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Aug 03, 2020

Hiscox interim results and revised forecasts for syndicates 33 and 6104

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Hiscox has today released to the market its half year interim results and revised forecasts for managed syndicates 33 and 6104 for the 2018 and 2019 accounts, as follows:

Syndicate 33


Current Estimate

as at 30 June 2020

Previous Estimate

as at 31 March 2020*

2018 account

(9.5%) to 0.5%

(10%) to 0%

2019 account

(13.5%) to (3.5)%

(7.5%) to 2.5%

Syndicate 6104


Current Estimate

as at 30 June 2020

Previous Estimate

as at 31 March 2020

2018 account

(55)% to (45)%

(65)% to (55)%

2019 account

(40.5%) to (30.5%)

(75%) to (65%)

*amended per HSX news release 7/8/20


Extracts from the Interim Results report from the Chairman Robert Childs, as follows:


Financial highlights

Gross premiums written: $2,235.5m (HY 2019: $2,337.5m)

(Loss)/profit before tax: $(138.9)m (HY 2019: $168.0m)

Group combined ratio: 114.6% (HY 2019: 98.8%*)

Reserve releases: $63.0m (HY 2019: $26.0m)

Covid-19 comments

We have reserved $232 million net for claims from COVID-19, including $150 million for claims from event cancellation and abandonment, media and entertainment and other segments including travel as disclosed in our first quarter trading statement.

The additional $82 million includes amounts set aside for: Hiscox London Market, Hiscox UK and Hiscox Europe property business; UK and Europe travel bonds; and third-party claims in US allied health. It is too early to fully estimate any impact for Hiscox Re, although we are materially underweight in European exposure.

UK business interruption insurance and the FCA test case

Hiscox, like other insurers, has been clear that our standard UK property policies do not provide cover for business interruption as a result of the general measures taken by the UK Government in response to a pandemic. This position has been disputed by some policyholders and business interruption has become a defining issue for the industry during the COVID-19 pandemic.

The Financial Conduct Authority (FCA), the UK's conduct regulator for financial services firms, has brought an expedited test case before the UK courts on behalf of policyholders to seek clarity on the application of cover for business interruption under a wide range of wordings from a number of insurance providers.

Resolving contract disputes through the legal system is a tried and tested route which is why Hiscox, alongside seven other insurers, agreed to participate in the FCA test case in order to provide certainty for customers and brokers as quickly as possible. The test case will address what triggers cover under the policies and, if there is any cover, its scope; however it won't address issues of quantum and the adjustment of individual claims. We await the Judgment from the test case, which is expected in mid-September, and when the process is complete, including any appeals, we will of course abide by the final outcome.

Notwithstanding that we do not consider this to be a covered loss, and significant uncertainties around the final Judgment exist, we provided a risk scenario in our first quarter trading statement on 5 May. 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. Since publishing this risk scenario, we have undertaken further analysis which confirmed our confidence in this range of modelled outcomes, after taking into account the three points noted above and also the impact of different closure periods for affected businesses.

The outcome of the FCA test case may also have an impact on our inwards reinsurance portfolio written by Hiscox Re & ILS, as some of its clients are primary insurers operating in the UK market which may be impacted by this Judgment; however, given the uncertainty and the range of interdependent outcomes, we are currently unable to accurately estimate the quantum of any potential liabilities.

Market comments

In the third consecutive year of rate improvement at Lloyd's, momentum in Hiscox London Market has accelerated further, with aggregate rates up 13% year-to-date across the portfolio. Rates are up in nearly every line, including US public company directors and officers' (D&O) which is up 81%, US general liability up 31%, cargo up 23%, major property up 16% and commercial and household property up 11% and 12% respectively. Renewed discipline in the market is combining with a global contraction of risk appetite to drive rates up, and submissions to London are increasing as risks fail to find a home with local carriers.

In reinsurance, where pricing has been underwhelming and we have remained disciplined, the market has begun to harden considerably and rates are up 11% across the portfolio year-to-date. After encouraging signs at the Japanese renewals in April, where we achieved an aggregate 38% increase on wind layers, we saw further evidence of the market's upward trajectory at June's Florida renewal, with the team achieving a blended increase of 29% across the portfolio. This trend continued in July, and with the vast bulk of the book written for the year, we look ahead to January with anticipation.

The magnitude of what many in the industry suggest may be the largest insured loss in history is gradually becoming apparent, and as a result we expect a continued contraction of risk appetites along the entire (re)insurance chain. As we approach the wind season, we are strongly capitalised, diversified and well positioned to capture opportunities in all of our markets.

Capital

In May, the Group successfully raised £375 million through a non-pre-emptive placing of new ordinary shares equivalent to 19.48% of the issued share capital immediately prior to the placing. The proceeds of the placing will be used to respond to growth opportunities in the London Market and in reinsurance, and to further strengthen our capital buffers .

To provide additional capital relief and further reduce volatility, we purchased more than $100 million of additional catastrophe reinsurance in the form of industry loss warranties. We are also accelerating a range of operational initiatives which are on track to deliver over $60 million of expense efficiencies ahead of our business plan in 2020.

Outlook

We may be on the doorstep of the hardest market in many years, and we have the experience, distribution and firepower to grow.

For more information and detail in the Interim Results announcement please click here and the Hiscox website also contains the analysts presentation with more analysis and charts.

Hiscox share price down 5% approximately at time of writing.