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

Hello, and welcome to the Beazley 2023 Half Year Results. Please note this call is being recorded. I will now hand you over to Adrian Cox, CEO, to begin today's conference. Please go ahead, sir.

Thank you, Argenti. Good morning, everyone. Thank you for taking the time to join us today, and welcome to the Beazley 2023 half year interim results presentation. I am Adrian Cox, CEO, and I'm joined this morning by Sally Lake, our CFO; and Jahan Anzsar, our Chief Actuary. Let's briefly go over the agenda. I'll begin with the highlights and then hand over to Jahan, who will take us through the elements of the half year P&L that have been impacted by IFRS 17. I think Jahan will be joining us for the foreseeable future, as we digest and build our understanding of how IFRS 17 will work in practice. And Sally will then discuss financial performance. I will go through our platform strength and a brief review of the underwriting divisions. Sally and I will share a little more detail about our capital strategy, and I will conclude with the outlook for the rest of the year, and we will then move on to Q&A. So turning the pages then, please read the disclaimer, and I will go to the key financials and the highlights. So starting with profits then, we've achieved a record half year profit of just over $366 million, and I'll talk about that a little more in the next slide. I'm pleased to confirm we are on track to achieve our full year guidance on both the combined ratio in the high 80s in IFRS 4 terminology, and growth of mid-teens growth and mid-20s net. The property opportunity is genuinely exciting. And I'm also delighted by the international growth we've had this year in cyber. This is something we had planned for, and it's always rewarding when a plan comes together. As part of the maturing of our 3-platform strategy, we're in the process of starting another insurance carrier in the U.S., this time one for the E&S market. You may recall that the 2 insurance companies we currently run are both for the admitted marketplace. Again, I'll discuss this in a little more detail later, but subject to regulatory approval, this will begin trading early in 2024. I can also confirm that the capital we raised last year will be fully deployed in the business plan for next year as we had planned. And finally, we have implemented IFRS 17, a nontrivial task. Given this is a year of transition, we'll be discussing both IFRS 4 and IFRS 17 numbers. If we unbundle the half year profit, $222 million came from underwriting and $144 million from investments. This is a little more than the profit this time last year. And indeed, it's the most profit we have ever made for a half year. In fact, apart from 2022, we made $584 million for the year as a whole. Our profits this half year are more than we've made in any one full year. So before we go any further, I just wanted to highlight that. And I think they demonstrate that we are capable of delivering on our potential by achieving this high level of profit. And it shows, I think, we're beginning to reap the benefits of the work -- of the hard work over the last 4 years both in growing the business, we've doubled the size of Beazley since 2018 and by exercising the underwriting agility and discipline to grow in a profitable way. And I think it's good to see we're delivering against expectations that our shareholders have of the performance of a business of our size. And the outlook with which we will finish today will indicate that our expectations are that we should continue to do so. We shared in July that our growth rate for the half year was 13% growth and 28% net, which was in line with the guidance we gave at year-end. Our IFRS 4 combined ratio for the half year is 88%, also in line with the high 80s full year guidance we gave at the beginning of the year. As we translate that to IFRS 17, the combined ratio is slightly lower at 84%, driven by expenses, discounting and reserving. These 3 have a lesser impact this half year than last because of a particular effect of reserving within IFRS 17, a feature of growing a business of pace, in this case, property, and the impact that has on the risk adjustment, which is partly a function of the return on capital of that business that we estimate. The higher the expected return on capital, the greater the level of risk adjustment. And you can see that extra margin in the increased reserve centile we have at the half year. This will occur each time we grow our high-margin business, and Jahan will discuss in a little more detail in his slide. The sum of all that generates a return on equity of 19%, nicely above our long-term target of 15% and despite the peculiarities of that effect of IFRS 17. And with that, I will turn it over to Jahan.

Thanks, Adrian. Good morning, everyone. My name is Jahan Anzsar, and I'm the Chief Actuary here at Beazley. Over the next few slides, I'm going to outline a few of the key changes arising from our transition to IFRS 17 and the resulting impact of these changes to the combined ratio at this half year '23 point as well as give you more detail on the discounting impact to the half year '23 point. So starting with the key changes to highlight, and more specifically around reserving. As we have previously communicated, our preferred reserve confidence level under IFRS 17 is the 80th to 90th percentile, whereas under IFRS 4, our reserves were towards the upper end or above this range. So we very much continue our prudent reserving approach and philosophy. And this graph demonstrates that our reserve conservatism continues. We are at the 89th percentile at the half year 2023 point, up from our half year '22 and full year '22 points. And this is based on the outcomes of our recent first quarter 2023 reserve review. As Adrian mentioned, we are using the cost of capital approach to estimate the risk adjustment, which is, of course, the margin that sits above our best estimate reserves. And a reminder that under IFRS 17, one of the key principles around the level of risk adjustment is that it should reflect the compensation around how risk is managed and how we price our contracts. And of course, as we've said before, under IFRS 17, the best estimates underpin our reserves. Given the IFRS 17 reserving approach and our use of the cost of capital method to estimate the risk adjustment, if we materially grow lines of business that are expected to yield high returns, then we will initially have a higher risk adjustment, and this will, therefore, contribute to a higher claims ratio. I want to reiterate the word initially here as that starting risk adjustment will earn down as the risk crystallizes. So this is very much about timing. A current example of this is our property risk business, where we have a combination of material growth in what is expected to be a high-return environment, against a backdrop of best system at loss ratios reducing. But given the relatively short-tail nature of this book, we do expect this initial high risk adjustment to normalize by year-end. There is also a seasonal effect on property risks, where we expect more premium to be earned in the second half of the year than the first half of the year as more of the risk earns through. And so we see the seasonal effect also impacting the combined ratio at the half year '23 point. And of course, the higher risk adjustment on property risks is contributing to the higher reserve percentile at the half year '23 point shown on the previous slide. So this slide shows a bridge from half year '23 IFRS 4 combined ratio to the IFRS 17 combined ratios. And on the left-hand side, you see the undiscounted IFRS 4 combined ratio of 88%, in line with our full year high 80s guidance. And we then next draw out the 6 points impact as a result of the IFRS 17 claims ratio differences, largely arising from the property risk adjustment piece I've just set you through. We then have the other IFRS 17 versus IFRS 4 related differences, which we've highlighted previously, such as expenses and other components to arrive at the 88% undiscounted IFRS 17 combined ratio. We then have 4 points of discounting impact to the COR before we get to the discounted IFRS 17 combined ratio of 84%. Now it's worth reminding ourselves of the early rule of thumb we shared, in that we can expect a roughly 6 percentage points impact on the combined ratio, i.e., a reduction in moving from the IFRS 4 to IFRS 17 undiscounted combined ratio. And at the half year '23 point, we see that discounting then contributes to a further 4 points combined ratio reduction. I'm going to delve a little deeper into the discounting impact on the combined ratio now. So over the first 6 months of 2023, we continue to see discounting contributing to an increase in our profit. And this contribution amounted to $85 million. And much of this was driven by the continued increase in yields in 2023. Stepping through each of the components on this waterfall chart, the unwind component pertains to opening reserves and the unwind relating to reserves established during 2023. The next component, the new and change in undiscounted liabilities relates to the further discount credit arising from new liabilities established in 2023 as well as the impact to discounting from changes in assumptions. And then finally, the change in discount rates component relates to the impact of those rising yields on both our opening reserves as well as those reserves established during the first half of 2023. Now we have included a further useful information on discounting such as our yields and mean terms in the appendices of this presentation. Staying with discounting. Here, we show the results of sensitivity testing, both the assets and liabilities, and the resulting impacts to profit after tax at various yield curve increases and decreases. So for example, with 150 basis points decrease in the yield curve, we see an approximate $25 million increase in profit after tax at the half year '23 point. We do see a greater dollar impact arising from the assets, given we have more assets than liabilities. And with that, I'll pass over to Sally for more on our financial performance.

