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

Good morning, and welcome to Beazley's H1 2023 Trading Update. [Operator Instructions] I will now hand the conference over back to Adrian Cox, the CEO, for the update. Please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining us for our half year 2023 trading statements. We're doing things, as you know, a little bit differently this year. With the introduction of IFRS 17, we're going to present our full set of half year results separately from this trading update and later than we expect in future years on 7th of September. At that time, we will also update you on our claims numbers. and our refreshed capital strategy and metrics. We've done a lot of work on this, this year, and we're looking forward to sharing our conclusions with you in September. In this statement, we haven't updated our combined ratio guidance as we'll be doing this formally in September and we're only partway through our half year process. But I can tell you that had events in half 1 than we would have had a need to change our guidance, we would have done so today. So the focus is going to be on premium rate change and investment performance for the first half of the year. I'll cover the key elements of the statement released this morning and then open up for some Q&A. So I'm pleased to confirm that we have delivered growth in line with expectations at the beginning of the year, driven by a better rating environment in Property and exposure growth. We've added 8% so far this year, which is the highest we've generated for a while, and I'm pleased with that. The main driver of this, of course, is our Property team, which added 44% exposure in the first half. Pleasingly also, Cyber grew in the first half of the year, less in the second quarter than the first, which is what we had expected and shared as such in the Q1 IMS, but we did grow by just under 5% in the second quarter in Cyber. We've also shared our net premium growth because we gave some guidance on that at the beginning of the year. That has accelerated to 28% for the half as we have bought less reinsurance following the capital raise. I can share, though, that the ratios of 1 in 10 and 1 in 250 property losses as a percentage of our earnings and equity, respectively, remain as we presented at the year-end. The overall rate change of 5% risk adjusted is down a little from Q1. The main driver of that is the Cyber market, which is getting a little bit more competitive. And I think it's a reflection that prices which more than doubled since 2020, probably overshot a little bit last year. And so we remain very comfortable with the margin in that business. To go into some of the details a little more on some of the divisions. On the Property, on the reinsurance side, we are growing in line with the plan. And the opportunity remains pretty much as we had assumed at the beginning of the year. So the potential outperformance in that division is very correlated to the level of reinsurance demand growth. And I think insurers have carefully managed that so far this year, which has prevented further reinsurance market dislocation. However, that has meant that insurers are retaining more risk and the result of that, of which is tighter underwriting and pricing discipline, line size and aggregate management in the Property insurance market, particularly in catastrophe-exposed areas. We saw this in the first quarter, and this has continued to accelerate in the second, and we have capitalized on that. Our Property insurance business has grown by over 80% so far this year. As we've mentioned a few times, the largest and longest term opportunity is in insurance, and I'm very pleased with what we have achieved so far this year. On Cyber, as I mentioned, rates are slightly down in the first half, about 3%. However, they do remain adequate, and we continue to add exposure. The impact of the updated cyber war wordings, I think it was at its peak at the beginning of Q2, and that is reflected in the growth rate, which has come down a little bit to 14%. As I mentioned earlier, our second quarter growth was still 5%. I think the noise around war is diminishing and the second half of the year should be a little easier to navigate. What is pleasing, though, is the growth of our international cyber business, which is 28% this year. And this reflects broader demand growth as that market is in an earlier stage of development, and it is a less crowded marketplace. Although there is noise in the market that the frequency and severity of cyber claims is up, that is not something we have seen yet in our book, and we're very comfortable with the rates that we are getting. Cyber is also the largest product in our digital risk team and the U.S. SME segment has been particularly competitive this year, and that is why that team is broadly flat so far. Moving on to MAP. As we previously flagged, the restructuring of the smart tracker, has meant that we no longer front the third-party capital, and so the majority of that business no longer comes in as gross premium. I mentioned in the Q1 IMS that the bulk of that business when used in the first quarter and so you can see that the impact of the half 1 at minus 5 is less pronounced than it was in the first quarter. MAP has continued to perform exactly to our expectations during the first half of the year with continued demand growth for many other products within that portfolio. In Specialty Risks, the challenging conditions that we've been speaking about at the first quarter and at the year-end, particularly in D&O, continue to persist in Q2 and this is the primary reason that it is roughly flat year-on-year. Mildly encouragingly, though, the pipeline of IPOs is rebuilding. The financial markets are beginning to reopen. And so there's been a little bit more new business in the last month or so, but the market remains very competitive. I'll reiterate again that we continue to be bearish on the components of that portfolio that are particularly exposed to social inflation. But I'm pleased we've been able to offset both those headwinds with other more attractive parts of that division. Specialty Risks diversification remains a key strength, I think. Moving on to Investments. We earned slightly less in the first half than we were hoping at the end of the first quarter. Our overall return has been impacted by volatility in risk-free yields in our fixed income portfolio. However, the yield of 5.3% at the 30th of June should ultimately provide a good level of return. So overall, I think we're pleased with how the first half of the year has gone. We remain confident in our growth guidance for the full year, and we're looking forward to continued opportunity and growth into 2024. And with that, I'll open up to questions.

