Hiscox Ltd (HSX) Earnings Call Transcript & Summary

Good morning, and I'd like to thank you all for joining today's call with Hiscox Full Year 2022 results recap. My name is Brika, and I will be your moderator for today's call. [Operator Instructions] I would now like to hand the conference over to your host, Paul Cooper, Chief Financial Officer, to begin. So Paul, please go ahead.

Welcome, and thank you for joining me for our IFRS 17 restatement event today. I'm Paul Cooper, the Hiscox Group CFO. I'm pleased to share with you our restated 2022 full year and half year numbers. While getting to this point involved a huge amount of effort to cut through complexity and breaks and deeply established habits. Hopefully, our presentation today will deliver sufficient information and good time for you to rebuild your models ahead of our interim results in August, as per our usual schedule. Please treat our materials today as a build on the December teaching, although as you will see, our thinking has evolved in some areas, following a detailed analysis of our restated numbers and as reporting conventions and disclosure standards start to emerge from peers. As always, please be aware that all numbers presented today are unaudited and may be subject to further change. A few words about the agenda for today. I'll start by walking you through the income statement bridge from IFRS 4 to IFRS 17, including our new written premium APMs and explain the seasonality of earnings. I'll then talk you through the impact of discounting on claims liabilities, a topic I know you are all keen to better understand for modeling purposes. Next, I'll cover our primary profitability metric, which under IFRS 17, remains the combined ratio. We will look at some of the complexities introduced through the treatment of reinsurance commissions and reclassification of expenses. We will also take a look at the balance sheet bridge, risk adjustment and new confidence level target range. I will conclude with some key takeaways and comments on outlook. There's a lot to cover, so fasten your seatbelts and I'll begin. As I mentioned back in December, IFRS 17 is merely a new accounting standard. While there are changes in the presentation of our financial results, a new concept to grapple with, notably on discounting claims liabilities, it doesn't change the way we run the business. There is no change to our strategy, economics of the business, investment result in SAA, reserving philosophy, capital and dividend approach. Let us now look at the full year 2022 numbers. There's a lot to digest that the changes will start making sense to you as we move through the presentation. As you can see, there are positive movements to PBT, ROE and NAV. Discounting of claims reserves of $196 million is the main driver of PBT, increasing from $45 million under IFRS 4 to $276 million under IFRS 17. This flows through to the ROE, getting us into the double-digit territory. Discounting is a material contributor to the increase of $ 218 million in closing shareholder equity. Improving NAV per share by $0.63. At the bottom of the slide, you will see our 3 segmental combined ratios. In retail, there is a marked decrease, broadly no change in London market and also a notable increase in Re & ILS. There's a lot to unpick here. So let's jump straight into explaining the detail to help you understand the movements, starting with growth. As you know, IFRS 17 only presents earned premiums, but to understand the volume dynamics in our business and for comparability, we feel it is important to give a volume growth measure in line with how it's been presented historically. Therefore, we have introduced 2 new alternative performance measures to present written premiums on a gross and net basis, which you would have seen reported as part of our Q1 trading update. What will be helpful to you is that growth trends are broadly consistent with the old IFRS 4 world and the rate of growth is not impacted on transition. It's just that the starting point is slightly different. This is due to 2 reasons: insurance contract written premium or ICWP for short is a little lower than gross written premium due to reclassification of inwards reinstatement premiums to claims, and inclusion of reinsurance overrider commissions on inwards reinsurance. Net ICWP is 8% higher than NWP as outwards reinsurance commissions were previously deducted from acquisition costs. However, they are now offset against allocation of reinsurance premium. This means that on a net basis, things do look a bit different in our Re & ILS segment, meaning there is an uplift to NIC WP versus NWP. However, we expect the gap to track on a consistent basis, subject to any material changes in the reinsurance program. The treatment of reinsurance commissions also has knock-on implications for the combined ratio, which I will come to later on. So as you can see, written growth will be relatively easy to model in the new world. Earned growth will be subject to one quirk, namely seasonality. It's important to start by saying that seasonality has no material impact on an annual basis. It is only a half year phenomenon in our big ticket business, and in particular, in Re & ILS. You will see this when I bridge the income statement at half year and full year in a moment. What I mean by seasonality here is that more premiums are earned in H2 compared to H1 in cat-exposed lines. IFRS 17 requires us to earn the premium in line with the risk profile of the business, i.e., the period where the risk exposures are concentrated at a more granular contract grouping level. Our Nat Cat business is impacted by the U.S. wind season in H2, giving rise to the shift in earnings pattern. The seasonality impact varies by segment. It is most prominent in Re & ILS, which writes a greater share of the Nat Cat business, where only 29% of written premium was earned in the first half compared to 44% on a group basis. This seasonality impacts half year profits, but this is just a tilt with no overall change to the full year profitability. For London market, there is a moderate impact. Finally, for retail, the path from written to earned premium is linear as it was under IFRS 4. So no change here. This seasonality impact is important for your modeling of half year versus the full year. So please bear this in mind ahead of August. Notably, we expect Re & ILS insurance service result to follow the premium earnings profile, and this will also be lower in H1. This will naturally flow through to the half year combined ratio. Let me now bridge our profit from an IFRS 4 to 17 basis for 2022. Let's start with the full year 2022 bridge at the top of the slide. There are notionally 2 main changes, which result in an uplift to profit of $231 million for the full year to $276 million. In order of magnitude, these changes are: firstly, discounting, which had an overall net benefit on our profits of $196 million. This comprises of 3 main steps resulting in $76 million, $18 million negative and $138 million movement, which I will talk you through on the next slide. This means that the mark-to-market losses in our bond portfolio and our IFRS 4 2022 profit now have some offset because of discounting of claims liabilities. Secondly, FX movements of $24 million. There is now more symmetry in the balance sheet as unearned premium