Hiscox Ltd interim results

Hiscox Ltd interim results

For the six months ended 30 June 2016

"A good first half"

Highlights

·      Hiscox Retail continues to perform well, and was the biggest contributor to profit in the first half. 

·      Hiscox USA delivered growth of 32.8% in local currency.

·      Hiscox London Market grew by 9.7% in local currency, benefiting from new classes of business and expertise in niche areas.

·      Hiscox Re delivered another strong performance, due to good risk selection, new products and income from our ILS business.

·      Profit before tax excluding foreign exchange gain or loss £118.7 million (2015: £150.8 million).

Bronek Masojada, Chief Executive Officer, Hiscox Ltd, commented:

"Our retail businesses continue to grow in strength and profitability. Hiscox London Market and Hiscox Re have been disciplined in tough  markets. Brexit has caused volatility and Sterling weakness, resulting in a foreign exchange gain which has benefited the bottom line.  As this good result illustrates, our strategy, our people and our brand can deliver opportunities."

ENDS

Contacts:

Simone Selzer                                                                  +44 (0)20 7404 5959

Notes to editors

About The Hiscox Group

Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). Our ambition is to be a respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastrophe-exposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle. It's a long-standing strategy which in 2015 helped generate gross premiums written of £1,944.2 million and a profit before tax of £216.1 million.

The Hiscox Group employs over 2,200 people in 14 countries, and has customers worldwide. Through the retail businesses in the UK, Europe and the US, we offer a range of specialist insurance for professionals and business customers as well as homeowners. Internationally traded, bigger ticket business and reinsurance is underwritten through Hiscox London Market and Hiscox Re.

Our values define our business, with a focus on people, quality, courage and excellence in execution.  We pride ourselves on being true to our word and our award-winning claims service is testament to that. For more information, visit www.hiscoxgroup.com.

Chairman's statement

It has been a good half year, with the Group delivering a pre-tax profit of £206.0 million (2015: £135.1 million) and growing gross written premium by 17.5% to £1,288.5 million (2015: £1,096.3 million). This result is flattered by the impact of significant currency movements.  Our underlying combined ratio has deteriorated reflecting a very tough trading environment. Our strategy of building retail businesses to offset the volatility of internationally traded lines continues to be effective, with Hiscox Retail the biggest contributor to profit in the first half. Although the year has started well, we remain cautious as we are on the cusp of the hurricane season.

Results

The half year result to 30 June 2016 was a pre-tax profit of £206.0 million (2015: £135.1 million), £118.7 million excluding foreign exchange gains/losses (2015: £150.8 million). Gross written premiums increased to £1,288.5 million (2015: £1,096.3 million) or 13.0% growth in local currencies. Net earned premiums were £767.5 million (2015: £709.8 million). The impact of foreign exchange was a profit of £87.3 million (2015: loss of £15.7 million). The net combined ratio was 80.7% (2015: 82.5%), excluding foreign exchange gains/losses 88.4% (2015: 80.3%). Earnings per share were 70.4p (2015: 43.7p) and net tangible assets per share grew to 545.3p (2015: 462.8p). The annualised return on equity was 28.3% (2015: 19.9%).

Dividend, balance sheet and capital management

The Board of Hiscox Ltd has declared an interim dividend for 2016 of 8.5p per share (2015: 8.0p) an increase of 6.3%. The record date for the dividend will be 5 August and the payment date will be 9 September.

The Board proposes to offer a scrip dividend alternative subject to the terms and conditions of Hiscox Ltd's 2016 Scrip Dividend Scheme. The last date for receipt of scrip elections will be 12 August and the reference price will be announced on 22 August. Details of how to elect are provided on the Company's website.

During the period the Group paid a second interim dividend of 32p per share (comprising a final dividend equivalent of 16p and an additional return of capital of 16p). Net asset value per share has increased by 8.6% from the year end.

As we have previously said, while the Group continues to maintain a progressive regular dividend policy, returning capital to shareholders is not a long-term strategy and going forward the focus will be on pursuing opportunities for profitable growth.  

Leaving the European Union

There is a great deal of uncertainty about what is going to happen now the UK has voted to leave the European Union. We are preparing for a range of outcomes, depending on whether we remain in the single market or need to navigate new trading arrangements.

