Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the Hiscox Q1 trading update. My name is Lucy, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Paul Cooper, Group CFO, to begin. Please go ahead.

Thanks. Good morning, everyone, and welcome to the Hiscox Q1 2025 trading update. I'm Paul Cooper, the Hiscox Group CFO, and I'll be walking you through the usual topics that we cover at Q1, namely growth, claims, investments. After this, I will hand over to the call operator who will open the floor for Q&A. So let's begin with growth. The group delivered ICWP of almost $1.6 billion, up 2.4% year-on-year. The improving multiyear growth trajectory in Retail continues, driven by good momentum in Europe and improving growth in the U.S. London Market has returned to growth, as previously guided, and Re & ILS has found attractive opportunities to grow net premiums at January renewals. Let's dive further into this and examine our growth by segment, starting with Retail. Retail ICWP grew by 6.1% in constant currency as the Retail distribution engine continues to build momentum and add customers and policies well in excess of rate increases, which remain positive at 2%, although moderating. Pleasingly, every market is achieving growth, and the business remains on track to deliver constant currency growth in excess of 6% for 2025. Amidst the backdrop of economic and geopolitical uncertainty, Hiscox Retail benefits from its broad geographic footprint with exceptional opportunities in the U.S., where our digital direct business continues to grow at a double-digit rate; and in Europe, where growth momentum is building. In the U.K., the business continues to benefit from management actions, including new distribution deals going live, with a good performance across all areas of the business to deliver growth of 4.4% in constant currency. Our European business has delivered growth of 8.8% in constant currency, with growth broad based across markets, channel in both commercial and personal lines. In the U.S., ICWP grew by 4.6% as U.S. broker returned to growth, increasing by 1.5%, and momentum in U.S. DPD continued. Our U.S. digital direct business continues to deliver double-digit growth with the launch of a new brand campaign expected to provide an additional tailwind going forward. In U.S. digital partnerships, we continue to grow, albeit at a more moderate rate. The team continues to work closely with partners on a number of growth-enhancing initiatives. Now moving on to London Market. Hiscox London Market grew by 4% in the first quarter as the business captured attractive opportunities in property and marine, energy and Specialty. In property, we are benefiting from new commercial deals and improving rates in flood. In marine, energy and specialty, investments in our underwriting capabilities have supported growth in energy construction as the business won a number of new deals. While rates fell by 3% in the quarter, they remain up 69% cumulatively since 2018. Moving on to Re & ILS. Hiscox Re & ILS achieved net ICWP growth of 9.1% as the business deployed additional capital into attractive opportunities at the January renewals. ICWP decreased by 1%, reflecting ILS flows over recent periods. Despite rates reducing 7% in the first quarter, the business remains well rated, with cumulative rate increases of 80% since 2018. Terms and conditions and attachment points have broadly held. Turning to claims. The largest event during the first quarter of 2025 was the California wildfires. The group's previously disclosed $170 million estimate remains prudent and unchanged, with $150 million in Hiscox Re & ILS and $10 million in each of London Market and Retail. This estimate does not take account of any potential subrogation. In addition, whilst volume fees remain robust, the wildfire losses will likely act as a drag on Hiscox Re & ILS's performance fee income at both half year and full year. Outside of wildfires, the group's loss experience was within expectations. Let's move on to our investment results. For the first quarter of 2025, the investment result is $114.1 million, representing a return of 1.4% year-to-date. This has been driven by interest on cash and strong coupon income on fixed income assets, and, to a lesser extent, favorable mark-to-market movements on our bond portfolio. The reinvestment yield on the bond portfolio was 4.5% at the end of March 2025. Duration is short at 1.8 years, and quality is high at an average A rating. In the wake of U.S. tariff announcements during April 2025, market volatility has increased. Hiscox's investment portfolio has remained resilient through this period, as movements in yields have helped to offset a widening of credit spreads, while the impact from equity markets has been limited given the group's relatively low exposure. While continued volatility is anticipated, the group's short-duration and high-quality fixed income portfolio positions Hiscox well. In summary, our diversified business is capturing high-quality growth across all businesses. Momentum continues to build in Retail with growth in line with guidance. Hiscox London Market has returned to growth and continues to see attractive opportunities in certain lines against the backdrop of increased rate softening across the portfolio. We continue to be disciplined underwriters in these micro cycles. Re & ILS has captured attractive opportunities, with strong net growth in the first quarter. Turning to midyear renewals. Conditions are expected to be slightly more favorable than in January following the nat cat losses in the market over the past 12 months. Given our substantial net growth in recent years, including the January 2025 renewals, at midyear, we expect to maintain the level of capital deployed and take rate on loss-affected business. I look forward to seeing you at our Capital Markets Day on May 22. This concludes my opening remarks. I will now hand over to the operator to open the floor for Q&A. Operator, over to you.

