Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Hiscox Ltd 2021 Interim Results Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Robert Childs, Chairman of Hiscox to begin. So Robert?

Good morning, ladies and gentlemen. I'm Rob Childs, the Chairman of Hiscox. After 21 years as CEO and 28 years at Hiscox, Bronek is retiring at the end of the year. During his tenure, he's taken us from being a small private Lloyds business to a global specialist insurer with a premium of $4.5 billion and a market cap of much the same. He's been an inspirational leader, demonstrating strategic insight, great operational abilities and true grit in difficult times. Bronek has always acted like a proprietor, matches energy and long-term vision. We have worked together for 28 years, and I and we will miss him. What an act to follow. We believe, in Aki, we have the right person for the next chapter at Hiscox. Aki is an original thinker, open and engaging and someone who can motivate and build teams. He's quite well known to most of you. He's had valuable experience before coming to Hiscox with Virgin Media and the Pru. We believe we have the best of both worlds with an internal appointment with extensive previous experience. He has a drive and long-term vision to take us forward, maintaining our sense of ownership. Bronek is retiring as the business is turning a corner. It is my pleasure to announce, therefore, a very good half year result of $133 million. And very pleasing to all our shareholders, the Board has agreed to resume a dividend payment with a progressive policy going forward. Today, as usual, you'll be hearing from Aki Hussain; then Joanne Musselle, our CUO; followed by a newcomer to the presentation, Kevin Kerridge, our CEO of Hiscox USA. Bronek will conclude the presentation. I'm now going to pass you over to Aki.

