Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Ladies and gentlemen, a warm welcome to Hiscox Ltd 2020 Interim Results. My name is Jobin Joseph. I'll be coordinating today's call. [Operator Instructions] Now I would like to hand over to the host, Mr. Robert Childs. Please go ahead.

Please turn to Slide 1. Good morning, ladies and gentlemen. I am Robert Childs, the Chairman of Hiscox. It has been a challenging first half, particularly in the second quarter. It's also been a time to concentrate on staff and customers. With over 3,000 people working from home, we are supporting them through the lockdown and beyond. For our customers, we have done much to alleviate their financial burden. In respect of the business interruption issue, we are supportive of the FCA process, of being proud of our excellent claims-paying reputation, we have not found this an easy time. We also played our part for society. Generally, we support for the ABI COVID fund, significant donations from the Hiscox Foundation. Now turning to Page 2. Our long-held strategy is working. You could say it was built for times like this. 30 years in the making, our Retail business is now over $2 billion in premium. The future is digital, and we are there in the present $0.5 billion and growing of direct-to-consumer and partnership business. We are also well positioned in our Reinsurance and London Market divisions to benefit from the coming hard market. We have the capital, the people and the reputation. For more financial detail, I will now invite Aki Hussain, our CFO, to present.

Thank you, Robert, and good morning, everyone. I'm Aki Hussain, Group CFO. As he has said, 2020 has been a tough year for our customers, our colleagues and society in general, and we're playing our part in helping our employees and customers through this period. Now turning to Slide 4 and our business performance. In a challenging environment, our business has delivered a resilient performance. Revenues in our Retail and London Market divisions are up. However, overall group revenues are down 4% as we maintained a disciplined approach in Reinsurance and ILS. For the first time in a number of years, we're reporting pricing improvements in each of the 3 operating divisions. Our first half performance has, of course, been impacted by COVID-19, and we have set aside reserves totaling $232 million net of Reinsurance, mostly in our Retail division. This includes the $150 million we disclosed earlier in the year for claims arising from event cancellation, travel and entertainment. The additional $82 million was for estimated losses, mostly IBNR for London Market, U.K. and Europe property, U.K. and Europe travel bonds and third-party liability claims in our U.S. allied health care business. As a group, we're reporting a loss, the bottom line loss of $159 million at a group combined ratio of 114.6%. As COVID, the group generated a profit of $93 million at a combined ratio of 96.5%. Our business remains strongly capitalized, and we have materially increased our reserve buffers. And in line with our announcement in April, we are not proposing an interim dividend. We recognize the importance of the dividend to our shareholders, and we'll be revisiting the matter early in 2021. Now turning to Slide 5. As usual, I'll take you through our divisional performance in a little more detail beginning with Retail. The Retail business grew by 4% with 4 out of our 5 business units reporting growth in the first half, with only the U.K. reporting a small decline of 2%. This is in part driven by the mix of business written in the U.K. such as event cancellation cover, which has been particularly hard hit by government measures to slow the spread of COVID-19. We have, as you might expect, experienced a slowdown in GWP in the second quarter as the lockdowns took effect, with April and May reporting the most huge impact. And we're happy we can see recovery coming into July. As you've heard me say many times before, our Retail business has over time benefited from secular trends in society with the growth of the gig economy and the growing customer preference to transact direct or online. So looking at the Retail performance through a distribution lens. I'm pleased to report our digital direct and partnership channel continued to report strong growth, with revenues up 14% in the first half despite the lockdowns. At the half year point, our direct and partnership business, revenues now account for 24% of total Retail revenues. And by the end of this year, I expect this to rise to over 25%. And you will hear more on this from Ben in a few minutes. Retail has been heavily impacted by COVID-19, and we have set aside reserves totaling $175 million in the Retail division. Excluding the effects of COVID-19, the underlying business franchise remains robust, generating a profit in excess of $100 million at a combined ratio of 95.4%. The combined ratio is benefiting from temporary cost reductions worth about 1.5 to 2 points. So on a normalized basis, I estimate the combined ratio is between 97% to 97.5% and remains on track to be within the 90% to 95% zone by 2022. Looking forward, in the second half of the year, we expect to see a $10 million to $15 million negative impact on Retail top line as a result of moratoriums and premium holidays offered to customers. And against this, as I said earlier, we are seeing the tailwind of positive rate momentum across the Retail division. Turning to Slide 5 -- sorry, Slide 6. In our London Market division, we are seeing strong rate momentum with a portfolio average increase of 13%, and we're reporting a GWP growth of 5% in constant currency. Rates are now increasing in 15 of the 16 months we're writing, and we are seeing robust GWP growth where we believe rates are having a good day. There remain a couple of areas in the property division where further rate improvement is required, and underwriting action has been taken to right size the underlying exposures. In the first half of the year, we have experienced above-average large losses, which are contributing around 7 points to the combined ratio. And excluding COVID, the London Market combined ratio stands at around 104%. Turning to Slide 7 and our Reinsurance & ILS division. Here, we're reporting a 