Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Good morning or good afternoon, and welcome to the Hiscox Limited Q1 interim management statement. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor over to Chief Financial Officer, Paul Cooper, to begin. Paul, please go ahead when you’re ready.

Great. Thank you, and good morning, everyone. I'm Paul Cooper, Hiscox's Group CFO, and thank you for joining our Q1 trading update. While it's the first time that we're reporting our numbers under the new IFRS 17 standard, the structure of our disclosures has not changed. The key areas I'm going to touch on today are growth, loss experience and investment results. After this, I'll hand over to the call moderator who will open the call for Q&A. Starting with growth. As we told you at our December IFRS 17 [ teaching ], under the new standard, we have elected to report top line growth using insurance contract written premiums, our ICWP as an alternative performance measure. This is not a big change from IFRS 4 as the metric is similar to GWP with adjustments relating primarily to reinstatement premiums and non-claim-dependent commissions. I'm pleased to report that Q1 for the group delivered CWP growth of 7.4% in constant currency, underpinned by an attractive rate environment across all 3 business segments. Given the fateful rates and underwriting conditions in our big-ticket business, we increased our natural catastrophe bet and have deployed organic capital to make the most of the opportunity. Let me cover this first. Hiscox ILS delivered an excellent net insurance contract written premium or NICWP growth of 37.6%. We deployed additional organically generated capital as the market hardened materially in the lead up to the January 2023 renewal season with risk-adjusted rate increases of 45% in property and 26% in specialty. Overall, in Q1, the business achieved an average risk-adjusted rate increase of 41%. And since 2017, rates are up 116%. At the April renewals, Hiscox ILS took the benefit of the rate increases of some 20% without material change to exposure given our already attractive market share in Japan. As flagged previously, we expect lower ICWP growth, which was more muted at just over 5%. This is mainly due to the market-wide subdued ILS capital appetite and our own ILS fund also saw net outflows of 148 million in the quarter. Hiscox's ILS team are actively engaging with investors so we're ready when demand returns. And looking ahead at June and July renewals, we will assess opportunities on their own merit, and we'll deploy Captain a disciplined manner if favorable conditions persist and with great focus on maintaining the high quality of our book. I'm equally pleased about growth in our London market division, where ICWP was up 8.6%, underpinned by the attractive and improving underwriting environment and double-digit top line growth in major property, marine and terrorism books. Risk-adjusted rate was up 10% on average in Q1 and cumulatively up 86% since 2017. The hard reinsurance market is driving improving momentum in property with rates in household and major property up in excess of 20%. Net growth in Q1 is very strong, with NICWP up 21.6%, underpinned by better-than-expected growth in marine, energy and specialty where we retain more on our own balance sheet. With Aslan renewals being traditionally busy for proxy lines of business, the outlook for the first half is positive, although it's worth mentioning that rates are softening in casualty lines, particularly in D&O. And while we're pleased with the current momentum in our London market business, we will maintain underwriting discipline, growing selectively where we see compelling opportunity. Turning to retail. Adjusting for the impact of FX movements that we have little or no control over, we expect growth to continue to trend towards the mid of the 5% to 15% range, and the first quarter represents solid progress, showing improvement from 5.1% at the full year 2022 to 6.5% in Q1, both in constant currency. Our commercial lines