Thank you, Rob, and good morning, everyone. I am thrilled and delighted to be appointed CEO. I'm being given the opportunity to follow on from Bronek in leading a wonderful business full of dedicated and talented people. I will be leading a business that has a great history, a business that has turned the corner after a prolonged soft market and the challenges of 2020. When I look across our business, I see significant opportunities everywhere, in London Market, in Re & ILS and in Retail; and in particular, an escalating opportunity across our digital platforms. I'm looking forward to leading the business as we write the next chapter in our story and realize its potential. Now turning to our current financial performance. I'm pleased to report a return to profitable growth for each of our reporting segments. In Hiscox London Market and Re & ILS, we're seeing the benefit of multiple years of much needed rate improvements, combined with disciplined underwriting actions. And this, together with a quieter second quarter for loss experience, is driving material improvements in combined ratios. In these improved conditions, we have deployed capital, enabling the businesses to grow their net written premiums at a much faster rate than gross. As you know, net written premiums are the key source of earnings power. In Retail, we are continuing to see robust growth, and our digital partnerships and direct business globally continues to go from strength to strength, particularly in the U.S., which is up 30%. I'm pleased to report an overall profit of $133.4 million. Now adjusting this for COVID loss estimates arising from new lockdowns in 2021 of $17 million and the LPT charge of $26 million disclosed earlier in the year, the underlying profit rises to $176.4 million. In light of the group's improved performance, having carefully considered the capital requirements of the business, the Board has decided to resume dividend payments. And today, we are announcing an interim dividend of $0.115 per share. In absolute terms, the dividend cost of $40 million is consistent with our last interim payment in 2019. However, of course, on a per share basis, it is a 20% dilution following the equity raise in May of last year. Now moving on to each of the business units. As usual, I will begin with Retail. Hiscox Retail has delivered a strong performance in challenging conditions, growing its top line by 7.9% or 2.6% in constant currency. This was driven by growth in Europe; a resilient performance in the U.K.; and a slight top line decline in the U.S., where the planned reductions in the U.S. broker channel were mostly offset by stronger-than-expected growth in the U.S. digital partnerships and direct business. We're now roughly halfway through the $100 million of U.S. broker GWP reductions we announced in March. Now adjusting for this, the Retail go-forward portfolio grew at 6.4% in constant currency. Our global digital partnerships and direct business now represents over 1/4 of Retail GWP. It grew 23% in the first 6 months of the year to over $355 million, and we now have 880,000 DPD customers globally. There continues to be considerable room to grow into an estimated 50 million individual small, micro and nano businesses. The opportunity is particularly significant in the U.S., where we grew DPD premiums to $220 million in the first half. Now to provide more color on the business and the attractiveness of the opportunity, you'll hear shortly from Kevin Kerridge, the CEO of our U.S. business and the architect of the DPD business from inception. I'm particularly pleased that our Retail business remains on track to return to a combined ratio in the range of 90% to 95% by 2023. In the first half, there are a couple of things that you've noted which distort the picture. Firstly, as you remember, the Retail combined ratio we guided to excludes COVID-19 losses arising from lockdowns in 2021. You'll recall we estimated these would amount to less than $40 million for the first 6 months. In fact, the current estimate is around $17 million. Secondly, in May, we completed a loss portfolio transfer transaction related to selective lines of Hiscox Syndicate 3624 at a net cost of $23 million to the Retail segment. This is a one-off transactional cost. Adjusting for these 2 items, the Retail combined ratio is showing an improving trend at 96.7% compared to full year 2020. Moving on to London Market. Hiscox London Market has delivered a strong performance in the first 6 months of the year, continuing the performance trend from the second half of 2020. We have seen robust GWP growth and an even stronger net written premium growth at 16.7%. Over a number of years, our focus has been on improving the performance of our portfolio into a hardening market so we are growing where it matters and where we see the best opportunities. Importantly, the impact of underwriting actions taken over the last few years are now manifesting themselves in much improved loss performance and profitability. In the first half, London Market delivered a net combined ratio of 81.7%. That's a 23.5 point improvement on the prior period and an underwriting profit of $68.7 million. The outlook for the rest of the year remains positive. Rates are up 12% year-to-date, and momentum is continuing. As a reminder, 2021 is the fourth year of rate improvement with a cumulative increase of 60% since 2017. We believe we're now writing new business with a mean combined ratio expectation in the mid-80s, which will earn through in the coming years. We're also making good progress on e-trading as we use technology to increase efficiency, improve risk selection and open up new pockets of business. And you'll hear more on these initiatives from Jo in a few minutes. Now turning to Re & ILS performance. Whilst GWP has increased, when adjusting for reinstatement premiums, the top line remains flat. In the second quarter, the team attracted $190 million of gross new inflows into the ILS funds. This resulted in a significant increase in gross written