Beazley plc (BEZ.L) Earnings Call Transcript & Summary

All right. Morning, everyone. Shall we kick off? Welcome to Beazley's 2022 year-end results. I'm Adrian Cox, the CEO. With me today are Sally Lake, CFO; and Bob Quane our CUO. Here with the agenda for today. So I'll talk you through the highlights, give you an update on our platform, do some recap of the capital raise and where we are with that. And then I'll hand over to Sally, who will talk you through the financial performance. And Bob will dive into a little bit more detail on each of the divisions, and then will revert back to me with an outlook for 2023. Please read the disclaimer. Thank you. All right. So highlights for 2022, a strong underwriting result last year with a combined ratio of 89%. I'm pleased with this. I think it reflects the hard work over the last few years. And given that 2022 witnessed geopolitical uncertainty really unseen since the Cold War. I think it also demonstrates our resilience to the unexpected. On that subject our provisions for the war in Ukraine are unchanged since the half year. Of course, our result wasn't immune to the secondary effects of all that. And the turbulence there after which led to some quite significant rate increases, interest rate increases in 2022 and a subsequent mark-to-market loss for us of just under $180 million for the year. And the combination of those 2 factors is a profit before tax of $191 million and a return on equity of 7%. Following some sustained premium growth over the last 4 years we have reached the nice milestone of $5 billion in gross premium, which is an increase of 14% year on year in 2021. There's a bit of FX suppressing that, but I do note it is less than the growth in the first half of the year. And I'll go into a little bit of detail on that on the next slide, although the growth is in line with our mid-teens guidance. Overall in 2022, we generated a decent rate increase of 14%, which does influence our guidance for 2023. And finally, I'm pleased to be able share that the Board eventually approved a dividend of 13.5p, which is in line with our progressive guidance and also in line with the historical about 5% average that we usually deliver. So some thoughts on growth in the second half then. It was lower than the first half. There are 2 main drivers to that. The first is the continued softening of the D&O market and we have a reasonably sized D&O book. And the second is the moderation of rate increases in Cyber, which had been going up sharply since the start of 2021. We signaled the results of the half year that we'd started to take risk off the table in D&O business as a result of the rapid change in the rating environment as new business came to a grinding halt in the D&O world after Russia invaded Ukraine in February. As has been quite widely commented on I think, this persisted -- this rate change softening market persisted throughout the rest of the year, so we continued to de-risk as a result of that. And that reduction in premium is reflected in the overall numbers for Specialty Risks which houses D&O, which grew only 2% last year. We will continue to cycle manage prudently as we always do, both to take risk off when the market conditions don't reflect that and to grow rapidly when they do. And to Cyber, so better risk selection underwriting by insurers improved management risk by most businesses, and a complete reset of prices for Cyber insurance has delivered good loss ratios for both us and I think the market as a whole in Cyber. So it's unsurprising and entirely logical therefore, that the rate increases of the previous 2 years moderated in the second half of the year, given those good loss ratios. But it does mean that the extra premium that we would have got from a higher rate change didn't come through as much in the second half of the year, as it did in the first. And that those 2 things in combination subdued our growth in the second half and in the fourth quarter particularly. I would like to underscore that our appetite for Cyber both in the short-term and the long-term is undiminished. But an additional factor in our Cyber business in Q4 is the changes that we made towards Cyber wordings, particularly around war, which we implemented gradually in the last quarter of the year and fully at the 1st of January. And this has had a temporary dampening effect on new business for Cyber. So to explain this a little more, we've been signaling for some time that the systemic risk in Cyber, insurance needs to be more transparent and explicit. And the issue that surfaced most recently is war, given that cyberattacks now form part of many nation states armory. And war is not something that insurance generally covers because it's too big of an issue for the collective balance sheet of the industry. Insurance in a time of war is generally provided by government, not the private sector. Unfortunately, war exclusions were written before cyberattack became a part of most nation states armory. So it doesn't really contemplate that. So we have updated our wording to reflect those capabilities. Most insurers and regulators feel the same way. And our updated wording is in line with the Lloyd's requirements that come into play at the end of March this year. Unsurprisingly, the market is figuring out how to make this transition. And it has been a little disorderly as not all insurers are implementing at the same speed, and some have yet to come to a full decision as to what they want to do. We are though seeing different insurers in different markets now quote with new updated war exclusions. And we are confident that the market will reach some sort of equilibrium in Q1, at the end of Q1 or beginning of Q2, noting that the Lloyd's guidelines are for the end of March this year. Because we transitioned to this new wording earlier than most, there has been an impact on our business at the end of last year, the beginning of this, but we did not expect this to persist longer than the early part of Q2. Moving on then to platforms. We outlined our platform strategy in the Capital Markets Day in May last year. And here's an updated view of our premium by platform. I do think that access to risk is a key part of our strategy, and good access to risk is a real advantage and our platform strategy I think gives us that. The first thing to note in this is that the growth in the E&S business which is up to 70% in the U.S. and up to 60% in Europe and the growth in our wholesale market business, which in 2022 grew at the same level as our U.S. platform at 13%. And I think this reflects the fact that during times of market change more business flows to the E&S markets and to the wholesale markets. Having said that, of course our youngest platform, our European platform, which we had thought would grow the fastest does and it grew at 23% last year, and we expect growth at similar levels in 2023. Another nice milestone for us was that we wrote just over $2 billion of premium on our U.S. platform, which is a great step on a journey that we began nearly 20 years ago in the States. On to the capital raise then. As you know, we raised just over $400 million in equity capital in November last year, the rationale for that was threefold. The first was an opportunity to regrow our property franchise. In the near term, in reinsurance, as we thought that the reinsurance market was finally going to reset to address its multiple challenges of climate change, inflation and covering its cost of capital and over the medium to long term in our insurance business as we believe that technical and catastrophe exposed property business is once again firmly in the wheelhouse of the Specialty insurance market, having been commoditizing for much of the last decade. The second reason was to retain more of our premium in Specialty Risks and Cyber that we've been sharing with proportionally with the reinsurers over the last few years to maintain a good balance net. And thirdly, to improve balance sheet resilience post extreme event. So how have we fared since we laid out that plan in November last year? Well, the property markets have moved as we anticipated. So our treaty book gained about 50% rate increase at 1/1 and our North American open market business, about 20% in rates at 1/1. And as a result of that, we grew our premiums in property risk by just over 40% in January this year, which is absolutely in line with our plan in November. Much to the disappointment of our reinsurers, we successfully bought less Cyber and Specialty Risks reinsurance at 1/1, but they understood our rationale and why we did it and they remain fully supportive of us. We could have placed a lot more than we actually did. And in terms of balance sheet resilience, post event, Sally and Bob will give a little bit more detail on this later, but the key points are that our 1 in 250 risk appetite is now less than 20% of shareholders' equity, which -- and it was over 50% a decade ago. And our 1 in 10 AEP has gone from 44% of budget earnings in 2022 to 38% in 2023. So this has enabled us to grow and continue to reduce volatility across the business. And with that, I'll hand over to Sally.

