Data Breaches: Big Opportunity for U.K. Insurer Beazley
Silicon Valley has a reputation as the world champ for innovation, while Brussels looks like a leader in regulation. In a twist, new regs from the European Union’s de facto capital could mean big profits for some tech-savvy companies.
For instance, the EU’s soon-to-hit General Data Protection Regulation ought to boost demand for London-based Beazley (ticker: BEZ.UK), which insures companies in the event of cyberattacks, according to bulls on the stock.
Beazley looks set for an ongoing lift as organizations around the globe try to guard against data breaches and related threats. It’s similar to how makers of security software have made more and more money by providing protection from hackers, leading investors to bet on funds like the ETFMG Prime Cyber Security exchange-traded fund (HACK).
“Beazley’s valuation fails to capture both the exceptional growth and high margins available in cyberinsurance,” say Jefferies analysts in a recent note. They’ve started coverage of the stock with a Buy rating and price target of 600 pence ($8.52), implying a rally of 13% from a recent print around 533 pence. (Beazley also has U.S. shares, traded over the counter under the ticker BZLYF.)
The cyberinsurance business could provide 25% of Beazley’s earnings by next year, the Jefferies team reckons. That’s up from an estimated 13% in 2016, as the overall market for such products grows at about 30% per year.
The analysts praise the unit’s flagship product, Beazley Breach Response, largely pitched to small- and medium-size U.S. businesses. It helps in conducting an initial probe, sending notifications to affected individuals, and more. “The service elements are highly attractive for clients lacking their own capability to counter a breach, while also enabling Beazley to tackle a breach from the onset, minimizing the ultimate cost for the breach for both Beazley and the client,” the Jefferies team says.
Data Breaches: Big Opportunity for U.K. Insurer Beazley
The General Data Protection Regulation is due to take effect across the EU in May, promising fines of up to 4% of annual sales for companies that fail to notify authorities of breaches within 72 hours. One high-profile example of a GDPR-driven change comes from Facebook (FB), which is seeking to make it easier for its users worldwide to manage their data before the wide-ranging law takes effect.
Here’s the bottom line for Beazley and its peers, according to Jefferies: “The insurance industry could experience a material increase in demand when companies begin to assess their GDPR requirements.” Meanwhile, Australia and Canada have similar data-breach regulations in the works. The bank’s team also notes that the number of significant breaches at businesses, government agencies, and other organizations topped 1,300 last year, versus fewer than 200 in 2005, according to the Identity Theft Resource Center, a U.S. nonprofit.
The cyberunit’s performance probably will be disclosed separately from other businesses soon, and that will prompt a rally, predict the analysts, Philip Kett, Alexandra Zou, and Mark Cathcart. Some investors worry about Beazley expanding into a new area with a short history, but the company has managed its risks relatively well through reinsurance, the analysts say.
The insurer’s other business lines aren’t shabby, either. “We believe that the income from its traditional lines, along with a solid capital base and good liquidity, will enable Beazley to continue its extraordinary growth in the cyberfranchise,” the Jefferies team says, adding that the company has “emerged profitably from the soft market for its traditional businesses.”
Beazley’s stock, part of the mid-cap FTSE 250, has gained about 30% over the past 12 months. It got a lift in mid-January as the company said fiscal 2017 pretax earnings, due on Feb. 8, would exceed market expectations at that time. Analysts now expect full-year pretax income of 107 million pounds. The stock trades at 17 times the consensus forecast, versus 14 for British insurers Admiral Group (ADM.UK) and Hastings Group (HSTG.UK), but below the price/earnings ratios of other players, such as Hiscox (HSX.UK) at 17 and Aviva (AV.UK) at 19.
To be sure, among the dozen analyst teams covering Beazley, the average price target is 509 pence, implying a drop of about 5% from the recent price, although seven teams have Buys on the stock.
IN EUROPEAN MARKETS LAST WEEK , stocks joined in a global selloff, blamed in large part on rising bond yields, which appear to be peeling some money away from equities. The Stoxx Europe 600 index fell about 3%, paring its 2018 gain to less than 1%, as the yield on the 10-year German Bund rose above 0.75%—touching levels last seen in 2015.
“It does look like nervousness in equity markets is down to rising bond yields,” wrote Neil Wilson, a senior market analyst at ETX Capital. Meanwhile, Forex.com analyst Fawad Razaqzada noted that German yields have been “rising sharply in recent days amid growing speculation that the European Central Bank may start tightening its policy in the coming months, owing to an improving euro-zone economy.”