business grew 7.8% in constant currency. We continue to push forward with technology initiatives across all 3 territories and are pleased with how things are progressing. In the U.S., the new platform rollout is now principally complete. Directed business has been live since June last year and is now embedded and partnership is making good progress towards increased usage by partners and agents. In Europe, the rollout of the core technology platform is on track. And in the U.K., the launch of our eTrade extranet is receiving positive feedback from brokers. Looking at growth through the market lens, Europe continued strong growth with ICWP up 13% in constant currency with strong momentum in all 5 markets. In the U.K., the improving underlying growth is masked as a result of the business reducing exposure to some delegated authority partnerships, the normal cause correction to drive profitability. This action has dampened growth by 3.5 percentage points in the first quarter. However, it will have a reducing impact as the year progresses and the underlying momentum in the business begins to drive headline growth. In USBPD, accelerating growth in the direct business was partially offset by the expected slower momentum in partnerships as our new technology is being embedded. As a result, IC WP grew 6.8% at the lower end of the 5% to 15% range, as previously guided. The sustained positive momentum in the direct business reinforces our confidence in the outlook for the rest of the U.S. BPD business. The combination of continued acceleration in the digital direct business and improving momentum in digital partnerships is expected to drive USBPD growth towards the middle of the 5% to 15% range in 2023. Moving on to lot experience. Despite a number of natural catastrophes, such as earthquakes in Turkey and Syria, convective storms in the U.S. Midwest and plugs and site plans in New Zealand, the total net loss reserves for these events as well as the nonnatural cat losses for the group are in line with our expectations. Just over a year on from the start of the Russian-Ukraine conflict, our estimated exposure remains unchanged at 48 million, with the majority of the loss still IBNR. Our current pricing and reserving assumptions incorporate expected inflation, which is a multiple of experience seen in the book historically. The increased premiums being collected through rate and indexation are keeping pace with our view of expected inflation. Finally, I would like to make a couple of comments on the investment result. I'm pleased to see that the unrealized losses in 2020 are now unwinding as our bond portfolios mature. This means we saw an investment result of 98.1 million in the first quarter compared to a loss of 119.4 million a year ago. At the same time, we are achieving an investment yield of 5.1%, a significant improvement on 2.4% overly 12 months ago. While the third quarter saw significant market turbulence, principally as a result of turmoil in the banking sector, I'm pleased with the fact that our investment portfolio saw no material deterioration. In summary, -- the first quarter saw us deliver against our promises. Re & ILS and London market continues to thrive in very favorable market conditions, growing top line and materially increasing net retained premium as we deploy our own capital to make the most of the opportunity. For our retail businesses, growth momentum in the U.K. and U.S. is accelerating in line with expectations, and Europe continues to deliver strong double-digit increases. Loss experience is within our expectation, and our pricing is keeping pace with inflation. The group remains well [ captivized ] on both a regulatory and ratings basis with continued strong capital generation and high levels of liquidity. We will deploy capital where we see attractive growth opportunities into each of the business units, in line with our strategy. All this in combination with the improved investment result means the outlook is positive. I will now hand over to the operator to open the floor for Q&A.