Good morning, everyone. For those of you who don't know me -- think you all do. My name is Sally Lake, I am the CFO of Beazley. I'm going to be taking you through my usual trio of investments, reserving and capital with a little sprinkle of IFRS 17. And then I'll be handing over to Bob to give you an update on underwriting. So just quickly, Adrian has mentioned most of this already, but here are the financials, which we're really happy with. The net growth is slightly lower than the growth, which was expected because we bought more reinsurance in 2022 than we did in the previous year. And this has more of an impact on a written basis than an earned as it takes a bit longer. Looking forward, as Adrian has already said, we're looking at a reversal of this as we plan on buying less and already have bought less reinsurance following the equity raise. You'll see the expense ratio is flat year-on-year, and we're delighted with a [ sub-90%] core. And note that we've been able to see better attritional claims than we're expecting at the beginning of the year. We're taking this opportunity of profitable growth periods to continue to invest in our business with some discretionary spend focused on automation, efficiency and thus ensuring we are in the best position to continue to scale the business. So investments come first. So after a tough year, we are pleased to see that we've made a positive return in the second half of the year after a real challenging year following the macroeconomic impacts that we were all very much aware of. The yield on our fixed income investments increased from just under 1% to just under 5% at the end of the year, and this gives us a real chance of making a really good investment return going forward, although we do note that volatility within the markets does continue. How does that make us feel about our portfolio? High level, very much in line with what we saw a year ago. Sovereign debt make up more than half of our total investments, and our corporate exposures remain well below past levels, reflecting our continuing caution around the outlook for credit. Our equity investments are very limited and made current uncertainties. And what's really interesting on the side is that the total value of our investments continues to grow in line with our business, and it's increased by over $1 billion during the year to nearly $9 billion, given the good level of yields, and this gives a really good outlook in terms of investment income for 2023. So now on to reserve releases before we look at the levels. So it's really pleasing to see that we continue to see positive reserve releases across all areas of our business for a second year in a row. And we saw an increase in our specialty risk division releases, which is our biggest division compared to the previous year. We see lower reserve releases in both Cyber and property. And actually, you see that we've seen a small strengthening within those in the second half of the year, and I wanted to explain that. In 2021, we saw some adverse deterioration in our attritional claims in property, which we've corrected for. And then in our Cyber book, the year is affected by ransomware, particularly 2020 had some claims settle worse than expected. We saw some strengthening in that year. Despite all of that, they've continued to release at a total level, but slightly lower than in previous years. However, given the movements in these markets since these more challenging years and the claims experience we've been seeing on this newer business, this feels behind us now, and that's demonstrated by the underwriting result in Cyber. You'll also see that we've opened the more recent years, lower in both these areas in the loss development tables. So it's an emotional time for me because, as you know, my favorite graph is going to be seen for the last time, I might have it stuck up on my wall. But just to remind everyone for the one last time and what this shows us. So this shows the level of reserve on our balance sheet compared to the bottom actuarial estimate, which is not a best estimate, it has a level of prudence within it. And what we've done is always prefer to be within 5% to 10% above our actuarial best estimate overtime. As we mentioned at the half year, as we transition to IFRS 17, we will be moving to a percentile range, and I'll talk about that more in a moment. And in the interim results, we flagged that we have chosen not to build up the reserve at this point because of the transition to IFRS 17. I'll go into that in a minute. And we ended the year at 5.3%, as you can see on that graph. So let's move on to the transition to IFRS 17. So moving -- we're going to move away from the percentage over actuarial to a confidence level range going forward. And our new preferred range will be to hold between the 80th and 90th percentile from now on. Our 5.3% margin at the end of 2022 would have been towards the top of this new range. It's also worth noting that IFRS 17 results are also subject to discounting, which is different to how we approach IFRS 4. So the outcomes going forward will be affected by the prevailing interest rates at that time. Now hopefully, that's enough excitement for now, but just to note that we'll be having a session just after the Q1 IMS to go through more detail on IFRS 17 ahead of half year results where you'll be seeing lots of balance sheets under the new basis. So finally, before I hand over to Bob, we're just going to mention capital. Adrian's already spoken a lot about the raise we did in November. And the ECR shown here already allows for the additional premium that we're planning on writing during 2023. At the same time, our U.S. insurance company has seen a reduction in its requirements as we continue to use our captive that we setup a couple of years ago in order to get the most efficient way of using our capital in the U.S. Look at these 2 together, the capital surplus is at 44% before dividend, and it's exactly where we expect it to be when we raised equity towards the backend of the year. And as Adrian said, one of the main drivers for raising the equity was to ensure that our balance sheet remained robust post event. So along with this thinking, we will be assessing whether the 15% to 25% preferred range remains the right level going forward. And we'll be updating you on that over the next year. And lastly, as mentioned, the dividend of 13.5p is a 5% increase on the previous year. I'll now hand over to Bob to talk more about underwriting.

