Hiscox expects US wholesale & reinsurance rates to harden on Covid-19

Hiscox Group, the specialist insurance or reinsurance underwriter and ILS capital manager, has forecasted rate hardening for the U.S. wholesale insurance and reinsurance markets due to the impacts of the Covid-19 pandemic.

The re/insurer also said today that while it believes it has sufficient capital to pay claims from the pandemic, it is evaluating potential capital raising options.

Noting speculation in the mainstream press that it might need to raise capital, Hiscox responded this morning.

“The COVID-19 pandemic has resulted in unprecedented global economic uncertainty,” the company explained.

Adding that, “The Hiscox Board believes the Group has sufficient capital to meet expected liabilities arising as a result of exposures to the pandemic.”

Capital raising options are being explored by Hiscox, but seemingly more as a way to take advantage of any rate hardening seen across insurance and reinsurance markets than because it needs any additional funding.

Hiscox believes that both insurance and reinsurance rates are going to harden as a result of the pandemic impacts, specifically in the areas of U.S. wholesale insurance and also reinsurance.

The company explained that it expects, “The resultant uncertainty arising from the pandemic and consequent capital contraction to result in rates hardening across US wholesale and reinsurance markets.”

As a result of which, “Whilst Hiscox’s capital, liquidity and funding positions remain robust, Hiscox is evaluating possible sources of capital to respond in an appropriate way to these market dynamics, which could include raising new equity.”

No decision has been made on whether to raise capital or not at this time, nor on how any capital would be raised, its timing, or the amount required.

As ever, it will be a case of right-sizing any capital raise to the actual opportunity available, which given the continued uncertainty related to the impacts of the Covid-19 pandemic to global insurance and reinsurance markets is difficult to judge.

Of course, Hiscox has a dedicated insurance-linked securities (ILS) platform, Hiscox ILS, which writes both primary and reinsurance business.

One option would be to capitalise a new ILS vehicle to underwrite alongside the main Hiscox group, perhaps, but in the current environment an equity raise could prove a more attractive option, given the ability to retain more of the risk premiums underwritten.

However, an ILS capital raise alongside an equity one could provide greater capital flexibility, enable the peak catastrophe exposures to be held on more efficient capital and ultimately lower the group’s cost-of-capital at a key time when a growth opportunity at harder rates presents itself.

More broadly, another forecast for harder rates means opportunity for the wider ILS fund market as well, with the only potential issue for the sector being its ability to raise more capital at this time while financial market volatility from the coronavirus pandemic persists.