Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Very good to see you here in this different location for us. I'm very proud of our underwriting team, led by Joe, we had the best underwriting result in 5 years in what has been the fourth worst catastrophe year. So I think it's a really good result. And it's a great pleasure to be standing here with a new CEO, Aki, who you'll hear from a few minutes. I'm so pleased that the transaction has gone so well. And also, you'll hear, I think the passion and the clarity of vision from Aki later on. The future looks bright for us. It's also very satisfying to be paying a dividend. Anyway, I'm going to pass you now on to Aki.

Thank you, Rob, and good morning, everyone. It's really great to see all of you here. I'm sure you've had some navigation to do with the travel disruption and so on. So really pleased you all made the effort. So thank you very much. We're delighted to be holding this presentation in person for the first time in 2 years. Now of course, it's an honor and privilege to be standing here as the CEO of Hiscox, a wonderful business, full of talented and dedicated people. Now today's presentation is going to be slightly longer than normal. You'll hear from me on strategy and about how I think about our business. Following me will be Liz Breeze, our Interim CFO, who will explain our financial performance. And then finally, John Mizell, who will take us through our underwriting results and how we the best results in the last 5 years. Hiscox is a high-quality business with best-in-class assets and capabilities that position us to drive sustained and profitable growth for years to come. Over many years now, we have nurtured and honed where I'd like to call the Hiscox underwriting ecosystem. That is, of course, made up of underwriters, but it's also a range of other technical disciplines, including research and risk modeling, pricing, claims analytics, reserving. And it's a deep technical expertise that means we can successfully write the complex volatile risks at one end of the spectrum and develop algorithmic underwriting solutions for the simpler risks. Combined with this technical expertise, we've been investing in technology. Over the last few years, we invested over $300 million to re-platform our retail businesses, make them digital ready and providing faster and better decisions. Over the last 20 years, we've been investing to build a brand. We now have an internationally recognized brand with market-leading brand perception scores in our target markets. And we've been judiciously allocating capital to drive attractive shareholder returns. Now all of this is underpinned by the unique Hiscox culture and sense of purpose, that binds our businesses together and that binds our people together. Now this is a graphic that you've seen many times. And this represents a long-held strategy of balance, where we balance the greater volatility of our big-ticket businesses against the most stable returns from retail, where we've taken the excess profits from big ticket to fund the expansion of retail. And it's worked really well. And you can see the balance has evolved over time, and that will continue to evolve. The concept of balance remains incredibly important to us. But as our markets evolve and as our customer expectations change, how we think about our business will change. And in this next phase of the story for Hiscox, our focus and our ambition is to build more balanced portfolios in each of our segments and manage the overall group volatility. So turning to how I think about our business. Firstly, we are building on strong foundations with two important changes: Firstly, I think about our business in four segments rather than two. So as you can see here, it's Retail digital, Retail traditional, RE & ILS and London Market. And secondly, our portfolio of businesses is underpinned by a set of group-wide core capabilities and attributes, which you can see in the circle in the center. So just a few words on each of these segments. Now Retail digital. This is where we see a more significant long-term growth opportunity. This is where we are growing fast into large and underpenetrated markets using new generation technologies, data analytics that enable us to distribute, underwrite and connect to our partners and customers. But this is not just about deploying fancy new technology because we're underwriters. We're underwriting house. So technical rigor and risk management discipline is a basic prerequisite. Technology for us is an enabler. It's enabling us to access new markets in new ways and drive faster and better decisions. Retail traditional. This is the rest of our retail business, where we interact with our broker partners through non-digital means. We've built this business by specializing attractive and growing niches by developing an intimate understanding of our customers by using our superior risk selection capabilities and providing first-class customer service. London Market. This is part of the heritage. This is where we write up more volatile, complex risks through the Lloyd's syndicate. This business gives us the opportunity for cyclical growth. And over the last couple of years, we've used our expertise and the improving market conditions to build more balance into the portfolio. And then finally, RE & ILS. This is where we're a short-term reinsurance specialist, short tailwind. We've been using the favorable market conditions to rebalance the portfolio back towards our core areas of expertise. Now all four of these businesses, all this segments are underpinned by 5 core group-wide capabilities. Now traditionally, the underwriting excellence and capital management and capital capabilities have come from our big-ticket businesses. And now more recently, the expertise in new generation technologies, data analytics and auto underwriting has come from retail and driven growth and development across the group. Now all of this, once again, is underpinned by our people and our culture. Our culture that rewards innovation, a culture that encourages a long-term ownership mentality. Our culture is a key source of strength and a competitive advantage. And in executing our strategy, I will be using 4 underwriting performance metrics to manage the business, to drive progress and to measure success. Now to achieve profitable growth at attractive ROEs we have to focus on our customers, develop a deep, meaningful understanding of their needs and staying true to our promise. And at the same time, create an environment where our people can thrive, whilst we bring in new capabilities and new people with fresh perspectives to accelerate our journey towards our ambition. In terms of financial metrics, our focus is on both growth and returns. We will drive profitable growth in each of our business segments. We will take the opportunities where we see them. And across our Retail Digital platforms, we are focused on capturing the once-in-a-generation growth opportunity in small and micro businesses. Now underlying all of this is our desire to build the business sustainably, whether it's reacting as climate risk experts or investing in sustainable assets or driving the diversity agenda right across our business, or indeed giving back to the communities in which we operate. We will lead on those aspects of the ESG agenda, where we know we can make a difference. So just turning to each of these businesses for a moment to provide a bit more color. So retail digital is a new terminology. It's slightly broader than direct digital