Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to the Hiscox Q1 2024 Trading Update. I'm Paul Cooper, Hiscox's Group CFO, and I'll be walking you through the usual topics that we cover at Q1, namely growth, claims experience, the investment results and the buyback update. After this, I will hand over to the call moderator who will open the floor for Q&A. Let's begin with growth. I'm pleased to report the group has delivered ICWP of just over $1.5 billion, up 8.3% year-on-year. This has been underpinned by disciplined capital deployment in Re & ILS as well as accelerating growth in our retail business. We continue to make solid progress across the portfolio of businesses. In retail, we are beginning to realize the benefits of the initiatives implemented over the last couple of years focused on improving service to brokers, reinvigorating our brand as well as launching new products to service our customers' needs. In our big-ticket businesses, we continue to maintain a thoughtful and disciplined approach, growing the business where we see opportunity and moderating our position where this is not the case. Let's dive further into this and examine our growth by segment, starting with retail. Retail ICWP growth increased to 5.8% in constant currency, up from 4.2% at full year. In line with our guidance, retail growth has returned to its medium-term target range. This has been driven by a step-up in growth in the U.K. business and robust growth in both U.S. DPD and Europe. So 3 of our 4 retail engines are now performing well with good momentum and opportunities ahead. In the U.K., improved performance across all areas of our business delivered growth of 8.3% in constant currency, a significant step-up from 2023 full year growth of 2.4%. We remain positive on the U.K.'s outlook. However, growth will temporarily moderate in the second quarter due to some nonrecurring premium recognized in June last year. Our European business has delivered growth of 6.6% in constant currency. This is in line with our expectations due to challenging first quarter comparatives. We expect the growth rate to build as the year progresses with the momentum further helped as new products and partnerships come online over the course of 2024. In the U.S., our digital business, U.S. DPD, is now growing at double-digit rate, having accelerated to 11.3%, up from 9.2% in the second half of last year. It is most pleasing that both the direct and the partnerships parts of the business are growing at double digits. Marketing investment, strong retention and the full digital launch of our workers' comp partnership are all helping to drive growth in the direct business. In digital partnerships, production is ramping up across both our new and existing partners. The only part of the retail portfolio that is performing below our expectations is US Broker, where premiums continued to reduce in the first quarter. As previously disclosed, the business has been impacted by the challenging market conditions in cyber and the time it is taking to pivot to growth after the book was decisively reunderwritten back in 2021. While we're starting to see promising results from our targeted growth campaign, particularly in architects and engineers and entertainment lines, we expect the US Broker business to continue to shrink at mid-year. Now moving on to London market. After a year of strong results, our London market division has continued to exercise discipline to manage the cycle effectively. The rate increase of 3% achieved in Q1 was slightly ahead of our expectations. While it is lower than last year, overall, the business remains attractively rated with cumulative rate increases since 2018, now standing at 76%. London market ICWP decreased by 4.9% and net ICWP decreased 6.3%. Adjusting for the one-off impact of accounting reclassification items, London Market gross premiums were broadly flat year-on-year. Consistent with our strategy to lead on the majority of the business we write, during the first quarter, we made the proactive decision to non-renew certain large binder deals and instead write the business in the open market. The initial negative impact of this is expected to dissipate through the course of the year. Looking at the underlying momentum. Property classes continued to enjoy double-digit net growth, most notably in property