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Questor: joining the FTSE 100 caps the Hiscox success story, but at 17 times earnings it’s a hold
Questor share tip: a fourfold increase in the share price has propelled the insurer to the top flight, but valuation is a concern
To unwind from the rigours of insuring clients against kidnaps and flooding, Robert Hiscox collected fine art and went on an annual game hunt deep in Africa. Five years after the retirement of its outspoken chairman, Hiscox has become a big beast itself.
Last week it was confirmed that the company would enter the FTSE 100 on Christmas Eve, capping a remarkable rise that has seen its shares increase more than fourfold in value in a decade.
For all the unpredictability of natural disasters – as the woes of the Lloyd’s of London market often make clear – there appears to be no better business model than the accurate pricing of risk whatever the weather.
Balance is what chief executive Bronek Masojada has been striving for, developing local speciality business that is less volatile than big-ticket underwriting.
Last year was the most costly yet for natural catastrophes after a spate of hurricanes, Mexican earthquakes and California wildfires, but Hiscox still managed to turn a profit of £94m before foreign exchange costs despite $225m (£176m) being set aside for claims.
In the aftermath, insurers had expected pricing to strengthen but competition means that premiums have risen by less than hoped. Hiscox has set aside $125m to cover claims due to hurricanes Florence and Michael in the United States and typhoons Jebi and Trammi in east Asia.
Marine and subsidence claims have also ticked up and liability insurance for company directors has seen rising claims.
This year is the first time Hiscox will report in dollars, a switch designed to iron out some of the volatility caused by currency movements. It is also a year characterised by slowing, but still impressive, topline growth, from 16pc after two quarters to 11pc after three.
Hiscox, which has been based in Bermuda for more than a decade for tax and regulatory reasons, has built a retail business that made up 56pc of gross written premiums last year and recently signed up its millionth customer. Retail is well placed to carry on growing as a share of the business but sustaining a consumer brand doesn’t come cheap.
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Hiscox raised its marketing budget to £54m last year, with particular emphasis on the United States. Hiscox USA has been a standout performer, with premium growth of 29pc in 2017 easing to 18pc in the first nine months of this year.
Analysts at HSBC are unconcerned, explaining that the US slowdown is a function of the operation’s scale and that 15pc growth today generates as many new premiums as 30pc book growth did three years ago.
There are other bright spots. In Britain a new IT system is expected to save money in the broker channel when it is fully operational. And analysts think the London market’s underlying underwriting profitability will improve next year after actions taken by Lloyd’s.
The group remains renowned for its activity in the art market but a lesser known growth driver is its popularity with small enterprises, which favour its automated underwriting platform.
Analysts at Bernstein point out that Hiscox is also well invested. Because 70pc of its bond holdings are dollar denominated with short maturities, the company will benefit quickly from rising interest rates. Investment income will almost double over the next five years, they forecast.
- Questor archive: telegraph.co.uk/questor
Masojada is taking Brexit in his stride. At a cost of $15m, Hiscox has set up a new Luxembourg subsidiary that will be ready to write business from next month. Some €40m of capital will be put into the new structure.
Questor has been a fan of insurance recently, pointing out the attractions of Direct Line here at the end of October. But despite its chunky yield, shares in the motor and home insurer look directionless. The same cannot be said for Hiscox. As one of Europe’s few insurance growth stories, its stock has continued to make progress despite the board cautioning a month ago that the pace will moderate from here.
There is never a bad time for a stock to enter the FTSE 100, particularly as vindication of a job well done. But trading at 17 times next year’s earnings, this is not the best entry point for new shareholders even though Hiscox’s long-term prospects are sound.
Questor says: hold
Ticker: HSX
Share price at close: £16.08