premiums as the new capital was deployed in June. In our reinsurance segment, we have seen multiple years of rate increases, much like London Market. Rates are up 9% year-to-date and 36% since 2017. In this improving market, we have closed some of the gap left by a reduction in third-party capital support by deploying our own balance sheet and supporting a 40% increase in net written premium. In growing the net, we have taken a more meaningful catastrophe bet. Our reinsurance business has returned to profit, and I'm particularly pleased with the material improvement in combined ratio, which is after absorbing a $33 million impact from storm Uri. Now turning to investment performance. We achieved an investment return of $61.9 million or an annualized return of 1.7%. Given the lower interest rates, the investment income is ahead of expectations, but as you can see, it is almost entirely driven by risk assets with bonds giving us very little in total. The current yield to maturity on the bond portfolio remains low at around 0.5%, with investment-grade corporate bond spreads at historically low levels. Now rather than reach for yield, we are comfortable maintaining our credit exposure given the supportive economic and policy backdrop. Now the group continues to maintain a modest exposure to risk assets. Now turning to reserves. Our reserve position continues to remain robust with a margin above the actuarial estimate of $348 million or around 11.3% of net reserves. We continue to see positive aggregate reserve development with prior year reserve releases of $79 million. Now staying on the topic of reserves. In the first half, we completed 2 loss portfolio transfer transactions, which means we now have reinsurance cover in place totaling $899 million on net ceded reserves of $587 million. This is equivalent to a 1-in-200 return period reserve deterioration cover. These transactions have been capital accretive and will moderate P&L volatility. You will recall from previous updates that we have seen reserve volatility in recent years from 3 specific areas: firstly, in Retail, U.S. broker channel-originated and stand-alone general liability business. In Re & ILS, volatility has come from the legacy Bermuda health care book, and in London Market, it's been the property portfolio binders. The first of these -- the first 2 of these have been largely addressed by completing the loss portfolio transactions. The third issue in London Market has been addressed through portfolio re-underwriting actions that have been taking place over the last 3 years as well as rate improvements. We have completed the last significant leg of remediation actions this year on this book. Now turning to capital. Capital strength and financial flexibility is of paramount importance to the group. The 2 LPT transactions added an estimated 10 points to our regulatory capital ratio. And this, in combination with profitable growth in the first half, has resulted in a 20-point improvement to our regulatory capital ratio, taking it to 210%. The last leg of the BSCR strengthening implemented by the BMA across the industry will complete at the end of this year. The expected impact is a reduction to the BSCR ratio of between 10 to 15 points. This will be moderated -- or this impact will be moderated by further internal capital generation in the second half. Our capital position is strong. The biting constraint, as you know, over the years, has been the desire to maintain an A rating from S&P. And as you can see, even in a post-stress scenario, we expect to maintain a BSCR ratio of around 180%. This is comfortably above the minimum required for an S&P A-rated company with our risk profile. As we look forward, we have sufficient capital to execute our business plans and the opportunities we see ahead. And now I will conclude with some remarks on outlook and guidance. As you may recall, I provided some quite specific guidance regarding 2021 performance back in March, which we summarize for you on this slide. I'm pleased to report the half year results illustrate we are on track to deliver against this guidance. Our London Market gross written premiums are in line with expectation, and as promised net written premiums in both London Market and Re & ILS have materially exceeded gross written premiums. As a reminder, this is the key source of earnings power and will emerge as earned premiums over the next 24 months. In Retail, we are halfway through reshaping our U.S. broker channel book. Adjusting for this movement, Retail premiums grew at 6.4%. This is in line with our guidance of being at the bottom end of the 5% to 15% range in 2021. The underlying Retail combined ratio is 96.7%, showing an improvement on 2020. And last but not least, we have committed to driving a 1% per annum reduction in our operational expense ratio in 2021 and 2022. Our disciplined expense control in the first half has resulted in an expense ratio of 44.9%. This includes 1% adverse impact from exchange rate fluctuations as the dollar has weakened. Comparing this to a normalized expense ratio in 2019 of over 46% demonstrates solid progress. As I look into the second half, I'm optimistic. Our business performance is on track, and the cost correction actions will continue to earn through. When thinking about full year profit projections in your models, it will be important to factor in 2 things. Firstly, investment income outperformed in the first half. We don't expect a repeat in the second. Secondly, the first half included benign claims experience in the U.K. This is already not the case in the second half with multiple flood events experienced in July, and we also benefited from a quiet second quarter from a loss experience perspective in London Market and Re & ILS. I'm optimistic as we go into the second half. Our business is strongly capitalized with greater financial flexibility, with business lines carrying more rate and margin than in recent years. And now I'll hand over to Jo to take you through our underwriting performance.

