Record annual profits and a surprise $150 million share buyback gave a boost to the Hiscox share price on Tuesday but are they enough to assuage investor nervousness about the performance of the insurer’s retail arm?
Hiscox is one of the best-known names in Britain’s insurance industry. Although-based in Bermuda, the UK-quoted company is behind one of the oldest syndicates on the Lloyd’s of London insurance market that provides cover for big-ticket risks, from natural disasters to cyberattacks.
It also has a reinsurance and insurance-linked securities (ILS) business, another big-ticket division, and a retail arm that provides cover for everything from motor to fine art. Aki Hussain, its chief executive and previously its finance chief, has led the business since the beginning of 2022. He took over from Bronek Masojada, an insurance industry veteran who ran Hiscox for more than two decades.
Masojada’s final years were marred by a controversy over the group’s handling of business interruption policies when the Covid 19 pandemic erupted in March 2020.
Hiscox was one of a number of insurers to argue that these policies should not pay out to cover claims arising from the coronavirus lockdown, causing a backlash from small businesses that had been crippled by Covid restrictions and were counting on their policies as a lifeline. The Financial Conduct Authority, the City regulator, intervened and the dispute went to the Supreme Court, which ruled largely in favour of policyholders. Hiscox later admitted the affair had caused “brand damage”.
While the business interruption furore is behind the insurer, its shares, which changed hands for more than £14 apiece at the start of 2020, have yet to recover back to those pre-pandemic levels.
Still, annual results yesterday pushed the stock in the right direction.
They showed pre-tax profits at Hiscox more than doubled from $275.6 million in 2022 to an all-time high of $625.9 million last year, boosted by a better than expected performance from its $8 billion investment portfolio.
Hiscox had been hit by a rout in bond markets in 2022, as investors took fright at rapidly rising interest rates, pushing the insurer to an $187.3 million investment loss. This reversed last year, however, propelling Hiscox to a $384.4 million investment gain, a result that was 17 per cent higher than City analysts had forecast.
The group’s reinsurance and ILS division also outperformed, helping to counter a softer showing from the company’s retail arm, which contributed $267.3 million to group profits. Hiscox’s overall combined ratio, a key measure of an insurer’s profitability, improved slightly to 89.8 per cent from 91.1 per cent a year earlier. Anything below 100 per cent indicates an underwriting profit, while a ratio above that level shows a loss. The ratio for the retail business was 96.2 per cent, worse than the 93.7 per cent in 2022.
In an unexpected, but welcome, development, Hiscox also announced a special cash return to stock market investors through a $150 million share buyback. This is on top of a final dividend of 25 cents a share. Hiscox stock rose by 60p, or 5.4 per cent, to close at £11.81 on Tuesday on the back of the results, taking the shares to their highest level since May last year.
Management were upbeat on the prospects for the retail business, with Hussain saying the division had enjoyed a positive start to 2024 and was expected to post revenue growth of between 5 per cent to 15 per cent this year.
That range is wide, however. Furthermore, as Andrew Ritchie, an analyst at Autonomous, points out, Hiscox’s “achievement of guidance for retail has been very patchy in recent years”.
Hiscox’s robust overall profits and buyback were enough to offset disappointment yesterday with the retail arm’s 2023 performance and any scepticism about the group’s guidance for the division this year. Yet Tempus believes that some caution is still warranted until firmer progress in the retail business materialises.
Advice Hold
Why? Bumper cash returns are welcome but consistency in retail is more important
Hammerson
The last time this column looked at the merits of investing in Hammerson was two years ago when the country was emerging from the pandemic.
Given the uncertainty, the recommendation was to “avoid”, which has proven to be a sensible call given the landlord’s shares are now almost a fifth lower than they were then.
However, sentiment towards Hammerson, which owns some of the country’s best-known shopping centres, has started to improve in recent months, partly because of its own self-help actions but also because of the prospect of interest rate cuts.
Shopping centre valuations have cratered over the past decade: the average mall is worth 60 per cent less than it was at the peak in early 2016. That decline was brought on by the rise of online shopping but has been accelerated over the past couple of years by spiralling interest rates.
But central banks are widely expected to start cutting interest rates within the next few months, which would provide some support to Hammerson and its £4.7 billion portfolio, which includes Brent Cross in London and Birmingham’s Bullring.
Hammerson’s rents also look to have finally bottomed out having declined by a third since 2017. Last year was the first since then that valuers increased their estimates of what the group should be charging.
The perennial criticism of Hammerson has been that it is a rag-bag of assets with too much debt, but since joining three years ago, Rita-Rose Gagné, its chief executive, has tidied up the portfolio, selling off bits that do not fit her vision of city centre “flagship destinations”. Net debt fell 23 per cent last year to £1.33 billion. Gagné’s move to fill the remaining malls with fewer retailers and more bars, restaurants and leisure concepts seems sensible.
If nothing else, that Hammerson’s shares trade at a 50 per cent discount to its last reported net asset value could make it a takeover target, or so Morgan Stanley bankers think.
Although the outlook appears to be clearing for Hammerson, uncertainty about the future of shopping malls remains and so an upgrade, albeit only to “hold”, seems appropriate.
ADVICE: Hold
WHY: The portfolio is neater and sentiment is improving, but some uncertainty lingers
