Cube Midcap Report (22 April 2020) – Rainy day for Hiscox #HSX #BEZ #JMAT

Cube Midcap Report (22 April 2020) – Rainy day for Hiscox #HSX #BEZ #JMAT

Good morning!

Today I’m planning to look at:

  • Hiscox (HSX)
  • Beazley (BEZ)
  • Johnson Matthey (JMAT)
  • Antofagasta (ANTO)

Finished at 13.45.


  • Stock data should display here.
Market cap £2.4 billion ($3.0 billion)
RNS Market Update on COVID-19 Exposure
Writer disclosure No position

Perhaps I’ve been too relaxed about the exposure of one of my larger holdings, Berkshire Hathaway, to the Covid-19 crisis.

Let’s see what specialist insurer Hiscox has to say about its policies:

Hiscox is actively settling claims for event cancellation and abandonment, media and entertainment and other segments including travel. On the basis that disruption caused by restrictions on travel and mass gatherings continues for a six month period from March 2020, Hiscox expects to pay net claims totalling up to $150 million. In the event that restrictions on travel and mass gatherings are extended beyond six months, Hiscox expects that these claims could increase by an additional $25 million.

In really good years (2012-2016), Hiscox has made pre-tax profits of $300 million – $440 million.

Before this crisis, consensus forecasts suggested that profits would get back to these levels during 2021 – 2022.

So for an investor with a long time horizon, and assuming that economic life gets back to some form of normality before the end of this year, the potential blow to Hiscox does not appear all that serious.

Unfortunately for non-event, non-travel related businesses, Hiscox says its policies don’t cover business interruption caused by UK government policies.

This is a hot topic right now, for understandable reasons. Some business owners feel they deserve an insurance payout, but the insurance industry is standing firm.

In the words of the ABI:

Standard business insurance policies are designed and priced to cover standard risks. They are therefore very unlikely to provide cover for the effects of global pandemics, and insurers would have no obligation to pay out claims in relation to the COVID-19 pandemic. This includes forced closure by the authorities. 

The ABI says that business interruption policies would typically cover instances where premises are forced to shut due to infestation/infection at that specific address. They don’t cover closure due to government decree that all premises of that type must be closed.

It remains to be seen whether the insurance industry will prevail in this row against some customers, but I would expect the wording of their policies to protect them from making payouts.

Hiscox discloses that it has 10,000 business interruption (BI) customers, most of whom have monthly revenues of less than £40k. The economic loss resulting from closure, according to Hiscox, will be materially lower than revenues (there are probably lots of low-margin businesses in there).

That does help us to think about what the risk of BI payouts might be, e.g. six months of closure, for 10,000 customers, suffering an average economic loss of £5k per month would result in additional cost to Hiscox from this crisis of £300 million.

Disputes are ongoing:

A number of UK policyholders have disputed the application of their policy in relation to business interruption. Hiscox recognises these are extremely difficult times for businesses and is determined to help provide greater certainty for customers. As a priority it will therefore work with the UK insurance industry, its regulators and its customers to seek means of expediting resolution through the range of independent mechanisms available.

Risk is mitigated by:

  • different countries may take different views, e.g. exposure in the USA is considered negligible
  • catastrophe reinsurance policies taken by Hiscox may pay out
  • balance sheet equity of $2.2 billion at year-end, including cash of $1.1 billion

My view

I’ve had a positive view of Hiscox for years, and have been frustrated by its very high share price.

With the shares now at a more than 50% discount to their 2019 range, and at a more “normal” premium to book value, I could consider buying in at the current level.



  • Stock data should display here.
Market cap £1.9 billion ($3.0 billion)
RNS Trading Statement for 3 months ended 31 March 2020
Writer disclosure No position

This insurer comes in with a similar estimate to Hiscox: $170 million of Covid-19 losses (which is net of reinsurance, the same as Hiscox’s estimate).

Putting that to one side, Q1 has been good: gross premiums written up 13% to $840 million, helped by rate increases of 8% – very encouraging. Perhaps there is no longer an over-supply in the insurance business, leaving good rates for those left behind?

Investments had a negative return of minus 1% for the quarter. I’m disappointed to see that the company was selling its small allocation to equity funds during the quarter:

We have seen a great deal of volatility in markets during 2020, and uncertainty continues as Covid-19 persists. During the first quarter of 2020 we reduced our exposure to a number of capital growth assets, and temporarily lengthened the duration of our fixed income investments in order to reduce the impact of the market volatility.