[Operator Instructions] Your first question comes from Freya Kong with Bank of America.

Just on the Property rates that you're achieving, I think 22%, how does this compare to guidance that you -- or your expectations at the start of the year before you start this year, and they seem to be coming in a little soft? Is there a mix effect that we're not appreciating? It's still good, but maybe not as good as you'd expected. And then secondly, on the Cyber war wording, any more color that you can give in terms of what competitors in the U.S. are doing and why you're more confident on the outlook for H2?

Okay. Thank you for those questions. I think the -- overall, the rates on Property are slightly better than we had thought they were going to be at the beginning of the year. The book is mostly insurance and so they will be lower than you'll see for reinsurance reporting on the Property cat portfolios. When -- so on the -- if we bifurcate again between reinsurance and insurance, I think the reinsurance rates are pretty much as we thought that they would be, but the Property insurance rates have climbed more than we thought that they would do. But the reason why it's lower is because of that mix. On the cyber war, when we look at business retention, our business retention has improved. It was at its lowest at the end of March and beginning of April. It has improved steadily since then. We are seeing more insurers around the world, including in the U.S. move to new war wordings and there is increasingly collaborative discussion across the market with our brokers about how we can do this well together. So we are hearing less noise. I think it will continue to reverberate for a little bit, but we are getting increasingly confident that we should be able to put this behind us relatively soon.

Your next question comes from Kamran Hossain with JPMorgan.

Two questions from me. The first 1 is just on, just touching on the property market, yes. Adrian, you kind of -- in your prepared remarks, you talked about kind of growth into 2024. Clearly, Property on the insurance side seems to be doing quite well. How much of your kind of 2024 confidence is coming off the back of a stronger property primary market than you expected? The second question is on kind of a topic that's been in the headlines a bit in the last week or so. Could you maybe talk us through kind of [indiscernible] clearly, the press has decided that you have some exposure? You might not have some reinsurance cover. Are there any impacts on any capital issues that we think about? Do you have a cover? How should we think about that topic in -- overall?

Thanks, Kamran. So yes, to answer the Property one first. We do think that the property insurance market is making a real shift to the fact that to align to the fact that Property insurance, particularly stuff that has catastrophe exposure is more complicated and more changeable than it had previously been given credit for. And we think that demands a real shift in how it's underwritten. And there is evidence that, that is happening. So yes, some of our confidence for 2024 is driven by the fact that we see that Property primary insurance opportunity as being a long-term one. When you listen to commentary around the market from the large reinsurers, they also remain confident that the reinsurance opportunity is going to persist. And if that continues, there will be opportunity for us there as well. But as I mentioned earlier, that is a smaller part of our overall Property business, and we'll continue to capitalize on that as long as that opportunity does persist. [indiscernible], we don't provide -- we don't share much about our reinsurance purchasing or comment about rumors on it. I can say that we are very confident on the reinsurance cover that we've purchased across the business and our processes in place to continually monitor and manage our cover and its effectiveness. I think when we talk about reinsurance, as we have done before, we have a preference to trade with large professional reinsurers with whom we've built up a relationship over a very long period of time. So whilst we do business with a lot of reinsurers and lot of alternative capital, our exposure is very correlated to the large professional reinsurers who we've traded with, in some cases, for well over 20 years. And so our exposure as you move away from that cohort of reinsurers goes down quite quickly. Hypothetically, if we had reinsurance with a counterparty, whose collateral was impaired, noting, Kamran, that no loss has happened, what we could do is to cancel and replace that reinsurance with another counterparty. The only thing at risk would be the premium that we paid for the first counterparty, which we would then attempt to recover. So where are we in that sort of situation, that is what we could and what we would do. Does that help?

