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Mar 03, 2021

Hiscox Ltd 2020 year results

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Hiscox's results announcement received today contained the following highlights:

• Gross Written Premium US$4.033bn

• Loss before tax US$268.5m

• Group combined ratio 114.5%

• Excluding Covid-19 the combined ratio decreased to 97.0%

• Prior years' release US$32m

We have extracted the following comments:

Chairman's statement (Robert Childs):

"The challenges of a global pandemic have not withered the green shoots of a hardening market.

"Rates are rising across all three of our business areas, and the market is turning.

Chief Executive’s statement (Bronek Masojada):

Global pandemic

"We have reserved $475 million for Covid-19 claims across all lines

"The Group's largest share of Covid-19 losses is for event cancellation and abandonment, where Hiscox proactively sold communicable disease cover, and many of these claims have already been paid.

"The Group's second largest share of Covid-19 claims is from UK business interruption cover in commercial property policies.

"In January 2021, the Supreme Court Judgment largely confirmed the outcome of the High Court's ruling in respect of Hiscox that, except in rare circumstances, cover is restricted to Hiscox policyholders who were mandatorily closed. Approximately one third of Hiscox's 34,000 UK business interruption policies may respond as a result. The Supreme Court Judgment represents the final outcome of the industry test case, and there can be no further appeals. A process that would normally take a number of years was completed within nine months; almost lightning speed for any legal process of this complexity. We have begun paying claims in line with the Supreme Court Judgment.

"Hiscox's exposure to potential business interruption claims arising from further UK government restrictions to contain the spread of Covid-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be largely run off by the end of June 2021. Following the Supreme Court Judgment, the Group estimates exposure to restrictions already announced in 2021 to be less than $40 million if restrictions extend to the end of June.

"Hiscox has undoubtedly suffered some brand damage this year. While I was reassured that net customer numbers in the UK remained stable in 2020, the route to restoring our brand is the same one which created it; providing flexible insurance cover to meet each customer's needs, paying each claim fairly and quickly, and doing this all with good customer service. Our reputation was built one risk, one claim, and one customer at a time, and with that same focus, in time, the brand will strengthen.

Hiscox London Market (uses the global licences, distribution network and credit rating of Lloyd's to insure clients throughout the world)

"Our London Market business is the star performer of 2020. It continues to use the global licences, distribution network and credit rating of Lloyd's to insure clients throughout the world. The team's focus over the past several years has been on improving portfolio quality in a rising market so growth is modest at 5.7%, taking gross written premiums to $1,023.4 million (2019: $967.9 million).

"A focus on quality has been rewarded with profits of $97.2 million (2019: $23.3 million) and a net combined ratio of 93.7%, a 11.9% improvement on 2019. More importantly, we have delivered an underwriting profit of $40.7 million (2019: loss of $26.3 million), even after including $13 million of Covid-19-related losses.

"In our property lines we saw rate growth of 20% in major property where we grew our average line size over the year. We have reduced exposure in household and commercial binders through non-renewal of contracts, increased rates and by restricting aggregate in certain counties.

"The most significant rate improvement continues to be seen in casualty lines such as US public company D&O and US general liability, alongside terms and conditions improvements, and reduced line sizes.

"In the marine and energy book trends are positive, with rates increasing by 24% in cargo, and 20% in hull.

"In 2021, Hiscox London Market will benefit from the continuing hardening market. Thanks to Syndicate 33's stamp capacity of £1.7 billion we have sufficient headroom to do this. We will judiciously increase our aggregate exposures, with most growth coming from rates. As a result, we expect London Market growth in 2021 in mid to high single digits delivered at improving margins.

"The compounding impacts of rate and portfolio improvements in recent years will, we believe, drive attractive multi-year profitability.

Hiscox Re & ILS (Group's reinsurance activities in London/Bermuda and ILS activity through funds in Bermuda)

"After a cautious start at the January renewals, we returned to growth as the market began to harden from April onwards.

"Overall, we have achieved a 12% average rate increase, with positive rate momentum carrying through to January 2021 renewals.

"During the year we have been reshaping the book to focus where we see the most opportunity. In US property catastrophe and excess of loss, we adjusted the portfolio away from the more capital-intensive nationwide covers and Florida programmes. In the international catastrophe book, we secured rate increases of 16% in Japan, in line with an updated view of typhoon risk which reflects two active years for Japanese windstorm losses.

"Net exposure in our retrocession book was up 65% as we sought to take advantage of rate improvements of over 20%.

Hiscox USA (small- to mid-market commercial risks through brokers, other insurers and distribution partners and directly to businesses online and over the telephone)

"Gross written premiums grew by 2.6% to $887.1 million continued strong growth in our direct and partnerships small commercial business.

"This channel grew revenues by 22.7% in the year to $337.7 million and now insures approximately 430,000 customers.

"Hiscox is already one of America's leading digital small business insurers.

Hiscox Europe (high-value household, fine art and classic cars and commercial insurance for small-and medium-sized businesses)

"growing gross premiums by 9.5% to $447.1 million

Hiscox UK (commercial insurance for small-and medium-sized businesses, media, events and entertainment as well as high net worth personal lines, fine art and luxury motor)

"Gross premiums written grew by 1.3% to $756.1 million

"Our high net worth personal lines and fine art business has proven resilient.

"Revenues have been challenged as the team showed discipline on broker commissions.

"We also faced losses from Storms Dennis and Ciara in February as well as a large individual fine art loss.

Hiscox Retail (retail businesses around the world)

"Hiscox Retail wrote $2.3 billion of premiums globally in 2020, representing more than half of our Group's gross premiums and almost three-quarters net of reinsurance.

"Hiscox Retail's 2020 result is a loss of $237.6 million (2019: profit of $169.2 million) and a combined ratio of 120.0% . This result has been materially impacted by Covid-19.

"we have taken a decision to reshape our broker channel book, by exiting liability business for customers with revenues over $100 million as well as all broker channel stand-alone general liability business. We will also reshape our cyber book to respond to adverse ransomware trends. These actions will result in a reduction of up to $100 million in the USA broker channel which will be partially offset by continued strong growth in digital direct and partnerships business.

"The combined effect of these changes will result in a one-time circa $200 million reduction in Retail premiums

"We anticipate that 2021 Retail gross premiums will grow at the low end of our medium-term target range of 5%-15% on a like-for-like basis after allowing for $200 million reduction in premiums.

Hiscox's shares have trended down this morning (at the time of writing) as a result of this announcement.

The analysts' presentation is available is now available from the Hiscox website here.