Hamilton, Bermuda, August 23, 2010 – Hiscox Ltd (LSE: HSX), the international specialist insurer, today announces its interim results for the half year ended 30 June 2010.
|
H1 2010
|
H1 2009
|
|
|
Gross premiums written
|
£904.3m
|
£906.0m
|
|
Net premiums earned
|
£592.7m
|
£545.4m
|
|
Profit before tax
|
£97.2m
|
£141.4m
|
|
Earnings per share
|
20.9p
|
33.2p
|
|
Interim dividend per share
|
5.0p
|
4.5p
|
|
Net asset value per share
|
318.9p
|
259.3p
|
|
Group combined ratio
|
93.6%
|
87.8%
|
|
Group combined ratio before monetary FX
|
94.8%
|
78.6%
|
|
Return on equity (annualised)
|
14.8%
|
27.5%
|
Financial highlights
· Interim pre-tax profit £97.2m (2009: £141.4m), despite catastrophe related claims from the UK winter freeze, Chile, Windstorm Xynthia and Deepwater Horizon, and a lower investment return environment
· Gross written premiums remained constant at £904.3m (2009: £906.0m)
· Earnings per share 20.9p (2009: 33.2p)
· Interim dividend increased by 11% to 5.0p (2009: 4.5p)
· Combined ratio before monetary FX of 94.8% (2009: 78.6%)
· Investment return of 1.7% for the half year, 3.5% annualised, (2009: 3.4%, 7.0% annualised)
· Return on equity 14.8% (2009: 27.5%)
Operational highlights:
· Our local specialist businesses continue to grow well, with Hiscox UK up 11.6%, Hiscox Europe up 12.0% and Hiscox USA up 22.5%.
· Our successful brand building in the UK shows that customers are prepared to pay for quality.
· Hiscox London Market showed restraint in a weakening market and reduced income by 15.1%, but opportunities are arising in the energy markets.
· Hiscox Bermuda grew by 21.3% as it took advantage of favorable US catastrophe reinsurance rates in the first half on behalf of itself and third party capital.
· $750 million bank facility gives us the capability to exploit market opportunities as they arise.
· Our estimates for the Chilean earthquake and Windstorm Xynthia remain unchanged at possible net claims of £100 million, based on an insured market loss of US$8 billion for Chile and US$3 billion for Xynthia. Our estimate for claims from the Deepwater Horizon event and the subsequent clean up is also unchanged at less than £10 million.
Robert Hiscox, Chairman, Hiscox Ltd, commented: “The story remains the same and it is a good one. Hiscox is defensively placed for these market conditions with a robust book of reinsurance balanced by growing specialist businesses. When the market turns, which it inevitably will, and interest rates rise, which they must one day, we will have another surge of growth. In the meantime, we will keep our tinder dry with disciplined, selective underwriting and cautious investing.”
Detailed financials available at Hiscox, but first the chairman’s comments:
Chairman’s statement
A pre-tax interim profit of £97.2 million against a backdrop of large natural catastrophes, much tougher investment markets and continued investment in our brand, our US offices and our direct operations is a testament to the strength of our business. Selective underwriting and sensible reinsurance buying reduced the impact of the losses, and shrewd investing helped produce a good return within the constraints of our conservative investment parameters.
The Group’s long-term strategy of building a well-balanced international insurance group continues to develop well. Our regional businesses, which focus on specialist lines that are less prone to the pressures of the cycle, have shown healthy growth. Europe’s underwriting performance has rebounded in the absence of the series of unconnected claims that blighted the first half of 2009. Our London Market business continues to underwrite with discipline, trimming its sails to the prevailing market winds and will take advantage of improving conditions in the offshore energy market. We continue to reserve prudently and have released £93 million from prior years (2009: £73 million).
Results
Pre-tax profits for the half year to 30 June 2010 of £97.2 million (2009: £141.4 million). Gross written premiums remained constant at £904.3 million (2009: £906.0 million). Net premiums earned improved to £592.7 million (2009: £545.4 million). The Group combined ratio rose to 93.6% (2009: 87.8%) as a result of the string of catastrophe losses and before monetary FX to 94.8% (2009: 78.6%). Earnings per share fell to 20.9p (2009: 33.2p) and net assets per share rose to 318.9p (2009: 259.3p).
Dividend, balance sheet and capital management
Continuing our policy of progressive dividend growth, the Board has approved an increase in the interim dividend of 11% to 5p (2009: 4.5p) which will be paid on 28 September to shareholders on the register at the close of business on 3 September.
