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

Good morning, and welcome to Beazley's IFRS 17 Restatement session. I will now hand over to Sally Lake, Group Finance Director.

Good morning, everyone, and welcome to our 2022 indicative comparable session for IFRS 17. This session has been set up a number of weeks ahead of our half year results in order to help inform your models on what the main changes are for Beazley in the move from IFRS 4 to IFRS 17. This should be watched and digested along with the session we did back in May, which explained our IFRS 17 approach in more detail. This session talks more about how the application of these changes affect outcomes in 2022 to help aid further understanding. Next comes our results in September, which will be on an IFRS 17 basis for the first time. I'm Sally Lake, Group Finance Director for Beazley. I'm here with Jahan Anzsar, Beazley's Group Actuary , who will help me with today's presentation. For Q&A, we also have Stuart Johnson, our Head of Group and Statutory Reporting. Now just to be clear, this is all about 2022. We'll be giving no forward-looking guidance for the current year and the half year results are still being formed and we'll be reporting them in September. Now if we move just on to the disclaimer, please do read it as always. Particularly on this presentation, it's important to say that the numbers shown here remain indicative, unaudited and subject to change. Just briefly now touching on the agenda. We'll give an update on our opening equity, which go through the main changes we have under IFRS 17. We'll do a spotlight on reserving. As for Beazley, the way that we reserve is changing in line with 17 principles, so it's worth spending some time here. We've been through -- once we've been through these changes, we'll take a look at the P&L on 2022 and how these changes affect that. We'll then move on to the combined ratio, which we discussed back in May. Whilst we haven't changed our definition, we'll be showing a bridge from IFRS 4 in more detail, and you'll see that the effects in total are larger than we flagged back in May. So just to briefly recap on a few things before we dig into the numbers. Firstly, what's staying the same. As you'll have already heard in many of the presentations of this type, Beazley as a business is unchanged. There is no change in strategy and cash generation doesn't alter. We continue to receive premiums, invest money that we hold to cover capital and to pay accounts. Our dividend paying capacity for which we primarily consider both the level of capital we have as well as future growth prospects for our business is unaffected by the move to IFRS 17. So that's what's staying the same, but what's changing? Well, the KPIs will be changing our performance, along with our reserving approach and discounting is now part of our overall reporting on IFRS 17. And we'll touch on all of these changes during the presentation. We'll quickly run through our accounting choices now. We've chosen the GMM model. Our risk adjustment is calculated in a cost of capital approach. We're using a bottom-up approach for discounting, and our expenses have now been updated to use a directly attributable approach and to be in line with IFRS 17 principles. We're -- on aggregation, there'll be 2 groupings of contracts, onerous and profitable, and Jahan will speak about how these are both treated. We've picked a fully retrospective transition approach. So the standard will be applied like it's always been in place. And that's why we're able to show 2022 comparatives today. Investment valuations will be at fair value through the profit and loss, and IFRS 9 has no material impact. However, for today that isn't relevant because IFRS 17 is only relevant for 2023 onwards, but we just wanted to mention that. Okay. So let's firstly move on to the expected impact on equity as we transition from IFRS 4 to IFRS 17. So there are a number of impacts in equity. The main upward movements are caused by the change in reserving, which we'll speak about later on and the introduction of discounting. Furthermore, there is a small offset for onerous contracts and a small number of overall other adjustments based on IFRS 17 principles. So overall, we see a modest rise in equity at transition date of 1st of January 2022. So now we're going to go into a few changes that we've -- that have happened and how they have moved numbers in 2022. We're going to talk about expenses and how we've changed our approach to that within the insurance results. We're going to talk about our new growth measure, insurance written premium, which replaces growth written premium. Good news is that there's very little effect because of that. I'll then pass over to Jahan to talk about the contractual service margin, or CSM, along with the loss component and how that's moved. We'll then go into discounting and how it affected the numbers in 2022, and then we'll be doing a deep dive into reserving. So firstly, on expenses. So obviously, we spent the same amount of money last year, however, you add it up. But in the past, we used to say that all of our expenses were in the insurance result as we felt this was the most transparent and the most simple. Now we can't do that anymore as IFRS 17 requires only directly attributable expenses to be included within the insurance results. So we have performed an attribution excise, and you can see that this has led to a reduction in insurance expenses. Now this is probably more pronounced than you are seeing in other presentations of this type. And that's not because our IFRS 17 approach is out of line. We believe that it's in line with market, but it's because our peers tended to do some attribution within IFRS 4. So the shift between the 2 standards is more pronounced at Beazley. It's also worth noting here that we're still refining the allocation of non-directly attributable expenses by segment ahead of finalization. And in particular, some of the drivers in the smaller divisions may change, but we remain broadly happy at a total level. Now if we move on to how we measure growth. So we don't have growth written premium anymore. So we're going to be looking at insurance written premium as our main growth measure. There's some small differences in definition, but overall, the messaging is the same, as you can see from the comparison graph above. And actually, if you look at the overall movement in the 2 measures over the past few years, you can see that the overall growth measurements from them are exactly the same or slightly different. Now with that, I will pass over to Jahan to go through CSM.

