# Hiscox Ltd “A positive result in a changing market”

- Link: https://www.directorstalkinterviews.com/hiscox-ltd-a-positive-result-in-a-changing-market/412788664
- Published: 2019-07-29T07:27:13+01:00
- Author: Giles Arbor

**Hiscox Ltd** (LON: HSX) have today provided interim results for the six months
ended 30 June 2019.

|   | H1 2019 | H1 2018 | 
| Gross premiums written | $2,337.5m | $2,228.8m | 
| Net premiums earned | $1,313.8m | $1,277.9m | 
| Profit before tax | $168.0m | $162.7m | 
| Earnings per share ($) | 51.2¢ | 52.2¢ | 
| Earnings per share (£) | 39.6p | 38.0p | 
| Interim dividend per share | 13.75¢ | 13.25¢ | 
| Net asset value per share ($) | 817.0¢ | 833.7¢ | 
| Net asset value per share (£) | 641.9p | 633.6p | 
| Group combined ratio | 98.8% | 87.9% | 
| Return on equity (annualised) | 13.3% | 13.3% | 
| Investment return (annualised) | 4.8% | 0.7% | 
| Foreign exchange gains / (losses) | $15.6m | $(8.5)m | 
| Reserve releases | $26m | $154m |

**Highlights**

· Gross premiums written up 7% in constant currency, with all business segments 
growing.

· Profit before tax up 3% to $168 million, driven by a good investment return of
4.8% annualised.

· Interim dividend up 4% to 13.75¢.

· The Group experienced a higher volume of claims in the first half of 2019 than
the same period last year.

· Reserves have been strengthened for prior-year claims from Typhoon Jebi, Hurricane
Michael and the risk excess book, as industry loss estimates have increased.

· Retail growth has moderated as planned, due to on-going discipline in US private
company directors and officers’ (D&O) business and as Hiscox UK adapts to new IT
systems.

· Hiscox Re and Hiscox London Market are capitalising on opportunities as they arise,
as pricing momentum continues to build.

**Bronek Masojada, Chief Executive Officer, Hiscox Ltd, commented:**

> “Hiscox delivered a profit of $168 million for the first half despite a more challenging
> claims experience. Looking ahead, with six consecutive quarters of rate growth
> in some Lloyd’s business, the market is in a better position than it has been 
> for some time. In Retail, we will continue to invest in our infrastructure and
> marketing to drive sustainable growth. Our strategy of diversification gives us
> options.”

**Chairman’s statement**

I am pleased to report that the Group has delivered a pre-tax profit of $168.0 million(
2018: $162.7 million) and grown gross premiums written by 4.9% to $2,337.5 million(
2018: $2,228.8 million) in the first six months of 2019. Every business segment 
grew and Hiscox Retail was once again the main profit generator, albeit in a more
active period for claims. In aggregate we have experienced favourable reserve development,
however there have been some adverse movements on industry losses and reserve strengthening
in some exited lines. The effects of these have been more than offset by strong 
investment returns, as we have benefited from financial market movements in the 
first half.

In Retail, growth has moderated as we exercise discipline in US private company 
directors and officers’ (D&O), and implement new systems and ways of working in 
the UK. In our London Market business, market losses and renewed discipline in Lloyd’s
are putting upward pressure on rates, and the picture looks more positive than this
time last year. In reinsurance, where rate improvement had been more sporadic in
the first quarter, we have seen good price increases on loss-affected risks in the
second quarter and are finding opportunities in the retrocession market, where reduced
capacity has significantly improved rates.

As ever, the results of the half year are no indication of the results of the full
year, so as we approach hurricane season there is still potential for the wind to
blow us off course.

**Results**

The result to 30 June 2019 was a pre-tax profit of $168.0 million (2018: $162.7 
million). Gross premiums written increased by 4.9% to $2,337.5 million (2018: $2,228.8
million), or 6.8% in constant currency. Net earned premiums were $1,313.8 million(
2018: $1,277.9 million). The combined ratio was 98.8% (2018: 87.9%). Earnings per
share were 51.2 cents (2018: 52.2 cents) or 39.6 pence (2018: 38.0 pence) and net
assets per share reduced to 817.0 cents (2018: 833.7 cents) or 641.9 pence (2018:
633.7 pence). The annualised return on equity was 13.3% (2018: 13.3%).