We are focused on growing the value of the business for our shareholders, so I am pleased to report the total net asset value per share (the bedrock under the share price) rose 59.6 pence over the year and 19.7 pence from the end of 2009.
The $750 million banking facility, completed at a competitive rate, gives us the capability to exploit market opportunities that may arise.
We remain prepared to buy-back shares if their price falls to an irresistible level.
Overall comment
Dirk Stuurop resigned as Non Executive Director of Hiscox Ltd on 19 August 2010 due to personal commitments and the consequent difficulty in attending board meetings. We are deeply grateful for the very wise advice he has given us since he joined the board on 11 October 2006, especially in helping us keep our nerve during the banking crisis.
A year ago I wrote that the insurance cycle was alive and well, albeit split, with reinsurance more disciplined than insurance, and I hoped that CEO’s would crack their whips to stop the decline in rates, especially when there are such slim investment pickings. Well it would appear that the record profits last year have caused a triumph of optimism over discipline. Despite the low investment returns and substantial losses of the first six months of this year, rates in many areas (particularly big ticket risks) have got steadily more competitive. However, motor and household rates have increased, and the reinsurance market has been steadier.
We are defensively placed as 30% of our income comes from reinsurance and our specialist businesses are in control of their own pricing. We are reaping the reward of our heavy investment in the brand (both financial and in living up to the promises) and clients are prepared to pay a little extra for quality. The message is getting through that insurance is not a commodity and not all insurers behave the same.
Hiscox London Market
This division uses the global licences, distribution network and credit rating available through Lloyd’s to serve clients throughout the world.
|
Profit before tax
|
£69.8 million (2009: £77.4 million)
|
|
Gross written premiums
|
£383.1 million (2009: £451.4 million)
|
|
Combined ratio
|
82.2% (2009: 86.6%)
|
|
Combined ratio before monetary FX
|
90.7% (2009: 66.4%)
|
Gross written premium income in our London Market unit reduced by 15% due to deliberate shrinking of lines where rates are under the greatest pressure, particularly large US property and catastrophe exposed small property.
The combined ratio improved despite the impact of claims from the Chilean earthquake, Windstorm Xynthia and the Deepwater Horizon energy loss, but helped by foreign exchange gains of £20.9 million.
As ever I am writing this in the midst of the hurricane season. After a benign year in 2009, Mother Nature has shown how capricious she can be. We wait to see if her temper improves.
We are ready to take advantage of improving market conditions in the offshore energy area where we have seen rates rises in excess of 20%. We expect a further tightening of capacity as competition retreats from the recent series of market losses.
As previously announced, aviation is another sector in which we see potential, and we have recruited a small but experienced team, led by David Slevin, to underwrite an aviation book, subject to the approval of Lloyd’s.
If competitive market conditions remain in the big-ticket risk arena, we currently plan to reduce Syndicate 33′s capacity to £900 million in 2011 (2010: £1 billion). However, we have doubled Syndicate 3624′s capacity next year to £300 million (2010: £150 million) to cater for aviation, the US and a new agreement to provide capacity to Dual International, a professional liabilities underwriter in Europe and Australia. Capacity for Syndicate 6104, which is funded entirely by external capital providers, remains static at £45 million.
Hiscox UK and Hiscox Europe
This unit comprises our specialist retail businesses in the UK and mainland Europe.
|
Profit before tax
|
£19.6 million (2009: £3.6 million)
|
|
Gross written premiums
|
£248.2 million (2009: £222.1 million)
|
|
Combined ratio
|
93.1% (2009: 106.3%)
|
|
Combined ratio before monetary FX
|
90.9% (2009: 103.0%)
|
UK
The UK’s gross written premiums rose by 11.6% year on year, mainly as a result of growth in our direct and specialty commercial businesses. We have recently been recognised by the Reputation Institute as having the best reputation among UK insurers in a consumer study of top companies, proof that our investment in marketing is helping to build a brand you can trust. More tangible evidence is the overall 4% rate increase we have achieved across our household book whilst maintaining premium income. In a market known for its cut-throat (and often irrational) competition, clients are willing to pay for a better product with better service from a name they can depend on.
The UK maintained a good loss ratio despite a high volume of claims from the winter freeze, the disruption or cancellation of events due to the volcanic ash cloud and claims activity in the solicitors account. We have decided to withdraw from the solicitors’ PI market, where we believe it is impossible to make a satisfactory return from the standard policy terms insurers are currently obliged to sell.