We believe this represents a structural rather than strategic challenge for the Group. Hiscox has always had an international view and Hiscox Europe is well-established.  Excluding the UK, we employ 355 people in Europe and, generate gross written premiums of £260 million in the EU.  Both are very important to us. Over the coming months and years we will work to understand future trading arrangements, and if necessary set up a new EU-based insurance company. 

Traditionally, market dislocation has provided opportunity for those who are fleet of foot. We are a global business, with carriers in key markets that can take advantage of the changing environment. In time this may give us opportunities, for example supporting small MGAs by giving their clients access to the London Market.

Rates

Overall trading conditions remain tough with rating pressure affecting most markets. Where well-rated business is harder to find, we are happy to shrink where we deem it necessary.

In our retail businesses rates in casualty are flat to softening but are slightly up in personal lines.

In specialty lines such as kidnap and ransom and contingency, we are seeing fierce competition. However we benefit from market-leading positions, excellent underwriting expertise and long-term relationships. We are also committed to finding new ways to reach new markets.

Conditions are most challenging in the London Market. Aviation, energy and big ticket property business has experienced rate pressure for some time and that contagion is now spreading to other lines.  We still see good opportunities in our binding authority business (US small ticket household and commercial property), although rates here are also softening.

Hiscox Re has reported rate reductions for some years but there are signs of this slowing at the important 1 June and 1 July renewals.   

Hiscox Retail

The Hiscox Retail segment comprises Hiscox UK and Europe, and Hiscox International.

Hiscox UK and Europe

This division provides personal lines cover - from high-value household, fine art and collectibles to luxury motor - and commercial insurance for small and medium-sized businesses, typically operating in white collar industries. These products are distributed via brokers and through a growing network of partnerships. For some simple risks we distribute policies direct-to-consumer in the UK, France and Germany.

Hiscox UK and Europe delivered another good result despite challenging trading conditions. We are pleased to have grown by 9.3% and to have achieved a combined ratio that is better than our target range of 90-95%. It was another relatively quiet period for claims and a focus on finding efficiencies through updated IT infrastructure and new e-trading solutions is paying off.   

Hiscox UK and Ireland

Gross written premium  grew by 9.3% to £244.4 million (2015: £223.6 million). Growth was driven by professions and specialty commercial lines in our broker channel where we have expanded our appetite for larger risks. Our direct-to-consumer home business also performed well, benefiting from our new IT system's ability to tailor pricing. Our market-leading position in media, entertainment and events, and specialised claims handling team, continue to set us apart, achieving double-digit growth in the period.

Product innovation remains critical and helps to differentiate us in these markets. In high net worth home, we launched a new renovation and extension product designed to provide homeowners with additional protection when undertaking sizable building works.  Hiscox Trader - our e-trading solution for commercial brokers - has also helped us make efficiencies to the way we quote and process small risks. In time we expect to add to the six products already on the system.

We were the first insurer to cede risks into Flood Re, much to the credit of our UK underwriting and operational teams, and we are already benefiting from the access this gives us to new customers.

There have been a number of claims but our exposure remains small. This includes the storms that battered parts of the UK in June.

Hiscox Europe

Gross written premiums in local currency grew by 7.5% to €132.6 million (2015: €123.3 million) and by 9.2% to £101.2 million (2015: £92.7 million) in Sterling. Growth was mainly driven by commercial lines business in Germany and Spain.

Our German operations are doing very well. Here, core homeowner and small business products continue to deliver, while a new focus on classic cars, the expansion of our cyber business, and new products launched for online shops and IT freelancers all help to differentiate us.

In France, income was reduced by the cancellation of an unprofitable home surveyors' scheme. In Spain, all lines are growing, with a particularly good performance in professional indemnity and directors and officers' business.

We had minimal exposure to Storm Elvira and our European operations continue to benefit from low loss levels.

Hiscox International

This division comprises Hiscox Special Risks, Hiscox USA and DirectAsia.

Hiscox Special Risks

Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art risks. Hiscox Special Risks has teams in London, Guernsey, Cologne, Munich, Paris, New York, Los Angeles and Miami.