binders and flood, while we continue to manage the cycle in D&O, cyber and GL. The transition to the green economy and national energy security concerns continue to present significant opportunities. Our ESG sub syndicate launched a year ago has had a positive start to 2024 with casualty risks now also written under its umbrella. We are also continuing our collaboration with Google Cloud. After the 2023 proof-of-concept successfully demonstrated that we could reduce the time taken to quote a terrorism risk from 3 days to 3 minutes. We are now implementing this into the live environment. Work is also underway to extend the core capabilities to our major property class. Over time, we aim to roll out AI capabilities to all relevant lines of business, which will free up time for our underwriters to focus on their higher value tasks. Moving on to Re & ILS. Hiscox's RE & ILS achieved ICWP growth of 19% as the business deployed additional loan capital and new quota share capacity with net ICWP growing nearly 10%. January saw an orderly and balanced renewal season with standardization of terms and conditions across the market. Rates grew modestly by 2%. This follows a significant improvement in 2023 with cumulative rate increases since 2018, now up 94%. Regarding the April renewals, rates fell slightly in the Japanese renewals, but remains adequate. Looking ahead, positive market conditions are anticipated to persist throughout 2024, and we will continue to deploy capital where we see attractive opportunities. After a successful 2023, our ILS fund returned profits to investors, leaving our assets under management at $1.7 billion at the end of March. Fund outflows were partially offset by our side car and ILS fundraising efforts. The movement in AUM should be considered alongside the additional quota share capacity we secured ahead of 1/1. We expect ILS AUM to continue to decrease, resulting in a likely trend of net ICWP growth exceeding moderated top line growth in 2024. Now looking at our claims experience. The first quarter of 2024 has seen some natural catastrophe activity, but these have had a limited impact for Hiscox. Overall, we are well within our group's nat cat budget for the quarter. The situation regarding the Baltimore bridge disaster is complex and ongoing. I can report Hiscox has no direct exposure to the business interruption policy at the port, nor the property policy covering the bridge. Hiscox London Market does participate on the reinsurance for the IG Group of P&I Clubs. No associated reserves were booked in the first quarter as it remains an emerging event. However, we expect the net loss to be moderate for the group due to the reinsurance arrangements in place. Let's move briefly on to our investment result. The investment income results for the first quarter of 2024 is $66.9 million, representing a return of 0.8% year-to-date. This has been somewhat impacted by mark-to-market adjustments on bonds as expectations of Central Bank rate cuts moved out during the quarter. The outlook for the year is good, with the yield to maturity now at 5.2%, up from 5.1% at year-end. The duration of the bond portfolio has been extended to 1.8 years to position the portfolio in anticipation of falling interest rates and also to be more in line with our liabilities. I am pleased to report good progress with our $150 million share buyback. As at 30th of April, we have repurchased 4.7 million shares for approximately $71.4 million. This represents approximately 48% of total buyback. At full year 2023, we declared a final dividend of $0.25 per share, an increase of 4.2% year-on-year. Today, we have gone ex-dividend on this. In summary, we are excited for 2024 with opportunities to be realized across all areas of our business. The return of our retail business to the target growth range is an encouraging result and demonstrates the success of our initiatives to proactively capture the opportunities in front of us. We expect our U.K., European and U.S. DPD engine to continue to deliver robust growth through the year. Attractive market conditions persist within our big-ticket businesses, and we will continue to deploy capital where there is opportunity for profitable growth. This concludes my opening remarks. So I will now hand over to the operator to open the floor for Q&A. Operator, over to you.

