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Hiscox profit warning reduces buffers ahead of the hurricane season

Creeping losses are continuing from catastrophe events in last year’s hurricane season, including Typhoon Jebi in Japan and Hurricane Michael in Florida
hurricane
Analysts worry that level of earnings buffers to absorb catastrophe losses has materially declined ahead of the hurricane season

Hiscox Ltd (LON:HSX) has warned that half-year profits will be lower than expected, which undermines the insurer’s buffers to absorb catastrophe losses ahead of the hurricane season.

Ahead of interim results at the end of July, the FTSE 100 group said that it expects to deliver an interim pre-tax profit of US$150mln-US$170mln, versus US$163.6mln last time and analyst forecasts of nearer US$190mln.

Almost all the profit will be from an estimated US$150mln of investment returns to the end of June, having benefited from further market movements in the second quarter.

As a result of “significant” deterioration from catastrophe events in last year’s hurricane season, including Typhoon Jebi in Japan and Hurricane Michael in Florida, the underwriting result is likely to be around break-even.

Hiscox has made a net US$40mln addition to reserves for the creeping of prior year losses, which was largely expected, but has unexpectedly also taken an US$60mln tax charge as part of a reappraisal of historical marketing activity.

Retail business is expected to produce a combined ratio within the normal range of 90-95% at the half year, with growth in line with the first quarter and expected to trend towards the middle of the target 5-15% range in the second half.

Broker Peel Hunt, which had been pencilling in around a US$190mln profit before tax for the half year, said the interim profit miss accounts for roughly 9% of its full-year estimates at the midpoint of the guidance range.

“Overall, whilst earnings quality has deteriorated and the tax charge is disappointing, the full year outlook will be largely determined by the impact of the 2019 Hurricane season which peaks in Sept/Oct.

“What is becoming clear is that the level of earnings buffers to absorb catastrophe losses has materially declined ahead of the hurricane season.”

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