For the six months ended 30 June 2020
"Opportunity ahead for every part of our diversified business"
| H1 2020 | H1 2019 | |
|---|---|---|
| Gross premiums written | $2,235.5m | $2,337.5m |
| Net premiums earned | $1,328.2m | $1,313.8m |
| (Loss)/Profit before tax | $(138.9)m | $168.0m |
| Earnings per share ($) | (50.2)¢ | 51.2¢ |
| Earnings per share (£) | (39.8)p | 39.6p |
| Interim dividend per share | - | 13.75¢ |
| Net asset value per share ($) | 712.4¢ | 817.0¢ |
| Net asset value per share (£) | 576.5p | 641.9p |
| Group combined ratio | 114.6% | 98.8%* |
| Return on equity (annualised) | (12.7)% | 13.3% |
| Investment return (annualised) | 2.5% | 4.8% |
| Foreign exchange (losses) / gains | $(13.6)m | $15.6m |
| Reserve releases | $63.0m | $26.0m |
Highlights
- Operationally resilient, with over 95% of employees working remotely, not furloughing any staff.
- Investment in technology and digitisation paying off; Retail operations robust and all major system implementations remain on track as we continue to lead the way in electronic placement at Lloyd’s.
- Supporting our employees, customers and society through a challenging period, with over $7 million donated to causes in support of those impacted by COVID-19 and partnerships to directly support SMEs.
- GWP reduces by 4% in constant currency as diversified strategy enables us to grow in Hiscox Retail and Hiscox London Market while remaining disciplined in Hiscox Re & ILS.
- $232 million reserved for COVID-19 related claims across the Group, including $150 million for previously announced claims from event cancellation and abandonment, media and entertainment and other segments including travel.
- Hiscox Retail delivers a strong performance in challenging economic conditions, with premiums up 4% in constant currency, driven by growth in four of five business units, and good underlying profitability.
- Hiscox Retail on track to hit 90-95% COR target in 2022 as benefits of portfolio optimisation, operational efficiencies and scale begin to show through.
- Accelerating rate improvement and impacts of recent portfolio action bring an expectation of better returns in Hiscox London Market, where rates are up 13% year to date.
- Keeping our powder dry in Hiscox Re & ILS as conditions begin to improve, with rates up 11% and expected to improve further.
- Strong capital position, with BSCR approximately 230% following £375 million equity raise in May, which enables us to withstand severe downside scenarios and take advantage of growth opportunities.
- Reserves of $347 million (10.7%) above actuarial estimate.
- No interim dividend as previously announced.
Bronek Masojada, Chief Executive Officer, Hiscox Ltd, commented:
“The dedication of our people around the world has enabled the business to respond to the challenges of this global pandemic and to deliver a resilient performance. Our investment in technology has paid off in all areas and supported our growth in Hiscox Retail and Hiscox London Market. Our long-held strategy of balancing volatile big-ticket risks with our more steady retail earnings in the US, UK and Europe provides both stability and opportunity. We are well positioned to capture the opportunities ahead in all our markets and in all our segments around the world.”
*The comparatives are on a previously reported basis and reflect the impact of foreign exchange gains and losses. See Note 6 of the condensed consolidated interim financial statements for further details.
ENDS
For further information
Hiscox Ltd
Marc Wetherhill, Group Company Secretary, Bermuda +1 441 278 8300
Kylie O’Connor, Group Communications Director, London +44 (0)20 7448 6656
Ryan Thompson, Investor Relations Manager, London +44 (0)20 7448 6522
Brunswick
Tom Burns +44 (0)20 7404 5959
Simone Selzer +44 (0)20 7404 5959
Notes to editors
About The Hiscox Group
Hiscox is a global specialist insurer, headquartered in Bermuda and listed on the London Stock Exchange (LSE:HSX). Our ambition is to be a respected specialist insurer with a diverse portfolio by product and geography. We believe that building balance between catastrophe-exposed business and less volatile local specialty business gives us opportunities for profitable growth throughout the insurance cycle.
