Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Good morning, and thank you for joining Hiscox's Q3 2022 Trading Update. I'm Paul Cooper, the Group CFO. I'll start with brief opening remarks focusing on 4 key topics: growth, large loss experience, investment results and refinancing, following which we will open the floor for Q&A. Let me start with some comments on trading momentum and growth. The group gross written premiums are up 9.3% in constant currency. Key drivers have been the ongoing momentum in retail due to the very strong growth across Europe and sustained momentum in US DPD, in line with expectations and strong performance in our reinsurance division, which crossed the $1 billion GWP milestone in the third quarter. Let me provide more color on business divisions, starting with Retail. GWP grew 6.1% in constant currency. This reflects excellent constant currency growth of nearly 15% in Europe and a resilient performance in the U.K., also improvement in the U.S. growth from half year levels as the impact from the U.S. broker channel corrective actions that were completed in May reduces. Excluding this, the go-forward Retail business grew around 8% in constant currency. Most pleasing is the growth in our Retail commercial business, up around 10% in constant currency on a go-forward basis. With a focus on small micro and nano businesses, our US DPD business delivered 9.8% growth as the business continues to make good progress in platform migration. All direct new business customers have been live on the new platform since June, and we are seeing some early positive signs of success. Quote turnaround time is faster, conversion rates are up, and there are early indications that the new customer journey is driving a higher proportion of bundled purchases. Migration of partners commenced in September, and we plan to substantially complete this process by the end of the year. As such, US DPD remains on track to deliver the previously communicated guidance of GWP growth in the middle of the 5% to 15% range in 2022 before accelerating to an excess of 15% in 2023. London Market's growth is somewhat disguised by the impact of the re-underwriting actions we have been undertaking to drive better portfolio profitability in the household and commercial property binder books and also Russian sanctions. Together, these 2 factors have taken 5.2 percentage points from the division's top line growth. In London Market property, we concentrate on deploying aggregate where we retain control, either on the open market or via our Hiscox+ platform. The rating environment surpassed our expectations as we achieved an average rate increase of 7%, which is cumulative rate increases of 72% since 2017. In line with our strategy, our portfolios are balanced, rates adequate and with healthy margins and good growth in attractive areas. This gives us confidence in a robust outlook for the full year. Hiscox Re & ILS GWP grew by 32.3% as we benefited from hardening market conditions. The business achieved an average risk-adjusted rate increase of 12.5% which is cumulative rate increases of 52% since 2017. Net flows into the ILS funds have been close to nil in the quarter following over $500 million of net inflows during the first half. Future ILS flows are somewhat more uncertain as the attractions of materially increased rates are counterbalanced by investor sentiment impacted by Hurricane Ian losses and investors rebalancing portfolios due to the volatility in financial markets. Hiscox Re & ILS generated over $40 million of fee income from ILS and quota share partners year-to-date. The reinsurance book is largely written for 2022, so our attention now turns to the upcoming January 2023 renewals. We are expecting further and potentially material rate hardening as capital withdrawal combined with elevated demand creates an exciting opportunity for the reinsurance market. In the event of material rate hardening, we would expect to deploy more of our own capital and increase retained premiums. Moving on to loss experience. I'm proud to be able to say that we are delivering what we said we would. Firstly, the retail as the loss ratios across all 3 of our U.K., U.S. and European Retail businesses improved on the prior year period. The business remains on track to return to within a 90% to 95% combined ratio range in 2023. This is a combined effect of good progress in operational changes, portfolio remediation and a supportive rate environment. Secondly, Hiscox's natural catastrophe losses in the quarter are consistent with expectations given the estimates of insured losses. The group reserved $135 million net of reinsurance, including reinstatement premiums for Hurricane Ian based on an insured market loss of $55 billion, the majority of our exposure is in big ticket lines, $40 million net in London Market and $90 million net in Re & ILS. Estimated net losses for the Retail portfolio are modest at $5 million. Finally, while the conflict in Ukraine certainly continues to be a live event, Hiscox's estimated ultimate loss from all risks in Ukraine and Russia remains unchanged at $48 million net of reinsurance. It would, of course, be remiss of me not to mention inflation. While the economic inflationary pressures continue to increase across our markets, we have various elements of inflation loaded in our loss ratio picks and pricing models, alongside reflecting appropriate indexation in our rated exposures. Premium growth trends remain positive and ahead of our claims inflation assumptions. Next, some thoughts on the investment result, Central banks tightened policy aggressively during the third quarter as inflation proved more persistent than expected. This resulted in further increases in risk-free rates. The group booked an investment loss of $294 million in the period, mainly due to mark-to-market losses on our bond portfolio, which are expected to unwind as the bonds mature. It's 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 4.8% as at 30th of September 2022. In fact, as at the end of October, this 5%, this is up from 3.4% at the end of June and 1% at the end of December 2021. The short-dated nature of our portfolio means that increases in risk-free rates leads to improvement to our portfolio yield in short order and much improved prospects for investment returns in 2023 and beyond. Lastly, in case you've missed it, in September, the group issued GBP 250 million of 5-year unsubordinated unsecured notes. The issuance of the notes coincides with the upcoming redemption of GBP 275 million of unsubordinated debt in December 2022. The funds raised for liquidity and will go towards the redemption of the expiring note allowing the group to continue to conduct its general corporate purposes while remaining appropriately leveraged. Personally, I'm really pleased that we managed to successfully execute our refinancing plan in what turned out to be an incredibly turbulent and challenging months for debt capital markets. The transaction was in excess of 3x oversubscribed demonstrating strong sentiment and market confidence in the group. Given the market conditions, the coupon on the new notes is 6%. So please don't forget to update your assumptions regarding finance costs next year and beyond. So to conclude, the group has performed well in a complex underwriting environment. Our Retail business is on track with platform migration going well, and we look forward to an acceleration of growth in 2023. The performance of our big-ticket businesses remains robust after the impact of Hurricane Ian and improving conditions are presenting new 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] And our first question today comes from Will Hardcastle from UBS.