21% reduction in GWP. This is the result of a number of factors. Firstly, in the early part of the year, pricing growth is less attractive, and we remained disciplined in preserving our capital. We've also seen a reduction in the availability of third-party capital. You'll recall, as we reported in our full year results, we have received a notice of redemption from one of our ILS investors. You'll also recall from our fourth quarter we mentioned related to the casualty reinsurance book. And finally, we are also continuing with underwriting action on our risk book, which is largely -- which is a largely Retail book of business and has been a source of those expected losses in recent years. Now the outlook for our Reinsurance division has become much more optimistic as the year has progressed as we've seen increasing evidence of material rate improvements at each successive renewal period. At the half year stage, we're now reporting an average portfolio rate increase of 11% and expect the positive momentum to continue into next year. And we expect this will lead to an increase in our net revenues in 2021. The bottom line results has been impacted by estimated COVID-19 losses. Excluding these, we are reporting a combined ratio of 87.5%. We closed the half year with $1.52 billion of assets under management in the ILS fund, although the deployable capital is around $1 billion with the balance either being in runoffs following the redemption notice or held as reserves against prior year losses. Moving on to Slide 8 and our investment performance. We're reporting a first half investment return of $85 million, a significant improvement from the first quarter position as financial markets recover. We were cautiously positioned heading -- coming into 2020. And this has served us well and enabled us to take advantage of market uncertainty by topping up our allocation to risk assets through March and April. However, our yields continue to decline and spreads narrow, the yield to maturity on our fixed income portfolio is now at its lowest point ever at around 0.7%, which, of course, is not great for bond returns over the next couple of years. We also no doubt have noted our allocation to cash at 26% is high at the half year point. This reflects the equity proceeds which was held as cash in money market funds and the precautionary drawdown on our financial lines. I expect to repay the financial lines in the third quarter and return the cash allocation to between 10% and 15% by the year-end. Turning to Slide 9 and our reserves. We're reporting an aggregate favorable reserve development of $63 million. Our 2019 cat reserves are running well and are a key driver for the increase in positive development. In contrast, we are continuing to see adverse development on exited lines, in particular, on health care and political risk, totaling around $15 million. We remain very strongly reserved with the margin, got the actuarial estimate of $350 million. This has grown from just under $300 million at the end of 2019. And I regard -- I now regard the reserve buffer to be at the upper end of my expectations. Our U.S. casualty experience continue to progress in line with expectations, and I'm pleased with the changes and improvements we've made in our U.S. claims function. I expect the positive effect of operational changes in U.S. claims, combined with underwriting actions and pricing improvements in our U.S. Retail business, to reflect the bottom line that comes through into the bottom line over the next 12 to 18 months. Moving on to Slide 10. This is a chart that you're, I'm sure, very familiar with, and it demonstrates or reflects our capital position, which, as you can see, remains very strong and has been further bolstered by the equity we raised in May. As you can see, we remain well capitalized on both the ratings and the regulatory basis, and we're reporting an estimated regulatory solvency ratio at the end of June of 230%, which equates to a capital surplus of $1.7 billion. I'll just remind you that the BSCR continues to be strengthened according to the BMA timetable, and we expect a 10- to 15-point reduction by the end of this year and then into 2021 as the strengthening is adopted. Moving on to Slide 11. This next exhibit demonstrates very clearly the capital strength and resilience of the group and its ability to withstand a combination of severe scenarios. Taking the chart from left to right. In the second quarter, our capital position has improved from a strong starting point to the solvency ratio of 202%, increasing up to 230%. And this is a result of a strong organic capital generation in the quarter, the equity we raised in May and both partly being offset by additional COVID-19 losses. Moving on along, we can see that the balance sheet is then able to withstand, yes, is able to absorb in North America 1-in-250 year hurricane, costing up to $200 million net of reinsurance, in addition to the top end of our published U.K. BI risk scenario. After both of these hypothetical events, we would expect to have a regulatory capital COVID ratio -- coverage ratio at 179%, which leaves us with ample regulatory capital and is consistent with an S&P A rating. And finally, turning to Slide 12 and expenses. As part of the equity raise, we committed to an expense saving versus our 2020 business plan of between $60 million and $90 million. At the halfway point, we're on track with savings of $38 million achieved. These savings are largely tactical in nature and should mostly be regarded as one-off as we have benefited from savings on travel, marketing and recruitment during the lockdown period. Overall, our ambition for the Retail segment expense ratio remains to be in the low 40s, and we are targeting a reduction of 1 point per annum for the next few years from 2021 from a normalized Retail expense ratio of around 49% to 50%. Efficiencies will come from realizing the benefits from the investment in technology that we've undertaken over the last 2 years, and the growing scale of the Retail businesses. And once again, you'll hear more from Ben on this in a few moments. And now I'd like to hand over to our Chief Underwriting Officer, Joanne Musselle, to tell you more about what we're doing from an underwriting perspective.