reserves and deferred acquisition costs are revalued at the closing FX rates in line with the rest of the balance sheet, resulting in a favorable impact on transition. As I talked about in December, the impact of onerous contracts on 2022 profit is small. I've prepared a slide on this, which is included in the appendix as the impact is so negligible. As a reminder, we will reevaluate the onerous contract position twice yearly and set up and subsequently run off any new positions as needed. Let's now have a look briefly at the half year bridge at the bottom of the slide. You can see the $18 million negative impact of seasonality I talked about a moment ago on the half year profit, which is largely earned through in the full year result as shown in the full year walk. Having just seen the material impact of discounting on profit in 2022, $196 million at full year and $119 million at the half year, it is worth spending some time to unpick the COR components. Well, isn't IFRS 17 complicated? As I showed you on the previous slide, there are 3 steps to discounting. Let me talk you through how each one works and what the impact is on the numbers. Starting with Step 1. This is the initial discounting of claims on recognition. You can use the weighted group discount rate and duration to get the estimated PV of the incurred claims and initial discount benefit to claims. In 2022, the average weighted group discount rate was 2.9%, with a duration of 1.9 years. This gets you to a $76 million favorable impact from initial discounting. The size of the impact is dependent on the prevailing interest rate in the period. In 2023, the initial favorable impact from discounting on claims recognition will be larger than 2022 due to an expected higher blended rate. As a reminder here, the discount is applied to net earned claims in the region of $1.3 billion in 2022. Moving on to step 2, which is the unwinding of the initial discount over the settlement period of the claim. Opening reserves unwind at the opening forward interest rate and new claims in the period unwind at the prevailing forward interest rate in the period. You can think of this as removing the appropriate portion of the discounting benefit that has already been applied, this will have an unfavorable impact on profit. In 2022, the size of the unwind was negative $18 million. In 2023, we estimate the unwind will be a negative in the region of $110 million to $140 million. At half year, this is expected to be in the region of $60 million to $65 million. The 2023 numbers are significantly higher due to the impact of higher interest rates. Finally, to step 3, this is the impact of discount rate movements in the period. For 2022, the circa 4% rise in interest rates led to $138 million favorable impact, and this is recognized in the IFIE to make 2023 estimates. We suggest you use the sensitivity analysis set out on the slide. The overall impact of discounting is the sum of the 3 steps. In 2022, it was a positive $196 million impact. Please do remember this is a noncash item. Let me turn your attention to the combined ratio. As I noted at the start of the call, combined ratio remains our key profitability KPI. Although our thinking on the definition has evolved since December as reporting convention starts to emerge, we have taken the decision to adopt a net-net definition of the COR which I'll define on the next slide, and many of our peers are arriving at the same conclusion. There are limitations with either approach, but ultimately, the KPI should be a fair reflection of our business model. Our big ticket businesses make extensive use of reinsurance as a risk management tool and IFRS 17 doesn't deal with this in an intuitive way. Let's take a look at the new definition. The combined ratio comprises the insurance service expenses, less amounts recoverable from reinsurers as a proportion of insurance revenue, less allocation of reinsurance premium. Before I talk about the IFRS 17 impact, the transition to own share presentation increases group COR by 1.7 percentage points. As some of you who have followed us for many years may remember, a 100% basis was introduced to present the Hiscox's combined ratios when our ownership of Syndicate 33 was moving notably from period to period, thus introducing comparability issues to our KPI. As our ownership of Syndicate 33 has been relatively stable for a while, it appears appropriate to announce streamline disclosures and align COR presentation with the income statement. Without going into too much detail, the difference between 100% and owned share basis is down to the mix of Syndicate 33 business across net premiums and net claims. This change in definition resets our starting point for the IFRS 17 walk. Moving from left to right. The first 2 bricks, the 0.6 percentage point increase due to change in treatment of reinsurance commission a 1.4 percentage point decrease due to reclassification of some expenses as non attributable to outside the COR arise from a onetime step change in definition. I will explain in detail how this works on the next 2 slides. The next 2 bricks represent movements which continue to occur period-on-period. But as you can see, these are very small. Notably, onerous contracts are a smaller benefit to COR in 2022 as some of the loss component has unwound. And lastly, there is a 2.4% benefit from discounting, which in the interest rate environment is favorable given the relatively higher interest rates in 2022. A point to note is that not all of the lines necessary for the calculation of the combined ratio are included on the face of the IFRS 17 income statement. So we will be providing some additional disclosures to help you calculate it. Before we look at how reinsurance commissions impact the ratio, a point of housekeeping, the impact of LPTs has been reclassified in the definition as they net to nil in the insurance service result, but would have created volatility in the net COR as they distort earned premiums. Before I move on to talking you through the claims and expense ratios, it's worth me explaining the impact of change in reinsurance treatment and reclassification of expenses to nonattributable. Firstly, reinsurance. This slide uses IFRS 17 numbers to illustrate how IFRS 4 and IFRS 17 standards treat reinsurance side by side. Please bear in mind that what you see on the screen will not reconcile to the published IFRS 4 numbers. This is just for illustrative purposes to show you the mechanics. Under IFRS 17, fixed reinsurance commissions are no longer deducted from acquisition costs. Instead, they are deducted from the allocation of reinsurance premium. While the impact on profit is identical and the economics of our reinsurance contracts are unaffected, it can have a material impact on the COR when extensive reinsurance such as in our Re & ILS business is used. Splitting this out, for the expense ratio, reinsurance commission has moved from the numerator in the old definition to the denominator in the new definition, increasing the ratio. For the claims ratio, it has the opposite effect. Reinsurance commissions now appear in the denominator, and so the claims ratio decreases. The move of reinsurance commissions from the numerator to denominator means that we are rebasing the COR to a higher number. This is rather counterintuitive, but the more