Just running through that investment math, if that's okay. If 75% of your investment portfolio is fixed income, and that's yielding, as you say, 5% today, assuming anything from equities and cash would get us to 4% plus all-in yield for '23. Is that math correct? And was there any re-risking taken in the quarter? Or was that just capital market moves effectively? And secondly, your messaging on the growth opportunities probably far more forthcoming than a number of companies have been to this point. I guess what would be the binding constraint on your growth on reinsurance? Is it credit rating agency capital and actually used to use the sort of 160 or below BSCR as a sort of proxy to maintain that credit rating? Does that still stand today?

Yes. Thanks, Will. So in terms of the investment performance, clearly, rates have gone up, and you've seen Central Banks sort of respond. And I think the way to think about it is if you look at our SAA at the half year, that's pretty consistent as of now. So we said that as of October, you'll get 5% on that bond portfolio. We've got a healthy amount of cash for liquidity. And we're starting to see certainly into 2023, that we'll get returns on that cash. So you'll get a bit there. But in terms of the overall sort of with risk aspects, we're not actually taking more risk. So -- what we are seeing is our investment managers sort of on the bond portfolio is, I'd say, do 2 things in broad-brush terms. One is be positioned slightly more defensively in anticipation of the macroeconomic conditions. And I think the other aspect is that they are positioning themselves to take advantage of the higher yield on offer. So I think that's a positive. And I think the other aspect is in a zero rate inflation -- zero interest rate environment, there is the incentive to pursue and look into different asset classes to top up yield. And when you're in an environment of 5%, we just don't have to sort of go down that sort of reach for yield path. So I think that's the sort of investment question. And in terms of growth, I think -- the reinsurance market is becoming very interesting and very exciting. So rates were going up prior to year and there is an imbalance between growing demand for reinsurance capacity. And that's counterbalanced by some withdrawal from a supply perspective. And you'll know that our business model offers a lot of flexibility either to write on an ILS fund balance sheet, so third-party capital balance sheet or on our own balance sheet. In terms of binding constraints, we're very well capitalized from a balance sheet perspective. And you're right, the sort of binding constraints at the sort of rating agency aspects. And really, just as a sort of rough guide at the half year, we were around 200% BSCR. You'll know that the sort of rating starts to come under a bit of pressure from a rating agency perspective when we're at around 155% to 165%. The important thing is that we will be looking to ensure that we've got a balanced portfolio. And that's just across reinsurers, but also across the sort of London Market business. And that's what we've been focused on from a sort of strategic perspective.

