Should you buy an insurer in the middle of a global catastrophe? Certainly Hiscox, Britain’s battered three billion pound insurance stock, is in part a bet on how long the Covid-19 crisis will continue.
But with the shares now trading at £9.42 – nearly half what they were in July 2019 – a significant number of leading analysts believe that the insurer is worth a look.
The company’s third quarter trading update came out this week and revealed a reassuring lack of extra nasties, making the case more compelling. After a torrid year and the need to raise capital at £6.50 a share, there are encouraging signs that the insurer is beginning to steady the ship.
Ravaged: Insurer Hiscox is worth a look, despite a torrid year including claims from disasters such as wildfires in Asia
What went wrong at Hiscox? In as much as insurers can, the company has done its best to diversify and create a specialist slot for itself at the same time. Just under half of the business is what is called ‘bigticket insurance’, which is everything from oil rigs in the Gulf of Mexico to skyscrapers in Asia.
This is a volatile market, where riots in Chile, typhoons in Japan and wildfires in Asia can all have a huge effect on profitability.
Hiscox balances the volatility with a retail business including smaller commercial insurance, art and private client policies, and specialist services such as kidnap and ransom cover. As such, it doesn’t compete with the likes of general insurers such as Direct Line, but attempts to differentiate through its specialist knowledge and global teams.
This year’s problem is that Covid19 is a perfect storm – coming after several other storms, typhoons and wildfires. It will cost Hiscox an estimated $387million (£296million) to deal with cancelled events and other Covid-related issues.
This figure will rise by around 10 per cent if Covid-19 restrictions continue into 2021. The company is also embroiled in a court case with the UK financial regulator, the FCA, about whether it should pay certain business interruption claims to small and large businesses. Aside from Covid, though, analysts believe that the company is getting stronger. Andreas van Embden, insurance specialist from Peel Hunt, says the latest three quarter trading statement from Hiscox was encouraging and showed that the company was improving the quality of the business that it underwrites.
He was also pleased that Hiscox had managed some revenue growth, with a 15 per cent increase in premiums for the third quarter and 2 per cent for the three quarters as a whole. Analysts at Jefferies also highlighted the premiums growth and the fact that the company had not increased its estimate on Covid claims since the last update.
The company is benefiting from a shift to digital, analysts say, and there is potential for growth in the US small and medium-sized business market in particular. Hiscox is also hoping to return to paying a dividend at some point in the future, although not all analysts believe this will be possible in the short term.
Midas verdict: There are obvious risks in buying Hiscox, as there are with so many companies right now. As well as exposure to Covid-19, there may be further risks associated with what the insurance industry calls ‘wind events’ and other natural disasters. On the other hand, since the pandemic began, the company has fallen in price and is better positioned for the future in a growing market. Reassuring news about 2021, such as a viable vaccine, would lift the stock and analysts are bullish about how far it could go. Jefferies’ price target on the stock is £10.20, while Morgan Stanley’s is £9.90. Life’s a risky business, and investing can be too – but Hiscox might be a good policy at this price.
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