As mentioned in the recent trading update, the Group has made an additional tax 
provision for the half year with an impact of $58 million. This is presented as 
a prior-year adjustment and does not affect the current year results. This additional
tax provision includes a reappraisal of how Hiscox has invested in and classified
marketing activity historically. The Group does not expect any further charges to
arise and re-affirms its current guidance of 10-12% on its effective tax rate.

**Dividend, balance sheet and capital management**

The Board is pleased to announce an interim dividend per share of 13.75 cents, representing
a 3.8% increase on the 2018 interim dividend. The record date for the dividend will
be 9 August 2019 and the payment date will be 11 September 2019.

The Board proposes to offer a scrip alternative subject to the terms and conditions
of Hiscox Ltd’s 2019 Scrip Dividend Scheme. The last date for receipt of Scrip elections
will be 16 August 2019 and the reference price will be announced on 27 August 2019.

Further details on the dividend election process and Scrip alternative can be found
on the investor relations section of our corporate website, www.hiscoxgroup.com.

**Rates**

In Hiscox Retail, rates have been broadly flat. In the UK, competition in commercial
lines is being balanced out by improved household rates, where a prevalence of escape
of water claims continue to place upward pressure on prices in the market.

In Hiscox London Market, we have seen good rate momentum, with rates up approximately
5% across the portfolio, helped by the Lloyd’s Decile 10 directive and the cumulative
impact of two consecutive years of large market losses. We have seen most pronounced
increases in US public company D&O, cargo, marine hull, major property and household.

In Hiscox Re & ILS, rates are up approximately 6% across the portfolio with increases
confined generally to loss-affected accounts, as an abundance of capital continues
to dampen a widespread market turn. During the April renewals, when the majority
of Japanese business renews, we achieved rate increases of 8% overall, while in 
June, when a lot of Florida-based wind-exposed business renews, rates increased 
by 12%. We continue to see opportunities in the retrocession market, where reduced
capacity combined with several years of losses is contributing to material rate-
hardening.

**Claims**

As mentioned in our recent trading update, the insurance market has seen continued
deterioration from 2018 catastrophe events, including Typhoon Jebi in Japan and 
Hurricane Michael in Florida. The scale of deterioration has been significant, with
industry loss estimates having increased materially since these events. As a result,
the Group has strengthened reserves for prior-year claims from Typhoon Jebi, Hurricane
Michael and for the risk excess book. The combined impact of reserve strengthening
for these events is approximately $40 million net. Last year, the Group benefited
from prior-year releases from Hurricanes Harvey, Irma and Maria, which totalled 
$25 million, however we did not have that same benefit this year.

The Group has also strengthened reserves for some exited classes, including healthcare,
by $10 million. Reserving for other prior year attritional and large losses amounts
to $53 million.

After a particularly benign start to 2018, our retail businesses have encountered
a more normal loss experience so far this year, and we expect this to continue in
the second half. This includes a higher volume of claims in US D&O for private companies,
where we have reduced our exposure and continue to do so. We expect the full year
combined ratio for Hiscox Retail to be at the top end of our 90-95% range.

Reserve releases for the first half were $26 million (2018: $154 million), and we
expect second half reserve releases to be below $100 million (2018: $168 million).
Our prudent approach to reserving has not changed.

**Hiscox Retail**

Hiscox Retail comprises all our retail businesses around the world; Hiscox UK, Hiscox
Europe, Hiscox USA, Hiscox Special Risks and Hiscox Asia. In this segment, our specialist
knowledge and retail products differentiate us and our on-going investment in the
brand helps us build a strong market position. Hiscox Retail is the single biggest
segment in the Group and delivered most of the profit for the Group in the first
half.

| Gross premiums written | $1,154.6 million (2018: $1,113.0 million) | 
| Profit before taxCombined ratio | $137.7 million (2018: $100.0 million)95.0% (2018: 90.7%) |

**Hiscox UK**

Hiscox UK provides commercial insurance for small- and medium-sized businesses as
well as personal lines cover, including high-value household, fine art and luxury
motor.