The next question comes from Andrew Ritchie of Autonomous.

First question, I just wanted to explore a bit more of the visibility on that growth pickup, the plus -- ahead of -- in excess of 15% in DPD in '23. I guess the reason I'm asking is you make it clear that the direct customers are on the new platform, but I think a lot of the partners are still to migrate which I don't know if strikes me that could be harder? Or maybe if you could just update us on the pipeline or the -- the path of bringing those partners on over the rest of the year? And any pickups or anything that could generate. So I'm just interested, overall, is the visibility on that growth pickup. The second question is related to Will's question on sort of flexibility to grow the reinsurance book in the event that you can't place as much retro or ILS. Is it -- would you be happy to grow your net cat exposure, I guess, measured by P&Ls? Or is it a case of probably you keep that the same possibly with a different balance in gross and net and you're just looking to get paid more for the same exposure? As what I'm interested in, if you see what I mean, grow the exposure or keep the exposure and just how to get paid more. Those are my 2 questions.

No, I get it. So look, if we deal with DPD first, I think that we're pleased with the progress of the re-platforming. So -- and that's come through in terms of the DPD growth of nearly 10% at Q3 year-to-date. I think the important things around it are -- firstly, we're pleased with the way that the platform is going from a direct-to-consumer perspective. You know that there is a societal shift as consumers, customers buy more online. And in terms of that re-platforming, we're selling direct-to-consumers in all 50 states, and that was as of June. The conditions of that has been very, very promising, although early days. So conversion is up back to where it was prior to re-platforming and also sort of the buying process, it's encouraging that we're seeing signs that customers are much more interested in buying on a bundled product basis. And therefore, if they're coming on to the site to buy, let's say, an E&O product, they might be buying -- interested in buying BOP also. And I think that's a testament to the way that the sort of customer journey has been designed into the new platform. So that's the sort of direct-to-consumer, that's promising. Although as I said, it's early days. And then in terms of the partners, as of October, we've got 122 partners on the platform. So that's a substantial number already converted. So we can drive new business for those partners that we temporarily suspended. And then the ramp will be complete by the end of the year. And then, Andrew, the way to think about it is from 2023 on, we'll drive -- we've got a healthy pipeline of partnerships, and we'll start putting those on to the new platform. And I think all of that in the round, if you take where we are as of Q3 and then project on to 2023 shows us that we're encouraged by that and have confidence in the guidance of the 15% plus that we've previously mentioned. I think the second question around how we're thinking about growing the net CapEx. I think that there's -- again, thinking about the flexibility of the model, I think that if you take the Re & ILS business, first of all, of course, we've got the optionality between rising on third-party capital or on our own balance sheet. I think, again, the rating environment certainly post Ian is strong, and as I said, exciting. I think what that leads us to is in very broad-brush terms, I think if rates are up, let's say, around 10% going into 1/1, I think you can see us maintaining exposure rather than driving exposure higher on our own balance sheet. But it's been mentioned of rates going 20%, 30% plus going into [indiscernible]. If that's the case, I think we'd see no problem increasing more exposure on our own balance sheet. So that's sort of the way that we think about it. The other aspect to consider that I put in there is we've been very focused on capital allocation and the London Market property business that is cat-exposed. We have dialed back the exposure. And we think we're being paid more and that the rating environment is much more attractive at the moment on the reinsurance side for the cat-exposed business than as opposed to London Market. And as a consequence of that, that's where we've chosen to play. We have said that if we had the same exposure as we had several years ago on the London Market, the Ian loss would be much, much bigger.

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

Two questions, please. Firstly, you've guided for US DPD growth in excess of 15% next year. How should we think about this in terms of overall retail growth within that medium-term 5% to 15% range you've previously guided for? And second question is on London Market. So the property book has been going through a number of years of re-underwriting. Is this an ongoing project that we should expect to continue?