Thank you, Aki, and good morning all. At the year-end, I laid out some expectations for 2021 and will start with an update on Slide 13. Given the market conditions, we had a plan to grow where there is opportunity, and we have done this with gross written premium across the portfolio increasing 8.5%. Our plan was to retain more premium net in big ticket, deploying more of our capital in a favorable market. Re and ILS has grown its net written premium 40% and London Market 17%, and this is compared to 9% and 10% growth, respectively. In Retail, digitally traded business has seen a 23% growth in the first half, with U.S. digital and partnership up at 30%. Whilst a more favorable market, discipline and active portfolio management remains key. The refocus of our U.S. business to small revenue customers, cyber remediation across the portfolio, in addition to actions on our decile 10 portfolios across the group is progressing well and on track. Active portfolio management is not just on the go forward. As we have heard from Aki, we've also successfully completed 2 legacy reinsurance transactions, which will reduce volatility capital and management time on the back book. Rate momentum continues, and I'll go through the detail in a later slide. A familiar slide to many, Slide 14 shows how we actively manage our portfolio. Overall, I am pleased as our underwriters have grown where there's opportunity and shown discipline when needed. In aggregate, we've increased our top line while walking away from $100 million of underperforming business. We have also strengthened the portfolio through reduced exposure and tighter terms and conditions, and I'll take you through a few highlights. Our largest segment, Small Commercial, which can be seen on the far left, has grown by 5%. And this is pleasing as some portfolios like events and cancellation are still affected by the restrictions and we're exiting some U.S. broker business. As I've mentioned, our reinsurance top line increased by 9% gross but over 40% net as we have taken the opportunity to retain more on our balance sheet. After many years of remediation, our property lines grew by 5% overall. And global casualty, which is our casualty lines written through Lloyds, has grown by 12%, once again driven by rate. Our exposure in 2021 is lower than 2020 and materially lower than '19 and '18. Another familiar slide is our rating chart on Slide 15. As a reminder, the chart shows our rates indexed back to 2012 on a rolling 12-month basis, and it's really satisfying to see a continuation of upward rating momentum. London Market, which is the blue line, continues its dramatic rise, where rates are up 12% overall. 2021 was the fourth year of rate rise in London Market, a compound growth of 60% since 2017. While some of the early rate rise negated an increased view of risk, we are now seeing the rates materially improve profitability. While overall momentum continues, the picture is more nuanced by line of business. Cyber, product recall and space have hardened significantly over recent months. Rates in casualty lines continued double digit but at a slower pace as we have benefited from dramatic rate increases earlier in the cycle. This underwriting discipline is extending beyond pricing as we're also reducing exposure through line size and terms and conditions, which reduces volatility. Rate momentum has also continued in Re & ILS, which is the red line, with an average increase of 9% across the portfolio and a cumulative rate increase of 36% since 2017. The business benefited from double-digit increase in risk, marine, retro and North American property at the important January renewals. April reinsurance renewals focused on Japan delivered mid- to high single-digit rate rise, and June's Florida renewals achieved a 10% average rate increase. Retail, which is the green line, accounts for more than half of the group gross written premium and nearly 3/4 of net premium and is much less cyclical with regard to pricing. Whilst the rolling nature of the graph and the scale makes this tricky to see in the chart, we are seeing just over a 5% positive rate movement with rates accelerating through 2021. Quarter 2 rates are up 6% compared to 4% at quarter 1. Increases in construction material and labor cost plus the ongoing debate around casualty social inflation is making claims inflation a hot topic. Whilst inflation has increased, our view is rates are being achieved in excess. We're also taking preemptive actions across the portfolios at the underwriting stage to ensure adequate sums insured and rebuild costs. Whilst rates have improved, the quality of our portfolio has also improved, and I would like to thank our underwriters for all of their hard work. Slide 16 shows how we have grown premium whilst reducing aggregate exposure. Claims arise from exposure, not premium, and the 2021 underwriting year looks promising, tracking below 2020, which in turn is tracking below 2019 at the same point in time. We continue to actively manage our portfolio, focusing on repricing or reducing the bottom decile whilst continuing to invest and grow our exposure in our top performing lines. We have embedded an active portfolio management cycle in each one of our business units with visibility and tracking of the structural performance of our lines. When the market eventually softens, visibility and course correction is key. Emerging claims trends and underlying risk evolve, and we need to adapt our underwriting to take these changes into account. We have not always got the time spot on historically, but this underwriting discipline ahead of the cycle will position us well for the future. Turning to Slide 17. Cyber is one such portfolio that has evolved materially. As can be seen in the top left quadrant, global ransomware attacks have increased materially since 2019. In line with the rest of the industry, we have also experienced an increase in frequency and severity across a number of our markets, particularly in the U.S. region. We saw early signs of this emerging trend 3 years ago and have been undertaking portfolio actions since 2019, examples of which can be seen in the top right quadrant. Even though we're a Tier 2 player in cyber, we have adjusted the group's cyber risk appetite and taken corrective action, focusing on customers with lower revenues in Retail and reducing exposure to lower-attachment business in big ticket. In addition to the underwriting action, we have also put through material repricing, which can be seen in the bottom left quadrant. This repricing is gathering momentum. And in quarter 2, the average increase across the whole of our portfolio is over 30% and is now up 60% since 2019. We also attach great importance to mitigation actions as human error is by far the biggest business vulnerability when it comes to cyber attacks. We incentivize our small business customers to attend the Hiscox CyberClear Academy, an approved training program designed to help counter cyber risks. To date, around 5,000 businesses have gone through the program and early indications show a positive impact on their loss ratio compared to those who have not. We're also introducing changes to our cyber product offering as well as utilizing third-party data and models. It's not just cyber where we're utilizing technology, we are increasingly using technology across the portfolio to achieve underwriting advantage, and Slide 18 shows our focus in 4 areas: improve risk selection, enhance customer experience, access distribution or assist with underwriting efficiency. So let me give you some examples of these, starting with risk selection. In the U.K., we have partnered with a third-party data provider and discovered a strong and consistent predictor associated with ghost post office boxes. Customers registered at these are costing us around GBP 10 million per annum, running at a loss ratio of around 300%. Two examples of improved customer experience. In Europe, we have launched an app to assist our customers with assessing the true valuation of their classic cars. And in the U.S., our cyber customers with less than $100 million in revenue will receive complementary access to breakthrough AI-powered cybersecurity protection provided by Paladin. To enhance our distribution capability in London Market, we have extended our Hiscox+ API flood and household offering to commercial. And finally, underwriting efficiency. We have embarked on an IT transformation program across all of our retail platforms and given the size of our retail customers, have an ambition to underwrite 90% by volume without referral to an underwriter. We are well on the way to achieving this, and our new business written through our digital partnership and direct portfolio is already at 95%. I will now hand over to Kevin Kerridge, our U.S. CEO. Kevin has been a key architect of the Hiscox digital proposition, first in the U.K. and then in the U.S. And he will talk more about our U.S. digital partnership and direct business.

