Beazley’s move to establish a new Bermuda operation is seen as “a strategic investment irrespective of the phase of the cycle” by analysts at Peel Hunt.They also highlight how this can increase access to third-party capital, in particular with the returns of the firm’s cyber underwriting expertise now set to become accessible to ILS investors.Yesterday Beazley, the London headquartered specialty insurance and reinsurance company, to drive growth and expansion into the alternative risk transfer market, including ILS opportunities.Beazley’s Chief Executive Officer Adrian Cox explained that .

Later in the day Cox also revealed, that .There was a lot to digest and equity analysts tracking the insurance and reinsurance market have been largely positive on the growth potential and additional diversification of the business that Beazley’s move will drive, although some have highlighted reduced capital returns as a possibility while the new venture scales-up.Investment bank Peel Hunt’s analysts gave some thoughtful views on what the strategy in Bermuda could mean for Beazley, in particular with respect to access to third-party capital and ILS investors.

Overall, the analysts believe the investment in operations in Bermuda will provide Beazley “more flexibility to manage the underwriting cycle.” While near-term capital return expectations may have been dampened and driven the share price down after yesterday’s announcement, the analysts believe such an investment should “compound nicely over time and only temporarily defers meaningful capital returns (special dividends/buybacks) in our view.” In terms of cycle management, while the Bermuda venture is not anticipated going to drive meaningful growth on its own, without the rest of the re/insurers business delivering, it is seen as a way to offset part of the premium declines that analysts have been pencilling into their assumptions (part of which will be due to the softening of the cycle).Access to third-party capital is seen as one key driver and benefit of the move into the Bermuda market.“As the underwriting cycle softens, the rationale behind Beazley’s new capital allocation strategy is starting to make sense, in our view.

It does not have a Bermuda platform.This limits its flexibility to access third-party capital outside of the Lloyd’s market.Third-party capital is an important tool in managing the cycle, allowing Beazley to flex the level of risk exposure it retains (eg Cyber and Property peak risks) without materially shrinking the portfolio,” Peel Hunt’s analysts wrote.

Beazley has been very successful in attracting third-party capital to its London and Lloyd’s underwriting businesses and the Bermuda market is a natural step to further expand that access, while also potentially diversifying to differentiated investor and capital sources.On the plans to launch a cyber ILS fund joint-venture, the analysts commented, “Beazley intends to invest to attract more third-party capital to the Cyber reinsurance market through the creation of a reinsurance Cyber fund with an established Bermudian partner.There is significant Cyber reinsurance demand as aggregate exposures grow, and Beazley’s Cyber underwriting expertise will be used to raise third-party capital.” Leading them to say, “As a market leader in the Cyber market, Beazley brings significant expertise to Bermuda, which should enable it to access new business in niches where there is increasing demand for cover.” Concluding, “This is a strategic investment irrespective of the phase of the cycle and in that respect, we believe it makes sense.

Capital generation is set to continue in the short term.As such, we believe scope remains for special dividends and share buybacks as the soft market develops over the next few years.” It’s also worth noting that Beazley’s venture into Bermuda is a further vote of confidence in the island’s insurance, reinsurance and insurance-linked securities marketplace, infrastructure and regulation.Analysts at Autonomous Research said that the cyber ILS plans Beazley has, “feel a natural extension of their cyber presence and expertise.” Jefferies analysts noted that the investment, “comes with lower execution risk than an acquisition,” and also has “scope for improving expense ratio from efficiency gains.” Analysts at Berenberg said the Bermuda unit “opens new avenues for growth” and sees Beazley putting returns ahead of growth, in their opinion.

Also estimating that “the return on invested capital is likely to be 18-20%, above the company’s through-the-cycle ROE target of 15%,” from the Bermuda investment.RBC Capital Markets analysts said they can “see the strategic logic in helping the development of the Cyber Re ILS market.” Finally, Goldman Sachs analysts said the Bermuda move sees Beazley “investing for long-term growth as the cycle softens,” with capital returns unlikely to be affected.Goldman’s equity analyst team also noted that “Bermudan presence will provide better access to risk pools while allowing business to be written through its global platform,” for Beazley.

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