partnerships, so DPD, a term that you're familiar with. So Retail Digital encompasses all of our digitally distributed and underwritten business, including with brokers. And there's quite a bit of innovation going on in that space at the moment. And as you know, in this space, in this retail digital space, we're facing into huge markets that are underpenetrated and underserved. Across our retail footprint, we have 50 million small and micro businesses, of which 20 million are currently in our target customer base. And as our products expand, our target customer base will also increase. And as you can see on the right here, we're merely scrapping the surface of the opportunity. These markets are large, and they're growing leading capabilities and our business are growing fast. Now at the heart of our retail digital proposition is what we call our digital ecosystem made up of a series of market-leading capabilities. Brand, I've mentioned earlier, we have, as I mentioned earlier, market-leading brand perception scores in the small and micro business segment. Through our underwriting excellence and expertise, we've developed algorithms, which means that the business flowing through this channel, almost 100% of it is auto underwritten. We've written millions of policies -- we've been at this for many years. We've written millions of policies, price millions of policies, and that data informs our risk selection, and we have an established API capability that means we can connect to our partners in pretty short order. This is a clear example of the Hiscox's technical excellence, our underwriting capability, combined with technology, providing it with a powerful competitive advantage. Turning to Retail traditional. As I said, this is the rest of retail, where we interact with our broker partners through non-digital means. We specialize in attractive and growing niches. And just to pick one out here. One of our fast-growing issues in the commercial lines is what we call emerging professions. And typically, we're providing professional indemnity insurance here. We've seen tremendous growth in this segment in all 3 of those geographies that you can see. As we've seen a significant increase in management consultants, IT consultants, personal trainers and other such professions. And as those -- as new professions continue to emerge, we will continue to innovate and expand our risk appetite. The retail traditional business currently comprises between 70% and 75% of the total retail business. So it continues to be the backbone of retail and will continue to be so for a number of years to come. We will continue to invest and achieve growth in our retail traditional business and reiteration will provide the majority of our retail profit for the next 5 years. Turning to the London Market. In London market, we've seen where I would characterize as a quiet revolution over the last couple of years. We've used the favorable market conditions to build out a more balanced portfolio. We've taken more control through being a lead market as opposed to a follow, all against a backdrop of improving market conditions. And Jo will take you into a lot more detail on how we've transformed the portfolio. But suffice to say, the London Market business is now more balanced, more controlled and better priced and well positioned to drive attractive returns through the cycle. Now under Aki's leadership, -- the London Market business has been innovating. They've taken a leaf out of the retail strategy using those same concepts and capabilities and developed a digital distribution and underwriting system. We call it FloodPlus. So this was launched in 2016. And through this platform, we provide flood cover to residential property owners in the U.S., across the whole of the U.S. as an alternative to the National Flood Insurance Program. Through the FloodPlus API, our cover holders in the U.S. are able to seamlessly connect to our platform. The platform, which is a proprietary platform, interrogates multiple internal and external data sources and provide a bindable price in real time. It also enables us to collect -- or sorry, it also enables us to control aggregate by Flibzone and adjust pricing in real time. Another clear example of Hiscox's underwriting excellence through the use of technology being codified, enabling us to apply more control and to scale up efficiently. Now on this platform, over the last 3 years, we've seen growth at a CAGR of 44%. And in 2021, we booked revenues of around $100 million. Now this is still nascent. More products are being added to the portfolio. We got to a platform rather than the platform is being built out. In 2022, we expect the platform to book probably around $200 million, even double. So finally, reinsurance and ILS. As I mentioned earlier, this is where we are a short-tail specialist reinsurer with market-leading research capabilities and the third-party capital management platform. And it's through our deep expertise and the underwriting ecosystem, we were able to effectively and efficiently match risk to capital. And with the combination of the portfolio actions that we've taken over the last couple of years, rebalancing back to our core areas of expertise, that combined with a third-party capital strategy means we're well positioned to drive attractive returns over the next few years. Indeed, the third-party capital strategy is now beginning to provide meaningful fee income. And in 2021, we generated $40 million of net fee income in the RE & ILS segment. Now of course, central and absolutely critical to successfully executing our strategy and driving profitable growth is my leadership team. And they're all here today. They're on the front row, if you're interested. And they'll be available for a brief chatter discussion afterwards. And of course, we're really excited about inviting -- about welcoming 2 new members to the team later on this year. Paul Cooper will be joining as the group CFO in the middle of the year. And then John Dye will be joining as the U.K. CEO in September. So our strategy and vision for the business is clear, and our direction is set. So a key role for the leadership team is to clear the path so our people can execute effectively. Now as well as the leadership team, we are blessed with superb incumbent capability, a broad-based talent -- sorry, a broad and diverse talent base, bringing wide-ranging expertise and perspectives. And I hope what this slide starts to do is just bring to life what I mean when I talk about the bench strength and the technical expertise that we have across the business. And what you can also see here is that almost 1/3 of our senior leaders have over 10 years of experience with Hiscox. And we complement that deep experience bench with bringing in new capability to bring in fresh perspectives, which you can see on the right-hand side. So fantastic new talent that we brought in over the last year. I'm only sorry because of the available space on this slide that we can showcase more of our global talent. So to summarize how I see our priorities for the next few years. We will drive strong and profitable growth across retail. We will capture the once-in-a-generation opportunity in small and micro businesses. We will drive sustainable returns across each of our business segments. We'll continue to build on our market-leading capabilities through investing in people and in technology. This will all be underpinned by the unique Hiscox culture and set of purpose and our desire to build a business sustainably. Now I'll hand over to Liz.

