Questor: Hold Hiscox in the calm before the storm

Hiscox

890.5p -40.5p

Questor says Hold

The whole point of insurance is to protect against unpredictable risks, and so it’s only right that the Hiscox team are scanning the horizon for the next big claim. Robert Childs, the firm’s chairman, warned yesterday that “a prevailing mood of suspicion and scepticism towards the financial services industry” could mean that the state support that kept the wheels on the sector in the aftermath of 9/11 might not be repeated in future.

For now, though, there is an eerie calm settled over the specialist insurance industry, which centres around the Lloyd’s of London market. A dearth of large disaster claims for several years has kept premiums under pressure but shielded insurers from cripplingly large pay-outs. And despite a flurry of takeover bids last year for rivals such as Catlin and Brit, the remaining five listed Lloyd’s specialists – Amlin, Beazley, Hiscox, Lancashire and Novae – have not fallen prey to bidders.

Mr Childs stressed Hiscox’s “strong independent future” in the results statement, and the figures for the first six months of the year give the impression of a firm planning for the long term.

The FTSE 250 company wrote 12pc more premiums in the period, totalling almost £1.1bn, and group pre-tax profits rose 8.4pc to £135.1m.

The retail business, which offers cover to individuals and small businesses and makes up half of written permiums, shone particularly brightly in the UK and US to offset a more lacklustre performance in the reinsurance market, which is crowded with competitors, and big ticket specialist cover. Even pockets of this business, such as artwork cover, managed to produce growth.

The interim dividend rose 6.7pc to 8p per share, although the firm cautioned that next year’s Solvency II capital requirements for insurers, along with the looming hurricane season, could swerve into the path of its returns policy.

Espirito Santo analyst Sarah Lewandowski note that “the sector has not been trading on fundamentals but on the potential for M&A and the high yields in the sector”. Hiscox itself noted in the results statement that the industry is “defying gravity”, attracting avalanches of money from investors seeking returns at a time of ultra-low interest rates, bond yields and equity markets. The shares came off record-breaking highs to close at 890.5p, or 16 times 2016 earnings, compared to 12 times for Beazley.

Hiscox is one of the most diversified and well-run in the business, but it is liable to fall to earth along with the rest of the market once claims rise. Hold, for as long as you think the sector can outrun Mother Nature.