Hiscox Re’s Kathleen Reardon: Leaning into the hard market

Hiscox celebrated a successful start to 2023 with a successful set of interim results. That performance was driven by its London market and reinsurance business. Pledging to “lean into the hard market”, the group has allocated additional organic capital to the Hiscox Re and insurance linked securities (ILS) business. 

“At Hiscox, we have a long held strategy of balance between our big-ticket and retail businesses – where managed volatility in our big-ticket businesses has typically been offset by more stable returns in retail. This strategy has allowed the group to manage market cycles,” said Hiscox Re & ILS CEO, Kathleen Reardon.

“Hiscox Re & ILS sits in the big-ticket part, and that’s where the opportunities are looking really attractive right now. We are now getting paid really well for risks on the reinsurance side, and it’s the first time in my career that rates in all lines of business in reinsurance are going up simultaneously. It is an exciting time to be in reinsurance.”

All this, she explained, is coming against a background in which multiple factors are pushing and pulling at how insurers—and, by extension, reinsurers—view the world. She mentioned, in particular, climate change, ongoing high inflation, and political instability, such as Russia’s war against Ukraine.

“The outcome there is that increased risk means more demand for insurance products, and from that more demand for reinsurance protection,” she said.

This has led to Hiscox deploying additional capital in support of Hiscox Re & ILS this year.

“Given the attractive market conditions, Hiscox has deployed additional net capital so we could lean in during the hard reinsurance market,” Reardon said.

Reardon spoke about the strength of the firm’s three-pronged capital strategy. “Hiscox Re & ILS has a strong capital strategy that has enabled us to flex within the different market cycles. We have been offering quota share-type structures for over fifteen years and are in year 10 of our ILS Fund offering. And of course, we have the net capital from the group. This is all backed by 50 years of writing reinsurance at Hiscox.”

“The group has been really supportive of Re & ILS deploying more of its own capital in high-margin businesses, which were largely property catastrophe in North America, and the retrocessional lines of business. That net retention growth was well into the double digits. We saw an opportunity and it made sense within the group’s appetite for managed volatility.”

She went on: “Our results at the half year mark were strong, despite the catastrophe events we saw in the first half of the year. This included severe convective storm activity in the US and, internationally, the devastating earthquakes in Turkey as well as storm activity in New Zealand. The improvement on rates, programme structures, and terms and conditions supported these results.”

So far, said Reardon, the year has not seen Hiscox retreat from any of the sectors set out in its business plan. She says that the firm saw significant growth for all the property cat exposed businesses, including retro, North America, and international property. She said also that the firm saw growth in its cyber and aviation offerings.

A key theme to the aviation sector last year centred around the Russian invasion of Ukraine, and the snatching of more than 500 passenger planes by the Russian state. A key lesson the industry learned from that was around composite cover.

“Much of the marine and aviation coverage on the market before the Ukraine crisis was structured as composite covers, meaning bundled-up lines of business. Bundling coverage that way made it more difficult to price each and every component accurately.” Those covers, she added, are now repriced and they structures are being simplified.

She said: “Some of that business has reverted to being bought on a standalone basis, such as terror.”

Reardon also commented on ILS and incumbent capital. She said at Monte Carlo last year many expected new capital would enter the market to chase fresh demand, but ultimately this was not the case.

“We certainly have seen the rate, the terms and conditions, and the structural improvements,” she said. “But the market has not seen a significant influx in capital.”

She added: “Some ILS investors have been rebalancing their portfolios to account for losses from reinsurance investments from prior years and other investments in their portfolios. That rebalancing exercise is essentially still going on. Many investors are waiting for a full clean year. They want to see good results and they want to see the sustained hard market.”

Other investors, Reardon said, who are familiar with the industry, and have experience with the cyclical nature of the market, will still look for opportunities to invest. A key point she raised is that newer investors are showing enthusiasm and optimism towards the sector.

Conversations abound as to whether the hard market will continue its momentum into 2024 and beyond.

“There’s no crystal ball”, said Reardon, “but the conditions which contributed to the hard market are still with us – climate change, conflict, and capital constraints. Looking at losses, the first half of the year was not so quiet. Given these factors, we expect the hard market to persist into 2024.

She went on: “In reinsurance we are in the business of taking on risk and, when catastrophes occur we are there to help communities build back more resiliently. That is the value of reinsurance. We want to be long-term partners for our clients and that means getting adequate rate for the risk. The marketplace for reinsurance is in a healthier place than we’ve been in a long time.”

It has been noted by some that the most-recent renewals for the cat-exposed business lines were much more orderly than 1/1. The thinking seems to be that the quantum had already been priced in. The question was whether the industry is looking at a more-level playing field, and whether rate rises would be more gradual.

“Everything we say is with the caveat of the hurricane season around the corner,” Reardon said. “‘Orderly’ in this case means that the reinsurers have defined their appetite, had their business plans approved, purchased their outwards protection, and decided what they wanted to do during this market cycle.”

She added: “We entered the hard market on strong footing, having identified market loss trends and taken decisive action early to rebalance our portfolio and restructure attachments points. Because of our early action and the additional capital from the Hiscox Group, we were in a good position to support our clients as they navigated through this uncertain environment. That conviction and confidence that the Hiscox Group had in Re & ILS really meant a lot.”