Yes. So DPD, I touched on, as I said, in response to Andrew's question that from a DPD perspective going into 2023, we remain confident of meeting that guidance is in excess of 15%. I think the overall Retail portfolio, if you look on a go-forward basis is around 8% end of Q3. We've said around the 5% to 15% range is our guidance on overall retail growth -- and I think we're making sort of good strides towards that. So if you look at Europe in particular, a 15% of that performance is very encouraging. So we see a good positive -- good positive runway. I think -- so overall, the direction of the sort of middle of the 5% to 15% range stands based on the performance and the momentum that we're seeing across the business. One encouraging sign as I said is it's not just the re-platforming and how well that's going. But also the U.S. broker business returned to growth in Q3 versus Q3 last year. I think in terms of London Market property, I think it's important to note that -- and we've signposted this that we've been re-underwriting that account for 3 to 4 years, and we will continue to do so going into next year at the moment, and we've determined that we're not getting sufficient returns on the London Market proxy business. And we're not getting paid sufficiently for taking that risk. It's -- we are a very big writer of London Market property. We are, I would say, experts in that field. We have our own view of risk. And as a consequence of that, I think if you look back, we've achieved something like 60% rate increases over the past 4 to 5 years. That, in our view, remains insufficient for where we want to get to. And so I think as a consequence of that, you'll see going into 2023, still some re-underwriting of that portfolio. But I think you've got to take that in -- in the context, I think, of 2 things. One is the more attractive rates on offering reinsurance. I've talked about that earlier. But I think the other aspect is we're seeing across London Market some really good signs of growth in other classes of business. So we're up more than double digit in classes such as D&O, terrorism, marine and energy, personal accident. So I think there are other classes that offer very attractive returns and that we shouldn't just get on that pricing [indiscernible] and what's going on in London Market property.

The next question comes from Tryfonas Spyrou from Berenberg.

I just have 2 quick questions. The first one, you mentioned for sort of $40 million fee income from Re & ILS. Could you maybe give us some color on how much of that is split into sort of profit commissions and how much is sort of a stable run rate in terms of the fees? And the second one is the one you just commented on D&O growing double-digit. At the same time, we're now seeing D&O rates coming down in the last 2 quarters. So how should we think about your view on where the overall rate environment sits in terms of the D&O? Are you happy to grow exposures given how much rates have come, although the delta has been sort of decreasing year-on-year in Q2 and Q3?

Yes. Great. Thank you. So the first question, we haven't split out sort of profit commission and sort of ongoing steady fees. But the $40 million, I think, is a good increase on the $23 million that we achieved and disclosed at half year. So that's a good trajectory in terms of that capitalized fee income. And I think, again, it reflects the strength of the ILS and ecosystem that we have in the sort of Re & ILS business unit and our ability to match risk to capital. So I think that's a positive on that side. In terms of D&O, I think it's important to bear in mind, you're right. So rates have come off slightly modestly in 2023. They're off about 5% year-to-date. But that's against a backdrop of increases of about 250% or more across 5 years. So the D&O business is, I think, very well rated. And I think that, again, it falls within that overall strategy of writing a balanced portfolio and seeking to grow in parts of the business where we see the rating environment is attractive. And that's what we've done, and D&O is a good enhancer of that.

The next question comes from Iain Pearce of Credit Suisse.

The first one was just around the London Market growth opportunity for next year. So you sort of planked some challenges around profitability in the London Market property book. Just thinking about how the other lines of business are performing and if sort of all those lines of business are meeting return on capital thresholds and if we're expecting those to grow into next year? And the second one is just on the re-platforming. I was just wondering if you could provide a little bit more color around some of the expected benefits you expect from the re-platforming and how that will impact the financials, whether this should add further growth, greater efficiency, greater retention, just some of those key customer metrics? And on the conversion rates, you sort of said that conversion rates are back to pre re-platforming levels. Would we not be expecting those to be better than the pre platforming period?

Yes, sure. So look, I think if I look at the first question, the important point that we said is strategically the London Market business doesn't have a top line growth target. That's in aggregate. What we are interested in is getting a balanced portfolio that delivers sustainable returns. And I think you've got to look at not just London Market, but the other classes within that. You've seen -- and what I've mentioned earlier on with those other classes where we are getting double-digit growth that we are selective. And we will make sure and the set each of the classes on their own merits around the returns that they can deliver, that's what I say on London Market. And then in terms of the re-platforming, I think there's several considerations. So your immediate point, Iain, around conversion and the fact that it's back up to where it was previously. It's early signs. So we remain optimistic around the trajectory and the direction of that from a conversion perspective, but also the financial dynamics, as I mentioned, around customers buying bundled purchases. I think the other element is from a sort of operating leverage, which I think is the sort of backdrop to the point that you were making, is that we would expect and we -- part of the reason we've made that investment is to drive growth but to drive it at scale. And I think that's the sort of emphasis on that. So a good example would be as the customer journey is enhanced, what you should expect is fewer customers going on to the call center to complete the customer journey. And as a consequence of that, naturally, you get operating leverage. But all of that means that we are reaffirming our guidance and committed to the guidance of being within that 90% to 95% range of next year.

