Shares in Hiscox (LSE: HSX) crashed 15% on Thursday morning, after the international specialist insurer reported soaring claims in the third quarter.
Chief executive Bronek Masojada spoke of “significant catastrophe losses from storms in the US, the Caribbean and Japan,” with the firm having to set aside $165m for claims from Hurricane Dorian and Typhoons Faxai and Hagibis. That’s “materially in excess of the group’s catastrophe budget for the second half,” and fees and profit commissions should be around $25m lower at the end of the year too.
If that’s not enough natural disaster for one year, Hiscox also has exposure to the California wildfires, though at this stage it can’t tell us the size of any potential loss.
Price fall
The morning’s price drop has taken the shares down nearly 25% over the past 12 months, and with the potential for such catastrophes, I’m not surprised if investors shy away from insurers like Hiscox. But if you do invest in companies like this, you have to know you will take short-term hits from time to time, and only buy if you think the shares are good value for the long term. That’s especially important with disaster insurance, which must suffer from the worst short-term unpredictability in any sector.
So what’s Hiscox done for those long-term investors who understand the risk? Even after the decline of 2019, over five years, the Hiscox price is up 55% compared to the FTSE 100‘s 11%. Dividend yields have varied between 2% and 3%, so that’s a very good overall return.
If this is the kind of insurance sub-sector for you, the current weakness might even provide a good buying opportunity.
Safer
I prefer less specialised general insurers like Aviva (LSE: AV) myself. I see them as safer and more likely to provide reliable and progressive dividends, which is a core requirement for me.
Saying that, Aviva hasn’t exactly set the world on fire over the past five years, with its 17% share price loss comparing badly to a simple index tracker, never mind to Hiscox’s strong gain. On the plus side, Aviva has been paying bigger dividends, with its yield reaching 8% in 2018 — and the current year is forecast to deliver 7.4%.
But the shares are on very low P/E multiples of only around seven, so big investors are clearly not convinced by the Aviva proposition at the moment. I think that’s for a number of reasons.
Complexity
One is the complexity that is Aviva. The company, under the leadership of new CEO Maurice Tulloch, is in the process of splitting out its two UK businesses, general insurance and life insurance. It’s no easy task and could take some time, and such a serious restructuring clouds the horizon with the kind of uncertainty that the City hates.
Plans to cut costs by up to £300m lead to fears of pressure on the dividend too. After all, when a company needs to rein in its cash outflows, I usually advocate a careful look at the dividend. But it is well covered, and I’m relatively upbeat about it.
I can see the Aviva share price remaining low until some clarity emerges, but I still see it as a top income buy and I’m happy to keep pocketing my dividends.