While gross premiums written reduced by 1.7% to $378.5 million (2018: $385.2 million),
the business grew by 4.3% in constant currency.

Our broker business had a challenging 2018 as it adapted to a new system with new
ways of working, which impacted growth. In the first half of this year we have made
good progress, with service levels improving and work on track to be completed by
the year-end. However, as we have previously said, growth will remain subdued until
these changes are fully embedded.

The direct-to-consumer market remains competitive, particularly in commercial lines.
Despite this we are operating in healthy niche markets and have been able to grow
premiums by around 10%. Our investment in marketing continues to differentiate us,
and we will look to build on the success of our campaigns in the second half.

Cyber is still a growth area for the Group and in March we launched a new and enhanced
product called CyberClear at an event attended by over 350 brokers and business 
partners. The new product provides market-leading protection to our UK customers
and we are proud that it has been rated the most comprehensive cyber insurance policy
for SMEs as the first and only policy to receive a 100% score in the Insurance Times
Cyber Product Report.

Bob Thaker transferred from Hiscox Asia to take up the role of Hiscox UK CEO during
the period. After over four years leading our business in Asia, the UK is already
benefiting from his experience of building a business in a competitive market with
high customer expectations.

**Hiscox Europe**

Hiscox Europe provides personal lines cover, including high-value household, fine
art and classic car; as well as commercial insurance for small- and medium-sized
businesses.

Hiscox Europe is doing very well and delivered a strong performance, with gross 
premiums written growing by 9.0% to $245.1 million (2018: $224.8 million¹), or 17.0%
in constant currency. The business has benefited from the transfer of Hiscox Ireland
and a number of European underwriting partnerships from Hiscox UK to Hiscox Europe
as part of our previously mentioned Brexit-related structural changes.

Spain and Germany are again the main drivers of growth, with professional indemnity
and cyber – where we are maintaining our leadership position – performing particularly
well.

Hiscox Spain is benefiting especially from the ‘MyHiscox’ broker extranet which 
we rolled out in 2018 across Europe. The team is also looking at a number of partnership
opportunities in the technology and insurtech space.

In Hiscox Germany, we launched our new CyberClear product in the second quarter,
which has been well received by the market. We are growing our team in Munich and
will expand our footprint in Germany with new offices in Berlin and Stuttgart later
in the year.

Hiscox Benelux experienced good growth in the first half, with art and private client
and commercial lines performing well. In classic car, work is under way to strengthen
our presence with new offerings for the classic car segment, such as a new motor
liability solution. Our online broker business also continues to perform well in
The Netherlands, and the roll-out of the ‘MyHiscox’ portal will continue in Belgium
later this year with cyber and professional indemnity solutions.

In Hiscox France, partnerships with well-known financial institutions continue to
be an important distribution channel, and we are adding new products such as cyber
to existing relationships.

Following Hiscox Ireland’s transfer into Hiscox Europe, we have increased our local
presence in Dublin, with new office space and new hires, and the team has settled
in well to their new home within the Group.

**Hiscox USA**

Hiscox USA underwrites small- to mid-market commercial risks through brokers and
directly to businesses online and over the telephone. We also partner with other
insurers who sell Hiscox products.

Gross premiums written increased by 3.1% to $437.1 million (2018: $423.9 million),
driven by growth in our direct and partnerships division where we now have over 
320,000 customers. Our marketing and brand-building efforts are critical to powering
our growth, and we intend to increase our marketing spend in the second half.