Thanks, Sally, and good morning, everyone. My name is Jahan Anzsar and as Sally mentioned, I'm the Group Actuary at Beazley. Over the next few slides, I'm going to cover what happened in 2022 on the contractual service margin, CSM, onerousity and discounting before telling you a little bit more about the reserving changes arising from the move to IFRS 17. And of course, we covered a lot of this in detail in our May presentation. In terms of the CSM, we established this when we expect cash inflows to exceed outflows on a portfolio of business. It reflects the future profits we expect to earn as insurance contracts are fulfilled. And what we saw in 2022 was that this increase. The main contributor to this increase with increases from discounting as yields rose materially through 2022. But other factors such as the growth in our business, improvements in the profitability of our cyberbook as well as a continued strong rating environment across many lines of business also added to the increase in the CSM. If we now move on to onerousity. So if we expect cash outflows to exceed inflows, then that group of contracts is considered loss-making, and we, of course, recognize that loss immediately on the profit and loss. And so what we saw happen in 2022 around the loss component was a corresponding reduction -- and a large part of this arose due to improved profitability on our cyber risk business as the result of the actions we took to address the uptick in ransomware claims experience came through during 2022. As mentioned earlier, we saw a significant increase in the impact of discounting to our future cash flows through 2022. This amounted to around $273 million, and much of this was driven by the increase in yields through 2022, as shown in the penultimate bar of this chart. Just stepping through each of the waterfall components, beginning with the unwind, which pertains to the opening reserves and the unwind relating to reserves established during 2022. We then show the new bar, which relates to the further discount credit arising on new 2022 liabilities. The change in undiscounted liabilities reflects the impact of discounting from changes like things and assumptions that moved the reserves. And then the change in discount rate is the impact of those rising yields on both opening reserves and those reserves established during 2022. So the unwind and change in discount rate will come through the insurance finance expense line on the P&L with the other items coming through on the insurance service expense line. And as we mentioned in our May presentation, we evaluate our discounting quarterly. And as well as this, the figure shown will be influenced by the growth in the business that we had during 2022. Let's now move on to the impacts of reserving changes made under IFRS 17. As many of you are already aware, under IFRS 4 accounting, we aim to hold a margin of 5% to 10% above a prudent actuarial view of the reserves. To reiterate this was a prudent and not a best estimate view of the reserves that we were 5% to 10% above. And at year-end 2022, we estimated a 5.3% surplus over this prudent actual estimate. Now on to IFRS 17 and as for the requirement of the standard, we will be reporting a reserve percentile to give you a view of the strength of our booked reserves. And our preferred range under IFRS 17 is the 80th to 90th reserve confidence level. As Sally mentioned earlier, we will be using a cost of capital approach to set that reserve margin, and this approach allows for the compensation that we're targeting for each line of business in line with IFRS 17 principles. Under IFRS 4, our reserving process involved bringing together a top-down actuarial estimate with a bottom-up view of loss costs, loss costs from our underwriting and claims teams and the intention is to maintain much of it given the excellent feedback loops it enabled, but also to use it to inform the total level of reserve margin we hold under IFRS 17. And especially around ensuring that the margin fully caters for the uncertainties around the amount and timing of the future cash flows just as we do current -- under IFRS 4 or did under IFRS 4. Now as at year-end 2022, the 5.3% surplus over the actuarial estimate equated to a reserve percentile near the upper end of the 80th to 90th percentile IFRS 17 range. And historically, Beazley's booked reserves have been near the upper end or above this range. And so what we have under IFRS 17 is a slightly lower reserve percentile emerging. So how does this change? How does this reserving change impact the profit and loss? Well I think it's important to firstly think about the buildup of the IFRS 17 reserves, which are comprised of the best estimate reserves as well as the risk adjustment, which, of course, as we've said, is built up using a cost of capital approach. This is a different buildup of the reserves to what we have under IFRS 4 and the movements in the best estimate as well as the risk adjustment can be different to the movements of the IFRS 17 reserves, thus leading to a potentially different P&L movement. Now for example, if you have the same level of risk adjustment in IFRS 4 and '17, but the best estimates move down, then you will see a reserve release coming through on IFRS 17. And in terms of impacts of all of this to the 2022 comparatives, we saw the equity benefit on transition at the beginning of 2022 as a result of the reserving change. And then we have the differences in the change in claims with the IFRS 17 measure, given its buildup, which I've just covered, reacting quicker to the prevailing claims environment, and this is especially the case in the first half of 2022 relative to the second half of 2022. There are, of course, variations on these themes by division, given the differing risk profile and expected returns on capital. And Sally is going to highlight some of the divisional profit figures shortly. Now at our year-end 2023 disclosures, we will be publishing loss development triangles on an IFRS 17 basis, and these will cover the last 5 years. With that, I'll pass back to Sally. Back to you, Sally.

