Hiscox Ltd Q1 Update – 16th April 2014

Company Overview

Hiscox Ltd is a specialist insurer with a core focus on catastrophe risk as well as additional lines such as marine and aviation, political risk, fine art, terrorist attack and HNWI kidnapping and ransom.

The company also underwrites interplanetary probes and observation satellites alongside maintaining a significant reinsurance footprint.

Index  FTSE 250 Ticker  HSX.L Latest Close  703.50
52 Week High  743.00 52 Week Low  535.00 P/E  10.69
Dividend Yield %  2.76 Dividend Cover  3.14 CEO:  Bronek Masojada
CFO:  Stuart Bridges


Insurers Set for a Renaissance as Recovery Progresses

While central bank policies have lifted global stock markets over recent years, quantitative easing has weighed on the insurance sector heavily. With artificially inflated bond prices leading to yield compression, investment income for insurers has declined rapidly. The consequence of this has been highlighted in dividend cuts by both RSA Insurance and Aviva during the early stage of 2013.

However, with developed economies such as the UK and the US now transitioning toward an environment of gradually tightening policy, the era of ultra-low interest rates is unlikely to prove a burden upon the balance sheets of insurers for much longer.

This is because when interest rates begin to rise, those insurers with short term investment portfolios (non-life) will likely experience a rise in investment income, which will bode well for profitability within the sector. Hiscox Ltd (HSX) is one such insurer. Traditionally, 50% of the group’s profits would be drawn from its investment portfolio; however, this has not been the case during 2012 and 2013.

The aforementioned dynamics, in addition to strong organic growth within existing businesses, led the group to report a 24.9% increase in earnings per share for the year ending 31 December 2013. This was supported by strong growth in premiums written, lower claims costs and fractionally improved returns from the group’s investment portfolio when compared with previous reporting periods.

Since covering HSX.L late last year, shares in the group have continued to perform well and with the close of Q1 now fading into the background we set out in today’s report to provide an update of our outlook for the stock over the months ahead, along with a revised price target.

Hiscox Ltd Daily Chart



On a price to earnings basis Hiscox remains cheap. This is because the stock currently trades on a multiple of 10.6X 2013 earnings, which compares well with those of the wider non life sector.

In contrast to the wider industry HSX experienced another year of solid growth during 2013, with EPS (earnings per share) up by 24.9% over the period. This was while new management teams at the likes of RSA and Aviva continued with efforts to transform their respective businesses following what has been a tough year for both companies.

As discussed previously, our expectation is that the group will benefit greatly from a slow and steady rise in fixed income yields.

Although we still expect a healthy pace of organic growth within the business, it is the impact which an era of ultra-low interest rates has had upon the earnings of HSX that really interests us. Nevertheless, the valuation assigned by the market to HSX remains attractive.



The primary risk facing Hiscox is from natural disasters such as hurricanes in the US, earthquakes in Japan or Tsunamis in Asia. This is due to the group’s catastrophe risk and reinsurance businesses.

Further from here, the recent rise in incidents of civil unrest across the globe means that geopolitical risks in the current environment must also be acknowledged, given Hiscox’s HNWI, Kidnap, Ransom businesses, and again the group’s catastrophe business. Despite the potential for outcomes here to impact upon profitability, past the deployment of quality underwriting practices, it is difficult for the group to mitigate these risks.

In addition to the above, HSX like most insurers is also at threat from the potential for the global economic recovery to slow, or worse, to deteriorate. Should this happen then the improvement in investment returns which is anticipated for the group would likely be delayed.

Although there is little that the board are able to do that will prop up the global economy, they can continue, as intended, in their drive to remain diversified across multiple lines of business while keeping overseas geographical expansion a core area of focus.

Nevertheless, for the above reasons, and given that the group’s line of business is risk itself, the risks attached to HSX shares are above average.



In summary, HSX remains a well-managed business that continues to perform despite a tough investment environment which has seen much of its traditional source of income reduced. This positive performance bodes well for the group over the medium to longer term.

As referenced previously, much of the investment case surrounding the shares is derived from a heavy reliance upon fixed income investments for profits. As the developed world continues its transition toward a rising rate environment, the profitability of Hiscox’s investment portfolio is expected to improve.

This will be a positive contribution to the strong organic growth that the group’s international businesses are currently experiencing and is likely to have a notable impact upon the group’s overall performance.

Our positive outlook for the group sees the stock trading higher over the remainder of the financial year, with a price target of 820.00 pence for shares currently trading at 706.50 pence each. This is while strong support is expected for the shares at, or around, the 625.00 pence level.


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