Hiscox‘s (LSE: HSX) interim results out today painted a mediocre picture for the specialist international insurance company, generally in line with its recent trading update, but with a little more disappointment.
Positives included an increase of 4% in the interim dividend to 13.75 cents. Pre-tax profit was up 3% to $168m, fitting the higher end of the trading guidance which was predicted to be between $150m and $170m. This was driven by a strong investment return of 4.8%, benefiting from financial market movements in the six months to 30 June.
Gross premiums were up 7% globally and all business segments saw robust revenue growth.
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“Looking ahead, with six consecutive quarters of rate growth in some Lloyd’s business, the market is in a better position than it has been for some time,” said CEO Bronek Masojada.
Hurricanes ahead
Despite the relatively good news, the share price dipped slightly. Overall, Hiscox’s capital position remains strong but with hurricane season fast approaching, fear of the unknown is to be expected. I think a volatile time for the share price could be imminent. Human-induced climate change is increasingly making headline news and I find this a worrying challenge for insurers to deal with in the catastrophe sector.
“As ever, the results of the half year are no indication of the results of the full year, so as we approach hurricane season, there is still potential for the wind to blow us off course,” said chairman Robert Childs.
Although the results had a generally positive outlook, downsides included a higher volume of claims in the first half than in the same period the previous year.
Hiscox’s combined ratio rose to 98.8%, an increase of 10.9% from the same prior-year period. This was not good news as it is a measure of how perceptive the company is at choosing who and what to underwrite. The increase in claims during this period contributed to this.
The full-year combined ratio for Hiscox Retail is expected to be at the top end of its predicted 90%-95% range, which has partly been caused by an increase in the volume of claims by US Directors & Officers of private companies, it said. The group has begun to reduce its exposure in this area, according to the chairman’s statement.
On top of all this, the group has been implementing a new IT system, which did not go as smoothly as planned, weakening retail growth and contributing to the drop in gross written premiums by 1.7%.
Trying times
The company’s recent guidance warned of a lower level of earnings cushion to absorb the impact of catastrophe events ahead of hurricane season. It has now confirmed that the reserve strengthening required will be impacted by around $40m for Typhoon Jebi in Japan and Hurricane Michael in Florida.
Profits in the overall insurance market from catastrophic events in 2018 have been significantly deteriorating as industry loss estimates have increased and underwriting has been impacted by reserve strengthening.
So are the fundamentals good enough to add this stock to my portfolio? Although I like this company for the long term, it has a very high trailing price-to-earnings ratio of 39 and a high debt ratio of 79.
I’d be inclined to steer clear at the moment and hold off for a larger dip in the share price or better news to come.