Thank you, Sally. Good morning, everyone. My name is Bob Quane. I'm pleased to be here to give you a high-level overview on how our 4 underwriting divisions are performing. I'll start with Cyber. As Adrian already said out, we had exceptional rate increases we saw in Cyber have moderated in the second half of 2022. Despite this, we have seen strong growth in Cyber as new business looks to buy high -quality insurance protection around the globe. Today, Cyber is a $10 billion insurance market. But in the next 5 years, we expect it to grow to $30 billion. And as a market leader, we are focused on helping the market scale up. There are 2 things we're doing to achieve this. Firstly, we have updated our war exclusion wording, which Adrian has touched upon earlier. Secondly, we're working with third -party capital to create additional capacity in the market by launching the first ever Cyber Catastrophe bond. This is a small but important first step, and we expect to be able to announce additions to the Cyber Cat bond later this year. Our capital range in November will allow us to retain more of our Cyber risk as we pull back on our quota share arrangements, as Adrian talked about, very disappointing for our reinsurers who were clamoring for more. But we believe the opportunity in the Cyber market coming from demand growth will offer them opportunity to participate in our Cyber business going forward. In summary, we have an agile Cyber business built on underwriting experience, married with data and intelligence gathering that is able to evolve as the cyber threats and market conditions do. Also, Cyber has a substantial growth potential, and we intend to capitalize on that. Specialty Risk offers scale and diversification for over 20 products around the globe with multiple distribution channels, including direct, delegated and reinsurance. We see the opportunity to build our niche products, such as environmental, M&A and safeguard, which further will diversify our business mix within the Specialty Risk division. We will continue to support D&O clients and actively underwrite the class, but D&O over time, will become a smaller percent of our business, given the current market conditions. While other products that are seeing faster growth will become more substantial. This approach will continue to deliver sustainable growth across our Specialty Risks business. The Ukraine war had a significant impact on MAP in 2022, but we were pleased to maintain profitability across our MAP products. In the current geopolitical environment, political risk and political violence, covers have become increasingly relevant to our clients. Looking forward into 2023, we expect the trends we have seen to continue to grow in high-risk, high-reward areas. We continue to develop underwriting tools to assist in real -time monitoring of mobile asset exposures such as ships and planes in high-risk locations. Increasing market retention for war prevents us with an opportunity to grow that book, and we will lean into that opportunity. Hurricane Ian was a turning point for the property market, which is now playing out in 2023. The primary and reinsurance markets continues to see significant increases in rate, terms and conditions and deductibles, especially for catastrophe -prone business. As Adrian has already outlined, January 1 was in line with our expectations and growth plans. Terms and conditions tightened, attachment points increased, rates increased significantly and property values increase, reflecting inflation levels. Across the property portfolio, we have made strides in our understanding of climate risk. We've been actively investing in our modeling and pricing tools and taking steps to embed the learnings into our underwriting process. This work has put us in a solid position to take advantage of the current property market conditions to build out our property franchise in the U.S. market and other niche markets around the world. As we are planning to grow property, I wanted to touch on the issue of volatility. Here we can see our 1 in 250 risk appetite as a percent of shareholder equity. Over the last 10 years, our risk appetite has remained relatively stable, while the shareholder equity has been increasing. As a result, you can see here, volatility has been in a downward trajectory for more than a decade. On this slide, you can see the 1 in 10 loss relative to expected annual earnings. Just 4 years ago, the 1 in 10 loss event could have reduced our annual earnings by as much as 70%. Today, a similar event is expected to impact our annual earnings in the range of 30% to 40%. We have worked to create a more stable and less volatile earnings landscape. With that, I'll turn it back to Adrian to cover the outlook.

Thanks, Bob. Asked whether I was going to bring water with me. I thought it would. Thanks, Sally.

Never regret the water.

Never regret the water. Okay. So on with the outlook then. Despite all discussion about IFRS 17, we're going to continue to guide for the moment on an IFRS 4 basis. There's plenty of time to talk about IFRS 17. So we'll keep the language that we all understand for the time being. As Bob said, we live in a high -risk reward environment, all the uncertainties that we've been talking about for the last couple of years, we feel are going to persist into 2023 and beyond. And our guidance and our underwriting actions reflect that. But given the overall market conditions for last year and our expectations for this year, as we stood here last year, we said that we expected a combined ratio of about 90. Having moved on a year with another year of rate changes and our expectations for 2023, we're lowering that guidance 1 notch to the high 80s in 2023. On to growth. We're giving both net and growth guidance this year as there's some -- quite some divergence between the 2. And so I thought we would try to explain those a little bit. There are 2 drivers between that difference in gross and net growth. The second we've already talked about, so -- and those drivers are about equal weight. So there's a 10 -point difference between gross and net. So it's about 5 each. The second, we've talked about so we're buying less quite a share reinsurance on Specialty Risks and Cyber. The first is a more technical reason, which we wouldn't normally put up on a slide here, but it has quite some impact, so we thought we would. So 5623, which is the Beazley smart tracker, we have moved this year from being an SPA to a full syndicate. As a result of that, the third-party capital that's backing it, is providing capital directly to the syndicate rather than reinsuring Beazley. So the gross premium moves away from our balance sheet straight to the third -party capital, all right? And so it doesn't flow through our balance sheet anymore. That has absolutely no difference net, but it makes some difference growth, and it's an over $300 million business now. So it has quite some impact. So we thought we would outline that. As I indicated earlier, we are experiencing, and we have expected some short-term disruption on our Cyber book as the market adjusts to the new war wordings, and we think that will impact the book through the first quarter of this year. We are expecting the market to settle over the next couple of months, noting again the Lloyd's deadline is the 31st of March, and it has a decent share of business. If the market doesn't settle as we've anticipated, we will come back and update the market accordingly. Having said that, and as Bob was talking about our Specialty Risks book, which has been the engine of our growth really since 2010, we're not expecting that to grow at the same rate going forward given some of the headwinds that we've been describing. However, we have a new engine for growth in property, which we were very excited about in November, and we've had a very positive January. So the diversification and the sort of optionality that we've built into our product and platform strategy is really proving its strength now. And so we're still able to predict or project or guide to mid-teens growth this year, which is mid -20s net. Yield on the investment portfolio was 4.7% as at the end of December, which will provide a meaningful headwind last year and hopefully, a meaningful tailwind into this year. And we have 2 sessions for you this year, one in May for IFRS 17. And given we've already got one in May, we'll do a property one in Q4. And with that, I'll open up to Q&A. Please, would you direct questions to me, please, and I will allocate them out. Should we?

