Hiscox deploys $110m through collateralised reinsurance ILS funds

Bermuda headquartered insurance and reinsurance group Hiscox deployed $110m of its own and third-party sourced capital through collateralised reinsurance and insurance-linked securities (ILS) funds at the beginning of the year, less than it expected.

Back in its November results statement Hiscox had said that it hoped to deploy as much as $250m of fully collateralized reinsurance capacity, both its own and third-party, through its collateralised reinsurance and ILS funds at the January renewals.

In the firms latest results statement, published this morning, CEO Bronek Masojada said that only $110m of capital had been deployed through the firms third-party reinsurance capital platform, which was less than had been hoped for.

Masojada explained that Hiscox is seeing signs that capital markets investors are being more disciplined than some traditional reinsurers, which suggests that the firm could not raise as much capital as hoped due to investors unwillingness to support the currently available reinsurance market pricing.

Masojada said that Hiscox saw reinsurance rates down by approximately 16% at the January renewals. As a result he expects Hiscox will shrink its reinsurance business over the course of 2014 as rates are unattractive and competition from both traditional and alternative capital are high.

Masojada explained; “Given the aggressive nature of competition from both traditional and new sources of capital, our reinsurance business will shrink in 2014 as we continue to prioritise quality clients who value our underwriting, brand and balance sheet.”

Hiscox continues to work with third-party capital from a variety of sources. Masojada said; “We have good support from quota share partners and Syndicate Names. In 2014 they are backing Hiscox Re at a record level.”

Hiscox continues to look at insurance linked securities as an area of opportunity and this focus looks set to remain. With $110m already under management Hiscox will likely look to grow this figure over the coming year to take advantage of reinsurance market opportunities.

Masojada continued; “We continue to explore new opportunities in the Insurance Linked Securities (ILS) space, and through Kiskadee we launched a number of collateralised reinsurance funds during the year. We have deployed $110 million of capital – less than we had expected as we are seeing signs that capital markets investors are being more disciplined than some traditional reinsurers. We believe that over time, our record of prioritising profit over volume will win a following in this new investor base, and our support from them will grow.”

Hiscox is, like many other large and diverse insurance and reinsurance firms, actively adjusting its portfolio and pulling back from reinsurance business deemed unprofitable or unattractive under the current pricing environment.

Robert Childs, Chairman of Hiscox, explained; “So much of the punditry this year has been about the growth of the ILS (Insurance Linked Securities) market and its effect on reinsurers and pricing. Competition has increased but as a respected leader in reinsurance we have been able to maintain our share of well-rated business. Reducing margins are a big issue for businesses that have no alternative to reinsurance. Although we are not immune, we are in the fortunate position of being able to reduce lines of business where this competition impinges and grow in areas where it does not.”

With firms as large as Hiscox with well-known and respected brands struggling to raise third-party capital in the current reinsurance market environment, it shows that capital raising may be difficult for smaller ILS focused managers through 2014.

At the same time, ILS investors are beginning to show that they are unwilling to compete with traditional reinsurers if it means not being compensated at sustainable levels for taking on risk. That is no bad thing and in the current climate investors are wise to be cautious and to ensure that they are backing the right contracts at the right prices.