Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Good morning, and thank you for joining Hiscox' Q1 2022 Trading Update. I'm Liz Breeze, the Group Interim CFO. And I'm joined here by Jo Musselle, the Group CUO. Unfortunately, Aki Hussain, the Group CEO, is unable to join us today due to a sudden close family bereavement. He will return to the office in the next couple of days. So if you would like to have a follow-up discussion with him, this, of course, can be arranged. I will start with a few brief opening remarks, focusing on 3 key topics: growth trends, loss experience and investment results. Then we will open the floor for Q&A. So let me start with a few comments on trading momentum. It is very pleasing to see that the group delivered double-digit growth of 11.8% in constant currency in the first quarter. Key drivers of the growth have been the continuing improved momentum in Retail, especially in DPD; strong growth in the FloodPlus platform; and significant inflows of AUM into our ILS funds. The strong momentum is moderated at headline level by ongoing portfolio optimization initiatives to improve risk-adjusted returns and consistency. I'll provide a bit more color on this later. The rate momentum has been favorable across all business units, and we expect this trend to sustain as the year progresses. So now beginning with a bit more detail on Retail. This division grew 4% in constant currency to $670 million. The headline growth rate includes the impact of ongoing activity to reshape the U.S. broker portfolio towards smaller-ticket business. Excluding this, the underlying Retail business portfolio momentum is improving with a growth of 7.6% in constant currency, showing really good progress towards the middle of the 5% to 15% range. The course correction actions will largely conclude in Q2, and we expect the U.S. broker channel business to return to growth in the second half, supported by continued rate tailwind. With a focus on small, micro and nano businesses, our Group Digital Partnerships and Direct business or DPD, as we tend to call it, grew gross premiums written by just under 10% in constant currency. This is a good result as we have deliberately slowed down our new business growth in U.S. DPD while we embed and optimize our new digital trading platform as previously guided. This is short-term pain from new technology which will provide agility and scalability commensurate with our growth aspirations. Despite this, U.S. DPD remains on track to achieve 15% to 20% top line growth in 2022. And as we move through the second half of this year and the IT platform replacement materially completes, we will start marketing more assertively, take advantage of our expanded product footprint and bring on a healthy pipeline of new digital partnerships that we've already lined up. We're continuing to see positive momentum on retail underwriting. Profitability in the business remains on track to return to the 90% to 95% combined ratio in 2023. This is the combined effect of good progress in operational changes, portfolio remediation and supportive rate environment. Now moving to our Hiscox Re & ILS business. Gross premium written has grown by 45.8% to $421 million. Our ILS platform has continued the strong growth seen last year with the team adding another $200 million into our ILS platform on top of the $190 million we announced that we raised last year. This AUM increase has enabled us to grow into favorable market conditions in North American catastrophe and retrocession. Following net inflows of $157 million over the last 12 months, the AUM now stands at $1.6 billion, providing a tailwind to increasing fee income. Net premiums written of Re & ILS grew 20.5%, at a slower rate than the top line. And as we go through this year, you should expect this trend to continue now that we have achieved a better balanced portfolio. The London Market growth is somewhat disguised by the impact of re-underwriting actions we've been undertaking to drive better portfolio profitability. Just to give you an idea of its magnitude, our reduced appetite for underpriced natural catastrophe risk in London Market has taken just under 7 percentage points of growth in Q1, impacting both our property binder and major property portfolio. As you may recall, we have been re-underwriting our property binder for over 3 years now, and this still doesn't appear to be sufficient to achieve genuine rate adequacy, particularly as our view of cat risk has been evolving. The effect of these re-underwriting actions is skewed towards the start of the year due to the timing of when this business is renewed. So the impact will be less prominent as the year goes by. Another approximate 3 percentage points of growth was eroded following our decision to tighten cyber risk and due to the impact of Russian sanctions. Despite this, net premium written grew 5.5%, significantly ahead of the top line momentum. As we are focusing in growth profitable areas, we are comfortable ceding less to reinsurance to benefit from a strong rating environment and should expect this gross-net dynamic trend to continue through the year. In line with our strategy, the portfolio we are writing is balanced, rate adequate and with healthy margins and good growth in areas we are keen to grow. For example, we are seeing good growth in D&O, benefiting from over 250% of cumulative rate increases over the last 5 years. And in flood, despite the NFIP's rates becoming more competitive, we are making further enhancements to FloodPlus digital platform which will further improve pricing adequacy, speed and