[Operator Instructions] The first question comes from the line of Will Hardcastle of UBS.

The first one is just on retail. I guess you called it out there that maybe the only niggle in retail was the US Broker side of things. When would you expect this headwind to normalize? And with the U.K. now coming through, U.S. DPD coming through, would you be confident enough at this stage to be exiting 2024 nearer to double-digit levels? Or is that too optimistic? And then on London Market, I guess, can you help us to understand whether we should be anticipating this still to be in the positive territory by full year stage? And you talk about that this is partly because of improved economics. Is there any way to discuss whether that perhaps less premium expectation that people expect now is entirely offset by the better margin?

Great. Thanks, Will, for your 2 questions. So yes, look, it's useful to walk through the retail dynamics. So yes, you're right. I think it's useful to put US Broker in the context of the overall retail performance. So let's start with that. So first of all, it's good that we are back within the 5% to 15% range at Q1. The overall momentum is positive. If I talk to US Broker, I think there's 2 things that are occurring. One is, we talked and signposted posted at Q2 last year that the cyber market in US Broker has become very competitive. And although that sort of abated slightly into 2024, it has persisted into this year. I think the important thing to bear in mind is as the cyber book has shrunk as a proportion of the overall US Broker portfolio, clearly, the drag is less going forward than it would have been, let's say, in 2023. I think the other aspect is, you'll recall that in 2021, we repositioned the entire US Broker portfolio away from, let's say, really large clients for simple purposes, and much more towards a smaller micro end. And it's just taken time to really reengage with brokers, our underwriters and distribution to get that sort of underwriting appetite clarified and really driving forward. Now what I would say is there are signs of sort of positive momentum, certainly, within architects and engineers and entertainment. They are 2 aspects where we've put some growth initiatives forward, and that's clearly got some traction. But I mean we are cautious on US Broker overall, and that's why we've said, "Look, we don't anticipate this to return to growth in Q2. We'd expect the reduction in premium to continue, and we'll give an update at the half year." That does contrast, I would say, with the other engines of the retail business. So your sort of point about the trajectory of retail as a whole, it's worth considering the 3 other aspects. So the U.K., clearly, what we've seen is a really good step up from the 2.4% at full year '23 up to the sort of in excess of 8% for Q1. The momentum there is really positive. So we have new distribution deals signed. We've got a stronger operating rhythm within the business and the brand refresh has been positive and is driving traffic into our website. I think Europe continues to have solid and strong performance. It had a solid Q1 at 6.6%. We expect the momentum to increase over the rest of the year. And then U.S. DPD, it's clearly a benefit and is very encouraging for us to see that, that momentum that was building in H2 last year has continued into the first quarter of this year at the 11.3%. So I think you can see the sort of shape and direction of the retail business when you take all 4 of those parts in aggregate to help you sort of determine where we'll end up within that 5% to 15% range. And then I think on the London Market question, well, I think it's useful just to put that in a strategic context, first of all. So what we have said is that, if you look at what differentiates us in London Market, it's to lead on the majority of the business that we underwrite. And that lead, that enables us to have better control over terms and conditions, and it enables us, we believe, to see the market faster. And I think as a consequence of that, we non-renewed certain binders in the first quarter. And what we intend to do is capture that business and write it in the open market. Now clearly, that saves on some additional commissions where it's delegated authority. And I think what you'll see is that, that growth will come back over the course of the year as we write more and more of that business in open market. I mean renewables is a good example of that, where we non-renewed a binder. We have -- if you think it's pretty much an emerging line of business with the significant investment in the transition to the green economy. And in essence, what we've done is we've built up the underwriting expertise, we have added engineering resource, and we've got more and better data for better underwriting insights. And clearly, that enables us to lead on the business as to purely degrade the authority. So you will see where we have done that, taking that approach and that strategy, improved the economics, but it won't be material given the context of the overall London Market business and the overall group. So hopefully, that helps sort of explain the London Market sort of trajectory, Will.

The next question comes from Kamran Hossain of JPMorgan.

Two questions for me. The first is just on, I guess, DPD and partners there. It's good to see growth ramping up in 2024 from those partners. What's the pipeline like for new partners at the moment? And kind of where -- in general, where are these partners coming from or being sourced from? The second question is on the London Market. You've -- it sounds like you want to increase the amount of business that you lead. But I know there's also a comment that you're writing more -- you've said that you've seen particularly strong growth in property binders as well and properties. So I'm just trying to square the 2 things, because one says you want to leave and one says you're growing a little bit more on property binders?

Yes. It's - okay. That's a good point and worth clarifying. So I think if I deal with the second one first, just on the market, because it follows on quite nicely from Will's earlier question. Now the important thing on London market is it's not either or. What we said is that lead on the majority. But if you take the London Market binder business, rates are very attractive in that line of business at the moment. So they're up 12% on our book of business in Q1. And that's entirely with our consistent -- consistent with our -- the points that we've made that we will deploy capital into attractive market conditions. And you've seen that -- if I broaden that point out, not only in property, where overall, we've grown that double-digit on a net basis, but also into the reinsurance space where we grew our net book nearly 10%. So I think it is consistent, but it's definitely not an either or, but it will give you a sense of sort of what we want to achieve on the London Market. I think for DPD, the point that we would do is, the strategy is really one-off, all roads lead to Hiscox. And therefore, what we want to do is broaden out the distribution base, certainly to points of aggregation. So if you have a look at sort of some of them, they might be wholesale brokers who are online. They might be other insurance companies that want access to our portfolio of businesses that they don't have expertise and write on their own balance sheet. And I think there's a -- if you look at what we've achieved, we had something like 4 new partners in Q1 of 2024. We'll continue to see a pipeline. Clearly, the business is very attractive of those partners who either want to get access to our products or actually want to earn decent fee income for distributing our products on our behalf. I think the important thing is that we are very focused on the quality of those. It's not just a question of driving volume for its own sake. And therefore, you shouldn't expect a sort of partner pipeline to be sort of metronomic and sort of steady [indiscernible]. And indeed, what you'll see is actually, the existing partner base is very pleasing. I would say that we have some tremendous existing partners. They are showing strong growth as we have replatformed -- finished the replatforming of that. And indeed, you are starting to see traction on the newer partners.