reinsurance or third-party capital we use, the higher the combined ratio. This bears no relevance to the underlying profitability of the business. Moving on to reclassification of expenses. As you can see, the classification of non-claims expenses is slightly different under IFRS 17. As a reminder, attributable expenses relate to costs associated with writing insurance contracts and are included in the insurance service expense. We then have non-attributable expenses being the other operational expenses line in the income statement, such as brand marketing, a portion of overheads and training. Unsurprisingly, corporate center expenses are deemed to be non-attributable where judgment comes into play with partially attributable expenses such as management time and IT expenses. Under IFRS 4, we previously included the vast majority of these in the underwriting result, but they have now been redistributed between attributable and non-attributable expenses. The vast majority of the expenses are attributable and remain part of the insurance service result. As I told you on an earlier slide, this improves the COR by 1.4 percentage points. Looking at non-attributable expenses. Our corporate center costs will be carefully controlled, and we expect to continue with increased investment in brand to support growing the business. Now that I have explained the main building blocks of the COR transition, I will dive into claims and expense ratios individually. As you can see, it is 5.7 percentage points lower than our reported claims ratio. 3.8 of this benefit is due to the changes to treatment of reinsurance, which I've just talked you through. Discounting is the only other material movement. You will note there is no impact of reinstatement premiums or RIPS in the claims ratio walk as these were immaterial in 2022. However, it is worth mentioning that under IFRS 4, RIPS formed part of the denominator as they were included in net earned premiums. Whereas under IFRS 17, they are a part of the numerator as they are netted off against incurred claims or amounts recoverable from reinsurers. Moving on to the expense ratio. To start off from an obvious point, please note that the expense ratio is not impacted by discounting. As you can see on the slide, it's 3.8% higher from our previously reported expense ratio. This is mainly due to the change in treatment of reinsurance, driving 4.4 percentage points of increase. So more than the benefit to the claims ratio I mentioned earlier. On a positive note, there is a 1.4 percentage point favorable impact from the reclassification of non-attributable expenses. Now let me walk you through the combined ratios by segment. Before I jump into the explanation of how IFRS 17 impacts the retail combined ratio, let me remind you, there is no change to the economics or expected profitability of our retail business. We are not introducing any new guidance today, and there is no change to the outlook. Now to the retail combined ratio block, shown on this slide. As you can see, the starting point has increased by 0.8 percentage points from the previously reported 94.8% in 2022, as we move to an own share presentation. This is not an IFRS 17 change. This is due to the impact of business mix with the own share having a lower weighting of business written on Syndicate 33, including our U.K. Fine Art book which in most years will operate at a lower combined ratio than the average for our retail portfolio. Please note that the 0.8 percentage points move is not a fixed number and will vary according to the performance of the retail business written in Syndicate 33. Although, as you will know, this change from 100% to our share doesn't change the profitability of the retail business, it is purely a ratio change. There were 3 components under IFRS 17, which will drive the undiscounted ratio going forward. The largest moving part is the benefit from a reclassification of nonattributable expenses as required by the standard. Out of the combined ratio, which results in a 1.6 percentage point reduction in full year 2022. This is a presentation of change to the COR, which leads to no change in PBT. Again, it is important to note here that 1.6 percentage points is not a fixed number, and it may be higher or lower period-to-period depending on the level of non-attributable expenses. The other 2 building blocks relate to a change in reinsurance treatment and onerous contracts. These, in aggregate, reduced the ratio by a modest 0.3 percentage points in 2022, but will vary from period to period. So overall, the impact of IFRS 17 change on the retail combined ratio in 2022 was a decrease of 4.6 percentage points of which $2.7 million is due to discounting. Moving on to the retail combined ratio target range, which is 90% to 95% under IFRS 4 on a 100% basis. We are planning to release the quantified target range in new currency with our half year 2023 results in August when we report under IFRS 17 for the first time. However, to avoid any confusion, I am happy to confirm 3 things today. Firstly, that this range will be on an undiscounted basis as we have no control over interest rate movements. Secondly, that it will incorporate the directional benefit of expense reclassification I have just highlighted. And thirdly, our expectations of ultimate retail profitability and cash flows remain unchanged. Let's move on to London market. The London market combined ratio is broadly consistent between the 2 standards. You are now familiar with all the building blocks. The only thing I would note is that the impact of discounting is slightly less than retail due to the business mix of shorter tail Cat-exposed lines and longer-tail casualty lines. Another point to remind you about is seasonality. You won't see it on the slide, but there is a moderate impact at half year, which becomes negligible by full year. Let's turn to Re & ILS. In contrast to London market, there is a step change to Re & ILS COR due to extensive use of third-party capital. To give visibility on this, we will be calling out the drag on Re & ILS's combined ratio from the impact of reinsurance treatment. The offsetting benefit from discounting is also less pronounced due to the shorter duration of the Re and ILS book. Again, as a reminder, the half year combined ratio will be impacted by seasonality, meaning you should expect a higher combined ratio in H1, returning to expected levels by the end of the year. Let me be clear that this is not a reflection of any change in the underlying profitability of the business, but rather an outcome of the earnings pattern where we earn around 2/3 of our premiums in H2. In contrast, expenses continue to be recognized in a linear fashion, and the expense ratio was increased by the treatment of reinsurance in H1. Looking at the closing balance sheet. It is important that you understand our change in equity for calculation of return ratios. There is only one point to draw out. There is a 218 million increase in closing shareholders' equity, mainly due to discounting driven by steep interest rate increases in the period, accounting for 196 million of the movement. This will reduce our leverage ratio accordingly. It is worth noting that our previously reported full year IFRS 4 2022 ROE never benefited from initial discounting of claims. But as we have now moved to IFRS 17, you will