The next question comes from Andreas van Embden from Peel Hunt. As we have no audio from Andreas, we'll move on. The next question comes from Derald Goh from RBC.

Two questions, please. The first one is just on your underlying combined ratio. I wonder if you can offer any comments on specifically your attritional loss ratio as well as any reserve development, please? The second one is just going back to US DPD. I think at the start of the year, Aki alluded to the profitability of the book being at an underwriting profit, i.e., below 100% combined ratio. But what -- has that outlook changed? I mean, given the re-platforming potentially increased IT spend, et cetera? Any comments at all there, please?

Yes. Let's see. Can you just repeat the first question around attritional for the group? Or was it around just retail or what? Could you explain that?

Yes. I mean if you could split it between retail and big ticket as well. That we that would be great, please.

Yes. Okay. So look, from a -- yes. So I think I mentioned, if I start with London Market, the loss expectations are for -- the losses are better than expectation from a Re & ILS perspective through the year, what we've seen is we've had some exposure to Australian floods. We talked about that at the half year and some other small losses. And then in terms of the retail book, what we're seeing is -- and as I've mentioned in the IMS, that our loss ratios have improved across U.K., Europe and U.S. year-on-year. And you'll know that we have taken sort of extensive underwriting action in terms of that U.S. broker book, for example. And the attritional trend is improving overall for retail. So if you add on rate increases, you can see that the attritional trend is positive.

Anything on the reserve development?

No, nothing that we're seeing.

The next question comes from Faizan Lakhani from HSBC.

This is Faizan Lakhani from HSBC. My first question is going back to DPD growth next year. Could you help me break out how much of that growth has stemmed from rate increases, the onboarding of new platforms and then just the ones that are already onboarded, how much natural growth is there as well? The second question is on third-party capital. Of the ILS funds that you raised during the year, how much of that has already been deployed? And is there any issues around sort of trapped capital that means sort of think about when it comes to the fees and growth in that line of business? And my final question is just on coming back to the London Market property business. In terms of just color structurally, why is that less profitable than the Re & ILS property business?

Yes. So the first one in terms of breaking out the DPD growth, we just don't do that. So you've got the -- I've talked about the promising conditions and environment that we -- and the actions that we've taken that give us confidence to maintain guidance of that 15% plus in 2023. In terms of third-party capital on the Re & ILS, we've deployed all of that. So the additional inflows that have come in they were very meaningful in the first half of the year. And of course, with Ian, there is some trapped capital and obviously, that attracts fees on that capital. London Market, again, I think it is important to emphasize that what we're seeing is we have our view of risk and we're updating that constantly, and it is a big book, that London Market business. We know what we're doing in that space. And I'll repeat, we have been getting rates. So in excess of 60% over the 4 to 5 years, we are about 10% up at least in 2022. I think it's just more our view of risk is increasing in that area. And we continue to re-underwrite that book. It just so happened, and you can see from rate charts that the rating environment for reinsurance is much stronger for reinsurance than the London Market. And I think the -- the important thing to bear in mind is just stepping back a level and looking at Re & ILS versus London Market is these are different portfolios that have different characteristics. And they have -- they're related, but they're just not the same. So I think that sort of helped to explain not only that -- let's say, from a sector perspective, why you're seeing stronger rate increases in reverses London Market but also just the individual portfolio is a manifestly different when you compare and contrast Re & ILS versus London Market.

The next question comes from Kamran Hossain from JPMorgan.