The Hiscox Group employs over 3,400 people in 14 countries, and has customers worldwide. Through the retail businesses in the UK, Europe, Asia and the USA, we offer a range of specialist insurance for professionals and business customers as well as homeowners. Internationally traded, bigger ticket business and reinsurance is underwritten through Hiscox London Market and Hiscox Re & ILS.
Our values define our business, with a focus on people, courage, ownership and integrity. We pride ourselves on being true to our word and our award-winning claims service is testament to that. For more information, visit www.hiscoxgroup.com.
Chairman’s statement
After three successive years of heavy natural catastrophe losses, 2020 has brought a catastrophe of a different kind. The outbreak of the first global pandemic of the modern era has touched every part of the economy, and changed the way we live, work and interact with each other. Our industry has weathered impacts on both the asset and liability side of its balance sheet, and its role as a global risk sharing mechanism has been drawn sharply into focus yet again, with insurers collectively paying out billions in claims.
Hiscox has set aside $232 million for claims arising from COVID-19 in the first half, and delivered a pre-tax loss for the Group of $138.9 million for the period (2019: profit of $168.0 million).
While the Group’s gross premiums written reduced by 4% in constant currency to $2,235.5 million (2019: $2,337.5 million) in the first six months of 2020, the underlying picture is more nuanced. In challenging conditions, Hiscox Retail delivered a strong underlying performance, with four of our five Retail businesses delivering growth and the segment contributing more than $100 million in profits excluding net claims relating to COVID-19. Following an expected decline in new business written in April and May, as economies were placed on pause by governments around the world, trading improved in June, with non-COVID-19 claims in line with expectations.
COVID-19 has added further impetus to an already hardening market in big-ticket lines. In Hiscox London Market, our underwriters have done well to capture strong rate increases, up 13% in aggregate, and grow in the areas where rates are strongest, more than offsetting reductions in property binders and general liability business. In reinsurance, we have remained cautious, keeping our powder dry as we expect improvements in pricing, terms and conditions to continue. Portfolio action in both businesses is beginning to have an impact, but will take time to show through in the P&L.
The COVID-19 crisis has shown us very clearly that the future of insurance is digital, not only in how we run our business, but how we reach our customers. Our long-term investment in digital infrastructure is delivering here, particularly in the London Market and in Hiscox USA where we are leading the way in digital distribution and generating efficiencies.
The magnitude of what many in the industry suggest may be the largest insured loss in history is gradually becoming apparent, and as a result we expect a continued contraction of risk appetites along the entire (re)insurance chain. As we approach the wind season, we are strongly capitalised, diversified and well positioned to capture opportunities in all of our markets.
Dividend, balance sheet and capital management
In the face of unprecedented economic uncertainty, prudent capital management is critical to ensure we are able to continue to serve our customers, pay valid claims and grow where opportunity permits. We have taken a range of proactive management actions, both before the onset of the pandemic and since, to further strengthen Hiscox’s robust balance sheet and position us for growth.
In April, we announced the decision to withdraw the 2019 final dividend and that the Group will not propose an interim dividend payment, or conduct any further share buybacks in 2020. The decision was not taken lightly by the Board, who are acutely aware of the importance of dividends as a source of income for our fellow shareholders, including many private shareholders and those who own shares through pension funds. The Board is committed to return to paying a dividend as soon as possible, and will re-evaluate the position at the year-end. The Executive Directors will not be taking any cash bonuses until the dividend is reinstated.
To provide additional capital relief and further reduce volatility, we purchased more than $100 million of additional catastrophe reinsurance in the form of industry loss warranties. We are also accelerating a range of operational initiatives which are on track to deliver over $60 million of expense efficiencies ahead of our business plan in 2020. At the halfway point, we have achieved a $38 million expense saving against our business plan expectations. These actions are tactical in nature and should mostly be considered as one-off, having been assisted by reduced travel, recruitment and economic activity during the global lockdown.