Yes.

Right. That's why I'm bringing the water with me. All right. Tell you what. I'll bring the water and the bottle and I'll neck yours. Okay. All right.

Sorry, 3 questions, please. Firstly, could you help us in the gross growth outlook for mid-teens, how much this is exposure growth versus rate expectations baked in? And secondly, on that slide where you show your 1 in 250 appetite reducing even further in 2023. How do we square that with the growth that you expect in property and property cat? And the last question is just on the ECR ratio being 40%, clearly shows that loaded for growth in '23, you still haven't deployed all the capital that raised when comments at that time suggested that you wanted to? So how should we think about that?

Okay. Three good questions. Thank you. So our rate expectations for this year overall across the book are less than they were for 2022. We don't give guidance on rate expectations for the year overall, but we are expecting to put on more exposure this year than we did last year because rates overall are more positive for us than they were last year, particularly in property. Our 1 in 250 has come down as a percentage of equity, even though we're planning to grow this year, and that is in line with the strategy that we outlined during the capital raise. So we want to be able to grow our property business and maintain a balance sheet that was more resilient post extreme event, and that's reflected in our 1 in 250. So we wanted to be able to have our cake and eat it, which hopefully, we have been able to do. ECR versus growth. So we have got a capital surplus that's above our traditional 15% to 25% range as Sally was discussing. And this was a conversation we had a number of times in November. Historically, when we first set our 15% to 25% range for capital surplus, there was an assumption embedded within there that following an extreme event, we will be able to raise capital and grow into a market turn on the back of it. As we look through the events of the last 7 years or so, I'm not sure that central assumption was as true as it might have been back in 2005 and 2006. So one of the things we decided to do as we blend into the property opportunity was to increase our balance sheet resilience. So then if there was an extreme event, we wouldn't have to go back to the markets in the same way that we would have done historically. And that's why the ECR -- the surplus over ECR is higher than it was. We will come back to the market later in the year with new guidance as to what our preferred surplus range is.

Maybe just a quick follow-up, if that's okay. So of that $400 million that you raised, how much have you set for 2023 growth?

Well, mid-teens overall. That's all I can share, unfortunately. The growth ambition is a multiyear one. So alongside a more resilient balance sheet, we are intending to grow over a number of years. So there is that to it as well.

James Pearse from Jefferies. So first one is just...

The mic doesn't like the question. We'll have to move on, I'm afraid.

Here we go. Sorry, I think that was probably a user error. Apologies for that. I'll start again. Can you -- so James Pearse, Jefferies. Can you help me bridge from, I guess, the 89% combined ratio in 2022 to high 80s this year? And I guess if I just think about the main moving parts, you've got favorable impact from pricing this year and in previous years. Catastrophe losses for the industry were worse than average in 2022. Presumably, there's some favorable operating leverage impact, too, from all that growth. So I guess, what's the adverse factor that I'm not taking into account that sort of takes you back to high 80s? So that would be my first one. Second question is just on Cyber rates. So still looking strong, but are moderating when and where are you expecting those rates to settle?

Great. Okay. So we started last year at 90%, right? So ignoring what happened in the year rates have improved a bit since then. So we're high 80s, right? Why did we beat the 90 last year because our experience in the first half of the year was better than we were expecting. Our experience in the second half of the year was roughly what we were expecting. And the combination of that is 89%. So we've got to the high 80s by going where do we start from last year, what's happened since, and we've moved 1 notch down. That's essentially the explanation. Does that make sense?

So essentially, kind of the 3 favorable factors that I laid out kind of they effectively get you from 90s to high 80s. Is that kind of 1 notch that you spoke about?

Yes, we've -- the rates have gone -- the rates have improved overall. So we've brought our guidance down a notch. And we have better than -- we had lower -- fewer losses than we were expecting in the first half of the year. Cyber rates, we showed at the half year last year, a Cyber combined ratio in the high 70s. And that was flatter because there was no Cyber Cat, and we provisioned for Cyber Cat. But we did say we target a combined ratio of mid-80s for Cyber. And so broadly speaking, we were making the sort of money that we were generating sort of loss ratios that we needed to. I think the Cyber market, in general, reached that conclusion in the second half of 2022. So that combination of a pricing reset, better underwriting and actually better risk management across a lot of businesses has improved the loss ratios. And it's a relatively short tail class at the moment, right? So for the current environment, Cyber business is priced pretty adequately because we don't need any more rates. What's going to happen this year on Cyber rates? Well, we continue to think there's going to be strong demand growth because you don't get from a $10 billion to $30 billion industry without strong demand growth. But we also think the Cyber insurance industry is feeling more confident than it was because it's managed to generate good loss ratios again. So broadly speaking, that's what we expect. Fundamentally, though, it will get impacted by what happens to the loss environment, right, because it's a short tail class. And so if losses remain below what people are expecting, the Cyber market will get more competitive. If there are more losses emerging, that will affect accordingly. And the more unexpected those losses are, the more the market we are at, and we're comfortable with that.

Darius, KBW. Two questions, please. So the first one on the Cyber reinsurance that you still maintain? How much more are you paying relative to last year? If you can give us any color on that helpful. How should we think your expected Cyber exposure growth in sort of the medium term, given the capital raise and the sort of demand growth that you envisage?