Your next question comes from Tryfonas Spyrou from Berenberg.

Just on Property, can you maybe share a little bit more color on as to where exactly you're growing? Is it mainly a sort of U.S. E&S expansion? I appreciate the market that has been very sufferable. So any color on where that in which market and geographies you are funding? And on Cyber, just coming back to growth there, I think July is being renewal for Cyber. So can you maybe give us any sort of comments on -- how is that sort of faring compared to sort of Q2 or Q1? Should we sort of expect maybe a reacceleration in terms of the growth? And then lastly, I just had 1 last question on I think there'd be some headlines that you are moving out of your Lloyd's business onto sort of the U.S. platform. Maybe you can speak a little bit about the rationale, I'm not sure as savings, sort of some acquisition costs or sort of lower commissions. Any color as to that move.

Well, you saved the best question for last. So I'll take them in order. So Property, our insurance business is mostly North American. The vast, vast majority of it is North American. It's all E&S business. So we don't write any U.S. admitted insurance business within our Property division. It's all E&S, and it's mostly U.S. and mostly North American. The reinsurance piece is more international. It's about 60% to 65% North America and the rest international. And 1 of the reasons why we write the reinsurance business is because it does give us that geographic diversification. Cyber, you're right, July is a big month for us. I think we're feeling better as we head through July. As I mentioned, some of the noise is dissipating. And we're hoping to find it an easier time of it in H2. What I was also trying to highlight in the sort of prepared a bit earlier was a lot of our growth this year has come outside of the U.S. And we've spent 8 years investing in our platforms outside the U.S., partly in preparation for the time that cyber demand would really begin to build, and I'm delighted that it has. So that market is at an earlier stage of its development. The growth rates are much higher. It's much more ubiquitous across mid-market and large risk and it's a less crowded marketplace, and that's been very, very useful for us. So hopefully, if the -- as the war wordings begin to increase, we'll see a little bit more opportunity in the U.S. and continued strong demand growth internationally, which we've invested a lot in and I'm very pleased with how that's worked out. The Lloyd's question is something that we weren't planning to talk about quite yet because nothing has actually happened. But -- and I think the -- what we're doing is being misinterpreted by the markets. I'll gladly share what we're doing. So as we talked about at the Capital Markets Day last year, what we're moving to is a 3-platform strategy that we outlined. The first is our wholesale platform, i.e., the business that we write in London, Singapore and Miami, which is the largest chunk of our business. And then alongside that, we have our 2 retail platforms in North America and Europe. What we've decided to do is to simplify and tidy up our structure so that it reflects those 3 platforms. And fundamentally, what that means is that we want to write our wholesale platform business on Lloyd's paper and our retail platform business in Europe and North America on our own insurance company paper. So in Europe, that's our European insurance company, BIDAC. And in the U.S., that's our 2 admitted insurance companies, and we are in the process of starting a new E&S company, which is going through regulatory approval as we speak. So the move that we're doing is to -- so currently, our underwriters in the U.S., if they're writing or admitted in the admitted market, they use our admitted paper. If they're writing in the E&S market, they write on Lloyd's paper through an MGA that we own Beazley U.S.A. From next year, that business will be transitioning, we hope from that MGA writing on Lloyd's paper to our new E&S carrier, which should start trading if we get regulatory approval from the 1st of January next year. And that means that all the business that we write onshore in the U.S., we write on to our own company paper, which structurally internally makes us more efficient and makes us a simpler and easier to understand structure and that's the benefit of it. What we're not doing is changing our distribution strategy or changing what products we write where or what we do where. So all the business that we write in London and Miami and Singapore, we will continue to write in London, Miami and Singapore. So we're not moving any business out of the London market. No one's going to be doing anything differently next year, apart from the fact that our U.S. underwriters when the right E&S business, will be writing it onto our own company paper rather than Lloyd's paper. And we've been working with the U.S. regulators to...

And just maybe if I -- I think your line was a bit cut off previously when you were talking about the claims environment in Cyber. Can you maybe repeat what you sort of alluded to in terms of -- we've seen a general pickup in frequency and severity? I'm not sure what you said on your experience or what comments you made. I think the line was a bit funny at the point.