see the unwind negatively impact ROE and earnings in future periods. As this is the only slide that touches on tax, it is worth a brief mention here. The increased tax charge for 2022 is purely due to timing differences on taxable versus accounting profit. For '23 onwards, we do not expect a meaningful impact to ETR as a consequence of adopting IFRS 17. I will now take you through the impact of IFRS 17 on our reserves. As I mentioned earlier, there is no change to our reserving philosophy, and we remain conservatively reserved. Just as a reminder, in our old money, our best estimate was measured as a mean estimate of expected losses and our reserve margin represents an additional buffer to compensate for the uncertainty in the timing and amount of claims. The risk adjustment of 246 million replaces the IFRS 4 reserve margin. With events not in data or ENIDs being reclassified from margin to best estimate. Overall, net reserves have increased by 178 million, with a reclassification of 534 million of legacy portfolio transactions or LPTs, more than offsetting the decrease from discounting of 250 million. As a reminder, IFRS 17 requires LPT to be reclassified into the asset for remaining coverage. To be clear, the economic benefit of the LPT does not go away, but just moved to a different part of the balance sheet. Now to the new IFRS 17 KPI confidence level, which represents a measure of reserve conservatism in the new world. In reality, the concept of confidence level is not new, and our actuaries have had visibility of this internally. What's new is that there is now a requirement to disclose it. The overall confidence level is very similar between IFRS 4 and IFRS 17. Roughly speaking, in 8 out of 10 years, our reserves should be adequate and there has been no significant change to this as a result of IFRS 17. As you would expect, our long history of reserve releases bears this out. For 2022, the risk adjustment of 246 million equates to a confidence level at the 78th percentile. Let me talk you through the confidence level in a bit more detail on the next slide. As I mentioned on the previous slide, the risk adjustment, plus best estimate is equivalent to a confidence level of 78% under IFRS 17. The ENID reclassification I've just talked about means that for the same confidence level, the risk adjustment will be a smaller percentage of a larger best estimate than under IFRS 4. Our business is made up of segments with different volatility profiles. For example, our big ticket reinsurance business typically has margin held against specific Cat or other events which tends to lead to a higher confidence level. Conversely, our more stable retail business would have smaller event specific reserves, which trends towards a lower confidence level. Based on this, going forward, we expect to operate in the range of 75% to 85% under normal business circumstances, demonstrating our prudent reserving methodology. This means that the pattern of consistent reserve releases you are used to seeing would be expected to continue barring unforeseen circumstances. Our retail business is less volatile than big ticket. And as its share grows, the 75th to 85th percentile range becomes even more robust with a high likelihood of positive runoff. Just to remind you, confidence level ranges are not really comparable company to company as different insurers have different reserve volatility. What would make more sense is to compare how Hiscox's reported confidence level moves from period to period. And the nature of our business means we expect it to move. We will certainly explain it if it falls outside our target range. You will be pleased to hear we are nearing the end of the presentation. So let me run through key takeaways. For those of you who started to drift off during the presentation, now is the time to wake up and refocus your attention as I'm about to summarize the key points to remember from today. The overarching message you should take away is that there is no change to the economics of our business or cash flows. The slide is a little busy, so let me briefly touch on each key takeaway. Firstly, discounting. As you've seen, this is by far the most significant factor on our restated numbers, and I've talked about it in some detail. It's been introduced to represent a more economic view of claims liabilities on the same discounted basis as assets, which ultimately reduces volatility in the income statement. An important thing to bear in mind when you come to do your modeling is that discounting gives a noncash benefit to the income statement, which will unwind in future periods. In other words, the overall impact is simply timing. The initial recognition of discounting is now included within the combined ratio with the unwinding rate change through the IFIE. Secondly, as we have already flagged in December and recap today, the impact of seasonality skewed to H2 for Cat exposed business, in line with the risk profile of the business, particularly in Re & ILS. This results in lower profits and a higher expense ratio in H1, but there will be minimal impact at full year. For the avoidance of doubt, this will be the case going forward, and you should build that into your expectations for each set of H1 and H2 results split. Thirdly, there is a new treatment of reinsurance commissions, which are now offset against premiums, increasing the combined ratio, notably for Re & ILS, with no change to profit. Also, remember the LPTs net out in the income statement, but would have distorted the combined ratio view. So we reclassified them for the definition. Next, there is a change in how expenses are split under IFRS 17, which is between attributable and non-attributable with the latter excluded from the combined ratio. This means the expense ratio decreases, thus partially offsetting the deterioration caused by the change in reinsurance treatment. And finally, reserving in our confidence level. Our reserves remain robust. There is no change in measurement, although there is now greater transparency through presentation of our risk adjustment and confidence level. So what does this mean for our 2023 numbers? On discounting, as I outlined earlier, on discount unwind, we are currently forecasting some 110 million to 140 million, an unfavorable impact for the full year, which is of course much higher than the 18 million we saw in 2022. At half year, the equivalent number is around 60 million to 65 million. This will be a noncash drag on profit, so please bear this in mind. On growth, all the guidance we issued in March is unchanged. On combined ratios, as I mentioned earlier, the retail target is new currency will be released with the half year results. It will be on an undiscounted basis and will incorporate the directional benefit of expense reclassification seen under IFRS 17. Another point I want you to keep in mind for half year is that seasonality of earnings will depress Re and ILS's underwriting result and combined ratio in H1 versus H2. This is not a drop in underlying profitability, but a matter of timing. Finally, on confidence level, I have now stated our target confidence level range of 75% to 85% under normal business circumstances, and expect to travel within it in 2023. That concludes the presentation. And I'm now going to hand over to the moderator for Q&A. Thank you.