In May, the Group successfully raised £375 million through a non-pre-emptive placing of new ordinary shares equivalent to 19.48% of the issued share capital immediately prior to the placing. The proceeds of the placing will be used to respond to growth opportunities in the London Market and in reinsurance, and to further strengthen our capital buffers.
The Group remains strongly capitalised against both our regulatory and rating agency requirements, and is able to withstand a combination of severe downside scenarios. Our Group regulatory solvency ratio at the end of June is 230% which is sufficient for us to weather a severe US windstorm in addition to the upper end of our UK business interruption risk scenario provided in our first quarter trading statement on 5 May, while retaining our A ratings which were reiterated by S&P and Fitch in May.
Rates
In the third consecutive year of rate improvement at Lloyd’s, momentum in Hiscox London Market has accelerated further, with aggregate rates up 13% year-to-date across the portfolio. Rates are up in nearly every line, including US public company directors and officers’ (D&O) which is up 81%, US general liability up 31%, cargo up 23%, major property up 16% and commercial and household property up 11% and 12% respectively. Renewed discipline in the market is combining with a global contraction of risk appetite to drive rates up, and submissions to London are increasing as risks fail to find a home with local carriers.
In reinsurance, where pricing has been underwhelming and we have remained disciplined, the market has begun to harden considerably and rates are up 11% across the portfolio year-to-date. After encouraging signs at the Japanese renewals in April, where we achieved an aggregate 38% increase on wind layers, we saw further evidence of the market’s upward trajectory at June’s Florida renewal, with the team achieving a blended increase of 29% across the portfolio. This trend continued in July, and with the vast bulk of the book written for the year, we look ahead to January with anticipation.
In Hiscox Retail, which is inherently less cyclical, conditions are also improving. In our US portfolio, rates are up 5% as the US admitted market reduces its risk appetite, driving business into the excess and surplus lines market. Rates in our US excess and surplus lines portfolio are up 9% in aggregate and we are pushing rate increases and tightening terms and conditions across all of our lines. In the UK and Europe, pricing has been stable, but the effects of capacity withdrawal in certain markets are becoming apparent, creating new opportunities for growth.
COVID-19 exposure
We have reserved $232 million net for claims from COVID-19, including $150 million for claims from event cancellation and abandonment, media and entertainment and other segments including travel as disclosed in our first quarter trading statement. The additional $82 million includes amounts set aside for: Hiscox London Market, Hiscox UK and Hiscox Europe property business; UK and Europe travel bonds; and third-party claims in US allied health. It is too early to fully estimate any impact for Hiscox Re, although we are materially underweight in European exposure.
UK business interruption insurance and the FCA test case
Hiscox, like other insurers, has been clear that our standard UK property policies do not provide cover for business interruption as a result of the general measures taken by the UK Government in response to a pandemic. This position has been disputed by some policyholders and business interruption has become a defining issue for the industry during the COVID-19 pandemic.
The Financial Conduct Authority (FCA), the UK’s conduct regulator for financial services firms, has brought an expedited test case before the UK courts on behalf of policyholders to seek clarity on the application of cover for business interruption under a wide range of wordings from a number of insurance providers.
Resolving contract disputes through the legal system is a tried and tested route which is why Hiscox, alongside seven other insurers, agreed to participate in the FCA test case in order to provide certainty for customers and brokers as quickly as possible. The test case will address what triggers cover under the policies and, if there is any cover, its scope; however it won’t address issues of quantum and the adjustment of individual claims. We await the Judgment from the test case, which is expected in mid-September, and when the process is complete, including any appeals, we will of course abide by the final outcome.