This business delivered gross written premiums of £44.9 million (2015: £53.7 million). Conditions continue to be highly competitive; with contraction in oil and mining, and consolidation in other markets affecting premium as business travel to high risk areas decreases. Despite the drop in income, profitability remains good due to careful underwriting and effective expense management. The team is also exploring new markets and products, and new ways to distribute their valuable expertise.

It has been another benign period for claims.

Hiscox USA

Hiscox USA underwrites small-to-mid market commercial risks through brokers, other insurers and directly to businesses online and over the telephone.

Hiscox USA continues to be a major area of opportunity within the Group and has achieved strong growth year-on-year, increasing gross written premiums by 40% to £183.4 million (2015: £131.0 million), or 32.8% in local currency. All product lines contributed, and the performance of our direct and partnerships division continues to be particularly strong with customer numbers now over 110,000.

As experienced across a number of our divisions, conditions in bigger ticket business such as commercial property and terrorism remain competitive, and though we continue to actively seek out profitable opportunities we remain disciplined in these areas.

We expanded our cyber offering with Hiscox CyberClear, a product aimed at US small and medium-sized enterprises with less than $1 billion in annual revenue. This complements our existing offering for larger businesses and, combined, these products are doing very well - giving us profitable opportunities in a growing market.

The US has embarked on a project to replace its core IT system which will allow us to grow and achieve efficiencies over time.

Claims for the period have been in line with expectations.

DirectAsia

DirectAsia is a direct-to-consumer business in Singapore, Hong Kong and Thailand that sells predominantly motor insurance. Hiscox acquired the business in April 2014.

DirectAsia achieved gross written premiums of £7.2 million (2015: £9.5 million) as the team navigates its way through competitive markets in Singapore. As a relatively new brand in Thailand, our marketing efforts are driving growth and we hope to capitalise on this good performance.

In March we announced the sale of the Hong Kong division, with IT separation on track and regulatory approval pending. This will allow us to focus on our core Singapore and Thailand markets, where we see greater potential.

Hiscox London Market

This segment uses the global licences, distribution network and credit rating available through Lloyd's to insure clients throughout the world.

Premium income grew by 15.0% to £342.7 million (2015: £298.1 million). Our newer classes of business (flood, cargo, product recall and US general liability) are performing well. Along with personal accident, these lines are offsetting reductions in some of the more challenged areas such as marine and energy, aviation and big-ticket property. 

The specialist automotive and equipment business we write through WhiteOak has been an important contributor to growth in the past. We are increasing rates in some areas and being selective in others as conditions demand.

Our leadership position in US general liability and directors and officers' business boosts the expertise in the market, helping to attract new business into London. During the period we also launched our Cyber Threat Protect product which aims to simplify cyber cover for clients and has been well received.

Hiscox MGA continues to develop, establishing a presence in Paris that will give us greater access to the Mediterranean yacht market. In Miami, the property and terrorism businesses are developing well and we are exploring opportunities to extend our casualty offering in Latin America.  

Our London Market business has experienced a number of claims. Notable losses include the Alberta wildfires, Houston floods, and earthquakes in Japan and Ecuador which result in a combined £9.1 million net loss. We also have some exposure to the Jubilee Oil Field claim, reported to be the largest energy market claim since Deepwater Horizon, this and other large losses are reserved at £16.1 million.

Hiscox London Market was awarded Insurance Team of the Year at Reactions London Market Awards 2016, in recognition of the work of our cyber and liability teams, as well as Marketing Team of the Year.

Hiscox Re

The Hiscox Re segment comprises the Group's reinsurance businesses in London, Paris and Bermuda, Insurance Linked Security (ILS) activity and Bermuda healthcare business.

Gross written premiums for Hiscox Re were £364.7 million (2015: £287.8 million), an increase of 20.6% in local currency, the result of new product successes and business written under Kiskadee. 

Hiscox Re experienced less aggressive rate reductions at the important 1 June and 1 July renewals, and benefited from opportunities to write well-rated business at the June Florida renewals as well as growth in our key client partnerships.

Kiskadee Investment Managers' assets under management have now reached US$1 billion.