In the broker channel, we remain disciplined, focusing on profitable sectors and
not chasing premium at the expense of quality. For example, strong competition in
the cyber market means we are being selective and growing cautiously. In D&O, we
are doing what we said we would and remain on-track to shrink the book by more than
half in response to increased claims volumes and rate inadequacy in the market. 
This action is necessary and will improve profitability in the longer term. We have
taken similar corrective action to improve profitability in media and entertainment,
as previously disclosed, and this work is also progressing as planned.

As we said previously, we expect growth for Hiscox USA to trend towards the mid-
point of our 5-15% target range for our retail businesses in the second half.

The long-term opportunity for our US business is significant, and with our share
of less than 1% of a highly-fragmented market, we are still early in our journey.

**Hiscox Special Risks**

Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident,
classic car, jewellery and fine art. Hiscox Special Risks has teams in London, Guernsey,
Cologne, Munich, Paris, New York, Los Angeles and Miami.

Gross premiums written reduced by 4.0% to $67.0 million (2018: $69.8 million) during
the first half of the year. Over 30% of Special Risks’ business comes from multi-
year policies, which is reflected in these figures. On an underlying basis, growth
was stable.

In kidnap and ransom, market conditions remain challenging, with increased competition
and pricing pressure. Our expertise and relationships in this area are helping us
to maintain our leadership position in the market.

Our Security Incident Response (SIR) product continues to perform well and during
the period we launched an enhanced version that provides additional protection for
business integrity risks such as bribery and corruption, embezzlement and financial
statement fraud. The product now covers 19 additional insured events and we will
continue to evolve it in line with the ever-changing risk and security landscape.

Recent political tensions with Iran have resulted in a heightened state of alert
for marine clients travelling in the Gulf. In response to this, within a week, the
team developed and delivered to market a new product that focuses specifically on
providing crisis management support and loss of hire indemnity if a vessel is detained
or seized. New insurance products rightly come under a lot of scrutiny and need 
to go through a robust product governance process before launch, so I am delighted
that we have been able to respond swiftly and provide real value for our clients
when they need it most.

**Hiscox Asia**

Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and
Thailand that sells predominantly motor insurance, acquired by Hiscox in April 2014.

The business achieved gross premiums written of $26.9 million (2018: $9.3 million)
during the first half of the year. Excluding an adjustment for premium written via
an agency into Hiscox Insurance Company (Bermuda) Limited, gross premiums written
were $18.6 million (2018: $13.4 million). Both Singapore and Thailand have had consecutive
record-breaking months for car and motorcycle insurance sales, driven by the success
of new partnerships, and we continue to seek similar partnerships with like-minded
businesses.

With Bob Thaker’s return to the UK, we have appointed a new Managing Director, Sirinthip(
Celine) Chotithamaporn. Celine has been instrumental in launching two start-ups 
in Thailand and has significant insurance experience, including most recently as
President and CEO of Allianz Thailand. Her expertise will be valuable as we focus
on reaching scale and we are delighted to have her on board.

**Hiscox London Market**

This segment uses the global licences, distribution network and credit rating available
through Lloyd’s to insure clients throughout the world.

| Gross premiums written | $484.6 million (2018: $458.7 million) | 
| Profit before taxCombined ratio  | $34.4 million (2018: $42.7 million)103.3% (2018: 88.6%)  |

Gross premiums written in Hiscox London Market increased by 5.6% to $484.6 million(
2018: $458.7 million), or 6.6% in constant currency.

Rate improvements driven by the Lloyd’s Decile 10 directive, of which we have been
great supporters, and recent market losses, has led to good growth in many of our
core lines including D&O, cargo, marine hull, major property and household. We continue
to lead consortia for general liability, flood and product recall which gives us
additional scale and prominence in the market.

Like others in the market, Hiscox London Market has been impacted by a deteriorating
loss experience from Hurricane Michael, where assignment of benefits – a practice
where insureds can pass on the claims recovery rights to a more aggressive third
party – has challenged the market in Florida. Legislation to reform the practice
was passed in April, and we hope will provide more stability in the market and fairer
outcomes for customers.