Notwithstanding that we do not consider this to be a covered loss, and significant uncertainties around the final Judgment exist, we provided a risk scenario in our first quarter trading statement on 5 May. The scenario takes into account our view of the number of customers either ordered to close or with premises materially impacted, savings likely to be made by customers on their normal business expenses and various forms of government relief available to businesses, adjusting for wider business trends resulting from reduced economic activity. Based on this scenario, our analysis suggests a range of modelled outcomes between £10 million and £250 million net of reinsurance.
Since publishing this risk scenario, we have undertaken further analysis which confirmed our confidence in this range of modelled outcomes, after taking into account the three points noted above and also the impact of different closure periods for affected businesses.
The outcome of the FCA test case may also have an impact on our inwards reinsurance portfolio written by Hiscox Re & ILS, as some of its clients are primary insurers operating in the UK market which may be impacted by this Judgment; however, given the uncertainty and the range of interdependent outcomes, we are currently unable to accurately estimate the quantum of any potential liabilities.
COVID-19 response
We are committed to continuing our support of the international response to this pandemic, and to helping our people, our customers and society through a very challenging period.
We currently have over 95% of our more than 3,400 employees around the world working from home, and we are supporting them through flexible working and the provision of mental health and well-being services. We are standing by our employees by retaining all current roles through this time, and we are not furloughing any staff. We have also continued to pay contract staff and suppliers who work in our offices during the lockdown.
In addition to paying claims that are covered by our policies, we have taken action to assist our customers by alleviating some of the financial pressure they are facing. Our Retail businesses across the globe have implemented a range of actions locally, including extending credit terms, providing payment hibernation, premium rebates and discounts, as well as automatic extensions and extending cover to ensure customers remain protected when they need it most.
In response to the pandemic to date, we have given over $7 million to good causes around the world. The Hiscox Foundations in the UK and USA have committed £1 million and $1 million respectively to support national and regional initiatives in aid of vulnerable groups. We have also established partnerships with organisations aiming to improve SME access to funding and critical business resources, including Business in the Community in the UK and the Women’s Business Development Center in the USA. We were also proud to lead the Bermuda (re)insurance market in raising nearly $1 million for the local hospital.
Like other industry events, COVID-19 requires an industry response, and I was pleased to work with the Association of British Insurers to create The COVID-19 Support Fund, which aims to provide fast financial support to a host of community-based charities through the Charities Aid Foundation and partners including the National Emergencies Trust and Business in the Community.
Hiscox was one of the founding supporters of the Fund, which is the largest non-government fundraise in support of COVID-19 in the UK to date, with over £83 million in voluntary contributions pledged so far against an ambitious target of £100 million, as we collectively support some of those hardest hit by the crisis.
Pandemic is not the first systemic risk that has faced the insurance industry; however it is one that the industry cannot underwrite on its own. Protection gap schemes already exist for other systemic risks such as flood and terrorism that would otherwise be uninsurable, and Hiscox will continue to support industry efforts to develop effective solutions in all our markets, such as those recently proposed by Lloyd’s of London.
Hiscox Retail
Hiscox Retail comprises our retail businesses around the world; Hiscox UK, Hiscox Europe, Hiscox USA, Hiscox Special Risks and Hiscox Asia. In this segment, our specialist knowledge and retail products differentiate us and our ongoing investment in the brand, distribution and technology helps us build a strong market position in an increasingly digital world.
The Retail segment represents more than half of our business on a gross basis, and more than three-quarters on a net basis. We have been building this business globally for over 30 years and it is a real differentiator for the Group when allied with our big-ticket businesses. During 2019, Hiscox Retail wrote over $2.2 billion of premium globally, of which about one quarter, more than half a billion, was direct and partnerships business. Arguably, this makes Hiscox the biggest digital commercial insurer in the world, which makes me very proud.
Hiscox Retail delivered a strong performance in challenging conditions, growing its top line by 4% in constant currency, driven by growth in four of its five business units. While new business flow contracted in April as economic activity slowed down following government action to stop the spread of COVID-19, there were encouraging signs of a recovery in June. Nevertheless, we expect the economic uncertainty caused by the pandemic to impact growth for the balance of 2020.
