When Hiscox is questioned about a large payout that it has made against big insurance claims, it tends to state simply that this is what it’s there for: to cover risks and pay the remedy when things go wrong. This FTSE 250 insurer has built a reputation around being more expensive than many of its peers, but more reliable. Except that it’s not quite so straightforward this time.
Hiscox came into being in 1901 and now has more than 3,100 staff in 35 offices in 14 countries. Headquartered in Bermuda, as well as operating on the Lloyd’s market, Hiscox sells cover directly, including to more than 300,000 small businesses and 60,000 homeowners and drivers in Britain.
The last time that this column visited Hiscox, in December 2018, it had just won promotion to the FTSE 100 index, the premier league of British quoted companies. After a sustained fall in its shares, in part after large payouts against natural catastrophes, it is now back in the FTSE 250.
More recently, it has become embroiled in a dispute with several hundred small business owners, who bought policies covering business interruption. They say that their policies should pay out because they have had to shut their doors in response to coronavirus. Hiscox is clear that the policies sold do not cover interruptions caused by the government’s co-ordinated response to a global pandemic, only localised disruptions.
It is paying compensation in cases where events have had to be cancelled, including as a result of travel restrictions or bans on large gatherings. Depending on how long Covid-19 lasts, it estimates that these claims could cost it up to $150 million, or $175 million if the rules are in place for at least six months.
It hasn’t put a figure on how much could be at stake in the dispute, which is almost entirely confined to Britain and involves customers with revenues of less than £40,000 a month, in many cases below £10,000. If it paid out, it would be on lost profits against that turnover.
However, if it, or its regulator, cannot resolve the row, then it may be that the courts have to decide. The Financial Conduct Authority has not given specific guidance on the dispute, but has said that it believes most business interruption policies do not cover pandemics.
This is a tricky one. It’s tempting to align sympathies with business owners, who assumed that they would have protection. At the same time, Hiscox is not a public service and is obliged to contest a payout if it doesn’t believe the contract covers the claim being made. It is not the only insurer to be refusing claims.
While Hiscox and other insurers will not be winning popularity contests here, the truth surely must be that the dispute doesn’t alter the fundamental investment case. It is a financially healthy underwriter with a diverse customer base and healthy geographical spread; even if it had to pay out hundreds of millions over business interruption, it might wipe out a set of annual profits, but it wouldn’t cripple the company.
The past three years have been bad for insurers, hit hard by claims against a spate of natural disasters, including Hurricane Dorian and several large typhoons. Yet recent evidence suggests that policy prices are on the rise and, indeed, Hiscox is considering raising capital to take advantage of the opportunity.
With the dividend suspended, the shares, down 19p, or 2.8 per cent, at 666½p, carry no yield but trade for nearly 38 times last year’s earnings. There are other sectors more alluring, but existing shareholders should hold on.
Advice Hold
Why Dispute over business interruption cover could be expensive, but would not destabilise an attractively diverse insurer
Hotel Chocolat
This chocolatier and cocoa grower moved swiftly to raise capital early at the start of coronavirus, bagging £22 million from shareholders in late March to help to fund growth and to provide a buffer against the coronavirus pandemic.
Given that the virus took hold only weeks before its busy trading period over Easter, it also seems to have adjusted to life under lockdown. All 125 of its stores in Britain, along with its four in the United States and five in Japan, are shut; social distancing is in place at its packing facility in Cambridgeshire and, after trimming its range, the company has stayed open for online orders only.
Hotel Chocolat opened its first shop in north London in 2004. Unlike most chocolatiers, it grows its own cocoa on a plantation that it owns in St Lucia, where it also runs a hotel. As well as operating restaurants and cafés, the company sells accessories including hand creams, body scrubs and lotions.
In a trading update yesterday that was light on detail but upbeat, it said that it had experienced strong demand online over Easter, though not enough to offset a material fall in trading because of its store closures. Analysts at Liberum, the house broker, estimate that just over half of the lost shop sales have been made up online.
The company also put in place a new £35 million flexible credit facility, £25 million of which was through the government-backed loan scheme. While the facility is in place — it expires in December 2021, but can be repaid early — the retailer cannot pay dividends.
It says good things about the popularity of Hotel Chocolat that customers were happy to move their orders online. Nevertheless, Liberum has lopped £17 million off its forecast sales for the second half to £43 million. The broker reckons that it will be lossmaking over the second half of the year and will announce profit before tax and other items of £8.5 million for the full year, against £20.7 million last time.
The shares, which had a modest yield when the dividend was in place, trade for an extraordinary 278 times Liberum’s forecast earnings for this year. Up 2½p, or 0.8 per cent, to 332½p yesterday, they are not for this observer.
Advice Avoid
Why Has responded well but the shares are expensive