Thanks, Jahan. Right. So let's move on to the P&L. So on an overall level, how has the profit moved? Well, in total, we've seen an increase from an IFRS 4 PBT of $191 million to an IFRS 17 profit of $547 million. So what makes this up? So if we look at the walk, it's very clear that the 2 things that Jahan has just covered have a significant impact on the full year profit. Firstly, discounting has had a significant change to the profit, and that's a large bar in the middle. But also, you'll see that more reserve adjustment has come through on an IFRS 17 basis, which has also led to further profit under IFRS 17 as the claims experience has resulted in the best estimate reducing. Finally, and a much smaller impact on profit, but it's worth noting that over the year, we saw a reduction in onerousity coming through the profit and loss, and that serves to add to the profit compared to IFRS 4. Outside of that, there are some other IFRS 17 adjustments, but they are very small. We'll just sort touch on the segmental here on the insurance services between our divisions, but I'm going to spend more time on these when we get into the combined ratio walk in a few slides. Just briefly, I'll touch on the half year profit and loss. And you see a similar effect here as well. If we look at the walk, the 2 main bars are the same, but it's worth noting 2 things here. The discount effect under IFRS 17 are very much weighted towards the first half of 2022, as this is where the majority of the interest rate increase has happened. Also, there's a bigger differential in reserving when you look at the first half of the year in isolation. And this is because we saw positive movements in the best estimates during this time particularly in most recent years. This was reflected in IFRS 17 during the first half of 2022. Under IFRS 4, there was a lot more reserve release in the second half. Interestingly, onerous contracts increased during the first half of the year. So this led to a reduction in profit in the first 6 months, but this reverses in the second half. Again, the important thing to note here on onerous contracts is that whichever way they go, they are not big numbers. And then just touching briefly on the segmental for the first 6 months as well there. So on to our combined ratio. So just to recap on how we're defining it as we said in the May presentation and can be directly calculated from the insurance results. It's the insurance service expense less the amount of recoverable from reinsurers divided by the insurance revenue less the allocation of reinsurance premiums. It's important to note that all of those cash flows include discounting. So let's look at our combined ratio walk between 4 and 17. So for 2022, our IFRS 4 call was 89%. Under IFRS 17, that moved to 79%. Now firstly, overall, the reserving changes that Johannes discussed leads to more profit arising from claims under IFRS 17. And this leads to a reduction on core of 2%. So another way of saying that is if we were reserving using the cost of capital approach under IFRS 4, our call last year would have been 87%. Now let's move on to other IFRS 17 changes, which are more common across peers. So the primary driver is -- of the reduction is the non-attributable expenses being removed, which reduces the overall combined ratio by 7%. And we discussed that this is probably more pronounced than others, driven by our fully inclusive expenses approach under IFRS 4. -- discounting impacts by 3%, but this varies by division, and it's driven by the duration of the liabilities. There's a little impact on onerous due at a total level. And then there are other effects, for example, ORCs, reinsurance premiums and profit commissions moving between the numerator and the denominator. So taking each division in turn. Firstly, we go to cyber, and we see similar effects as we see it at a total level. There's slightly more benefit from reserving changes here. There's a lower discounting credit because of the duration of the liabilities. And you'll also see that you see a benefit in onerousity as a profitability of cyber improved over the year. Moving on to digital. We have quite similar outcomes. They write a lot of cyber within this class. -- but they have slightly higher non-attributable expenses because they spend [ 20 ] outside on things like distribution in this area. Moving on to MAP. You can see a slight increase due to reserving on this class. And that's primarily because there was a benefit in the opening equity because of the change in reserving see the MAP on transition. There's a small increase due to onerousity. And otherwise, we have a small amount of non-generic attributable expenses on this class. Property. There's nothing I really want to call out. Things are generally quite similar to the group discounting slightly lower, reserving slightly higher. And then if I go on to specialty risks. Overall, the reserving impact is slightly positive, but nothing significant. The main thing to point out here is the significant impact on discounting on this division as the liabilities in this area as we know because we know the average duration of these liabilities are higher than the rest of the group is leading to a bigger reduction on discount within the call. So all else being equal, going forward under IFRS 17 call, specialty risk will generally be at a lower combined ratio because of the duration of the liabilities. So we'll go to key takeaways now. So there's quite a lot in there. But in an effort to summarize, the growth measure we're using under IFRS 17, we expect to be consistent as we've done previously. You've seen a big impact of discounting in the full year profit -- we ended '22 with a reserve confidence level of age 6, which is towards the middle of our preferred range. And our core restated is 10 points lower than it was under IFRS 4, mainly due to differences in expenses and discounting effects. Now with that, I'll pause and take some questions.