In May, we launched a new CyberClear product for the London Market with a first-
of-its-kind experiential event on the underwriting floor at Lloyd’s. ‘The Cube’ 
aimed to test the market’s cyber knowledge, and attracted more than 150 brokers 
and underwriters.

In terrorism, our new malicious attack product has been well received by the market.
It provides cover for property damage, business interruption, loss of attraction
and crisis management assistance in an event involving a vehicle, explosive device
or hand-held weapon.

Our adoption of Placing Platform Ltd (PPL), part of the Lloyd’s Target Operating
Model work to move to digital trading, remains on track and we are currently placing
over half of all syndicate risks in this way. We continue to work closely with our
broker partners to meet the ambitious targets for the remainder of this year.

**Hiscox Re & ILS**

The Hiscox Re & ILS segment comprises the Group’s reinsurance businesses in London
and Bermuda and insurance-linked security (ILS) activity written through Hiscox 
ILS.

| Gross premiums written | $698.3 million (2018: $655.6 million) | 
| Profit before taxCombined ratio  | $14.0 million (2018: $57.8 million)111.3% (2018: 71.5%)  |

Gross premiums written grew by 6.5% to $698.3 million (2018: $655.6 million), or
7.6% in constant currency.

While we are seeing some positive rate momentum, particularly in those lines hardest
hit by two consecutive years of losses, this is dampened by the continued abundance
of reinsurance capacity available from traditional and alternative sources. We have
responded rationally, growing in wildfire liability where we have seen rate increases
of up to 200%, and managing wildfire-exposed property business where rates in some
cases have not responded in line with our view of the risk.

In the risk excess book, we are reducing our exposure on the bottom end of programmes
and pushing for more risk-reflective pricing, particularly in risk aggregate where
we have seen heavy losses and some underperformance in recent years.

Like others in the market, we have seen some deterioration in claims resulting from
Typhoon Jebi, the most powerful typhoon to hit Japan, as severe winds impacted an
area of high-value construction ahead of the upcoming Olympic Games and Rugby World
Cup. This has caused an unusually large number of claims and increased repair costs
due to demand surge.

In Hiscox ILS, our funds have performed in line with expectations. In January, we
started writing business to our new fund, the Kiskadee Latitude Fund, which gives
investors access to a more diverse portfolio of insurance and reinsurance risks 
with less focus on pure property catastrophe risk. Assets under management are currently
at $1.6 billion.

**Investments**

The investment return for the first six months of 2019 is $147.5 million (2018: 
$19.8 million), 4.8% (2018: 0.7%) on an annualised basis before derivatives and 
fees. Assets under management at 30 June 2019 were $6,367 million (2018: $6,460 
million).

After the sharp reversal in conditions towards the end of 2018, markets have been
bullish so far in 2019. Global equity markets are up around 16%, where developed
markets have outperformed their emerging counterparts year-to-date. Short-dated 
corporate bonds spreads have fallen by around one-third from recent highs, meaning
returns from credit have also been strong. Market behaviour seems at odds with a
background of slowing growth and geopolitical tensions such as the US-China trade
stand-off, but statements by policymakers seem to explain the apparent dichotomy.

US government bond yields have fallen year-to-date, adding to fixed income returns.
This has been driven by a significant shift in policymaker behaviour. Where 2018
was mainly a story of central banks tightening and removing stimulus, 2019 has been
the opposite. A year ago, the US Federal Reserve was expected to raise interest 
rates two or three times in 2019, however they now appear unlikely to raise rates
for the remainder of 2019 and the markets are pricing in several cuts. Likewise,
the European Central Bank was preparing to unwind its quantitative easing programme,
but has now stated its intention to restart stimulus. The targeted long-term refinancing
operations, to provide liquidity to banks and support the European economy, are 
due to be restarted, and further cuts to interest rates and more quantitative easing
have not been ruled out.

