By Victor Reklaitis, MarketWatch
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 ought to boost demand for London-based Beazley /zigman2/quotes/209655690/delayed UK:BEZ +0.17% , 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 like the ETFMG Prime Cyber Security exchange-traded fund /zigman2/quotes/207892345/composite HACK -0.61% .
“Beazley’s valuation fails to capture both the exceptional growth and high margins available in cyberinsurance,” say Jefferies analysts in a Jan. 23 note. They started coverage of the stock in January with a Buy rating and price target of 600 pence, then in February lifted their target to 625 pence ($8.35). They reiterated that price objective in mid-May. That implies a rally of 10% from a recent print around 605 pence. (Beazley also has U.S. shares, traded over the counter under the ticker BZLYF /zigman2/quotes/202378713/composite BZLYF +1.05% ) .
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-sized 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.
The General Data Protection Regulation is taking effect across the EU on Friday, 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 /zigman2/quotes/205064656/composite FB -0.70% , which before its Cambridge Analytica scandal said it was 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 , 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.”
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Beazley’s stock, part of the mid-cap FTSE 250, has gained about 31% over the past 12 months. The stock has been trading at about 18 times the consensus forecast, versus 17 for British insurer Admiral Group /zigman2/quotes/201079056/delayed UK:ADM +1.26% , but below the price/earnings ratios of other players, including Hiscox /zigman2/quotes/202830554/delayed UK:HSX +1.40% at 20.
To be sure, among the 10 analyst teams covering Beazley, the average price target has been 588 pence, below the recent price, although five teams have Buys on the stock.