The exposure to equity funds reduced from 2.8% to only 0.9%.

The core fixed income portfolio is very low-risk in the aggregate. Average duration is only 2.0 years, with yield of 1.6%.


Beazley expects $100 million in marine, property and reinsurance-related claims. Some of its bespoke policies in this division will cover business interruption resulting from Covid-19.

It also expects $70 million in claims from event cancellation (including communicable disease cover).

Balance sheet

The end-2019 balance sheet showed equity of $1.6 billion, plus subordinated debt of $550 million. Total capital $2.2 billion.

The capital requirement for the UK business was $1.8 billion. The US business also needs funds.

There is some wiggle room, but not as much as you might like to see.

To deal with recent events, Beazley has therefore started using a “letter of credit” facility (total available: $225 million), and passing on the risk of some of its activities to reinsurers.

My view

This is a good company, but I find the prospects at Hiscox more exciting. Hiscox is at a lower premium to book value, too!


Johnson Matthey

  • Stock data should display here.
Market cap £3.7 billion
RNS JM and COVID-19: supporting our stakeholders
Writer disclosure No position

JMAT remains active during this crisis:

Our teams are continuing to work hard to manufacture vital drug ingredients and medical devices for the healthcare industry and produce important catalysts and chemicals that enable the world’s food and energy supply chains.

For employees, there is good news – no redundancies “as a direct result of the impact of COVID-19 until the end of June 2020”. No UK government funds are being taken for furloughed staff.

Suppliers get good news, too – no payments to them will be delayed. Struggling small suppliers might even get paid early. How unusual!

And there’s good news for charities and medical organisations, who are receiving various donations from the group and its senior management.

It’s a feel-good RNS, if ever there was one.

My view – this stock is priced cheaply but growth prospects are questionable. For example, the lifespan of the traditional catalyst business (for reduced emissions) may be limited by the increase in popularity of electric vehicles.

It’s true that JM has been working hard on battery materials for EVs, but I have no idea how profitable that might be.



  • Stock data should display here.
Market cap £7.3 billion ($9.5 billion)
RNS Q1 Production Report
Writer disclosure No position

This copper giant reports $2.5 billion in cash and liquid investments. That should be plenty of liquidity for the near-term.

It does have significant medium and long-term debts, and an overall net debt position. Planned capex has been reduced for the year to $1.3 billion.

My view: I know little about this sector, but I note that the price of copper is firmly within its range since before the global financial crisis. As such, the valuation of ANTO around its book value may be fair.

Finishing the report there for today, thank you for dropping by!




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  • comment-avatar

    Hi Graham. Is it a “midcap”, I’m not sure but, if you have time and feel so inclined, perhaps you could cast your eye over today’s RNS from BooHoo. My biggest individual holding, so I’m happy.

  • comment-avatar

    Hi Graham,

    I think you should tread very carefully with Hiscox. The quote from the ABI note refers to “standard business insurance policies” nor Hiscox business insurance policies. It is based on a “Dear CEO” letter published by the FCA on 15 April, which says:

    “Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic. While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances”.

    It is important to understand, however, that the wording used by Hiscox in respect of “notifiable human disease” would seem to provide much wider cover than is normal elsewhere in the market. I am no lawyer but, having reviewed the Hiscox wording, I would certainly be looking to take legal action against them if they denied my COVID-19 BI claim. In this context, I would draw your attention to a different paragraph from the FCA letter:

    “In contrast, there are policies where it is clear that the firm has an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment, rather, such claims should be paid as soon as is possible. This is consistent with the wider objective of the authorities to support business and consumers during the current crisis. If there are reasonable grounds to pay part of a claim but not to make the payment of such claims in full, we would like you and your Board to adopt an approach of making an interim payment. Many firms are already doing this. If you disagree with doing so, we would like you to send to us the grounds for reaching that decision including how you believe it represents a fair outcome for customers. Your firm’s decision is likely to help inform our assessment of its culture”.

    Also, consider that Hiscox have built an exceptionally strong brand (reassuringly expensive) based on excellent customer service and a readiness to pay claims without fuss. Whether or not they win the argument over BI coverage, brand damage could be significant and lasting.

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