[Operator Instructions] The first question comes from the line of Will Hardcastle from UBS.

Thanks for the presentation. Just thinking about that discount rate, it sounds like you're taking -- am I right you're taking the average during the period for the quarter could be but then you mark to market as at the end of that current period? I'm just trying to make sure I get the current year and then the mark-to-market component correct? And then -- and so a there'll be some unwind on the current year period as well. Just trying to make sure that's correct. And then on the seasonality, just really trying to -- if you could just go through some of those, it sounds like discount rates won't just kind of a [indiscernible] like always the H1 BH2, -- but one or the sort of the permanency of seasonality H1 the H2? It sounded like reserving perhaps onerous contracts perhaps -- just some help there would be great.

Great stuff. Thanks, Will. I think I'll start with the last one, and then I'll pass on the harder discounting questions to the man to my right. So on the seasonality, that's a great question. And should -- you know another way of saying that, should you expect more reserving in the first half under IFRS 17 than IFRS 4. My answer is not necessarily. And the reason for that is it really depends where you are in the market and what's happening to the best estimate. So during 2022, we saw an improvement within the best estimate, which was more quickly recognized under IFRS 17 than IFRS 4. Now that could clearly happen the other way in a different claims environment. So I think one way I would characterize it is that any -- during any duration, IFRS 17 will react to the claims experience that it's seen during that period more quickly than perhaps IFRS 4 would have done. Because what happened in IFRS 4 was that whilst we use the best estimate in actual reserves to inform what we were holding, we weren't necessarily as reactive as long as we were within a range. So the answer on that is it really just depends on what's happening in the claims in that time. Jahan, I'll pass over to you for the discounting and unwind.

