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By DAN REYNOLDS, senior editor of Risk & Insurance®

As last winter began, the announcements started to trickle in.

On Dec. 22, 2008, Hiscox announced that it had tapped John Tutera, formerly of Lexington Insurance Co., and Robert Cruz, formerly of AIG, to become its vice presidents of construction and terrorism insurance in the U.S. respectively.

Then, in February, Hiscox was out with the news that it had grabbed another Lexington graduate, Steve Silverman, who was going to partner with Fireman's Fund veteran Randi Glazer, who also came over to Hiscox to head up the company's new U.S. inland marine business.

So, just what is Hiscox up to? Quite a bit, actually, and Bronek Masojada, the London-based CEO of the company, admits that even he's a little anxious about the scale and timing of what he and his fellow Hiscox executives have undertaken.

Masojada says Hiscox is eying the changes created by the wounding of AIG and some other domestic insurers due to their investment losses and financial blunders, and is making an aggressive move to grab more of the U.S. middle market. Hiscox is in hiring mode, having opened up a new office in Miami in May. It also plans to open an office in Los Angeles by the end of the year.

"When you're actually going for it and hiring people, that's exciting, that's movement," said Masojada. "Now I'm getting pretty anxious because now you've got to deliver."

What Masojada and his team would like to deliver to shareholders is a growth rate that would see the specialty insurer add about $100 million in overall U.S. business per year. Masojada says Hiscox started building business in the United States back in 2006, and had built that up by the end of 2008 to about $100 million with 100 employees.

Now, the company is at break-even point in the United States in terms of profitability, has a headcount in the United States of 150, and plans to have as many as 200 U.S.-based employees by the end of 2009. From a base that included offices in San Francisco, Chicago, Philadelphia and New York, the company has added offices in Miami, Boston, Lexington and Kansas City.

Richard Watson, the former London-based managing director of Hiscox Global Markets, moved in April to New York to become the CEO of Hiscox USA. In the move, Watson was going from the head of a $1 billion business to a $100 million business: Why?

"Because of the opportunity to build from $100 million to $1 billion," responded Masojada. "He knows the scale of the opportunity and also the degree of commitment that we have," he added.

In addition to its inland marine and construction business, Hiscox also plans to build on a long history of writing terrorism and errors and omissions insurance.

Also in the Hiscox mix is the underwriting of more esoteric pursuits like thoroughbred racing and breeding stock and technology and media errors, which covers such things as libel and defamation. The company also has a substantial practice insuring the art and automobile collections of high net-worth individuals. Total premium in that sector for the company was $405 million in 2008.

Hiscox may insure some glitzy people, including British royals, according to published reports, but as it expands and writes more commercial insurance in the United States, it's not going to be putting down glitzy lines, according to executives. This expansion into the United States is characterized by Masojada as a measured, mostly middle-market play in terms of the size of the lines being put down.

GO SLOW, GO STEADY

"It's slowly, slowly, catchee monkey," said David Bruce, a London-based Hiscox division head of specialty for Syndicate 33.

"You don't grow your business by doubling over night. It doesn't come by slamming down a $500 million line," Bruce said.

Even with that steady approach in mind, Masojada said he hopes for and would be delighted to see strong results from the U.S. expansion.

"The ambition is really to grow the business at $100 million per year, so if it goes to $200 million this year that would be fantastic," Masojada said. "If you can grow at $100 million per year, you know, over five years that is some pretty substantial business."

"Within the Fortune 1000 we will pick off little pieces, but we're not trying to do all of General Electric's property," Masojada said. "We will pick off small areas there and then middle markets as well because we can put down a $10 million, $20 million line."

So far in 2009, Hiscox, which does 30 percent of its business in reinsurance, has been aided by the hardening of the reinsurance market. As an indication of how things have hardened in reinsurance, Hiscox Bermuda, which houses the company's reinsurance operations, saw gross written premium in the first quarter of 2009 almost double, from $61.3 million to $121.6 million.

Gross written premium for the entire company was $824.52 million as of March 31, 2009, compared with $544.48 million as of March 31, 2008.

In its U.S. division, Hiscox reported gross written premium of $17.1 million in the first quarter, compared with $11.3 million in the first quarter of 2008, an increase of 51 percent.

Writing in the London-based "Independent" in May, financial columnist Alistair Dawber rated Hiscox's stock, which is traded on the London Stock Exchange, a "hold." In a column titled "Too Early to Back Aggressive Hiscox," Dawber quoted Masojada saying the firm is "aggressively selling" policies, as compared to some its more "nervous" peers.

Dawber also wrote that the company will be hard-pressed to match the impressive results of its first quarter. However, he also said, "We like Hiscox and think that shareholders will get a solid stock with a decent yield."

Masojada, who could be found relaxing with some co-workers over tea one afternoon at the Ritz Carlton Hotel during the Risk and Insurance Management Society's annual conference in Orlando, Fla., seemed a prudent man, but he admits that Hiscox is gambling a bit in the timing and chemistry of its U.S. expansion.

One hand yet to be revealed is that the U.S. primary property/casualty marketplace hasn't hardened much, if at all, outside of the expected price increases in errors and omissions and directors and officers coverage in the stumbling financial sector.

As the major domestic insurers reported their second quarter 2009 numbers in late July, well-heeled companies like ACE Ltd. and Chubb Corp. were reporting rate increases overall in the low single digits, from around 2 percent in the case of Chubb to in the 4 percent and 5 percent range on the part of ACE.

But data collection that takes into account a wider range of information showed a market that ACE chairman and CEO Evan Greenberg referred to as "messy." Rates were up 5 percent in some places, down 5 percent in others.

"I think generally, I think rates are relatively stable," said Cliff Gallant, an analyst with Keefe, Bruyette & Woods. "Depending on geography and class rates are either down five or up five."

Mike Foley, CEO of Zurich North America Commercial, who works for a company which has had U.S. operations for more than 100 years, says that if carriers aren't willing to raise prices soon, at least gradually, they're going to be letting themselves in for some pain in coming years as the claims connected to those lower prices start coming in.

"The historic challenge for the industry is that we tend to go one or two years too long in the softening market and then need dramatic rate increases to offset the fact that people look at their lagged economics and realize that they have dug a hole that isn't done being filled yet," Foley said, chuckling a bit at his analogy.

"The steepness of the cycles is really something that we don't think is helpful to anyone in the marketplace, so if we could collectively get a gradual increase it would be more positive," Foley said.

In addition to watching the rate of hardening, Hiscox is bracing itself to see whether U.S.-based risk managers will feel comfortable doing business with a carrier headquartered offshore. "You have taken a bet that people will switch away from some of the troubled carriers? and you're taking a bet that people will deal with a foreign firm," Masojada said.

Another gamble is those aforementioned Hiscox hires of U.S. industry veterans who are leaving larger carriers for a smaller one. That means key employees that Hiscox has invested in will have to get used to a new culture and a more pressing need to produce with nowhere near the support structure they might have been used to.

"There is no separate new product development department, you are the new product development guy," said Masojada.

"We are a small company, obviously, so we are looking for people that bring a certain level of talent and enthusiasm to their jobs that are also innovators," said Carl Bach, a former AIG and ACE executive who is now a New York-based executive vice president for business development with Hiscox USA.

September 1, 2009

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