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Usually, each quarter there is a reshuffling in FTSE 250 as well as FTSE 100. It's like the football leagues, in that some stocks are boosted in performance from the FTSE 250 to the FTSE 100. Others are downgraded. In a recent update, Hiscox (LSE:HSX) received a call to the main index. What happens now? Here's what I think.
A return trip to the top
To be clear, this is not the first time Hiscox has been big enough to exit the FTSE 250. Over the years, it has fluctuated between the two indexes. It dropped from the FTSE 100 back in 2020 when the pandemic hit. Fast forward to 2024 and a 12% share price rally has reduced the market cap to £3.57bn. This is enough to bring it back to the main stage.
Before I fully explain where I think the stock goes from here, it is important for me to understand how it has traded in the past.
The pandemic has not been a good time for Hiscox, which specializes in small business insurance. In the 2020 financial year, more than £350m of claims were made. Many of these were related to event cancellations and business interruptions. As a result, it posted a loss of £293m for the year.
However, since then it has managed to do well. After all, the shock of the pandemic was a black swan event. During normal business conditions, insurance is a profitable and proven business model.
Engines firing perfectly
Last year, Hiscox was doing well. Interim results that came out in August show that profit before tax grew by 7.1% compared to H1 2023. The division of income from different segments probably gives investors confidence going forward, as no one area is above the others.
Retail is doing well, and the CEO also mentioned that “Since the best conditions of the real estate market in ten years have persisted until 2024, we invested a lot at the beginning of the year in our insurance business”.
Let's not forget that Hiscox has global operations, including the US and Asia. So even if the UK market is not performing well, it can balance this with other areas.
Thoughts of the future
Despite the rally in the share price, the price-to-earnings ratio is only 6.95. I see this as an understatement, given the fact that I use a rating of 10 as a fair benchmark. Therefore, a rise in the FTSE 100 could help the stock rally further as it attracts more attention from value investors.
Another risk is that the stock loses out on the FTSE 100 due to other major competitors. This includes the likes of The Admiral, Prudential, Legal & Generaljust to name a few! This may stop the momentum in the share price, as investors may already have enough experience in the sector.
Ultimately, I think the future is bright for Hiscox and I am considering adding it to my portfolio.
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