By head­ing for the hills, His­cox avoids heavy flood dam­age

The Daily Telegraph - Your Money - - Stock Market - Josephine Moulds

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

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