Hiscox is best known for insuring the fine arts and classic cars of the wealthy. The reality is much less glamorous: much of its retail business comes from protecting small businesses. It is also a little less lucrative. American subscription losses have helped wipe out almost a third of its shares since the peak in July.
Social inflation, or the growing propensity of US courts to award higher damages to companies, added to underwriting losses. There are few signs that this will reverse. Business leaders could be even more exposed to new laws, passed last year, which allow claims related to historical allegations of sexual abuse. Armies of lawyers are happy to take on such cases and are better funded than ever. Speculative investors have pledged up to $ 9 billion to fight these cases, according to Bloomberg Intelligence, in hopes of high returns.
Hiscox responds by reducing the risk of liability for its directors. His focus on small businesses protects him from oversized payments. A little comfort if, as expected, social inflation continues to rise. Last year, Hiscox shares were trading at a multiple of 20 times future profits due to its plans to expand into the United States. Even after abandoning adolescents, exposure to litigation means that the shares are too expensive.
He has already had a modest year. Pre-tax profits fell to just $ 53 million, a 2% return on equity. But a longer litigation increases costs and time capital must be set aside in the event of a claim. Across the United States, settlements for the largest cases increased to an average of $ 55 million in 2018, from $ 28 million in 2014. Premiums increase to reflect these facts – if they increase quickly enough, this remains a problem that affects the entire industry.
Insurance aims to allay customer fears. In announcing the results, boss Bronek Masojada sought to do the same for his investors. But his assurance that direct exposure to the coronavirus is relatively low is more of a distraction than assurance. The only way that investors can allay their fears about this is to bail out.
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