Thank you, Aki, and good morning all. So I took up the role of group CUO in January, and we're definitely hoping for a less eventful start. A lot has happened since, but I thought it would be good to revisit a slide that we presented at the full year which set out our expectations for 2020 and provide an update, and this can be seen on Slide 14. So as you heard from Aki, our expectation for Re and ILS was to reduce our gross bet in response to what we viewed as inadequate pricing alongside less deployable third-party capital at 1/1. And we have delivered on my expectation, with gross written premium reducing by 21% as we did substantially re-underwrite our non-cat portfolio, include an exiting casualty reinsurance, and we exercised discipline at the January renewals. As the second quarter progressed and with the onset of COVID, conditions in Reinsurance began to improve, and we have achieved strong rate increases at the midyear renewals, with Japanese wind at 38%, full power of 20%; and recent Florida renewals up 29%. With the impact of these price increases, our Reinsurance gross written premium is now down just 10% year-to-date. Momentum is expected to continue, and we are ready to increase our net bet in January with material capital available to deploy on our own balance sheet. Moving on to London Market. We noted at the year-end that the rating division was improving, and this was expected to continue. However, we also noticed that not all lines are rate adequate, and we still have parts of the portfolio to course correct. And we have done just that. The headline growth rate up for the London Market segment of 5% does mask some strong underlying growth in our investment lines as we continue to exit the underperforming premium during 2020 in our binder portfolio. It has, however, been an active half for large claims with above-average large offers and some deterioration coming from exited lines such as political risk and health care. Large losses do not come uniformly through the year, and the year-end position will give a better view if this is just timing. More pleasing is the continuing rate momentum, up 13% across the portfolio driven by contraction of risk appetite. And we expect this to continue for the balance of 2020 and into 2021. And for Retail, our expectation was a COR of 96% to 98% with growth in the middle of our usual 5% to 15% target range. Pre the COVID saw the significant impact on our Retail portfolio in the first half both in terms of claims and growth. But excluding COVID, the underlying Retail COR is 95.4% with claims experience in the U.K., U.S. and Europe in line or better than expectation, which is pleasing. So overall, the benefits of the significant portfolio action we have taken and the rate improvement is beginning to become evident, but this will take time to fully earn through the P&L. Moving on to Slide 15 and COVID. The impact of COVID-19 is unprecedented, with many in the industry predicted that this will be the biggest insured loss in history. And whilst the range of industry loss estimates is wide and still speculative at this stage, it is clear that it's touched many parts of our portfolio. We've previously disclosed $150 million net loss estimates for claims relating to events cancellation, media, entertainment and other segments including travel on the basis of 6-months restrictions. And we are actively working with our insurers and brokers to manage these claims, and settlements are in line or actually just below our expectations. We have bought an additional $82 million net at the half year to cover claims from London Market, European and U.K. property, U.K. and European travel bonds, and we've made provision for third-party claims from our U.S. allied health care portfolio. It's too early to fully estimate the impact in Hiscox Re, although we are materially underweight in our European exposure, and we have a modest net retention. Retail business interruption has been a source of much media retention particularly in the U.K., where, like others in the industry, our standard BI policies do not respond to the general measures taken to stop the spread of COVID-19. This is being challenged, and we welcome the FCA test case to bring clarity. Notwithstanding this is not a covered loss, we previously disclosed a risk scenario based on a broad set of assumptions which results in a model range of losses between GBP 10 million and GBP 250 million net of reinsurance. Whilst noting that a different set of assumptions could give rise to a different outcome, we remain confident in this range even after taking into account the impact of different closure periods for affected businesses. And then moving on to the balance of the portfolio. As we move beyond COVID, there is clearly an increased probability of risk from third-party liability and recessionary impact. We are actively managing this increased risk through portfolio, rate and underwriting changes. Excluding COVID, our frequency of claim notification is materially down year-on-year. We've seen a 10% reduction in big ticket and a 15% reduction in Retail. Now some of this will be timed in, but some of this will translate to lower claims of people who have just done less. At this stage, it's too early to tell what is [ known to be just ] a signal, and we have yet to take credit for these reducing trends. Slide 16 should be familiar. It shows our portfolio through the different segments. Small commercial, which you can see on the far left, is our largest segment, and this has doubled since 2015 and has continued to grow despite the significant economic disruption in our key retail markets. London Market property has slightly contracted as we complete the portfolio action necessary in the household and commercial binders which have contributed to higher attrition than we would have liked. But despite exiting 110 through the full year, the good rate increase we have achieved on the remainder of the portfolio has resulted in a modest reduction to the top line. Our largest growth area can be seen on the far right, and it is the London Market casualty. However, its 21% growth is nearly entirely fueled by rate increase, with exposure decreasing or remaining flat in our general liability and our public D&O. Another familiar slide is our rating chart on Slide 17. As a reminder, this chart shows our rate index back to 2012 and on a rolling 12-month basis. The rolling calculation does have the impact of delaying some of the positive rate momentum, however, the picture is clearly a positive one. Whilst demand may be uncertain in some areas, I am pleased to say that rates are improving in every segment, particularly in the London Market, where rates are up another 13% overall, and this is in addition to the 12%, 11% and 7% we have seen over the preceding 3 years. And as you can see, rates have reached a point they have not been for many years. Re, which is the red line, had a slower start to price correction, but rates are up 11%. And with the trajectory of that line headed upward at an increasingly steep rate, we are confident about the prospects of growth heading into next year. Retail, the green line, which is inherently less cyclical in nature and the flat to downward trend is more a feature of change in business mix than rate, but the trajectory is on the up, and we are seeing rate is as planned in all areas of our retail book. U.S. Retail is leading the way at 5% in aggregate and 9% for the excess and surplus lines business. If we move on to Slide 18 and look at the big-ticket rates in more detail. So in 2020 in London Market, 2020, the fourth consecutive year of rate rises, where rates are up 45% on a compound basis since the lower 2016. So this has been driven by withdrawal of capacity as risk appetites contract globally and a continued benefit from the Lloyd's Decile 10 initiative, which continues to encourage some much-needed discipline in the market. This discipline doesn't just extend to pricing, we're also successfully tightening terms and conditions as well as reducing commissions. Overall, we've seen rate improvement in 15 of the 16 lines, including U.S. public company D&O, where rates are up a further 80%, and we see an attractive opportunity for growth. Looking at the London portfolio -- London Market portfolio in its entirety, I feel positive about the outlook for the remainder of 2020 and into 2021, with the majority of our portfolio now priced to generate good returns. In Reinsurance, which you can see on the blue chart, we were largely underwhelmed with pricing at the beginning of the year with overcapacity still a feature, and our expectation was to remain disciplined. However, as 2020 has progressed and the uncertainty caused by COVID, we have seen strong rate acceleration through the midyear renewals, and I'm confident about the prospects for growth next year. Overall, my focus heading into the second half can be seen on Slide 19. It is proactively managing our losses and exposure while capturing the opportunity presented. So just to pull out a few areas, we continue to manage our future exposure and have updated the Hiscox view of risk for cyber, Japan and Florida. We've clarified our communicable disease exposure and opportunistically purchased increased reinsurance protection ahead of the wind season. Our underwriting has been flexible, providing extension, suspensions or early renewals to assist our customers. As well it's important to know that as they pivoted their business, like the insured who pivoted the [ spirit ] business to supply alcohol for hand sanitizers. We've also updated some of our terms and conditions to reflect the COVID challenges. Overall, as we head into the second half, I look to our diverse portfolio, and I see opportunities everywhere. I will now hand over to Ben Walter, who will talk more about our Retail business.