First question is just on reinsurance. I mean obviously, you flagged that you're intending to grow the reinsurance book assuming the prices go up, which I think we all hope they do. What's the impact on your own reinsurance protection? Clearly, you've reduced -- kind of reduced exposures last few years being more focused on retail. What do you expect the impact to be on your own purchasing for 2023? The second question is on Retail. Really pleased to see reiterating the 90% to 95% guidance. A slight kind of -- I guess you've added some words on the end of it. You were saying despite the tough economic backdrop. Now when I think about economic backdrop, I tend to think a little bit more about top line and the revenue outlook. What kind of pressures are you kind of concerned about on the 90% to 95% target for retail given that you've kind of called it out in the statement?

Yes. So let's deal with reinsurance first. So I think the thing to bear in mind is almost that we write a lot of inwards reinsurance that you've highlighted. And therefore, as rates rise, if you think about the sort of quota share in ILS partners, literally the rates that are increasing will just be literally passed through on to our ILS quota share partners and therefore, we should pick up additional capital-light fee income. Then in terms of the sort of remaining book, we are a net beneficiary overall of the sort of inwards versus outwards. And of course, the greater share is where is increases. It's more on property cat, the sort of non-property cat, we're expecting rates to be less -- and I think the -- so overall, from a reinsurance perspective, we would expect to be a beneficiary from a rising rate environment. I think the other thing, Kamran, to bear in mind is as reinsurance becomes more expensive and as rates go up, what we're seeing is a reinsurance-led hard or strict hardening market. So that will translate into -- or it should translate into increased rates in the primary end of things. And you'll know that we have achieved good rate increases across the portfolio for 4 to 5 years now. So I think my expectations around that is that the cycle would be extended. I think the other one in terms of -- does that make sense?

Kind of. I would have seen with your -- more than half of the brokering and retail and that probably going up that it would be difficult to argue that you are net beneficiary, but that's why and I'm sure -- yes, I'm sure it makes sense all the numbers be it [indiscernible].

We've run the numbers, we're a net beneficiary on reinsurance. The second component, look, I think it is important to highlight in terms of retail and the retail core, we've affirmed business remains on track. If you look year-over-year, the loss ratios are improving, and we remain confident in our guidance. And I think the comment just realizes and as I said, is the economic change conditions are changeable. So we're not seeing anything of concern at present. But clearly, we're in an interesting times here. That is really a reference. It's sort of almost remiss not to acknowledge that if things are changing.

Got it. Okay. That makes sense. I kind of think about it a bit more in terms of top line, but that makes sense.

The next question comes from Abid Hussain from Panmure Gordon.

Just 2 questions for me, please. Just following on from the last question on the potential economic pressures. I wonder if inflation is part of the equation. And so just on inflation, can you tell us what's your long-term inflation assumption across the reserve book? And how does that compare with the current experience by segment, if that's possible? And then my second question is on rates. Clearly, the positive outlook into 1/1 renewals. I'm just wondering which particular lines are you particularly pleased with or it looks pleasing in terms of going into the 1/1 renewals? I know, D&O you're happy with despite the rates coming off there. But just a little bit more color on that would be helpful in terms of [ line by line ] please?

Yes. Look, so inflation, we -- you'll know from our half year presentation, we've spent a lot of time looking at this. And I think what's important to note and we noted is that from an underwriting perspective, if you look at the sort of claims inflation assumptions that we put in, we have doubled those assumptions and in some classes of business, doubled them again. And our pricing remains ahead of and the rates that we're actually getting remain ahead of those claims inflation assumptions. I think that's the point to note on inflation from a sort of forward-looking perspective. On a backward-looking perspective, we don't put out sort of long-term assumptions we're making. But what we have said is you'll know, firstly, that we put up a $55 million net precautionary reserve at the half year. As I said, that was precautionary. We have a pretty cautious and prudent reserving practice overall. We have a significant margin on top of that. It's around 11% over best estimate at the half year. And of course, the other aspect of the loss portfolio transfers, the reinsurance protection on those reserves that cover about 20% of the '19 and prior reserves have added protection should the specter of inflation come through. The other 2 dynamics that are important to bear in mind on inflation is one that our average duration of reserves is only something like 1.9 years. So there just isn't a sort of compounding exposure that one might get on a longer tail book of business. And the other aspect, of course, is that I think it's easy to sort of overlook. But on the investment portfolio, next year, we're looking at sort of yields of 5% on the bond portfolio. So there is a -- there's an added benefit on the asset side that I think could be overlooked or there's a tendency to overlook. So that's sort of inflation. And then in terms of rates, we don't comment in terms of outlook on individual classes of business. But in terms of sort of broad brush terms, what I would say is Re & ILS. We've commented that rates were going up pretty healthily prior to Ian and, therefore, sort of going into the 1/1 renewal season post Ian, that rating environment is very attractive. And I think that has caused us pause to see depending on how the rate environment is at 1/1, whether to write much more business on our own balance sheet. And then I think the other aspect more generally is, and maybe a nod back to the comment around the macroeconomic factors is we're in an environment, a pretty uncertain environment, be it geopolitical and be it macro. And I think as a consequence of that, we're seeing that people want and will require insurance. And as a consequence of that, I think the cycle is, as a consequence, going to extend and remain healthy.