Thank you, Jahan, and good morning, everybody. I am Sally Lake and I'll be briefly touching on investment performance in the first half of the year before handing back to Adrian to give an update on our platform strategy. So just looking at the financials in a bit more detail, as Adrian and Jahan have already touched on the effects of claims in the first half of this year comparing to last year. We have now finalized our 2022 comparables under IFRS 17, which we gave indicatively to the market back in July. As we flagged, there may be some changes on finalization and these have happened mainly on reinsurance assumptions along with some other finalization points. Overall, the combined ratios are broadly unchanged. The half year profit is similar to indicated and the full year profit has increased slightly from our initial indications. If you would like more details on this, please do get in touch with our IR department, and we're happy to arrange one-on-one meetings and give more information. We can also see that there has been an increase on the IFRS 17 expense ratio as we are continuing to invest in the business during this time of growth as well as also ensuring that we are investing in the enhancement of our business model. This includes the execution of our 3-platform strategy, modernization of our underwriting and finance platforms, setting up an onshore A&S carrier and getting ready for digital trading. Now moving on to investments. And we did touch on this back in our trading update in July. So I'll just touch on this briefly. As we said back then, we returned slightly less in the first half than we were hoping for at the beginning of the year. Our overall return was impacted by the volatility in risk free yields in our fixed income portfolio. However, the yield of 5.3% at the end of June should ultimately provide a good level of return. Now if we look at our portfolio disposition at the half year, we can see that our group financial assets continue to grow quickly as we grow our business successfully. As ever, we remain conservatively invested with nearly half of our assets in high-quality sovereign bonds. However, we have utilized more of our investment risk appetite in recent months, and we've done this by adding to equities and corporate debt, while our sovereign exposures have reduced. Cash and equivalent exposures have also increased during the period. And this in turns reflects some operational practices as well as the timing of investments and is expected to be temporary. And with that, I'll pass back to Adrian to talk about platform strength.

Thank you, Sally. Okay. So we continue to build out and mature our 3-platform strategy. We have done a couple of things to advance that this year to help streamline and simplify our structure, our systems and processes and our governance, which will allow us to gain efficiencies from scale and benefit from being less complex organizationally. What does that mean? Well, we've set up an A&S carrier in the U.S., and we'll transfer to it over the next few years the A&S business that we write onshore in the U.S. currently on Lloyd's paper. In 2024, that will be about $600 million and just under $2 billion ultimately as well as any new business we write from next year. We have worked closely with our third-party capital for bonus at Lloyd's, their names and their representatives and their agents to help them understand our strategy and to get their support, which we received overwhelmingly and I thank them for their efforts. This will be very useful for us operationally. We shared this view of our business last year, and I thought we would keep this disclosure to help your understanding. Our fastest-growing platform this year has been North America, driven by the growth in property, which for the insurance part is mostly North American. Wholesale growth has accelerated in property, but the move of our smart tracker that is in MAP to a full syndicate and the cycle management we're practicing in specialty risks has reduced growth from 13% in '22 to 9% this half year. And that underwriting discipline has also impacted the growth in Europe, despite the growth you'll see in the Cyber division there in a couple of minutes' time. Overall, all platforms are growing well, and I think we've concentrated our investments where the opportunity is strongest. I'll now go through quick highlights of each division, starting with cyber. So 14% growth in -- thank you, Sally. 14% growth in insurance written premiums, which is pleasing, and you'll see how we've achieved that growth on the next slide. The combined ratio is higher this year because 2022 saw an exceptional environment as the claims experienced following our underwriting emerged and our best estimate loss ratios went down. Profitability in cyber remained strong this year, but we haven't had the improvement in profitability that we saw in 2022. As you can see, we have grown across all platforms, but there's excellent growth internationally, both on our global wholesale and our European platforms. I'm delighted that we invested in building our capabilities outside North America these last few years and it is paying dividends. The properties had a very strong growth of 65%, and the undiscounting combined ratio has been impacted by the effects Jahan has discussed, noting that the best estimate loss ratios have improved materially this year and that the volatility at a 1-in-10 and 1-in-250 basis is unchanged from the beginning of the year. As you can see, growth is concentrated on our global wholesale platform, which writes both insurance and reinsurance and North America where, I think, the largest and most sustainable long-term opportunity exists. Specialty risks has been flat this year, which masks a great deal of work under the surface, as we transition the mix of business to suit the current risk-reward environment. We remain very conscious of actively managing the cycle. Underwriting is at the heart of all that we do. So as prices soften in financial lines, we react accordingly. And the claims environment does remain complex in areas exposed to social inflation, which for us is limited really to our health care portfolio and our employment practices portfolio. Social inflation is having a real impact in North America, particularly it is really concentrated in areas of bodily injury, which in the U.S. market is commercial auto, personal auto, workers' comp, excess casualty, general liability and product liability. We don't do that sort of business in Beazley. So the effects of social inflation are quite concentrated for us in a relatively small area of our portfolio, but where it does exist, we are managing it very carefully. From a platform perspective, the global wholesale and European platforms have seen the most impact from that cycle management, but we still see opportunity to grow our diversifying business in North America, and that's where you can see the 7% increase, which makes us flat overall. As we've previously highlighted within MAP, Syndicate 5623 becoming stand-alone means that our gross premium has not grown as much. But we are experiencing good growth underneath that. As the world economy has recovered post-pandemic, but we're also dealing with an increasingly risky environment. Demand has grown over the last couple of years for a number of specialist products in that division. Cargo and health, for example, reflecting global trade. Contingency reflecting more economic and leisure activity. And war, political risk and political violence reflecting the higher geopolitical risk that our clients can see. And these have all been areas of real growth over the last couple of years. When we look at by book -- by platform, you can see that growth in Europe and U.S. have been relatively small and the impact of the smart tracker on global wholesale. Let's turn now to our capital management philosophy. That philosophy has not changed since I took on this role in 2021. What is changing is how we are articulating it and how much of our thought process around that we are sharing. We've always had a focus on portfolio balance and diversification and actively deploying capital where it can generate the highest return. We can confirm that we are moving the articulation of that to group SCR coverage, and that the funds we raised in November last year will be fully deployed in the business plan for 2024. And I can emphasize, as I said at the Capital Markets Day last year, that whilst our priority will be to deploy surplus capital into profitable growth, if that is not available, we will seek to return it to shareholders. Now I thought it would be useful to share this slide as I think it demonstrates there's always been more to our capital strategy than simply staying within the 15% to 25% surplus ratio that we have disclosed historically. To illustrate this, I'd like to talk you through examples in recent years about how we thought about capital. The exhibit you see here shows the interim and special dividends, which are the purple bars and pink bars that we've paid from 2012 to 2017, alongside our surplus over ECR post dividend, which is the gray line, and our growth the following year, which is the orange line and our 1-in-250 natural catastrophe risk appetite which is the blue line. The first thing to note, I think, is that post dividend, our capital surplus has varied from 11% in 2013 to 36% in 2016. So it's clear, I think, we're always thinking about more than just staying within the range. We were contemplating a number of factors. The regulatory regime as we were moving from ICA to Solvency II during that period, and we thought at some point, we would need a higher buffer, which is the gray line. As our expected growth rate increased, the orange line, towards the end of the period, we kept back more capital so that we could capitalize on any medium-term opportunity, noting that insurance is a cyclical business. So you need to think about capital uses of it over a number of years, not just purely the one in front of you. So as we began to believe we were nearing the end of a very soft cycle that really started in 2006, we looked to keep more surplus capital because we thought we would be able to deploy it well over the next few years. Actually, with the benefit of hindsight, that hard market opportunity didn't really come to fruition until 2019, but that was our essential assumption at the time. And then lastly, exposure to peak risks, the blue line. Back in 2012, the risk reward for property was excellent. And the big difference between then and today was that if capital was eroded in an insurance company by a large catastrophe, as long as we haven't underperformed the market, the assumption was that you could recapitalize quickly, take advantage of the ensuing hard market and make back the money for shareholders over the next couple of years. Hence, back then, our risk appetite was about 45% of our equity. That risk/reward dynamic deteriorated in the years 2013 to '17 and so we actively brought down our risk appetite in 2 ways: firstly, by our underwriting, but the other was keeping more surplus capital to protect that equity risk to shareholders. And so we continue to think about the deployment of capital in the same way. What surplus do we have? What are the prospects for profitable growth for next year, but also the next few years? And how do they measure up against the benefit of returning capital to shareholders? What should our acts be for peak risk against equity, given the shareholders' appetite for that and the risk reward for those peak risks and what regulatory changes may that be ahead of us? So given this sort of multidimensional set of considerations for capital management, as we thought about how we wanted to set out our strategy today, we decided that since insurance is that cyclical business with multiyear trends, establishing a new surplus range will actually be unhelpful. So with that, I'll hand back over to Sally to discuss the new capital framework and what we are going to do.