Thanks, Jo. Good morning, everyone, from a very early New York. I'm Ben Walter, CEO of our Retail division. Clearly, as Aki described, it's been a tough 6 months for Retail as we have borne much of the impact of COVID from a loss perspective. But I'm pleased with the resilience of the top line, of the underlying performance and, as importantly, the resilience of our teams. So we've kept our operation running smoothly throughout the lockdown period. I'm pleased to say that our key operational metrics have stayed within their target service levels from day 1, which is a testament to the robustness of our systems and the commitment of our people. Years of investment in both have paid off handsomely this half. As you can see on Slide 21, even as the business grapples with so much disruption, our Retail businesses have continued to deliver on their long-term objectives. We grew 4% in the first half. And as Aki said, we are reaffirming our commitment to returning to the 90% to 95% combined ratio range in 2022. Key to that commitment is underwriting discipline. As we said before, we have cut back materially in unprofitable and marginal areas. Two examples you will be familiar with are U.S. private market D&O and media. And between those lines alone, we have now cut $80 million of premium. It's worth noting that private company D&O is very different than the public company business we write in London. And due to slower price rises and increasing employment liability exposure, we still do not see rates adequate to grow here. In the U.K., we have discussed before that the private client growth had shrunk modestly as we needed to seek rate to fund increasing escape of water claims. While those increases have cycled through, further discipline has been warranted as commission levels have reached to what we deem to be unsustainable levels. We have seen a number of broker panels tender with commissions as high as 32.5%. And we think these levels -- these are levels that do not represent good value for the customer, so we have declined to participate at the expense of the top line. Fortunately, we have more than made up for those reductions with growth in our core small commercial business even in the face of the COVID-induced economic slowdown. The smallest risks where we have a unique right to win and an increasingly efficient operational platform continue to grow as a share of the book. On a global basis, we only saw these books shrink slightly in April and May with a return to growth in June. Our direct and partnerships business in particular continues to be a growth engine, and we are on a run rate for over $500 million in 2020, which will be a full quarter of the Retail business. I'll give some more detail on this in just a moment. Finally, we made good progress on both our large system replacements and our nearer-term digital initiatives. Again, I will share some detail on this shortly. On Page 22, you can see the 10-year trajectory of our direct and partnerships business, which has delivered a 19% CAGR over that time and still delivered 14% growth in H1 despite being much larger in scale and, of course, despite the pandemic. We started that business in the U.K., which has slowed in growth in the past couple of years, but that masks the aforementioned underlying dynamic which sees a modestly shrinking personal lines book more than offset by a fast-growing commercial book. In the U.S., we have seen tremendous growth to over $300 million. But in our view, this business is still in its early stages as the entire market is experiencing a shift to digital distribution and we are ideally positioned to capitalize. Despite the macro environment and the launch of the first phase of its new IT platform in May, June was the best month yet for U.S. direct and partnerships. Europe is a bit more nascent, but growth has picked up in the past couple of years. And in time, we expect the continent to follow the same global trends we have seen in the U.K. and the U.S. And finally, our motor business in Asia has hit its stride this year and is now growing nicely towards scale. As you can see, digital insurance is fast becoming the cornerstone of retail across the world, and we will continue to invest behind that opportunity. Slide 23 gives you a sense of what that investment looks like and how we are starting to reap the benefits. In addition to our core system replacements in all of our key geographies, we are also finding ample opportunities to digitize both the front and back end of the insurance value chain. With 1.3 million Retail customers and growing, we expect to equip 3 million transactions this year, and this shows no signs of slowing down. We have already automated more than 1/3 of them, but we are targeting much more. Given our scale, the potential improvements to both cost efficiency and customer experience is significant. Our efforts to date have focused on 4 key technologies, and I'd like to share a couple of examples. First, APIs, or application program interfaces, are the future of digital insurance trading. They allow us to seamlessly integrate our partner systems with ours using both proprietary and industry standard protocols depending on the market. In the U.S. alone, we have nearly 40 partners trading with us in this way, meaning their employees can place business with Hiscox without ever leaving their native internal platform. Second, machine learning has finally come of age for insurance applications with off-the-shelf solutions now available to integrate directly into our own systems. In the U.K., we are using a solution to read plain language e-mails in our broker channel and automatically route them to the right place for one-touch resolution. We are already seeing accuracy rates well into the 90s, and the software automatically learns from its own errors to improve. Machine learning becomes even more powerful when it is paired with robotics, which can automate repetitive tasks of ever-increasing complexity. For example, we were planning to migrate our U.K. policies from the old system to the new with a large team of people. Instead, we now have a robot doing it automatically with a smaller team just to oversee the process and resolve outliers. Europe in particular has seen strong success with robotics and is now processing hundreds of thousands of routine transactions. And finally, self-service, which is certainly a cost saver as it takes the work out of our hands but increasingly is a customer demand. Our customers want control for most basic routine activities. They still want to talk to someone about sophisticated insurance issues, but the days of calling someone to update your credit card are unsurprisingly long gone. We have made a lot of progress. But as you can see on Slide 24, there's much more we can do even with the technology we already have in-house. Natural language processing has countless more applications in our markets. And as I've said, our customers are always demanding more self-service options. We also see significant opportunity in our claims experience, where digital submissions and payments are faster, more accurate and often more secure. But we are also constantly evaluating new technologies as they mature. COVID has certainly taught society that we can do much more than we ever thought with video chat. And the same is true with text and other forms of communication. Customers want to choose the way we service them, and we will accommodate that. And there are developments on the internal side as well. For example, we're now looking at software that can diagram and mine our operational processes and model improvements before any changes are made, lowering transition risk and speeding up both the pace of change and the elimination of waste. Taken together on Slide 25, I hope these things give you a sense of why we remain so optimistic about the long-term prospects for Retail. The shift to digital is inexorable, and it has only been hastened by COVID. We have been investing in these capabilities for years, and that head start, particularly in small commercial, puts us in a strong competitive position to capitalize on the trend. We know that the coming months will be challenging until life can return fully to normal. Our customers are having a tough time out there right now. But we know from experience that when economic recovery comes, SMEs are some of the first to benefit as they can form and respond nimbly. Our market shares remain low, and when firm formation is high, we tend to do disproportionately well. And finally, much like the diverse choices afforded by our strategy of blending big ticket with Retail, we are fortunate to enjoy a global footprint in the SME space. Some countries will recover faster than others, and we can flex our investments accordingly. Thank you very much. Now I'll hand over to Bronek for business performance and outlook.