[Operator Instructions] We have the first question on the phone line from Andrew Ritchie of Autonomous.

Thanks very much for this presentation. It is definitely one of the most comprehensive we've had. Just methodological question. I would have expected the current year benefit from discounting to be closer to the IFIE even in 2022, given the short duration of your business, and I don't think you locked in any discounting transition on the reserves. So I'm just curious why there wasn't more convergence because there was only a tiny fee expense compared to the 76 million current year benefit. My assumption when I look at your forecast for '23 is I'm going to end up with a very similar current year benefit and IFIE roughly, would you accept that -- I mean broadly, what it should be on a steady state anyway, maybe just confirm that. Just some other quick questions of clarification. I don't think there's been any real change, but just clarify what is other income in the new income statement. Just remind us what that is? And has it changed? You mentioned the tax rate, but you didn't remind us what the ETR is long term. Just clarify that. The other question is, when I look at your IFRS 17 presentation last year, you said you were not going to come out with a target confidence interval, but you are now, what changed your mind?

Thank you, Andrew, for each of those questions. So I think it's useful to go to Page 8 for the sort of discounting points that you make. And I think the -- if you look at each of those components, I think what you can see is really what drives the level of discounting, both on initial recognition and then during the year and then for the unwind is really 2 aspects. One is the size of the reserves and then the second aspect is what's going on with the yield curve and interest rates. And generally, what you can see is, and what we've tried to highlight and why you have a difference between initial discounting and IFIE is that the initial discounting is on the incurred claims. So I mentioned earlier that the incurred claims for 2022, as an example, were around 1.3 billion. And I know that on a sort of forward basis on 2023, you would be modeling expectations around the overall group combined loss ratio as an example. However, in terms of the impact of sort of rate changes and what's already sitting on the balance sheet for discounting that's going to be reflective of the circa 3.5 billion that we had on the balance sheet at year-end undiscounted. So the first aspect of why you would get a difference between the 2 is one is the incurred claims, which typically should be lower than the actual, call it, the reserve bank on the balance sheet. That would be one driver of differences. And then the reason that you're seeing sort of such a change is, obviously, rates increased quite significantly in 2022 from around 100 basis points to 400 basis points. And that's really why you're seeing, I think, 2 things reflected on Page 8. One is for 2022. The unwind coming through is only 18 million. So that would really be the sort of discount rate. The discount that was embedded at 2021 sort of unwinding along with the unwind of any claims that are incurred in 2022, but unwinding in 2022. Obviously, that's a lot bigger, and that's why we've guided you in 2023 for a far larger amount because you're essentially sitting on a larger discounting element, and that's the sort of 110 million to 140 million that is expected to unwind for the full year 2023. That $110 million to $140 million is obviously a lot higher, and you can see that through the sort of step 3 on Page 8, where did that change in interest rates, as I mentioned, drove up the IFIE quite significantly, the 138 million. And if I draw your attention, and so what does that mean in the round for 2023 and indeed on a prospective basis. You can infer that 2023's initial discounting, notwithstanding the size of the incurred claims, the discounting element should be higher than the 76 million in 2022 by virtue of higher interest rates as they currently stand. Now clearly, there remains a degree of uncertainty around interest rates. The big unknown is the sort of bottom right around the way that the yield curve will move throughout 2023, and that will flow through to the IFIE accordingly. So what we've tried to do on that page is give you the sort of building blocks and the principles. Albeit, I recognize that it's quite challenging to actually forecast the impact on discounting because of those variables. I think what is helpful is going to be...

Sorry, can I just check the current year discount is the weighted average over the year or at period end for the current year effect?

The current year will be the weighted average discount.

As the claims are incurred over the year?

Indeed. So that -- and all I was going to suggest is if you look at -- I mean, this is obviously 2022, but we'll give you an indication of the sensitivity of the discount rate for rate changes as well. So hopefully that will help in terms of the approximation in terms of how rates will impact the IFIE.

I think I was just to clarify that you will provide a discount benefit on the current year. It's not in the spreadsheet. There's no -- I know you've given us in the one of the slides, but you will systematically give us the discount benefit to current year.

No. I think that's the -- I think you've got to go back to the building blocks that I mentioned. So it would be -- what's the weighted average discount rate, assumptions around the remaining payout pattern. And obviously, the discount rate so that they're applicable that are....

No, I don't mean for forecast. We can forecast it. I think it's important that you give -- when you report financial results, you should give us the discount impact on the combined -- the current year discount impact.

You can -- well, what you'll certainly see is the difference between discount and undiscounted that is disclosed in the end. So it's a requirement.

Okay. I would suggest it should be an interim -- on every financial period, you should disclose that, as your peers are doing.

Well, we will take that away, Andrew. Thank you. So that was part one of your question. I think the second part was around what's in other income. And generally, there are sort of several dynamics to that. There is commissions on sort of business that we write on behalf of others, so sort of third-party commission. There is the element of both revenue and profit commissions that we receive for the syndicate 33 share that we don't own. And then the last aspect is ILS and the ILS fees would be the third component. Now one of the changes that you will see in the bridge is that if you look at IFRS 4 and how things were incorporated within the underwriting result, what we used to have within the underwriting result is some of that other income. That's now been reclassified out of the insurance service result, but it's on its own line as you move from the insurance service result to PBT. So you see that clearly on the income statement. And then the last part of our confidence level, I mean, I think there's 2 things. It's really a question of if you sit back, the first thing is that the standard requires a confidence level. And what we think is important is to illustrate the range within which we expect to travel because -- and I think this is consistent with what we said in December, is that we are not expecting to land and target a specific point estimate. I think what this shows is 2 things. One is that the reserves, as I said in my sort of presentation, the reserving philosophy remains the same. And the reserves are conservative. So the 78th percentile is robust. It does mean around 8, 10 years, those reserves will be sufficient. And indeed, the range that we have selected. So the 75th to 85th percentile, we think is also a conservative range. So to bring that to life, if we travel towards the bottom of that range, then you shouldn't automatically expect that we will strengthen reserves. That range in itself is conservative. And what we were trying to articulate is 2 further things. One is around you will know that we are growing the retail business that have reserves that are typically less volatile. And therefore, what you can expect is as those reserves grow as a proportion of the total you can imagine that the overall reserves become less volatile, and you can expect, therefore, at the 78th percentile to have a higher probability and a higher level of reserve runoff through time. And we have had that history of reserve releases over history. And the last aspect, I know there's always the temptation to draw comparisons with others and other companies, but the fundamentals are what dictates the confidence level is the profile of volatility and the underlying portfolio of business that's written that gives rise to those reserves. So there isn't a direct read across between any company. What is important, I think, is the point estimate that we have year-on-year, where that's moving within the range and the drivers for it. The last point, so you mentioned ETR. So yes, there's just we don't provide guidance, but you can see that there isn't a sort of material change from that reclassification. As I said in December, the underlying tax is still driven by the underlying GAAP reporting. So all that happens on a group basis is you have a degree of deferred tax washing through as timing.

We now have Will Hardcastle from UBS.

