Typically, each quarter there’s a reshuffle in the FTSE 250 and the FTSE 100. It’s something like the football leagues, in that some stocks get promoted for good performance from the FTSE 250 to the FTSE 100. Others get relegated. In the most recent review, Hiscox (LSE:HSX) received the call up to the main index. What happens now? Here’s what I think.
The journey back to the top
To be clear, this isn’t the first time Hiscox has been large enough to move out of the FTSE 250. Over the years, it has fluctuated between the two indexes. It fell out of the FTSE 100 back in 2020 when the pandemic hit. Fast forward to 2024 and the share price rally of 12% has pushed the market cap up to £3.57bn. This is enough to get it back to the big league.
Before I can fully explain where I think the stock goes from here, it’s important for me to understand how it has traded in the recent past.
The pandemic wasn’t a great period for Hiscox, which specialises in small business insurance. During the 2020 financial year, it was hit with over £350m worth of claims. Most of this had to do with event cancellation and business disruption. As a result, it posted a loss of £293m for the year.
However, it has since been able to perform well. After all, the pandemic shock was a black swan event. During normal business circumstances, insurance is a profitable and proven operating model.
Engines fully firing
Over the past year, Hiscox has been doing well. The interim results that came out in August show that profit before tax grew by 7.1% versus H1 2023. The split of revenue from different divisions likely gave investors confidence going forward, as no one area is overpowering the others.
Retail is doing well, with the CEO also citing that “as the best property market conditions in a decade have mostly persisted into 2024, we deployed more capital early in the year into our reinsurance business”.
Let’s not forget that Hiscox has worldwide operations, including the U.S. and Asia. So even if the UK market underperforms, it can balance this out with other areas.
Thoughts for the future
Despite the rally in the share price, the price-to-earnings ratio is only 6.95. I see this as undervalued, given the fact that I use a ratio of 10 as a fair benchmark. Therefore, the promotion to the FTSE 100 could help the stock to rally further as it attracts more attention from value investors.
One risk is that the stock gets lost in the FTSE 100 due to other larger competitors. These include the likes of Admiral, Prudential, Legal & General, to name just a few! This could stall the momentum of the share price, as investors might already have enough exposure to this sector.
Ultimately, I think the future is bright for Hiscox and am considering adding it to my portfolio.
This post was originally published on Motley Fool
