pence, earnings were 11% higher at 35.5p per share, significantly above analysts forecasts of 32.7p per share.
Beazleys dividend payout was also above expectations. The group announced a second interim dividend of 7p and a special dividend of 10p this morning. This gives a total of 20.5p per share for 2016, equivalent to a 5% yield at yesterdays share price.
One of the attractions of Beazley and Lancashire is that theyve refused to slash prices in a market where insurance rates are falling. So-called catastrophe claims such as the destruction of a major ship or building have been rare in recent years. This has pushed down insurance rates for this type of cover. But pricinginsurance on the assumption nobody will claim is very risky.
Instead of cutting rates, Beazley and Lancashire have scaled back their insurance activity in this sector. This is most notable at Lancashire, where revenue has fallen from $764m in 2014 to an expected level of just $582m in 2016. The groups earnings have now fallen from $1.29 per share in 2012 to an expected level of $0.67 in 2016.
Lancashires shrinkage has resulted in the group returning a lot of surplus cash to shareholders. Dividend yields as high as 10% have been available at time over the last few years.
Larger Beazley has returned capital too, but has also diversified. Chief executive Andrew Horton said today that US growth had helped to offset declines in other areas. Beazleys earnings have ranged between $0.41 and $0.51 per share since 2012.
Are these stocks a buy?
I dont expect Warren Buffett to buy Beazley or Lancashire, as theyre mainly UK businesses.
But for private investors looking for attractive long-term returns, I believe both stocks are worth considering.
Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.