Thank you, Jo, and good morning, everyone. I'm delighted to be talking to you today and bringing to life the opportunity ahead for our digital partnerships and direct business in the U.S. or DPD as we refer to it internally. Whilst I've met some of you at investor conferences over the years, I'm probably a new face to many. But this is certainly not the case in Hiscox. Prior to taking the reins as CEO of Hiscox USA earlier this year, I've spent most of my 25 years at Hiscox building and running our digital businesses, starting in the U.K. and then moving to the U.S. in 2009. I've always been excited by what we call our digital DNA, a drive to grasp opportunity using digital models, which is not just about the technology itself but also about the way we think. We know that small businesses and also the partners that serve them are an underserved market. They want to embrace digital to give them better access to product and better service. We believe that leveraging digital in the way we have gives us the opportunity to create America's leading small business insurer against that need. That puts us front and center of a very significant opportunity. There are approximately 32 million SMEs in the U.S. The insurance penetration is low, and the market is underserved and competitively fragmented. According to our internal estimates, in gross premium terms, this translates into a total addressable market of about $130 billion, which has grown at a compound annual growth rate of 3.5% since 2016. Most importantly, as you can see on Slide 21, U.S. DPD has been growing at a 35% compound annual growth rate since 2016, significantly faster than the market. We've been taking share by offering a market proposition that resonates with small businesses, focused on a great experience, empowered by digital but also supported by humans when a customer needs it. While our risk appetite and product set narrows today's target market to $16 billion of premium, we know it will grow substantially over time through evolving our own underwriting appetite as well as finding opportunity to work with third-party carriers. We've built the ecosystem that allows us to digitally trade. And so now expanding our industry footprint and adding new products will drive further scale with marginal investment required. Increasing our target market is a key strategic lever we will pull in the next stage of our journey. This puts us in an incredibly strong position to build on our 2021 annualized DPD premium of around $400 million to drive further into this market and help more small businesses to secure coverage. But getting to this stage didn't happen overnight, so let me take you through the detail of how we got here. We've been very busy over the last decade after entering the market as a first mover on the 15th of November 2010 with no legacy, a lot of digital expertise from the U.K. and huge amounts of ambition. That was before insurtech really became a thing. Let me walk you through some of the broad themes on this chart. First, we have a significant head start on the market, having launched in 2010, which is key to our profitability now. Building a digital business is about constant small turns of the dials and constant small course corrections, whether that's operations, underwriting or marketing and distribution. The compounding nature of those cumulative turns course corrections over a decade are hard to replicate. Second, we have continually expanded the footprint of the business. On product, we started with general liability and professional liability, building that out across business owner's policy, cyber and also products like workers' comp underwritten by third-party carriers. On industry classes, we have built out from office-based professions to artists and trades. On geography, we started in 21 states and now have a national footprint with the sole exception of Alaska. And on distribution, we started with a pure direct-to-consumer model and very quickly leveraged our digital platform into partnerships where, today, we have over 100 partners accessing our products. Third, we have invested heavily in market presence and capabilities, whether that be our marketing investment to build brand awareness, brand affinity and consideration; an investment of over $250 million since launch with about 20% of that specifically on building our brand among small business owners; or the investment in APIs and the recent investment of over $100 million in renewing our full technology stack so it is fit for purpose for the next decade ahead, an investment, which is in market today, in our service centers and on track to fully complete by the end of this year. We also believe strongly that digital DNA encompasses access to people when customers or agents need them. And so whilst over 80% of transactions go through the machine without touching a human, we've also invested in our 2 service centers, 1 in Virginia and the other in Nevada, which together now handle about 1 million calls per year. It has taken a lot of hard work and investment to get to where we are today. And as we look back at our achievements, I'm filled with excitement about the next 10 years not just because of the foundations we've built here but also because of the way the market is shifting. If you need evidence of that, you'll see that we wrote $30 million of premium in a single month for the first time in June 2020 as the global pandemic took hold. With the entire Hiscox team working remotely, we were able to meet the growing demand to trade digitally as new business formation accelerated. We now have 490,000 customers, and it is not long before we cross the 0.5 million milestone. A key part of our expansion has been an omni-channel distribution strategy we like to refer to as All roads lead to Hiscox. We strongly believe that the most effective way of acquiring customers is by supporting all the various channels where they choose to place their business insurance. We are ultimately agnostic as to whether a small business reaches us and transacts with us directly or through our partners, and we constantly look for new ways to reach new customers. DPD started life as a direct-to-consumer play, which we see as a long-term opportunity as businesses change their buying behavior, similar to the journey personal lines auto insurance has been on. The opportunity there today is growing fast but it's still small. When we're asked about how we feel about new entrants coming into this space, we welcome it because that accelerates the change in buying behavior and floats all boats. We are well positioned as the landscape continues to change over time. The bigger opportunity today is the digitization of partner distribution. We have well over 100 distribution partners funneling small business insurance our way. These cover the full range from the agencies of personal lines powerhouses to captive agent networks to insurtech aggregators to the thousands of mom-and-pop retail agents that exist in every main street in the U.S. In a recent survey, 91% of users said that our platform was better or much better than others they used. We continue to invest to keep that experience differential in place. The foundation of this opportunity is our multifaceted digital platform where we can support partnerships with Hiscox portals or integrate into their shop windows using APIs, all backed by best-in-class service center experience when needed. And through all of this, we've been obsessed with meeting customer needs and delivering products that work for them. To do this well, we've been very selective on the makeup of the DPD book. Let me describe our typical customers and the products they purchase. The U.S. DPD appetite covers over 800 industry classes, and some examples are shown on this slide. Over 60% of our customers are professionals. Within that category, the largest segment are emerging professions, examples of which include technology and marketing consultants. Often, we see these customers leaving full-time employment to start up their own specialist businesses. Next are the traditional professions such as architects, engineers, realtors and accountants. These customers are typically highly educated and operating in industries with professional standards. The final professional segment are service industries, which range from wedding photographers to hairdressers and now salons. The common theme here is that they are providing a service to their clients, often interacting with them in person. In addition to these 3 segments, we have a growing trades book. In this space are landscapers, plumbers, carpenters and many other trades which are a critical part of the U.S. small business population. While these industries present an attractive market opportunity, given the diverse nature of these businesses, we are very selective in our risk appetite. For example, we don't tend to cover certain activities such as roofing, excavation or construction. Our digital platform enables us to put a very tight box around appetite and underwriting. Across all industries, the biggest driver of demand comes from contractual obligations. About 3/4 of our customers buy general liability, and just over 1/3 purchase professional liability. Clearly, there is some difference in buying behavior, depending on the nature of these businesses. Traditional and emerging professionals who offer advice or an intellectual product seek professional liability coverage to protect against errors in their work. Services and trade industries who interact directly with their clients or clients' property seek general liability coverage to protect against accidents leading to property damage or bodily injury. We also think about our customers in terms of size, and for U.S. DPD, that means as small as possible. 82% of our customers have annual revenues below $150,000 and 96% below $0.5 million. Many of our customers are purchasing insurance for the first time and/or starting business for the first time, working out of a home office or shared space. Because of this focus on nano businesses, we see less take-up of our business owner's policy, often called BOP. BOP is typically purchased by larger businesses with more meaningful property exposure. That said, we are seeing increasing demand as we expand the product footprint. Industry, product and customer size are all important dimensions we consider when looking at the U.S. DPD book. And because of our sophisticated approach to underwriting, we are able to write business at attractive loss ratios across the entire book. So in summary, I think you'll agree that the opportunity ahead of us is significant. We want to keep capitalizing on our first-mover advantage and the decade-long head start we have in the SME digital opportunity. We have an enviable position on the scale of what we've built so far, the inherent structural profitability and the capabilities and market presence we've built. Our focus now is on continuing to invest to drive growth, further enhancing structural profitability and widening the competitive moat. We will continue to leverage the resources, expertise, experience and capabilities of the broader group. The capital required to support our growth is fully funded from profits generated across the group, including the big ticket business. The cost of back- and middle-office functions is shared, which contributes to DPD being a profitable business, and we are benefiting from the deep underwriting expertise of the rest of the business. Last but not least, our single global brand supports the success of our distribution strategy. U.S. DPD is strongly positioned and has the full support of the group to continue its expansion, leveraging this capital, brand and know-how. I hope you now share my excitement about the opportunity that lies ahead of us. Now let me hand it over to Bronek for his final thoughts.