Okay. Yes. So we've been hearing in the market and from the advisers that we have and the companies that we talk to, that there has been an increase in frequency and severity of cyber claims, particularly on the ransomware side, and we are aware of that and we're prepared for that. We haven't really seen evidence of that in our own portfolio as yet. So as far as we can..

Your next question comes from Will Hardcastle with UBS.

A couple of questions. I guess I was just trying to tie up how I should feel about the incremental changes on Cyber. We've got -- there's a lot of moving parts. There's a negative rate momentum, as I say, there's a continued growth challenge from the war wordings and it's -- you mentioned that remains competitive comment. But then these war wordings are receding, the headline -- headwinds of it. And you said that in the comments that the market is effectively overshot. So that suggests margins are going to be great. I guess what I'm trying to get to is, do you feel incrementally more positive or negative than where you thought we be feeling at this point in time a few months ago? It's hard to sort of tie those things up. And the second one is just trying to pick apart a bit of the Specialty component. You mentioned in the commentary that some areas in that Specialty that are less exposed to social inflation. If you could just give us that sort of split maybe on the D&O versus the others? And then where those lines and opportunities are, that would be great?

Okay. So when we talked about our expectations for the year on Cyber back at the year-end and Q1, we had said that we expected there to be some noise around the Cyber war wording transition, but that would gradually recede. That was our expectation at the beginning of the year. So there was always some uncertainty around that. How do we feel now 6, 6.5 months on? Well, it's played out as we thought that it would do. So our expectations haven't changed, but the uncertainty around those expectations has diminished. So I'm happy with where they are, with where we are. It is where we thought we'd be, but the uncertainty around that isn't there any longer. So I'm pleased about that. There has been some softening of rates. I think that's because, as we mentioned at the year-end, cyber insurers have got more confident that they've got their arms around the new exposures and that they've been repriced for [ Property ]. I do think there was a price overshoot. So it's not surprising that rates are off a bit, we are very comfortable with the margins. But I'm also very comfortable that we're not just fishing in the North American pool, that we're fishing in the international pool, and that's where the demand growth is stronger and the market is less crowded. So I'm very pleased with that, too. So overall, I'm happy with where we are in our side of business, and we're very confident in the long-term opportunities that we've been talking about for a long time. Moving on to Specialty Risks. What areas of our book are most exposed to social inflation? Well, in our head, it's the sort of bodily injury exposed parts of our health care book and our employment practices book, which isn't a huge amount of it, but we've been bearish on that -- on that for a while. And within the health care book, particularly it's the U.S. hospitals, which we write very little of now in the ground scheme of things. So we're growing other bits of our business. We're growing our programs business and our treaty business. We're growing our environmental business. We're growing our M&A business. And there's a lot of diversification in that division. We don't talk about it much. And we can certainly provide you with some more color when we next -- at next catch up, well. But I hope that helps.

Your next question comes from Ashik Musaddi with Morgan Stanley.

Just a couple of questions. One is actually a clarification. I mean, did I hear you correctly that you mentioned that the -- if you had to change the core guidance, you would have already done that. Did I hear you correctly on that? So just a point of clarification.

Yes. That's exactly what I said.

Yes. Okay. Perfect. And second thing is, I mean, clearly, rates are softening compared to the first quarter. First quarter was [ 10% ]. Second quarter is probably lower because first half is [ 5% ]. So whereas you are maintaining your growth guidance for the full year, which is more or less in line with the first half. So is it fair to say that the mix -- the growth mix is going to be more or less similar to what you have done at first half or -- and especially, I'm struggling with the Specialty. I mean, because Specialty and Cyber pricing has come down, I think, sequentially, would you still be growing this? Or is it going to shrink a bit more materially, especially Specialty business and probably Cyber as well? Or are you taking more exposure on Cyber because now the wording issue, the war wording issue is more or less done?

