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Hiscox quadruples profits and looks to retail

Despite a forecast-beating quadrupling of profits, shares in the Lloyd’s insurer Hiscox plc remained steady today (22 March 2004).

On the back of 2003’s benign underwriting environment, Hiscox became the latest quoted Lloyd’s insurer to reveal “record” profits. Pre-tax income leapt from £20.7mn in 2002 to £83.4mn and would have been even higher were it not for the previously announced £40mn revision to its World Trade Center reserving. Earnings were better than the consensus £70.2mn estimate and are likely to encourage insurance analysts to revise upwards their 2004 and 2005 earnings estimates for the insurer.

Chairman Robert Hiscox was also upbeat about the pricing cycle explaining that, despite some pricing pressures, rates are not set to tumble, even in light of the “feast” that has occurred since the shock of the World Trade Center loss.

In a statement, he remarked: “The near future looks good as the rates are at a very profitable level and competition is sensible. Looking further out, I think that margins will stay healthier for longer than usual for three reasons.  First, reinsurance is expensive and hard to buy, and it is the false comfort of cheap reinsurance, which is the main seducer of underwriters into weak underwriting. Second, interest rates are still low which keeps the focus on profitable underwriting. Third, old liabilities continue to eat at our established rivals whilst we are sheltered from all old liabilities by Equitas, which reinsured all the liabilities of Lloyd’s prior to 1993”.

He did explain, however, that the group will now put greater emphasis on its retail book because of its stronger pricing stability than traditional London market business. “There is no doubt that internationally traded business will come under pressure first, so we are increasing our emphasis on building the more stable retail book in and out of Lloyd’s,” Hiscox remarked, continuing: “The Board allocates capital where the best use of it can be made.  We have recently put the maximum resource behind Syndicate 33: now endeavours outside Lloyd’s could yield the best return.

Hiscox’s Lloyd’s Syndicate 33 contributed a total profit of £87mn on a gross income of £827mn for 2003, while the UK retail arm – which includes both high net worth and commercial liability – contributed a pre-tax profit of £18.5mn.  Acquisition and new office costs meant Hiscox’s offices in Continental Europe made a small loss of £1.9mn, although the Guernsey operation contributed a profit of £2.3mn.

The group also revealed that it expects its Syndicate 33 to make a profit of between 12.5 percent and 17.5 percent of its £842mn capacity on the 2003 underwriting year (against 22.5 percent – 27.5 percent for the 2002 underwriting year). It has, however, kept the 2001 year open (current estimated loss of between –17.5 percent and –22.5 percent) because of uncertainty over the WTC loss.

Tim Young, insurance analyst with London stockbrokers Collins Stewart, told Insider Week that much of the good news may have been factored into the share price already: “Broadly, I thought these were a good set of numbers - definitely well ahead of consensus. On the basis that analysts will have to upgrade forecasts for 2004 and 2005, I'm surprised that the share price hasn't moved. Nonetheless, this is a highly rated company so the good news might have been priced in.

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