Thank you, Adrian. So going forward, as Adrian said, we'll be looking at the group solvency ratio as our key reporting metrics for capital. And we've chosen this measure for a number of reasons. So firstly, we think it's more appropriate, given how our business has evolved. As we've been highlighting for the last few years, our non-Lloyd's platforms in the U.S. and Europe are a key part of our overall growth plans. And we believe it now makes more sense to have a capital metric that is designed for the group as a whole, and it creates consistency across a number of territories. Secondly, the way that the group capital surplus measure is calculated is done using clearly defined regulated framework, so it's much better understood. It's also consistent with other external reporting that we do. This measure is already reported on an annual basis within our SFCR. We also hope it makes small comparable, providing better alignment with our peers, both in the U.K. and Europe. The other thing to note is that at half year, we've always previously provided a projection of our capital surplus against ECR to the year-end. From now on, we will simply be disclosing the capital coverage at a certain point in time. As far as what we're aiming to do going forward, we'll be looking to hold capital in excess of 170% of the SCR. We haven't set an upper limit because as Adrian has just touched on, the actual surplus we hold will be driven by the market opportunity and our growth prospects at any given time. For example, we are currently growing our property book significantly, so we plan to put the capital to work, as we are looking into the business plan next year. So how is our ECR surface looking as we sit here today? We wanted to show you this for one last time. But going forward, we will not be reporting this to the market anymore. You can see that based on our current expectations of growth into next year, we estimate that we will be at 23% surplus above the ECR pre-dividend at 31/12/'23. This shows that we are planning to deploy the capital -- the rest of the capital that we raised back in November last year within 2 years of the raise as we continue to execute on the growth opportunities we have within the business at the moment. So let's move on to our new measure, the group solvency ratio. Within our SFCR in May, we reported a ratio of 244%, which already took account for the business plan we had for 2023, which we are currently executing on. Since then, the ratio has increased to 273% at half year '23 as we have generated own funds through Solvency II profit, both from underwriting and investments. It's not surprising that we have seen an increase in the year so far. This is something that we expect to repeat and then we would expect a reduction once you get to year-end. And let me explain why on the next slide. So the timing of our updates to our capital resources and requirements lead to a sawtooth effect in our coverage ratio over the course of an annual cycle. As I just said, in the first half of the year, in a normal year with planned growth, own funds will increase in line with our underlying profits. This results in a higher solvency ratio at half year. We update our capital requirements once a year, and this is done before the end of the year after we complete our business planning process. When we are growing profitably, the overall effect is that the ratio will typically peak at half year before coming back down in the second half of the year, reflecting the anticipated growth for the year coming. In the second half of the year, our capital requirements will be recalculated in line with our usual timetable as well as reflecting growth in the underlying business. This would be the time where we would also make any changes to our model refinements, et cetera. Overall, this year, based on our growth next year, we are expecting our year-end solvency ratio at the end of this year to be lower than what we reported at the end of last year, so below the 244% within the SFCR. Clearly, at different points of the cycle, for example, in low growth basis, we would expect the ratio to increase year-on-year depending on our medium-term growth expectations. That would be the point where we'd be looking to return -- start looking at returning capital to shareholders. So for the first time, we've now included a few sensitivities within our disclosures, which we've always monitored internally. These are shown here based on their half year solvency position. We've chosen to show our largest RDS on cyber, our 1-in-250 nat cat loss from a U.S. windstorm as well as the impact on the SCR of changes in interest rates. This will be something we continue to show as and when we disclose updates to our capital position. And with that, I will pass back to Adrian for the outlook.