Thank you, Aki, and good morning, everybody. It's a real privilege to present to you today. My name is Liz Breeze, and I'm the interim CFO until Cooper joins later this year. It's the first time that many of you are meeting me, but I've spent the last 10 years working at Hiscox across a range of roles. I started in group. I did a U.K. retail finance role and most recently as the CFO of our RE & ILS division. Now turning to our results. The group delivered a strong 2021 result in what was a heightened year of natural catastrophe activity. This is testament not just to the balanced business we've created with the balanced portfolios in each of our business units. Particularly pleasing is the group underwriting profit of $215.6 million, the strongest in 5 years, despite 2021 widely being reported as the fourth largest catastrophe year. All divisions have generated an operating profit. This isn't luck, but the direct result of consistent underwriting actions across the group over the last 4 years, which are now bearing fruit. We've also put our capital to work and taken advantage of growth where we see we have a right to win, such as our globally traded lines in Hiscox London Market and small commercial business insurance in our U.S. direct and partnerships business. Our balance sheet remains strong. We continue to be prudently reserved against COVID-19, where our net claims estimates have not changed materially. We've been able to generate surplus capital and absorb the strengthening of rules in our BMA regulatory capital requirements. We've increased our underwriting exposure and we have recommenced the dividend, and I'm pleased to announce a $0.23 per share dividend subject to shareholder approval. Okay. I will now take you through each of the different divisions in a bit more detail, starting off with Hiscox Retail. Hiscox Retail gross premium written grew 5% to $2.29 billion or 1.5% in constant currency, with the business benefiting from positive rate momentum in all geographies. This includes the impact of over $100 million of larger U.S. retail broker business exited in 2021. The underlying growth is good at 6.8% in constant currency. Our direct and partnerships business delivered $694 million of gross premium, up 18.2% in prior year in constant currency and now serves over 910,000 customers globally. And as you heard from Mackie earlier, we see this as a key opportunity for future structural growth. The business achieved an underlying combined ratio of 97.3%, a 2.6 point improvement on prior year. This excludes the impact of the loss portfolio transfer completed during the first half of the year and COVID-19 net losses. Portfolio re-underwriting action and profitable growth all contributed as did a largely benign non-catastrophe loss environment in our U.K. and European business units. This keeps us on track to deliver guidance of a 90% to 95% combined ratio in 2023. Now a bit more color on the individual markets. The U.K. business delivered a resilient performance with gross premium written up 9.9% or 2.9% on a constant currency basis. The commercial business showed strong growth of 9.9% in constant currency, improvements coming through from rate and strong retention. In personal lines, which includes our Art and Private Clients and direct home book, we have taken deliberate action to rebalance the portfolio and non-renew some of the higher commission business, but ultimately, this action should improve returns. Hiscox Europe delivered another strong top line performance, growing gross premium written by 9.8% in constant currency, with particularly strong performance in Germany, Spain and Benelux. In Hiscox USA, we have now exited over $100 million of large cyber stand-alone general liability and other broker channel business, which is no longer within appetite. So excluding the effect of course correction actions in 2021, Hiscox USA grew its underlying portfolio by 9.2%. Our U.S. digital partnerships and direct business continued to deliver an excellent performance with top line growth of 25.5% to $424 million. Looking ahead to 2022, in the second half of the year, we will replatform this business onto a new digital platform. During this period, we do expect a deliberate slowdown of growth, meaning the full year -- for the full year, the direct and partnerships business is expected to trend between 15% to 20%. Moving on to our Hiscox London Market business. They delivered a strong performance in 2021 despite the above mean industry natural catastrophe losses. Gross premium written grew by 5.6% to $1.2 billion as we continue to corporate our property binder portfolios and build a more balanced and resilient portfolio to whether any future soft markets, which Jo is going to tell you more about shortly. Importantly, net premiums written grew by 9.5%, 2x faster than top line as the strong rate momentum made retaining more premium attractive, and we were able to put more capital to work. Our investment in digital innovation in London market is paying off, as you heard from Aki earlier, and we were able to achieve 46.5% growth writing in excess of $100 million of premium through this platform. Our lending market business also achieved a very strong combined ratio for the second year in a row at 89.1% as we continue to feel the benefits of the 60% cumulative rate increase since 2017, alongside active portfolio rebalancing. This was in spite of $68 million of natural catastrophe losses in 2021, mainly from Hurricanes Ida, the U.S. tornadoes and Storm [indiscernible]. Finally, Hiscox and RE & ILS. Our RE & ILS business had an excellent performance in 2021 despite the net natural catastrophe losses of $122 million, an exceptional combined ratio of 68% was aided by reserve releases from both natural catastrophe and other noncatastrophe lines supplemented by benign in-year loss experience from our specialty reinsurance business. Net premium written grew by 42.3%, a consequence of modest increase in net exposure for catastrophe lines, rate increases and a different mix of reinsurance protection. This allowed us to take advantage of the hardening market in lines where we consider pricing to be adequate. Our third-party capital management strategy continues to work well for our business, delivering capital-light fee income of $40 million. We've got a good track record with our investors, and this has allowed us to raise $217 million of AUM at this year's [ 1 1 ] renewal and this pipeline is looking strong for the rest of the year. This takes total ILS AUM to $1.6 billion for our managed ILS funds that we continue to see business to. Moving on to our investment performance. The investment return for the full year was $51 million, representing a return of 0.7% on our invested assets. So we started 2021 with a bond portfolio yield to maturity of 0.4% and therefore, modest expectations of returns for the year. Through the second half of 2021, we witnessed a rebound in global economic activity and inflationary pressures when interest rates started to rise sooner than expected. As a consequence, bond yields have increased, generating temporary mark-to-market losses in our bond portfolio. Our diversified risk asset portfolio of equities and investment funds performed well, generating returns of 11.6%. Now looking at '22, central banks have reaffirmed their intention to tighten monetary policy. Government bond yields have shifted sharply higher at shorter maturities. And there has been a consequential result of further temporary mark-to-market losses on our short-dated bond portfolios. But this will mean a material dent in our 2022 investment result. But the opportunity for 2023 is great, and reinvestment opportunities are there, and we expect the returns to continue. Now I look at our balance sheet, where reserve resilience continues. We continue to take a robust approach to reserving, holding $372 million of margin, which is 11.7% above the actuarial best estimate. This chart shows the loss experience by accident year, and you can see a downward trend on every single one of those lines. This means all years experienced favorable development in 2021. This resulted in $149 million of reserve releases or 3.7% of our opening balance of net reserves. The remaining development is broadly spread across business lines with all operating segments seeing favorable development. You will hear from Joe shortly how active underwriting portfolio management has contributed to our strong results. We have been equally focused on balance sheet management. In 2021, we concluded two loss portfolio transactions, one covering the majority of the Hiscox USA Surplus Lines broker business for 2019 and prior years and the other covering the runoff of the Hiscox RE healthcare book. Yesterday, we added a further transaction to our balance sheet, buying protection for our casualty reinsurance book, covering an additional $95 million of gross reserves. Of the 2019 net reserves we held at year-end, 18% of those are now covered by a protection from adverse event deterioration. And when you include yesterday's transaction -- sorry, including yesterday's transaction, and this will give us protection for up to a 1-in-200-year risk scenario. These deals not only strengthen our balance sheet but limit downside profit volatility from the back book of reserves. Finally, let's look at capital. As at the end of 2021, we are robustly capitalized at 200% of the BSCR. The balance sheet actions we took by purchasing 2 LPTs during 2021, added 13 percentage points, more than offsetting the strengthening of the calculation rules set by the BMA, our group financial regulator. 2021 was the final year of rule strengthening, which has added 34 percentage points over the last 4 years when comparing our 2021 position on a like-for-like basis. Our business is strongly capital-generative, adding 17 percentage points net of the interim dividend to our 2020 position. This is well in excess of the extra capital we have consumed to increase our underwriting exposure in 2021. Under the BSCR rules, the final proposed dividend is not captured in the year-end position. So when factoring in the proposed final dividend of $0.23 per share, the year-end position will reduce by 6 percentage points. This leaves us comfortably positioned to take advantage of further growth opportunities and be able to withstand severe downside with scenarios without compromising our S&P A rating. So I'll now take you through a couple of key external changes that will impact our business going forward. Firstly, in December 2021, S&P published a proposal detailing significant changes to their model used to assess capital adequacy. We expect these changes to be introduced during 2022. The precise model has not yet been released, but we've done some modeling internally to anticipate the potential implications. Our initial view is that the outcome for us will be overall positive as the model will recognize for the first time, the benefit of diversification in our portfolio across lines. Secondly, from 2023, we will be reporting our results to the market under the new IFRS 17 accounting standards. Ultimately, these changes will not impact the underlying economics of our business. However, they will change how we talk about performance and the key measures which we use to run our business. Consequently, we will be looking to help educate the market and share insights on how this will change performance of you in the second half of 2022. Finally, the likely emergence of a global minimum tax. At the end of December, the OECD published a set of model rules, which are intended to provide a baseline for domestic legislation globally for all countries adopting the global minimum tax under Pillar 2 of the base erosion and profit shifting proposals, or BEPS. The U.K. and U.S. are all in the process of drafting legislation. So this regime is ready for a phased implementation in 2023. So what this means is that very likely Hiscox will be subject to a global minimum tax in the next 3 to 4 years. And the likely impact would be an increase to the effective tax rate on a steady-state basis to around 15% or above. I'm now going to hand you over to Jo, who will take you through the underwriting performance in more detail.

