Hiscox ILS funds AuM slides to $1.4bn, but growth targeted for Hiscox Re & ILS

Hiscox Group, the specialist insurance or reinsurance underwriter and ILS capital manager, says its reinsurance and insurance-linked securities (ILS) unit Hiscox Re & ILS is seeing the best market conditions in at least five years, with an expectation of a return to growth.

CEO Bronek Masojada commented this morning, “In 2021, I expect our big-ticket businesses to perform well, thanks to the increased capital allocated to them, their judiciously positioned portfolios, and the benefit of compound rate increases.

“Hiscox London Market and Hiscox Re & ILS are in their best markets for almost half a decade and their focus is on driving profits over maximising scale. This will provide good returns for shareholders and allows our Retail businesses to navigate the economic uncertainties within their respective countries of operation.”

Hiscox as a group reported a loss of $268.5 million before tax due to the impacts of the COVID-19 pandemic this morning, while at the same time its overall gross premiums written were relatively flat in 2020.

The reinsurance and insurance-linked securities (ILS) business of Hiscox Re & ILS, where the Hiscox ILS funds sit, underwrote 14% less in gross premiums last year, at $743.4 million, as the company took a price focused approach to the renewals and also navigated having less deployable ILS capital in its funds through 2020.

Positively, the reinsurance and ILS unit has been seeing rate momentum and growth since April 2020’s renewals and this continued into the key January 2021 contract signings.

Chairman Robert Childs commented, “Our long-term strategy has been to build a balanced book of business. We have grown our small-ticket Retail business in the UK, Europe, USA and Asia to balance the big-ticket London Market and Re & ILS businesses written through Lloyd’s and in Bermuda. We have seen strong profitable growth in Hiscox London Market as rates continue to surge ahead in the wholesale markets. Disciplined underwriting over the last three years as we weeded out underperforming business has meant that we are very well placed to take advantage of the improving conditions.”

Looking ahead into this year, Masojada believes the improving rate environment, particularly in reinsurance, spells better profits for this segment of the business.

He cited, “the rating environment that will drive strong return to profit by our London Market and Re & ILS businesses.”

He explained that in 2020 Hiscox Re & ILS showed a “disciplined approach to price inadequacy” at the beginning of the year, adding that, “After a cautious start at the January renewals, we returned to growth as the market began to harden from April onwards. Overall, we have achieved a 12% average rate increase, with positive rate momentum carrying through to January 2021 renewals.”

The CEO provided more comments on areas of the business of particular relevance to ILS investors.

It seems Hiscox has been one player that has looked to capitalise on rate improvements in certain regions across its property catastrophe reinsurance book and also in retrocession, areas where its third-party capital from the ILS funds may have played a supporting role.

Masojada said, “During the year we have been reshaping the book to focus where we see the most opportunity. In US property catastrophe and excess of loss, we adjusted the portfolio away from the more capital-intensive nationwide covers and Florida programmes. In the international catastrophe book, we secured rate increases of 16% in Japan, in line with an updated view of typhoon risk which reflects two active years for Japanese windstorm losses. Net exposure in our retrocession book was up 65% as we sought to take advantage of rate improvements of over 20%.”

Commenting on the ILS assets under management, Masojada said, “In 2020, Hiscox ILS assets under management declined slightly to $1.4 billion (2019: $1.5 billion). The slight reduction on the previous year is mostly due to redemptions we reported last year.”

Hiscox had been warning of a reduced amount of deployable capital being available through 2020. It’s likely as we move through 2021 the Hiscox ILS funds will benefit from some releases of trapped capital and an increasing amount of the $1.4 billion of assets will become deployable again, helping to deliver improving returns in the firming reinsurance market environment.

Another factor will be Hiscox’s strong capital base, assisted by equity raised in 2020, which will support the Hiscox Re & ILS growth and so also benefit the ILS funds as well, with the group having more firepower.

“In 2021, Hiscox Re & ILS will benefit from the deployment of some of the proceeds from the Group’s equity raise earlier in the year. We expect that our net written premium growth will exceed growth in gross written premiums as Hiscox Re & ILS retains more risk in the strongest reinsurance market in several years,” Masojada explained.

“In 2021, I expect our big-ticket businesses to perform well, thanks to the increased capital allocated to them, their judiciously positioned portfolios, and the benefit of compound rate increases. Hiscox London Market and Hiscox Re & ILS are in their best markets for almost half a decade and their focus is on driving profits over maximising scale,” he continued.

Hiscox will no doubt be hoping to attract new capital through its ILS funds to participate in the improved market conditions and better returns it expects its reinsurance business to generate.