Future ILS flows less certain despite “materially increased rates”, Hiscox warns

Hiscox Group reported its results this morning, saying that net flows to its insurance-linked securities (ILS) funds were broadly stable for the third-quarter, but noting that after hurricane Ian investment sentiment has been impacted to a degree.

Hiscox ILS, the insurance-linked securities (ILS) and collateralised reinsurance underwriting and investment management unit of the Hiscox Group, had reported significant fund-raising success through the second-quarter of the year, with $561 million of inflows lifting its ILS assets under management to $1.9 billion.

Through Q3 of 2022, Hiscox says that “Net flows into the ILS funds have been broadly stable in the quarter.”

But looking ahead ILS market conditions are less certain after hurricane Ian and Hiscox acknowledges this in its latest trading statement saying, “Future ILS flows are somewhat more uncertain as the attractions of materially increased rates are counterbalanced by investor sentiment impacted by Hurricane Ian losses and investors rebalancing portfolios.”

But positively, the group also disclosed having earned “over $40 million of fee income from ILS and quota share partners year to date,” within its Hiscox Re & ILS division.

Hiscox as a group has set up a $135 million reserve for losses from hurricane Ian, which it has based on an industry loss of $55 billion plus a margin.

The company said the size of its reserve for hurricane Ian losses reflects its “continued reduction in under-priced natural catastrophe exposed risk,” across recent renewal seasons.

Also reflective of this is the fact Hiscox Re & ILS, the division where reinsurance is underwritten and the ILS fund management business conducted, saw significant price increases at renewals at the mid-year.

Overall, the Hiscox Re & ILS division increased its gross premiums written to just over $1 billion for the first time, saying that it “benefitted from further hardening market conditions.”

Aki Hussain, Group Chief Executive Officer, commented, “The Group has performed well in a complex underwriting environment. Our Retail business is on track, with platform migration going well and we look forward to an acceleration of growth in 2023. The performance of our big-ticket businesses remains robust after the impact of Hurricane Ian, and improving conditions are presenting new opportunities.”

Hiscox reported that of its big ticket businesses, “Hiscox Re & ILS is benefitting from stronger rate momentum with an average risk adjusted rate increase of 12.5% in the period.”

Adding that, “Rates are particularly strong in retrocession, North American property catastrophe and cyber portfolios, where traditional reinsurers and alternative capital reduced capacity and cedents looked to purchase more cover in an inflationary environment.”

This meant, at the most recent sets of renewals that, “The dislocated reinsurance market experienced in Florida at the June renewals meant the business achieved a 34% rate increase, although the premium increase was smaller, as we strategically moved up on program layers and reduced the number of cedants to focus on selected customers,” Hiscox said.

In addition, the company explained that, “Hurricane Ian’s landfall in September is expected to further reinforce the hardening rate momentum.”

But noted that it has flexibility in its business model and said, “We will remain disciplined in our approach to drive rate adequacy, whilst being ready to deploy more of our own capital in the event of third party capital withdrawal and materially elevated rates.”

$90 million of Hiscox’s reserve for losses from hurricane Ian is attributable to the Hiscox Re & ILS division.

Looking forward, Hiscox noted that the focus is now on the end of year renewal season, where it forecasts “exciting” opportunities could emerge due to market forces.

“We are expecting further and potentially material rate hardening as capital withdrawal combined with elevated demand, creates an exciting opportunity for the reinsurance market. In the event of material rate hardening we would expect to deploy more of our own capital and increase retained premiums,” the company explained.