[Operator Instructions] Our first question is from Will Hardcastle of UBS.

The first one is just thinking about London Market, Re & ILS, clearly, the rates are down from a really strong base, so we imagine it's diminishing margin year-on-year. I guess just wondering how much flex you feel there is there, reserves earned through, et cetera. And Aki used to talk about this type of attritional combined ratio, I think it was mid-80s and 70s for London Market and Re & ILS, I wonder if there's any update on those in this context. And the second one is, could you touch on where tariff implications could impact your business most? And anything that you're doing so far, whether it be pricing or operationally, to try to counter this?

Great. Thanks for those questions, Will. So look, turning to the rate environment and big ticket, I think you're right to point out, and I mentioned it in my opening remarks, that the business is well rated. If you look at the rate increases, for example on London Market, they are up 69% since 2018, and the equivalent number for Re & ILS is more like 80%. So we're coming off of very significant highs. I think the general commentary in the market is that the rating environment is the best in a decade, for example, over the past couple of years, and that's come through in the level of returns that we've delivered. So yes, rates have come off, but they are off of those very strong highs. The other thing to consider, and we did talk about it, is from an outward reinsurance perspective, the purchases that we've undertaken actually came in below our plan. So we are making savings on that perspective. I think the other thing sort of considering about margin is that you all know that we are -- we have a conservative reserving philosophy and have generated consistent reserve releases. So we've got an unbroken track record of reserve redundancy, and hence, prior year development, positive prior year development, over a more than 20-year track record. So I think hopefully you see that bodes well from a sort of an accretion perspective. And then I think the last aspect which I think is a differentiating point is that we are more than a big-ticket business. Our Retail business continues to compound and generate good returns with our guidance at the sort of 89% to 94% combined ratio. So I think, hopefully, that gives you a picture of sort of where we're going in terms of sort of rates and profitability. I think with regards to tariffs, it is -- the market is uncertain and the outlook, I think, is hard to predict. I think what I would say is, if you look at sort of the macroeconomic perspective, what we continue to keep an eye on particularly in the U.S. is new business formation, and that continues to be strong. The U.S. economy is very dynamic, and in that small and micro end of the small commercial businesses, you do see the sort of gig economy and people do -- are very flexible in terms of being entrepreneurial and starting businesses. And that bodes well. And obviously, insurance is not a luxury purchase and it's relatively small in terms of average premiums as a proportion of the overall expense base of these businesses. So I think that sort of bodes well from that perspective. Tariffs by their nature, are inflationary. And we've got a long experience of building and managing inflation into our pricing. Clearly, from an insurance perspective, we have the ability to reprice on an annual basis. And you'll see -- and what was especially pleasing is the actions that we proactively took in 2021, '22 with regards to inflation, whereby we did get ahead of and we're quite proactive in terms of the expectations and assumptions we made with regards to inflation from our pricing perspective. And then from an investment perspective, we have seen a lot of volatility in the capital markets, but our strategic asset allocation is competitively positioned. Again, in my opening remarks, I mentioned that the fixed income portfolio is well rated with an average A rating and is short duration at 1.8 years. And what we've seen is as credit spreads have widened, you've seen an offset with regards to yields falling. And also the relatively small exposure to risk assets, less than 3% of the overall $8.5 billion portfolio, I think, shows that the investment portfolio has been resilient with regards to tariffs.

Our next question is from Kamran Hossain of JPMorgan.

Two questions for me. The first one is just on the U.S. DPD business. I mean clearly, like stepping back slightly from that, you've got the 6% resale growth target for the year. Within that, did you assume that U.S. DPD would be higher? I think the partnerships thesis may be slightly surprising to me as you've been talking about it since the middle of last year. It was the assumption that it would be a little bit higher within the 6%. And how far through are you to kind of -- how far through the plans are you in improving things with partners? Or is this kind of an early CMD topic for a few weeks? Any kind of early views, thoughts, color, et cetera, are very welcome. Second question is just on the L.A. wildfires. You specifically called out subrogation in your statement. And just really interested in kind of if you can give us any kind of split, rough exact numbers, whatever you really feel like, on kind of which fire cost, how much you -- just so we can get an idea of maybe how much potential upside there might be if subrogation does come through?