resilience. The rating environment surpassed our expectations as we achieved an average rate increase of 8% in the first quarter. We expect the momentum to sustain through the rest of this year, supported by the impact of Ukraine losses in the affected classes, particularly terrorism. I'm now going to move to our loss experience. I'm really pleased to report that excluding the impact of the conflict in Ukraine, all business units have had a good start to the year with a better-than-expected non-catastrophe loss performance, driven by the strong rate momentum and the remediation actions that we've undertaken over recent years. Q1 has seen a number of natural catastrophes occur around the world, including European storms, floods in Australia and an earthquake in Japan. The total net loss reserved for these events is within our first quarter natural catastrophe budget and there's been no outsized losses. The tragic events in Ukraine have been another serious test for the P&C sector. While the losses incurred in Q1 have been minimal, the group has reserved circa $40 million, net of reinsurance, mainly in Hiscox London Market division with a smaller impact for Re & ILS. We believe our estimate is robust. Hiscox London Market has exited the aviation hull business in 2018 and political risk business in 2017, the lines in which the insurance industry is facing the most significant uncertainty. The majority of our exposure is in the political violence, war and terrorism book, which provides physical damage cover and ensuring business -- and ensuing business interruption coverage to multinational companies that have fixed physical assets such as office buildings or manufacturing plants in Ukraine. Our coverage designed to respond to events such as the current conflict in Ukraine has indeed responded where damage has occurred. While the conflict is ongoing and the extent of destruction is not yet clear, the book is significantly reinsured and we believe our loss estimate is robust. The remaining exposure is mainly in the marine portfolio. Hiscox has a modest share of the marine hull market in Hiscox London Market and in our Re & ILS division, where we write whole account coverage. While we are aware of a small number of vessels trapped within the conflict zone, our average line size is small. We use significant reinsurance on this book and our net exposure is modest. With regards to the indirect potential exposures such as cyber, we have not yet witnessed any material impact from the heightened geopolitical tension. Converted cyber book has seen reduced frequency and severity of claims across all business divisions, which is a result of the underwriting actions we have taken and the clampdown on ransomware by governments across the globe. In this period of heightened risk, we are adjusting both our pricing and appetite for cyber exposure across the group. Lastly, on inflation. While economic inflationary pressures continues to increase across our markets, we have various elements of inflation loaded into our loss ratio picks and pricing models alongside reflecting appropriate indexation in our rated exposures. In March, our Re & ILS business executed the loss portfolio transfer transaction buying protection for our casualty reinsurance portfolio, which is in runoff. This transaction does not have a material impact on our capital position but protects $116 million of group reserves from further deterioration. This is in addition to the 2 other LPTs completed in 2021. In total, 18% of the 2019 and prior year group reserves, mostly longer tail in nature, are now reinsured against future loss performance deterioration, acting as an effective mitigant from inflationary pressures on the back book. So to conclude, I'll now turn to our investment results and share a few thoughts. The first quarter of the year saw a spike in risk-free rates, which resulted in significant but temporary mark-to-market losses in our short-dated government and corporate bond portfolios. So the group booked an investment loss of $120 million in the quarter. While this, of course, is disappointing, it's not a surprise to anybody. As you know, Hiscox applies fair value accounting to our investment portfolio, and we would expect losses from movements in yield curves to reverse over the life of the bonds when held to maturity. It is important to remember that these mark-to-market adjustments are noncash and noneconomic in nature. Under the new IFRS 17 accounting standard, effective from next year, such unrealized losses would be somewhat offset as changes to discount rates would also be applied to the valuation of our liabilities. For now, on a positive note, the yield on the bond portfolio has increased significantly to 2.4% as of 31st of March 2022, up from 1% at the end of December 2021. The short-dated nature of our portfolio means that increases in risk-free rates lead to improvements to our portfolio yield in short order and much improved prospects for our investment returns from 2023 and beyond. So to conclude, our business has delivered a solid performance in the first quarter. The rate environment continues to be supportive, and both our big ticket and Retail businesses delivered good underlying growth in areas where we see the right opportunities. We continue to position the business for attractive and sustainable returns through reducing exposures where we believe risks are underpriced. The group remains strongly capitalized with liquid resources sufficient to pay claims, dividends and execute our growth strategy. I will now hand over to the operator to open the floor for Q&A.

