BULL POINTS:
■ Performance of investment book
■ Rate rises on UK household book
BEAR POINTS:
■ Weakening insurance conditions
■ Less profitable than some rivals
■ Dividend yield nothing special
■ Shares expensively rated for the sector
It has been a difficult time for the Lloyd's insurers. Early this year they were hit hard by big and expensive catastrophes such as the Chilean earthquake, European windstorm Xynthia and the Deepwater Horizon rig disaster. Hiscox alone suffered a total net loss of £110m from those events – that's large by the standards of a Lloyd's insurer. But those events were not quite large enough to generate losses on a scale that would have forced premium rates upwards. And with this year's hurricane season having turned out to be fairly benign, premium rates - across almost all business classes - are under pressure.
IC TIP RATING | |
---|---|
Risk rating | Medium |
Timescale | Long-term |
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That leaves Hiscox's prospects looking dull. In a trading update last month - and in relation to Hiscox's reinsurance book - management remarked that "the absence of significant industry losses during the hurricane season will lead to increased pressure on prices at the January renewal period". Hiscox also reported nothing better than stable rates in the group's specialty lines, although the UK household book did push through a 4 per cent premium rate rise.
In fact, and helped by first quarter losses, Hiscox's combined ratio (of claims to premiums) deteriorated by nearly six percentage points to 94 per cent in the 12 months to end-June. That still means modest underwriting profits, but it's nothing more than in line with the scale of underwriting profits being generated by most Lloyd's insurers. Although a small handful of them are notably more profitable - broker Numis Securities expects Lancashire, for example, to report a combined ratio of 64 per cent for 2010. What's more, Hiscox owns just 73 per cent of its managed capacity, meaning that it has to share some of its profits with Lloyd's Names. In contrast, most quoted Lloyd's underwriters own all of their capacity, so all of their profits benefits shareholders.
ORD PRICE: | 358p | MARKET VALUE: | £1.36bn | |
TOUCH: | 358-359p | 12-MONTH HIGH/LOW: | 371p | 300p |
DIVIDEND YIELD: | 4.6% | PE RATIO: | 10 | |
NET ASSET VALUE: | 297p | COMBINED RATIO: | 94% |
Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2006 | 1.13 | 201 | 41.7 | 10.0 |
2007 | 1.20 | 237 | 48.4 | 12.0 |
2008 | 1.15 | 105 | 18.8 | 12.8 |
2009 | 1.44 | 321 | 75.2 | 15.0 |
2010* | 1.51 | 182 | 37.4 | 16.5 |
% change | +5 | -43 | - | +10 |
*Numis Securities estimates (EPS not comparable with historic figures) Normal market size: 10,000 Matched bargain trading Beta: 0.5 |
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Still, the group boasts a decently-performing investment book - in the nine months to end September it generated a 3.2 per cent return. That compares with much thinner returns elsewhere in the sector. Take Hardy Underwriting, for instance, it expects a return of just 1.4 per cent for 2010; while Beazley reported an annualised investment return of a mere 0.8 per cent last month. True, that reflects the fact that Hiscox is prepared to take on a shade more risk than many other Lloyd's insurers and, at the half-year stage, it had invested just over 5 per cent of its portfolio in equities. In contrast, many Lloyd's players are entirely focused on cash and high-quality bonds - safe, but hardly an ideal strategy for generating returns in today's world of ultra-low interest rates.
In addition, the dividend yield on Hiscox's shares isn't that attractive. Based on Numis Securities' full-year estimated dividend payment, the shares yield less than 5 per cent, which is nothing special by sector standards. Based on Numis Securities' full-year estimates, shares in Catlin, for instance, serve up a 7.6 per cent prospective yield, while Chaucer's prospective yield is better still, at 8.2 per cent.