So the Cyber reinsurance that we bought at 1/1 was proportional, and the terms and conditions were entirely unchanged, and the price was entirely -- yes, it was all unchanged. Cyber exposure growth, we have an ambition to grow that business as fast as demand is growing for it. And so we have a plan for relatively decent exposure growth this year, but it will react to how quickly demand is growing and where it is growing. What we've been investing in over the last 18 months or so is making sure that -- because we're expecting demand to grow increasingly internationally. So we're trying to make sure that we have the mousetrap to capture that business internationally because historically a lot of it's been in North America. So what we're really doing is positioning ourselves to capture the growth as it comes. And we're prepared to put that on.

So you don't need any more rates [indiscernible] you are happy to [indiscernible]?

Yes. Given the current loss environment, I think rates are adequate.

Ashik Musaddi from Morgan Stanley. Just a couple of questions. So first, sorry, going back to that 90% to 80s, high 80s, I mean, clearly, you are growing property cat, which should typically be lower attritional versus 90s and you're taking more Cyber. I mean you're retaining more Cyber, which is the same case, and whereas rates is completely different. So you have 2 levers. One is your exposure in lower attritional is going up and you have rates. So I mean -- so that's what I'm trying to think like what does this high 80s? Are we just trying to -- is it just because 1% or 2% mix is a bit hidden in these high 80s, that's why we are not seeing that? Or would you say, no, it's just rates that matters, the exposures are more or less not really that matters?

Yes. So our business mix has shifted a bit, all right? And you're right, as growth in Specialty Risks ebbs away a bit, and we're growing more in property, and we continue to grow Cyber and we continue to grow MAP. That mix of loss ratio between attritional and cat moves a bit. So the combined ratio of high 80s, yes, but the component parts of that will change a little bit. So there's slightly lower attrition and -- sorry, larger cat component to that, yes, which is why we also wanted to share the 1 in 10 and the 1 in 250, so we could give some guidance around that.

That ebbs as well. It's also worth remembering that we -- when we guide, we assume an average cat across the board, including in Cyber. And Cyber has had another year where we've had benign catastrophes from a Cyber perspective as well. We as always have guided assuming an average cat there. So that's a -- you've got to remember that as well. So even though we've had a really good Cyber year here, that is off the back of good claims experience from both an attritional perspective and the cat perspective. Looking forward, we don't -- we add back in that cat as well. So there's quite a bit in the bridging from how we ended '22 and how we feel about 23%. Sorry to interrupt.

Thank you.

Yes. And just one more question on reserve releases. I mean can you just give us a bit more color on what was driving the Cyber addition? And is that a risk going forward? Or was that just a one-off for last, second half last year?

We were tidying up some claims from 2020 predominantly, and it's the business interruption part of those claims that took the longest to settle. And we know from our property business, I don't mean the business interruption is quite complicated. And these are the first times that we've been assessing business interruption losses from this sort of event. And they cost a little bit more than we had anticipated. That's all. 2020 is pretty much over now. So we're not expecting it to persist. And as we have said, since Q4 2020, when we rolled out the new underwriting ecosystem and so on and so forth, the experience has been completely different.

Andrew Ritchie from Autonomous. It'd take a bit of attention between the slide from Bob that talked about the lower volatility of the P&L because of the 1 in 10 and 1 in 250 versus the desire to hold more capital which is what you implied, Adrian from -- maybe there's an upward tendency to our target capital level. Because if your earnings are becoming inherently that's volatile in history, then the 15% to 25% would be -- you could maybe argue, go the other way. So I'm just curious to reconcile those 2. And in relation to that slide from Bob, is the 1 in 10 all exposures? Or is it just nat cat? I'm not sure what it is saying. And in relation to the...

Hang on, let's stop there because we can answer the first 2. Otherwise, I'll forget them, all right? So Bob, do you want to answer the second question? Is it all -- is it all divisions or just property?

So 1 in 10 for property ...

For property. Okay.

When you see annual earnings for the whole company.

Yes. So it's all...

It's for the property.

Yes. Exactly. So we're trying to manage the near and the front of the tail, right, Andrew. So what we've shown with the 1 in 10 is that being able to grow but not just grow property grow across the book, generates a higher earnings level across the piece, which allows us to write property because we've got more earnings to risk, if you will. So our 1 in 10s come down because we're not just growing property, we're growing Cyber and Specialty Risks because we're keeping more of it. And that's helped that part of the tail. The 1 in 250, which is a risk appetite as a percentage of shareholders' equity, that's one of the reasons we raised equity because we can protect the far end of the tail as well. So we've got 2 separate solutions to the near and far end of the tail, if you will.

But you're increasing the probability of actually delivering a positive outcome even with the one -- even at the tail?

So, put it this way, another way to think of it because I think about this is a phrase question, had we not raised equity, that graph wouldn't have reduced in '23, it would have gone up because what we're comparing it to is the amount of equity we have. So we could have -- we could have grown as we plan to with route raising equity. What we would have done is put -- overall shareholder equity at more risk by doing so. So the reason that the graphs are coming down on the -- as a percentage of shareholder equity is as a result of the equity rate. So I see them as complementing each other rather than being at odds with each other.

Yes. Had we not raised the equity, we wouldn't have been able to keep more in Specialty Risks and Cyber, which is what's generated the extra earnings, which has suppressed the 1 in 10.

What about looking at capital structure? Is that another avenue? Because, I mean, another way of increasing tail resilience is to, I don't know, not repay facilities, so that's there as an option. I know you've still got half facilities as an option, but to have all of them as an option. Is that under examination as well, the capital structure?

So I think as we grow through in the way that we're doing. So obviously, when we go back to the slide, I can't remember which number it was looking at the various areas that we grow our business. We're still growing in Lloyd's, and we're definitely growing in Lloyd's in 23, etcetera, but we are growing in other areas as well. So I think potentially as part of the work that we're doing as far as the surplus that we're looking at ensuring that the ECR being our primary measure being the most appropriate thing is something that we're looking at. In terms of looking at other ways to manage our capital overall. which is something that we always do. We consider different things when we -- ahead of the raise in November because, obviously, we had different options open to us. I think that we thought equity was a good thing to do because it was a growth story. And in the past, we've had questions about our level of leverage, and this is an opportunity not to add to that at this point. That doesn't mean that we wouldn't look at other instruments going forward, but there's nothing to report as we sit here today.