The long-term growth prospects for Hiscox Retail remain undiminished. In the first half we passed another milestone, reaching 1.3 million Retail customers globally, including over 700,000 in our direct-to-consumer businesses.
Hiscox Retail’s result has been materially impacted by claims from COVID-19, with claims from event cancellation and abandonment, media and entertainment and other segments including travel falling within the segment. Excluding the net COVID-19 related losses, the claims experience was in line with expectations, and the business delivered underlying profits in excess of $100 million.
| Gross premiums written | $1,175.2 million (2019: $1,154.6 million) |
| Loss before tax | $137.7 million (2019: $100.0 million) |
| Combined ratio | 95.0% (2019: 90.7%) |
Hiscox UK
Hiscox UK provides commercial insurance for small- and medium-sized businesses as well as personal lines cover, including high-value household, fine art and luxury motor.
Gross premiums written reduced by 2% in constant currency to $363.3 million (2019: $378.5 million) as good growth in January and February driven by our broker commercial business and underwriting partnerships was offset by a contraction following the outbreak of COVID-19.
New business flow has been impacted by reduced economic activity, however this trend slowed in June as the UK economy began to gradually re-open. A substantial portion of the premium shortfall is attributable to sectors, such as hospitality and events, which have been most impacted by the measures taken by the UK Government in response to the pandemic.
Premium volumes will continue to be moderately impacted by measures we have implemented to help our customers through what remains a very challenging period for businesses, including payment hibernation, premium rebates and discounts.
Excluding the impact of COVID-19, both the art and private client book – which was impacted by 500 claims totalling £10 million from Storms Dennis and Ciara in February – and the professions and specialty commercial book, have reported a favourable claims experience.
The operational resilience of the business has been tested during this period, and it is pleasing to see that service standards are holding up well despite the increased claims volume, as the additional people we have deployed to the front line continue to serve our customers efficiently.
The team has done well to implement a new online first notification of loss system successfully and ahead of schedule, enabling customers to notify us of losses quickly and easily online. Our commitment to innovating in product and distribution is ongoing, and a partnership now under way with accounting software provider Free Agent is the first of its kind in the UK to offer insurance products within accounting software.
It will take some time for us to determine and respond to the impact on our brand in the UK resulting from the business interruption dispute, but we look forward to the certainty the FCA test case will provide. We believe the best way to safeguard our brand is by doing what we have always done well; paying covered claims swiftly and fairly, and providing the best support and service to our brokers and customers. I see my colleagues across the Group, but particularly in the UK, go the extra mile to help our customers every day and I am confident the team will deliver here.
Hiscox Europe
Hiscox Europe provides personal lines cover, including high-value household, fine art and classic car; as well as commercial insurance for small- and medium-sized businesses.
The business delivered a strong performance, growing gross premiums by 10% in constant currency to $263.4 million (2019: $245.1 million), with strong retention overcoming a decline in new business as a result of the Continent-wide lockdown.
The varied duration and severity of lockdowns among European nations is observable in the performance of each of the individual European countries.
Germany and Benelux delivered strong double-digit growth, driven in Germany by cyber, technology and media and in Benelux by a strong performance in Belgium, which grew 14%.
France and Spain were most significantly impacted by their respective lockdowns, reporting subdued growth. We expect to see a bounce back as the economies re-open, and will continue to focus on successful partnerships with banks and other carriers, as well as technology and insurtech companies.
Ireland’s commercial lines book, a strong growth driver early in the year, has seen a material decline in new business in line with the reduction in economic activity during the lockdown. In line with other local insurers and Insurance Ireland members, the team has been supporting customers affected by COVID-19 with extended credit terms, premium adjustments and other financial measures.
Excluding the impact of COVID-19, the claims experience for Europe was benign.
