Hiscox Re & ILS sees building price momentum, but capacity dampening rates

In reporting its results today, insurance and reinsurance firm Hiscox Group explained that rate momentum continues to build and price increases have been accelerating at renewals so far in 2019, while its Hiscox Re & ILS unit continues to find attractive opportunities in retrocession.

But while rates have been increasing and helping Hiscox to find attractive opportunities in its reinsurance and ILS activities, the firm believes the market remains over-capitalised and that this has held rates back somewhat.

Overall, Hiscox was hit by loss creep during the first-half of 2019, which has dented its results as reserve releases fell to less than one fifth of the prior year period.

Having pre-announced a $40 million strengthening of its typhoon Jebi, hurricane Michael and risk excess book reserves, the impact to Hiscox’s results had been expected.

While pre-tax profit came out a little higher than the prior first-half, at $168 million, and income earned was up, this was helped by an impressive investment return ($147.5m compared to just $20m in H1 2018) which meant that despite much higher claims expenses Hiscox’s overall profit of $145.1 million for the first-half of 2019 is only slightly behind 2018’s $148 million.

Bronek Masojada, Chief Executive Officer, Hiscox Ltd, stated, “Hiscox delivered a profit of $168 million for the first half despite a more challenging claims experience. Looking ahead, with six consecutive quarters of rate growth in some Lloyd’s business, the market is in a better position than it has been for some time. In Retail, we will continue to invest in our infrastructure and marketing to drive sustainable growth. Our strategy of diversification gives us options.”

Premiums written rose 7% across the business as Hiscox found opportunities to put more capital to work at renewals in 2019.

Assisting Hiscox in deploying more capacity across its business has been an environment where the re/insurer has found rates to increasingly firm as the year so far progressed, culminating in the best increases being found at the mid-year renewals for the company.

Chairman of Hiscox Robert Childs commented, “In our London Market business, market losses and renewed discipline in Lloyd’s are putting upward pressure on rates, and the picture looks more positive than this time last year.

“In reinsurance, where rate improvement had been more sporadic in the first quarter, we have seen good price increases on loss-affected risks in the second quarter and are finding opportunities in the retrocession market, where reduced capacity has significantly improved rates.”

Specifically this has helped the Hiscox Re & ILS business, the unit where the firms reinsurance and insurance-linked securities (ILS) operations are housed.

Rates have been improved throughout the first-half but the acceleration of rate momentum is clear and Hiscox has taken advantage of this to build its book.

Childs explained, “In Hiscox Re & ILS, rates are up approximately 6% across the portfolio with increases confined generally to loss-affected accounts, as an abundance of capital continues to dampen a widespread market turn.

“During the April renewals, when the majority of Japanese business renews, we achieved rate increases of 8% overall, while in June, when a lot of Florida-based wind-exposed business renews, rates increased by 12%.

“We continue to see opportunities in the retrocession market, where reduced capacity combined with several years of losses is contributing to material rate-hardening.”

Overall, Hiscox Re & ILS’ gross premiums underwritten grew by 6.5% to $698.3 million, or 7.6% on a constant currency basis.

However, the company continues to feel the market has excess capital and that this has held rates back from achieving even higher peaks.

“While we are seeing some positive rate momentum, particularly in those lines hardest hit by two consecutive years of losses, this is dampened by the continued abundance of reinsurance capacity available from traditional and alternative sources,” Childs said.

Adding, “We have responded rationally, growing in wildfire liability where we have seen rate increases of up to 200%, and managing wildfire-exposed property business where rates in some cases have not responded in line with our view of the risk.”

In other areas the firm has pulled back a little as rates are not responding as it would like, in particular risk excess.

Childs explained, “In the risk excess book, we are reducing our exposure on the bottom end of programmes and pushing for more risk-reflective pricing, particularly in risk aggregate where we have seen heavy losses and some underperformance in recent years.”

In the insurance-linked security (ILS) business things appeared more stable, Childs said, “In Hiscox ILS, our funds have performed in line with expectations.”

“In January, we started writing business to our new fund, the Kiskadee Latitude Fund, which gives investors access to a more diverse portfolio of insurance and reinsurance risks with less focus on pure property catastrophe risk,” he continued. “Assets under management are currently at $1.6 billion.”

Hiscox will hope that it has now put its Jebi exposure behind it, having strengthened its reserves. That bodes well for its ILS fund investors as well, who will now stand to benefit from a portfolio built at higher rates over the rest of this year.

The addition of a strategy with less catastrophe exposure will also prove of interest to investors, as choices remain relatively cat exposed in the ILS world still. It will be interesting to see whether that strategy can help to stimulate a fresh phase of growth for the Hiscox ILS funds.