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Hiscox clarifies combined ratio guidance for retail unit
7th Nov 2019 14:50
(Sharecast News) - Hiscox released a statement on Thursday to clarify what it said in its third-quarter update earlier in the week about its medium-term combined ratio target.
The combined ratio is a measure of an insurer's profitability. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above means it is paying out more money in claims than it is receiving from premiums. So the lower the ratio, the better for the insurer.
Hiscox said on Monday that it expected the full-year combined ratio for Hiscox Retail to be between 97% and 99% and that it continued to target a ratio of between 90% and 95% "over the medium term".
In an analyst meeting on Wednesday, the company was asked for clarification over what it meant by medium term. Management described an expected return to a target range of underwriting profitability for Hiscox Retail with a progressive improvement of 1-2% a year over the next two to three years, it said.
Specifically, for 2019, it expects a combined ratio of 97% to 99%, while for 2020, 2021 and 2022, it expects 96% to 98%, 95% to 97% and 90% to 95%, respectively.
"The group did not believe that this constituted inside information, rather it was a clarification of the meaning of medium term," it said.
Hiscox said these were "conservative" expectations, which it will aim to exceed.
"The retail market opportunity for the group remains significant and the growth engine of the business remains intact," it added.
RBC Capital Markets said it was adjusting its estimates to reflect lower retail profitability in line with the new ranges.
"Following the analyst round table on 6th November and subsequent market announcement on 7th November, we reduce our 2020-21E earnings per share estimates 4.2% for 2020 and 12.9% for 2021. Our book value per share estimates reduce 0.5% in 2020E and 2.4% in 2021E respectively."
The bank, which cut its price target on the stock to 1,350p from 1,450p but maintained its 'sector perform' rating, said these reductions to its estimates reflect a slower path to the 90-95% range in the retail division than it had envisaged in its post 9M19 trading statement model update.
"We adjust our retail combined ratio assumptions to 97.0% in 2020 (previously 96.4%) and 96.0% in 2021 (previously 93.6%) reflecting the mid-point of the ranges given in the market announcement on 7th November," it said.
"Whilst downgrades to estimates are disappointing, we expect that Hiscox's actions that it has taken in its retail business are likely to be cautious. In our experience, reserving actions tend to have an inherent hindsight bias, and therefore recognition of positive reserve development is likely to be slower than it would have been had issues in the portfolio not arisen."
The combined ratio is a measure of an insurer's profitability. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above means it is paying out more money in claims than it is receiving from premiums. So the lower the ratio, the better for the insurer.
Hiscox said on Monday that it expected the full-year combined ratio for Hiscox Retail to be between 97% and 99% and that it continued to target a ratio of between 90% and 95% "over the medium term".
In an analyst meeting on Wednesday, the company was asked for clarification over what it meant by medium term. Management described an expected return to a target range of underwriting profitability for Hiscox Retail with a progressive improvement of 1-2% a year over the next two to three years, it said.
Specifically, for 2019, it expects a combined ratio of 97% to 99%, while for 2020, 2021 and 2022, it expects 96% to 98%, 95% to 97% and 90% to 95%, respectively.
"The group did not believe that this constituted inside information, rather it was a clarification of the meaning of medium term," it said.
Hiscox said these were "conservative" expectations, which it will aim to exceed.
"The retail market opportunity for the group remains significant and the growth engine of the business remains intact," it added.
RBC Capital Markets said it was adjusting its estimates to reflect lower retail profitability in line with the new ranges.
"Following the analyst round table on 6th November and subsequent market announcement on 7th November, we reduce our 2020-21E earnings per share estimates 4.2% for 2020 and 12.9% for 2021. Our book value per share estimates reduce 0.5% in 2020E and 2.4% in 2021E respectively."
The bank, which cut its price target on the stock to 1,350p from 1,450p but maintained its 'sector perform' rating, said these reductions to its estimates reflect a slower path to the 90-95% range in the retail division than it had envisaged in its post 9M19 trading statement model update.
"We adjust our retail combined ratio assumptions to 97.0% in 2020 (previously 96.4%) and 96.0% in 2021 (previously 93.6%) reflecting the mid-point of the ranges given in the market announcement on 7th November," it said.
"Whilst downgrades to estimates are disappointing, we expect that Hiscox's actions that it has taken in its retail business are likely to be cautious. In our experience, reserving actions tend to have an inherent hindsight bias, and therefore recognition of positive reserve development is likely to be slower than it would have been had issues in the portfolio not arisen."