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Lloyd’s carriers exceed expectations

The two most highly valued Lloyd's insurers, Beazley and Hiscox, opened the results season with better-than-expected earnings for the first half of 2016.

Beazley's pre-tax profits fell 3 percent year-on-year to $150.2mn but still beat the analysts' consensus of $143mn, with a greatly improved investment return offsetting a higher-than-anticipated combined ratio.

The carrier reported a return on equity (RoE) of 19 percent, 1 percentage point down from the same period a year earlier.

"A strong, top-quartile RoE would likely be in the low double-digits in this environment rather than at the outstanding levels the company has enjoyed over the last few years," said CEO Andrew Horton during a press conference.

Meanwhile, a strong foreign exchange tailwind helped Hiscox smash the analyst consensus of £153mn ($200mn) with a pre-tax profit of £206mn for the six months to 30 June.

Forex gains at the firm totalled £87.3mn in the period, compared to a loss of £15.7mn the year before.

This boost also helped group RoE jump by 8.4 percentage points to 28.3 percent.

Underwriting performance declines

Both carriers experienced a deterioration in underwriting performance as the soft market maintained its grip.

At Beazley, an uptick in claims and expenses offset 3 percent growth in revenues, which were reported at $939.9mn for the first half.

Net insurance claims grew by 4 percent to $436.2mn, while expenses also saw a 4 percent increase to $782.6mn. Reserve releases increased by 0.3 percentage points to 9 percent of net earned premium.

This resulted in a 4 percentage point increase in the carrier's combined ratio to 90 percent for the period.

Meanwhile, favourable forex movements at Hiscox skewed the headline figures.

Net earned premiums rose 8 percent to £767.5mn, while the group combined ratio for the period fell 1.8 percentage points year-on-year to 80.7 percent.

But when excluding forex gains the combined ratio was 88.4 percent, an 8.1 percentage point increase on the prior year.

In contrast to Beazley, reserve releases at Hiscox dropped by 4.8 points to 12.5 percent of net earned premium.

Speaking to The Insurance Insider following publication of the results, Hiscox chairman Robert Childs said part of the combined ratio deterioration was down to the £19mn in catastrophe losses experienced by the carrier during the half.

Hiscox was exposed to the Alberta wildfires, Houston floods, storms in the UK and Europe and earthquakes in Japan and Ecuador.

During the previous H1 cat losses were "unusually, close to none", Childs said.

But there was no hiding the tough trading conditions, particularly in reinsurance and big-ticket specialty.

"If I look at the London market, in local currency it hasn't grown at all this year," Childs said.

The chairman said the carrier was cutting back on areas where rate declines were most severe such as marine, energy and terrorism in order to navigate the soft trading conditions.

Hiscox also continues to execute its strategy of offsetting reinsurance and specialty market volatility with small-ticket retail business.

Hiscox Retail, which houses Hiscox UK and Europe and Hiscox International, was the greatest contributor to profit, with pre-tax profit at the segment growing 50 percent year-on-year to £92.3mn for the first half.

However, when excluding forex movements, this figure dropped to £68.2mn, down 7 percent on the previous year.

The combined ratio for the segment improved by 4.6 points to 84.1 percent.

"We try to balance the small ticket with the big ticket, and that is working," said Childs.

US fuels top-line growth

Despite these difficult conditions, Hiscox still grew its top line by 9.5 percent to £1.29bn for the six months, equivalent to 13 percent in local currencies.

In its results statement the carrier highlighted 32 percent growth from Hiscox USA, which underwrites small- to mid-market commercial risks in the region.

The US growth boosted top line in the Hiscox International division, where gross written premiums (GWP) were up 21 percent to £235.5mn.

Meanwhile, Beazley CEO Horton said the firm's US business continued to grow strongly in the first half of the year, partially offset by continued premium rate declines from large-risk business underwritten in London.

During a press conference, he said Beazley's growth in the US allowed the carrier to be in a strong position to absorb uncertainty around the "Brexit" vote in the UK.

"The US is our largest market by a wide margin and approximately 80 percent of our business in 2015 was transacted in US dollars," he said. "Our underwriting capital and overall asset allocation broadly reflects this currency split, so the recent weakening of sterling has not affected our capacity to underwrite."

Overall, first half GWP at Beazley increased by 2 percent to $1.12bn, as the carrier took advantage of 1 percent rate increases in specialty lines.

Premium rates across the underwriting portfolio fell by an average of 2 percent, as prices in energy dropped by 15 percent, large-scale commercial property by 7 percent and reinsurance by 4 percent.

In a research note, Shore Capital's Eamonn Flanagan said he believed Beazley's main focus was to diversify and expand its book.

Flanagan noted the carrier's ambition was a "sensible" policy, given the increased recruitment opportunity arising from the fallout of recent M&A activity.

Nevertheless, he warned that the policy needed "careful nurturing and monitoring" given the current rating environment.

Investment returns soar

Both carriers reported double-digit increases in investment return, providing a significant boost to the bottom line.

At Beazley, returns were up 44 percent on the first half of 2015 to $62.7mn, as falling yields in the period generated capital gains on fixed-income investments.

Meanwhile, Hiscox's investment performance benefited from bond portfolio gains as a result of the UK referendum in the last week of June.

The investment result for the half was £39.9mn, up 35 percent on the previous year and equating to an annualised investment return of 2.3 percent.

Brexit plans

In their interim statements, both firms outlined their stance on operating post-Brexit.

Beazley said the move would "undoubtedly complicate planning" for many businesses in the City of London, but it did not expect the impact to be greatly disruptive to the business. However, it added the long-term macroeconomic repercussions of the vote were hard to predict.

Commenting on the conversion of the carrier's Irish reinsurance platform to an insurance operation, Horton said that it was always the Beazley strategy before Brexit to have domestic US paper, domestic EU paper and Lloyd's paper.

However, he said that now was the right time to implement the plan following the result, adding that an insurance operation in Dublin would be a good thing to have if EU passporting rights fell by the wayside.

Meanwhile, Hiscox said the referendum result represented a "structural rather than strategic" challenge for the group.

Excluding the UK, Hiscox generates GWP of £260mn in the EU and, if necessary, it will set up a new EU-based insurance company, the firm said.

"Traditionally, market dislocation has provided opportunity for those who are fleet of foot. We are a global business, with carriers in key markets that can take advantage of the changing environment. In time this may give us opportunities, for example supporting small MGAs by giving their clients access to the London market," it commented.

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