And finally, the Cyber bore, presumably, these haven't earned that your book is still going to earn onto the new terms. It didn't happen instantaneously. So you still got...

Yes. I mean we started writing new business with the new wording in October and all the renewals are starting to go on from January, so that will take a year to, as you say...

And when you talk about disruption, you're talking about demand or the pricing is going to look weird because the price drops because you've excluded?

No, it's not a pricing thing. It's a terms and conditions thing, right? So if other insurers are not changing their war wordings, brokers and clients may in the interim before that transition is complete, choose to buy on our war wording. That's what we're seeing.

And why would others not be changing on war wordings? What's the rationale you're hearing?

So I think there seems to be a general acceptance that a war wording that was written before there was anything or there's anything called offensive cyber capability, it was written, the war wording needs adapting to contemplate that. The insurance industry historically hasn't been very good at making changes before any things happened. The insurance industry generally reacts to when some things happen. What we're trying to do here is go we can anticipate something happening. We'd like to do something about it. And making that transition is a little bit messy, and that's where we are. That's all.

I guess, are people trying to compete and say, look, my policy is more comprehensive than yours, for example? Or is it just...

I think it's just a little bit untidy at the moment. As I mentioned, not all insurers have concluded what they want to do. People are implementing at different speeds. We are seeing different insurers around different markets start to offer quotes with updated war exclusions. There is this Lloyd's deadline in March. Our central expectation is the market will settle down because the reinsurers are very concentrated on it. Regulators are very focused on it. This question is not going away. It's just that the transition takes a little bit of time. That's all.

Will Hardcastle, UBS. Given the big capital stack now, 40%, I guess, just trying to think there about the cyber retention going forward. Is it a possibility that this could actually keep increasing the cyber retention? Or is it a matter of this was an opportunity taken this year and if growth persists, we could look to increase the use of reinsurance going forward? Which direction should we think that's going in?

By cyber retention...

So gross and net. Just trying to understand how much the use of reinsurance, the proportion will change?

Proportion reinsurance. I think -- so we've always talked about maintaining a balanced and diversified portfolio. And historically, there have been a sort of rule of thumb, and we didn't want any one product, we won 15% of the whole. We flex that with Cyber because when prices suddenly double, it's difficult to do that. But we are very explicit that you can have too much of a good thing. What's happened with what property has given us the ability to do is to continue to diversify the business and things that we're good at where the market conditions are right. So one of the secondary impacts of growing our property franchise is that we will be able to continue to grow our Cyber and still maintain that diversification. And that's one of the reasons why we bought less reinsurance this year. And hopefully, that will persist. And the more growth engines we have, good growth engines, the more we can grow Cyber because we maintain that diversification. That's a core part of our strategy. Sorry, I'm not in charge of the mic.

It's Kamran Hossain from JPMorgan. A couple of questions. First of all, I guess, on Cyber and just thinking about the growth outlook overall, clearly, kind of Q4, Q1 has been a little bit difficult when Cyber has been a massive part of the growth story. And you're probably going to rely on increasing exposure in 2023 to hit your growth aspirations. Given that Cyber is a -- it's not just a Lloyd's thing. To what extent do you have real confidence that you can hit the Cyber growth whatever you're implying within your overall growth numbers so that we -- that we can come back at the half year and things seem like they're going well? So that's the first question.

Can we -- I'm really bad at multiple questions. So let's get to that one, and then we'll go on to the next one. So when we thought about the guidance for this year, we brought it down a little bit to reflect this temporary disruption in the Cyber market as -- through this transition that we described. So we have already taken that into account. We believe that -- our central expectation is that will calm down and settle down at the end of the first quarter, beginning of Q2, right? That is our central expectation. And that is the basis of the guidance. If that doesn't come, if that doesn't happen, we'll come back and update the market as to what our expectations are now. But the evidence we've seen so far is that it leads us to that expectation and that guidance.

Just to follow up on that before I go for my next question. In terms of, I guess, the other markets, U.S. players, what are you seeing there in terms of kind of words changing in terms of kind of policy changing?

Yes. So we have seen in domestic insurance companies, including in the U.S., quote with wordings that have been updated to reflect Cyber in war.

Second question is on capital and probably in a slightly different way. Not going to ask about the 40%. But I guess if you plug in your high 80s combined ratio mid -20s net risk and premium 4.7% investment yield, you end up with a pretty big PBT number? Clearly, if you get to your aspirations for earnings this year, you're going to be sitting on a huge cash hopefully. What do you intend to do with that? Is this dividend growth 5% next year? Or if you do sit there, you hit all of these things, mid -20s growth, high 80s, 4.7% yield? What do you do with the money this time next year?

It's nice that we're spending the money before we've made it. But you're right, there are some good tailwinds, right? And we've put them out there high 80s combined ratio with that sort of investment yield on our assets and that sort of growth should produce a good PBT, if you can find all that together. What we have said when we think about capital is our primary obligation is to grow the business in a prudent and sound way, right? So if there is opportunities to deploy that capital to grow the business further in a sustainable way, generating the sort of margins that we want, that's how we will deploy it. And when we look at the drivers for growth at the moment in things like Cyber and property and some of the specialty business that we write, it is not easy to -- it's easy to think that, that growth is going to persist for a number of years. So our central expectation now is that we'll be able to deploy that capital well for the next few years. If things change between now and the end of the year and actually, we don't think we can deploy that for good growth, we will return it.

It's Abid Hussain from Panmure. Just one question following on from Kamran's question actually on capital. So clearly, the trajectory on PBT is looking very healthy for next year and possibly beyond. But just looking at the capital number, the $400 million that you raised, how quickly are you looking to deploy that? It feels like you're not looking to deploy all of that given that the volatility of the book is going to increase with the growth in the property lines. Is that a fair reflection?

