By heading for the hills, Hiscox avoids heavy flood damage
RICH people live on hills, says Robert Hiscox, chairman of the insurance company that carries his name. This, he jokes, saved the rather exclusive Lloyd’s underwriter, which deals in everything from fine-art to kidnap insurance, from suffering a worse hit during the recent floods.
In its first-half results announced this week, Hiscox booked only£5m of losses from its UKhousehold account, which serves the aforementioned rich people. Reinsurance accounts bumped that up to a more substantial forecast loss of £30m plus another£25m from the Kyrill storm in January.
While Hiscox has booked these as a loss, they are only estimates as many of the claims for the floods have yet to come in. And they are very cautious estimates at that. Hiscox is assuming a total industry loss of £5.5bn, but other estimates have gone as low as £3bn-£3.5bn.
Often claims do not reach initial estimates and the difference is stored as reserves. This meant Hiscox could largely offset the £55m of losses from extreme weather conditions by releasing reserves from its back book.
As a result, the figures were excellent despite the floods and the weak dollar. The company reported a combined ratio — that is, claims and expenses going out as a percentage of premiums coming in — of 85pc, showing Hiscox is well into an underwriting profit.
That does not include the investment return, which improved 8pc to £48m. Significantly, the company was able to reassure investors that its exposure to US subprime loans was minimal.
Mr Hiscox, along with a number of savvy investors, sees the current meltdown as an investment opportunity and applauds the fact that risk will now be priced correctly. Hiscox has a portfolio of short-term bonds, which are maturing all the time, and which the company is now able to invest at higher rates.
Looking ahead, the insurer warned there would be another £20m of losses in the second half from the floods during July.
Then there is hurricane season. So far it appears that Hiscox will be relatively unscathed by Hurricane Dean if it stays south. In some ways it could benefit the company as it may remind people that they need cover, which could help prop up rates.
Outside of catastrophe insurance the industry is suffering from a decline in premiums. But Hiscox at least is reacting responsibly by saying it will not write as much business in these areas, in order to reduce supply and hopefully bolster prices. It seems the retail sector could learn a thing or two from insurers.
It’s worth looking at insurers on a price to book value, rather than price/ earnings. This is because the forecast losses from events and the subsequent reserves, which are highly volatile, go through the profit and loss account, making the earnings highly volatile. An insurer’s ability to underwrite is also dependent on its underlying capital, hence its book value is particularly significant. Hiscox shares are trading on around 1.37 times its book value compared with a sector average of 1.41. BUY