London H1: Growth dominates discussion as new leaders set out stall
With the disclosure of Hiscox’s H1 results this week, all three listed London market players have now reported their first-half numbers, which alongside management commentary give a snapshot of the sentiment in EC3 right now.
The underwriting results beat analyst expectations across the board, aided by a benign Q2 for cats and the benefit of compounding rate increases from prior periods now starting to meaningfully earn through.
It was also an opportunity for new and incoming leaders to start their own dialogue with the investor community, with Beazley’s Adrian Cox pointing to a cautious expansion strategy under his leadership and Bronek Masojada handing over to incoming CEO Aki Hussain in his last address to investors.
However, pricing momentum and growth expectations into 2022 dominated discussion, with executives from all three firms still bullish on growth prospects despite evidence that rate momentum is slowing.
We outline some key points from the trio’s investor calls below.
Rates are showing signs of plateauing…
Commentary and data points from the three firms substantiated reporting by this publication in June that specialty rate momentum was starting to slow in London, with a two-track market emerging between short- and long-tail lines.
First-half rate change data shows signs that the acceleration seen in recent years in London is now starting to lose pace, with both Hiscox London Market and Lancashire reporting H1 pricing figures in line with the previous year – although these are still in double-digit territory.
Beazley was an outlier here with a renewal rate increase of 20% for the first half, a figure which is skewed by the significant acceleration in pricing in its cyber and executive risk division, where rates were up 44%.
Speaking to analysts, Beazley CEO Cox said that, excluding cyber, the firm has “like everybody else... noticed that there is a little bit of tapering on some of the shorter tail lines of business, which continues.”
Strong rate momentum is still present in longer-tail lines and Beazley does have a higher weighting of that business compared with peers, the CEO noted. For this reason, the firm is expecting the same level of rate change for the second half, although Cox also said he expected some slowing of overall rate change into 2022.
However, rate adequacy has been keenly in focus. The profitability of business currently being written is particularly under the spotlight for the Lloyd’s market, with business planning season on the horizon and an overarching message from the Corporation that syndicates need to demonstrate profitability if they are to grow exposures.
Incoming Hiscox CEO Aki Hussain said he believed his firm was now writing new business with combined ratio expectations in the mid-80s – marking a clear improvement from this time last year, when the executive told investors Hiscox London Market was putting business on the books at around a 90% combined ratio.
2021 is the fourth year of rate improvement with a cumulative increase of 60% since 2017. We believe we're now writing new business with a mean combined ratio expectation in the mid-80s
While some of the early rate rise seen at Hiscox merely compensated for an increased view of risk, “we are now seeing the rates materially improve profitability”, management said.
Meanwhile, Lancashire CEO Alex Maloney reiterated previous assertions that this is not the best market his firm has ever seen, but there are still opportunities to source well-rated business.
“If you're in an '06 or '02 market, we're going to deploy everything we've got. But I think as we've said, we're not quite there yet,” he said.
He went on to say: “We've consistently said about this market opportunity is that some classes of business are better than others, and we've got classes of business that are 150% of adequacy, and we've got other classes that we would probably argue are not adequate enough.”
…but exposure growth is uneven
All three carriers outlined ambitions to grow further amid the market opportunity, and H1 gross written premium (GWP) growth rates on the whole showed a more aggressive approach to expansion in the first-half of 2021 compared with previous H1 periods.
Lancashire has leaned into the cycle the hardest of the three, booking 41% year-on-year GWP growth, partly as a result of added new classes.
Lancashire has added casualty reinsurance, specialty reinsurance and accident and health to its portfolio, and all three were ahead of initial expectations in terms of the premium written, according to CUO Paul Gregory. The firm had guided to the top end of a $40mn to $60mn premium range for these three classes, and management said it was confident this would be achieved or even exceeded this year.
CEO Maloney said: “Our core strategy has not changed, will not change. We firmly believe in the insurance cycle, and we will continue to navigate the cycle and manage our business for the long term.
“We're incredibly focused on rate adequacy and the majority of our portfolio was seeing three to four years of rate hardening, and all the time the adequacy is there. We’re going to grow our business.”
