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May 05, 2020

Hiscox Q1 2020 Trading Statement including COVID update and a new equity raising

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In two separate announcements on Tuesday afternoon, Hiscox firstly updated the LSE with a Trading Statement for the first quarter of 2020 and secondly announced the raising of extra capital in order to respond to growth opportunities and rate improvements in the US wholesale and reinsurance markets. This morning Hiscox confirmed that it has successfully raised £375m gross proceeds through a new share placing.

We have extracted the most interesting points to Hampden Members from yesterday's Trading Statement below (click here for full announcement) as follows:

Rates

In Hiscox's London Market division, Hiscox comments: "Rates are up in 15 of 16 lines, including US public company directors and officers' (D&O) which is up 85%, US general liability up 26%, cargo up 23%, major property up 16% and household and commercial property up 11%. The market is expected to continue to harden, driven by further capital contraction due to the uncertainty from COVID-19."

"Pricing in reinsurance so far is below our expectations, despite an unprecedented succession of natural catastrophes, however we are now beginning to see rate improvement accelerate. Rates are up 8% year to date, including the impact of the Japanese renewals in April, with retrocession up 15%, international catastrophe up 12% and North American catastrophe up 7%."

Discussing the property catastrophe book, Hiscox says "In US property catastrophe and excess of loss business, our teams in London and Bermuda remained disciplined and reduced exposure materially, reflecting a disappointing pricing environment.

"At the April renewals in Japan, the team secured strong rate increases of 38% for windstorm and 20% on a combined perils basis, in line with our new view of typhoon risk after two active years for Japanese windstorm losses.

"Looking ahead, our expectation is for further capital contraction in the market to push up rates and drive improved terms and conditions at the June and July renewals, and we remain committed to writing business only at the right price.

COVID-19 exposure -- extracts

"Acknowledging there remains material uncertainty, including plans for the lifting of restrictions in many countries which are as yet unclear, we provide further detail around our COVID-19 exposures. Our estimates are based on broad assumptions about coverage, liability and reinsurance, which ultimately may be subjected to legal challenge or legislative action.

"As described in our announcement on 15 April, we are actively settling claims for event cancellation and abandonment, media and entertainment and other segments including travel. On the basis that disruption caused by restrictions on travel and mass gatherings continues for a six-month period from March 2020, we expect to pay net claims totalling up to $150 million. If restrictions on travel and mass gatherings are extended beyond six months, these claims could increase by an additional $25 million.

"We believe our US retail business has negligible exposure to business interruption. Hiscox USA provides business interruption cover for 25,000 small businesses as part of the Business Owner's Package product sold through its direct and partnerships division. Coverage requires physical damage to trigger, and all of these policies use a standard ISO form with an explicit virus exclusion. We believe we have limited business interruption exposure in Europe.

"Exposure to losses in our London Market and reinsurance divisions is uncertain at this stage. Hiscox London Market has a small market share in major property...". "We have no material exposure to lines such as trade credit insurance which are heavily impacted by COVID-19.

"It is too early to estimate the quantum of claims from within our third-party liability book and claims resulting from recessionary impacts, as these will emerge over the next few years. We are taking proactive underwriting action to mitigate these impacts.

UK business interruption risk scenario


Hiscox's announcement says that they "welcome the FCA's recent initiative to accelerate resolution of disputes in the industry over the application of property policies relating to business interruption." Click here for our article on this development.

"Notwithstanding this is not a covered loss, we have provided a risk scenario which models the impact of a 12-week lockdown. The scenario takes into account our view of the number of customers either ordered to close or with premises materially impacted, savings likely to be made by customers on their normal business expenses and various forms of government relief available to businesses, adjusting for wider business trends resulting from reduced economic activity. Based on this scenario, our analysis suggests a range of modelled outcomes between £10 million and £250 million net of reinsurance.

These numbers are "based upon their current view of the likely risk scenarios ....and on the basis of broad assumptions about coverage, liability and reinsurance, which ultimately may be subjected to legal challenge or legislative action. Other estimates, based on alternative risk scenarios and/or assumptions, could give rise to different potential outcomes."

"In view of the uncertain impact of COVID-19 on the global economy, we are unable to accurately forecast the outlook for 2020. As such, we have withdrawn all financial guidance for 2020 until there is more clarity. We remain confident in our ability to return to our normal 90-95% combined ratio target range for the Retail business in 2022."

Investments

"The investment return for the first three months of 2020 was a loss of $79 million (2019: $84.2 million), or -1.2% (2019: 1.3%) resulting from the impact of mark to market losses on bonds and a reduction in equities. Assets under management at 31 March 2020 were $6.8 billion (2019: $6.3 billion)."

"While the investment performance has improved substantially since the quarter-end, and most of the first quarter losses have since been recovered, our expectations for the full year investment return are materially lower than the original budget. At the end of April, the investment return stood at -$7 million."

Capital raising

We have extracted various points from Hiscox's separate "Proposed capital raise of ordinary shares" announcement of yesterday (click here for full announcement) below. This morning, (Wednesday) Hiscox informed the LSE that it has raised £375m gross proceeds through the issue of extra shares at 650 pence each - a discount of 6.1%.

Background to and Reasons for the Placing

"Hiscox expects opportunities for profitable growth in wholesale and reinsurance markets as a result of capital contraction and rate improvement across the market following the uncertainty caused by the COVID-19 pandemic."

"The net proceeds raised from the Capital Raise will enable Hiscox to respond to future growth opportunities and rate improvement in the US wholesale and reinsurance markets, as well as prudently position the Group to withstand a range of downside scenarios."

Interestingly, Hiscox reveals in the statement that they have:

  • put a freeze on recruitment, travel and entertainment expenditure which together with other operational efficiencies will deliver $60m - $90m savings;
  • are adjusting the business mix and exposure including its total catastrophe exposures, to create "additional capital relief";
  • purchasing $100m of additional reinsurance "to protect the natural catastrophe book ahead of the US wind season";
  • no final dividend or share buybacks.

"A combination of these actions and the net proceeds from the Capital Raise would, even after absorbing an assumed pandemic loss of $175 million, result in Hiscox's Bermuda Solvency Capital Requirement (BSCR) ratio increasing from a pro forma estimated level of 195% as at 31 March 2020 to 250% pro forma.

"This would give Hiscox significant capital headroom to withstand a range of modelled downside scenarios as well as provide it with the flexibility to deploy capital for future growth. In addition, Hiscox has robust reserves of approximately $300 million above actuarial estimates, and on 28 April S&P affirmed Hiscox's A rating for financial strength and maintained the stable outlook for the Group."

Please read the full announcements for the complete detail and we have downloaded today's Investor Presentation slides from the Hiscox website available by clicking here. These contain much of the information above in visual form.

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An encouraging overview of current and expected trading conditions. QBE and R&Q have already announced capital raisings.