Yes. Thanks, Kamran. So on the first question, I think it's important, if you look at the -- and what I'm pleased about from a Retail perspective is the momentum that has been building across all of Retail. So that growth isn't -- the momentum isn't just building in U.S. DPD, but it's broad-based. So we've gone from 4% to 5% to 6% within our current guidance. And that momentum continues to build through the rest of the year. What is especially pleasing, turning to the U.S. and the focus on your question, is that U.S. broker has returned to growth. So that's gone from minus 4% to plus 1.5%. And the momentum in U.S. DPD is building. So interestingly enough, if you look at H2 last year, it was up 6.3%. We've gone to 6.6%. So there is an increase, double-digit -- sorry, double digit, digital direct, too many Ds. The digital direct component of U.S. DPD continues to perform well. It's coming along nicely and growing double digit. Partnerships continues to grow, but that growth has been more moderate as you've mentioned. And really, the focus is on the sort of 1 or 2 larger partners that we've previously highlighted, where production isn't where it needs to be. Now we are -- have been very proactive in that space. So Mary, our U.S. CEO, has been visiting actively each of the top 10 partners within the U.S. DPD space and has been agreeing a number of growth initiatives with those partners. So for example, there is a real emphasis on new business incentives, and also there has been a real refinement and clarification of underwriting appetite and customer segmentation, where we expect that to open up further opportunities for growth. And then sort of more broadly on the partnership aspects. One of the things we've talked about is the strong pipeline that we continue to see. We've got more than 190 partners that we have within the portfolio. And we've been looking at ways to streamline that onboarding of those new partners so that we can get growth faster and more efficiently and more effectively. So I think you can see from those actions that we're undertaking that we expect to drive partnership growth harder, it's just taking a little time. And then sort of with regards to second question about the L.A. wildfires. We haven't disclosed the breakdown in terms of Eaton versus Palisades. There is a strong likelihood, as we've noted, around the potential for subrogation in the Eaton loss. And just as a guide, I think in the vendor models, they assume around a 20% subrogation level. So hopefully, that helps you somewhat with your estimates.

Our next question comes from Andreas van Embden of Peel Hunt.

I just had a question on the -- or 2 questions. First one on Hiscox Re, the outwards book. Can you maybe comment on the assets under management in that ILS portfolio? It's come down a little bit and you mentioned that was due to the L.A. wildfires. But could you break down any outflows around that during the quarter? And do you expect this portfolio to continue to support your outwards program in the rest of the year? Or do you continue to -- or should we assume that, that sort of assets under management will continue to decline in the remainder of the year? And actually the same for that -- for your partnership over that quota share partnership booked at trade capital, can you maybe comment on the inflows and outflows there? And then finally on Retail, on the 2% rate increase that's come through in the quarter, is this sort of rate above inflation trends? Are you pushing through rate in that portfolio and covering inflation?

Great. Thanks, Andreas. So second question first. I mean, clearly, the 2% is an average and is positive, but continues to be rate adequate across the Retail portfolio from an inflation perspective. Just bear in mind my earlier comments around inflation and the steps we take proactively around that. In terms of the Re & ILS book, yes, the AUM, I mean, has been -- I mean, it's modestly come down. It's something like $1.4 billion to $1.3 billion due to the impact of those wildfires. We're not sort of breaking that down further in terms of inflows, outflows. We continue to see good interest from third-party capital. But I think in common with the entire sector, we're not seeing a dramatic uptick in terms of the billions of new capital wanting to come into the market. I think there is a bit of healthy interest in terms of cat bonds at higher layers. But yes, there's no guide on the outlook for AUM for our business.

And on the trade capital, are there any changes there?

No.

Our next question is from James Shuck of Citi.

I had a question on just the rate outlook. Particularly in London Market, I think the rate went from kind of plus 2% at full year to minus 3% Q1, and sort of echoes some figures from your peers as well. Just keen to get your insight into the outlook for the cycle from this point. And I'm less interested in the kind of business line because there's lots of micro cycles going on, and more about the kind of competitive backdrop and where that competition is coming from. I guess the fear is that, that rate of -- or the rate of deceleration, if you like, in rates is going to accelerate. So just keen to understand some of the competitive factors behind that. Secondly, Paul, you mentioned in brief just about strategic asset allocation on investment portfolio. I wasn't sure if I just misunderstood that slightly, but were you intimating that you have some flexibility to increase the risk on that portfolio? Obviously, you're carrying a fair amount of capital at this point and the cycle is rolling over, so do you see some ability to increase the risk assets within that?