The next question comes from Faizan Lakhani of HSBC.

The first is sort of looking at the retail growth beyond 2024. So you mentioned DPD growth has sort of [indiscernible] got sort of low double digit. I just want to understand how sustainable that is. And assuming that we maintain that level and the rest of the business sort of grows sort of rate plus 1% to 2%. Would it be fair to say that structurally, you're sort of thinking about growth being at the lower end or the 5% to 15% looking out to 2025 onwards? The second question is on the rate increases within the retail business was about 3%. Is that enough to cover inflation or should we assume that the retail combined ratio deteriorates from here?

No, I think it's -- thank you, Faizan, both of those questions. So I think the first one is what's hopefully been helpful is the trajectory of the business over the course of 2024. So we're into the first quarter. We've talked about the trajectory. And then -- and we've said that the guidance is to be within the 5% to 15% range. And then I think from a rate perspective and the prospects of inflation, I think what is useful, first of all, is that you've seen inflation come down. Mercifully, it's not where from a sort of whether you want to call it RPI, CPI perspective, say, 18 months ago. It was far more strong and had an upward trajectory. Hopefully, it's coming down. And you'll know that we've sort of been monitoring inflation quite closely. Now the read across, and I think the important point to note about rate is that there are sort of 2 dynamics. There's one which is the rate itself, but also indexation. And you'll know that we also index a number certainly on the property classes, that's not reflected in rates. So what you'll have is if the exposure of the building has increased by 10%, will increase premiums by say, 10%, the rate will be 0. But clearly, what we've got is more premium on the same underlying exposure. So I think that's just another aspect to consider on that. So you have to look at it in the round, but absolutely, we're focused on inflation and how it might permeate through the book.

The next question comes from the line of Anthony Yang of Goldman Sachs.

My first question is coming back to Hiscox UK. Are you able to give some color on how much quantitatively the nonrecurring premiums was recognized in June 2023? And then the second question is just a general question. Why ILS outflow given the attractive market conditions in general?

Yes. Great question. Thanks, Anthony. I think the first one is -- I mean we've signposted the Q2 nonrecurring. I mean, I'm not going to put a number on it, but I think it's more important to just think about the overall trajectory of the U.K. So what I think is very pleasing is, firstly, to step up in Q1. And I think what's useful is that that's off the back of, and it's broad-based. So it's across products and channel. And what we've seen is a stronger operating rigor in that business. We've seen the distribution deal that we talked about at year-end get traction, and we've seen the brand really start to play a part of the brand refresh. So I think it's more the question of the H2 momentum and the outlook for that is positive. I think then in terms of ILS, I think it's a really interesting position. So we're seeing sort of contracts. You recall that our ILS funds, we delivered record returns for them last year. We delivered ourselves a sub-70% combined ratio, which I was extremely pleased with. And against that background, I think if you look at the sort of various third-party capital providers that we trade with, what you have seen is an increase in quota share partners. So we have attracted more interest from those. And that's off the back of -- we can originate a lot more risk and get access to risk that those quota share partners may not be able to or indeed, it would be noncorrelating for them. So that sort of increase and we deployed their capital early in Q1. And then you're right, we have seen an outflow of the ILS capital. Now we have got some further capital in. So that number we quoted in that number. There is interest out there. We continue to garner interest. I think it's just a question of timing for that partner. So it's a bit new. But look, I think the longer if you see -- if I talk about more of the broader market context, the longer that ILS stays on the sidelines or exits, the harder the market will remain and you've seen that in the fact that we deployed our own balance sheet and grew in Re around 10%. So it's an interesting dynamic.