Thank you, Liz, and good morning, everybody. So given the market conditions, we had a plan to grow where we see opportunity, and we've done this. Across the portfolio, we've increased our gross written premium by 6% on a 100% basis. Our plan was to retain more net in big ticket, deploy more of our capital in the favorable market. And you can see on this slide, and RE & ILS has grown net written premium 44% and loan to market 10% in comparison to into 9% and 5% growth respectively. In retail, as planned, we have successfully exited over $100 million of U.S. business as we have refocused our U.S. retail portfolio to small revenue catalogs. Excluding these exits, we've seen good underlying growth of over 6%, with growth in our digitally traded business at 18% with U.S. digital and partnership at 25.5%. So whilst the favorable market, active portfolio management remains key. The refocus of our U.S. business, cyber remediation across the portfolio, in addition to our Decile 10 has progressed really well I'm pleased to say we're improving our underwriting margins year-on-year. As you've also heard from Liz, active portfolio management is not just on the go-forward portfolio. We've successfully completed three legacy reinsurance transactions. These free up the reduced reserve volatility, they free up capital and also management time to focus on the go-forward opportunity. Rate momentum continues, and we can see this on the next slide. So this slide is looking at our rate momentum in our big ticket lines of reinsurance and earn to market, and it's satisfying to see an upward trajectory. In London Market, the blue line, continued its dramatic rise, rates are up 13% overall this year, a compound rate growth of 60% since 2017. Now early rate rise has offset our increased relative view of risk, but the rest significantly improving the underwriting margin. Whilst the overall momentum continues, lines are hardened at different rates. So cyber as an example, has hardened significantly over recent months while rates in casualty still continuing, but at a slower pace as we benefited from dramatic rises earlier in the cycle. Overall, our rate advocacy in London Market remains solid. The red line are reinsurance rate has also improved in this line with an average increase of 8% across the portfolio. And that's a cumulative rate rise of 35% since 2017. So similar to London Market, early rate rise has offset an increased relative risk. But whilst the rest hasn't contributed to the underwriting margin improvement. We do, however, view additional rate necessary to see satisfactory returns through the cycle. On next slide, retail. So retail is much less cyclical with regard to pricing. And on the whole, consistent rates deliver margins throughout the cycle, but we are achieving rate across all business units. The U.S., our green line, is up further 6% this year, and that's 15% in total since 2018. U.K. up 7%, 9% since 2018 and Europe up 4%, but we've seen accelerated momentum at [ 1 1 ]. As retail is a collection of about 50 different portfolios across 10 different geographies it will be no surprise that the underlying data is far more nuanced. Rates have been consistently adequate in Europe and Europe and in U.K. and Europe, driving good returns through the cycle and course correction and cumulative rate is now drive advocacy in the U.S. in our go-forward lines. So all in all, another year of positive rate rise. But how do they fare against the hot topic of the increasing claim inflation? Are these rates enough? So there are many interesting factors with effect of loss costs on both business we are yet to write and also claims we yet to pay. Taking these into account, though, is the part of our normal planning, pricing, capital and reserve in cycle. So as an example, cost and wage inflation. So this is just simply the same claim cost in more tomorrow than it did yesterday due to increases in maybe construction or materials or labor costs. So how do we mitigate? Well, we mitigate by reflecting the actual underwriting exposures, the exposure that our rates are applied to, things like sums insured, wages, turnovers. If I use property as an example, so we may ensure a property for a rebuild of $1 million and use a rate of 0.2%, which gives us a premium of $2,000. The same build in a different inflationary environment could cost us $1.1 million for rebuild. Of course, if we left some insured for $1 million, the policyholder would be under insurers. So we utilize what we call index linking to increase the sum insured to say $1.1 million. The rate actually stayed flat at 0.2%, but now our premium is $2,200. So a 10% uplift on the same risk to counter the increased cost of a claim. So other inflation pressures are less about the same claim costing more and more about an increased number of claims. So as an example, if I take climate, is climate change increasing the frequency of events in the future compared to the past, whether that be physical on our property portfolio or litigation on our casualty. And here, it's really about understanding what we call the future risk. We call it the Hiscox view of risk. And we invest heavily in this across the group. We utilize experts. We buy external models. We augment this with our own data and research to reflect the evolving nature of these perils. It's fair to say our view of climate risk has increased. And over recent years, leading us to an increased frequency of the US hurricane, Japanese typhoon and California wildfire. And once we update our view of risk, obviously, then we need to reflect that in our underwriting. We do that with regard to changes in our underwriting appetite or maybe terms and conditions. So you can see, reflecting inflation is really part of our normal portfolio management, and we have many tools in our armory to take this into account in addition to the increase in rates that you've seen on the previous slides. With these actions and rates, I believe we're achieving premium growth in excess of our inflation expectations. So moving on to my thoughts by segment. In London Market, we've not just leaned into a hardening market, the results are a combination of risk plus many years of hard work. When I look at the portfolio, it's one of balance, quality and well positioned for control. In the top half of the slide, you can see that the quality of our portfolio has improved. In aggregate, we're growing our premium whilst reducing exposure. Since 2019, we have reduced our open market exposure by 11% on our line side, but we grew our premium by 19%, more premium for less risk. We are near completion of our remediation of our property binder portfolios, and we've reduced our premium by 26% for exposure by 39%, reducing our exposure to Florida wind by 11% in households and 34% in commercial. And it's not just the underwriting results and quality of the portfolio that has improved. As Aki mentioned, you can see in the bottom half of the slide, we are positioning our portfolio to take control in a changing market. We now lead around 70%, which is a 30% more uplift since 2017. In delegated underwriting authority, we have less than 10%. And this, together with our investment in data and analytics, will be key in making sure that we are in control of rating and term conditions in a changing market. For RE & ILS, it's a case where we focus, drive rate and relevance. In the top half of the slide, you can see how we have repositioned and refocused our portfolio over the last 5 years. Since 2016, RE & ILS has exited or nonrenewed $378 million of nonprofitable business. We've exited the longer-tail classes of healthcare and casualty and corrected our aggregate product. In addition, as you heard, we've purchased significant legacy reinsurance on that long-term line to limit the volatility, free up capital and also the management time for the go-forward opportunity. On the top right, the rate continues to be driven through all segments, and you can see this in the pie with momentum continuing again at [ 1 1 ]. And similarly to London Market, you can see in the bottom half of the slide how we are well positioned for the future. Utilizing our third-party capacity strategy through ILS and quota share for both relevance and also capital efficient fee income. And again, all underpinned by our investment in data, analytics and view of risk. And retail. Retail, we're looking to accelerate the small business with automated underwriting driving consistency. Across U.K., Europe and U.S., we now have well over 90% of our commercial customers that, by our definition, are nano and micro. And this means they have less than 1 million dollars, pounds or euros in turnover. These customers are offered by insurance for the first time and they tend to buy smaller limits. Whilst it's really difficult to see in the slide because it's now such a small segment, we have called out the blue. And you can see that our reduction in the larger customers has been significant between 2020 and 2021. There's been a 78% reduction in what we call mega customers as we have refocused our U.S. portfolio and also remediated our cyber. You can see in the bottom part of the slide, and you've heard from Aki, our progress on automated underwriting. And whilst over 90% of the digital business is automatically underwritten, there's also been some really good progress in our broker business. And now across retail and commercial, about 50% of all of our risks are automated underwritten. So why is this important? Well, for a variety of things. First, it drives consistent results. The second, it allows us to do response at scale. And all of this is in addition to the efficiencies that, of course, automatically underwriting our portfolio brings. So if I look forward to 2022, our corrective action is largely behind us. You may recall this slide from last year when about 4% was within that gray. We're now at just 1%, which is the finish of our -- the completion of our small business acceleration in the U.S. and the completion of our cyber aviation. The quality of our portfolio has improved and that's been demonstrated in our underwriting results. We are well positioned across all of our segments to capitalize on the opportunities in front of us. And all of this is underpinned by investments in data and analytics and active portfolio management. I will now hand you back to Aki.