Thank you, Kevin. As always with Kevin, he sells himself short. What he didn't tell you was that back in the year 2000, when the dotcom boom was at its peak, we gave Kevin GBP 1 million and said, "Please go and figure out what this Internet thing is all about." And he built from scratch our U.K. direct business, which is now a $150 million business and contributes very well to the U.K. business' profitability. He then, as he said, relocated to America with his family and has repeated it clearly in a bigger scale and ultimately, we expect, an even more profitable scale. I think though it's really important to look at the digital partnership and direct businesses around the world in the context of our Retail businesses as a whole. As you can see, the Retail businesses have gone over the last 5 years from the $1.5 billion per annum to, at the end of last year, $2.2 billion. Within that, the digital businesses grew at a compound 22% rate, but importantly and in a way that I expect to continue, the broker channel business has grown at a compound 5%. And both are really important as we look to our future opportunities. In terms of profit, you can see how strong the underlying profits have been. Clearly, last year, including COVID, we would have lost money, but you can see how much smaller that loss was, thanks to the performance of the business. And in the first 6 months of this year, Retail has made over $70 million, so you can see that we're back on track on an underlying level. So looking forward now, clearly, I'm delighted about the way the strategy has worked over the last 18 months. Our big ticket businesses in Re & ILS and London Market, as you see in the P&L today, have made a material contribution to the group's profitability. And given the rate position that you've heard from Jo and that impact of her constant course correction, that will continue in the future. And we expect to be able to use some of the excess profits that the big ticket businesses generate to overinvest in the Retail business so we can continue to capture both the digital opportunity but also important other opportunities in the broker channel and in our high net worth business. Because I think -- as I look at opportunities ahead on the next page, the portfolio course correction. As I listen to the presentations, I think you've got some new words that you're going to learn from or hear a lot from Jo and from Aki, is this constant course correction, never being satisfied with what you've done and tweaking the dials piece by piece quarter by quarter to ensure the portfolio stays in a good shape. And you've seen the impact that Jo has had in the 18 months since she took over that leadership role. At the same time, we've had material rating action. That's partly thanks to market, but more importantly, in fact, has been thanks to the efforts of hundreds of underwriters around the world who've negotiated that policy by policy, broker interaction by broker interaction or through the analysis and tweaking of portfolio actions. And that's what we are benefiting from today. And at the same time, there's been hard work on expense management above and beyond the shorter-term impact of reduced travels. So we are seizing the opportunities in every part of our business, and that means we are very well capitalized. We are above 200% on the BSCR capital ratio, and we're pleased to have achieved that. And that's allowing us to pay the dividend. The promise we made to all of you, our shareholders, when we raised the capital is that we return to the dividend list as soon as the Board thought it was the prudent thing to do. This is my last opportunity to speak to all of you as Chief Executive of Hiscox. I've been privileged to lead this business for a very long time. I think it's important though that you all know that it has never been me alone. I had a wonderful partnership with Robert Hiscox and with Rob Childs, then with Richard Watson, Aki and Jo. And it's that team effort which has driven the growth of Hiscox. I leave now it in good hands. I'm delighted that Aki is succeeding me. I know that he's got an ownership mentality and will run the business for the long term. I can see at least a decade of opportunity ahead. In Jo, we have an underwriter who's got rigor, discipline and inspiration to ensure that constant course correction continues forever. And in the senior team, we have depth and breadth, as you're seeing today from Kevin and others who you don't know. So I'll leave Hiscox in good hands and entrust Aki and Joanne and the other senior team my wholehearted support, and I look forward to their continued success. So with that, we'll take any questions.