Despite the challenging remote working conditions, the team has been able to keep the delivery of a new core IT platform on track. The new system will be key to us reaching our ambitions for our European businesses.
Hiscox USA
Hiscox USA underwrites small- to mid-market commercial risks through brokers and directly to businesses online and over the telephone. We also partner with other insurers who sell Hiscox products.
Gross premiums written increased by 3% to $452.0 million (2019: $437.1 million), with good retention in both our direct and partnerships and broker channels compensating for a drop off in new business.
The direct and partnerships channel continues to grow as the US economy begins to recover and we have seen an accelerated pick-up in the use of digital applications. After suffering an expected decline between March and May, the direct channel had its best ever month in June, an increase of more than 20% on the prior year.
In the broker channel, we are excercising discipline in allied health and entertainment. This action will impact short-term growth but preserve profitability.
We have seen continued rate improvement in excess and surplus lines, with the most significant improvements in general liability, E&O, terrorism and cyber, while terms and conditions continue to tighten.
The implementation of our new policy administration system for the direct and partnerships business remains on track to complete as planned by early next year. The new technology is critical to enabling the direct-to-consumer business to scale over the long-term, which is key to our ambition to be the country’s leading online small business insurer.
Underwriting and claims management action taken in response to increased claims activity in some US casualty business is delivering as expected and we are pleased with our progress. Work to in-source a large part of our legal claims capability is on track and claims settlement periods – a key barometer for overall claims costs in our US business – continue to improve, and we expect to complete the in-sourcing in 2021. Having taken an increasingly cautious approach to prior year reserve development and current year loss picks, claims in US casualty lines are progressing in line with our expectations.
Hiscox Special Risks
Hiscox Special Risks underwrites kidnap and ransom, security risks, personal accident, classic car, jewellery and fine art. Hiscox Special Risks has teams in London, Guernsey, Atlanta, Cologne, Munich, Paris, Madrid, New York, Los Angeles and Miami.
Gross premiums written were $72.3 million (2019: $67.0 million), growing by 8% in constant currency in the first half on the back of a strong renewal performance.
We continue to innovate in product and distribution and our broadened distribution strategy focusing on portfolios and partnerships is delivering good results. We have seen early success in adapting our specialised products to sell alongside more commoditised insurance products with selected partners, including a recently-launched trucking insurance product with a kidnap and ransom add-on for companies crossing the US-Mexico border.
Hiscox Asia
Our brand in Asia, DirectAsia, is a direct-to-consumer business in Singapore and Thailand that sells predominantly motor insurance.
The business grew gross written premiums by 27% in constant currency to $24.2 million (2019: $18.6 million).
Thailand continued its strong momentum despite the impact of COVID-19, with success in its direct-to-consumer operations as well as through partnerships.
In Singapore, headwinds from the Singaporean Government’s response to COVID-19 continue to impact premium growth. The partnerships channel has shown encouraging signs since re-opening in June; however top-line growth is expected to remain subdued for the remainder of the year.
Hiscox London Market
This segment uses the global licences, distribution network and credit rating available through Lloyd’s to insure clients throughout the world.
| Gross premiums written | $508.0 million (2019: $484.6 million) |
| Profit before tax | $7.6 million (2019: $34.4 million*) |
| Combined ratio | 107.4% (2019: 103.3%*) |
million), as conditions continue to improve and we push material rate increases through the majority of lines. In the third consecutive year of rate improvement at Lloyd’s, momentum has accelerated further, with aggregate rates up 13% year-to-date across the portfolio. While it is not yet a universally hard market in the traditional sense, strong momentum encouraged by market discipline and a reduction of risk appetite from many market participants continues to drive rates up and create opportunities for those who are well capitalised and able to take advantage.
The public company D&O market has seen rate increases on renewal business of 81%, with more business finding its way to London as US commercial carriers’ risk appetites contract further in the face of COVID-19-induced uncertainty. We are currently receiving more than four times the premium for the same amount of risk as two years ago, and remain focused on carefully selecting individual risks, with the benefits of re-positioning the portfolio in 2018 beginning to show through in the results. With more markets retreating, we see further opportunity for profitable growth.