Our core strategy has not changed, will not change. We firmly believe in the insurance cycle, and we will continue to navigate the cycle and manage our business for the long term
However, not all the listed London players have chosen to significantly grow in excess of rate.
The first half of 2021 was the first time since 2018 that Hiscox London Market has not grown GWP in excess of rate, while this half Hiscox Re & ILS grew in line with achieved rate after a portfolio repositioning exercise last year.
Hiscox has taken action in recent years to "right size" underlying exposures in areas where business was underpriced, with delegated authority one particular area of focus.
Hiscox’s Hussain was positive about the opportunity for the London Market business ahead, saying: “The hard yards that the London Market team have done over the last four or five years in what has been a prolonged soft market are now beginning to pay off.
“We're leaning into that hard market, and we will continue to lean into the hard market and deploy capital.”
Beazley, meanwhile, grew in excess of achieved rate in H1, although given the rating skew in cyber (and the repositioning work Beazley is doing in that division) it is challenging to ascertain the level of exposure growth booked by the carrier.
However, messaging from management signalled caution from Beazley. Explaining the growth strategy for the business, Beazley CEO Cox explained an 85-15 split to the carrier’s portfolio, where the 15% has been identified by the firm as susceptible to longer-tail Covid and social inflation claims trends – and where it will be more cautious on growth.
Growth next year should be partly rate and partly organic, he explained.
“We're looking to grow across most of our book. We still remain quite defensive on things like employment practices liability, certain parts of our healthcare book and certain parts of our E&O/PI book…But the 85-15 remains. We are in a very live claims environment at the moment. I think that will influence both what the market does and what our view of risk is.”
Same but different at Hiscox and Beazley
With a change of the guard at two of the three listed London players, both incoming Hiscox CEO Hussain and Beazley’s recently appointed CEO Cox took the opportunity to outline early indications of the direction of strategic travel.
Hiscox has always extolled the virtue of having a dual-engine business with both retail and big-ticket units, claiming it promotes resilience, stabilises earnings and facilitates growth. To achieve that split, Hussain confirmed he would not stray from the existing strategy of focusing on the build-out of the retail arm to complement the big-ticket business.
“I believe the strategy of the business has worked well over the last 20 years,” he said, adding that he was fully behind the push to focus growth efforts in US retail in particular.
“The overarching strategy is a sound strategy that has enabled us to build retail business entirely organically from scratch to near enough $2.5bn, which is where it is now, and to allow our big-ticket businesses London Market and Re & ILS to prosper and deliver.”
I've clearly been CEO a long time and I always wanted to hand over Hiscox into my successor in the rising market
In his closing remarks, Masojada took the opportunity to thank his leadership team.
“I've clearly been CEO a long time and I always wanted to hand over Hiscox into my successor in the rising market,” he said. “And as you just heard from Aki, I also wanted to do that when we saw opportunity across multiple areas of the business. And clearly, as Aki just laid out, that's what we all see at the executive [team] here at Hiscox. So Aki, Jo, Kevin, other senior leaders, you all know you have my wholehearted support.”
Meanwhile, Beazley CEO Cox praised the H1 results at his firm, claiming: “It feels like we're beginning to get the old Beazley back.”
The CEO took the opportunity to address the “missteps” taken by the business in 2020, including underestimating the firm's Covid exposures in event cancellation and having to increase its Covid provision last September.
“Unsurprisingly, I think that has impacted shareholders' confidence in us and our ability to do the hard things well. And one of my ambitions is to demonstrate to you over time, that we merit your trust, and that the Beazley you knew is the Beazley that you still have and that the future prospects for us are genuinely exciting.”
It feels like we're beginning to get the old Beazley back
Strategically, Beazley believes it does not need to expand its geographical footprint and has decided to choose relevance and expertise over size.
“We have a preference to locate where there are large pools of demand for the specialist products that we sell,” Cox said.
The firm will continue to run a portfolio of “sticky” mid-market and SME business with the more volatile, cycle-dependent wholesale business, the CEO continued.
“When you combine that then you have a business that can create and maintain differentiated products where demand growth is higher. That gives us long-term opportunity for compound growth with levels of cross-cycle margin significantly higher than the cost of capital,” said Cox. “It's an appealing model, I think.”