August 1, 2011 8:35 pm

Hiscox upbeat despite cost of natural disasters

Hiscox increased its interim dividend in spite of tumbling to a £85.6m pre-tax loss on the back of one of the worst first half years for catastrophes ever seen, the Lloyd’s of London insurer said on Monday.

The company has reserved £210m for the big natural disasters seen in the first half, including the earthquakes in Japan and New Zealand, but it also suffered in other areas, including from clients repatriating insured employees because of the unrest in north Africa and a large fine art loss when a painting was damaged in transit.

Few Lloyd’s of London insurers are expected to report first-half profits for 2011, although Lancashire did report a profit last week. Bronek Masojada, chief executive, said that given the costs of the first six months Hiscox showed a reasonable result.

He added that the dividend increase of 0.1p to 5.1p was “a tickle”. “It’s just to show our commitment to a progressive dividend policy,” he said.

Without further disasters, consensus analyst expectations are now for a profit of £11m for the full year, the company said, compared with profits of £211.4m for 2010. The first-half loss of £85.6m compares with a profit of £97.2m in the same period last year.

Net earned premiums were down 6.4 per cent overall at £554.7m, but that disguised a near 9 per cent rise in premium at the UK retail business and a rebound in the reinsurance business written in May and June.

“Hiscox remains optimistic regarding the rating environment, especially in catastrophe exposed lines, and it retains a balance sheet and reinsurance protection sufficient, in our view, to take full advantage of any opportunities that may arise,” said Eamonn Flanagan at Shore Capital.

The shares slipped 13.5p to 394p.

FT Comment

Big natural catastrophes throw the investment thesis behind insurers like Hiscox into sharp relief. The case is always a fine balance between the risks of high-cost single losses and the heightened profitability that comes with higher premium rates after a really big event. This year has brought the big disasters, but not yet clear evidence of the big price increases – and we are only just entering US hurricane season, where more costly things are insured in more dangerous locations than anywhere else. Hiscox has two routes to smoothing out the investment case. Firstly, it has been writing less premium like many rivals, while expanding its capacity to write more if the market turns. Secondly it’s moves to diversify are showing results, with its UK retail arm showing its best ever first-half profit at £25.2m. Forecasts for year end net asset value are likely to fall below 300p. This means the shares remain close to a 1.4-times book in spite of Monday’s fall, which could prove expensive if insurance rates do not begin to show real improvement.

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