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