Thank you, Sally. So on to the outlook for the rest of the year and into 2024. I think we're in a period of good opportunity, good market opportunity, and I'm pleased that we are capitalizing on it. We have the platforms, products, the infrastructure and the capital to do so. As per the trading update in July, we can reiterate our guidance for mid-teens growth, gross and mid-20s net for the full year. We can also reiterate our guidance of IFRS 4 combined ratio of high 80s, which translates into an IFRS 17 undiscounted COR of low 80s, because the timing issue that has impacted our COR at the half year, as Jahan explained, should unwind and normalize by the end of the year. As with many things, IFRS 17 is all about timing. We thought we would guide using the undiscounted metric for IFRS 17 because -- but if we were to do a discounted guidance with interest rates where they are, this would translate into a discounted IFRS 17 COR of high 70s. We're not using a discounted COR guidance because we will have to update that every time our discount rate changes, which we don't want to have to do. So our guidance for the full year is IFRS 4 high 80s and IFRS 17 undiscounted low 80s. As Sally said, we will have fully deployed the capital we raised last year in the business plan for next year. As Sally showed again in the ECR slide, surplus on above ECR is within the old range at 23% pre-dividend with around 20% growth net assumed in business plan so far. This contemplates both gross growth next year, but also keeping more business net as we continue to keep more risk on our balance sheet and buy less quota share reinsurance, which is something we also did this year. That is alongside the opportunity for growth in property and cyber internationally, for example. And finally, I think it's good to note that the issues around our updated cyber war exclusions are beginning -- are now dissipating. It is good, I think, that insurance policies are clear, and I'm very pleased that the market is moving towards consensus on this matter. And with that, we will turn over to Q&A.

[Operator Instructions] Our first question comes from Kamran Hossain from JPMorgan.

A couple of questions. First of all, on the risk adjustment. Obviously, you flagged a 6-point impact at the group level for the first half. I just double checked the impact of that is something like $125 million for the first half. And I guess, looking into next year, you've kind of flagged that you're going to grow again, I think you talked about 20%. Should we assume similar type of seasonality as we look forward to 2024 on the basis that you're probably going to grow then in property, given what's going on in that market? The next question is just on seasonality of premium you kind of flagged again in property. There some seasonality effect as well as the risk adjustment effect. How should we think about premiums in property for the year? I think you printed something like $450-ish million of revenue in the first half. What kind of percentage is that for full year view? So how much of a kind of seasonality effect is there from the kind of more on premium being in H2? So those would be my 2.

Okay. So to your first one, do we expect the sort of growth rates -- relative growth rates in 2024 to be the same as they are in 2023? Whilst we're finalizing the business plan, I don't think our property business will be growing as fast next year as it has done this year, although it will continue to grow. So you shouldn't -- it shouldn't have as much of an impact next year as it has done this year. Mix of business between H1 and H2 for property, I don't have that to hand, but we can get that to you. That's fine. We do write more in the first half than the second half. Q2 is our biggest quarter. Having said that, there is a reasonable chunk in Q4. So we'll come back to you on that Kamran, but that's a good question..

And can I just add a couple of things. In terms of the level of the risk adjustment next year compared to this, it really depends on the relative return within the business plan next year. So was the expected return on capital for property next year to equal this year, then the effect would be similar in terms of risk adjustment and then adjusted for COR and depending on how big that is. On the second point, in terms of seasonality of earnings in property, IFRS 17 dictates that you earn the premium in line with the risk. And so you have an effect that you earn more in the second half of the year. And so the two effects of increased risk adjustment and seasonality of earnings that Jahan has spoken about, the seasonality of earnings will be materially corrected in the full year as we go through the cat season.

Yes, we're going to earn more premium and the risk adjustment will unwind. So the two headwinds turn into tailwinds in H2 effectively.

and the risk adjustment...

The quantum set, we haven't disclosed that, but that doesn't sound a million miles out to me, Kamran.

We're now moving on to our next questioner, which is Andrew Ritchie of Autonomous.

Just one quick kind of clarification. I noticed quite a big restatement of operational expenses from what you restated previously. So it looks like more of the expenses are now considered attributable. Maybe just to clarify if that's the case. Second question, maybe Jahan could tell us, what's the prior year impact in the service result? And I guess, the prior year would include any release of risk adjustment, which I guess is small in the first half, but also just best estimate prior year development in the service result. Another question I had, maybe, Adrian, I'm a bit confused as to why a new E&S carrier in the U.S. helps you simplify. The group has, I think, 10 or 11 risk-carrying entities today. And you're adding one. It just seems -- it just looks to me that you're complex already and becoming more complex. So maybe help me understand why the initiative you suggested actually is the opposite. And then the only final question is on the MAP division kind of high combined ratio. There is some commentary about, I think, maybe there's risk adjustment effect there as well or is there something else going on?

Do you want to take OpEx?

So yes, Andrew, you're right. We mentioned in July that we were still going through the attribution. And I mentioned how we've always fully attributed our expenses and IFRS 17 shows that we're not allowed to do that anymore, which, frankly, is quite frustrating to us. And I think different firms are having different views of level of attribution within IFRS 17. So during the finalization, the audit, we landed on the final number. We are going to continue to talk about the total number as well. The way that IFRS 17 discloses is that it's not easily seen, but we are definitely focused on that. But that's why it's updated for comparables because within the finalization audit, we agreed the attribution level. Just quickly on the PYD, prior year development, so we made a decision to not disclose at a level lower than we would normally in IFRS 17 at this half year. That's simply because of the level of work that was needed, including on the audit, and we thought the best thing to do is to ensure that we deliver what we needed on IFRS 17. At this time, we've had 4 as of date audited with a new reserving philosophy at the same time. So it's been no mean feat. So prior year development and loss development tables will be with you at the end of the year from that perspective. Jahan, do you want to go on to MAP and then we'll end on E&S.

Yes, sure. So Andrew, yes, just on MAP, there are, as you mentioned, some risk adjustment effects there as well, less pronounced than what we've drawn out on property. But yes, as we transition to the IFRS 17 approach, there are some risk adjustment considerations within that, but less pronounced.

And they're one-off rather than.

Correct, yes.

As a follow-up on the -- which is linked to this. On the PYD, I appreciate you're not disclosing that. But maybe just to clarify, when you talked about a 6-point impact of risk adjustment, is that allowing for any release of risk adjustment? Because risk adjustment goes both ways. It's in place the combined on the current year, but then there's a release. So is that a net number or just one side of it?

It's a net number. It's how IFRS 17 and IFRS 4 compare, so it's a net number. But obviously, with property growing so significantly, the kind of current year in fact is a lot bigger. So just helped the effect be more extreme, which is what we're trying to find out. But yes, completely allows for all of it.