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

Two quick ones, I think. First one, can you talk through, I guess, how sustainable you think the better-than-expected ex-cat loss ratios are? I guess perhaps is this evidence of the pricing and underwriting coming through? Or is there a risk that it's simply lower man-made losses resulting in a favorable quarter? And second one, Russia/Ukraine, the $40 million. We've seen a varying degree of what companies are disclosing as a loss estimate at this point and how robust the estimates are and whether that's expected to escalate as the year goes on. I guess can you try and give us some comfort or -- as to how robust that estimate is? Is that your ultimate expectation at this point?

Okay. Thanks, Will, for both those questions. So first one, the sustainability of the non-cat experience that we saw in Q1 and then secondly, Russia and Ukraine and a bit more clarity on what that $40 million loss estimate is. So I'm going to hand both of those questions over to Jo Musselle, our Chief Underwriting Officer.

Thanks, Liz. So yes -- so as Liz said, we had a good first quarter where all of our portfolios in terms of the business divisions had a favorable non-cat. As you know, we've been underwriting or re-underwriting our portfolio for the last couple of years across the piece. We've exited significant amounts of business in our big ticket business. And obviously, as you know, we took a remediation into our U.S. portfolio as well, and that's obviously in addition to significant rate that's being driven across all portfolios over the last 4 years. And so in terms of how sustainable is it, I think it's as an effect of that. I think the biggest driver that we look at is attritional loss ratio. So as you know, sort of risk loss ratios or larger claims can come through the year. But the attritional loss ratio in the portfolio is the sort of the main indicator of the health of that portfolio with regard to risk versus rate. The attritional portfolios are positive across the divisions. So that's really pleasing. In terms of how sustainable, I think there has been -- particularly in casualty lines, I think there has been a view which is how, following COVID, has the court returned -- has litigation returned to pre-COVID levels, et cetera. And so what we're doing is within our casualty lines, in our longer tail lines, we're not taking that favorable experience through our P&L. With regard to our reserving methodology, some of that favorable experience that we're seeing in terms of the loss ratio, we're actually holding on to indeed until we view it indeed being favorable rather than noise in the portfolio. So yes, I think whilst -- how sustainable is it? I think the markets are -- the attritional loss ratios are favorable. And again, it's the sort of result of the remediation action that we've taken across the portfolio. So with regards to Russia and Ukraine, I think your -- obviously, from our point of view, our thoughts first goes to those directly impacted. And obviously, the other thing that I'd say is, clearly, this is a live cat event and an emerging situation we continue to monitor. But with regard to the $40 million, this is our best estimate, our view as the situation stands. Those losses mainly emanate from our war, terror and political violence portfolio; some in marine; all in -- our big ticket business in -- predominantly in our London Market and some in our Re & ILS. As Liz mentioned, the loss we've incurred to date had been minimal. So the vast majority, pretty much nearly all of this, is IBNR. But we believe this to be a robust loss estimate. We have extensive reinsurance in place, and we believe this estimate to be robust. I know that clearly, there will be varying ways of which people are reserving this estimate, and we've seen some of that through the reporting season. But from our point of view, it's a best estimate with the event as it stands at the moment.

The next question is from Andrew Ritchie of Autonomous.

A couple of questions for Jo maybe. Jo, could you just remind us? When you talk about rate increases, I think, particularly Retail here, which I think you said is 5%, is that excluding the effect of indexation, if you understand what I mean? In other words, that is the rate per unit of risk -- the unit of risk may itself be indexed to inflation. I hope that question makes sense. The other question was you've seen some interplay between net count reductions in London Market versus some growth in reinsurance. Net-net, how would you describe the group's sort of nat cat, sort of RDS, PML, however you want to think about that position changing year-on-year? Is it net up meaningfully? Or is this simply a sort of reallocation from one part to the other? And the final question, I should probably know the answer to this, having followed you guys for a long time. But when you talk about portfolio yield, the 2.4%, is that excluding the roughly 18% of the portfolio which is in cash and short term? Or are you just referring to the fixed income portfolio? And if you are, I mean, presumably, cash and short term, we should be plugging in 50 bps extra return on something like that or maybe just give us a sense as to what we should think about for that part of the portfolio.

Thanks, Andrew. So I'll take 1 and 2, and then Liz will pick up on 3. So you're right. So in terms of our rate increase that we report on Retail, that does exclude indexation. So as you are aware, there are parts of our portfolio that are rated on underwriting exposure, things like our property portfolio rated on state sum insured. And as those -- as inflation affects cost of materials and rebuild costs, as an example, those underwriting exposures are indeed indexed to take into account of that increased inflation. So in that instance, we're applying the same rate, but obviously the underlying exposure, $1 million rebuild going to $1.1 million rebuild, is generating more premium with the same rate. So the rates we report are indeed excluding indexation. There are other parts of our portfolio that also are rated on underwriting exposure. So again, those rates are excluding indexation. So portfolios were rated on things like wage roll. As indeed wage roll and turnovers are increased due to inflation, that then is reflected in our underwriting exposure, and our rates are applied to them. So yes, you're absolutely correct. The rates that were reported exclude indexation. Your second question in terms of the sort of nat cat reduction on our London Market but our growth in Re. From a high-level point of view, our appetite for nat cat risk is broadly flat. You are correct that depending on different parts of the cycle in different markets, we would utilize that cat budget differently, obviously making sure that we're generating the returns that we would expect for that risk. I think it's important to say we've got the same view of risk across both our London Market and reinsurance portfolios. But clearly, the markets are different. The primary market is different to the reinsurance market in terms of obviously conditions and pricing. And at different points in the cycle -- at the moment, we're reducing our London Market cap and increasing our reinsurance. If we look back a couple of years ago, that would have been slightly different in a different rating environment.