[Operator Instructions] And our first question today comes from Will Hardcastle at UBS.

First question, I guess, can you just walk us through some of the growth in net premium growth dynamics, please? I see there's a 22% premium growth in London market well in excess of the headline 9% gross growth. How would you expect this -- the gap or the relationship of these to develop through the year -- and just following up, I guess, within U.S. retail, it appears that the non-U.S. DPD growth is below that of the headline rate increase? And what's the driver of this? And how should we expect this to develop or impact profitability? Moving away from premiums. You mentioned that June and July renewals have every potential to be extremely attractive. Can you talk us through where you see some of the greatest opportunity to arise at this stage? Is it just in the reinsurance division or some of this come through London market and DNF pipelines? And I guess it's just a question about your thinking on exposure there. Will it likely be April, similar to your April renewals where you moved up the layers or not?

So talking about the growth to that first of all, I think it's important to note and what we've said is the hard markets that we're experiencing are very favorable, particularly in Re & ILS. And to some degree, certainly in property in London market. And also, we've seen good conditions in marine and energy. And what that means is if I take London market first, we've seen top line growth of 8.6%, as you said. The net written is actually very strong at 21%. And really the factor of that is 2 things. One is property. We're seeing good rates in London market in excess of 20%, and we have taken that. And then for Marine and Energy, the other aspect that plays out is that actually we're seeing double-digit growth in marine and energy but on a net basis, actually, we have less quota share reinsurance, and therefore, the growth for Marine and Energy is more pronounced. So I think you can sort of looking forward for London market, certainly, the opportunity within property remains very attractive, I would say. Turning to U.S. retail. This is very much in line with what we've said at the year-end and in line with guidance. So just as a reminder, we've got nearly 600,000 customers in the U.S. retail space. As a reminder, we refocused the U.S. retail trading business at the first half of last year away from those clients that have larger revenues, and it's very much a focus of the underwriters in the field in the U.S. now to get on the front foot and grow that business. And they have done that with the 1.7% growth in Q1. For the U.S. BPD business, it is very much a continuation of what we said at the year-end. So we're very pleased with the progress of the direct to commercial business for U.S. DPD. We're seeing very strong new business growth. As a reminder, we put that business on the new platform in June of last year. And then very much, it is driving sort of business-as-usual growth and always the signs are very positive from the way that the system is behaving in terms of conversion, in terms of the amount of transactions that are completed online and the outlook for that growth. In terms of the partnerships business, that is very much now firmly in the embedded stage. So what we are seeing is we have taken on since the start of the year now, 17 new partnerships, that's after posing onboarding any new partners for 2 years. And we're in excess of 91% of new businesses on the partnerships is on the new platform. So very much that trajectory you'll see is after the sort of guidance that we set is towards the lower end of the 5% to 15% range of USBPD at 6.8%, we expect that to trend towards the middle of the 5% to 15% range for the full year, absolutely in line with guidance. Now you mentioned profitability, again, just as a -- we've said that the retail business Will, we expect to perform within the 90% to 95% range. That obviously remains unchanged. If I look forward for the Re & ILS book, just to comment on that. We're very pleased with the net growth of 37%. Again, it's important to bear in mind that we have a hybrid model for our Re & ILS business, where we can write on our own balance sheet or right on and using other capital either through ILS funds or potash. And it just happens, and you'll be aware of this market dynamic that at the moment, we're not seeing any meaningful influx of alternative capital come back into the Re & ILS space. And as a consequence of that, you see the top line for us a bit more muted, but certainly, on a net basis, we are growing exposure as PO1 we've deployed casted into that space. And we think the 37% growth on a net basis is very healthy, and the rating environment is very positive at 41%. If I look at [ 14 ], you'll recall that we have a good market share in Japan, and we took rate of 20% of 14 and didn't expect growth exposure because we were comfortable with our position there. And then looking ahead to 1.6 and 1.7. The market environment remains attractive. What I would say, though, is that we have a number of high-quality cedents. And what I would expect for sort of the 1.6, 1.7 renewals is that we would look to add premium with those high-quality seeds as opposed to -- add to the volume of those seasons in any meaningful way.

The next question comes from Andrew Ritchie from Autonomous.

A couple of questions on retail, first of all. Can you just clarify a little bit confused on the U.K. retail because you talk about commercial growth of 7%, the overall growth in constant currency was 1%. And you talk about, I think, the delegated authority partnership ending. So I'm assuming the shrinkage is in retail or personal lines, I guess. Could you just clarify that's the case? Because I thought we went through some re-underwriting of that last year. It sounds like there's another underwriting. But it implies quite a lot of shrinkage of the commercial book, which is most of it is growing at 7%. So just clarify what's going on there would be helpful. A quick one on U.S. retail pricing, which I think you put in the statement plus which is actually an acceleration from last year, which is a bit surprising because your U.S. retail business doesn't have a lot of property in it. And the professional lines pricing is not doing a lot. So is that what's happening? Do you actually see any valuation in U.S. retail pricing? And the final question is a sort of just a conceptual question. I think if we think about exposure, property cat exposure, and I'm thinking by the way, across [ Re & London market ], I think in aggregate, whilst you've grown in net, there still isn't a huge amount of sort of growth in exposure, I think, I mean, because obviously, very strong rate increases in property, and there's also been some shifting in layers. Could you just clarify how we think about year-to-date exposure growth, thinking of both London market and we in [ CAT ].

