Hiscox reports retro rates up 20%, but deployable ILS capital still dented

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Hiscox Group, the specialist insurance or reinsurance underwriter and ILS capital manager, has reported that its reinsurance focused Hiscox Re & ILS unit has secured rate increases of 12% across its portfolio for the year so far, with retrocession up 20%, although its book shrank at the mid-year renewals.

Hiscox logoGross premiums written by Hiscox Re & ILS are down 7% and as we reported a quarter ago the underwriter continues to keep its “powder dry”, particularly on catastrophe risks as it expects further rate improvements at the January 1st 2021 renewals.

Bronek Masojada, Chief Executive Officer, explained that the company is benefiting from “the strongest pricing we have seen in the London Market and in reinsurance for more than five years.”

Adding that Hiscox has the, “financial strength, operational resilience and underwriting expertise to take advantage of these favourable market trends.”

Despite premiums being down for the first nine months of the year, the company said that Hiscox Re & ILS experienced “good growth at the July renewals.”

Hiscox provided a view of rates across its core business areas, saying that, “In reinsurance, where we made the decision to retrench in January in response to underwhelming pricing, the market continues to harden significantly. Hiscox Re & ILS achieved strong rate increases at the year’s final major renewal in July, resulting in a total year-to-date portfolio-wide rate increase of 12%, including 20% in retrocession.

“While still not a universally hard market, rate improvement continues to be driven by capital contraction and discipline encouraged by an ultra-low interest rate environment, which is expected to continue at the January renewals and beyond.”

Diving into the Hiscox Re & ILS segment results, Hiscox noted that premiums would actually be down some 12% year-on-year were it not for reinstatement premiums due on loss activity.

Impacting the top-line is actions taken to improve performance, but also the continued depletion of insurance-linked securities (ILS) capital, as its third-party reinsurance capital managed remains at $1.5 billion, with only around $1 billion of that deployable still, which the company said “continues to impact the top line.”

Trapped ILS capital can often be reconciled towards year-end, some being made available to roll-forwards. So it’s possible the Hiscox ILS unit may have a little more available to deploy, plus any additional it can raise from investors for the January renewal opportunity.

Looking ahead to the January 2021 renewals, Hiscox said “the expectation remains for capital contraction to continue to drive material rate hardening.”

“Headline premiums for Hiscox Re & ILS in 2021 will be driven by the deployment of some of the proceeds from the Group’s equity raise earlier in the year, as well as the level of third-party capital support available from quota share partners and the Hiscox ILS funds,” the company explained.

With the equity raise capital available to it, as well as still $1 billion of capital in the Hiscox ILS funds, the company will remain able to capitalise on the rate environment.

With its additional equity capital base, the third-party investors in Hiscox’s ILS funds may also benefit from the deployment of that, in enabling the funds to take on a broader book of business in smaller chunks, as has typically been the strategy to create diversified portfolios at Hiscox ILS.

On loss activity, Hiscox said that it has reserved $75 million for third-quarter natural catastrophe losses, with impacts felt from hurricane Laura based on an insured market loss of $8 billion, plus claims under aggregate reinsurance contracts, provisions for wildfire claims and some large individual risk losses.

On the COVID-19 pandemic, Hiscox warned that it could face a further $30 million to $40 million of potential exposure relating to event cancellation in 2021, should lockdowns and restrictions continue around the world.

In addition, should the UK lockdowns persist, Hiscox warns of the potential for further business interruption claims, but noted that any additional BI claims will “continue to benefit from reinsurance cover,” suggesting the company expects to pass the majority of these on.

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