Hiscox Underwriting Chief on 2010 Outlook

London-based specialty insurer Hiscox, which launched a significantly expanded U.S. presence in 2006, saw gross profits reach record levels ($481 million) in 2009. In this exclusive interview with Insurance Journal, Hiscox Chief Underwriting Officer Rob Childs discusses the profitability for the company, as well as the outlook and obstacles for the year ahead.

NOTE: Listen to this interview as an audio podcast.

Insurance Journal: Let’s start with the results, Rob. On an annual basis, profits were up significantly for Hiscox in 2009. What are the factors driving profitability?

Childs: A lot of the profitability comes from our London market business, which has had a stunning year, along with our Bermuda business and our guaranty business. With the Bermuda and the London business, of course, we have a significant reinsurance account, and the reinsurance account had a clean year. So that has added a lot to the profit.

IJ: Is that going to carry over into 2010? If I’m correct, you had a record profit year.

Childs: Well, I think you can’t argue for a completely loss-free year. But we’ve basically taken our reinsurance business from 13 percent of the book in 1999 to 31 percent of the book in 2009, and we’ve done that on the basis of chasing margin. Now the pricing on the reinsurance account is still very high. We set Bermuda up in 2006 to take advantage of the rate rises following Katrina, Rita, and Wilma, and the prices are still up there around the same level.

IJ: Let’s talk about specialty markets. What particular sections of the specialty market are really competitive for Hiscox right now?

Childs: Our specialty business has grown by about 27 percent year-on-year in local currency, and represents $270 million out of our controlled premium of $1.7 billion. And the specialty business includes things like kidnap and ransom contingency, terrorism, and political risk, and that has grown, and that has been a good area for us. Our political risk account at the moment is quite small, but we would look upon now as an opportunity to grow it. So I think that the market has picked up a significant amount of losses in the crash, but we’ve kept our account very small waiting for the turn, so hopefully we can grow it. But our kidnap and ransom book has grown a lot, and we also have a well-developed piracy product, and the world is probably not becoming a safer place, so I’d expect that to grow again next year.

IJ: Let’s talk about catastrophe losses. From what I understand, the profitability of Hiscox is up at least in part because we had a relatively low cat year. But we’ve had a major earthquake in Chile and another in Haiti, so I imagine catastrophes are at least on people’s minds if not necessarily flowing to their bottom lines. What is your projection for catastrophes in 2010 and how it will impact Hiscox?

Childs: God, wouldn’t I like a crystal ball like that. Oh, gosh, I would be a very wealthy man if I had that kind of crystal ball. One has to say that one would expect it to return to the norm and that there would be some measure of catastrophes this year. But we build our business plans around having losses. I think the key thing for us this year is that we’ve had — if I look at what have been the key drivers — we’ve had a benign catastrophe and we’ve also done extremely well on our investments as the investments have recovered. I think we’ve made a 7.2 percent return on investments, which is very high this year.

And so looking forward, one would expect that would have to return to the norm, too, and the investment yield is going to be in the 2 percent to 3 percent range rather than the 7.2 percent range. So what I would say is that in low investment returns, the pressure is going to be upon underwriters to increase their prices to compensate for the low investment return. So I’m hoping that is going to factor into slightly higher prices into the market.

IJ: What about differences between the U.S. market and the U.K. market? What is your expectation for performance in both areas, since you have a presence both in London and the United States — and Bermuda — as well?

Childs: We get about 40 percent of our premium overall from the U.S., so I would differentiate from the dollar premiums written in London and the dollar premiums written on‒shore in the States. We set up our U.S. office in 2006, and we’ve been continuing to build that. Basically we started with professional indemnity and omission products in 2006, and they’ve been developing well. We’ve added other lines of business that we do from the UK — terrorism, technology, and media insurance — and we also took advantage, I think, of the wobbles with AIG to recruit quite heavily.

So we’ve built, I think, a fairly good infrastructure there. We have 11 offices in the United States, and we’re employing just short of 200 people. So I think we’ve built a good, solid infrastructure. We’re not looking to massively accelerate, though, on premium in the U.S. because the market is quite competitive. So I think we’re just looking to build on our specialty lines and look for organic growth.

IJ: Hiscox is one of the largest Lloyd’s of London insurers. How has the company reacted to news from New York that there are some plans in the works to develop a New York Insurance Exchange?

Childs: I’m interested. We had Commissioner Wrynn come over and talk in London. I’ve spent some time with him. I think on the whole that we recognize that it could be very good for New York to have an exchange, but I would also recognize that it’s not necessarily the easiest thing to create something which is going to copy Lloyd’s, which has been going on for 300 years. History matters, and to create something from scratch which has the strength of the Lloyd’s Mutual will be difficult, I think.

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Editor’s Note: This interview was conducted and edited for length by East Editor Kenneth J. St. Onge

Topics Catastrophe Trends USA New York Excess Surplus Underwriting Reinsurance London