So the new carrier, the -- so currently, our onshore E&S business is written through an MGA that we own called, Beazley USA, BUSA. And so we have a service company that we use to bring that business back into Lloyd's, and we have a number of service companies -- we had a number of service companies across our platforms. Service companies are complex vehicles to run, and they also mean that all that falls within the Lloyd's systems and processes and protocols and so on and so forth. So as we look at our U.S. business, part of our U.S. business, we run as a U.S. insurance company or U.S. insurance companies and part of which falls into the whole Lloyd's environment. Actually, that drives quite a lot of complexity in how you actually have to run those things. Starting a U.S. E&S carrier allows us to move our U.S. platform purely to running those -- such insurance companies and unwinds an awful lot of internal processes that we have to go to from Lloyd's brands business and the way you actually have to run a service business. So unwinding all that over the next year or 2 will generate a huge amount of internal efficiencies and simplifications. So it's not just a structural simplification. There's a lot of systems and processes that we can do as well. And from a governance perspective, it allows us to update the way our Board runs, although we can have a Board overseeing the U.S. business in totality, a Board overseeing our wholesale business and a Board overseeing our European business. And I think that's very helpful.

Yes. Just to add, I think that there is -- like Adrian said, there were a number of simplifications that we're seeing from doing this. Not all of them are obviously outstanding. I understand the point, Andrew. I think we've discussed it before on our structure. And I think there are multi benefits, not just structurally also from an operational perspective. But it's a very good point. But one of the primary drivers for doing it is overall simplification of the group.

And next, we have Freya Kong from Bank of America.

So you're targeting 20% growth in 2024, should we be looking at net insurance revenues, written contract premiums? Just help me clarify that. And given that the rate outlook is softening in cyber and specialty risks, which is combined maybe 50% of your book, do you expect all this incremental growth then to be driven by property? Or where should we see it? Secondly, on capital, I guess I'm a bit disappointed, there's no upper range to the target. So how does the market get comfort on capital discipline at Beazley? The commercial pricing outlook generally looks to be slowing down apart from property. And given that the underlying business is so capital generative, would it be too much to expect both growth and capital returns?

Okay. So the 20% growth we are talking about net written premium, so net insurance written premium, and it's going to be -- as I sort of alluded to earlier, the net growth is higher than the gross growth because part of our net growth is going to be from buying less quota share reinsurance. So our gross growth next year, we think it's going to be lower than it was this year, sort of partly reflecting some of the conditions that you mentioned.

Just to clarify that, Freya, that's an early view of the business fund. We've got work to do between now and later on in the year. So that's our view at the moment, and that's what the '23 CR is based on. But given where we are in the year and given where around the cats is and et cetera, we would usually see an update between now and the end of the year, but that's our view as we sit here today. We'll update if and when needed.

And I think the gross growth will be from property. I think it will be from cyber. As we sort of showed this year, I think the growth in cyber will be more international and less U.S. as it has been this year. I think there'll be a little bit of growth in MAP. But gross, you're right, I think that the specialty risk division will be flatter. Why have we not given an upper end to our capital strategy? As I sort of mentioned on the slide that showed what we've done historically, actually just showing a range doesn't really reflect how we think about capital, right? We think about capital in terms of how much we have, what the prospects are, not just for next year, but for the next few years, because insurance opportunities, the risk and reward changes over multi years at a time, whereas the capital surplus just reflects next year, and risk reward for peak risks changes. So it seemed unhelpful actually, to put out a range because I think it's slightly misleading, because it gives you a view of one element of a capital strategy, which is how much we've got, but it doesn't give you a view as to what we think the prospects are for using that capital over the medium term or our view as to risk reward of some peak risks that we have. So we thought it was an oversimplification of how we think about capital. So rather than putting together a range, we thought we would set what we think -- what we aim to be above, which is the 170% and then share how we think about deployment of capital. And so as we discussed at the half year and year end going forward, as we show what our capital surplus is, we will discuss what we will be doing with it and why. And I think that is a more useful way to go about it and to be challenged on it, frankly, than just establishing a range, which is an oversimplification of what we're actually doing.

Next, we have Ashik Musaddi from Morgan Stanley.

Just a couple of questions I have is, first of all, if I remember correctly, I mean, last time when we -- at the full year results, you mentioned that you are looking to hold a bit more capital compared to the previous rules because you wanted to be a bit more on the sustainable basis on the capital side, whereas if I look at your reported ECR numbers, it's like 23%. So you're not actually holding more capital now versus your previous strategy. Am I missing anything there? And how does that 170% compare to this 15% to 25% hurdle? So any sort of, let's say, ballpark comparison would be helpful. So that's the first one. Second question, is how much confidence do you have on this COR normalizing? Now the reason why I'm asking is, I mean, risk adjustment has gone to 89%. I mean there might still be some excess unpaid claims because property cat, although it's a short-tail line of a business, but there could be capital -- there could be situations where capital gets locked in. So that's what I'm just thinking like what's the confidence you have that risk adjustment actually goes back to 85% with full year and then again go back up based on seasonality? So that's the second question I have. And maybe a small third question is cyber disaster scenario. This 7% that you're guiding in a worst-case scenario, is it an aggregate cover -- aggregate scenario risk or is it like a single event risk?

Great. I'm going to take those in reverse order. Otherwise, I'll forget them. So the cyber number is a single event. So we have a number of scenarios that we monitor too, and this is the biggest single one. So it's an occurrence rather than an aggregate or an aggregate across the year. And yes, so that's that. The risk adjustment, the unwind of the risk adjustment and the seasonality of the earnings, that is mechanical. So that will happen, right, because those are the rules. So we have absolute confidence that that's going to happen because those are the rules we've set ourselves. And plenty of other stuff could happen between now and the end of the year, which will impact our combined ratio. So all that we've talked about is assuming that we exhibit we have average claims and an average cat season, so we use up our cat margin and we have an average claim. If other things happen, they will obviously impact our best estimate loss ratios and any margin that we want to put on top of that. But I think we can be confident that the risk adjustment will unwind because it's a mechanical thing. And we're confident about the season out of the earnings because that too is a mechanical thing. And that's why Jahan said what he did because that will just -- it will just naturally flow through. But it is assuming that everything else is sort of average, if you will, yes. As we have always said, we've always given a combined ratio guidance, assuming average cats and assuming nothing else really happens to expected claims. On to your first question, you've absolutely hit the nail on the head. We raised capital last year for 2 sets of reasons. One is to be able to grow, partly by growing property and partly by buying less reinsurance on cyber and specialty risks, and the other was to make sure that our balance sheet remained resilient against 1-in-250 and 1-in-10, i.e., we weren't giving proportionately any more risk to our shareholders as we grew property. Why is our capital ratios -- and at the beginning of the year, our ECR surplus was 44%. Move on a year or at the half year at least it's 2023. So how we managed to do that? Well, we've got more equity, right? We have raised the $400 million. We've also generated more profits this year -- this half year, and we're expecting to generate more profits in the next half of the year, so we don't need as much surplus to be able to manage that tail risk on property than we did. And that was always the plan. Does that make sense?

Yes, that's very clear. And anything on comparison of how 170% compares with 15% to 25% of the bottom end, higher end?