Thank you, Jo. So to conclude, the world remains somewhat uncertain and unpredictable place. But notwithstanding that, the outlook for our business remains strong. As you've just heard, for our big ticket businesses, we're now more balanced, more controlled and better priced and well positioned to drive strong profit and take advantage of cyclical growth opportunities. Our retail business will return to strong growth in 2022 in the middle of -- in the middle of the 5% to 15% range and our portfolio re-underwriting actions and operating improvements are working. And we're confident of reaching the 90% to 95% combined ratio by -- or in 2023. The balance sheet is strong, providing us with flexibility to invest in attractive opportunities as they emerge. So I wanted to leave you with some final thoughts. So I joined the business in 2016 as a CFO. And I joined the business because of the people that I met, because of the culture that I was exposed to. I was joining a business that was close to the start of the journey with a long and exciting road ahead. And I was joining a bunch of people who wanted to transform insurance and how it was done. Now in 2022, I am standing here as CEO, I feel exactly the same. We have a long and exciting road ahead of us. Thank you for listening. We'll now take questions. Now for the benefit of people who have dialed in on the audio, could you please state your name and firm and just trying to restrict it to two questions at the most.

[Operator Instructions]

It's Kamran Hossain from JPMorgan. The first question is there's kind of a running theme or me through the presentation, which is the reduction in volatility and wanting to make the business produce more predictable returns, especially compared to the last few years. Does it still make sense to be in reinsurance, I guess, with that kind of big kind of picture strategic question. And then the second question is just around, I guess, the 60% rate increases in London Market in the last few years. This is -- it's a macro change and everyone has had price increases, but where do you think that 60% has gone? Because whilst margins are improving, some of that has disappeared. So I'm just interested in kind of thoughts on that.

Thank you, Kamran. So in terms of the 60% rate increase and where it's gone, Jo, can you take that? And I'll address the point of volatility first. You're right. The ambition for our business is to produce somewhat more consistent returns and reduce overall volatility, but not to eliminate volatility. The business that we write is inherently volatile. We are building more balanced portfolios in each of the segments. Each of our businesses is a critical and key driver of our strategy and the 4 portfolio that I spoke about earlier, make us stronger and give us optionality in various parts of the insurance market. So it's not about eliminating volatility. It's managing that volatility. We should expect more consistent results from us in the future, but there will still be volatility.

Yes, with regard to the 60% rate increase that we've seen, I think, as you can imagine, it's far more nuanced underneath that aggregate headline figure. As we've seen through the cycle, things have hardened at really different times. So the early rate rises were our casualty portfolio, followed by property and more latterly, our specialty. So as an example, I mentioned cyber significantly hardened over the last 6 months. Where it's gone? Some of it is definitely offset an increased view of risk. I think as I mentioned, we do foresee an increased view of risk during that period. And some of that definitely offset the increased view of risk. But now since then, more latterly, it is significantly improving margins that you can see in the London Market. Obviously, from 2017 when we were at sort of the depth of the soft cycle, those rate increases plus the other feature, which is the tightening of terms and conditions, often in a soft market, we get leasing conditions in a hardened market we tighten. So those two things together is significantly improving the results that you see on the revenue. And obviously, from an underwriting year we had a very costly CAT year this year, 4 costly CAT years but even notwithstanding all of that, we've got good underwriting margin returns in our London Market portfolio.

This is Ashik Musaddi from Morgan Stanley. Just a couple of questions. I mean if I look at the retail rate change, it's about 5%, and you're still 2.5% away from your guidance of 90% to 95%. So how is the rate change evolving in 2022 and 2023 that will feed into that 90% to 95%? What I'm trying to understand is what's the possibility that you do 90% to 95% in 2022? What has to happen for you to deliver that? So that's the first question. And secondly, if I think about the capital you're generating in 2021, you said 17 points were generated, 6 points were deployed in growth, but then there is another 6 points that went out to us dividend basically. So 12 points of use of capital. Is this a good run rate to use going forward, i.e., you're generating net-net 4, 5 points of capital every year? Or am I missing anything in that puzzle?

So in terms of the retail guidance, I'll take that. And Liz, do you want to take the capital? So in terms of the path to getting to 90% to 95%, that is primarily driven by operational improvements. So you'll recall the many conversations we've had over the last 2 years and also buy it through the re-underwriting of the portfolio. Those actions are working and progressing well. So we're confident of reaching the 90% to 95% in 2023. There is no further guidance at the moment. We're pleased with the rate that we're getting. But for the moment, I should [indiscernible] 95% in 2022.

And then from a capital perspective, we were pleased to finish the year really strongly capitalized at 200% of our BSCR requirements. I would say that, that is a strong position for us to move forward from going into the future. We don't target a specific percentage and you could see it fluctuate from there. So in terms of where we decide to invest in the future in terms of taking different exposures. We're in a great place to build from, but no further guidance in that area.

Ian Pearce, Credit Suisse. I just have one question on the retail business firstly. You talked about the digitally distributed retail business, not contributing significantly to profits for the next 5 years. So could you just talk about the different profitability trends between the traditional and the digital business retail, if breakeven is the right assumption for the next 5 years? And then just following on from that, what sort of investment assumptions should we be assuming in the retail digital business in order to assume a breakeven for that period?

So in terms of the profitability of the additional digital distributed business, we're now approaching $700 million in terms of top line revenue and business makes money. So the way we would think about it and the way we think about it is primarily in terms of loss ratios. The overall business generates attractive loss ratio, loss ratios within our range of tolerance. The reason that the profitability -- aggregate profitability and over the next 5 years, it will not be the major provider, firstly, it's a much smaller part of the business. It's roughly 20%, 25% as opposed to 70% to 75%. And secondly, we have an opportunity point to capture growth, any of this profitable growth. So we are running the business at a slightly higher expense ratio. That comes in the form of investment in technology and in marketing, but it is below 100%. It makes money.

It's [indiscernible]. I've got a couple of questions for me. First of all, you talked about reducing volatility looking forward. Just wondering whether or not that could apply to the investment portfolio given the mark-to-market losses last year? And the second question I had, just really your view on the outlook for reinsurance rates, you talk about additional rate being required. Will you look to reduce your reinsurance portfolio if that rate doesn't start coming through in.

Okay, Barry. So in terms of outlook for reinsurance rates, Jo, can you take that? In terms of the volatility on the investment portfolio, it's purely accounting. It's not real. So what you see at the moment is interest rates going up and the value of the bond portfolio declines. That's not something we can manage. We have to follow the accounting conventions. And the vast majority of our funds in our in-bond portfolios. What you will see is post implementation of IFRS 17 is overall P&L volatility from interest rate changes should moderate because reserves will also be discounted.

Yes. In terms of the reinsurance rates, I mean, as I said, we've refocused our portfolio. We've relooked at where we're attaching. And actually, our view is, at the moment, our rates are adequate and is driving the margin. My question was more about go forward. So if we want to generate returns through the cycle, our view is that we need additional rate. Now that momentum continues at [ 1 1 ], that momentum continues. And it is really to match when I also talked about with that increasing view of risk. When I look back over the last sort of 3, 4 years, our risk has increased. Our view of risk prices have increased. But when I look forward, climate climate that trajectory is to continue. So my reference is really about the go forward, making sure that there's additional rates to produce those returns through the cycle.

Ivan Bokhmat from Barclays. I have a couple of questions. The first one is on inflation. And specifically, I wanted to drill down on retail, so I was just wondering how you think about the rate of claims inflation at the moment across your portfolio? I think last year, you got 5% rate increase. You think inflation is running above that. And how you factor that in the midpoint of the growth range for next year. So that will be the first question. How easy it is to pass on the cost inflation to customers? And the second one would just be on the developing conflict in Russia and Ukraine. Maybe you could put some numbers around your exposures. And specifically, I wanted to perhaps draw a question to your cyber exposure. As usual, in your presentation, you've got the range of between $100 million to $600 million of losses. What scenarios does either end imply?

So that's a question on inflation and on the conflict in Ukraine. I think Jo, can you cover those two things?