Yes. Thanks, Sally. So your 2 questions in terms of the discounting. We used quarter end discount rates depending on whether we're discounting the opening or the closing balance, so it will be a point in discount rates. And you're absolutely right, the unwind because we reevaluate the discounting each quarter through the year, that unwind will include as well as the unwind of the opening reserves. It will include the unwind arising from new liabilities that we put on the books during 2022.

That's great. And just while I'm here because of the unwind mark-to-market, that actually acts as a nice dampener on volatility to your P&L versus what it used to look like. Is there any chance in some disclosure in the future, maybe you'll give sensitivity to that? One of your peers gave a nice sensitivity to 100 bps change, which showed the [indiscernible] volatility.

Yes. No, it's a great question. We're working out what's the most useful to help. So my answer is, yes, we are looking at that. We haven't landed it yet. As Jahan said in his discounting slide, which is my favorite slide. We've also got a lot of growth going on at Beazley at the moment. And so what we're aiming to -- what we have to do is be very clear about what we're disclosing and how that gets impacted by growth. So yes, we don't have it today, but we are working on it because we realize that, that will be helpful. So more to come on that.

The next question comes from the line of Ashik Musaddi from Morgan Stanley.

Just a couple of questions. I mean, is it possible to get this -- so on Slide #24, you have the discounting benefit. Is it possible to split it into what is the mark-to-market number? And what is the discounting effect for the year? I guess we can calculate it as well based on your disclosures, like the discounting benefit times premium, but just in case you have those numbers, handy. And just related to that, I mean, given that you're marking to market the interest rates through P&L for the opening reserves as well, is it fair to say that unwinding will always be more or less equal to the discounting benefit ex growth, basically? I hope my questions were a bit clear...

Yes. No, that's right. I mean, Jahan, just looking at each other. I think that the second one is, yes, if we have constant interest rates, which when we started trying to do IFRS 17 was a situation that we thought could happen. But clearly, 2022 has proven otherwise. But I think generally, if I sit back and I think about how we think about this in Solvency II, which we do some comparable things there. Generally speaking, all else being equal, our discounting credit will grow in line with our liabilities. Unfortunately, what will happen is it's never a constant interest rate, but Jahan, Hopefully, you agree.

Yes, absolutely. I think that is absolutely the circumstances. Ashik, to your first question. And I think what you're asking is about the mark-to-market sort of split out of that $273 million. Well, if you look at the insurance finance, the IFE line on the P&L, you'll see -- and I think this is what you're referring to the mark-to-market is about $212 million, and you can take that from Slide 18, which as I said, that what comes through in that insurance finance income stroke expense line is the sum of the change in discount rates and the unwind. So, that is what comes through. And I believe that then goes against the change in the asset values within that section of the P&L.

But what is the -- what are those 2 numbers because, I mean, it's easier to model unwind and mark-to-market changes separately because mark-to-market is a one-off, whereas the unwind will be there as long as there is discounting. So would be great in the future time to get this split basically?

Which isn't you're referring to more than what we've done on Slide 18 there, Ashik. If you look on Slide 18, we've taken that award from year-end.

Yes. Yes. No, no, that's fine.

Okay. Yes. If we can pick that up after with you, Ashik it's not giving you what you need because one thing would be really interesting, it's a good point to say it that we'll obviously be engaging with you guys between now and September. So any feedback you can give us on what would be helpful. We're not signing up to doing it. But we're -- I said in May that we're hoping to hold everyone's hand through this so that everyone gets the best place in their model. So we can pick that up after if it's not giving you what you need.

The next question comes from the line of Andrew Ritchie from Autonomous.