Yes. So that is -- unfortunately, we've got -- that is very apples to oranges, right? Because the ECR is what we need for our Lloyd's business, the group SCR is what we need for all of our businesses and the calculations are completely different. So it is very, very difficult, if not impossible, to bridge from one to each other. But hopefully, the group SCR, because it gives you a view of the whole group and is more comparable, is a more useful number. But the ECR is sort of a reflection of part of our capital requirements on one way and SCRs could be relating. So you really can't work from one to tell that, sorry.

And also just to add one includes the next...

Yes. So the ECR includes next year's business plan and the SCR doesn't. So it is virtually impossible to go from one to the other in a walk.

Our next question now comes from Derald Goh from RBC.

A few more questions on capital, please, if I may. So I'm just comparing the solvency ratio from year-end '22 to half year now. It looks like about a 30-point increase. Could you maybe speak to the split, the moving parts? Because it's interesting, looking at SCR, it seems like there it was flat. I would have thought there would have been some impact from interest rate movement, maybe changes to diversification benefit. And can you say or maybe give a sense on what is the normal level of organic capital generation that you have in any given year? That's question one. Question two, I guess, just going back to the range again. Why is 170% the right number? Because looking back historically, I think there were periods when you're operating more than 200%. So maybe your thought process behind that and if possible, a guidepost, so to speak, on how you might manage with that level? Third one, presumably, the 270% today, you've not accounted for any potential benefit from the risk margin reduction. Can you confirm that? And have you assessed what that benefit might be, please?

Okay. Do you want to talk about the -- sorry, we -- do you want to talk about the first one, Sally?

Yes. So in terms of split of own fund generation, we don't give that. That will be a combination of our best estimate reserving and how that's moved in the first half of the year. And we've talked about how that's been positive as well as the investment return during the year. We don't -- we haven't given a split of those things as yet, but they're the main things that have moved since the end of the year. So we haven't done any significant updates or anything like that. So it's quite simple. For the first half of the year, it's just profit on a solvency basis we've made in the first 6 months. Second half of the year, there will be more of that and also a potential update. So there'll be a bit more detail in the second half of the year within our exposure because there will be more going on. Just going on to the effect of the risk adjustment on the solvency ratio, they are 2 different things. They are called very similar things just to keep us all on our toes. But when we talk about IFRS 17 risk adjustment, that has no impact on our solvency ratio. The solvency ratio is on Solvency II basis, and it has a risk margin, but that is not the same as risk adjustment. So what you're seeing coming through on a solvency basis is a Solvency II profit based on best estimate. What you're seeing coming through on an IFRS 17 basis is a combination of that best estimate reserve along with the risk adjustment. And it's a risk adjustment that has led to the situation that Jahan has been describing within IFRS 17, that does not impact the solvency ratio.

And your last question I think was on what's...

Sorry. Sally, just to clarify, I actually meant the solvency reform in the U.K., so I'm speaking for the risk margin in Solvency II.

Apologies. We haven't made any significant allowance for that within our modeling at this point in time. Sorry, apologies, I got that wrong. So we haven't assumed any benefit of that.

And then the last one was sort of what long-term level of solvency ratio can you expect, which I guess is sort of akin to Freya's question. The solvency level that we will have will reflect the opportunities to use that capital over the next few years. So the more exciting we think the opportunities are in the medium term, the more capital, the higher solvency ratio we will have. If we think that the opportunities to use capital and grow the business are more limited, we will have a lower solvency ratio, and we will return some capital to shareholders because there's no need for us to keep it on our own balance sheet. So I don't know what that long-term average will be over a cycle because we haven't got there yet. But the reason why our solvency ratio is higher at the moment is because we think there are some exciting prospects to grow the business. If they participate, that solvency ratio will come down because we don't need excess much. Does that make sense?

Yes, absolutely. And just to clarify, so I guess, come year-end, whatever that solvency ratio is, the SCR, we have accounted for the following year's business plan, but not the own funds, right? So I guess, on an underlying basis, you could argue in a way that, that underlying solvency ratio might actually be higher than what is actually shown.

Yes. In summary, so what you'll see between now and the end of the year is you'll see own funds generated during the second half of the year, so going up hopefully assuming we're making a profit in the second half of the year on a solvency basis. And then you'll see a drop caused by adding in on a one-off basis, the full year expectation of growth for 2024. And so that would be a slow down.

Yes. And not adding any expected profit for 2024. Yes, you're absolutely right.

Exactly, yes. And we know that others allow for growth differently kind of on an ongoing basis on this kind of measure. The way that we run business planning is still annually based really around the Lloyd's timetable for the entire business. So we do -- rather than doing it on an ongoing basis, we still think, as we sit here today, it makes sense to do that. And so you will see that effect, noting that not everyone doesn't like that, but I think it's still right for our business that after the cat season, given where we think one wants to go in, that's when we clarify our business plan.

And we're now taking a question from Faizan Lakhani of HSBC.

First is coming back to the solvency. I understand it's sort of a multifaceted way of looking at solvency and looking at the next sort of medium-term opportunities, which seem to be quite strong. But does that suggest that you want to stay above sort of 200%, 210% plus in the next sort of 3 to 4 years, obviously, depending on the market conditions? And I guess, in a scenario testing, what sort of market conditions do you need to be at sort of 170%, 180% level? Is it back to sort of the 2013 to 2015 scenario? That's my first question. Second is on the risk adjustment. And I'm sorry, I probably just have not understood this. But is it correct -- am I understanding correct in saying that when you write the business, you set up a risk adjustment. But as it earns through the percentage of the risk adjustment deteriorate -- reduces simply because you're earning that premium rather than that risk adjustment unwinding via sort of PYD? And the third sort of related to that sort of my lack of understanding. When I just look at your slides, property undiscounted has improved about 4 points, which is not really suggesting there's a huge risk adjustment issue. But when I look at sort of cyber risk and specialty risk, there seems to be a significant deterioration year-on-year. So I just want to understand have I just misunderstood the risk adjustment and how that works through in the different lines of business, that would be helpful.

Okay. So the reason why cyber and specialty risks here to have got worse year-over-year is that last year, in the first half of last year, the best estimate loss ratios for cyber and D&O within specialty risks improved dramatically. We sort of redid our cyber underwriting in October 2020. And we really started to see the experience change at the beginning of the -- following beginning of 2022 and the POs moved down, and that gets recognized under IFRS 17, more quickly than it would have done under IFRS 4. So you kind of saw a big improvement in POs. And that really impacted the claims ratio for cyber. The same thing happened in D&O, which we grew quite fast in 2019, '20 and '21. We started to see the experience really improve in those years. And again, the pure -- the best estimate loss ratios came down in the first half of last year. That gets recognized more quickly under IFRS 17, which recognizes these trends earlier. And so that really impacted the claims ratios in the first half of the year. Interestingly, if you look at the full year, it's -- the full year is closer on an IFRS 17 basis to an IFRS 4 basis because we recognize that in the second half of the under IFRS 4. So what you see this year under IFRS 17 is the fact that the sort of best estimate loss rates haven't really changed, but we haven't had that improvement, which has flattened the claims ratio. Does that make sense?

