Join­ing the FTSE 100 caps the His­cox suc­cess story, but at 17 times earn­ings it’s a hold

A four­fold in­crease in the share price has pro­pelled the in­surer to the top flight, writes James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

TO un­wind from the rigours of in­sur­ing clients against kid­naps and flood­ing, Robert His­cox col­lected fine art and went on an an­nual game hunt deep in Africa. Five years af­ter the re­tire­ment of its out­spo­ken chair­man, His­cox has be­come a big beast it­self. Last week it was con­firmed that the com­pany would en­ter the FTSE 100 on Christ­mas Eve, cap­ping a re­mark­able rise that has seen its shares in­crease more than four­fold in value in a decade. For all the un­pre­dictabil­ity of nat­u­ral dis­as­ters – as the woes of the Lloyd’s of Lon­don mar­ket of­ten make clear – there ap­pears to be no bet­ter busi­ness model than the ac­cu­rate pric­ing of risk what­ever the weather. Bal­ance is what chief ex­ec­u­tive Bronek Ma­so­jada has been striv­ing for, de­vel­op­ing lo­cal spe­cial­ity busi­ness that is less volatile than big-ticket un­der­writ­ing. Last year was the most costly yet for nat­u­ral catas­tro­phes af­ter a spate of hur­ri­canes, Mex­i­can earth­quakes and Cal­i­for­nia wild­fires, but His­cox still man­aged to turn a profit of £94m be­fore for­eign exchange costs de­spite $225m (£176m) be­ing set aside for claims.

In the af­ter­math, in­sur­ers had ex­pected pric­ing to strengthen but com­pe­ti­tion means that pre­mi­ums have risen by less than hoped. His­cox has set aside $125m to cover claims due to hur­ri­canes Florence and Michael in the United States and ty­phoons Jebi and Trammi in east Asia. Marine and sub­si­dence claims have also ticked up and li­a­bil­ity in­sur­ance for com­pany di­rec­tors has seen ris­ing claims.

This year is the first time His­cox will re­port in dol­lars, a switch de­signed to iron out some of the volatil­ity caused by cur­rency movements. It is also a year char­ac­terised by slow­ing, but still im­pres­sive, topline growth, from 16pc af­ter two quar­ters to 11pc af­ter three.

His­cox, which has been based in Ber­muda for more than a decade for tax and reg­u­la­tory rea­sons, has built a re­tail busi­ness that made up 56pc of gross writ­ten pre­mi­ums last year and re­cently signed up its mil­lionth customer. Re­tail is well placed to carry on grow­ing as a share of the busi­ness but sus­tain­ing a con­sumer brand doesn’t come cheap. His­cox raised its mar­ket­ing bud­get to £54m last year, with par­tic­u­lar em­pha­sis on the United States. His­cox USA has been a stand­out per­former, with pre­mium growth of 29pc in 2017 eas­ing to 18pc in the first nine months of this year.

An­a­lysts at HSBC are un­con­cerned, ex­plain­ing that the US slow­down is a func­tion of the op­er­a­tion’s scale and that 15pc growth to­day gen­er­ates as many new pre­mi­ums as 30pc book growth did three years ago.

There are other bright spots. In Bri­tain a new IT sys­tem is ex­pected to save money in the bro­ker chan­nel when it is fully op­er­a­tional. And an­a­lysts think the Lon­don mar­ket’s un­der­ly­ing un­der­writ­ing prof­itabil­ity will im­prove next year af­ter ac­tions taken by Lloyd’s. The group re­mains renowned for its ac­tiv­ity in the art mar­ket but a lesser known growth driver is its pop­u­lar­ity with small en­ter­prises, which favour its au­to­mated un­der­writ­ing platform.

An­a­lysts at Bern­stein point out that His­cox is also well in­vested. Be­cause 70pc of its bond hold­ings are dol­lar de­nom­i­nated with short ma­tu­ri­ties, the com­pany will ben­e­fit quickly from ris­ing in­ter­est rates. In­vest­ment in­come will al­most dou­ble over the next five years, they fore­cast.

Ma­so­jada is tak­ing Brexit in his stride. At a cost of $15m, His­cox has set up a new Lux­em­bourg sub­sidiary that will be ready to write busi­ness from next month. Some €40m of cap­i­tal will be put into the new struc­ture.

Questor has been a fan of in­sur­ance re­cently, point­ing out the at­trac­tions of Di­rect Line here at the end of Oc­to­ber. But de­spite its chunky yield, shares in the mo­tor and home in­surer look di­rec­tion­less. The same can­not be said for His­cox. As one of Europe’s few in­sur­ance growth sto­ries, its stock has con­tin­ued to make progress de­spite the board cau­tion­ing a month ago that the pace will mod­er­ate from here.

There is never a bad time for a stock to en­ter the FTSE 100, par­tic­u­larly as vin­di­ca­tion of a job well done. But trading at 17 times next year’s earn­ings, this is not the best en­try point for new share­hold­ers even though His­cox’s long-term prospects are sound.

Questor says: hold

Ticker: HSX Share price at close: £16.08

Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­ questor­rules; twit­

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