I'll echo Andrew's comments. This is really comprehensive. First one, you give a -- in the document, you gave a good explanation of how you get that discount rate being the swaps and then an adjustment to get the liquidity premium, I think it's using spread on AA bonds. If I back out, the liquidity premium looks really small, except sterling. I guess, it's almost -- it looks almost negative as well on 1-year rates. Do you agree with that? And why would it be negative for 1 year? And presumably, you're using year-end rates. I'm just trying to understand there's an averaging effect in it. The second one is just understanding the transition rates that you've used, how far back -- if we're sort of backing out that IFIE tail, would going back 2 to 4 years, give us enough data effectively? Or are the casualty lines much longer? I guess in that context, is there any possibility we can get that duration, I guess, for the retail versus the London market Re & ILS? And the final one is, is there any -- I didn't see the PYD numbers at the group level that you've disclosed for H1 and full year. Is there any possibility for when we're modeling going forward, we'll need to try and get those, I guess? And is there any possibility, this maybe geeky, but getting that disclosed divisionally next year? I guess what's the logic of not providing that?

Great. Thanks, Will. So hopefully, look, I could take each of those in turn. You're right. I mean one of the things if you look at the way that we have applied the discount rate, we've adopted the bottom-up approach. So it really is around the risk-free rate, adding on an illiquidity premium. And you're right, given the very short duration nature of our book, it is growing roughly 1.9 years on average, that illiquidity premium in January is pretty small. I mean it's pretty negligible just as a guide. So I think the sort of the negative aspects we can look into, but I don't think it's really a big feature, really, I would focus on the risk-free rate as a good guide. And really, it's not about -- the important point is, I think people get hung up on the spot rate. It really is the yield curve and the forward swap rate that is giving an indication of discounting because obviously what you're doing is looking forward in terms of that payout pattern for your claims. In terms of the prior year development, and what you will see in the half year and the standard requires it is we will show loss development triangles. It will be, I would hasten to add on an undiscounted basis. The other thing to think about is it will incorporate because of the nature of the presentation that IFRS 17 requires. Things like reinstatement premiums being embedded within the loss triangles. So that's something to be aware of. The other aspect is that the standard avails you to a 5-year loss triangle disclosure initially. And as I said in December, what we'll do is start with those 5 years and then add a year as each progresses so that you cumulatively get up to a 10-year level of disclosure 5 years hence. And then from a from a divisional disclosure perspective noted, we continue to be happy and satisfied with the group level of disclosures that we provide.

We now have Freya Kong of Bank of America.

Paul, thanks very much for the restatements and helpful presentation. A couple of questions. Just following up on Andrew's question. Did you lock in the discount rates at transition in 2021? And that was the reason why the unwind was so low over 2022 because isn't the unwind meant to be at the forward interest rate each year. And this gap between the discounting benefit and the unwind. Should this close over time? Or will there always be some sort of small lag effect either tailwinds or headwinds depending on interest rates. Secondly, how should we interpret any changes in your risk adjustment confidence level year-on-year? Will you clearly explain changes due to volatility of business mix versus actual changes in underlying prudence. This is quite hard for us otherwise, I think, to see. And the 75% to 85 percentile range is set to allow for normal volatility in claims. Yes, sorry, that's yes, that sort of the question. And the last question is just on normal business circumstances range holds, what sort of scenario would you make -- would make you go outside of this range?

So that's -- Fred, can I just ask you, you talked about locking in the reserves. The second part of that first question, I didn't fully catch. Could you just repeat that? What do we look in the interest rate. And then there was a second point about some offset?

Yes. So the difference between the discount benefit on the unwind, should that close over time? And will there always -- although there always be some sort of small lag effect?

Yes, okay. I get that. So let's talk about sort of reserving. So again, I think Page 8 is probably the most useful slide to talk about. And really, all that's happening is your opening reserves sort of reflective of your, call it, your prior year prevailing rates that have been applied to discounting. So you almost need to think that they will vary through as you're setting up your sort of incurred claims. That sort of prevailing, call it, the weighted average interest rate will drive your discount on your incurred claims, but it will also adjust the balance sheet reserves that are on balance sheet each year. So there isn't a sort of lock in to the interest rates that stays fixed throughout the unwind -- the full unwind of the discount and that's why you can see such a dramatic change in 2022 on Step 3, the 138 million is showing how that rate hasn't remained locked in. It has varied. As concerns the lag, I think it's really interesting, and you will get the general principle unfortunately is you've got those 3 moving parts that are absolutely interconnected. But you are getting that sort of lag effect come through. So the rate change on step 3 is pretty instantaneous. The incurred rates on step 1, I've sort of mentioned, the lag effect is the constant unwind of step 1 and step 3 is really what lags through. And the degree to which they offset, there isn't a -- you shouldn't expect them to absolutely match in any calendar year because of the nature of the lagging effect that occurs. The one important point to note, and we should -- we did try to emphasize this, but I want you to take it away, is that 2023, we'll see that drag on profit, it's noncash in the region of 110 to 140 because of the unwind that's coming through on balance sheet. Now the initial benefit of that, of course, in 2022 and prior hasn't occurred because we reported under IFRS 4, we were under a different regime. So that is a sort of transition of adjustment, I think that we would encourage you to sort of take note of. Then in terms of just moving around in terms of the -- your second point around reserves. We have talked about the range that we expect to travel within. And I think that as part of explaining around what's going on in terms of that confidence level, I think it will come through in terms of what's happening in terms of performance. So to mind, I think that there is excuse me, you're going to have a -- I'll wait until the fire alarm goes off. I'll just go on mute. Bear with us -- I think it's almost over. Right. Sorry about that. You'll be pleased to know that building was not on fire. That was a regular test. So -- but sorry, Freya, just to continue on your question. So we talked about discount rates. I think there's 2 things that we'll bring out. Obviously, the sort of performance in the year and the nature of what's going on from a volatility perspective in the reserves you would expect us to talk about. And we have commented on that in the past around reserve releases, Cat events that are new, et cetera, that would drive that point estimate. And we also disclosed under the analysis of change the movement of the risk adjustment. So you'll see those components. As to going outside the range, as I said, the range has been set as conservative, we'd expect to travel within it, as I've said. And should we go outside it, we'll have to see what gives rise to going outside of that range. And we'll see whether any management action is warranted were that to occur, either above the 85th or below the 75th. So I think it's a sort of wait and see and see what circumstances drive that.

