Profits at Hiscox swing back to black

Hiscox (HSX) shareholders have reasons for optimism after a rough couple of years, despite a very uncertain geopolitical environment. The Bermuda-based insurer swung back to profitability in 2021, reporting profit before tax of $191mn (£140mn) – 37 per cent ahead of consensus analyst expectations. 

The company has made good progress settling business interruption claims triggered by the pandemic, following a Supreme Court ruling which forced Hiscox to pay out. Last August management said it had put aside $492mn to cover the claims, and by the end of January 2022 chief executive Aki Hussain said 84 per cent of the claims “had received an outcome” and that the firm holds “conservative margin” above the actuarial best estimate of the claims value. 

The company’s retail division has recovered from the impact of the claims, achieving net profits before tax of $55mn despite elevated catastrophe losses, compared with re-presented losses of almost $300mn in 2020. Hussain says the company is on track to meet its 2023 combined ratio target of 90 to 95 per cent, while it currently stands at 97.3 per cent.  

Rate momentum was favourable across the business in 2021, with Hiscox London Market enjoying 13 per cent average rate improvement and its retail division (which tends to be less cyclical) achieving an average rate improvement of 5 per cent. However, the speed of rate growth is slowing in all lines except cyber.   

Investment returns, meanwhile, suffered. The rising rate environment in 2021 led to market losses, with investment returns of 0.7 per cent compared with 2.8 per cent in 2020. Assets under management at 31 December 2021 were $7.3bn, down from $7.6bn the previous year. 

While the tragic crisis in Ukraine raises questions for shareholders of insurance firms, management says the group has “negligible” exposure to investments in Ukrainian and Russian assets and “some limited direct insurance exposure” through certain areas including political violence and aviation, although these business lines are in run off. 

On cybersecurity, management says it's “too early to say” what the risk might be, although they do have some “war exclusion” in policies. 

Despite suffering a significant share price fall from its pre pandemic peak, with the shares down over 25 per cent over the past two years, Hiscox remains on a significant valuation premium to its peers. Analysts at Berenburg believe that much of the improved outlook is already baked into the price. 

Analysts at Peel Hunt say Hiscox is starting to deliver “a material improvement in underwriting quality following the restructuring of its wholesale business” and have the shares on a target price of 1,060p, comfortably above the current price. We take a more cautious stance while the implications of the Ukraine crisis are yet to play out. Hold. 

Last IC view: Hold, 924p, 3 Aug 2021