Hiscox is bolstering its existing reinsurance programme with the purchase of industry loss warranties (ILWs) ahead of the upcoming hurricane season and is looking at potential loss portfolio transfers (LPTs) to free up capital.

Hiscox – hurricane

  • Lloyd’s carrier unveils de-risking measures alongside capital raise 
  • $100mn ILW spend
  • Examining LPTs
  • Equity raise: ~£350mn
  • $60-90mn of operational efficiencies

Hiscox is bolstering its existing reinsurance programme with the purchase of industry loss warranties (ILWs) ahead of the upcoming hurricane season and is looking at potential loss portfolio transfers (LPTs) to free up capital.

The disclosure came yesterday (5 May) as the UK-based (re)insurer confirmed plans for an equity raise equivalent to up to 19.99 percent of its existing share capital which this morning was priced at 650p per share, raising £375mn.

In a trading update, the carrier detailed a number of actions it has taken to protect its capital position in “unprecedented and uncertain times”, which have seen the spotlight shone on its own potential Covid-19 business interruption exposures relating to its small business UK package offering.

Hiscox said it is taking action to adjust its business mix, including its total catastrophe exposures, to provide additional capital relief.

It has also purchased $100mn of new reinsurance protection, it revealed.

The (re)insurer said it maintains a “comprehensive and high quality” reinsurance programme with a diverse range to reinsurers to protect its book of business.

“Hiscox is supplementing this programme with the purchase of ILWs to protect the natural catastrophe book ahead of the US wind season,” said the release.

It added that the company is also exploring “selective” LPTs to release capital on the “big ticket back book”.

It didn’t provide further details about the lines of business in which it would look to offload back year liabilities from its balance sheet.

The purchase of ILWs comes amid an increasingly tight reinsurance and retro marketplace, with an alternative capacity crunch as retrenchment that had already been underway prior to Covid-19 is exacerbated by the crisis and concerns over further trapped collateral issues.

Other actions taken by Hiscox include the acceleration of $60-90mn of operational efficiencies for 2020 as part of a programme of expense savings. The measures include implementing a recruitment freeze and curtailing travel and entertainment expenditure.

Hiscox share price

The company said it is also continuing to take a conservative approach to its investment portfolio.

It said it had entered the year with a “high quality and conservatively-positioned investment portfolio”, which had helped preserve capital amid market turbulence. Hiscox has limited exposure to BBB credit, which has been beneficial as credit spreads have widened, said the carrier.

The (re)insurer has also pulled plans for a final dividend for 2019 or any interim dividend and will also shelve any share buybacks for 2020 in order to preserve capital.

The actions taken together with anticipated net proceeds from the capital raise mean that even allowing for an assumed pandemic loss of $175mn, Hiscox said its Bermuda Solvency Capital Requirement ratio would increase from a pro forma estimated level of 195 percent at 31 March 2020 to 250 percent.

“This would give Hiscox significant capital headroom to withstand a range of modelled downside scenarios as well as provide it with the flexibility to deploy capital for future growth,” said the firm, adding that it has “robust” reserves that are around $300mn above actuarial estimates.

Covid-19 opportunities

Despite mounting pressure over potential Covid-19 underwriting exposures, Hiscox said the rationale for the capital raise is to take advantage of opportunities for profitable growth in wholesale and reinsurance markets as capacity retrenches and rates improve across the market in the fallout from the pandemic.

“Hiscox is seeing continued positive momentum in its London Market business, with Hiscox Re & ILS positioned well to capture opportunities presented by capital contraction which is expected to drive rates up further.

“The opportunities for Hiscox Retail remain significant, with Hiscox currently occupying only small market shares in very large addressable markets. The Board is optimistic about the scale of the opportunity which lies ahead,” said the company.

It added that it is seeing aggregate rate increases on its London market portfolio of 12 percent year to date, while there is also accelerating rate improvement in reinsurance.

In Hiscox Retail, rates are up by 4 percent across the US portfolio with terms and conditions also improved.