Yes. Great. Thanks for that, James. So I think in terms of the London Market rating environment and competitive environment, I mean, it's always competitive. It's a healthy, dynamic environment, which is why I like it so much. What I would say is that we are very disciplined underwriters that are focused on cycle management. If you look at the last 5 years, we've generated combined ratio in the 80s for London Market. And you're right to point out that there isn't just a sort of wave of rates up and rates down, but there are micro cycles, and we have been, I would say, adept at underwriting those in the past -- well, with our history. If you look at -- we continue to see opportunities. We have grown property. There are attractive opportunities that we have written at the appropriate returns. And then in energy construction, we continue to see that as a structural growth opportunity. We -- our strategy with London Market, just as a reminder, is to be a lead underwriter. We've invested in the energy construction space, both from an underwriting and a data and an engineering perspective, and continue to grow that. But in areas where we're seeing a bit more rate softening, like cyber and D&O, we've been managing our exposures accordingly. So I think that the point to take away is, I think from a London market perspective, there are ups and downs within various lines. We will write the market that we see ahead of us in those micro cycles and remain disciplined. From an investment perspective and the SAA, I think we have a cautious position. We have the opportunity to increase the level of risk assets. However, I think that given the volatility, we will remain -- continue to be cautious in that space. I think one of the things that you will have seen that we've done is just adding to the level of illiquids that carry a high yield. But again, it's sort of around the edges. The portfolio as a whole from a strategic asset allocation isn't going to change radically.

Our next question is from Faizan Lakhani of HSBC.

The first is on the rate within the Retail division. It's good to see that it's a positive 2%. Just wanted to understand, net of claims inflation, what that sort of rate is. And if rates fall further from here, what sort of levers do you have to maintain your combined ratio within our target range? And the second question is on capital development. [indiscernible] has obviously been a big event and probably has dented capital generation to a certain point. But from what I can read, it seems to suggest that you're looking to maintain the same level of capital within Re & ILS. How do I think about the net capital generation for the rest of the year as you stand today?

Yes. Okay. Thank you, Faizan. So in terms of the rates, yes, there's a modest decrease, 3% to 2%. They remain adequate in terms of overall, as I've mentioned. I think in terms of the overall sort of 89% to 94%, you'll know that we're within that guidance at 2024. I think the aspects I'd sort of point to is our operating leverage. So you started to see that come through. There's been a 1 percentage point decline over the past 2 years, and we continue to build out and expect economies of scale to come through that line, both from the sort of technology investments that we've undertaken, but also from just the pure economies of scale on the marketing side of things. And I think the important point on the Retail part of the business is that growth has been very much driven, one, broad-based as I mentioned, with more momentum to come, but also it has been volume driven as opposed to rate driven. So that lends itself more to the sort of economies that I've mentioned. Of course, from an underwriting perspective, we continue to optimize the portfolio as we do, and that is just kind of the bread and butter and the core of what we do from an expertise perspective. And then turning to Re & ILS from a capital generation perspective, you'll know that if you sort of stand back and look at the big picture, the capital generation has been strong in the past 2 years, both from an asset side and from an underwriting perspective. Retail, you've got to view that as a compounder, and we expect to operate within that sort of 89% to 94%. And then from an underwriting perspective, let's see where the second half comes out in terms of cat, but the underwriting environment has been favorable and continues to be so overall.

Sorry, just 2 follow-ups. First back on the Retail. So is my understanding correct from what you're saying is that, potentially, the loss ratio could get worse, but you'd expect the expense ratio to get better from here that you're expecting? No, okay.

No, I'm not -- you asked really what levers can we pull, and what I was saying is, look, we firmly expect to be within the 89% to 94%. But the potential for operating leverage remains given -- off the back of what you're starting to see come through of the improvement we've made over the past couple of years.

Okay. Understood. And then the second one, I understand the comment around Re & ILS. But are we saying that the level of capital required to be deployed is lower this year relative to last year, therefore, the capital requirement growth should be lower?

Yes. Yes, that's a good assumption.

Next question comes from Darius Satkauskas of KBW.

Two, please. So one of your peers reported restatement premiums having a material impact on the top line growth. Could you remind us if restatement premiums are included in the insurance contract written premiums? And did you benefit from it this quarter? And the second question is on U.S. broker business growth. It was nice to see it returning to growth. How quickly do you expect this business to move towards the middle of our growth target range?

