Beazley doubled the estimated cost of its COVID-19 claims last week from $170 million to $340 million, mainly due to further event cancellation losses.
Jefferies notes that there are now growing concerns about the insurer’s capital adequacy, with investors fearing a follow-up to the $300 million equity raise it undertook back in May.
It’s estimated that Beazley’s Lloyd’s Economic Capital Ratio is between 112% and 115%, which is marginally below the group’s minimum target capital adequacy.
According to Jefferies, this leaves the company with adequate but not comfortable levels of capital and makes fourth quarter 2020 catastrophe losses a pressing concern.
“In our view, the group should proactively purchase additional reinsurance, strategically ceding short-term earnings in exchange for preserving shareholders’ equity,” Jefferies recommended.
Having taken on additional reinsurance for its specialty lines book earlier this year, Beazley’s management have already proven willing to use reinsurance to improve capital adequacy.
Although buying further reinsurance would now be more costly due to the hardening pricing environment, Jefferies argues that this is the favourable option for Beazley to avoid permanent dilution for shareholders.
Another option would be to buy Letters of Credit, which could be used as capital for the group’s Funds at Lloyd’s (FAL) requirements, given that Beazley does not appear to have a cash flow problem.
But more conventional methods of improving the capital ratio may unavailable to Beazley at this point, as its debt leverage is already high, with an estimated gross debt ratio of 28% for the full-year.
Likewise, raising equity looks like an unattractive solution for Beazley as it already undertook an accelerated book build for 15% of shares earlier this year, leaving only another 5% available before the firm runs into a rights issue.
Given the current share price and the likely higher discount required, Jefferies does not believe that another book build of 5% would raise enough equity to compensate for the likely increase in the cost of equity.