So the growth that we achieved in property at 1/1 and in January of just over 40% was exactly in line with our plans. And we plan to continue to grow property fast in this year. And hopefully, if things persist as we think they will, over the medium to long term, particularly on the insurance side we did want to achieve 2 things: the ability to grow our property book, which we are doing as we planned and to have a balance sheet that's more resilient, which does mean that, as we've been saying, we're rethinking the 15% to 25% surplus so that we remain more resilient post event. So we are deploying the capital. We've written exactly what we hope we will write in January, and it's a multiyear opportunity.

Just to follow up on that. Would it be fair to say sort of half of the capital raise was due to build resilience and the half was for growth. Is that -- does that sound about right?

No. No. I mean it's difficult to apportion because it diversifies away, right? So the trick we've -- the useful thing we have is we have 3 peak risks, liability with Specialty Risks, Cyber with our Cyber Division and Digital and property and those diversify against each other. So what we've actually managed to do is to deploy the capital in 4 ways: one, more resilience post event; two, grow property; three, grow Specialty Risks and; four, grow Cyber because they diversify against each other. It's quite difficult to unpick that and tell you how much has gone to each because they're all diversified.

It's Tryfonas Spyrou from Berenberg. I guess, looking more sort of to the medium term, it looks like the group is -- you're trying to diversify more in having more exposure to different business class. I guess, what would be your ...

Exposure to...

To various sort of business classes in the segment. So what would be your optimal you lookback in sort of in 5 years' time? What do you want to achieve in terms of optimum business mix and diversification?

We took a slide out -- but left it in case we got asked this question, right? So what you see here is the mix of business between the 4 divisions over the last 11 years. And we do flex them according to long-term trends like demand and also short-term trends in terms of pricing terms and conditions and so on and so forth. What we've always tried to make sure is that overall, we're diversified in a way that's capital efficient and safe in terms of managing volatility. But they do change quite a lot over when you move from here to hit. And of course, the most striking thing is that property was -- which is the purple one was quite large, and it's now relatively small. We've grown it a little bit here. And that will shift. Our job is to make sure that we run those twin things of making sure we deploy the capital where the risk-reward is best, but maintain diversification at an overall level. And we're in a fortunate position now of having another division where for the medium term, we think the risk reward looks good because the property market is finally addressing the issues and challenges that it has, and it's back into the specialty wheelhouse. So we'll see, hopefully, that purple grow, Specialty Risks, which because of a variety of headwinds we're describing probably won't grow as fast as those divisions that will likely shrink. But overall, as a proportion of the whole. But overall, we maintain that diversification. That's the strategy we deploy.

It's Nick Johnson from Numis. I've got 3 questions, but I'll do them one by one. Firstly, on Cyber growth. So if the market doesn't settle in relation to war exclusions, how easy is it to flex growth in property or other lines to offset that perhaps less growth in Cyber? Are you seeing really abundant opportunities to grow the business in property and other lines? Or is it always a hustle to grow the business and it takes time?

We're seeing lots of opportunity to grow across most of our business because prices are good and demand is high for most of what we do. So I don't think we'll react to issues on Cyber by saying, well, we've got to grow more over here because we're trying to maximize the opportunity everywhere. The good thing about having lots of opportunities is if one doesn't work out, it may not matter because other things are -- have the opportunity to outperform. So I guess, putting the question in a different way, is do we have the opportunity to outperform in other divisions if Cyber doesn't -- yes, we do have that opportunity because there's lots of opportunity out there. And so hopefully, overall, we'll be able to pivot if we need to.

Second question is on reserve releases. So I mean, reserve releases have been fairly subdued for some time when viewed in relation to growth in the business. Should we expect reserve releases to pick up at some point? And will that be independent of the current year loss ratio? Or are the 2 somehow inversely linked?

That's actually quite a big question, isn't it? Because of IFRS 17.

Yes. So I will say that the most recent years that we've written and have reserved are opening at a lower level than previous years in -- mainly because they're price better. But in part because, as we all know, we were aiming to be at the bottom of our range for IFRS 17. So I would say probably, but perhaps not back to the levels that we were expecting because we've brought our reserving down. So it doesn't mean that the profitability changes, but there is -- I have some expectation that profit from a year will be -- there will be a shift somewhat towards current year rather than prior year. But I'm not expecting it given that there isn't a huge shift in reserving, we've kind of -- our range is overlapping from our old but it's still 80th 90th percentile, which I hope everyone else agrees it's pretty healthy. But I would expect over the medium term, I would expect some shift, but I'm still expecting reserve releases, even though in the new world, they'll have a new name more in May.

And the last question is also on IFRS 17. So you say in the statement, I think that the transition to IFRS 17 would produce a 2% benefit to NAV. That feels quite low to me given the sort of waiting and longer-tail business, perhaps would have expected a bigger benefit from reserve discounting. Is there something else at play in that calculation?

Yes. So what we say in the reserve in the release is that we expect an increase in equity of at least 2%. There's 2 things there. It's one sided. So we're saying at least rather than exactly 2%. And the second thing is that the date of transition for IFRS 17 is the 1st of January 2022. And it's not that long ago, but it is from a yield curve perspective. So when we've looked at that, we've looked at the effect of the change in reserving, one, and the introduction of discounting. The introduction of discounting when your yields are 0.9, I think we said under 1...

In January 2022. Yes.

In January 2022 has an effect but it's a much smaller effect than you would see at year-end and the end of 2022 when yields were around 5. So, you're completely right. I agree. And when we look at different dates on IFRS 17, the discounting will have a much more significant impact on equity to the positive. That's a teaser for you all. You're all not going to miss me now.

Faizan Lakhani, Bank from HSBC. I have 3 questions, but I'll split them up. The first one is on -- it appears from the wording that rates are probably starting to soften. It sounds like sort of low single digit for the year, for 2023 outlook versus loss cost, how -- are you expecting net rate sort of feed through? Or is it going to start to move the other way?