Yes. So let's break that down. So the biggest moving part on rates is in Cyber. I think on a GAAP basis, there was -- in Q1, the Cyber rates reflected the sort of last part of the year and the positive rating environment that we're in there. We had expected the market to be roughly where it is on Cyber. And so the sort of rate changes we saw in the second quarter were consistent with what we had thought that they would be. And as I mentioned, we're very comfortable with the Cyber overall, given how much they moved and how much they've moved since 2020. And I do think they reflect the exposures that we have now. So we are -- we've put some exposure on the books on Cyber, and we continue to want to do that. So I'm comfortable with Cyber rate. On Specialty, I think our outlook for the year is broadly flat. So we'll continue to be bearish if D&O market stays competitive and prices continue to soften. But as I mentioned, to whittle, there are some businesses which we continue to grow like the M&A, like environmental, like some of our program and our treaty business, where the rates are more steady and there isn't the social inflation exposure that we are concerned about. And those 2 sorts of things offset each other.

Your next question comes from Andrew Ritchie with Autonomous.

So this might be a stupid question. I might have asked it at Q1. How -- does the Cyber rate change do you think fully reflect the tighter wording or is there a sort of risk adjustment sort of on top of that, if you like? Or maybe it's not really reflecting that? But just to remind me, I think you might have answered that in Q1, but maybe if you could just answer if that's the case or not. The other question on Property. Have you used the hard markets, very hard market, especially in E&S property to refine any distribution? I'm talking here examine maybe some of the delegated authority business, any sort of binder business, where there's been more issues across the market. Has there been any sort of repositioning, open market versus delegated to try and refine the quality of the book as well as the straight price?

Two great questions. Thanks, Andrew. So the updated war language that we're using on our Cyber is to reflect the way that we would have interpreted the contract anyway. We're just trying to make it clearer. As such, we haven't taken any credit for that in rate change. We could have done, but we thought it was cleaner not to. So if you, yes -- so -- and that's -- you can better argue that on both ways. We decided not to reflect that in our rate change. In terms of refining our distribution, actually you hit the nail on the head. When we look at our London business, we write less delegated business generally than our London peers. So overall, our delegated business is about 15% of us and that compares to a much higher average amongst the peers of sort of 40%-ish. So we -- and we've been, like others, have been managing that down over the last few years. So we're not really -- we're not a huge delegated market. So we have done a little bit more delegated this year, but the vast bulk of the growth has been in open market business, both here and onshore in the U.S. Onshore in the U.S., what we have done is shifted our distribution strategy from what was purely a wholesale one because our Property business was started by an MGA that we bought back in 2009 called First State date that was only wholesale. What we shifted that to over the last few months is to start building more retail relationships onshore in the U.S. and writing more of that business. And that's been very successful actually and so what you'll see over time is that onshore U.S. Property business being more retail focused. And I think that's an advantage for us.

Your next question comes from Ivan Bokhmat with Barclays.

I've got a couple of questions, some of them follow-ups. So firstly, on the Property, I just wanted to understand in terms of the types of business that you're writing. If I couple it with the comment that your ratios of 1:10 and 1:50 exposure as a percent of equity remain as of year-end. Does that mean that you're mainly writing high attaching layers and therefore, less exposed to frequency rather than severity in the type of business that you're writing? And maybe linked to that, a question on capital deployment. I mean, you clearly were writing with a very strong capital surplus in Q1. Do you think that we're now closer to the -- where the range used to be or it's more of a question for September? And then maybe final question also related to capital. Does that move of your E&S business from Lloyd's to [indiscernible]. Would that affect the capital that you would need to hold at the entity level and at the group level?

Okay. Thank you for that one. So yes, no, our 1 in 10 property exposure as a percentage of earnings and a 1 in 250 exposure as a percentage of equity are unchanged from year-end. And the reason I mentioned that is because we've been talking for a while that we've bought less reinsurance overall as a business. What that hasn't done has affected those particular property ratios because we're quite keen to keep those as they were. Interestingly, our book is -- on the insurance side, it's mostly primary rather than high access because we find it easier to portfolio manage with our primary business on the insurance side than with high access business. On capital deployment, you're right, we will be talking about this in September. But you can see from the growth rates that we have that we are deploying capital and we will share with you what that looks like in September and what our plans are in terms of thinking about how we measure our capital and our plans next year then. So sorry to keep you waiting, but it will be worth it. And then the third question in terms of does the move to start an E&S carrier and move the business that we're writing onshore to that carrier. Does that have any capital implications for us? No, not at the group level, not at the group level.

