Profile: Stuart Bridges, FD of Hiscox

Profile: Stuart Bridges, FD of Hiscox

Hurricane Katrina had a catastrophic effect on FTSE 250 insurer Hiscox, but FD Stuart Bridges has remained calm in the face of the storm

stuart bridges hiscox

In late August 2005 one of the most destructive hurricanes ever seen by
mankind began building up over the Bahamas. The spinning, spitting, surging
mutant then tore through the Gulf of Mexico at speeds of 178mph before
unleashing its fury on New Orleans and Louisiana.

For one week Hurricane Katrina pounded the United States’s south coast with
relentless cruelty, wreaking untold ruin on the cities and oil rigs that dared
to stand in its path. Katrina was the costliest Atlantic hurricane ever, causing
$75bn (£42.8bn) worth of damage and claiming more than 1,600 lives as it pursued
its course of destruction.

Destructive forces

On the other side of the Atlantic, executives at Lloyd’s of London watched
the devastation unfold with growing concern, even though they were 4,626 miles
away from the havoc.

One of these executives would have been Stuart Bridges, group finance
director of FTSE 250 insurer Hiscox, which had underwritten a big chunk of
business in the Gulf of Mexico and surrounding areas when Katrina hit.

By the end of 2005 Hiscox had absorbed a £165m net loss because of the human
and commercial destruction caused by Hurricanes Katrina and Wilma, among others.
Understanding the situation, the financial result for Hiscox prompted the
insurer’s chairman Robert Hiscox to say: ‘We thought that 2004 was a turbulent
year, but 2005 well surpassed it.’

It is surprising, then, to find that after the last seven months of chaos for
insurers, Bridges is not a panicked, over-worked FD trying to repair a damaged
balance sheet. In fact, the opposite is the case.

Bridges has just reported pre-tax profits of £70.2m for the year ended 31
December 2005 and in the process delivered a 12.8% return on equity and an
increased dividend of 4.75p, up from the 3.5p handed out in 2004.

Instead of dwelling on the catastrophes of the last year and concentrating on
damage control, Bridges is firmly focused on growth.

A positive approach

So what is the source of Bridges’s optimism? How can an insurer that has just
survived the most expensive hurricane disaster in history be on an upward curve?

Bridges says the company’s approach to risk management has supported its
bullish outlook. ‘The dynamics of supply and demand come in to how we underwrite
high risks like a hurricane. It is cyclical. When we are at the top of the cycle
underwriting becomes uneconomic, because the rates are too low given the risk we
are taking on,’ Bridges says.

Through sophisticated capital modelling and meteorological analysis, Hiscox
can predict, with a fair degree of accuracy, when a hurricane is likely to
strike. The group can then react accordingly when underwriting.

But more importantly, a disaster like Katrina reminds people of the
importance of insurance cover. ‘After a disaster like Katrina there is strong
demand for insurance and that brings higher rates. We watch the cycle and sell
as much as we can after a disaster, and then come down again at the appropriate
time,’ Bridges says. ‘It is simple economics. We have to have the capacity to
expand and contract appropriately.’

Expansion is exactly what Hiscox is doing. Towards the end of last year, the
insurer raised £170m from a rights issue, which it reinvested in opening an
office in Bermuda, one of the most prominent reinsurance centres in the world.
If Katrina had not happened, the opportunity to make this move would never have
materialised, says Bridges.

Hiscox plans to write $325m (£185m) in business in Bermuda this year in
addition to the $1.7bn it will write in the US in 2006. So popular is the setup
for reinsurers in Bermuda, that it has now outgrown the London market. In recent
years, companies in Bermuda have been taking in more than $37bn in premiums per

Bridges believes that one of the main reasons for Bermuda’s success is the
quality and speed of regulation on the island.

‘We met with the Bermudan Monetary Authority and it had a team of incredibly
knowledgeable, informed people who focused on key regulation. Just one week
after meeting with them we had a full licence and documentation,’ Bridges says.
‘They moved so quickly and efficiently. This compares with the FSA who recently
said that it would be speeding up the same process, which would now only take
four to ten weeks.’

Making progress

The speed and ease of the regulatory process in Bermuda contrasts greatly
with the hurricane of red tape that Bridges has had to cope with in London. In
addition to IFRS, he had to deal with a wave of insurance-specific regulation on
capital modelling and solvency.

Bridges says there is ‘finally light at the end of the tunnel’, but admits
the whole process has been onerous.

‘It has been difficult to keep an eye on the business because such a large
part of management resources have been dedicated to IFRS and regulation,’ he

Part of the problem, according to Bridges, is that there are too many
individual bodies doing work on regulation than is ‘sensible’, causing a lack of
overall organisation to co-ordinate the regulation.

‘All the work that has been done on regulation by individual groups needs to
be taken to a higher level. There needs to be an umbrella body, maybe the FRC,
to make sure that what these different groups are doing fits together,’ Bridges

But just as an opportunity emerged out of the Katrina wreckage, so Bridges is
hoping to make the best of the regulatory overflow.

‘We have looked at regulation and tried to see how we can benefit. A number
of analysts have shown interest in the additional disclosures under IFRS and the
business review (also known as the operating and financial review) is an
excellent marketing document for the company,’ Bridges says.

A former fund manager with Henderson investors, and having sat on the
opposite end of the boardroom table on results day, Bridges is a strong believer
in the importance of communicating clearly with investors.

‘It is crucial to communicate clearly with investors, and there is so much we
learn from a design and layout point of view to achieve. I also strive to make
meetings with analysts and investors memorable, having worked as a fund manager
myself,’ he says.

Financial forecast

Lloyd’s has always been associated with the glamorous side of the business –
insuring big-ticket risks like hurricanes and terrorism. But these areas are as
risky as they are lucrative.

This volatility is why Lloyd’s insurers has slowly expanded their business to
write the less exciting, but more stable retail risks, explains Stuart Bridges,
the group finance director of FTSE 250 Lloyd’s insurer Hiscox.

‘We have a large book of regional or retail business that is stable and helps
us to balance the risks we face in the global business,’ Bridges says.

This balanced portfolio is what enabled Hiscox to deliver a pre-tax profit of
£70.2m in 2005, which although down on the £89.5m profit of 2004, was still
impressive considering the £165m net loss the group suffered in the Hurricane
Katrina aftermath. ‘The big-ticket risks are still our core market, but our
focus is on balancing stable business with the volatile business,’ Bridges says.

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