Elsewhere, lines such as general liability, cargo and major property continue to show strong double-digit rate increases and the majority of lines are rate adequate.
We continue to take action to improve profitability in the property book, where we are reducing exposure in household and commercial binders which have continued to contribute to higher attritional losses. We have non-renewed contracts, increased rate, reduced overall limit, and shifted the geographical focus of the binder book; however while the underlying signs are positive, the 12-month terms on binder contracts means that we will not see the full benefits reflected in the financials until 2021 and 2022.
For Hiscox London Market, it has been an active first half for large claims, even excluding the impact of COVID-19. The business reported above average large losses, including a large individual marine liability loss, as well as claims from old years of account for D&O and political risks. However, the business did avoid material exposure to some notable market claims during the period, including the largest D&O loss in recent history.
In July, we launched a new variable consortium, in partnership with RKH Reinsurance Brokers, with a maximum line of over $20 million for a wide range of challenging general liability risks such as wildfire, trucking and construction. As a market first, it enables Hiscox to bind capacity on behalf of other consortium members, while allowing them to flex their line up to a selected maximum on a risk-by-risk basis. The variable structure provides the flexibility to respond to more challenging and specialist risks, and offers brokers access to a meaningful amount of capacity from a single underwriting source, increasing the efficiency of the placement process.
The transition to a new way of trading for our London Market team has been relatively seamless since Lloyd’s closed its trading floor in March for the first time in more than 300 years. We continue to lead the way in electronic trading at Lloyd’s through our CEO Bronek’s Chairmanship of PPL, the market’s electronic trading initiative. Prior to the lockdown, we already bound over 70% of business written at Lloyd’s electronically, and this figure is now over 80%. Our underwriting, operations and claims teams are to be commended for continuing to provide such high-quality service to our brokers and customers.
Having already increased the stamp capacity for Hiscox Syndicate 33 by 19% to £1.7 billion for 2020, the business is well capitalised and well positioned to grow as rates across the market improve further.
Hiscox Re & ILS
The Hiscox Re & ILS segment comprises the Group’s reinsurance businesses in London and Bermuda and insurance-linked security (ILS) activity written through Hiscox ILS.
| Gross premiums written | $552.3 million (2019: $698.3 million) |
| Profit before tax | $(15.0) million (2019: $14.0 million*) |
| Combined ratio | 123.6% (2019: 111.3%*) |
Gross premiums written reduced by 21% in constant currency to $552.3 million (2019: $698.3 million), the result of a reduced catastrophe bet in response to rate inadequacy and less deployable capital from third-party capital providers.
In US property catastrophe and excess of loss business, our underwriters in London and Bermuda held their nerve, remaining disciplined and reducing exposure materially. At the April renewals in Japan, the international team secured strong rate increases in line with our new view of typhoon risk after two active years for Japanese windstorm losses.
The mid-year renewals, where we achieved strong rate increases in Florida of 29%, provided the latest data point for a forthcoming hard market in reinsurance. A chain reaction of capital contraction has created stress in the primary and retro markets, which sees the market finely poised for a turn.
Hiscox ILS assets under management remain at $1.5 billion; however, with some of the capital being withheld as reserves for prior-year loss events, total deployable capital is approximately $1 billion. We have received a redemption request from one of our ILS investors, which will reduce the amount of third-party capital available to underwrite against in January, but we are well capitalised and able to retain more attractively priced risk on our own balance sheet.
Excluding the impact of COVID-19, the claims experience has been normal, with some natural catastrophes and man-made losses. Prior-year catastrophes in Japan and North America are performing well, and we remain conservatively reserved.
Investments
The investment return for the first six months of 2020 is $84.6 million (2019: $147.5 million), 2.5% (2019: 4.8%) net of fees. Assets under management at 30 June 2020 were $7,467 million (2019: $6,592 million).