It's right in the same business of different platforms. So there will be some movements around between entities, but at overall level, we're not expecting a material shift. And we can talk about it in September.

Your next question comes from [ Anthony Young ] with Goldman Sachs.

Adrian, just 2 questions from me. Firstly, just a follow-up on Property. So I think my sense is the growth is more driven by the primary Property than reinsurance. And I think you indicated that business you prefer the primary property side. I just want to kind of follow up. Say, will that be continued as part of the plan going forward? Or will basically consider tend to probably grow more on the reinsurance -- Property reinsurance? That's the first question. And then the second 1 just on Cyber. I think you indicated international region, i.e., outside U.S. seems to have a strong underlying growth, but also it sounds like it's kind of at early stage. I guess I just wonder, is it kind of contributing materially now? Or will it be in the future? And if so, what's kind of the planned time frame for that?

Brilliant, thank you. So on the Property side, yes, our growth is more on the insurance side than on the reinsurance side. Essentially, what we've done is taking the rate change on the reinsurance. And so we've grown our premium in reinsurance effectively by the same that we're getting rate. So we haven't added exposure. We've just taken the better deals. Our exposure growth has come on the insurance business. And although low rate change has been higher for reinsurance than insurance, I think insurance started the year at a better place. So insurance has been better rated than reinsurance on the Property side for some time. And so even though the rate change this year for reinsurance has been higher, we think that overall insurance remains the better trade. And that's why we wanted to put the growth. Our expectation is over the long term insurance will grow faster than reinsurance, but we will respond to where the best risk reward is each year and if it moves to insurance, then that's where we -- that's where we'll put more of our chips. And I think being able to do that quickly and agilely is 1 of the things that we tried to do well. On the Cyber side, yes, that is a meaningful part of our business now. The bulk of the growth is in Europe, including the U.K. That international business is several hundred million dollars this year. And so it does, yes, it moves the needle in terms of the overall size and shape of our Cyber book. And that's been the result of many years of our investment, and we're delighted with it. Thank you.

Your next question comes from Darius Satkauskas with KBW.

So 2 questions, please. One on Property, 1 on Cyber. So the first one, Property. You talked about hard reinsurance market driving primary property, particularly cat exposed. I suppose since U.S. reinsurance renewals are mostly in June and July, would you say that the opportunity to grow in the primary Property lines in D&O could be even greater in the second half compared to what you saw in the first half? Or how do you think about the seasonality here this year? And on Cyber, my understanding is that Cyber market in the U.S. is becoming somewhat saturated, but I'm curious about the demand growth. What's your latest view on the Cyber market demand growth potential in the U.S. going forward, even though supply sort of meeting demand right now?

Great stuff. Thank you. Yes, so there's definitely seasonality on the Property business. Q2 on the insurance side is certainly the largest one. Q3 is relatively quiet. We have quite a big Q4 book on Property. So there is certainly more opportunity to grow in the second half of this year. It will be more fourth than third quarter. Most of the treaty business is now written for the year. On the Cyber side, is the U.S. market saturated? No, I don't think it is. But there are elements of it that are getting there. And so we divide the U.S. market into 3: large, mid-market and SME, small, midsize enterprises. On the large side, I think insureds have either bought it or decided not to buy it. So there's not much organic growth there. Mid-market, I think the penetration is relatively high there. There's still some way to go. It tends to be in the lower part of the mid-market. So the real opportunity in the U.S. in terms of scale is in the SME world. And that's 1 of the reasons why we're building out our digital business there so that we can capture that as best we can. So there is certainly demand growth that remains. It is more concentrated in the lower mid-market and the SME business, which means that our per insured premium is going down because the new, new companies that we take on tend to be smaller than they have been in years gone by. The international business is completely the opposite of that. So whilst there is demand growth everywhere, it is more concentrated in the upper middle market and the large risks. So our average per risk premium is higher internationally at the moment.

Your next question comes from Nick Johnson with Numis.

A couple of questions. On Specialty, sorry, just to come back to this. Just trying to get a sense for underlying growth, excluding D&O, which is obviously a drag in the first half. You say you're seeing good growth opportunities, and you mentioned, I think, financial markets picking up. Just wondering if you see Specialty growth returning to perhaps historic levels of around 10% in the future once the D&O drag begins to fade? So that's on Specialty. And on Property, I mean, the weather news seems to get worse and worse. I just wondered if that gives you pause or thoughts on the Property growth or is what we're seeing consistent with your updated risk models?

