Bronek Masojada, chief executive of Hiscox, says that conditions on the Lloyd’s London insurance market are reminiscent of the 1990s. Those of us who remember Lime Street back then may find this hard to believe, but conditions are undeniably tough.
The trouble is that there hasn’t been enough trouble. The catastrophe market, in particular, has not had to deal with any significant events, barring perhaps localised difficulties such as the UK floods, for several years. Given the lack of returns elsewhere, this has tempted other sources of capital into what looks an attractive market and has forced down rates.
Sensible insurers, such as Hiscox, which has a strong record for riding out tough conditions in the markets, therefore have to become more careful in the business they take on, leaving the less attractive stuff to the tyros. Hiscox says that there are double-digit declines in rates in marine, energy and American large property business. It is out of political risk entirely. Likewise its reinsurance activities and ILS, which allows institutions to take a position, are under pressure and are being shrunk in some places. Against this, the lower pound provides a strong tailwind, though this will lessen over the year.
Instead, Hiscox has been investing heavily in its retail business, providing specialist lines of insurance such as professional indemnity, cyber and corporate espionage protection in America. Retail gross written premiums in the first quarter were up by 18.6 per cent at constant currencies, or almost 30 per cent in sterling terms.
Total premiums across the group were up by a more subdued 5 per cent, or 17.3 per cent in sterling terms, but this is encouraging enough given the tough environment. The other main metric, the investment return on the cash the company holds, is also attractive at 0.7 per cent, and analysts are confident of a 1.3 per cent return for this year.
Hiscox has made clear that it intends to invest spare cash in the business rather than return it to investors, like some of its peers, and the yield is not that great. This has not done the shares any harm. Up 22p at £11.87, they continue to probe record highs. Some might be tempted to take some profits, then.
My advice Take profits
Why Hiscox is well placed in challenging markets, but, given the price rise in the long term, investors should consider some limited sales
William Hill
Shares in William Hill may have gained 12 per cent since Philip Bowcock was confirmed as chief executive in early March, but they are still below the levels of last summer, when the rival 888 and Rank Group were mulling some sort of offer for the group. That never looked terribly likely and this column advised a “sell”.
The trading statement for what was almost the first four months of the year, taking in the Cheltenham racing, was solid enough. William Hill is improving its UK online offering, where it was running behind its competitors, and revenue growth was 16 per cent. This was far better than the pedestrian 1 per cent on the high street, where machine revenues were ahead by 4 per cent, and both were a bit better than Ladbrokes Coral, which reported the other day.
Australia, another weak spot in the past, was ahead again, with total amounts wagered up by 29 per cent at constant currencies, although the win margin was held back by several successful favourites. Profits for this year will be in line with expectations, assuming that nothing extraordinary happens on the pitch or track, helped by £40 million of savings from the group’s transformation programme.
The problem is the looming review of fixed-odds betting terminals, with a May government looking more likely to take a tough stance in the autumn or later. William Hill takes about a quarter of all revenues from such terminals and, with the shares, up 2p at 302¼p, selling on 12 times’ earnings, it is debateable how much bad news is built in.
My advice Avoid
Why Pending review will hang over the shares
Spirax-Sarco Engineering
It may be a long way from being a household name, but Spirax-Sarco has grown into one of our biggest specialist engineers, with a market capitalisation approaching £4 billion. The shares have not far off doubled since the start of last year and the company is one of those that are confident they can grow organically at significantly greater pace than the global economy as a whole.
The annual meeting statement was reassuring enough and analysts are looking for a growth rate of 4 per cent or so in 2017, even if forward visibility of orders is limited.
Spirax-Sarco provides equipment that manages flows of steam and fluids in industrial processes. These tend to be must-have products and the company stays close to its customers, selling mostly directly rather than through distributors.
It strengthened its position in Europe this year by paying €186 million for a German maker of controls for boilers, which brought with it a range of new products rather than the usual cost savings and synergies. The shares pose a bit of a quandary: off 35p at £51.50, they sell on almost 26 times’ holdings. Some profits could be taken, but the long-term trajectory still looks good.
My advice Hold
Why Company should continue to beat GDP growth
And finally . . .
Spirent Communications, which makes telecoms testing equipment, has faltered in the past and it has been suggested that it might do better as part of a larger group. Last week there was a favourable first-quarter trading update. Now Citi, the broker, has identified it as a takeover prospect, pointing to another deal in the sector between two American companies that has just completed. Numis Securities also put out a positive note this week, suggesting that the benefits of Spirent’s R&D investment are coming through.