Hiscox Re had limited exposure to the natural catastrophes listed earlier. The net impact of these losses is £5.4 million. Other large losses are being reserved at net £7.0 million.

Investments

The investment performance for the first six months of the year has exceeded our expectations largely due to the gains in bond portfolios following events in the last week of June. The investment result before derivatives was £42.0 million (2015: £27.9 million), 2.3% on an annualised basis (2015: 1.8%). Following the £91 million return of capital to shareholders in April, assets under management at 30 June 2016 were £3,946 million (2015: £3,032 million) boosted by positive cashflow and the impact of sterling weakness. 

After a volatile start to the year a degree of calm returned to investment markets in the second quarter until the unexpected outcome of the UK referendum.  The immediate response was a marked decline in bond yields, a dramatic sector rotation in equity markets and a sharp sell off in Sterling.  As a result our bond portfolios have generated stronger returns than we anticipated at the beginning of the year.  The risk assets however recorded a small decline in value as investors switched rapidly out of sectors that have performed well for us in recent years in favour of those such as oil, mining and consumer staples where many of the funds we invest in have been underweight. 

Bond investors have clearly concluded in the short-term that the Brexit vote will herald a period of low growth in developed economies.  The prospect of a rise in US interest rates this year has now all but disappeared whilst the Bank of England is expected to provide further stimulus by cutting official rates and possibly resuming quantitative easing.  In Europe the stock of bonds with negative yields has got larger and more negative.  Modest but positive returns from our bond portfolios therefore remains our objective.  We take a long-term view with our allocation to risk assets which represent 6.9% of the portfolio. Despite the uncertainty increasing following the referendum result, we continue to advocate low risk over no risk with the corresponding return assumptions.

Outlook

As previously announced, in September we will welcome Aki Hussain as our new Group Chief Financial Officer. Aki will be an excellent addition to our senior team, bringing extensive financial services experience, strong regulatory exposure, and a fresh perspective. I would like to take this opportunity to thank John Worth, our interim CFO, for his great contribution over the last twelve months. 

The speed of change in the UK political landscape over the last few weeks has been dizzying. We see the demand for insurance undiminished and our ability to meet our clients' needs unimpaired. We've been operating on the continent for over 20 years, and we plan to grow and prosper along with our customer and business partners. We may have to restructure to face European competition but we have time, resource and appetite for the change.

The balance and diversity of our business has long been a key driver of the Group's profitability. Our retail operations in the UK, Europe, US and Asia have plenty of room for profitable growth, and in our big-ticket internationally-traded business we will continue to find new opportunities where others find the conditions more challenging.

Robert Childs

25 July 2016

Additional performance measures

The Group has identified additional performance measures (APM) that are not defined in accordance with Generally Accepted Accounting Principles (GAAP), being International Financial Reporting Standards (IFRS), and may not necessarily have standardised meanings for ease of comparability across other organisations in the industry. These non-GAAP measures are used within these interim financial statements. These APMs are : return on equity, investment return, combined ratio, foreign exchange gains/(losses) and profit excluding foreign exchange gains/(losses). These are standard measures used across the industry, and allow the reader of the half year report to compare across peer companies.

Return on Equity (ROE)

As is common within the financial services industry, the Group uses ROE as one of its key performance metrics. Whilst the measure enables the Group to compare itself against other peer companies in the immediate industry, it is also a key measure internally where it is used to compare the profitability of business segments, and underpins the performance related pay and shared based payment structures, as discussed within the remuneration policy report in the annual Report and Accounts. The ROE is shown in note 10, along with an explanation of the calculation.

Investment return

Investment return is a performance measure that enables comparability across organisations for the performance of their investment portfolio. Together with the asset valuations shown and asset mix, may assist the user of the financial statements to assess the likelihood of future returns and its impact on the profit of the Group. The Group calculates the investment return as investment income, plus net realised gains on financial investments at fair value through profit and loss and net fair value gains on financial investments at fair value through profit or loss, together being the 'Investment result - financial assets', divided by the weighted average of investments and cash throughout the period based on monthly valuations. Note 11(ii) provides the necessary information to facilitate this calculation.