We now have Tryfonas Spyrou of Berenberg.

I have 3 questions. So the first one is on LPT transaction. Can you perhaps comment as to whether there will be an impact going forward? And if any, could you elaborate on how can this evolve so we can better understand how to model this? Second one is on the confidence, again, I guess you're sort of around 78% at year-end. How should we think about this in the near term? I mean given your comments, it's fair to expect that this could trend upwards given the growth dynamics we're seeing in Re & ILS than the market versus retail, I guess, in 2023, which is somewhat lower. So I guess, any comment there. And the third one is on the brand costs, you consider to be non-attributable in retail, so that I guess that's moving below the line. How should we think about this given that you have seen in the past that these obviously are driving growth in customers. And could [NICWP] somewhat considered part of the acquisition cost. So maybe if you could elaborate on this will be helpful.

Yes. Great, thank you. So in each of those questions. So the LPT, there's a long answer to this and a short answer. The long answer, I'm happy to sort of take offline and explain it. The accounting is actually quite complex. But I think the things to bear in mind is, firstly, you -- essentially, what the standard is encouraging you to do is to move the balance sheet. As the sort of gross claims run off and are paid out, you're essentially moving the balance sheet from, call it, unearned the ARC as it's currently classified to the AIC. That's just -- that's a balance sheet reclass. It's net nil. So you can, to some degree, ignore it. The other point, and we will start disclosing this, it's actually in the RNS, but you'll see that disclosed on a prospective basis is the standard gets you to essentially recognize as those claims run down a net nil P&L impact. So you have a gross up of your reinsurance recoveries on one side of the P&L that benefits claims. And then in another part of the P&L, you have a gross up on earned premium -- on reinsurance earned premium. And the latter point, the reinsurance earned premium is where you get quite a bit of distortion because obviously you can see from the presentation that a number of the KPIs have earned premium as a denominator. Now that impact is net nil. So really, all you're seeing is and what we've done for all of our KPIs and what will give you the information is to enable we'll show it on a net basis, and we'll provide you and show you the adjustments that we've made. It is distorting, and I think it's an unfortunate byproduct of the construct of the accounting standard. The only other aspect where you will see for the existing LPTs in terms of a P&L impact, is if there is gross deterioration then obviously the LPT is doing its work and recognizing the protection that, that affords, and well, on the one hand, recognize the additional recovery. But on the balance sheet, but the recovery actually goes through as a credit on earned reinsurance earned premium. So again, the standard in that aspect, if you think about the impact, what's happening is your gross claims are deteriorating, we are recognizing the recovery, but the credit goes through earned premium, which is personally, I think, very counterintuitive, but it's just something that we will disclose to enable you to understand the moving parts of that. That was the first question. And the second point about confidence level, 78%. I think that's just a reiteration of what I've said before. You can see the reserves are robust. You've got to bear in mind this is translation from what we had previously. And in essence, you can see the way that, that point estimate might move around within that range depending on the composition and underlying volatility of reserves, it's outlined on Page 20. As an indication of travel. But clearly, you've got to look at the overall group portfolio, and not just look at and extrapolate from any one driver. You've got to look at the reserves as a whole. And then on the third component about brand. Yes, I mean, it's a really good point. So essentially, what you have is the standard IFRS 17 drives you to define attributable costs where you have costs that are associated with writing or generating insurance contracts, it is specific and the brand is non-attributable. So albeit what you would understand and what we have said is, in order to drive growth in the retail business, in particular, and capture that opportunity that exists within retail, we will continue to invest in marketing. And we did so in '22, and we will increase that in 2023, 10% to 20%. And that component will break down that marketing strategy consists of both, call it, paid search, banner advertising and brand. And you've got to look at it in the hole. It's just a standard that really sort of breaks it down and gets the brand component to be disaggregated and put outside of the combined ratio.

Thank you. We now have a question from Nick Johnson of Numis.

Paul, a couple of questions, please. Firstly, I think the move to presenting combined ratio on an own share basis, I think it's pretty positive because that is all attributable to shareholders. I just wondered if you're going to still give 100% level of data for premium income, so we can get a feel for the sort of scale of the overall franchise? And secondly, on combined ratio, I might be being thick on this. But can we calculate the combined ratio from numbers in the disclosures? Or does that require additional disclosures to get to the combined ratio?

Yes. Thanks, Nick. The second one first is you -- if you would just follow the strict rules of the standard, you wouldn't be able to really understand the combined ratio. So that's where we're going to provide you, and I said in the presentation with the appropriate disclosures to enable you to calculate that thoroughly. So the reinsurance commission aspect that I mentioned is a good example whereby the standard requires you to disclose a single net number, i.e., the reinsurance premium netting off the reinsurance commission to get you a lower number. Now obviously, we will show you that greater element. So you can understand the distorting effect that, that has as an example. I think the other aspect in terms of the 100% owned share for premium. We don't intend to disclose that prospectively. But clearly, you've got an understanding of syndicate 33. And essentially, that will show the absolute size in the sort of syndicate accounts, et cetera, of both the stamp, but obviously, the premium that's written for that business. So you can get a sense of the own share to 100% level. That is the key driver of the 100% controlled premium, an absolute size of the business we control.

We have another question on the phone lines from Andreas van Embden of Peel Hunt.

I just had a question about actually the investment portfolio. You've always managed the investment portfolio shorter duration than your liabilities, and I appreciate your liability is now at 1.9 years, they're shorter than I thought they were. But I think you're still managing your assets versus liabilities still on a short duration basis. I just wonder whether in the future you will try and match that duration between your investment portfolio and your liabilities to get a better matching of that interest sensitivity through your assets and liabilities? Or is this just not relevant for your business model because you just want to make sure you've got a very liquid investment portfolio. So there will always be the sort of mismatch.