Thank you. So Yes -- so there are 2 particular headwinds in Specialty out there at the moment. The first is around D&O. At some point, that market will normalize again because the losses haven't gone away and as the financial markets open up, there'll be a more normal level of demand and therefore, supply. So at some point, we expect that to level out. And at some point, the issues around social inflation will be tackled 1 way or other. And if you go back to some of the principles around Specialty Risks is that we've always invested in businesses with strong underlying growth, so we like health care, we like technology, we like environmental, we like M&A. It's all businesses that have strong underlying growth. And so therefore, it should be possible to get back to those long-term rates of 10%. It's difficult to do that with 2 big headwinds that we have. Well, 1 big one in D&O and 1 small one in social approach because it's a small part of our business. But it certainly has that potential, particularly as, when we look at our European business, the 2 big divisions that dominate that are Cyber and Specialty. So that's -- we -- so we have more optionality than we do. So I'm hopeful at some point that, that will get back. On the Property side, has any of the weather news that we've seen caused us to rethink our strategy? No, not yet. I think our view of risk reflects what is going on at the moment. And it hasn't reflected our guidance for the year and it hasn't affected how we're building our models. So we had always expected the impacts of climate change to manifest more. That's 1 of the reasons why the Property market has changed in the first place. So nothing has happened so far as disabuse any of our assumptions, no, Nick.

Your next question comes from Derald Goh with RBC.

A few questions left on my side, please. The first one, so I'm conscious you'll be updating your capital disclosure on the 7th of September. Now I don't mean to be jumping the gun, but I guess what can you share today maybe qualitatively, I understand maybe not quantitatively today? And secondly, normally, we would also get a growth outlook at this time of the year. So it sounds like you're very optimistic on rate of 24%. I don't know if you can maybe quantify what your expectations are for next year, maybe on a gross or net basis or whichever way you find it now? Thirdly, just on investments, as you said, it looks like it was a bit weaker. I just wanted to clarify that these are just kind of fair value marks and there was nothing unusual behind that?

Great stuff. All right. What can we share about capital? Well, my CFO is shaking her ahead. So I think that -- sounds that. Hopefully, though, what comes through is that the net growth that we have had there so far this year, which is higher than the mid-20s we originally guided to, means that we are taking on more exposure and therefore, we are definitely using capital. We will show you how much and what our thoughts are around that in September. But I think we've been rightly bold in how we've underwrite this year and the sort of exposure growth that we've put on. I don't think we generally give guidance for growth for the following year in the summer. So we're not going to be able to do that now.

We'll be able to give a flavor of how we're feeling about the business plan in September along with capital.

Yes, we will in September. We expect -- we're expecting good opportunity next year as well. We'll clarify what that actually means, I think, in September. And the investments, yes, they were weaker because of the rising yields, the losses are all mark-to-market type losses rather than any actual realized losses. And I think our -- we were relatively cautious in the first half of this year in our disposition. And so there was a bit of opportunity cost there as well, I think.

Your next question comes from [ Stellan McCaney ] with HPC.

[indiscernible] HPC. I have 2 questions following up on, 1 on Cyber, 1 on Property, which is the theme today. Just looking back at your triangles from last year-end at Cyber, you had a 56% gross ultimate loss ratio for Cyber. Now rates have come down significantly, especially in Q2. And obviously, you'll have some level of sort of inflation and therefore, high frequency severity. How do we adjust that sort of 56% going forward? My sense was that 2021 probably wasn't profitable enough and that was 65%. So I'm assuming that you still believe you're writing below that level? And that's my first question. The second one was coming back to sort of the primary side of the Property. There's been a great deal of convective storms this year, and it feels like the players have probably taken a bit more risk hit on that front. Would that be fair to say that we wouldn't be able to see this in your 1 in 250, but you may be more exposed to this? I know you haven't been claims data, but any color on that would be useful.

Yes. Okay. So I think the Cyber rates were down -- what was the percent, 3, wasn't it?

[indiscernible] 11% for Q2, if you sort of adjust for Q1.

