Hiscox benefits from Kiskadee ILS premium income offset

by Artemis on May 12, 2015

For  insurance and reinsurance group Hiscox, premium income earned by its insurance-linked securities (ILS) unit Kiskadee Investment Managers is helping to offset reductions seen elsewhere in the business.

Bermuda-headquartered, London-listed firm Hiscox has been increasingly seeing the benefits of having its own ILS and third-party reinsurance capital manager in Kiskadee. The Kiskadee ILS brand launched in 2013 and had grown its assets under management to over $400m at the start of 2015, with $500m expected by the middle of this year.

As the Kiskadee ILS unit and its collateralized reinsurance vehicles assets under management grow, the contribution they make to Hiscox’s overall results increases as well. It’s no surprise that the firm has been putting a growing focus on the unit, as it can now leverage the scale it has reached to bring in meaningful income.

In Hiscox’s first-quarter management statement, which was published this morning, Chief Executive Bronek Masojada commented on Kiskadee’s input; “While the market has been tough, with a reduction in pricing in the big ticket businesses, we have continued to grow in our specialty lines and expand our ILS business.”

At the same time Masojada acknowledged that results look good for firm’s like Hiscox due to the continued benign loss environment; “It’s been an excellent start to the year, flattered by a good claims experience and favourable foreign exchange movements.”

Hiscox is noticing rates under pressure increasingly in what it terms “big-ticket” lines. This means outside of reinsurance, in the large commercial accounts, where Hiscox notices that “larger insurance risks, including big-ticket US property business, aviation and offshore energy, are under pressure.”

Hiscox noted that in the London market it is noticing “fierce competition” in big-ticket property business, but said that it will “remain disciplined.”

At the same time reinsurance pressure continues to be felt as well, Hiscox explained; “The on-going benign claims environment continues to put pressure on reinsurance rates with US catastrophe rates down by 10% in the first quarter. For the 1 April renewals for Japanese Earthquake, rates were down 12%. ”

But Hiscox, like so many others, is striving to remain discipline and turning its back on business that it deems unprofitable, meaning that the re/insurer “maintains a policy of walking away from unprofitable business.”

Despite the competition and continued declines in pricing in many lines, Hiscox actually grew its gross written premiums across the business in the first-quarter by around 12% to £501.6m.

One of the factors that is helping it to maintain premiums written is the addition of the ILS business and Kiskadee’s input as a source of third-party capital.

Specifically in reinsurance, Hiscox Re maintained its premiums written at roughly flat levels in Q1 2015, assisted by the continued growth of the Kiskadee ILS unit and its funds under management.

“Premium income generated from the Insurance Linked Securities operation is balancing reductions elsewhere,” the management statement says this morning.

That suggests that Hiscox is cleverly making use of its efficient, third-party sourced reinsurance capital under management at Kiskadee to enable it to maintain lines where perhaps its balance sheet is no longer the most appropriate capacity.

For insurance and reinsurance firms such as Hiscox, it is important to leverage ILS and third-party capital wisely, not to erode premium income but to maintain it, or as a source of growth, where the balance sheet is no longer the most efficient capital available for certain lines or risks.

This seems to be Hiscox’s approach, using Kiskadee to bulk up lines it can put out by adding collateralized capacity alongside its balance sheet, or putting Kiskadee capacity to work in areas where its balance sheet is no longer best suited. Effectively allowing Kiskadee to offset any decline in premiums written on the reinsurance balance sheet.

With further growth expected at the mid-year renewals, no doubt Kiskadee will be seeking to increase the third-party assets managed at the unit, the contribution that the ILS business makes at Hiscox should grow as well.

And the target remains in sight for Kiskadee, today’s statement said; “Our Kiskadee family of insurance linked funds is on track to attract $500 million in capital.”

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