So we're not expecting rates to soften overall. We're still expecting rate increases overall this year. And I think our guidance of high 80s will give you an indication that we still think we're exceeding loss cost overall.

So even for the written premium to come through, you [ stand ] for that.

But we are -- and we keep saying this, there are areas of our business, which are exposed to social inflation, which I think is the most pernicious of them, and we're being very, very bearish on those. We're fortunate. We don't write commercial auto. We don't write general liability. We don't really write products liabilities. So we're not really exposed to social inflation in the way that some are. But we do have elements of our book, particularly that which has bodily injury exposure to it, like hospitals or has claims that can outrage a jury like EPL, where we're being very, very bearish because I think that's where the inflation exposure is most concentrated.

And I understand your sort of high 80s guidance, but another way of sort of thinking about it would be from the current year loss picks that you're putting in your trials, but there's sort of 2 impacts to where you reduce your reserve margin, you have better rate feeding through. How do I sort of disaggregate the 2 roughly? I mean how much has those margins come down on your current year loss picks?

I would say the predominant is how we're feeling about the business because when we talk about the shift in reserving, it's not significant. We haven't moved out the bottom of our range, etcetera. So I would say the primary reason we're feeling happier to open lower is because we are seeing -- we have had significant rate, and I'm not sure if you want me to talk...

You said it was the last time, I thought...

Yes. There you go. For the last time. Significant rate primarily and then in the rounding, ensuring that we weren't adding to the reserve buffer as planned. But I would -- I haven't got a number to give you of the split, but I would say it's primarily the feeling better about the business.

Because our reserve margin has already shifted much in the last 5 years, not really.

And third one, so I will come back to capital on this one. I'm still a little bit confused here because the 40% factors in 2023 growth. Now I understand this is a play that maintains resilience in the business. But then your predecessor, you said 15%, 25% was sort of a self-imposed target. You don't really need to be 15% to 25% anyway even in a large event, you could go below that.

We could.

But now it seems to suggest that you have to be above that. And then that doesn't really tie back to the sort of substitute equivalent where it sounds like now you need to be sort of 300% above plus or so. It just sounds very, very prudent to have to have raise capital when your intensity business is very low.

So as we said, I think there was an assumption that post an extreme event, we would raise capital, and that underpinned the 15% to 25%. And Andrew was always very clear. We could go below the 15% if we wanted to. The fact is we never did, right? And in fact, in 2020, when we could have gone below the 15%, we chose to raise capital instead of going below 15%. So whilst we had that theoretical capability in actuality, we never deployed it. So when we thought that through last year towards tail end last year and we thought about how can we grow into this property opportunity that we've been waiting for 10 years to do. How do we do that in a way that doesn't leave us more exposed? Because if we're not going to go down below the 15%, and we don't want to go back to the market post event because appetite for that, I think, has diminished over the last few years, how do we do it in a way that's safe? And that's what led us to the action that we took.

So when I think about sort of rolling forward to sort of 2024, 2025, your payout ratio is relatively low. Your capital intensity isn't particularly strong.

Our payout ratio...

Sorry, the dividend as a percentage of normalized earnings.

Right.

The capital intensity business you're writing isn't particularly high, given the fact your diversification. Does that mean effectively the 40% that you're at is sort of the new level that you want to be at then?

No. So all we've said is that we are going to reconsider the 15% to 25% and come out with revised guidance later this year because we -- so no, we haven't given any number, and we're thinking about it. But also the growth opportunity that we've got in property is multiyear. So we expect to deploy this not just this year but into the next 5, 10 years. So we will give more guidance when we thought all this through.

It's Ivan Bokhmat. I've only got one question left. So Bob, thank you for the chart with the 1 in 10 years AEL. I'm just trying to think if we were to consider things like the annual cat budget, I know you don't disclose it, but it would be a great idea if you did since a lot of your peers talk about it in this way. Considering your plans to grow in property, do we -- should we expect that budget, if there was one, which I'm sure you've got one? Should we expect it to go down or up in percent of premiums, let's say? Because we already know that PYD, as Sally suggested, is probably -- should be expected to be a little bit lower.

Yes. And so we've alluded to this. We've said this, yes. So when we look at the mixture of -- when we look at the makeup of our expected loss ratio, I think the cat component has gone up a bit and the attritional has gone down a bit. Yes.

Could you try to steer it as a percent of premium in any sense of a range or

No. No. Although I note the request for us to disclose our cat budget. Sorry, you had to wait so long.

It's okay. It's Anthony from Goldman Sachs. 2 questions, but I will ask one by one as well. The first one is just coming back to the mid -teen guidance on GWP, and you mentioned property growth there. Is it more on the primary property or on the reinsurance property? Yes, just...

It's pretty well split between the 2 this year. I think ultimately, the bigger opportunity is in primary property. But the immediate near -term opportunity was in reinsurance. And so when we look at the split of our property business between reinsurance and insurance, our insurance book is much larger than our reinsurance book. But the growth will be roughly -- they're both growing stronger this year. Reinsurance as a percentage is much more stronger than insurance. That will go the other way in the medium -to long -term.

The second one is just on the guidance call at high 80s. Because I think you mentioned the price moderation generally. Is it right to think that, that margin could peak in 2023?

So we're expecting rate increases to go down. But there's still rate increases. And that's primarily because things like property are adjusting to recognize that there are exposures there that they hadn't been properly priced for in the past, and so rates are going up. Are we in peak period? I don't know. It all depends what happens this year. Certainly, we're not dependent upon peak pricing for opportunities to grow, right? We like leading into areas where there's long-term demand growth so that although we'll manage the cycle, there are opportunities during most stages of it. And as we think about property, as we think about Cyber, as we think about stuff like mergers -- M&A and environmental and political risk and all sorts of stuff that we sell, the exciting thing is demand growth we expect over a long period of time, and that's what helps give us optionality. All right. I think we have come to an end. Thank you very much indeed for coming. Thanks for your time. Enjoy your weekend. Thank you.