Just very quick questions. Is there any chance we can have Slide 18 for the half year. The reason I'm asking is just when we're forecasting, I would like to know the insurance finance income, I think, for the half year was 0. So presumably that's a net of mark-to-market plus a negative of unwind to just those 2 components for the half year would be useful. Second question -- sorry, this is probably a stupid question. Why did finance costs, so this is debt finance costs, change IFRS 4 to IFRS 17, they nearly halved. I probably should know the answer to that. And the final question, can you just run us through very quickly what the average duration you assumed for cyber, property and specialties.

Okay. Thank you. So we can definitely give you the half year discounting slide. We have it. We didn't include it because there is too much of a good thing, although apparently on discounting, there isn't. Sarah will look into getting that added on -- but it's -- as you can imagine, you can probably draw it yourself, Andrew, because you can see -- you can imagine that a lot of the fun was in the first 6 months. We'll take the finance expenses away and just follow up on that position being a significant impact, it might be something to do with FX. So it's a great question on average duration...

Separately identified -- the FX -- I presume the FX disappears or it goes down, something to do with claims discounting. I'm guessing, but I didn't want to do -- I don't know whether finance cost would change anyway.

No. We'll check that. Yes, sorry about that. We're not expecting that either. So -- on the average duration, I don't have it in front of me. I need my reporting accounts, but we have that -- we have that within the reporting accounts. The overall average is around 2 with specialty lines being about mid-3s and the rest being kind of 1.5, but we can definitely share that with you. It's disclosed in the report accounts at year-end. We've always disclosed that.

The next question comes from the line of Kamran Hossain from JPMorgan.

Just one question for me. On the operating expenses, I understand obviously they've come out with the combined ratio. What's in that $284 million, -- just more kind of out of curiosity.

Great. So thanks. We are all getting used to not putting all our expenses in the core. And if my boss was here, he'd be very annoyed by this because he's always tried to make it simple. So we have stuck to IFRS 17 principles when we've done this, but I'll pass it over to Stuart for some more details on that.

Thanks, Sally. So yes, the Ring standard sort of dictates sort of what can be directly attributable. And you talked about the sort of selling underwriting and starting with group reinsurance contracts. So on the stock, which is not included there, it specifically calls out things like product development, marketing and training costs. And we've also done an allocation of overheads to that for things which are not directly in line with righting that business. So that's all as per the requirements of the standard.

Yes. One thing to add on there is it's very much around if you're -- we can do a whole session, don't worry we won't, on a attributable expenses under IFRS 17. But if you're doing something this year that could lead to writing more business next year, you still can't attribute it to this year. So it's a really interesting concept around attributing expenses. And so that's how we've gone about it. We'll be very much stuck to the standard because we didn't have anything ourselves.

The next question comes from the line of Freya Kong from Bank of America.

Just on the CSM movements, might the CSM stock as at the year-end be a good indication of the insurance service result the next year? Or is that too simplistic a view? And going forward, will you give a breakdown of the insurance service result between CSM amortization and other parts? Secondly, on the non-attributable expenses, it seems like quite a big part of the P&L now. Is this something that you would look to give guidance on like an overall expense ratio for the business?

Yes. So on the second one, we'll be updating you on the expense ratio more in September. But yes, it is a big part. Again, I continue to say that it's a bit odd for us. But yes, we'll be able to give you some guidance on that in September. We're not guiding today. Over to Jahan for CSM.

Yes, Freya, in terms of CSM and that future store of profit, I think there's a number of factors that could cause things to deviate from that for example, if discounting moved further if interest rates move further, you could see a change in terms of the level of emergence of profit. The risk adjustment forms one part of that CSM component and updates to views in that can evolve that part of CSM. So there's -- it's an indicator, but I think it's important to bear in mind there are a number of factors that could lead to the actual being in terms of what comes through the insurance service results being different to that.

And we'll be taking people through how it's moved over the year where we see a part of the GMM model. What we'll be showing you is how that journey goes through the year. So you'll be able to see how it's...

With CSM movements.