Great. Thanks, Jo, and thanks, Andrew, for the 3 questions. So on the last one, which was the 2.4% reinvestment yield on our portfolio, so that is specific to the bond portfolio. And so you should think about it in this way. In fact, as I stand here today, that's now 2.7%. So we're continuing to see strong momentum in that opportunity as we go forward to 2023. In terms of the cash element of our portfolio, I think a couple of things there. We have been holding quite a lot of cash historically. And as we see the kind of the reinvestment yield opportunity going up, we'll be looking to make sure that we're not holding too much cash to make sure we're not missing out on anything. And we do hold that cash across a number of different currencies as we look to kind of hedge out some of our reserve exposure. So it is a blend of different currencies. So I don't actually have what the yield is on our overall blended cash position, but it would be modest.

The next question is from Andreas van Embden from Peel Hunt.

I've got 2 questions, please. Could you maybe discuss the loss portfolio transfer transaction you've completed in March? I see you mentioned that it's sort of neutral for capital. But first of all, does it have a P&L impact at all? And secondly, is there any remaining exposure at Hiscox to the runoff book? Or has that been now fully transferred? And maybe finally, on reserving, could you maybe discuss the reserve quality of your casualty book as it now stands in the first quarter and whether there's any step change in reserve release assumptions going forward?

Sure, Andreas. I'll take those 3 questions. So on the first one, yes, we concluded an LPT in the first quarter of 2022. And I think that happened actually the day of our year-end announcement, that we shared that news with you. So that final LPT that we've done there is for our casualty reinsurance portfolio, and that portfolio was put into runoff back in, I think, 2019 with a bit of drag coming into 2020. And overall, that transaction will be broadly P&L neutral. You won't expect to see any kind of material impact coming through at all in any of our combined ratios for our Re & ILS business. And that LPT covers the entire runoff portfolio, so no kind of lingering exposure. And to be quite frank, we're delighted we did it. Timing was perfect, and this is one of the key measures that we're using to protect ourselves against inflation. In terms of remaining exposures, so you recall we did 2 other LPTs in 2021. The first was for our U.S. broker business, and that covered 2019 year and prior for the U.S. And so we did buy protection for that. We obviously have continued to write U.S. broker business that's in appetite, and we are continuing to form underwriting action on there. So there is -- it's not a runoff portfolio per se, it's still a live book. So that's live exposure. The other LPT we did was for health care and also in our reinsurance portfolio. That was a portfolio that was put into runoff, I think, in 2018. And we have no residual exposure to health care on a go-forward basis. And then I think your final question was around reserve adequacy and guidance on reserving strength, et cetera. It's not something I'm going to comment on in Q1 trading update, so I'll just leave that one there.

The next question is from Alan Devlin from Goldman Sachs.

Two questions from me. First of all, on the net investment income, given the size of the move in the portfolio yield, 2.7% currently, how should we -- you think about that going into next year? Should that -- should we expect that all to kind of drop to the bottom line and higher investment income? Or given the size of the move, should we expect some of that to be passed on to your customers in terms of being factored into your -- given the industry's views on pricing? And then just a second question on your comments on cyber, how you're kind of viewing the cyber markets. You talked about lower frequency, lower severity and governments clamping down on ransomware, but it also seems your appetite for cyber is also reducing. Just wondering how you see the cyber market currently given the damage in that market.

Sure. So I'll take the first question on investment income, then hand over to Jo for cyber. So firstly, on the net investment income, so 2.7%. Yes, I'm really excited about the opportunity for next year. We will be putting our assets to work and generating that additional yield. Typically speaking, given we are a short-tail underwriter, the investment environment isn't something that forms a material component of how we do our pricing. So at the moment, I don't see any kind of significant impact, but obviously, everything to be determined in the future. So that's probably all I want to say on investment income. Jo, can I pass it over just on cyber?

Sure, yes. And just a follow-up on the investment income. Obviously, we're an underwriting organization, and our role, my role particularly as the CUO, is to make our money from underwriting. And so therefore, when we price, we don't take investment income into account. Our pricing is done excluding investment income to generate the returns from an underwriting profit point of view. With regard to cyber, you're right, the cyber market has been very interesting over the last few years, driven by quite substantial trends within claims, particularly around ransomware. Over the last 18 months, 2 years, we at Hiscox have taken significant action on our underwriting portfolios across all of the portfolios. So that's in our Retail and in our big ticket. More generally, we've refocused our Retail portfolios to the smaller end of the cyber customers, and we focused our London Market insurance portfolio to more of sort of the excess. We've also done some significant re-rating along with the rest of the market, and also, we invested heavily in terms of mitigation. So at that small end customer in Retail, we still see the largest driver of loss is not ransomware but actually human error, so an employee of one of our customers clicking on a link that they shouldn't, forwarding on a link, et cetera. And so we invest heavily on what we call the CyberClear Academy, cyber academy, which is a training for those small customers. So that's -- I'd say, in general, our exposure has come down over the last 12 months as re-underwriting has taken place across the group. Albeit -- given the rating action, we've clearly got far more premium for less exposure. So as we come into the year, we had a -- obviously, a view in terms of cyber, of course. The other thing that we do, we're a significant buyer of reinsurance in our cyber portfolio. Clearly, the Russia-Ukraine event has heightened the cyber risk. We are closely monitoring that situation along with our partners and our experts in this space. And whilst I think we report that we've seen no -- actually, no unusual claim activity in the first quarter, indeed, our claim activity is actually reduced for cyber in the first quarter, driven by our own remediation but also the more global trends with regard to ransomware. However, the situation does still remain heightened, and we've taken some additional portfolio action, particularly in some of the segments that we would think may be more exposed, things like utilities, et cetera. So yes, whilst the -- obviously, the report that we've said is that the actual claims activity is reduced in the first quarter, I think that the situation is still a heightened situation for cyber.

