Hiscox Ltd (LON:HSX) raised a gross £375mln in a discounted placing that was confirmed on Wednesday.
In a trading update after market close the day before, the underwriter provided a “risk scenario” modelling the impact of a 12-week lockdown and with some customers ordered to close or with premises materially impacted and in total suggesting “a range of modelled outcomes between £10mln and £250mln net of reinsurance”.
The FTSE 250 group has now withdrawn all financial guidance for 2020 “until there is more clarity” but said it remained confident in the company's ability to return to its normal 90-95% combined ratio target range for the retail business in 2022.
Hiscox and other insurers have been the subject of complaints and proposed legal challenges from small businesses angry at their refusal to pay out on business interruption claims, with the Financial Conduct Authority on Friday asking the High Court to make a judgement one way or the other.
Against that backdrop, Hiscox issued new shares equivalent to just under 20% of its existing share capital in an accelerated book build priced at 650p apiece, a 6.5% discount to their last closing market price.
Directors contributed roughly £600,000, of which approximately £150,000 was subscribed for by chief executive Bronek Masojada.
Proceeds of the capital fundraising “will enable Hiscox to respond to future growth opportunities and rate improvement in the US wholesale and reinsurance markets, as well as prudently position the group to withstand a range of downside scenarios”, the FTSE 250 company said in a statement.
“Hiscox is seeing continued positive momentum in its London Market business, with Hiscox Re & ILS positioned well to capture opportunities presented by capital contraction which is expected to drive rates up further.
“The opportunities for Hiscox Retail remain significant, with Hiscox currently occupying only small market shares in very large addressable markets.”
Shares in the company rose 5% to 724.8p by Wednesday lunchtime.
This was no doubt helped somewhat by an upgrade from Jefferies, where analysts said the placing was “reassuringly at the upper end of our expectations for $300m-$500m” and was at a narrower discount than feared, “perhaps reflecting the market's willingness to look to the long-term track record than focus on business interruption risk in UK small commercial lines”.
Jefferies upped the shares to a ‘buy’ rating from ‘hold’ and with a price target of 850p.
“Given that most equity issues year-to-date come from a position of revenue weakness, Hiscox stands apart as offering a substantial growth opportunity. The company’s capital pressures stem from four consecutive years of high natural catastrophe losses, coinciding with consistently high growth, causing capital requirements to outpace capital generation.
“Now, with deflationary pressures widespread, it is our view that growth will be valued at a higher premium. Thus although we acknowledge that the group faces material headwinds in the UK, we believe that the rapid de-rating of the shares reflects this and the opportunity to invest in US based growth creates compelling upside potential.”