Yes. So you'll be able to see CSM is going up, down. Again, my job is to say the easy stuff. All else being equal, the CSM should grow in line with how we're growing the business. But obviously, if it grows more than that, it means that we are expecting more profitability. If it grows less than that, we're expecting less profitability. But profitability now isn't -- it's profitability but what as we know it because one big driver of that profitability will be, for example, discounting. So it's quite a muddy measure. And so we'll be giving reasons for the movement to try and explain why it's moved. So for example, in this slide that Jahan did, it was around, well, a few things happened. One, markets improved, two, cyber had a significant shift and three and primarily three, it was around discounting. So the main driver of the CSM increase interestingly during 2022 wasn't to do with insurance. There was positives from insurance, but that wasn't the main driver. So I think that's something to keep in our heads.

[Operator Instructions] and the next question comes from the line of Nick Johnson from Numis.

I've got 4 sort of quick questions. Firstly, why is the reinsurance balance in the P&L gone from being a negative under IFRS 4 to positive under 17. I think it's about GBP 118 million delta in those -- the difference between those 2 numbers. Secondly, just to follow up on the non-attributable cost. Do you expect non-attributable costs to be fairly constant period to period, if you're obviously excluding things like inflation? And thirdly, do you have any plans to publish undiscounted combined ratios in the future, which would obviously help us compare to U.S. peers, for example. And lastly, I probably should know this, but will you still be publishing reserve release numbers, so we can get a feel for the mix between pure year and prior year. I guess that would need to be excluding the impact of changes in the discount rate?

Thanks, Nick. So taking -- I'll take the second and third. So do we expect non-attributable costs to be pretty constant? Kind of. So we're going to -- we've got a methodology that we're going to stick to. What -- where it will move is where we're making specific investments in either attributable things or non-attributable things. So yes, but it will vary. So over time, there will be things, and we'll explain those. But broadly, yes. Will we be publishing an undiscounted combined ratio? Yes. Because if no one else wants it, I do because I think that being able to understand how your insurance impacts have moved and how your profitability has moved separate to the discounting is extremely important. You pointed out exactly one of the reasons that being comparable to other people is very important as well. So for example, if you had a 90 call and 90 care moving to a 90 call could actually be made up of an improvement in discounting hiding a reduction in claims experience. And so those 2 things, I think that knowing that all 90s aren't created equal is very important. So yes, we will be showing you that. And our plan is to show you that by division as well because as I pointed out with specialty risk, you see a significant difference on that area. So yes, on to the reserve releases...

In terms of the publishing of reserve releases?

Yes. So what you're seeing in the disclosure of the accounts is the release of the CSM plus also the release of the risk adjustment and then the movement in the incurred claims underneath that. So there will be specific disclosures in the back, which bridges each of those movements through the insurance service expense.

So yes, but they will be worded differently. And then on the insurance balances?

So reinsurance balances. There will be a few things in there. So the discounting through there, plus also the reclassification and other things like ORCs, RIPS and PCs. And also the reserving adjustments we've just spoken about will be relevant for the reinsurance side as well.

Okay. I didn't quite catch that. Did you say that -- is there an impact of sort of commission revenue going through there?

Yes, exactly.

Yes. So there's a number of things that are reclassified from premiums to claims in IFRS 17, which is muddying the water. They're also discounted. And also given that our reserve recognition is different under 17, obviously has an impact on how much reinsurance we moved in 17 versus 4 because our growth moved -- so it's probably a quite unhelpful answer, Nick, that's quite a lot of differences.

That is helpful.

The next question comes from the line of Derald Goh from RBC.

Two questions for me, please. The first one, just going back to Slide 18, you've got that bar on the change in undiscounted liabilities. I think you mentioned something in your remarks. I probably missed it. So apologies for that. Can you remind me what is the driver of that bar, please? And my second one is just on the risk adjustment. Can you tell us what is the cost of capital used? Is it 4%? Is it 6%? And in terms of the capital itself, is that based off Solvency II? Or is that based off your Lloyd's capital requirement?

That is a full Jahan Anzsar question, so I'll pass over the same for all of that.