The next question comes from Iain Pearce of Crédit Suisse.

The first one was just on London Market growth. Even when we strip out the headwind from the reduction in property binder, the reduction in cyber, when we look at growth ex that, it looks like there isn't much growth ahead of rates. Just sort of given where your underlying combined ratios are and given the rate momentum you're continuing to see, just wondering why you're not growing better the book that you like ahead of rates. Secondly, just on that property binder book, it sounds like there's still remedial action that needs to be done there. So just how big is that book? And is that something you're still looking at having to take some re-underwriting action on? And then thirdly, just on the U.S. replatforming of the DPD business. If you could just give us an update on sort of how that's going, when you think that should be finalized and if there's been any impact on things like customer service or customer interaction that's having any headwinds at the moment or if that's all going to plan.

Thanks very much, Iain. So I'll take the first question, Jo, and maybe the last, but we'll see how we go. So I guess London Market growth and being ahead of rate, so yes, overall, we shrunk. In Q1, we're down 3.1%. And that was predominantly as a consequence of material cutting in our nat cat-exposed lines in the London Market business. And there were another -- other number of areas that we chose to take action in as well where we have cut back on cyber, as Jo has just described, and then also a limited impact from sanctions. So in terms of London Market and how we think about that, on a go-forward basis, we do expect that business to return to growth. We continue to see good opportunity there. And in our flood business, we are seeing strong growth momentum. Again, we're also seeing that in D&O. I think the thing that I would focus on for London Market, which is somewhat of a different dynamic to what we've had in previous years, is our net written premium growth, which is up 5.5% for the year, significantly ahead of the top line momentum. And what we're choosing to do there is where we see these attractive opportunities, which are a hard one, right? It's not like you can just go and write endless amounts of them. We're finding these great opportunities where we see opportunities, but we're also choosing to keep more of it. So we're buying less reinsurance. And this is helping us to grow our overall exposure in London Market to the areas where we've seen the greatest opportunity. In terms of action on the Hiscox London Market portfolio, I mean I wouldn't necessarily say that this is just a one-off and done remedial action. This is a consequence of us continually looking at all of our portfolios across London Market and the big tickets and say, "Okay, is the rating environment adequate?" And if it's not, we will cut. It's just a natural cycle of what we do in underwriting. So I'm just going pass over to Jo. If there's anything else you want to add. And perhaps you can answer the U.S. DPD.

Thanks, Liz. So yes. So broadly from a CUO point of view, I'm really happy with where we're growing in London Market. As Liz said, we're growing the lines of business where we see good opportunity, and actually, we're cutting back where we don't think the rates are adequate. I think as I mentioned at the year-end, with our big ticket portfolio, we're utilizing the hard market to ensure that our portfolios are structurally profitable, structurally profitable through the cycle. I mentioned things like we're leading more, taking more control. We're reducing our binder exposure. Again, taking underwriting control because we're not just thinking about today and the hardening market that we're in, we're thinking about tomorrow and how we have a structurally profitable business through the cycle. And yes, in terms of -- as Liz mentioned, in terms of the binder portfolio, you will recall we've been in a remedial action in that portfolio for about 3 years. And whilst, of course, we think we thought we've done enough, the view of risk also have increased during that period. And so therefore, we have to -- we've taken some more action. It's not linear through the year. The vast majority of it is in Q1, so that will be moderated through the year. But obviously, we're in a cyclical market. We have to make money in the market that's in front of us. And if we don't think we're getting rewarded for that risk, then we'll cut. And then your last question was on the U.S. replatform. So the U.S. has been replatforming for a while. We already have about 100,000 customers on the new platform. And so clearly, this is an operational platform, but the rest of the platforming will be done predominantly by H2 as we transition through particularly putting our partners onto the platform. I think you asked if there was any sort of issue in terms of customer service. As we say, we've already got 100,000 customers on the portfolio -- on the platform, which is positive. So we know the platform is operational and working. There's always problems with any replatforming. So obviously, we've worked through those, but nothing material, nothing that's had a significant impact in terms of end customers.