Let me just take each of those in hand. So dealing with U.K., the underlying momentum for the U.K. is strong and positive. So you're right to highlight, we're pleased with the 7% growth in commercial. APC actually returned to growth as part of that. So that's a positive outcome. And then just on delegated authority. The reason we called that out is it is a drag on the U.K. growth in the first quarter, but it is just part of normal course direction that we'd undertake. And it's important to note that that we'll be finished with that business is sort of outside of underwriting appetite. It will be marginally accretive from a profit perspective. And you'll see growth return for the U.K. or strengthen from that momentum perspective into the second half of the year. The thing to add around -- and we continue to invest in growth for the U.K. So there's several dynamics to mention. One is that we are investing in underwriting in APC to grow that business further. The second is, we've talked about it in the statement, but we're pleased with the deployment of further eTrade with brokers. We talked about it at year-end. We've got a significant number of brokers signed up to that, and the outlook is positive, although it will take time to obviously get some traction as would be expected. And then the last part, I think this is true of the U.K., but I think it applies to the broader point about the retail business is we continue to invest and grow the marketing spend to grow the business. And that's taken 2 forms. One is the sort of direct marketing. So we'll continue to do that to grow volume. And the other thing is we're investing in the brand game. So again, that will have a longer-term benefit certainly in terms of retention and attracting new business and growing marketing efficiency. So I'll say that. And then just the U.S. retail perspective, that's really a function of the new system for BPD. And what we're seeing is we can just be much more flexible with a new system in driving rate. And there is some -- an element of sort of class-specific growth you're right, and we don't write any meaningful property in the U.S. But what I would say is cyber and now I help continue to drive the PDL rates. So there's a bit of mix effect where we think we can and have done is taken rate, which contributes to that 9%. Then I think the sort of last point around the property cat exposure. I think we were very clear at the start of the -- for our year-end results. We have absolutely grown exposure. As a reminder, 1/1, our 1/1 renewals, net written premium was up 49%. The read across under IFRS 17 is the equivalent number is 7%. And the 2 dynamics is we are actually growing exposure there and have done. The important point and you've commented on it is that we've also taken advantage of the hard market conditions. And in that, what we've done is essentially the dynamic that is playing out is [ sedans ] are having retentions or increasing their retention. But also what we're doing is terms and conditions have tightened, and we've moved up either layers or programs. And what that essentially means is the premium dynamic change, clearly, the rates remain very favorable across the program. But what it will mean in general is that we've moved away from the sort of attrition of activity, which is more at the sort of working layers lower levels. So you can see that certainly in the chart that we showed back at year-end that shows our exposure growing, and that's reflective of our [ 10,250 losses ]. The P&Ls are up, certainly a lot more versus prior year. But the sort of 1 in 5, 1 and 10-year trend line has remained pretty flat, and that that's reflective of the conditions that I've just explained.

The next question is from Freya Kong from Bank of America.

Could you comment a little about the retention that you're seeing in the U.S. retail business, rates were up 9%, but overall growth was 4%. How competitive is the DPD marketplace in terms of pricing? And generally, how is the SME market holding up in the U.S. given broader concerns about the economy? And next question is the risk-adjusted rates you're seeing in big ticket lines is very strong, 41% in Re & ILS, 10% in London market. What's the earn through of incremental improvement we should expect to see in the combined ratios?