So in terms of the change in undiscounted liabilities your first question, just as a reminder, so that is things like changes in assumptions, for example, on the -- that drive the reserves, and that is quantifying the impact of that change to discounting. So I think the main thing to think about there is the change in assumptions driving that. And then your second question around the risk adjustment. So it is not the Solvency II cost of capital metric that's used to drive that. It is our own return on capital metrics. And you can see historically what we have achieved in terms of returns. So we do think about it separately for the individual lines of business as market conditions ebb and flow, and that is all sort of actively done through our business planning process and so on. So that is what is the starting point. And I think you asked about sort of the capital measure used for that. So that is our own sort of internal view of capital requirements rather than Solvency capital specifically, that is used as the basis for applying that return on capital too.

The next question comes from the line of Anthony Yang from Goldman Sachs.

Actually, 2 questions from me. The first one is on the estimating the discounting effect in core. I think I remember back in the earlier presentation a few months ago, is the risk-free rate plus liquidity premium. Can I ask how much liquidity premium is there within the discount rate? And going forward, should we -- can we assume the investment return yield as -- or I mean, the running yield as a proxy for discount rates? And the second question is -- sorry, apologies, I think I might missed it. Could I ask why the IFRS 17 reserves tend to be more -- seems more sensitive or reflects the claim experience quicker than the IFRS 4?

Okay. So whilst Jahan works out the first answer, I'll answer the second. I'll tend to be an actuary again for a little bit, and then Jahan can tell me what I've got wrong. So the way that we derived our held loss ratio under IFRS 4 was a top-down approach, and it didn't necessarily -- it wasn't based on actuarial outcomes. Actuarial outcomes were used as a comparator and a range maker rather than a specific outcome. So what we were able to do is look at what was happening with the actuarial and then form a decision. The way that IFRS 17 works is that you set your risk adjustment on top of your best estimate. So if you have a -- if you have a constant risk adjustment, where you have good claims experience, your best estimate goes down, even if you do nothing with your risk adjustment, overall, the summation of those things will reduce over time. That wasn't necessarily the case in the old world because it was a top-down approach, and we were looking at ultimate number rather than something above the actuarial which is some people did that some refill did something much more similar to IFRS 17. Our reserving was quite different. It wasn't bad. It wasn't good. It was just different, and that's why we've had to move to this approach. I'm going to just point out that in 2022, that meant we got more reserve releases, but that is because we're seeing a positive best estimate effects coming through during that period. And so the opposite could happen that if you saw best estimates increase, and you can see the other thing happen. It's just the timing. You've got 1 year of comparators here, and it happened to be where we were in a good place from a best estimate perspective. So that can go both ways. It just reacts quicker to the prevailing claims experience. Jahan, I'll pass to you for the discounting.

Yes. Thanks, Sally. So Anthony, to your first question, in terms of liquidity premium, it is small, de minimis really is the way to think about it. And I think focusing on the risk-free rate because that is -- that is what will drive the discounting. And yes, liquidity, particularly given the relative relatively short duration of our liabilities is de minimis. So focus on the risk-free.

Sorry, if I follow up. Does it mean that -- so I guess, looking forward, if we estimate the discount effect within the core, obviously, assume the risk free rate stays the same, then I think probably the risk-free rate is a better proxy?

Yes. Yes. Yes.

Yes. I wouldn't spend a long time adding a great deal to the risk-free rate as a proxy because it's not that big at this point in time.

[Operator Instructions] The next question comes from the line of Andreas van Embden from Peel Hunt.

Just one question from my side, please. Under IFRS 4, you held a catastrophe reserve sort of budget until the risk would run off usually for 12 months or slightly longer. What would be the approach under IFRS 17?

So yes, on the IFRS 17, we will continue to hold that catastrophe margin allowance and the runoff of it will reflect the runoff of that risk exposure. So yes, absolutely, that will continue under IFRS 17.

And that concludes the Q&A session. Thank you for joining today's call. You may now disconnect your lines.

Thanks, everyone.

Thank you.