Yes. That's a great question. I think it's useful to start from an ALM perspective of what gives rise to differences. You can see it again. I think it's quite useful to see the sensitivity outlined on Page 8 of the difference of 100 basis point change on investments, along with 100 basis point change on the liabilities. So the 2 differences are, of course, the absolute size. So what's going to drive difference from that perspective is crudely, we've got about 3.5 billion at the end of 2022 reserves. If you look at the investment in cash portfolio, drawing on your point about it in liquidity. We've got about 1.3 billion of cash and about 5.4 billion, 5.5 billion of bonds. And obviously, the rate changes are going to be driven on that bond portfolio. So given we hold capital in order to write business, clearly, the asset side of the balance sheet is greater than the liability side. So I don't think from an ALM perspective, you're going to have that matching in the first place purely from the difference in size. I know that feels somewhat intuitive, but I think it's important to point out. The second aspect and what really gives rise to that change is the composition of the sort of bond portfolio. Hopefully, I think what you can see is if you look at the IFRS 4 basis, where there were mark-to-market changes last year because of interest rates. Under IFRS 4, you only obviously saw the one [Indiscernible]. So we had the mark-to-market losses going through the P&L. And hopefully, what IFRS 17 does, and one of the advantages of it is you're now discounting the liabilities. So you do have less volatility in the P&L as a result of that. The second component is, as you said, duration. So I personally think at 1.5 years on the asset side versus 1.9 million there's not -- there isn't a big spread. But you're absolutely right. I think personally, I would like them to be closer together. We will be monitoring and evaluating the ALM. The important point to note, though, is that the yield curve has been inverted for a period of time and therefore, sort of extending duration at the moment on the asset side. Albeit modestly, doesn't make complete sense to me from a returns perspective. So I think, Andreas, will sort of look to all of those components and manage them accordingly. But I think it's also just having a sense of sort of what the yield curve is doing accordingly. What we have said and as a reminder is from a sort of investment strategy and an SAA perspective, there's no fundamental change.

And in the case, you would want to extend the duration of your assets in the future that primarily would be done through the bond portfolio, given where the forward curve sits, what would make more sense to expand your investment portfolio into sovereigns, government bonds? Or would you be willing to take on more spread risk on your investment portfolio?

Yes. Again, great question. I think the obvious thing and to me is that, certainly, what you've seen arguably in the last 2 years, if not longer, is there is just sort of volatility in the macro. Be it government policy, fiscal policy, economics and trends and left field aspects in terms of, say, wars or conflicts. So I think what we'd be doing is evaluating all of those on a regular basis and positioning in the portfolio accordingly. I don't think you can say at this point of time, given the externalities that prevail and that may prevail into the future of how we'd set up the SAA.

We now have Faizan Lakhani of HSBC. Your line is open.

The first one was on how -- on bridging IFRS 17 to sort of Bermuda SCR and what sort of bits and piece we should be thinking about when trying to do that? The second is on disclosure. In the past, you provided a breakdown of expenses at the full year. Will you still do that? And will you bucket that into sort of attributable and non-attributable expenses?

Yes. Thank you. So the second one first, just in terms of disclosures. So you'll still see the buckets of costs that remains the same, but have they then split down into attributable and non-attributable, it's an extra step that we think isn't necessary. You can see -- what you will see is by segment and in aggregate, is the difference between attributable and non-attributable. But just -- I mean, just to put it in context, Faizan, I mean I think it was on Page 19 I'm guessing. But what you can see is just the amount of nonattributable costs actually just isn't that significant is something like 60 million part of 1.6 billion. So to some degree, it's -- and it will be very explicit, but I've told you sort of the components of what's in there to help you. So I think you can sort of infer what we will disclose in terms of the total. And elements that belong in, let's say, the nonattributable bucket. Then bridging from IFRS 17 to BSCR and capital, I think -- and look, this is in broad terms, but the way to think about it is -- if you start with our NAV, that's obviously discounted under IFRS 17, you then increase capital because for the sub debt and then knock off intangibles that don't count. And those 2, if you look at 2022, are broadly sort of they net roughly off one against the other. And then you've got 3 drivers really for the other differences in broad terms. There's a difference in discounting. The BSCR actually has currently a higher -- it's mandated, but it has a higher discount rate. And therefore, the benefit is slightly higher compared to IFRS 17. The second aspect is the risk adjustment. The risk adjustment is different for IFRS 17 versus the BSCR. And again, I think the BSCR is slightly lower, so you'll see a pickup there on the risk adjustment. And then the final component is Capital really sort of worked out on a written basis versus an earned and unearned and essentially the profit that's embedded in the balance sheet from an unearned basis effectively gets recognized for capital purposes for the BSCR. So that would be the sort of third big driver of the differences between the two.

So in terms of trying to model the flow of capital, would it make sense to sort of take the new form of written premium apply sort of a combined ratio to that and assume that to sort of net income, plus sort of other income expenses. Would that be the right way to do it? Exclude IFIE and everything.

No, not really because -- well no, so you can get from the NAV to the capital bridge as I've mentioned, that's one aspect. The other thing to mention just on a prospective basis, though, is I said that capital is very much on a written basis. So you take into account your -- for your available capital. Your, call it, your expected profitability. So your loss ratios, et cetera, are not a bad basis. Not take into account changes in risk adjustment, not taking into account changes in discount rate. But then the other component from a required capital is what's happening in terms of our exposures, and that's also on a written basis. So what you've written and have exposure for the policy period, forms part of your considerations around underwriting risk and therefore required capital. And that latter aspect is obviously harder to model because it's not sitting within financial results, et cetera. But that's the theory.

I can confirm we have no further questions. So I'd like to hand it back to Paul for any final remarks.

Great. Well, thank you all for dialing in. And I hope you found that helpful, and thank you for your very thought-provoking questions. And I apologize once more for the fire alarm that went off in the middle of the Q&A. But overall, thanks very much for your attention today. Thank you.