Hiscox Re & ILS uncertain Florida renewal rates will reflect cost of risk

Hiscox Re & ILS, the reinsurance and third-party capital focused unit of the global insurer, has been taking underwriting actions following the losses of the last two years, but isn’t convinced anticipated rate rises in Florida will be sufficient.

Growth in premiums underwritten at the Hiscox Re & ILS business unit slowed after its insurance-linked securities (ILS) capacity shrank following the impact of the recent two year’s catastrophe losses, the firm revealed today.

As a result of these losses, Hiscox Re & ILS has been adjusting its view of risk, increasing rates and reducing exposure on some business, particularly in the risk excess and wildfire markets.

These actions are designed to insulate the reinsurance portfolio and the ILS funds from significant loss impact, in order to deliver stable returns.

While these actions have been shaping the Hiscox Re & ILS book, the firm also looks forward to the coming Florida reinsurance renewal with some trepidation, it seems, as while “significant rate improvement” is expected, the company said, “we are not yet certain if the increases will adequately reflect the cost of the risk.”

While the firm’s reinsurance and ILS premiums declined somewhat, its ILS and collateralised reinsurance linked assets under management at the manager arm Hiscox Re Insurance Linked Strategies Ltd. remain above $1.5 billion, including capital deployed into the new Latitude fund strategy.

Gross written premiums shrank by 4.6% to $342.8 million, down from Q1 2018’s $363.1 million, driven by the reduction of capital for deployment from the Hiscox Re ILS funds, after the significant losses of the previous year.

Without the impact of this slightly smaller ILS capital pot, the reinsurance premiums side of the business grew by 3%, the company said.

The Hiscox Re & ILS London and Bermuda teams have both been taking advantage of the improved rate environment in property catastrophe reinsurance and retrocession, achieving particularly strong growth in retro.

In April the firm secured double-digit renewal rate increases in Japanese loss-affected business, it said today, but noted that rates in its international book actually fell.

Commenting on rate movement, the firm explained, “An abundance of capacity in reinsurance, from traditional and alternative sources, continues to apply downward pressure on rate momentum.

“However, we are optimistic that sustainable rate rises will continue for the rest of the year as the market recognises significant deterioration on prior year losses and recent loss experience that requires an updated view of risk.”

In Florida though, Hiscox Re & ILS is not yet convinced that rate increases at the renewal will actually be sufficient to cover the cost of risk, which suggests it may not seek to grow as much as some companies this time around, taking a more measured approach to selecting which business to write.

The company also noted that the performance of its ILS funds through the last two years was “in line with expectations and we are pleased that our investors remain committed.”

Positive net returns have been delivered by the Hiscox ILS funds since their launch in 2014, while the strategy continues to expand its offering to bring new sources of risk to its investors.

In particular, the Latitude strategy, that brings together the London market and Hiscox Re & ILS businesses to create a diversified ILS fund portfolio focused on both insurance and reinsurance is a notable step in 2019 that could position the firm for further third-party capital growth further down the line.

The focus at Hiscox is on ensuring returns on both its own balance-sheet, for shareholders, as well as in the ILS funds for its investors.

Bronek Masojada, Chief Executive Officer, commented, “In the London Market and in reinsurance, where conditions are improving, we are growing areas and maintaining our focus on writing profitable business.”

Hiscox Re & ILS has seen rates increase by roughly 2% across its portfolio, the firm explained, with the retrocession and risk excess accounts seeing the most significant increases.

Rates in US catastrophe-exposed business are so far only up by low-single-digits, while pressure continues to be seen in the international book with rates down slightly in aggregate, although April saw 25% increases on loss-affected Japanese business.

The key Florida renewals will be interesting, as we suspect some reinsurers will grow their books significantly. Hiscox it seems, intends to take a measured approach and only grow where it feels rates are meeting its cost of risk expectations.

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