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Beazley Plans to Increase Hedge-Fund Assets as Investment Returns Decline

Date: Friday, July 23, 2010
Author: Kevin Crowley, Bloomberg

Beazley Plc, a Lloyd’s of London insurer, plans to increase its hedge-fund holdings as record-low interest rates squeeze investment returns.

Beazley will raise the proportion of its assets invested in hedge funds to as much as 13 percent in the next six months from about 10 percent now, Finance Director Martin Bride said in a telephone interview today. The insurer may then increase the holding to 20 percent depending on market movements, he said.

“The prospects for investment yields going forward are very linked to how interest rates move, and we don’t expect any sudden and sharp increases in interest rates,” Bride said. “We don’t want to generate investment losses.”

Central banks in the U.S. and U.K. have cut interest rates to record lows to stimulate economic growth following the worst financial crisis since the Great Depression, forcing insurers to seek alternative investments to generate returns. The chief executive officer and finance director of fellow Lloyd’s of London insurer Chaucer Holdings Plc were forced to step down last year after the firm’s hedge-fund holdings plunged in 2008.

Beazley said today its investment income for the first half dropped to $8.5 million from $40.5 million a year earlier.

“We took the view we don’t want a lot of credit in the portfolio because credit spreads are relatively volatile and we don’t want any direct equities in the portfolio because equities are very volatile,” Beazley CEO Andrew Horton said in the interview. “Hedge funds have the possibility of dampening some of the volatility.”

Bonds and Cash

Outside of its hedge-fund holdings, Beazley’s investments are mostly in U.S. and U.K. government bonds and cash, Horton said.

The insurer, the first Lloyd’s of London firm to post its half-year earnings, said today in a statement that profit more than tripled on higher sales and a foreign-exchange gain. Net income climbed to $97.9 million in the six months to June 30, from $31.2 million a year earlier. That beat the $43.1 million median estimate of three analysts surveyed by Bloomberg.

The stock climbed 0.8 pence, or 0.7 percent, to 122.8 pence at 8:24 a.m. in London, valuing the firm at about 648 million pounds.

To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net