So the U.S. SMB market remains good and healthy, I'd say, from a growth perspective. Just as a reminder, the way that we see it is the retail traded book, so the sort of more traditional market is-- and remains competitive. We've got a market-leading product set from a trading perspective. So we feel that we can compete there. And as I said, the 2 dynamics that will drive that growth further is, one, the underwriters very much being on the front foot with growth, but also the sort of level of marketing that we're driving into the retail business in the U.S. in particular. On BPD, the long-term structural growth dynamics remain very compelling. We've estimated there's something like 32 million customers out there. As I said, on a U.S. PPD basis, we're in excess of 0.5 million. So you get a sense of the market size that we can go after. And it remains fragmented, underserved and then societal shift to buying insurance online. So we think with the re-platforming the technology advantage, the brand and the underwriting expertise that we have, we're very well positioned for growth, the longer-term structural growth prospects for the U.S. DPD market. And guidance remains unchanged for that's trending towards the middle of the 5% to 15% range. With regard to retention and rate for the U.S., retention remains good and strong and healthy. So as I said, we're able to -- with the underwriting insights that we have, drive the rate that we've obtained. So we're pleased with the U.S. performance and the trajectory that, that has from a combined ratio, turning to the big-ticket business, you're right. We're very pleased with the outcome for Q1. So you're right, Re & ILS I 41% London market up at 10%. And within that, sort of within the London market, the property certainly for household and major property are up in excess of 20%. So how does that translate? Well, to give a guide, what we said is in a mean expected year, we'd expect and we delivered on that for the last year, full year results, London market to mid-80s combined. That was the third consecutive year of being in the 80s. This is, of course, under IFRS 4 -- and then Re & ILS was a low 81%. And with the rate increases, other mean expected year, you can expect certainly margin increasing to improve the London market and somewhat more positive for Re & ILS but healthy on both accounts.

The next question comes from Derald Goh from RBC.

A few questions, please. The first one is just on large losses. I hear you say that it's within expectations in your budget, but could you maybe get a sense of the relative shares from the main event, say, for example, was it higher from the earthquake and lowest from the U.S. Second question is just on cyber. Could you maybe comment on the claims experienced in the quarter on your own book and also maybe for the market? And thirdly, just going back to the midyear renewals. Could you maybe comment on how much appetite you have for U.S. cat and maybe Florida in particular?

So the key point about losses that we wanted to highlight is Q1 has been an active quarter for Nat Cat. So you've seen earthquakes in Turkey and Syria. You've seen cyclones and floods in New Zealand. And also there has been convective storms in the U.S. Midwest. And what we are keen to point out is when you add all of that up, it's within expectations in Q1. Also, from a non-natural cap loss perspective across the group, the game also within expectations. For cyber, it's interesting, we're not seeing any sort of meaningful uptick in cyber losses on our own book. I think generally for the market, it's been a reasonably benign couple of years, I would say, for cyber losses. My understanding, I think in sort of the press and market reports is that runs and where losses are picking up, but to -- for the sort of Hiscox book, and we write across all 3 of our business units, so reinsurers London market and retail, we've not seen any meaningful uptick in rents and wear losses at Q1. For the midyear outlook for the major renewals, so 1.6, 1.7. I'll just repeat the comment that I made. The market conditions remain extremely favorable. We've got a number of high-quality feeders and we'd be looking to grow premium with those high-quality seasons that we wouldn't be looking to add meaningfully to the number of cedents that we have across those renewal periods.

The next question comes from Kamran Hossain from JPMorgan.

Two questions, the first one reinsurance. The first one...

Kamran, we can't hear you. You fading out. Operator if we can fix this. If not, go to a different question and come back to Kamran.

Next question comes from Tryfonas Spyrou from Berenberg.

I have 2, please. The first one is on the D&O. I think you've begun growing this book in the second half of last year. Would you be able to give some color as to what the size of the D&O book now? And what is your appetite here going forward? It feels like you're saying that some parts of this market are still attractive despite rates coming off quite strongly in the last 2, 3 months. So any comments would be appreciated. The second one is on ILS and your AUM, I think they were down 0.1 billion during the quarter. We cited lower appetite for third-party capital being the key driver. Would you be able to comment as to what the trading activity has been from Q1 to date, it looks there was some pickup in activity for the industry after March, given [indiscernible]. So I was wondering if you have any -- see any increase in appetite on your end as well.