Thank you, Ben. Turning to slide -- or we're on Slide 26. You've had a good overview of the business thus far, but one of the themes which goes throughout is clearly the impact of U.K. business interruption. As both Rob and Jo said, we welcome the FCA initiative to have a test case to try and clarify the impact of wordings. We always felt that this process would have ramifications for the industry as a whole. And that was really confirmed when 2 weeks ago, at the beginning of the trial, the FCA said that in their view, the decisions by the judges would impact 60 insurance companies and almost 400,000 policyholders, of whom Hiscox have only a small proportion. Turning to Slide 27. As you all know, the hearing concluded last Thursday. And at the final stages, the judges committed -- said they would be giving a judgment in mid-September. I think that clarity less than 6 months after the lockdown began is of value both to customers who need certainty and also to ourselves. Clearly, there is the opportunity for both either the FCA or the insurers to appeal. And if that was to happen, there's an expectation that the appeal would be heard during calendar 2020 with a judgment either before the end of the year or early in 2021. Clearly, Hiscox's expectation is that we -- our interpretation will prevail, but we will have the claims capability to handle claims if that is not the case. Turning to Page 28. I think it's worth taking a step back and reminding ourselves of the guiding principles of the Hiscox business strategy. We continue to believe in the Retail opportunity. You've seen in the first half that Retail has grown by 4%. And over time, we remain committed to that 5% to 15% range, recognizing though it will be more difficult as we get bigger. To build on what Ben said in terms of the digital response, if you think about what we've gone through in the first 6 months, in January, in both our U.S. and our U.K. commercial business, the direct and partnerships division, we saw more business than the prior period a year ago. In April, it was 60%. And it's fair to say we are all worried about the longer-term impact. But in June and July, it bounced back to very similar to January and, in some cases, above January. And that shows the underlying strength of that business. For the bigger-ticket business, clearly, we are now -- it says we shrink and expand according to the pricing environment. And given the pricing environment that London Market and Re & ILS are enjoying, we're firmly in the expand mode. And we feel that's exactly set out, we have the capital to do that. So finally, on Slide 29, we look forward. The company has clearly been incredibly resilient in a very challenging 6 months. Our staff have been amazing working from home, providing service to brokers and to customers as well as dealing with the challenges of COVID-19. The Retail performance was -- ex COVID-19 was a combined ratio of just over 95%, driving $100 million worth of profit. And as Ben has outlined, the investment in digital technology has paid off. As we look forward, we see growth opportunities and profit opportunities across the business. The rates, there is momentum. Clearly, the most momentum is in the London Market business, but Reinsurance is catching up. And we're already seeing upticks, as Jo highlighted, in the Retail businesses around the world. We have capital but, more importantly, the risk appetite to grow in the big-ticket lines. And as we look into 2021 and beyond, we believe that the long-term growth story for Retail is undiminished and that we are well placed to take advantage of that. So with that, we bring our presentation to the end, and we will open up for questions.

[Operator Instructions]

Thank you. Thank you, Jobin. So I will act as a [Audio Gap]

We have first question from Kamran Hossain.

So I've got 3 questions. The first one is, obviously, the data on, I guess, submission is really encouraging in Hiscox Retail. Could you maybe talk about any internal Net Promoter Scores that you have or kind of indicators that you might have to hand about whether there's been any impact on the business -- on the Retail business generally and more particularly kind of on the U.S., whether there's been any read across at all? The second question is I think it's really positive that you've got lower claims frequency elsewhere, so you're not going to begin to recognize it. When will we begin to recognize this, 1 year, 2 years? Is this an early 2000 scenario again? And the third question, if there's a second wave of lockdown, kind of less local, more national, any thoughts about how we should think about that going forward?

Thank you, Kamran. I think Ben can answer the question around the Retail impact and how we're measuring our market position. Aki can handle the claims frequency when we'll recognize that. And maybe Jo can talk about the second wave.