Thank you for your questions. Yes, look, I mean -- look, a very quick one on reinstatement premiums. Under IFRS 17, so what was a reasonably new accounting standard, reinstatement premiums have to be accounted for within claims, the claims line. So there's a bit more fluidity around the top line. But strictly from a claims perspective, that's where we include them. And of course, for the wildfires, that $170 million includes all of the sort of reinstatement costs. The U.S. broker, I'm pleased with the return to growth. So we've gone from a negative 4% to a positive 1.5% in Q1. So that's quite a positive shift reflecting the management actions that we've undertaken over the past couple of years. So we have made refinements to and streamlining the submissions process, and also have optimized the auto renewal process from a digitization perspective. So those aspects, I think, have really helped drive the sort of U.S. broker top line. But as respect to the individual guidance, we're not putting out anything for sort of subcomponents of Retail. We've got the 6% that's building momentum, and I'm pleased with that.

Am I correct you expect a year-on-year drag from partnerships to disappear from the third quarter onwards?

Yes, we're not guiding with that. I'd sort of refer you back to my earlier question -- my earlier answer on partners.

Our final question comes from Abid Hussain of Panmure Liberum.

I've got a couple of questions remaining. Can I just come back to pricing. So there's a clear theme building across the sector of pricing coming off peak levels, and I'm thinking really of the big ticket lines here. And as James articulated, there's a fear that the rate declines are going to accelerate. I was just wondering if you can dimension for us in some way how far we are away from pricing turning inadequate? It seems from your comments that we're some way off, we're some distance off from prices being highly adequate and then obviously turning inadequate. But is that sort of the 80% that you're sort of quoting, the 70% to 80%? Or is it more like 20%? I don't know how to sort of dimension it. Is there anything that you can sort of talk to on that? And sort of some point on that, is there any lines that you're already thinking of pulling back in 2025? Or is this pricing, generally speaking, broadly adequate everywhere? So any comments on that. And then the final question is on the conflict brewing in Asia. So India and Pakistan are seemingly getting ready for another conflict, I hope it doesn't happen. But just wondering, do you have any exposure on aviation or any other lines of business should that conflict escalate?

Thank you for those 2 questions, Abid. So I think in terms of the pricing, I mean, hopefully, you've taken away both from the results and our actions that we've been very disciplined around underwriting those micro cycles. So it's -- as I said, it's not as simple as all lines up, all in down, you've seen a real mix. So just to call out some, we've seen, for example, general liability increase. Flood is another area that we've seen increase. Whereas, and I've highlighted, we've called out in the statement and on the call that cyber and D&O have continued to drift down, and we've been managing our exposures accordingly. So we're very focused on underwriting that cycle and those micro cycles. In terms of overall rate adequacy, it is important contextually. Sometimes people can get sort of focused on the sort of relative movement rather than the absolute. And that's why I've sort of pointed you to the 80% and 69% increase in 2018 for the big-ticket businesses. I'd just sort of guide you back to the disclosures we made at year-end around the overall rate adequacy of both London Market and Reinsurance, where Jo talked through a chart showing that reinsurance was -- had a significant proportion of sort of very rate-adequate business. And London Market, again, was in a good place. So we feel in a good place, but I would just sort of mention and go back to that point that we are very focused on managing the cycle and we'll allocate capital to areas where we see opportunity. And we are continuing to see opportunities. I think the other aspect is we do have the Retail business that I think is a differentiator at this point in the cycle, that is compounding growth and building momentum as I've previously said. With regards to the sort of escalating and terrible potential conflict in Asia that you've highlighted, we don't have any sort of direct aviation exposure. We came out of sort of aviation hull in sort of 2018, '19, and we don't expect material exposure currently on that, that sort of India-Pakistan sort of area of conflict. I think one of the strengths of the business, it is a very diversified portfolio, and that helps us manage a lot of the volatility that we're seeing, not only on inside of geopolitical -- the geopolitical environment, but also the investment environment.

Our final question comes from Vash Gosalia of Goldman Sachs.

I just had one quick question, and that's on FX. Just wanted to get a sense of the FX sensitivities within your P&L and equity. If you could just share some color on that, please.

Yes. Thank you. So from a P&L perspective, we've got -- quite a significant amount of our costs are in euros and GBP, but tend to be outweighed by the level of investment income and premium that is also in GBP and euro. So overall, if you saw, let's say, a 10% weakening in the dollar, we don't expect a significant impact on P&L. It'll be relatively modest. I think the other aspect is that we've got some assets and liabilities that move clearly from period to period, as you'd expect, that are in euros and sterling. And that translation manifests itself in the FX P&L gain or loss line, but tends to be offset pretty much by a similar movement in OCI. So that's the way to think about it. We do endeavor to significantly match currency from an ALM perspective.

We have no further questions. So I hand back to Paul for closing remarks.

Great. Well, thank you very much for listening to the Q1 statement, and I look forward to speaking to you some more in our Capital Markets Day on the 22nd of May. See you then. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.