As Lloyd's insurers go, Hiscox (HSX) is undoubtedly one the sector's high-quality players. When the insurers reported half-year figures a few months back, Hiscox announced a combined (of claims to premiums) of 74.7 per cent - one of the most profitable results in the sector. But the shares are also among the most expensively rated in the sector and, with premium rates likely to soften during 2014, that premium share rating is unlikely to be maintained.
- High-quality underwriter
- Few recent costly catastrophes
- Premium rates set to slide
- Weak investment performance
- Uninspiring dividend yield
- Shares expensively rated for the sector
Pressure on premium rates is certainly mounting, significantly driven by this year's fairly benign claims environment. Admittedly, the first half did see claims from such events as the Oklahoma tornadoes and floods in Europe and Calgary, but these haven't been especially painful for the Lloyd's players - they cost Hiscox a fairly modest $22m (£13.8m). Moreover, the second half has so far been largely free of costly catastrophes - no hurricanes, for example, and there's a feeling among sector analysts that a really big storm is unlikely before the hurricane season officially ends on 30 November. That said, one can't be ruled out yet, either.
While low levels of claims are good for short-term profits, it's bad news for the longer term. That's because costly claims force insurers to boost premium rates in order to rebuild their reserves. "If there are no storms of significance this year then there will be a boost to 2013 profits but it will add to the downward pressure on catastrophe rates during 2014," says insurance analysts Joanna Parsons of broker Westhouse Securities.
HISCOX (HSX) | ||||
|---|---|---|---|---|
| ORD PRICE: | 677p | MARKET VALUE: | £2.4bn | |
| TOUCH: | 676-677p | 12-MONTH HIGH: | 689p | LOW: 456p |
| FORWARD DIVIDEND YIELD: | 3.3% | FORWARD PE RATIO: | 13 | |
| NET ASSET VALUE: | 393p | COMBINED RATIO: | 74.7% | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Adj. earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.43 | 211 | 51.0 | 16.5 |
| 2011 | 1.45 | 17.3 | 5.96 | 17.0 |
| 2012 | 1.57 | 217 | 57.2 | 18.0† |
| 2013* | 1.68 | 254 | 56.9 | 21.0 |
| 2014* | 1.73 | 221 | 51.0 | 22.5 |
| % change | +3 | -13 | -10 | +7 |
*Numis Securities estimates Normal market size: 3,000 Matched bargain trading Beta: 0.75 †Excludes 38p a share special dividend via a 'B' share scheme **Adjusted for April 2013's 89-for-100 share consolidation | ||||
There has also been a big influx of new capital into the market of late - like insurance-linked securities, new arrivals from such places as China, or the emergence of new vehicles sponsored by the brokers themselves. That's a recipe for competing prices down.
Add all this up and insurance broker Willis has issued some bleak-looking forecasts for pricing in certain key business classes. For example, it reckons that property catastrophe rates could fall by between 5 per cent and 10 per cent in 2014's first quarter, with non-catastrophe property rates falling between 10 per cent and 12.5 per cent. It also expects the marine market to soften - rates could fall up to 10 per cent for cargo business - while energy-related classes are set to struggle, too. Most aviation classes are expected to see rates soften significantly as well. But it's not bad news for all business classes. Willis reckons some casualty lines, for example, could see rates rise by up to 10 per cent.
What's more, insurers can't look to their investment portfolios to shore-up earnings. Over 93 per cent of Hiscox's book is placed in cash or bonds. So with interest rates low, and as bond yields have risen, returns have become wafer thin. In fact, Hiscox's annualised investment return fell to just 1.5 per cent at the half-year stage, from 3.1 per cent a year earlier.
Yet Hiscox's shares, trading on 1.8 times broker Numis Securities' full-year net tangible assets (NTA) estimate of 384.8p, are among the priciest in the sector. In sharp contrast, shares in rival Novae (NVA) trade roughly at forecast full-year NTA, while those of Catlin (CGL) are rated on just 1.1 times. A prospective dividend yield of little more than 3 per cent is unimpressive for the insurance sector, too. Compare that with Catlin and Amlin (AML), for example - shares in both offer prospective yields of over 6 per cent.
