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Hiscox clarifies meaning of 'medium term' after share price plummets

Shares fell to two-year lows as analysts questioned the insurer's estimates for medium-term underwriting profit

Hiscox - The storm is not over for Hiscox as JP Morgan downgrades
Hiscox shares have been buffeted by hurricanes and analysts

Hiscox Ltd (LON:HSX) put out a statement on Thursday afternoon after its shares had plunged 16% at lunchtime on the back of some bearish broker notes.

“Given the share price movement, the FCA asked us to put out a clarifying statement and we were happy to do so,” a spokesperson told Proactive on the phone.

READ: Hiscox rocked by natural disasters in third quarter

At a meeting with analysts a day earlier, the FTSE 100-listed insurer has been asked for “clarification over the meaning of medium term” in its estimates for medium-term underwriting profit – the measure of the ratio of premiums against claims and expenses.

Hiscox management had given estimates for its Hiscox Retail arm for the combined ratio to move from 97%-99% in 2019 to 90%-95% in 2022.

In the statement the figures given to analysts at a meeting on Wednesday were conservative, while the company would “of course” aim at exceeding them.

Brokers expect earnings to suffer 

Earlier on Thursday, Jefferies said it felt the estimated medium-term underwriting profit range was “unlikely”, considering the insurer’s plans to restructure reserves for a cyclical turn due to a rise in social inflation, claims handling costs and adverse reserve development.

The plan will involve strengthening liability reserves, changing reserving methodology to hold casualty reserves longer and recording new casualty claims at higher loss picks, hoping to gain higher reserve buffers in the back book, sustainable recognition of releases and more prudent front book margins.

“In our model, this results in additional earnings cuts of greater than 30% for 2019, greater than 10% for 2020 and greater than 10% for 2021,” the analysts said.

JP Morgan Cazenove was unimpressed and downgraded the insurer to 'neutral', slashing its target price to 1290p from 1750p, after Wednesday’s meeting between the company and analysts.

UBS followed suit with a reduction to 1,410p from 1,550p, while Jefferies went to 1,229p from 1,605p.

Catastrophe budget

The FTSE 100-listed insurer said on Monday a stormy three months has led to a net US$165mln hit to cover the impact of Typhoon Faxai, Typhoon Hagibis, and Hurricane Dorian, leading to an increase in reserves “materially in excess” of its catastrophe budget for the second half.

Fees and profit commissions are also expected to be US$25mln lower at the year-end, although the gross written premiums were up 7.3% in constant currency to US$3.2bn in the period, led by growth in its London market underwriting business.

“The actions being taken on reserves are not directly an impact of higher large claims, but rather an expectation that future claims experience will be higher,” analysts at JP Morgan said, pointing out legal costs are being pushed higher alongside initial loss picks.

Meanwhile, actions to address US casualties will hit retail profits for a few years, likely to reduce capital flexibility, with consensus estimates plummeting.

JP Morgan said it may take several periods of positive performance to fully restore the market’s confidence, with the potential downside risk underpinning the downgrade.

“With the shares rated at a considerable premium to peers, we would suggest that some downside is warranted, albeit management prudence means that the stock should still arguably trade at a premium to peers,” analysts at Jefferies said, adding the market may struggle to settle on a valuation for Hiscox.

After Hiscox's statement, the shares erased most of their worst losses, down a more modest 10% at 1,243.6p, which was still around two-year lows.

Quick facts: Hiscox, Ltd.

Price: 1323 GBX

AIM:HSX
Market: AIM
Market Cap: £3.82 billion
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