Sure. Thanks, Bronek. In terms of NPS scores and impact on the brand, we have done a couple of dips across the world. Those are light-touch surveys where we take the pulse on where we are. And so far, we have seen our NPS scores hold up at the levels that they were before COVID happened. Clearly, that's a concern and something we're watching very closely. But we haven't seen a significant impact to-date, and the growth in the business relative to the economic environment would bear that out. What we are seeing more broadly, and we've done this -- I happen to be on the Board of the trade association in the States. And what we have seen is a dip in confidence in the sector overall. I expect that on both sides of the Atlantic as a lot of these issues have played out very publicly in light of the pandemic, but that seems to have been broad-based across the industry. And thus far, we have not seen a material impact to our NPS scores or our brand tracking survey.

Thanks, Ben. Aki?

I guess, regarding the frequency, as you heard from Jo, the frequency has dropped quite significantly in our Retail business, but it's difficult to tell right now to what extent that's differentiated between noise and signal. The way our reserving works is -- and in terms of the duration of these policies, they tend to be pretty short duration. So by this time next year, we will pretty much know whether it's real. And by then, I expect in the second half of next year to be recognizing that favorable experience.

Thanks, Aki. Jo?

Just picking up on the question on the second wave. So for events and contingency, the impact is significantly reduced as exposure just runs out. We previously disclosed if the restrictions continued for a further 3 months to the end of the year, then there's a potential $25 million. And whilst we do have some exposure in 2021, it is more limited because events are just not being scheduled and we're obviously not reloading our aggregate yet. For business interruptions, we remain of the view that the intent and the wordings of our policy even in U.K. are clear. But given this is being disputed, we felt it sensible to provide some clarity to avoid any future disputes. And in line with others in the market, we're making some changes for new and existing customers in relation to communicable disease, so our portfolio is steadily migrating to the clarified wording. So in our disclosed risk scenario, we did adopt different assumptions, and we did include some headroom in those assumptions given the uncertainty. But it ultimately would depend on when in fact a second lockdown occurs, the length, severity, to be really confident of the ultimate impact.

We have next question from Jonny Urwin from UBS.

Just 2 from me, please. So firstly, I guess, on the additional $82 million of COVID losses, I mean, yes, there's obviously a lot of focus on that this morning in the investment community given, I think, people just expect the $150 million to be reiterated for now, pending the FCA outcomes. So I mean can you guys give us a bit more kind of detail on that? How can investors get comfort that this number doesn't keep rising, yes, ex the FCA outcome? Maybe what's the total IBNR on the $232 million that might help? And then secondly, the reserve buffer has increased over a stronger best estimate. You're now saying it's at the top end of the range, the very top end of the range. When we think about the Retail combined ratio guidance, some of the last year's deterioration was driven by claims experience, and some was driven by a deliberate slowdown in the release pattern. So the question is does this stronger buffer mean that the release profile can perhaps normalize a bit sooner than we're expecting.

Great. Thank you, Jonny. I think both of those around the context of $82 million and then the reserve buffer are for Aki.

Thank you, Bronek. In terms of the additional $82 million, Jonny, I think you -- the last one on your question was, well, how much of this is IBNR. We don't tend to disclose the detail of that, but what we can say is that the vast majority of the additional $82 million is IBNR. And currently, I would regard this as it's consistent with our reserving style, and these are precautionary reserves that we're setting aside, and they're not reflective of the claims that we've currently received. And frankly, as far as we're concerned, at any point in time, we're all -- with all this reserve or what we think is a -- sorry, expected loss on an ultimate basis, and that's exactly what we've done with the additional $82 million. In terms of the reserves, actually you're right, we are now at the top end of my expectations at $347-odd million and almost 11% above the actuarial estimate. The basic sort of increase in the reserve buffer has been driven by our 2019 caps running very well. And I expect that to continue to the second half of the year, and we will take a view at the end of this year as soon as to what happens there. With respect to Retail, I think the guidance that we provided last year that we would expect the Retail business to get back to our 90% to 95% by 2022 still remains our position. The business is progressing well. You can see that reflected in the underlying Retail results for '20 -- for the first of 2020, where part of the reason that we've got to a 95% combined, of course, is the expense managed reductions we've taken but also the improved experience we're seeing in the U.S. But I've cushion against accelerating the expectation to get back into 90%, 95%.

We have a next question coming from Andrew Ritchie from Autonomous.

First question, I think it's for Aki, just I wanted to just explore the capital scenario a bit more, the slide which ends at the 179%. I guess the 2 things to think about is that -- and you've actually said that you've assumed the U.K. BI risk scenario of GBP 250 million. But today, you've told us that there could be more losses in Reinsurance potentially related to the FCA cases. I'm not sure why you wouldn't allow for that in your kind of worst-case capital. I guess the other thing in that capital slide is it doesn't reflect the BSCR changes. Do you just assume those are offset by capital generation, which I guess, hopefully, should be? Or what's your thinking around that? Or maybe just tell us what the additional capital tools could be to ensure in those worst cases plus the reinsurance cost in the U.K. BI dispute that you could still end up landing around that kind of level. A few other quick ones. I noticed your 1-in-200 year exposures at the back of the presentation for nat cat have gone down significantly for U.S. I'm guessing that's the purchase of the additional retro/reinsurance. But you indicated you grew in July. So have those gone back up again as a result of July? Or is that still a good ballpark? And then the final question, it's really hard to understand what London Market profitability is on the kind of, let's call it, the new business, i.e., free of some of those legacy losses, some of those large losses, which appear to be an older business. I mean it looks like the XXX underlying combined is in the mid-90s. I mean is that a good guide as to where the kind of new business is being written?