So D&O, I said I'm pleased with this that the underwriters have spent a lot of time developing that book into a high-quality balanced portfolio for the D&O class. You said about absolute size. As a useful guidance we don't sort of quote on individual lines of business. But if you go to the year-end results and have a look at the casualty split, it's pretty meaningful element of that casualty split that we've disclosed in the year-end to give you a sense of size. So it's high quality you're right. So rates were down 11%, but I would point out that, that book is well rated. So since 2017, the cumulative rate increases are now at [ 190% ]. So we're happy with where that book is. I think the outlook is more a case of taking sort of the foot off the accelerator given where pricing has gone to. It's very much a question of maintain. And I think what you can see is sort of an outlook for that business would be exposure to sort of would be flat to down for the rest of the year. I think from an ILS perspective, I think I repeat my comments that I said earlier on, the market remains, I think, in a state of trust with capital and third-party capital, not coming in, in any meaningful way. Of course, there's been some influx around cat bonds, which is a slightly different dynamic. But sort of the key ILS funds that are collateralized, what you're seeing is, I think 2 dynamics play out. One is that the third-party capital ILS capital wants some proof points. So they've had 5 years across the market of cat activity. As a reminder, 2022 was another year of-- in excess of 100 billion of insured losses. So they want to see that play out. And I think that means that you've got to get around to the next set of results in March or April. So that's to see how the cat season has played out and how that's reflected in the various reinsurance markets results. Of course, what that will mean is the meaningful renewal period of 1/1 would be sort of missed by that capital. And therefore, we remain positive about the market environment given the general lack of capacity, both from the traditional market and the ILS market into '23 and '24. So I think that's one dynamic playing out. The other aspect, of course, is that risk-free rates have gone up and the ILS capital or investors have now some meaningful other opportunities in other asset classes where they can get a decent return in the more traditional sort of investment market. So I think that dynamic continues. And what I would say is we remain very engaged with our -- with the ILS market. And as and when that capital chooses to come in, I think we're very well positioned given our underwriting ecosystem and our ability to match risk and originate risk and match that to capital. I think we're well positioned there to the ILS market given the optionality our Re & ILS platform provides.

The next question comes from Kamran Hossain from JPMorgan.

The first question or both questions on reinsurance. So I guess just thinking about how the cats played out in Q1. When I think about like the nature of some of the losses within individual markets, clearly, Turkey peak in that market, so you probably have some on the market does. But the convective storms will be secondary. How has your moving up the layers kind of effect of maybe where the losses have hit you on just interested in kind of views on that, I know it's only one quarter, but just interested in that. And the second question, I think I'm going to have another kind of go at the question that Freya asked on kind of how margins might improve. Clearly, low 80s reinsurance combined ratio last year, you had the second biggest Nat Cat of all time or kind of there thereabouts risk-adjusted rate of 41%. Is it unreasonable to assume at some point that you get to the combined ratios you saw in reinsurance in like 2013 to '15, given the rate environment, given the terms and conditions given the structures?

I mean I think turning to the first question, yes, the point remains the same, Kamran, which is for the reinsurance market and what we're seeing for [ Sedans ] is retention are higher. We've moved up the layers in general and have moved higher up towers and therefore, further away from attritional activity. So you can read into that where you've got more attritional losses of the type you've mentioned how that would play out from a profitability perspective. The second point, again, I think it's important to bear in mind, yes, it was a busy period in 2022, and we did deliver very pleasing combined ratios at the mid-80s and low 80s for London market and Re & ILS. We think that, that was a real lean year for our book. And so you can read into that that given the rates that we've taken both in property and London market and the 41% you mentioned in Re & ILS, that we can see margin accretion on both of those books of business in a mean year. Now returning back to the sort of early, what did you say, 2013, 14 of course, it's a difficult read across because of the position of the book but also the degree to which that was cat free or not if there was a cat activity, whether those losses were North America and international or the nature of it. So I think it's hard to make a [indiscernible]. But obviously, if it's a benign year, then that accretes even further to sort of margin.