Hiscox Trading Statement as at 30 September - rates significantly improving and Covid estimates held

Hiscox has published a Q3 Trading Statement to the LSE this morning. The following are excerpts from the statement. The full statement is available here.

Highlights:

• Hiscox Retail reported growth in each of its five business units driven by its digital platforms.
• Hiscox London Market continued to benefit from accelerating rate improvement, with rates up 18% across the portfolio.
• Hiscox Re & ILS achieved good growth at the July renewals, with rates up 12% for the year.
• $75 million reserved for catastrophe claims in the third quarter.
• No change to previously-disclosed estimates for claims related to COVID-19.

Rates

Pricing momentum for Hiscox London Market has accelerated further in the third quarter, with aggregate rates up 18% year-to-date. Rates are up in almost every line, most notably in US public company directors and officers' (D&O), US general liability, cargo, hull and major property. The improving rate environment withat Lloyd's continues to be driven by factors impacting both supply and demand, as carriers' discipline increases and clients' appetite for retaining risk shrinks in the face of on-going economic uncertainty.

In reinsurance, where we made the decision to retrench in January in response to underwhelming pricing, the market continues to harden significantly. Hiscox Re & ILS achieved strong rate increases at the year's final major renewal in July, resulting in a total year-to-date portfolio-wide rate increase of 12%, including 20% in retrocession. While still not a universally hard market, rate improvement continues to be driven by capital contraction and discipline encouraged by an ultra-low interest rate environment, which is expected to continue at the January renewals and beyond.

Claims

While the severity of individual catastrophe events has not reached the levels of the preceding three years, the third quarter has seen a high frequency of natural catastrophes, with the most active North American wind season on record and another significant wildfire season in California.

Hiscox has reserved $75 million net for catastrophe claims in the third quarter. This includes claims from Hurricane Laura based on an insured market loss of $8 billion, as well as claims under aggregate reinsurance policies, provisions for wildfire claims and some large individual risk losses.

The overall claims experience for Hiscox London Market has been in line with expectations, despite the active wind season and some large market losses earlier in the year.

Excluding the impact of COVID-19, claims for Hiscox Re & ILS were as expected, with the exception of exited lines, where the Group strengthened reserves for healthcare and casualty.

Claims management action in Hiscox USA continues to deliver the expected benefits and the significant majority of lines are performing well. ... Larger-ticket standalone general liability sold through the broker channel has experienced some adverse claims trends in line with the market, which the business is taking action to address. In cyber, there has been a market-wide uptick in ransomware claims severity and frequency, which is providing further impetus for necessary rate increases and tighter terms and conditions.

COVID-19 claims and potential exposure

There is no change to the Group's previously-disclosed estimates for claims related to COVID-19, which total $387 million net of reinsurance. This includes $232 million reserved in the first half, including $150 million for event cancellation and abandonment, with the balance across a variety of other lines. It also includes $130 million (£100 million) for COVID-19 claims arising from business interruption across all divisions, with the majority coming from Hiscox UK, and $25 million for event cancellation and abandonment, on the basis that current restrictions on travel and mass gatherings continue until the end of the year.

If these restrictions continue into 2021, Hiscox has an additional $30 million to $40 million potential exposure relating to event cancellation. This would be recognised in 2021 if events are unable to proceed.

Hiscox's exposure to potential business interruption claims arising from further local or national restrictions in the UK as a result of government measures to contain the spread of COVID-19 has been running off at approximately 8% per month from June 2020, with residual exposure to be fully run off by the end of June 2021. Any further claims for business interruption resulting from government restrictions imposed in 2020 would continue to benefit from reinsurance cover. Any potential exposure remains subject to the final outcome of the Industry Test Case on business interruption insurance.

Hiscox recognises these are extremely difficult times for businesses and is committed to seeking an expedited resolution to contract disputes relating to business interruption through the Industry Test Case. Following the Order made by the High Court on 2 October giving effect to its Judgment of 15 September, Hiscox is continuing discussions with the Financial Conduct Authority (FCA), action groups and other insurers to resolve any outstanding issues. In parallel with this, the FCA, a customer action group and the six defendant insurers have applied for permission to appeal to the Supreme Court. In line with the Framework Agreement governing the Industry Test Case this 'leapfrog' appeal is the fastest way to get legal clarity for all parties.

Hiscox London Market

Conditions at Lloyd's continue to improve in every line of business Hiscox writes, with double-digit rate improvement reported in nine of 17 lines. The most significant rate improvement continues to be seen in casualty lines such as US public company D&O and US general liability, where markets continue to retreat, creating further opportunities for profitable growth.

At the same time, the underwriting teams are taking action to reduce exposure and remediate underperforming portfolios. The benefit of portfolio action to improve profitability in the property book is beginning to show through, with lower attritional losses in commercial lines now evident.

The business is well capitalised and has sufficient headroom to execute its business plan next year and grow in lines where margins are attractive.

Investments

The investment return for the first nine months of 2020 was $130 million (2019: $186 million), or 2.5% on an annualised basis (2019: 4.0%). Assets under management at 30 September 2020 were $7,641 million (2019: $6,444 million).

Comment

Pleasing to see that the Covid estimate is unchanged and that Hiscox is benefiting from the hardening market with both premium and rates up strongly. The rates are expected to continue increasing at the January renewals.