The next question comes from Ashik Musaddi from Morgan Stanley.

Just one question from my side, Liz. The growth in Re & ILS has been probably the strongest that we have ever seen, 46%. So how should we think about the dynamics of that versus profitability? Because clearly, last year and for many years in the past as well, the combined ratio in that unit has been like very low. I mean if there is a normal cat year, I expect the combined ratio on Re & ILS to be very low. So how do we think about that sudden -- suddenly extra profit? Or -- I saw that there is a comment in the press release that net premium written increased by only 20% versus gross of 46%. So can you just explain the dynamics of this significant growth and the profitability, how we should think about it for the year?

Sure. So I guess the first comment I'd say on Re & ILS is, as Jo set out at the year-end, we've done significant amounts of net portfolio underwriting action over the last few years in Re & ILS. And as we kind of stand there at the end of 2021, we were broadly satisfied with the shape of that portfolio. That doesn't mean it won't change going forward, but broadly satisfied. So what that means is when I come to the gross growth that you're seeing for 2022, that gross growth was predominantly for our ILS platform, which means the risk entirely passes on to them, it's not kept by us, and we drive risk-free income from that portfolio. So it isn't something that will per se impact the loss ratio component of your combined ratio. It's fee income that you're seeing that you would get from that additional premium income. There's a bit of rate in there as well. But that's the kind of the narrative that you're seeing on Re & ILS. We do have a strong pipeline of ILS AUM going forward, but obviously, growth on that top line is contingent on that. From a net written premium perspective, you're predominantly seeing the benefits of rate coming through there. There's a bit of reshaping of the portfolio. But again, you would definitely see our net written premium growing at a much slower rate than our top line through 2022.

The next question is from Freya Kong from Bank of America.

On the repositioning in the U.S. broker channels, is this completely related to the liability exits that you flagged last year? Or is there something else? And what's the like-for-like premium base we should be basing our growth forecast on for Retail? And secondly, what's your outlook for rates and I guess, appetite in specialty lines given likely disruption from the war?

Okay. So first question was around U.S. broker and the nature of the portfolio actions that we're taking in there and what the kind of the baseline number is when you're doing your growth projections and then outlook on specialty. So broadly speaking, I'll hand both of those questions over to Jo. But just in terms of looking at that projected growth rate for our U.S. business, so you can see, I think, I include in the press release what the underlying growth rate of our U.S. business is if you strip out the actions that we've taken on broker, and that's 9.2%. So hopefully, that's enough to get you a clear understanding to do your calculation. So Jo, I'll hand over to you.

Thanks, Liz. So yes, absolutely. The repositioning that we talked about in the U.S. is the repositioning that we've been speaking about for the last 12 months. It is the exiting of those lines. So that was the financial services, it was a stand-alone GL and it was the repositioning of our U.S. portfolio to really focus on business with turnovers less than $100 million, which is where we really see the long-term opportunity for us in that space. And so it's really the sort of the tail end of that action. Even though we announced it last year in terms of that repositioning and the exiting of over $100 million of business, the way that the U.S. market obviously works is we have to send conditional renewal notices if we're non-renewing business. And that can take in certain states up to 90 days. And so obviously -- and then obviously, we've got a 12-month portfolio to work through. So that's why that action wasn't fully completed in 2021 and there's been a hangover into Q1 of this year. And it will finish in -- at the very beginning of Q2. Liz mentioned on the go-forward portfolio -- so that go-forward portfolio, the sort of the comparative growth rate is about 9.2%. And so -- and that's about 7.6% of the whole of Retail on the go-forward portfolio. Your second question was with regard to Russia/Ukraine and what will it do to rates. I think it's really too early to assess. I mean first and foremost, some of these areas that were being affected in terms of terror portfolio was in competitive market rates or slightly declining. And so certainly, it moderated any rate decline. With regard to how that portfolio responds, obviously, we'll see through the year. But obviously, our business is cyclical and if there are significant losses, which there are reported to be, then clearly, that will find its way through the pricing environment.

The next question comes from Nick Johnson of Numis.

Two questions, please. Firstly, on Retail Europe, just looking at the construct of underlying 12% income growth. I think that's the number. 8% is rates. Just wondering, excluding rates, what is the breakdown of the 4% balance between inflation indexation and customer growth? In terms of customer growth in Europe Retail, it will be interesting to see how much or what customer growth numbers -- customer numbers have done sequentially from Q4 last year to Q1 this year. If you can give us a feel for that. And then secondly, on catastrophe exposure, I think you said that at a high level, appetite is fairly similar. Can you give any color on sort of what's changed at geographic and peril level? I'm just wondering if there's anything significant to call out there.

