The descriptor “Lloyd’s of London insurer” is often banded about loosely and is not a particularly useful cover-all (Miles Costello writes). There are brokers that provide cover for customers using the world’s oldest insurance market; there are underwriters of risks, acting alone and as part of syndicates; and there are highly differentiated specialists, experts in, say, catastrophe risk, piracy and ships or airlines.
Then there’s Hiscox. The group traces its history back to an underwriter, AE Roberts, who operated his marine cover syndicate on the Lloyd’s market in 1901. Today, like many of its peers headquartered in Bermuda, Hiscox is probably the most diverse of the listed Lloyd’s insurers, with more than 2,700 staff in 14 countries, 32 offices and a market value above £4.2 billion.
It operates on the London insurance market and is involved in the big-ticket property, catastrophe, marine and terrorism protection deals. Yet this is a relatively small part of its business, accounting for only a quarter of the group’s earnings based on pre-tax profits in the first half to the end of June. It also operates in reinsurance, assuming parts of the risk already underwritten by other insurers; this is similar in size. Its main and developing area of growth is retail, responsible for more than half the group’s premiums written and pre-tax profits delivered in the first six months. This part specialises in providing cover for smaller businesses with turnover of up to about £250 million, insurance for individuals, mainly at the higher-value end of the property market, and cover for luxury cars. Hiscox is also a renowned expert in insuring fine art and jewellery.
The group’s interim performance was impressive. Pre-tax profits came in 27 per cent higher compared with the same period last year. It increased the amount of premiums it wrote by 21 per cent, often achieving healthy price increases, and it lifted the interim dividend by more than 5 per cent against last time.
Profitability also improved. Its combined ratio, which effectively offsets premiums written against claims paid, rose from 90.8 per cent to 87.9 per cent, where 100 per cent indicates breaking ven and the further below that it goes, the more profitable an insurer is. The only measure that went the wrong way was investment return, which is how much Hiscox makes from investing its received premiums. That fell to 0.7 per cent, or $19.7 million, from 2.3 per cent over the same period last year. Given the overall numbers, it’s little surprise that the shares rose 107p to £15.80 yesterday, ending the day up by 7.3 per cent.
So what’s not to like? Well, very little. Insurance is by nature cyclical; every three years or so a big hurricane or flood comes along that hits profits. When times are good, general insurers tend to watch their excess cash build up and then deliver special returns to shareholders. Hiscox’s track record here is good, although it has not paid a special dividend since 2016 — but then neither have its rivals.
Given its increased predilection for individual customers, Hiscox is less exposed than others to the catastrophe cycle. Although returns from household and motor cover fluctuate, Hiscox’s emphasis on the wealthy gives it more insulation.
The only issue is the price. The shares are expensive, trading at more than 40 times earnings during the first half. Insurers trade on rich multiples but with a yield of less than 2 per cent, Hiscox is a king’s ransom. In return, though, there is consistent and efficient growth. Hiscox is also involving itself in newer markets, such as cybersecurity and flood cover in the United States.
Definitely worth holding, and possibly more.
ADVICE Hold
WHY Diverse and well run but the shares are expensive
Senior
It’s been a tough three years for Senior, but yesterday the supplier to the world’s biggest aircraft makers suggested that the clouds were clearing (Miles Costello writes). The engineer came out with a set of interim figures yesterday that were far better than expected, in turn posing the question for investors: is its recovery and growth potential reflected in the share price?
Senior, founded in 1933, is a FTSE 250 business with operations spanning 14 countries and much of its activities are in the United States. It consists of two divisions. In aerospace, it makes components for the likes of Boeing, Airbus and others, as well as for business jets, and does a small amount of work for the US military. In flexonics, it makes parts for trucks and other off-road vehicles, including for the oil and gas industries, and counts Caterpillar among its customers.
Based on the six months to the end of June, both divisions are doing well. Aerospace revenues were up by 5.2 per cent to £363.5 million and operating profits rose 15.2 per cent to £38 million. In flexonics revenues rose by 12.6 per cent to £160.6 million and operating profits jumped by 33.3 per cent to £12.8 million. Margins at both businesses improved. As Senior reported a 36 per cent rise in group pre-tax profits to £31.4 million, it lifted the dividend by 7 per cent and suggested that margins would improve further in the second half. All that explains the 29¾p gain in the shares yesterday to 334½p, putting them less than 25p away from hitting an all-time high.
There is structural growth in aerospace, driven by aviation expansion. Flexonics is more exposed to macroeconomic conditions and the slump in the oil price earlier in the decade hit its oil and gas activities. However, Senior reckons that things are on the up, having reached a turning point late last year.
It guided towards higher margins in the second half, but was careful not to encourage analysts to lift their earnings forecasts. Trading at nearly 30 times earnings and with a yield of close to 2.3 per cent, the shares feel richly priced and it’s tempting to conclude that the future good news is built in.
ADVICE Avoid
WHY Growth potential is reflected in the price