Yes. So yes, with regard to inflation, I think it's specifically on retail, as I laid out in the presentation, we obviously take into account ordinarily in terms of our planning process. And I'd say in 2022, we've really doubled our expectation for inflation. So we've taken that into account and of course, reflected that in our underwriting and our pricing. I think there's two things I'd say and maybe throw out 1 of them is, yes, rates are important. And you can see that the rates we're getting in our retail. But more important is to reflect the underwriting exposures. So I gave the example of the building with the sum insured, your rate can remain flat, if you reflected the fact that, that building is going to cost more tomorrow than it did yesterday to repair, then of course, you need to inflate those funds insured to make sure that you get the paid the premium to that. So even though rates might stay flat, premiums in that instance, would go up. So those premiums are being reflected and passed back on. And it's not just on the sums and shared but clearly, things like turnover, was rolls, et cetera. Again, that's an area that we would look to make sure that we're keeping accurate to reflect those -- any sort of increase in costs. I think in terms of the second question, I mean, obviously, our thoughts are first and foremost, with those that are affected. With regard to ourselves, we, of course, are keeping a close eye on the development. I think we're really thinking of our potential exposures in 3 areas: The first is what I would call sort of direct exposure. You might see that manifest itself in our portfolio, in our Terra and political violence portfolio. What I would say there is we're not expecting a disproportionate loss and we're a significant buyer of reinsurance, both quota share and aggregate [indiscernible]. Other areas that you may expect some loss, but not in our portfolio would be political risk. That's a portfolio that's in runoff for us. Aviation hall, again, that's a portfolio that's in runoff for us and obviously on the trade credit side, we have very minimal negligible exposure in that area. Other direct exposures, not a financial loss, but under our K&R portfolio, we've done -- we, with our partner, control risk, been able to assist our insureds, as I say, not a financial loss, but we've been able to evacuate those that have obviously in the previous weeks. So that's what I'm saying terms of the direct -- across the rest of the portfolio, say minimal negligible. We then look at the sort of the second part that we're thinking about, and that's really around sanctions and that really would affect our premium. Again, we've looked across our whole portfolio compared to our gross in premium, it is a tiny proportion that would be subject to the sanctions albeit really small, the biggest area would be in our London Market, and we're clearly working with Lloyd's on that in terms of sanctions. Again, across the rest of the portfolio, it's pretty negligible volumes in terms of premium income. And then the third part is what we call that sort of indirect exposure. So cyber being the obvious one, retaliation and how could that affect our portfolio. I think on cyber, it really is too early to be definitive or speculate and how this could emerge. I'd say there's a couple of things, one, we a variety of war exclusion and infrastructure exclusions across our portfolios. But of course, it will come to how this unfolds, obviously, the attribution. So that's sort of the exposure in terms of cyber. I think when you reference the 100 million to the GBP 600 million on the back of the portfolio, back of the deck, it really is those sort of extreme events give the -- that sort of very large. I would -- if I look at our two biggest RDSs on a shorter return period, which would be a cloud outage or ransomware. We really have exposure sort of around versus 350 -- 300 to 350 for those types of scenarios. Lastly, the other thing that we're thinking about from an indirect point of view is, again, pressure on inflation. So commodity prices driving an increase on inflation. And obviously, as you heard, that's something that we're already taking into account, but that just means that we will clearly make sure that those. Any increases that we see or any pressures that we see are reflected in our pricing and in dpd[indiscernible]

Will Hardcastle for UBS. First of all, just thinking about the U.S. DPD business, you touched on on the retail digital there about current profitability. I guess the exciting part is the opportunity that exists beyond. Is there any way to sort of frame what sort of underwriting margin this can get in a more steady state, albeit steady state is some time away, just so we can frame that thinking? And then second one is on the new casualty transaction, just so I understand it clearly, does that trigger as of reserves as of today? And so any deterioration from today they get passed on? And any specific geography or line of business? I know you said casualty that we can take some comfort from.

Okay. Thank you. In terms of the LPT, Jo will take that. In terms of steady state margins, I don't really want to give a forecast right now as to what those margins might be. But you've certainly heard us here, we target the retail business to operate within the 90% to 95%. That's where we expect to be over the long term in a well-functioning, steady-state, nicely growing retail business.

Yes. So in terms of the casualty reinsurance transaction, yes, it does well. It goes back to effective of [ 1 1 ] 2022. So it is effective as of the 1st of January. To give you just a little bit more color of what's behind it. It's -- we wrote a portfolio in our reinsurance portfolio across our 2 syndicates of 33 and 364. We were a casualty between 2013 and 2019. It's a portfolio that we've exited. And therefore, we bought the additional reinsurance protection on that portfolio. And like the other the other loss portfolio transfers that we purchased. We buy out our -- the limit to about 100 and 200 year reserve deterioration. So it's similar to the other transactions.

It's Andrew Ritchie from Autonomous. First question on reserves. Your reserve buffer, I think you described still as being at the upper end or above the upper end of target and the release of the opening was, I think, even in the past suggested -- I can't remember last time you suggested I think 4% to 5% of opening would be a sort of normal run rate. It was a bit below that. So should we expect sort of a further increase in the run rate on releases as you get more comfortable with some of those big losses in reserves. If I could sneak in a sub-question within that question, though. Slide 51, the famous end of the world slide. The casualty reserve deterioration is [ $850 million ] on reserves of [ $2 billion. ] The last time you published it, it was [ $800 million ] in reserves of [ $3 billion ]. So it looks like your view of 1 in 200 has got worse. Is that the case? And then any other question, Aki.

Is that three question?

Well, that was a sub question on reserves. So I'm sneaking another one. My final question. What's your philosophy on dividend and capital management? I mean, you sort of laid out a strategy that you didn't talk about progressive dividend growth. I guess that's what the group has been in the past, but this is a sort of restart of dividend this year. So maybe talk about that in view of how we should think about progressive dividend and in view of it, I get a sense of the capital intensity of the business overall, maybe slightly reducing.

Okay. Andrew. So three questions there. There's a question around reserve buffer and release profile. So Liz, can you take that? In terms of casualty reserves and the RDS, Jo, can you take that? And in terms of capital management philosophy. So I'll begin with that. So I mean as you heard from Rob right at the outset and from this. Paying a dividend regard as being quite important to us. So it's an important sign of health, certainly for an insurance business. That's got to the stage that we've got to -- so it remains an incredibly important part of our capital management strategy. And when we think about capital, of course, there's a range of factors that we have to bear in mind. So we think about growth opportunities, balance sheet resilience, emerging opportunities and, of course, the requirement of investors. And we balance all of those against each other. There's no specific target outcome that we are aiming for. What I would ask you and investors to look at is look at our track record. Our goals tend to be entirely aligned. We are here to generate attractive return on equity, and we will only return capital because we believe we can generate attractive returns on equity deploying it in our portfolio of businesses. Liz, do you want to start with the reserve buffer?

So I was delighted with where we ended up for this year, sitting at 11.7% margin above our best estimates. I think if you go back a couple of years, Aki with his previous hat on, guided that around [ 10% ] was at the upper end of the range of where we want to sit in terms of prudence with our numbers and we're now testing at 11.7%. What I'd say about that is we're facing uncertain times at the moment. And I would, overtime, expect that number to come down. It could go up further before it comes down. But over time, it should come down again.