Okay. Thanks, Nick. So I'll take the first question on giving a bit more clarity on the Retail Europe numbers. Jo, if you can take the second. So overall, this quarter has been another fantastic quarter for our European business, so growing 11.7% in constant currency. So really pleased about that. I think the key thing to think about when you're considering that growth is it's not just a consequence of rates. It's also a function of portfolio action across the broad book as well. So if I give you a few examples. So in France, we are now seeing double-digit growth, which is absolutely fantastic. It's our second biggest region in the European portfolio, and it has shrunk -- or not shrunk, but it had slower growth over a few -- the last few years. And this is a real step up in terms of its growth rate, and that's a consequence of us doing significant portfolio action in that country the past few years. And now we're taking advantage of the opportunities we see there. So that's somewhere we're seeing a real growth opportunity. If we then compare that to, say, Germany, which has been a powerhouse of our growth in Europe over the few years -- last few years, that's in the top end of single digits at the moment. Now they have experienced good rates, but that is one of our regions where we have been fairly big on cyber and we have looked to moderate some of that growth. Jo's spoken about that earlier. And we've also taken some other portfolio action in that portfolio. So looking at rate and looking at growth and seeing how they all kind of add up is probably a bit too simplistic to kind of really see how that's changing. In terms of overall customer growth, Europe has been really strong in adding new customers this quarter. We haven't actually disclosed our customer numbers, but I can share with you that they are up materially for Europe. And they've been driving significant new customer activity in the area. So overall, we are really pleased with our European performance. It's been sort of a standout for Q1.

Thanks, Liz. And so with regards to our nat cat appetite, so as you rightly said, our nat cat appetite is broadly flat. However, clearly, we've gone through some of the nuances of where we apply that risk with regard to the different portfolios. Our nat cat risk is really a function of our -- what we call the Hiscox view of risk. We reevaluate that. We are regularly looking at the evolving nature of the peril. It would be no surprise for you to say that climate risk has increased over recent years, specifically some of the secondary perils, things like floods, wildfire, et cetera. And obviously, we update our view of risk regularly, and then we do an appropriate business plan with regard to that view of risk. So some of the things to call out would be obviously lessons learned from sort of U.S. hurricanes, Japanese typhoons, obviously been built into our view of risk. Previous things that we've built in, things like the assignment of benefits for social inflation in our Florida portfolio. And then obviously, we implement any sort of -- as I mentioned, sort of that climate view of risk. We're continually optimizing the portfolio to build sort of a diverse risk profile reflecting our assessment of the latest view of risk.

The next question is from Ivan Bokhmat from Barclays.

I've got a couple of follow-ups, please. The first one is on the inflation question that was upfront. I'm just wondering if you could just help us understand -- maybe provide, if possible, a digit estimate of where you think the claims inflation might be running. Because clearly, a few of your larger U.S. peers have been cautioning about some of the small commercial claims inflation. Maybe you can suggest by how much you've been indexing those U.S. retail exposures. And the second question would be also a follow-up regarding the U.S. replatforming. And you mentioned new products and new partners. So I was just wondering if you could just talk a little bit about that and perhaps also about the competitive environment in that space. Because I think a few of your kind of DPD players perhaps have had issues raising funding this year so far. Maybe any color on that.

Sure. So how about I start off with some bit on the U.S. replatforming. And then I'll hand over to Jo to finish that off with any bit [ on builds ]. And then you can cover inflation, Jo. So in terms of the U.S. DPD platform, I'll start off with the competitive environment. So I think one of the things that -- we are, first and foremost, an underwriting company that is enabled by technology. And that is definitely the sentiment that we have taken when it's come to building our U.S. DPD platform. And this is a key differentiator to how we've positioned ourselves against some of our peers. So it's very, very easy to grow on U.S. DPD -- U.S. small commercial business on a digital platform. You just lower your prices and you can grow spectacularly. We have embedded into that platform our history of underwriting knowledge, of pricing, market insight to be able to build a proposition that is both attractive for our partners to work with, gives us sustainable profit and allows us to really build a business that we can believe in. So yes, I think some of our peers who have been more technology-led in terms of their approach to building out platforms in the U.S. have struggled a little bit. I'm sure they'll catch up at some point in time. But at the moment, we feel really good about our proposition there. I guess if I hand over to you now, Jo, you can cover off the remainder.