[Operator Instructions] Our next question comes from the line of Tryfonas Spyrou of Berenberg.

Paul, and I got two questions. Sorry, if one of them may have been answered, my line got disconnected. So it's on the U.S. retail DPD in the U.S. growth. Can you maybe contrast the relative growth rates of partnerships versus the direct business? So that's the first one. The second one is a more high level, I guess, question on London Market. You talked about rates being up 76% cumulative since sort of 2018. And I appreciate it's a very simplistic way to look at it, but I estimate sort of total net premium growth of 87 during that period. So I guess in real terms and volume, that implies very little growth. Clearly, profitability is at a good level. The best conditions we've seen across Lloyd’s in general in many years. So my question is have we not seen more growth given we're in a cycle. Clearly, there's a lot of tweaking in the portfolio. But I guess I just want to get your, maybe high-level thoughts on why this hasn't grown more into this London Market cycle?

Yes, it's -- it's a good question. So I think what we've done, and hopefully, it's helpful that if you take the direct and partnerships business, you'll see that we've achieved in Q1 for U.S. DPD, 11.3%. And we said that partnerships is in double-digit category. You can -- roughly, the split, direct is 1/3, partnerships 2/3. You can sort of infer what those -- that it's also double digits for direct from that basis. I think London Market, I think it's important to -- we write and manage on a very disciplined basis across the cycle. That is absolutely the franchise value of Hiscox and London Market. So if you rewind, over the course of the 4 years, we've had 4 consecutive years in the 80s territory in terms of combined ratio for the larger syndicate above, say, $1 billion of premium, you'll see that for the last 3 years, we've been in the top 2 from a profitability perspective. That's not done through having a growth agenda come what may. It's absolutely focusing on profitable underwriting. And you can see that play out in the way that there are many cycles occurring across London market, where we're leaning into the attractive rating conditions in property. For the last 2 years, you've seen rates go up. It was something like 20% plus last year for certain of those sublines. And this year, you see binders increased 12%, 13%. So we're leaning in and growing where we see the conditions are attractive. And then equally, we're managing the cycle where conditions are less attractive. So cyber is down 9% for us. DNOs down 6%. We're managing that aspect accordingly on the sort of casualty line. So I think that's sort of one dynamic. The other one is we intend and are well positioned to capture the structural opportunity that exist in that transition to net zero, I talked about. And that's through 2 aspects. One is just purely the MES division but also the ESG syndicate that we launched last year. So we continue to innovate to grow. And then the last aspect, I think, is one-off efficiency that will underpin the overall London Market, and we're very pleased with the pilot that we're extending to the broader London Market business. Clearly, if we can drive efficiencies into the underwriting, terrorism is an example is reducing the underwriting from 3 days to 3 minutes really, really helps. And therefore, I think it's just -- that totally positions the overall sort of London market aspect. And then clearly, we're a diversified group. So we have the advantage and benefit of not only looking at London market on its own, but we've shown that we will deploy capital in attractive market conditions for Re. And equally, we've got a long-term structured opportunity in retail that we are continuing to capture.

The next question comes from the line of Freya Kong of Bank of America.

Just to clarify on London Market. So I think net premiums were down 6% in Q1, but you expect it to recover through the rest of the year through recaptures. Are we still looking at positive territory for the full year? Or do you expect there will be some overall disruption from the nonrenewals? And also, can you give us some steer on how much business in London Market that you'd lead versus what you delegate? And has this changed materially over time? And other than the renewables portfolio, are there other lines that you're looking to take more of a lead in? And another question just on the Baltimore Bridge, which you've talked about as a moderate loss. Some of your peers have said that there's nothing in that loss that would change our combined ratio guidance for the year. Would you say your comments are broadly consistent with this as well?