[Operator Instructions] Our first question comes from Will Hardcastle from UBS.

First one on the US DPD. Really helpful presentation. Just clearly, fantastic growth, delivery and opportunity. Just trying to get the current profitability of this relative to the rest of -- normally, given how fast the growth is, there's a differential there. I guess the focus clearly, in the near term, perhaps even medium term, is actually taking the opportunity. Just trying to understand. Over the next few years, that will be a bigger part of Retail. Should we be expecting a bit of a pressure on the Retail combined ratio as a result, albeit the higher absolute profit? And the second question is just thinking about the July loss activity. You've mentioned, on the U.K., flood losses. I guess you've also had some European flood losses. So any comment on that would be helpful. Just really thinking about perhaps retention levels. Or Jo, if you can provide that, that would be great.

Thank you very much. It's Bronek here. I will act as the sort of question coordinator between the different areas. But as those are both financial, the first question about how we expect DPD to deliver an impact on profit profile of Retail going forward and the second one is really about the financial impact of the floods, I'll hand those both to Aki.

Thank you, Bronek. I guess taking the second one first. I think it's straightforward. Of course, we've had the flood events in U.K. and Europe. We expect those to accumulate within a single retention, which will be about GBP 10 million, to cover those events. In terms of the DPD business, I guess in terms of the overall economics -- and now is not the time to kind of go into the detailed economics. I guess the comment I would make is firstly that we're writing business at attractive loss ratios. And for us, that is the key KPI that we're looking at. Expenses are elevated, and I would expect they will continue to be elevated for a little while yet because, as you've said, we are striving for growth. And given those attractive loss ratios and the secular change in consumer buying behavior that you just heard from Kevin and the fragmented nature of the market, the right thing for us to do is continue to pursue that growth. And we do expect the U.S. digital business to become a growing part of the overall Retail business. But as it grows, we will start to generate some efficiencies on the expense ratio as well, and we would expect to see that start to come down. We continue to expect our overall retail business to achieve -- to be within the 90% to 95% range by the end of 2023, so no change there.

Thank you, Aki.

Our next question comes from Kamran Hossain from RBC.

Two questions for me. But first of all, just, Bronek, good luck with kind of, I guess, the future, and thanks for everything over the last 10 years or so. The 2 questions I have are both on the retail presentation, which I thought was fantastic. The first question is just on the market side. When you kind of flagged the $16 billion, kind of where you think your real market -- total addressable market is versus the $130 billion, how much is excluded due to product offering versus risk appetite? And kind of which products are rolling out next? And how fast do you assume you will be able to kind of grow that substantially? And the second question is just could you give an indication on retention in DPD versus the rest of the Retail book? Retail has got a fantastic retention ratio so just interested in kind of whether there's any major differences and kind of if there are any kind of key drivers for that versus elsewhere in Retail.

Great. Thank you, Kamran, and thank you for your good wishes. Clearly, those are both to do with the digital partnership and direct: the first one about product and how we see that evolving; and the second one about retention levels. I'll hand that across to Kevin.

Thanks, Bronek. So let me take the second question first around retention. What I would say on that, Kamran, is that our retention rates are in line with market standards. So I'm obviously not going to give you a figure, but they're in line with the market, which is good. In terms of the gap between the $16 billion and the $130 billion, I mean, we're really excited about our plans over the coming years to expand from that $16 billion out towards $130 billion. And you're absolutely right that there is definitely opportunity to continue to round out and fill gaps in our current general liability and professional liability. But I think, by far, the 2 biggest opportunities are around continuing to expand the footprint of our BOP product. BOP is a significant market in its own right, tens of billions of dollars, and our current state and industry appetite is relatively small. So as we move towards the end of this year, we're already on the journey to actually expand that footprint to more of a national geography and more industries. So that's our own manufactured underwriting. And then, equally, the other opportunity is to look to work with other -- another carrier or carriers to do something on workers' comp. So our aspiration over time -- as well as the customer being able to buy a Hiscox professional liability, which is underwritten by us. Alongside that, they could buy a workers' comp from another carrier in our shop window. And the advantage to us is that that's a nice risk-free income stream for us, and it also improves the stickiness of customers overall as we get a bigger share of their wallet.

The other thing I'd add, which didn't really come up in the presentation, is the ability to roll out the business owners' product, the BOP product, is being facilitated by the fact that the new IT system has been rolled out now in Q3 and Q4, and that will give us more flexibility and more access to that broader product set. So the tech capability, we -- as you all know, we've invested in a lot over the last 3 or 4 years. This is where it begins to pay off for Kevin, running the business on a day-to-day, weekly basis.

Our next question comes from Andrew Ritchie of Autonomous.

First question, Aki, I was a bit confused on your commentary around expenses and the group expense ratio. I think you sort of tried to give us a normalized base. When I look at the detail of the expenses breakdown, I think it's Note 10 in the accounts, I'm surprised of some of the deflation year-on-year in some items. So I just -- just give us a sense. Is there some pent-up investment or salary increases or investment to occur in the second half? To just clarify exactly what you were saying on expenses would be useful. For Kevin, I'm just curious on your perception around the acquisition cost of business in DPD. I think the acquisition cost with some of the platforms is very similar to brokerage commission in levels. Some carriers have talked about inflation in that because there's quite a lot of competition to get on some of these platforms, even though they are proliferating. So do you see a lot of pressure on the sort of acquisition cost to get your -- or as it were on some of these platforms? Or maybe sort of comment on that will be useful. Final question. I guess we've been surprised over the years at sort of embedded cat load, especially in London Market, that we've been -- even when there's not been high-profile cats, there's been quite a lot of attritional type cat noise, especially in the property book. Aki, you talked about mid-80s is where you're writing new business. I just wondered if you could just give us some degree of confidence to what degree you've stress-tested that for a full examination of trending secondary losses, sort of a higher frequency of that type of event. It would be useful. And finally, congratulations, Bronek, on your retirement. Hopefully, we'll hear from you again before the end of the year. I hope your successor is as eloquent in his outlook and industry comments in the annual reports, which have always been a good read.