On the back of unprecedented support from central banks and fiscal policymakers, financial markets recovered significantly in the second quarter, and as such our mid-year investment return has improved materially from the first quarter.
Our cautious risk positioning ahead of the pandemic enabled us to take advantage of market uncertainty by topping up our allocation to risk assets through March and April. Incremental increases to our holdings in equities, high yield debt and emerging market debt have all performed well in the recent market rally, and have made good contributions to year-to-date returns.
With US one to three-year investment grade credit spreads having already retraced much of their widening in the first quarter by the end of June, we are comfortable to maintain our current level of risk at this juncture.
As government bond yields continue to decline and credit spreads narrow, the yield to maturity on our fixed income portfolio is now at its lowest ever point at less than 1%, which of course serves to reduce future expected returns.
People
The value of having good people is never more apparent than in a crisis, and I am incredibly proud of the way our people across the world have responded to the challenges put before them during this one.
Being forced into full-time remote working almost overnight is difficult enough, and that so many of our people have been able to remain effective under trying conditions, variously juggling roles as a colleague, parent, nurse, chef, entertainer and educator, is a testament to their adaptability.
Our front-line underwriting, claims handling and customer support teams have gone the extra mile to ensure our customers, brokers and partners receive the same high quality of service they expect from Hiscox. Their middle-and back-office colleagues have provided the support necessary to ensure our high standards have held up across the Group.
That we have been so operationally resilient is largely down to the tireless work of our global IT teams, under the leadership of our CIO Ian Penny, who have made the transition to remote working pretty much seamless. Our investment in systems and technology is key to powering our future, and the importance of the people ensuring our resilience cannot be overstated.
We have been fortunate over many years to have been able to cultivate talented people and promote from within, and I am very pleased that this tradition has continued with the appointment of Russ Findlay as Group Chief Marketing Officer. Russ has been with Hiscox since 2013, most recently serving as Chief Marketing Officer for Hiscox USA. In his new role, Russ will lead our 125-strong global marketing team and be responsible for our global marketing and brand-building activity. I congratulate Russ on his appointment as custodian of our strong brand that punches above its weight.
After 17 years with Hiscox including four years in Bermuda, Mike Krefta, Chief Executive Officer of Hiscox Re & ILS, is leaving us in early 2021 to return to the UK. Mike has held a variety of analyst and underwriting roles across the Group including in Hiscox Re & ILS, where he became CUO before taking the reins as CEO in 2017. Since then, he has grown the business to nearly $900 million of premium, established Hiscox in the ILS market, and led our ESG initiative. I would like to thank him for his energy and commitment to the Group and wish him well for the future.
Outlook
Having been in the business of risk for 47 years, one might expect to become somewhat immune to surprises, but some events have the ability to shock and amaze. COVID-19 has proven to be thus.
What one does become used to, however, is responding to such events, and our management team has risen to the challenges presented by this pandemic.
We have managed well as a business to handle simultaneous shocks to both our assets and liabilities; however, one thing we are not used to handling is our reputation for paying valid claims fairly and promptly being called into question. We are actively assisting the FCA to bring a prompt resolution to disputes around business interruption coverage in the UK, and we will abide by the final outcome.
Across Hiscox, we look ahead to the second half with confidence and optimism. The underlying business is strong. We are well diversified, with opportunities for profitable growth across all of our three divisions.
In Retail, we expect growth to continue as our digital platforms deliver efficiencies and new customers. In our big-ticket businesses, rates are rising rapidly and we are anticipating excellent trading conditions ahead.
We may be on the doorstep of the hardest market in many years, and we have the experience, distribution and firepower to grow.
*The comparatives are on a previously reported basis and reflect the impact of foreign exchange gains and losses. See Note 6 of the condensed consolidated interim financial statements for further details.
Robert Childs
Chairman
3 August 2020
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