Thanks. Yes, in terms of the casualty reserve deterioration, there's a few moving parts there. I can come back to you with a detailed answer. But in terms of some of the moving parts are obviously, we bought a lot of portfolio transfer on some of the reserves. So that has improved the position. But at the same time, we've changed some of some of the assumptions as well, which is on the forward looking, which is deteriorated. So I can come back to you with the detail behind that. While we're on this page, I just thought I'd mention just going back to the question on cyber. I just want to add that we are a what we would call a Tier 2 cyber writer, and we have actually reduced our cyber exposure during 2021. So with regards to the scenarios, I think our reduction on exposure is about 15% down in 2021 due to the purposeful action that we've taken across the portfolio. And then that should add also that we're a significant buyer of reinsurance on that portfolio as well, but just to sort of round out that context in terms of the RDS's.

Nick Johnson from Numis. Just a question on inflation in retail. You've talked obviously about the loss ratio impact on how you manage just on expense ratio, which is already high structurally. Just wondering how do you see inflation impacting the loss ratio in '22, '23? And with inflation in mind, should we be expecting the '23 combined ratio in retail to be sort of closer to 95% from 90%? You may have already said that, but I think I didn't quite hear up. And the second question is on retail pricing. The 5% rate increase you got last year. I just wondered what the number is if you exclude cyber?

Okay, so in terms of the inflation in retail or the inflation impact in retail and also the rates, if we can start with Jo, if you could take that. just before that, in terms of the guidance for the retail business, it will be in the [ 90% to 95% ] in 2023.

Yes. So in terms of the inflation in terms of retail obviously, we've spoken about on the pricing side, how that's taken into account. With regards to the inflation around, I think, the expense ratio, which was your question, as part of looking at our retail portfolio, we are looking at ways that we can simplify our business, and that is both structurally internally. As you know, we've sort of grown that retail business and with that has been enormous success, but also has been certain communications, both internally as we're looking to simplify that model, and we do think that, that drives down the expense ratio, which will negate some of the inflationary expectations that you have. I think on the retail, as I said, that headline figure is just such an aggregate number. And behind it, it's really nuanced in terms of business that we touch business. We don't touch, businesses for various, various lines. I think what I would say in terms of the next level down, what is really pleasing is that excluding cyber, we're seeing that upward rate momentum across all of the portfolio. So I don't know the figure off the top of my head, if I take cyber entirety. But what I do know is across all of our portfolios in U.K. and in Europe and the U.S. on all of the other lines, we are seeing that rate increase come through. The other thing that I'd say is during 2021, that momentum continues. So if I look at the first half of the year, it was more like a 4%; second half of the year, it's more like 6%, and we're seeing that continuing 2022 as well.

Faizan Lakhani from HSBC. I just wanted to pick up on the U.K. business. So from what I understand, the growth was going to 3 aspects. You had sort of strong growth in commercial and that was offset by sort of remediation actions on to the finance book and some sort of COVID impact. How does that sort of evolve next year? And I guess my question is more broad based. What do you need to ignite growth in that U.K. business next year? And the second is on coming back to the reserve margin. You, obviously, had a substantial amount of COVID losses for some business interruption cases, that's had time to sort of evolve and develop now. How much sort of IBNR do you have left in there? How much confidence do you have you can potentially release from that next year as well?

Thank you, Faizan. Liz, can you take the question on reserve margin. In terms of U.K. growth, you're right. We -- the headline is around 3% constant currency that are pluses and minuses there. The commercial business has continued to perform really well, around 10% up. And as you noted, we've taken deliberate action in the APC, the arts and the private client business, primarily where, frankly, commissions were right at the upper end and beyond our sort of appetite. That work is done. So why the APC business will grow, our expectation is that it will grow in 2022. Commercial business should continue from where we finished. We are also after effective a 2-year hiatus, we'll be going back into the market, building our brand investing more into our -- into the marketing of U.K. business. So I do expect the U.K. business to grow substantially greater than in 2021.

So I can take the margin question on COVID. So -- we had COVID losses across our business during 2020. And if I think about our U.K. retail part of our business, those losses are settling within our best estimate, and we remain comfortably reserved for that. Turning to the other areas of exposure we had with on our reinsurance portfolio. And obviously, the time to settle those kind of secondary implications is longer. And so we need to hold on to prudence and margin, et cetera, for an extended period of time to ensure we're settling appropriately within those numbers that were published previously.

Maybe just one thing to sort of that because we've had a number of questions on reserves and the reserve buffer. It's an uncertain world at the moment. So and we don't see any particular compulsion or need to reduce the prevalence in those reserves. But those uncertainties, they will either crystallize, in which case we will use the reserve buffer or they won't, in which case, it will be released. I think as I said, minutes ago, you should expect a moderation in that reserve buffer overtime.

Andreas van Embden, Peel Hunt. I had a question on your London market business in Hiscox RE. On London Market, after this sort of significant decline in exposure over the last few years and you mentioned in your release that you've reached great adequacy across most of your London Market book particularly at Lloyd's. What's your sort of thoughts on exposure growth in 2022 and 2023 here at Lloyd's? And moving to Bermuda and Hiscox RE, there's great use of fungibility of capital within the Hiscox RE business, and you have reduced both your sort of trade capital quota share usage in the last few years and ILS as well. What are your thoughts of that usage of third-party capital going forward and the mix?

Thank you, Andreas. So in terms of London Market, so we have seen the exposure reduce over time and that's been largely the portfolio accretive actions that Jo has been speaking about earlier. Most of that has now been done, but more to do on the property binder book, so you'll see some continued decline in there. We have the flexibility to grow where needed. And you should expect to see, I would say, a moderate decrease in exposure nothing particularly significant. We will take rate wherever we can get it. But in terms of -- to give you a couple of examples. For cyber, we are towards the limit of our appetite in London Market. For NatCat, we're approaching -- and that's our current prices. Now as the pricing environment changes if the rates go up dramatically from here, obviously, our appetite changes. So a modest increase in exposure, but we'll take all the rate. In terms of RE & ILS and how we think about third-party capital. We -- third-party capital, as you heard from Jo, gives us relevance, reduces our cost of capital for the reinsurance business. So it's a core part of our strategy. And we continue to see inflows in our ILS funds. So I am expecting the ILS business to continue to grow. The front end and the management to continue to grow in 2022. And again, that's a function of the performance of the RE & ILS team in our flagship fund if we're invested in the ILS business, despite all the challenges over the last 7 or 8 years, particularly last 4 or 5, given you have not lost money. And you are beginning to see, I think, not as much as I would have thought, but beginning to see some clarification and a flight to quality. The only some -- so we are -- we continue to see third-party capital as a core part of our strategy, and you will see that continue to grow, certainly the highest one early next year.

Alan Devlin from Goldman Sachs. Two questions. rather the start, you said you had excess profits and the big ticket businesses were funding the growth in the retail. Is that cross-utilization Finish? And if it is or when it is? Is it any point that you consider you're splitting the businesses up given the very different clients and volatility and in the end [indiscernible] multiples or earnings multiples? And then secondly, just following up on the ILS point, you may have -- how do you see that market evolving when you do have increased volatility in weather losses and higher interest rates and QE reducing investment money we've pumped into the system. Do you expect that market is still to grow over the medium term? Or are we at peak levels, right?