The next question comes from Ivan Bokhmat from Barclays.

I've got one question regarding the margins. You guys are were talking in the past on the large ticket books. I mean specifically at the first half, I think we were talking about 80% combined ratio in Re and 85% in London Market in a normalized year. I mean, now that the expectations for rate increases, particularly in reinsurance, are quite substantial -- you mentioned 20% to 30% in certain scenarios. I'm just wondering to what -- if such -- if such scenario comes to pass, should we assume a clear pass-through to the bottom line, i.e., that 85% going to potentially kind of high 50s? Is that a possible scenario in your view? Or the change in the view of risk, the cat budget that you would allocate would take some of that else? Maybe any thoughts on the forward margins considering the market outlook would be very helpful.

Yes. Look, it's a good point. Look, just as a reminder, we said that London Market in the normal year would be around 85%. And in a normal year, Re & ILS would be around 80% combined. I think that we're going into a period where rates are moving, but we just don't know the velocity or where they'll end up. So I think let's get through 1/1 and get to the year-end results, and then we can update you there on our outlook.

The next question comes from Ben Cohen from Investec.

Just following up from Ivan's question actually. And I guess you said what you saw in a normal year. I just wondered if you could put the Ian loss into the context of those, the 85% and the 80% target for those 2 different divisions?

Yes. Look, I -- Thanks, Ben. Look, I think the important thing is we've got still a quarter to go. So you've got the half year performance. We've said 80% to 85% in a normal year. With Ian, you could imagine that track above that.

Okay. But it sounds -- sorry, specifically for London Market, I guess, it sounds like you're saying that that's probably tracking better than normal ex Ian, and you're saying, Ian is a sort of relatively manageable loss there. Would that be a fair interpretation?

That is absolutely a fair assessment.

Okay. But not the same on the reinsurance side, which is obviously more geared to the catastrophe losses?

Yes, absolutely. The important thing to realize on the Re & ILS again is that we've got -- we've got the capital-light income as well. That's the $40 million. You shouldn't lose sight of that.

[Operator Instructions] Next question comes from Darius Satkauskas from KBW.

I was disconnected, so I'm sorry if my questions have already been asked. The first question. You repeated your combined ratio guidance for the retail combined ratio. Considering that you issued this guidance when inflation was very different, can you help us understand where your confidence comes from? I mean is it to do with the business mix that you're now more direct-to-consumer and that benefits sort of the loss ratio? Is it price increases? Any color would be helpful. Second question, income on the aviation renewals and if the potential aviation losses from Russia-Ukraine will lead to material rate momentum even if reported losses remain limited and would you consider growing here?

Look, yes, taking the second question first around Ukraine and aviation. The important thing is that we came out of that business in 2017 or 2018. So -- I think from that perspective, we were happy with that decision, then we don't have exposure to aviation from Ukraine perspective, and there isn't an appetite at the moment to go back into that. So that's that aspect. And then in terms of the core, we sort of reaffirmed that guidance. As you said, I think the 2 things you've got to bear in mind is one, the pricing environment. So we've continued to gain rate over the period, not just for 2022, but also the years prior to that. We're sort of, I think, cumulatively up to the mid-teens. And then I think from an underwriting perspective, you'll see that we have been constantly focused on underwriting the Retail portfolio, and that's borne fruit.

We have no further questions at this time. [Operator Instructions] As we have no further questions, I'll hand back to Paul for any concluding remarks.

No, we'll just thank you for your time and attention for this morning. Thanks, everyone.