Thanks, Andrew, I'd suggest that, Aki, you take the capital scenarios and the London Market underlying. And Jo, if you can comment on the -- what's happening to 1-in-200 and how you think that will work through. Aki?

Sure. Thank you, Bronek. Andrew, in terms of capital and the scenario that we set out there, we -- as you can see in the scenario, we started off with a pretty robust capital position and with the proactive actions we've taken in terms of raising equity and then, of course, the organic capital generation, the position here is very strong prior to reflecting those hypothetical downside scenarios. And you could always add more takeaway from those scenarios. But the point here is that those 2 aggregate scenarios added to around $500 million of net downside, and it still raises with a capital position around the 180% mark. And you'll recall from our equity presentation, strategy presentation I think to the [ actuarials ] some months ago that as long as that capital ratio is around the 160%, 170% mark, in between that range, that's consistent with an A rating and still leaves with ample capital. So even after taking this $0.5 billion of downside, the capital position remains very strong. The specific point regarding Re, I guess the way to think about that is this is not an isolated situation that affects Hiscox. Re -- our Reinsurance & ILS division has a -- currently and historically, it has had a pretty small market share within -- I guess, the term we use is underweight U.K. and Europe. And that speaks about historic view on pricing inadequacy. We also reinsure a significant amount of the business that we write in Re anywhere between -- for cat business, it can be up to 90%. Across the portfolio, around 75% is reinsured. So to the extent that losses would come to our reinsurance account, we currently don't expect them to be significant. And importantly, relative to the market, it will be a pretty small share. But frankly, they're quite uncertain, and we see the need to be faster in this scenario. In terms of the strengthening of the BSCR, you're right, we expect that the strengthening will take away maybe 10 to 15 points from the solvency ratio. That's reflected in our starting point for the first stage of strengthening where we had to reflect the whole strengthening for 2020, which was in line on year-end results. I would expect the bulk of that to be offset by the organic capital generation. You saw that -- you can see the generated -- capital generation in Q2, which is 9%. That's been partly elevated by the improvement in investment returns across the year in a normalized year. So underlying, excluding COVID-19, I would expect the capital generation to be somewhere between 18 and 22 points. And that should offset any strengthening required or driven by the BMA. And just moving on to the London Market profitability, I think your assessment of the calendar year underlying combined ratio is there or thereabouts. As we said, there's about a 4-point impact from COVID-19 and a further 7-point impact from above-average large losses. But I guess the important question is what about the business that we're writing now. The business that we're writing now, given the rate increases that are coming through that we've seen this year and also towards the back end of last year, we believe now it's around 90% or just below in terms of a combined ratio. Ultimately, that will start to feed through into the P&L. You know the way the earnings patterns work here. Given the mix of the business, we have some short tail or some longer tail in terms of the property values and so on. I expect that, that additional profit performance will start to come through into 2021, certainly into the second half of 2021. So we're pretty pleased with the business that we're working now.

Thank you, Aki. Jo?

Thanks, Bronek. Yes. So you're right. So at the beginning of the year, we felt that reinsurance rates were not sufficiently attractive to grow. And post COVID, in March, we purchased some reinsurance in the form of industry loss warranty at prices that were commercially attractive to both protect our capital and reduce the risk of the upcoming wind. And you're right, you will see that on Slide 41, where that has reduced the mean modeled loss on the U.S. windstorm to just shy of $200 million. And that was, if we looked at the -- go back to the end of the year, that was over $300 million. The vast majority of that has been driven by the additional $100 million of ILWs. You're right, that was modeled at the end of April, and we have written in our June and July renewals. So rather than we're down 20%, we're down 10% year-to-date including the June and July renewals. So whilst that mean modeled loss will increase a little bit, the majority of that driver is the purchase of the ILWs.

Great. Thank you, Andrew. Thank you, Jo. We have questions, Jobin, from Ben Cohen and Andreas van Embden. We'll take those 2 questions, and then we'll draw the Q&A to a close. So if you'd like to choose one of them, then we can go ahead.

Now we have next question coming from Ben Cohen from Investec.

Two -- 3 things I wanted to ask about. Firstly, could you just -- you talked a lot about Retail growth in different context. So I just wondered, could you just tie down a little bit more about how much you see the Retail division growing this year. And also the outlook for next year, maybe just recap in terms of sensitivity to economic growth. And the second thing I wanted to ask about was really just the uncertainty still around COVID losses from a third-party point of view. You've obviously made some estimates in the first half of the year. I wondered just where you feel you are in terms of getting ahead of loss notification. And I suppose it's a third, related in terms of the potential impact that there might be to the Reinsurance portfolio from the U.K. BI ruling. I just wondered, is this really just a very, very small loss that we're looking at? Why was this something that you didn't see fit to warn about at the time of the Q1 update with the equity raise?

Okay. I think in terms of Retail growth, clearly, Ben will be able to comment on that. In terms of the third party, Jo; and then the final question, Aki.

Ben, I'm afraid on Retail growth, I'm not going to give you much more certainty on 2020. We withdrew guidance given the uncertainty in the broader environment. And I'm afraid that uncertainty still remains. So I'm pleased with the growth we had in the first half contextually. And clearly, if the economic environment continues to heal, that will be a fair tailwind for us, but we just can't be sure at this point given the fact that this is still going on. The pandemic is still live. Different countries are responding in different ways. We don't know what the next phase looks like, and we're allowed to commit to a growth level while we find ourselves in this situation. Clearly, once the situation stabilizes and the pandemic starts to either be a normalized way of life or more hopefully starts to be behind us, we will look to return the business to the 5% to 15% target growth range.