Thank you, Liz. So yes, maybe I can give you a bit of color on inflation. So taking inflation into account is obviously part of our normal planning, pricing and capital cycle. We obviously consider 2 different forms of inflation, inflation on business that we've yet to write and then obviously, inflation on claims that we've yet to pay. And again, there's many different types of inflation. There's sort of the inflation that things just cost more tomorrow than they did yesterday. So that's sort of cost inflation. But then there's other types of inflation that we consider, things like social inflation, climate inflation or indeed, any other sort of maybe economic-driven inflation. So that's part of a normal cycle. You asked specifically what is the inflation assumptions that we take into account. Obviously, we're not going to go into detail. What I would say though is when I did the -- when we did the loss ratio [ premium authorization ] for 2022, our inflation assumption is pretty much double across the group. So that was roughly our view, and obviously, we've updated that view as we've gone through 2022. I think a couple of things to -- in terms of how do we mitigate or how do we deal with inflation. So as you rightly said, a lot of inflation is dealt with actually by our underwriting exposures, so making sure that our underwriting exposures are fair and accurate and reflect current environment. So if a building is going to cost more to be rebuilt, then clearly, we need to reflect that in our sums insured. If indeed, companies have higher turnover to wages, again, we rate off those and making sure that those underwriting exposures are fully up to date in our portfolio because, clearly, that is what we rate off. And the other area that we look at is on our underwriting actions, particularly in our big ticket business. If you write in excess business and clearly, there's inflation, you attach sooner. So it's making sure that your attachment points are reflective of the current environment and of course, things like deductibles, excesses again and then rating. Obviously, the rates that -- we've gained significant rate across. I think a key thing to point out, it is obviously very obvious but it's worth reminding, is when we look at those inflation -- claim inflation assumptions, obviously, that is only applicable to claims. And obviously, our rating and our indexation is applicable to the whole portfolio. So if you take [ a rough number ] which is half of your portfolio has claims over the loss ratio, clearly, it's not necessarily a direct comparable where you can say, I don't know, 4% claim inflation and you're only getting 4% or 5% in rate because, obviously, the rate and the indexation is applied to the whole portfolio. And obviously, the claim inflation is only applied to -- in that instance, it would be half of the portfolio.

Sorry, may I just follow up on that? In simple terms, can you just compare perhaps this 5% to 8% increases you're seeing in Retail to claims inflation? Would you say you're exceeding the trends with the pricing you're getting?

So I think we've probably answered the question fully enough there, so I'll probably draw that one to a close.

The final question today is from Kamran Hossain from JPMorgan.

I'll be quick because I know we are ending the call. First one is just on kind of Retail and kind of growth versus the exposure. I mean all the commentary in the release talks about kind of mid-single-digit rate increases at Retail in the different businesses, constant currency premiums up 4%. Can you maybe just talk a little bit about what's going on in exposure generally in Retail? Second question, just a clarification, I think, on the kind of Ukraine claims, $40 million. It's a helpful number to start with. Is there anything that we should worry about in the aviation reinsurance portfolio or any risks from that? And the third one, if there is time, any initial views on S&P model changes? I know that's kind of a key kind of capital metric that you look at. Any views on that for now? It sounds like S&P might be getting a bit more positive on capital.

Sure. So 3 cheeky questions for the last question. I'll take the growth one, and I'll quickly cover off the S&P model one. So I shared at year-end that we -- overall, we expect the S&P model changes to be favorable for us. Our position hasn't changed. Despite the fact that we are a cat writer and that is an area where the S&P model do expect loans to increase, we will benefit from the increased diversification benefits that are coming through in that model, the fact that you can now take in DAC and we'll get better credit for our margin. So overall, absolutely happy with the S&P piece. Let me turn now to growth. So overall Retail growth, yes. So we have been growing exposure in Retail. And I think the key thing that I would say is we continue to take portfolio action all the time in our Retail book. So when you look at rates and you look at growth, you need to factor in the fact that we are -- there is a certain amount of churn that is happening within that book all the time as we tweak and shape our portfolio. So we're seeing really good underlying growth, 7.6% in constant currency. We expect that to continue to improve through the year as we start to get back to where we have been on DPD -- on U.S. DPD, in that 15% to 20% range. And we are adding customers onto the portfolio, and we're feeling really good about that. So it is a -- it's a nuanced narrative. We haven't shared any customer numbers with you at this trading update. But as we go through the year, you'll be able to see a bit more of that. And Jo, I'll pass over to you now just to cover off the Ukraine question.

Thanks, Liz. So yes. So as I said at the beginning, clearly, this is a live cat and an emerging event, which is why we continue to monitor. The $40 million is our view, as it stands, as the best estimate of that event. As I mentioned, the losses that we've had reported to date are minimal. The vast majority is IBNR, so we believe that to be a robust number. You mentioned specifically aviation. Just as a reminder, we exited aviation in London Market in 2018, and we have no...

It's the reinsurance portfolio, sorry.

Sorry, in London Market -- we exited the aviation in London Market in 2018, yes. And in reinsurance, we just have a modest [ falling ] share of whole account coverage, including, in some cases, aviation hull, and a very small stand-alone portfolio. And so yes, as I said, the number of $40 million is our best estimate of the event as it stands.

Great. Thank you very much, everybody, in joining our call today.

Thanks, everybody.