Got it. We're expecting Cyber rates for the year in the -- to be down single digits. And as I mentioned, we're comfortable with that. We are not seeing currently any changes to frequency or severity in our Cyber claims experience. So the sort of inflationary pressures that you see elsewhere because of rebuild costs or social inflation, we don't see that in our Cyber claims. So ransomware, criminal [ gangs ] obviously, don't have the same kind of social inflation demands that plaintiffs do elsewhere. And so we're comfortable with the margin in that business.

And I think if I just build on that, if you look at the slide softening that we've seen in Cyber this year, which wasn't unexpected buyers, when you compare that to what rates have done in ransomware a couple of years ago, where they've more than doubled, I think you have to take the overall rate movement in that context.

It will. And of course, 56% that we're holding is the ultimate loss ratio as at that point for that year. That isn't all paid. That's IBNR on that. And so that loss pick for 2021 may change as well as that year continues to develop. On the Property side, as kind of Nick alluded to earlier, there has been a lot of activity this year, severe convective storms, amongst others. One of the reasons why we're concentrating our Property insurance play on the -- in the E&S market is that you are better able to underwrite to that stuff in a bespoke way. And I think we've done that well, thinking about all the additional perils that manifest these days. And so the activity that's happened so far in North America hasn't caused us to need to update our guidance in terms of the sort of combined ratios that we're targeting, nor has it made us pivot how we're underwriting. I think it's been exactly the sort of thing that we thought that there would be. So I think we're confident in our strategy there. On the reinsurance side, you're absolutely right. One of the things the reinsurance market has done by adjusting the attachment points at which treaties can come in is to get away from some of that noise. And so we're underwriting through that, and we're able to because it's the E&S business on the insurance side, and we, along with the rest of the reinsurance market, has moved away from that noise on the Property cat side.

Your next question comes from Abid Hussain with Panmure Gordon.

Just 1 question left for me, I think, is -- just 1 question. It's more for clarification and perhaps some observation is coming back to Cyber really and your expectations on underwriting margins for the full year. Whether they've changed or not? I appreciate the comments that you've made already on the growth of top line and the [indiscernible] rates. But I'm just trying to tie this all together. It seems like the coverage reduction is larger than the rate reduction. That's the implication being that the margins are not steady, but actually improving. I don't know if I'm misreading this, so that's why I just want to -- just wanted a clarification on that.

Yes. So as Andrew Ritchie asked earlier, do the rate changes that we're showing reflect the fact that our Cyber war wording has been clarified? No, they don't. Should that benefit us? Yes, I think that clarification is useful if you get that sort of event. And that should help certainly the cat part of the underwriting margin. And as we were discussing earlier, the loss ratios that we share on Cyber are the ultimate loss ratios, which, of course, particularly in the more recent years, have a lot of IBNR in them. And that will run off over time, and they may not end up where they are now, good years tend to get better and bad years tend to get worse. So overall, we think that Cyber is running better than it needs to in terms of the sort of our ROE is producing, that's why we're continuing to add exposure.

Your next question comes from Freya Kong with Bank of America.

Can I just clarify your views on rate adequacy in Property? Some of your U.S. peers are saying that rates in Property cat now look adequate. Do you agree with this? And on direct property, you said that rates were better than expected. Do you think rates here are adequate or will need to go up further, particularly given all the losses we've seen in the U.S. over H1?

Yes. Yes, I think I read the same sets of comments that you did, Freya. If you judge us by our actions, we've not put any -- we've not grown our reinsurance exposure. We've grown our insurance exposure, which kind of gives you a clue as to where we think prices are more adequate. But it's a moving feast, isn't it, right? So climate change, in our view, will continue to make things more volatile and more active over time and inflation builds year-on-year. So prices -- if prices stay flat next year, relatively speaking, there will be less adequate next year because you've got to factor in new increasing impact of climate change and increasing year-on-year inflation. So we think, broadly speaking, they're okay for cat and attractive for insurance, but they will continue to need to adjust to reflect the ongoing exposure changes that we don't think are going to stop. So unfortunately, it's a moving feast.

Okay. But on a risk-adjusted basis, so adjusting for claims inflation, you think that adequacy is decent for both that are in primary than reinsurance?

Yes.

This concludes our question-and-answer session, and the conference has now concluded. Thank you for participating in today's presentation. You may now disconnect.