Hiscox's group FD, Stuart Bridges

Photography: Anton Hammerl

If you’ve read Aesop’s Fable number 373 ­ about the lazy grasshopper, the industrious ants and the reversal of their fortunes when summer turned to winter ­ then you may have a simple reference point from which to read the financial events of the past quarter and the fallout we’ll be seeing in the next.

You might also get a quick grasp of the strategies behind some of the companies that are not failed, failing, or about to fail in what we’re told is the most serious financial meltdown since the Great Depression. It is undeniably dull: it’s prudence, so yawn-inducing even its biggest groupie, Gordon Brown, dumped it long ago.

But what seemed so unsexy in boom time has now been transformed, in desperate times, into a rare, much desirable asset. And one that FTSE-250 listed, Bermuda-domiciled specialist insurer Hiscox seems to have made invaluable capital from, while others operating in the global insurance sector, such as American International Group or Dutch group Aegon (though these are life companies and Hiscox is a non-life underwriter, it would be at pains to point out), were seduced into heavy subprime investment that proved a very bad idea.

For group finance director Stuart Bridges, who celebrates a decade in that role with Hiscox next autumn, the post-mortem is simple. “The key is to understand what you are doing in your business. It doesn’t matter whether it’s a structured investment or whether it’s a complex underwriting risk; I should be able to understand it and if I don’t then I should go and ask and make sure I do understand it. That for me is where things have fallen down,” he says. “Extra yield is always going to come at extra cost unless you’re very, very lucky.

“It’s the same with underwriting: extra premium will come at extra risk and our business is all about managing and taking risk. Key for us is constantly being in a position to pay out claims. So a little bit of caution goes a long way.”

Hiscox’s investment portfolio, for an example of what it does with its own money, is at once rather traditional and a sign of the times. It is shareholder friendly: heavily skewed to long-dated T-Bills and US AAA+ bonds, it holds no BB or BBB-rated credits from Europe and is only punctuated by a few cheeky percent in US sub-investment grade corporate credits. Just 1.3% of its £300m sterling-denominated investments are high yield.

“You’ve got to be in a position where you don’t have to sell your bonds and can hold them to maturity,” Bridges says. “We absolutely stayed away from high yields where we saw no liquidity, enticing as they were, but if you look at the mark-to-market valuations causing bonds to price as they are now, most will be paid off in full.”

Up the ratings
In mid-September the group had its credit rating upgraded from A- to A by insurance ratings agency AM Best. Bridges has refinanced the business, paying down its entire debt load debt, extending its loan facilities to £350m and its cash facilities to five-year terms, giving it valuable breathing space. “It is boring and dull,” he quips. “But dull is good.”

It really is. In Hiscox’s operating business, the impact of downturn and its swift response to changing conditions is evident. In the six months to June 2008, the company made more cash from doing less business as pre-tax profits of £109m came from £639m of gross premiums underwritten (GPU), led by retail growth in its UK and European markets. But by the end of September, year-on-year growth in GPU had shrunk by 8% group-wide, pulled south by a 14.3% reduction in its UK underwriting business ­ while its US business, less than three years old and loss-making at the beginning of the year, grew by nearly 67% in the period from GPU in June of just £13m. It now accounts for 40% of group business.

The changes in environment between its June results and September numbers encouraged the company to reverse its stated intention to reduce the capacity of its Lloyd’s of London syndicate to £550m and instead increase it to £750m. It will also launch a second syndicate in January 2009, with £60m from its cash haul, to write small business and technology risks for US clients.

Whereas many of the larger businesses in the insurance and reinsurance space have recently reported seriously shrunken profits, share valuations and dividends moving south, or emergency recapitalisations, boring old Hiscox now looks one of the most resilient players.

What’s more interesting is what Hiscox can do with this in 2009.

For Bridges, it means going hunting: buying businesses and teams at very tasty prices as rivals or other relevant companies go under, or look to make quick cash in the next 12 months. Bridges isn’t naming any names, obviously. But, so far, the company has made much capital from the nose-diving fortunes of American International Group, having hired whole teams from the stricken insurance giant to bolster its US business in construction, launch a Miami-based group to serve Latin American risks, a new office in Kentucky to serve growing director and officer liability (D&O) needs from small businesses and equine insurance, and add senior staff to its US terrorism, media, technology and D &O teams in Chicago and New York.