Sorry, just to clarify my understanding. So the improvement that you saw last year, so did that lower your current year loss picks or are you no longer seeing that...

Yes. It improved the currently year loss picks, it also improved the loss picks for the prior years.

All right. Okay. So you're not seeing the prior year benefit, but your current year loss pick should be the same, given the fact that you've seen the same level of economics and the ability.

Exactly right. Jahan, do you want to talk about the property and the risk adjustment?

Yes. So just generally on risk adjustment, yes, you establish it when you write the business. And as we said, that level is really a function of the return that we're expecting as we initially write that business. And yes, it does, it does earn down as the risk crystallizes, well be it at different speeds depending on the line of business and so on. But it doesn't down as the risk crystalizes. Where we ultimately end up is once we settle things claims, prices and so on, we hope to end up at the best estimate loss ratio because that risk adjustment does go down.

In terms of property, what we were referring to, the difference was at the half year '23 point, IFRS 4 versus IFRS 17. What we flagged was obviously there's a -- if you compare year-on-year, there is a backdrop of improving best estimate loss ratios on property. But the point about risk adjustment sort of pertains to the point in time position at the half year '23 when you compare the IFRS 4 with the IFRS 17 position, and that's the sort of half year drag that we're calling out on property. But as we said, this is against the backdrop of continued improving best estimate loss ratios underlying that. And if you think about the overall reserves on property, it's a combination of the best estimates as well as that risk adjustment piece. The sum of those gives you effectively the contribution to the overall loss ratio.

Yes. So what you're seeing is that if you compare year-on-year rather than IFRS 4 and 17 is you're seeing the risk adjustment go up, which Jahan explained earlier, at the same time is the best estimate improvement. The sum of those two things is a slightly improvement year-on-year. And so that's when you compare to your previous half year, that's what you're seeing. The thing that we're talking about is that when we compare to what we would have expected our old reserve on IFRS 4, it's higher because of this one-off risk adjustment effect. So there's 2 comparables going on, and you've got to think about risk adjustment -- what's happened to the risk adjustment and what's happened to the best estimate and then the combination of those two.

I guess -- sorry, very simplistically, at the full year, will you be disclosing how much is best estimate and how much is risk adjustment for us to understand if the underlying has improved? Did I understand correctly from the answer before?

So we'll be talking about PYD and loss development table. So we'll have more color on what's happening there at year-end, yes.

And then on to the solvency ratio, yes, so if you look at one of the first slides we did on capital and look at the years where we were giving special dividends, there were 2 things going on: one, where we were generating quite a lot of capital; and two, fundamentally, our growth rates were in the high single digits rather than teens and 20s, and that's why we returned capital to shareholders because we didn't see the opportunities to grow. Towards the end of that period, actually, as I mentioned, we were keeping more capital back sort of in '16, '17 because we thought the market was going to turn. We were wrong, but that was our estimates at the time. So where are we at the moment? We think we're in a period of good opportunity. We expect that to persist into next year, which is why the business plan now contemplates around 20% net growth. And we hope those conditions persist. And that's why we've said that we expect our solvency ratio to come down to below where it was last year, but still comfortably above the 170%. And we will maintain that stance as long as we think that opportunity persists. What will happen is as and when that abates, we would expect our solvency ratio to come down because we're not keeping as much back for future growth. And so it's very difficult to say what we think it will be in 3 or 4 years' time, but we will update you with what our assumptions are, so that you can check that what we're doing with our capital correlates with our view of what the opportunities are, and we're open to challenge on that.

I think the move to Solvency II is a really great move to the comparability. Thank you for much for the disclosure.

And from Numis, we have Nick Johnson with our next question.

I've got a couple of questions. I'm afraid it's one more on the Solvency II coverage ratio first. You say you're targeting above 170%. The 3 sensitivities on Page 36 add up to 52 points, and they all seem plausible in a single year. Just wondering what -- or if you can give a feel for what coverage ratio you're happy to travel with in reality so you stay above 170% post those sensitivity scenarios? And I guess, to keep it simple, let's exclude the impact of the growth outlook. I guess the minimum in reality is going to be pretty materially higher than 170%. I'm just trying to get a feel for how much higher. And the second question is on the expense ratio, which has increased from 32% to 35%. You say you're making some significant investments. How should we think about the trajectory of the expense ratio from here? Will there be further increase in the expense ratio as investments ramp up. Perhaps if you can just give us some color also on why the investment in comps is necessary currently?

Thank you, Nick. So yes, one of the things that we'll be looking at as we think about what solvency ratio to aim for, we will be looking at the 170%, of course, which is our -- which is what we're aiming to stay above. We'll also be looking at the impact of sensitivities on that ratio, right? And so I'm not sure we're going to add them all up and then put that on top, but we will be looking at what's happening to those sensitivities and the impact that has and make sure we're comfortable with that as well as, as you mentioned, what we think of the prospects for the growth are. So yes, although we haven't explicitly brought it out, those sensitivities and the size of those sensitivities will impact how much capital that we want to hold, absolutely right. The investments that we're making are really around the fact that technology has finally caught up with commercial insurance and specialty insurance, and that the industry is moving towards digitization at scale. We sort of mentioned this before. I think technology is finally able to really make a difference on how you administer insurance and on the systems and processes that you can do to allow a lot more automation, which is useful for us anyway, useful for us to move to the cloud and so on and so forth. We are also aware that our large broker partners are preparing to trade digitally at scale in the next couple of years. We need to be ready to trade with them. And that's what the investments are there to do. And although the technology is much better than it was a few years ago and much easier, it's still quite expensive, and that's why you're seeing the impact on the expense ratio. We're not expecting it to increase. We'll expect it to persist this way for a couple of years. And then the efficiencies that it generates should mean that, particularly if we continue to grow, it should come back down again. That is the plan.

And next, we're moving to Will Hardcastle of UBS.

The reality is most of my questions have been answered actually. But thank you, first of all, for moving to the Solvency II target capital. I think it's much more comparable now. I'll reiterate those comments. The second one is, it's just really -- you touched on it in the last couple of questions. I just wanted to be a bit more prescriptive. I guess, when you got this minimum 170%, really would you ever consider -- let's say, the 170% plus the 32% in terms of the RDS, the 1-in-250, takes us to 200% crudely. Could you ever envisage printing something below that level, so 190%? Or is that 170% really the minimum? Do you know what I mean? I know you'll think about it, multifaceted, but it's just to try not to say whether you'd be willing to go down to that.

I think he's asking how hard the 170% is.

170% is an aim for rather than a must-do at all stages. I think if we're reaching a stage where the sensitivities take us to below 170%, you can expect us to explain what we're doing to make sure what we're doing to address that. So we are contemplating those sensitivities and the likelihood of scenarios taking us to below 170%. What we're not saying is you can expect us to have 170% plus all those sensitivities at all times. But if we are -- if some of the sensitivities do take us below 170%, you can expect us to explain why we're allowing that to happen and what we're going to do about it.