Thank you, Andrew. So let's sort of go through that. I might sort of actually ask Jo to do that last question around what we've done in the property portfolio. So first to Aki on some more color around group expenses, then Kevin. I guess I'll take one on the acquisition costs. I'd say there is a benefit being a first mover. We have been talking to a lot of these people for a long time, but Kevin will be able to sort of help you on that. And then to Jo for the property and what we've done to improve the underlying cat exposure in the book. So Aki?

Sure. Thank you, Bronek. I guess in terms of expenses, the key message there is that half year expense ratio, both acquisition and admin expenses, turned out at 44.9%, let's call it 45%. And I guess what I was trying to do there is compare it to a more normalized period, which has happened in 2019. 2020, as you can imagine, for a range of reasons, was exceptional. And the equivalent figure in 2019 was 46.5%. And hence, the comment that the expense control measures and the focus on expense that we have applied over the last 12 to 18 months is beginning to take effect. And I guess, Andrew, you're commenting on the figures that you've seen in Note 10, where certain elements of the costs are actually lower in absolute terms year-on-year, in particular wages and salaries and social security costs. They're purely driven by the fact that we have taken measures to moderate expenses, and we have seen certainly in our group function during the course of the early part of 2021, a number of roles have been reduced. And that's all part of our expense moderation measure as we go forward. So there isn't a pent-up investment. The only thing I would add to that is in the first half, our marketing expenditure, which isn't found here in the notes, has been moderated simply because, again, many of the countries we operate in have been in lockdown. I would expect marketing expenditure to increase in the second half.

Great. Kevin?

Yes. So great question. On the partnership side, you are absolutely right that we have been at the front of the line with over 100 partners now, digital partners. And we've been in the front of the line because of our first-mover status, the fact we've got a very progressive mindset and the fact that our capabilities have been ahead of the market in terms of ease of integration. So I haven't really felt any pressure there on acquisition costs because people really want to work with us. On the direct side, I mean, clearly, when we started out, we were heavily reliant on Google paid search. And again, you're right that those costs are going up every year. So over time, we have diversified our acquisition activity away from paid search. We still do some obviously, but more and more of what we acquire in the direct business is through natural search, where we spent over 10 years, obviously, building those rankings. And also now, let's not forget the investment Aki was talking about in terms of investment in the brand, where our brand awareness is over 50% now in the small business space, which really helps reduce acquisition costs. So feeling in a pretty good place there, Andrew.

I mean, I think, Andrew, the thing you shouldn't underestimate when we talk about brand, you can see we are involved in [ narrow costing ] for our target audiences. And through sponsorship things like major league baseball, we do get to the sort of traditional trades and professionals. That will help build something independent of sort of Google search. So Jo, should we turn then to the property question?

Thanks, Andrew, for the question. So yes, you're right. In recent years, we have seen an increase in our attritional claims in our London Market property portfolio. And this, coupled with an increased view of risk has led to significant remediation over the last few years. Particularly in our binder portfolio in London Market, we've seen a reduction in aggregates in certain areas. And obviously, that, coupled with portfolio action and also 3 years of rate rise, has now started to earn through the P&L and obviously, improving the profitability.

Great. Thank you, Jo.

Our next question comes from Freya Kong of Bank of America.

So you've touched on this briefly when you talked about [ further reinvesting ] in the Retail business, given how good the opportunity is right now. Why don't you provide an update on your plans this year and quantify any other investment you plan for this year? Are your brand-building campaigns and marketing expenses at DPD captured in the current underlying Retail combined ratio guidance of 97% to 98%? And secondly, on cyber, could you elaborate on the incentives you're giving customers to attend your training academy. Do you think growth and expansion might be needed to improve the quality of the book?

Great. In terms of the overinvestments in the brand, to me, it's always been a basis, Freya, of having those profits flowing through from the big-ticket business and then reinvesting some of those in retail. That's how we provide the initial investments to Kevin and the team to get up and running, and we've continued to support that going on. In terms of the impact of the guidance we provided for the year, we would expect to operate within that guidance for the balance of this year. And I'm sure we're going to next year when Aki takes over. He'll provide updated guidance and clarity about where we're overinvesting and what's core underlying investment. In terms of -- I don't know, Aki, whether you wanted to add anything to that. And then after that, we'll go to Jo about the cyber. Aki?

Bronek, I think you really captured the essence there, which is we do expect to operate within the existing guidance for this year. Our plans for building out the brand are factored into the 97% to 98%. But you're also seeing in the results today, the benefit of the strategy that's been operating for a pretty long time. And we're seeing the profits beginning to flow through from the big-ticket business, Hiscox London Market and Re & ILS. We are optimistic about the future. We've seen solid rating momentum in both of those businesses. And in fact, much of the business that we wrote in the second half of last year and into this year is yet to earn through over the course of the next 12 to 24 months. So we're optimistic about the flow and emergence of profits from the big ticket businesses. And with that creates the financial flexibility to think about how we might capture even more of the growth opportunity that you just heard from Kevin. And as we develop our plans on that, which we will be doing towards the back end of this year and early next year, we'll be able to reveal more of that as we go forward.