Thank you for those questions, Alan. So I guess going back to the point you raised has the excess profit being -- you've been used to fund the expansion of retail has that model run its course? No. Now what we're talking about is, unfortunately, what we've had over the last few years is we haven't had the excess profits. And the model and the strategy that we're employing here is we do expect profit. We have more balance, we have more margins. It's better controlled. We're using our expertise more often rather than designating it to others. So my expectation in the next few years is that those businesses RE and ILS and London Market will generate excess profit, will provide as we continue to provide the balance to drive the growth in retail. Now the retail traditional business itself is also getting bigger and bigger and becoming capital generative. So the model is evolving. It's certainly not in its course. And in terms of the overall sort of businesses, they're all a core part of our business. We have greater optionality across the whole of the insurance sector because of the capabilities that we have. And there is a huge amount of cost organization. The underwriting ecosystem that I talked about, which is absolutely core to our strategy and the core of our being at Hiscox. Technology is fantastic, but it's an enabler. It quantifies our knowledge. It qualifies our experience, our appetite. Technology is not an end in itself. It's simply a vehicle to allow us to do even better at what we do already. That is not restrict that is not segmented by business unit. That's a Hiscox thing, right? Those -- the actually the risk model is the claims are analytics people they are ubiquitous across the whole group. It's a community that helps us underwrite and hopefully beat the market more often than not. So each of those businesses remain a core part of our strategy going forward. In terms of ILS, I don't know. I don't have -- I have not got the crystal ball, right? So you can imagine a scenario where if interest rates go up, some of these [indiscernible] wealth fund and pension projects, et cetera, start pulling their money out. But the quality of that is you would expect, so you're making more money, but interest rate investment income is going up and you would expect your insurance or reinsurance rates also to go up, making it much more capital efficient and we put more on to our own balance sheet. As we have done over the last year, I don't know. We'll see what happens. Okay. So we have a number of questions on the phone too. Okay? So I guess, as an operator on that. Can we have the first question?

First question comes from Freya Kong at Bank of America.

I have two questions, please. So RE & ILS did a really -- I mean, the combined ratio was 68% for the full year. That's very good. How much of this was driven by reserve releases versus a very strong attritional? And to what extent can we extrapolate this into 2022? Second question is on the U.S. DPD route platforming. Could we get a bit more detail on this in terms of cost benefits and time line? And would it be fair to say that 2023 growth outlook for retail could be higher than 2022?

RE & ILS, Can we repeat at [ 68% ], Kathleen? Okay. So I guess the way to -- rather than go into that detail the way to, I think I'd encourage you to think about our business. The RE & ILS what is our normalized expected combined ratio given our view of the risk we're writing and the margins that we're expecting to generate. So at the moment, we're writing our RE & ILS portfolio at what we believe to be a low 80s combined ratio. So that's our expectation in a normalized CAT environment. But of course, there's lots of variables in that. That's the expected margin on a steady-state basis at the moment. As rates go up, then we may well see that improve. In terms of U.S. DPD, sorry, as you noted, we are undertaking a replatforming of the business later on this year. So you've heard us speak about this many times. We've invested a lot of money across our various seasonal businesses. One of the lessons that we learned from replatforming in the U.K. is it's really difficult to do. You have to slow down the business. These are retail businesses where you're undertaking hundreds of thousands of transactions and pieces of data moving around, okay? So when replatforming from a legacy system onto a new system, what we plan to do in the second half of this year is to deliberately slow down new customer acquisition. It will be temporary, a quarter to two quarters. And therefore, relative to the run rate in 2021 of 25% growth in DPD -- U.S. DPD, we expect that to be somewhere between 15% and 20%. Now the new system brings a huge number of advantages for us, much more increased pricing utility, frankly, our all systems were pretty difficult to change any pricing on the old systems. We collect much more data, more agility in terms of product cycle, putting new products out to customers. So it brings a huge number of advantages and will give us scale of economies in time. I don't plan to give a revenue forecast for 2023 at the moment. Okay. I think there's another question on the phone.

Our next question is from Ben Cohen at Investec.

Most of my questions have been asked and answered. I just wanted to ask on the investment side, if you could comment on your risk asset performance year-to-date. And also in the context of, I guess, rising bond yields, what your plan to be for the 18% asset allocation to cash. Should we expect you to be reinvesting that in the near term?

Liz, would you like to take the questions on investment? So what was our risk asset performance in 2021? And might we invest some more of that free cash that we're holding into bonds given the rising yields.

No, sorry, in 2022. We know what it was last year, but this year, year-to-date?

Good morning. Yes. So in terms of our return on the risk asset portfolio in 2021, which is 11%, but that comes from a mix of different asset classes in the risk sector. So we don't just have sort of equities exposed to the S&P. It's a global portfolio with some hedge funds and et cetera. So it's sort of a balanced risk-taking portfolio that we have. In terms of going into 2022 and what the opportunities are that lie ahead for us, you're right, there are a lot with the rising interest rate environment. And we're not looking to change the shape of the portfolio at the moment, and that doesn't mean we won't. But obviously, we will be reinvesting into high interest rate products going through the year.

Sorry. And the risk asset portfolio performance year-to-date in 2022?

Ben, I think we'll leave that for another day. The investment income in the first couple of months has been quite volatile, as you can imagine. So I wouldn't tend it to be a particularly large figure for 2022 to the moment. I think there is -- so we'll take one more from the room.

[indiscernible] from Berenberg. I just have one question on London Market. I appreciate you now have going under the whole process remediating portfolio. You've done a great job at that. At the same time, rates have come up a long way. They expect it to potentially go up more. Why is it the time to have more exposure to the book now? I appreciate you mentioned you're not looking through that -- so it's just very curious to get your thoughts on that.

Thank you, Chris. So a good question is, why not increase exposure? We will be increasing exposure. The question was, are we going to grow this exposure by 10% to 20%? No. The select lines where we believe we are either underweight or we're getting significant risk-adjusted returns. We will be growing that. So earlier, I mentioned that we will be growing our Floodplus portfolio. That's a portfolio that we've been writing for 6 or 7 years. It's been well tested, given the hurricane. The very wet hurricanes that we've had over the last few years, and it's come through pretty well. So the team has done a fantastic job. We will grow that. Exposure we'll grow that, but we're not going to grow exposure everywhere. The portfolio we're building is balanced. It is well priced, and that's what we continue to do. There's a question on the phone. So maybe one more.

We have a question on the phone from Darryl [indiscernible] from RBC.

Just three short questions relating to the S&P model changes, please. So the first one, I think you mentioned it will be the first time that you recognized risk diversification benefits across the segments. I mean, any more comments around that? Is it specifically diversification from cap rates? And the second question, I think relative to the Bermudan solvency ratio, you previously said that an equivalent level would be 160%. What would that be allowing for the S&P change? And the third one is that allowing for this S&P change again, how might that change your risk appetite within the ticket compared to current levels?

Okay. Liz, I'm going to save you from this one. So Darryl, I think as far as the S&P is concerned, the details are pretty [ stark ] at the moment. What we do know from what they've said so far in terms of the consultation is that it's likely to be positive for us. These are all very good questions, but I think there are questions that we can answer once we have more detail from S&P. So we're up against the clock. Thank you very much for those questions. If we've got time for one more if there is any more, otherwise, we will call it a day. Okay. Thank you very much, guys. Thank you very much. Great questions.

This concludes today's conference call. Thank you all very much for joining. You may now disconnect your lines.