Hiscox’s third-party capital dips, but ready to capitalise on rate increases

Insurance and reinsurance firm Hiscox Group has announced a new capital raise to help the company be better positioned for growth opportunities and rate increases across its reinsurance and U.S. wholesale businesses, but at the same time third-party capital support at the firm has dipped.

In reporting its first-quarter trading statement, Hiscox revealed that it wants to be ready to capitalise on rate increases that it expects will come following the market hit from the Covid-19 pandemic.

This capital is being raised in the form of equity, with an equity placing for up to 19.99% of its issued share capital.

“We are announcing an equity placing today in order to respond to growth opportunities and rate improvement in the US wholesale and reinsurance markets. We have managed our investments prudently and our capital position is robust, with an estimated group regulatory solvency ratio at the end of March of 195%,” CEO Bronek Masojada explained.

However, he also explained that within the unit of the Hiscox business where reinsurance and insurance-linked securities (ILS) fund management activities are undertaken, the company has “remained cautious” so far this year, holding back for even better underwriting conditions that are expected to emerge.

In fact, gross written premiums declined by 15% in the Hiscox Re & ILS division, as the company did not find the attractive opportunities it was hoping for at the first-quarter reinsurance renewals.

“Pricing in reinsurance so far is below our expectations, despite an unprecedented succession of natural catastrophes, however we are now beginning to see rate improvement accelerate. Rates are up 8% year to date, including the impact of the Japanese renewals in April, with retrocession up 15%, international catastrophe up 12% and North American catastrophe up 7%.

“While rates are expected to improve further, growth for Hiscox Re & ILS for the remainder of the year will depend on pricing adequately reflecting recent loss experience,” the company said.

Having previously said that its ILS funds have no exposure to UK SME business policies, which are the subject of some legal claims as a result of the coronavirus pandemic, Hiscox has also further clarified the overall group exposure to Covid-19 business interruption.

Hiscox said, “We believe we have limited business interruption exposure in Europe.

“Exposure to losses in our London Market and reinsurance divisions is uncertain at this stage. Hiscox London Market has a small market share in major property, and Hiscox Re & ILS is underweight in its European exposure and retains a relatively modest proportion of its gross premiums. ”

With the UK situation, Hiscox provided a modelled scenario for its potential Covid-19 losses, at this stage saying they are look likely to fall somewhere between £10 million and £250 million net of reinsurance.

In Hiscox Re & ILS the company explained that it has, “delivered on our promise to pull back in the face of rate inadequacy, while keeping our powder dry for opportunities later in the year.”

Adding, “In US property catastrophe and excess of loss business, our teams in London and Bermuda remained disciplined and reduced exposure materially, reflecting a disappointing pricing environment.”

The Japanese renewals in April saw the Hiscox reinsurance underwriting team secure rate increases of 38% for windstorm and 20% on a combined perils basis, which it says was “in line with our new view of typhoon risk” after the two active peril years.

“Looking ahead, our expectation is for further capital contraction in the market to push up rates and drive improved terms and conditions at the June and July renewals, and we remain committed to writing business only at the right price,” the company confirmed.

The Hiscox ILS business remains with assets under management (AuM) of $1.5 billion, no movement since the end of last year and still with some of the capital trapped to support ongoing development of prior year loss events.

But the company warned that ILS assets under management is expected to dip, “Deployable capital is expected to further reduce as reported at the year-end, following an expected redemption from one of our investors.”

“Less deployable ILS capital and quota share support has meant a reduction in third-party capital available to support underwriting this year,” the company explained.

Facing similar challenges to everyone else in ILS right now, Hiscox continues to work on its new initiatives and is waiting for the more attractive rate environment to emerge, which it seems convinced is coming.

“Our new ILS fund launched ahead of 1 January renewals is writing business, offering investors a higher risk/reward profile which complements our existing medium and lower risk/return funds.

“The ILS team remain ready to take advantage of an improving rate environment as the year progresses,” the company further said.

“We expect the uncertainty arising from the pandemic and consequent capital contraction to result in rates hardening across US wholesale and reinsurance markets.”