The risk-on/risk-off environment, where asset returns tend to move together, appears
to remain in place. Such volatile environments can be difficult to navigate as they
have a tendency to change rapidly and diversifying assets are hard to identify. 
We remain cautious on our expectations for investment return, keeping risk assets
at modest levels (7.5%) and a relatively high allocation to cash at 17.4%, with 
scope to re-invest as circumstances allow.

**Marketing**

We now have more than one million retail customers, and our investment in marketing
has been a key driver of this growth, by building brand awareness and differentiating
us in our key markets. This year we will invest up to $90 million in marketing and
brand-building (2018: $69.7 million), mainly in the UK and USA, where we still see
significant growth opportunities.

During the first half of the year, we launched our biggest ever integrated campaign
in the USA, featuring our first ever US TV advertisements. The ‘Barcode’ campaign
is the latest in our ‘Encourage Courage’ brand series aimed at small businesses,
and is supported by a $12 million brand-building investment. We are using highly
targeted TV, radio, digital and press for the campaign, including well-known media
outlets such as The Wall Street Journal, in addition to sponsorship of Major League
Baseball and tailored adverts to mark Small Business Week and International Women’s
Day.

In the UK, we have focused our activities on cyber to help drive brand awareness
and affinity. We partnered with Brompton Bikes to produce ‘The Hack’ video campaign,
which brought to life what a cyber attack could look like in the real world, and
has achieved more than 25 million views to date.

In both Thailand and Singapore, new marketing campaigns and partnerships helped 
us to achieve several record-breaking months for car and motorbike policy sales 
in the first half.

**Richard Watson**

As previously announced, Richard Watson, our Group Chief Underwriting Officer and
Hiscox Ltd Board member, will retire at the end of the year after 33 years at Hiscox.
He will be sorely missed in these roles but I am pleased we will continue to benefit
from his expertise as a Non Executive Director of Hiscox Syndicates Ltd and as Chairman
of Hiscox Re & ILS.

When Richard joined Hiscox in 1986, we were fewer than 30 people underwriting around
£80 million of business. He has been central to many of Hiscox’s successes over 
the years; first as named Underwriter of Syndicate 33, then as CEO of Hiscox Global
Markets (as we called our entire Lloyd’s-based business at the time), CEO of Hiscox
USA, and finally as Group Chief Underwriting Officer and a Director of Hiscox Ltd.
He has had a remarkable career in insurance, starting off as a broker at Sedgwick’s,
before joining us as a political risks underwriter. He mastered many lines of business
at Hiscox and has always been a guardian of the Hiscox culture. Most recently, he
has championed our diversity and inclusion efforts and seen us make good progress
in this area.

I have enjoyed working with Richard immensely and profited from his sound judgement
and forthright opinions. I would like to thank him for his outstanding contribution
to Hiscox and look forward to working with him in his new roles.

Leadership changes can be disruptive, which is why we spend a great deal of time
planning for succession throughout the business. A new Chief Underwriting Officer
for the Group will be announced in due course.

**Outlook**

At the full year, I talked about the volume of change impacting the business and
our expectation that would continue in 2019.

In Retail, embedding our new IT systems and ways of working has taken more time 
than we had hoped but the alternative would have been to be strangled by legacy 
systems as so many of the banks have been. As the year progresses, the UK is resolving
its issues and the USA is benefiting from the UK’s experience. Such infrastructure
is essential for an efficient multi-channel approach, where our products are available
for customers to purchase however they choose – whether that is through a broker,
online, over the telephone or via an intermediary. We will continue to invest in
marketing to build our retail businesses.

In big-ticket lines, we are very supportive of Lloyd’s and their drive for positive
change. The market must become a more efficient and modern place to operate or it
will slowly wither on the vine. Such choices are made easier when there is no choice.
I am pleased that our senior leaders are taking an active role in initiatives such
as PPL which will define the market’s future. The positive momentum for rates in
big-ticket lines is good news, and although the benefits will be gradual we are 
ready to make the most of the opportunities as they arise.

I would like to take this opportunity to thank our employees, shareholders and business
partners for their support, and look forward to a productive second half.

Robert Childs

Chairman

29 July 2019

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