The combined ratio also improved as Hiscox UK continues to find efficiencies and to reduce its cost base.
Europe
Europe has rebounded from the string of unrelated losses last year. Good underwriting led by strong management has improved the loss ratio significantly in spite of the impact of Windstorm Xynthia.
Gross written premiums rose by 12%, boosted by favourable retention rates at the start of the year and growth in the Professional Specialty Commercial and Technology, Media and Telecoms (TMT) businesses.
Hiscox International
This division comprises our Bermuda, USA and Guernsey units.
|
Profit before tax
|
£-6.4 million (2009: £72.3 million)
|
|
Gross written premium
|
£273.1 million (2009: £232.5 million)
|
|
Combined ratio
|
114.0% (2009: 66.9%)
|
|
Combined ratio before monetary FX
|
106.8% (2009: 75.5%)
|
Bermuda
Gross written premiums grew by 21.3% as Hiscox Bermuda continued to find new opportunities, including the use of additional quota share capacity provided by third parties to take on more attractively priced business in the January renewal season. Bermuda achieved a small profit despite the reserves we have made for the Chilean earthquake and Windstorm Xynthia.
Guernsey
Hiscox Guernsey remained profitable and stable. Competition has increased for piracy risks, with new entrants quoting prices which seemingly ignore the amount of recent losses and the fact that the pirates have substantially increased their demands. Although our underwriters have been raising prices for this niche dramatically, our leadership and expertise in this area has kept orders coming in as, again, buyers want quality and longevity in their insurer.
USA
Hiscox USA delivered solid growth up 22.5%, driven partly by a gradual expansion into admitted lines. The good news is that the core Miscellaneous Errors and Omissions business we started in 2006 is doing well. The bigger ticket business we expanded into in expectation of a hard market following the problems of AIG has found growth difficult due to the government supported AIG becoming even more competitive, but the underwriters are maintaining discipline, competing with intelligent underwriting and service, not just on price. Their time will come. The difficult area has been our longstanding Global Technology account (previously written in London) which has had a number of claims from the larger insured companies. The competition has been more optimistic than us and continued to quote premiums we consider inadequate, so we have retreated from the larger risks, ready to return if rates improve. We will continue to expand the specialist lines and be extremely selective in the larger business until conditions improve.
Investments
Assets under management at 30 June 2010 totalled £2,705 million (2009: £2,379 million) and the annualised yield was 3.5% (2009: 7.0%), leading to an investment return on financial assets of £46.6 million (2009: £85.4 million). Given the low yields on offer from cash and short dated government bonds, a repeat of 2009 was never on the cards. In the context of what was available therefore, the portfolio delivered a creditable result.
The main contribution has come from our allocation to bonds and especially from the corporate exposure contained within the portfolios. We have benefited from the better returns available in the corporate sector where balance sheets and liquidity are improving compared to many sovereign borrowers where the reverse is true. The Group continues to hold no sovereign debt of Greece, Italy, Ireland, Portugal or Spain. The Government bond exposure is high in quality and short in duration. As the second quarter demonstrated, volatility is likely to rear its head from time to time causing short term price fluctuations but we are willing to hold our bonds to maturity if necessary. Cash remains an unexciting asset class from an investment standpoint and we maintained a low but prudent level during the period.
Our portfolio of equities and hedge funds proved particularly resilient during the second quarter’s turbulence and comfortably outperformed the broader indices. Exposure was held at approximately 5% of assets with some modest additions made at moments of market weakness in the second quarter.
Recent events and economic evidence point to the likelihood of interest rates staying lower for longer. The higher yields on offer in certain areas of the non-government bond market are therefore likely to persist and we would expect to maintain our allocation, providing interest rate rises continue to be deferred and valuations do not become extreme. The outlook remains very uncertain and parts of the market are still being artificially supported. Our focus remains on caution and conservatism.
Outlook
Capacity in the world insurance market remains plentiful despite insured disaster losses of $22 billion in the first six months of this year, and is likely to continue to remain so in the absence of any market-turning hurricanes over the coming months. But competition is the norm rather than the exception in our markets.
The Hiscox story remains the same and it is a good one. Hiscox is defensively placed for these market conditions with a robust book of reinsurance balanced by growing specialist businesses. When the market turns, which it inevitably will, and interest rates rise, which they must one day, we will make another surge of growth. In the meantime, we will keep our tinder dry with disciplined, selective underwriting and cautious investing.
Robert Hiscox
Chairman
23 August 2010
Recent Comments