Combined ratio

The combined ratio is a common measure enabling comparability across the insurance industry, that measures the relevant underwriting profitability of the business by reference to its costs as a proportion of its net earned premium. The Group calculates the combined ratio as if we owned all of the business, including the 27.5% of Syndicate 33 that the Group does not own. The Group does this to enable comparability from period to period as the business mix may change in a segment between insurance carriers, and this enables us to measure all of our underwriting businesses on an equal measure. The calculation is discussed further in note 8, operating segments.

The combined ratio excluding foreign exchange gains is calculated as the sum of the claims ratio and the expense ratio.

Foreign exchange gains/(losses)

Foreign exchange gains and losses are being highlighted due to their impact on the income statement of the Group. The Group will measure its underlying result excluding these gains and losses for more comparability between each period, and this enables the reader of these financial statements to do the same. The results are in relation to the translation of assets and liabilities on the balance sheets of subsidiary companies in currencies other than their functional currency at the appropriate period end date and represents the movement in a converted value compared to the value when originally transacted. The movement in the US Dollar and the Euro are the main contributors to these amounts.

Profit excluding foreign exchange gains/(losses)

This represents the profit before tax after deducting foreign exchange gains or adding back foreign exchange losses in the relevant period. This enables the reader of these financial statements, and the Group, to measure the comparability of underlying profitability without the volatility of these positions. To obtain the value, the reader of these financial statements should remove the foreign exchange gains/(losses), as identified in the income statement, from the profit before tax.
 

Condensed consolidated interim income statement

For the six month period ended 30 June 2016

Condensed consolidated interim statement of comprehensive income

For the six month period ended 30 June 2016, after tax

Condensed consolidated interim balance sheet

At 30 June 2016

Condensed consolidated interim statement of changes in equity

For the six month period ended 30 June 2016

Condensed consolidated interim statement of changes in equity

For the six month period ended 30 June 2015

The equity attributable to owners of the Company was £1,413,813,000 at 30 June 2015.

Condensed consolidated interim statement of changes in equity

For the year ended 31 December 2015

The notes to the condensed consolidated interim financial statements are an integral part of this document.

The equity attributable to owners of the Company was £1,527,963,000 at 31 December 2015.

Condensed consolidated interim cash flow statement

For the six month period ended 30 June 2016

Notes to the condensed consolidated interim financial statements

* The Group's percentage participation in Syndicate 33 can fluctuate from year to year and consequently, presentation of the ratios at the 100% level removes any distortions arising therefrom.

^ The combined ratio is made up of the aggregation of the claims ratio, the expense ratio and the impact of foreign exchange. The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net premiums earned. The expense ratio is calculated as the total of expenses for the acquisition of insurance contracts, and operational expenses as a proportion of net premiums earned. The foreign exchange impact ratio is calculated as the foreign exchange gains or losses as a proportion of net premiums earned. All ratios are calculated using the 100% results. Costs allocated to the Corporate Centre are non-underwriting related costs and are not included within the combined ratio.

The tables presented below contain the net earned premium, claims, expenses and foreign exchange items at 100% ownership, to enable calculation of the underling ratios included in the operating segments.

The return on equity is calculated by using profit for the period divided by the adjusted opening total equity. The adjusted opening total equity represents the equity on 1 January of the relevant year as adjusted for time weighted aspects of capital distributions and issuing of shares or treasury share purchases during the period.  The time weighted positions are calculated on a daily basis with reference to the proportion of time from the transaction to the end of the period. We annualise the ROE by using a standard compound formula for the half year periods, being the profit for the period divided by the adjusted opening total equity, to the power of 2 to annualise for a full year comparison.

In accordance with IAS 32 any changes in the fair value of the Third party investment in Kiskadee Funds, classified as a financial liability, are recognised as fair value gains or losses through profit or loss (note 18). The Group recognised a loss of £6,374,000 for the period to 30 June 2015 and 31 December 2015, which is included in other underwriting income above.

Wages and salaries have been shown net of transfers to acquisition and claims expenses.

* The foreign exchange adjustment arises from the retranslation of the estimates at each date using the exchange rate ruling at 30 June 2016.

** With the exception of the most recent development data for each accident year, which only relates to the six months ending 30 June 2016, the term period refers to one full calendar year.