Hiscox: Reinsurance market ‘continues to overreact to new capital’

Bermuda-headquartered, London-listed insurance and reinsurance group Hiscox has continued to pull back from its reinsurance underwriting, citing declining rates and blaming the market for overreacting to the entry of new capital.

Hiscox pulled back again on reinsurance underwriting during the first quarter of 2014, writing around 14% less business at its Bermuda-based reinsurance unit Hiscox Re compared to a year earlier. The firm’s retail and direct insurance business coped much better with all other units recording growth for the quarter.

Bronek Masojada, CEO of Hiscox commented; “The market is softening, but conditions in many of our insurance lines are good. Our retail businesses continue to benefit from long-term investment in the brand and our acquisition of DirectAsia represents another important milestone.”

In its first quarter results statement Hiscox acknowledged that as expected reinsurance rates continued to decline at the April 1 renewals. Hiscox said that Japanese earthquake rates fell by approximately 15% in April.

On the U.S. side, Hiscox said that the catastrophe reinsurance market has already been affected by the period of benign claims and that it “Continues to overreact to new capital with the inevitable results.”

Here Hiscox appears to be blaming traditional reinsurers for racing to the bottom on pricing in trying to compete too vigorously with alternative reinsurance capital. Perhaps Hiscox is right and there are areas of the market where reinsurance firms should have allowed alternative capital and ILS to take over, while maintaining a focus on the areas of the market where traditional firms had a stronger hold.

The inevitable result, however, is continued softening of the market and a gloomy outlook for the upcoming mid-year U.S. property catastrophe reinsurance renewals, which were once a key renewal for Hiscox’s reinsurance unit. If there is no change in rates before these renewals we’d expect to see even more pull back from Hiscox and their competition.

It’s not all gloomy though, as evidenced by the strong growth in many of Hiscox’s other business units. The firm reported that insurance line rates are either holding stable or softening. Hiscox has been increasing its risk appetite in parts of the market where it feels pricing remains healthy, with a particular focus on mid-market catastrophe exposed property business written in the London, it said.

The downsizing of Hiscox’s reinsurance book is not a surprise, the firm had expected to pull back and to place an increasing amount of catastrophe reinsurance business with third-party capital where the cost-of-capital and its return hurdles are inline with what is on offer in the market currently.

The firm said in its statement; “Alongside our core book, we continue to leverage our expertise writing on behalf of third party capital, and have enjoyed strong quota share support.”

Work also continues at Hiscox on its insurance-linked securities (ILS) operations within the Kiskadee Investment Managers unit. Hiscox has added two new senior hires to Kiskadee during the quarter to help it build out its offering. First, Richard Lowther (formerly COO of Alpha Cat) who joins Kiskadee as COO. Second, Alan Cossar, the former Chairman of the Bermudian Monetary Authority, who joined the firm as Non Executive Chairman of the two new Kiskadee ILS funds.

Hiscox said that it continues to build on its ILS activity through Kiskadee Investment Managers and it is likely that we will see the firm continue to leverage third-party capital to help it maintain a share of business in regions where its own capital is perhaps not low enough cost to assume it.

The rate environment looks set to remain gloomy in the reinsurance space, particularly catastrophe risks, but for groups like Hiscox that have options to pull back or grow different business units as well as third-party capital to leverage, navigating the difficult market conditions is perhaps easier.

Hiscox said; “We expect rates in many lines to remain under pressure, particularly in the absence of any catastrophes. However, our diverse business mix gives us options and we are restless and hungry for new opportunity.”