Thank you, Ben. Jo?

Yes. So with regard to third-party losses, I mean, in the way that we're thinking about COVID, we have reserved losses which are more directly impacted by the pandemic. So that's things like events cancellation, et cetera. We've now moved into things which are more affected by the economic interruption and the economic shock. So that's the potential business interruption and travel. And then you're right, as this pandemic moves, then we're looking into the sort of third-party liability. We think about it in a couple of ways. We think about third party, almost direct liability COVID-related, and that would be what we reserved at half year. So that would be the allied health care impact where we see a direct COVID-related potential third party. I suppose indirect COVID, we have seen some notifications on our portfolio. So I'll give you an example, accountants PI in the U.K., we've had some claims which are for filing of furlough or late filing of furlough. And whilst these are indirectly related to COVID, they are just part of the normal claim frequency that we see within accountants. And whilst they're doing that, they're not doing some other things like filing tax, et cetera. So we're dealing with those as part of the loss ratio, and any of those will be -- will be taken care of in the Q2 reserve in. And then as we move forward and we forecast on what is the impact with regard to any increased view of risk, so whether that be through recessionary loss or through other any sort of third-party litigation as we move into 2020 and 2021, whilst, of course, it's quite speculative at this stage, it's really important for us to understand because we've taken all of that into our underwriting. And we would look to see if there's an increased view of risk regardless of where that's come from and make sure that our underwriting action, whether that be portfolio action or the rates indeed that we're getting, is -- mitigates the impact of any sort of increase that we see with regard to view of risk.

Great. Thank you, Jo. Aki?

And then on the final point regarding the reinsurance account, I think at the time, what I know at the time of the equity raise, we're quite clear in explaining that exposure to losses in the reinsurance account was uncertain. But also to remind you, and as I have done today, that the Hiscox Re & ILS is underweight in Europe and with only modest net premium retentions. So frankly, the disclosure that we have today simply reiterating that and providing a lot of caution that there could be something. But frankly, I'd focus on the fact that we are underweight in Europe. This is something that's not unique to Hiscox, yes. But we are underweight in Europe with modest retention. And if anything does continues, we can't really expect it to be [ far from this ].

Great. Thank you, Aki. Jobin, I think there's one more from Mr. van Embden.

That's right. We have next question from Andreas Van (sic) [ Andreas van Embden ] from Peel Hunt.

I just have 2 focus points. One is on Hiscox Re and looking forward at the 1/1 renewals. I just wondered in terms of your plans for next year. With the ILS capital retrenching and you're alluding that could retrench even further in the second half of the year ahead of the renewals. Can you maybe comment on how much net risk you are planning to retain at 1/1? Just describe perhaps the move from gross to net, where there's going to be a significant change going on mid- to next year and perhaps how much capital that, that could potentially consume. And my second question is around the U.K. Retail and business interruption exposures. Could you maybe discuss your reinsurance protection program within U.K. Retail? What assumptions have you made for reinsurance retentions within your stress test of GBP 10 million to GBP 250 million and then perhaps discuss how much room do you have in your U.K. Retail reinsurance program to absorb further losses or pass on full further losses to your reinsurers?

Okay. I think in terms of the 1/1 plans for Hiscox Re, Jo, I think that's probably one for you to talk about. And in terms of the reinsurance, Aki, do you want to respond to that?

Yes. Thanks, Bronek. So yes, so as we look forward to 1/1, I mean, as I said, the rates are accelerating. We're 11 including the midyear, and we do see that accelerating. So we do think it will be an interesting market for us at 1/1. We do have the capital, and we are looking to deploy that on our own balance sheet. I mean with regard to what that exactly looks like, we're looking through that at the moment. And as we always do with business planning, we make a judgment about the inflection points around rates and the makeup of our portfolio in terms of that sort of gross versus net. But with the market we do foresee, we are confident that the rate acceleration that we're seeing will look forward to 1/1, so we are excited.

I mean I think, if I can expand on that, Jo, the moment, Andreas, there's a slightly balancing act that Jo and the team are performing between third-party capital, ILS and our net retained appetite. Thanks to the capital raise, and we clearly have more net appetite to deploy both in London Market and Re, and we'll be making a precise decision later as the year progresses. I mean on the one hand, it is -- as I say, because of the trapped capital and ILS, we may write less gross written premium, but certainly, our expectation is that net written premium will grow. And in fact, the very existence of that trapped capital which is driving the rating increase across the market as a whole. So it's one of those balancing acts, but very clearly, as Jo said, the balancing act is driving price increases. So Aki, you want to just talk briefly about the U.K. reinsurance program.

Of course, I mean, I guess the answer is pretty short. We don't tend to disclose the details of the reinsurance program. I would reiterate the previous messages that we've put out there, which is we do have a comprehensive reinsurance program supported by high-quality, top-tier reinsurance panel. And we're pretty confident in the cover that we have.

Okay. All right. Thanks, Aki. That's -- I believe there are no -- there's no other questions in the queue, so thank you all for your time. Just to reiterate, I mean I think we -- it's clearly been a challenging first half, but the business has been very resilient, both operationally and its ability to respond to customers. And as we look forward, clearly, there's a market opportunity particularly in the big-ticket area. But as Ben explained, we're not going to lose sight of the ability to keep on growing Retail. And we are positive about the profit and growth opportunities that we see this year and clearly into 2021. Thank you all for your time.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.