Yes. Another way of saying it, Will, is if that scenario that you just said, which is we're holding something that the sensitivities to take us below 170%, what would happen? The answer would be we would tell you and explain, that's what would happen, and tell you our plans for what our next moves are. And that is really dependent on why we're there, what the prospects are, et cetera. So again, all of our answers come back to, it depends on the situation that we're in, which I know isn't that helpful from a modeling perspective, but we are trying to be transparent about how we've been thinking about this because we've been spending a lot of time on how best to do it. And I think the combination of this gives you numbers to work with, but also more insight into how we think about things, especially across the cycle.

We're moving on to Anthony Yang from Goldman Sachs.

The first one is, I try to understand the risk adjustment, the mechanical unwind. So I think in full year '22, you guided -- the annual report disclosed claims duration of roughly 1.7 years for property. So I assume is it correct to assume that if the claims experience average, then that risk adjustment one will be roughly 2 years? And then the second question is just, if you could give as an update on the cyber loss experience in the first half, that would be really helpful.

Great. I'll answer the second one first whilst I remember the question. So the frequency of ransomware and cyber extortion on our book hasn't changed this year. So it stayed very positive, and we sort of discussed this a couple of times. We are aware and through conversations with others in the market and through the intelligence network that we have in the cyber ecosystem that we've built, but there is more activity this year. And there's been a reasonably material increase in cyber crime across the world. That hasn't manifested itself on our book yet. We have to assume given the size of the book and the sort of market share we have that it will do at some point, but that we haven't increased -- we haven't experienced an increase in frequency of cyber attack so far this year. But the claims ratios that we're holding, our ultimate claims ratio is not what we've experienced so far. But as we kind of mentioned, our best estimate loss ratios for cyber haven't really changed this year.

Sorry, a significant shift in them this time last year. And they've been -- rates and claims experience has been as expected since then.

So Anthony, just on your question about the runoff of that risk adjustment, bearing in mind the risk adjustment pertains to sort of the remaining uncertainty on unpaid claims, right? So that will that will crystallize as we settle our outstanding liabilities. It will dwindle to zero when we have much more certainty on the remainder of those outstanding liabilities. You mentioned the mean terms, those are averages, but I think you need to think about sort of that risk adjustment following the profile of the settlement of our unpaid liabilities and that earns down as that uncertainty disappears.

I'm sorry, I forgot to mention one quick question. Just on the Solvency II own fund, is it reasonable to assume that it would be similar to the IFRS profit?

It would be great if I could say yes. But I think the first half of this year has proven that I can't say that, right? Because what the difference would be that the own funds generation from an underwriting perspective would be based on the best estimate reserves. The IFRS 17 outcome is based on a combination of the best estimate reserves and the risk adjustment. It would be easier for all of us if they were fully comparable, but that's not -- unfortunately, there are differences between the two. So it's more around -- it's much more around a best estimate reserving approach on Solvency II. So in summary, no, unfortunately.

I mean all IFRS 17 is doing is impacting the timing of recognition of profit. So ultimately, both will say the same thing. It's just a question of when they adjust to the experience that we're seeing. IFRS 17 does react quite quickly. But it does have these idiosyncrasies or peculiarities of how it does its calculations, which -- and one of them has manifested itself at the half year.

And our next question comes from Abid Hussain from Panmure Gordon.

I think I've still got 2 questions or 1.5. First one is really basic question, and apologies if you've answered this before. So on the interest rate sensitivities that you've shown, I'm just trying to get my head around why the liability goes up when the yield curve shifts up. I'm assuming there must be some sort of interest or inflation linking on the liability side. So just to sort of -- if you could just explain that, please. And the second one, I'm just returning back to the capital question, apologies for that. My question is more around sort of the near-term impact. So if you deploy all of the capital that you raised back in November, which I think you said you will do by next year, so end of '24, it seems like even if we did that, your capital coverage ratio remain well above 200%. Is my math right?

Yes. So we said that our capital ratios, our expected SCR coverage at the year-end is going to be less than it was last year because we will have deployed the capital that we raised last year, but still come...

I'm thinking more sort of 2024 year-end.

Okay.

So if I roll forward, assuming you've deployed because you fully deploy your capital by then, it seems you're still going to be well above the 200% then. Is that -- am I missing something? Or is that right?

So the coverage ratio that we'll have at the end of next year will partly depend on how much capital we've generated and partly depend on what we're planning to do in 2025. And so it is quite a difficult question to answer because it's fundamentally driven by what we think the prospects are for the proceeding year, right?

Let me have a go. So if we look back at what's happened in the past, what you have is you -- when you're in growth mode, you would have and say, we were using solvency coverage ratio, you would have -- when you're growing more than you're making from -- let's go simplistically, year-on-year, your solvency ratio will reduce over time, which is good because you are deploying capital. When you start seeing the benefits of the profit that you're making from that growth, you would, at some point, assuming in a perfect cycle, see a switch from that, and you'll start seeing the solvency ratio going up as the growth is more than offset by the profit that you're making. I guess your question -- another way of asking the question is, when do you expect that flip to happen? Our answer is, not this year. Based on what we're seeing, next year. And I think it's squarely to say whether or not that's next year. We hope not because what we want to do is continue growing the business profitably. So I think it's too early to say. We expect that at some point because that's what's happened in the past. But I don't -- I think it's too early to say that.

Does that make sense?

Yes. I guess what I was saying was from what I'm seeing elsewhere, it feels like you'll continue to grow into 2024 as well. That's just my view, but you have to comment on that.

No, we're planning to grow into 2024. As we said, we expect -- currently, the business plans are about 20% net growth. We don't know what our plans for 2025 are going to be yet. As Sally said, hopefully, the market opportunity will persist, and we can continue to grow at that sort of rate, but we just don't know.

Got it.

And just on your other -- about the sensitivity, just to be clear, if interest rates go up, we do see a reduction in the liability. So what this slide is showing is the contribution to profit after tax of positive value is an increase in that profit after tax. So in the sensitivities where you have basis points increases, you see liabilities coming down and therefore, contributing to an increase in profit after tax.

Yes. Looking at it, I can see what you mean because underneath liabilities, you can see a positive. What that's saying is a positive -- liabilities come down leading to a positive impact on profit. So it's a great question, but that's why -- yes.

As there are no further questions in the queue, I'd like to hand the call back over to Adrian for any additional or closing remarks.

Well, thank you once again for making the time to attend this call this morning. Thank you for all your questions. I know today is a very busy day for you all. And so we really appreciate the time you spent with us. If you have any more questions, please contact Sarah and the IR team, we will take you through, and we'll try and get you as many answers as we can. And with that, have a great day. Thank you very much, indeed.