Hello everyone, and thank you for your patience. Welcome to the Beazley's year-end 2021 results call. My name is Daisy, and I'll be coordinating this call. You will have the opportunity to ask a question at the end of the presentation. If you would like to register a question, please press star followed by one on your telephone keypad. I'll now hand over to your host, Adrian Cox, the CEO, to begin. Adrian, please go ahead.
Thank you, Daisy. Good morning, everyone. Welcome to the presentation of Beazley's 2021 results. I'm here with Sally Lake, our CFO, Bob Quane, our CUO, having successfully made it across the Atlantic this last weekend. I'll take you through the overview and dividend policy. Sally will then discuss the financials and share the usual metrics. Following that, Bob will delve into a little more detail on the underwriting, including drivers of growth and thoughts on climate change, and he may even mention cyber. After that, I'll present our outlook for the coming year, and we'll go on to Q&A. On to the overview then. We're pleased with these results. While we're not yet back to the heady heights of 2012-2016, we have generated the largest profits in our history.
It's a combination of underwriting margin that's returning back to the sort of levels that we target, and a reasonable investment income in what was quite a difficult year, particularly the last quarter. Our combined ratio was 93%, and for us, that's the metric that really matters. We are working very hard to try to continue to reduce that further, this year. Our combined ratio includes all costs. It's a very transparent measure of the real margin in our business. It's good to deliver on our promises, and this is slightly better than the mid-90s to which we guided in the half year and the third quarter IMS, and is a reflection of lower than budgeted for cat activity in the fourth quarter.
Again, we expect this number to improve given both what we've done over the last four years on the underwriting side and our expectations for market conditions looking forward. Profits then of just under $370 million and a return on equity of 16%, which is respectable and, given our expectations for the combined ratio, should also continue to improve. Of course, the reason why our ROE isn't even higher, given those record profits, is that we're somewhat larger now. As a comparison, our gross written premium in 2016 was less than half of what it was in 2021. There are three thoughts I think that spring from that.
Firstly, the combination of the specialty products that we have and the domestic and wholesale platforms that we have to sell them on really does enable strong compound year-on-year growth, even allowing for the prudent cycle management that we pride ourselves on. Bob will discuss these drivers a little more. Secondly, the bigger asset base that this generates should yield greater investment income going forward. Lastly, after these last few years, we're now a tier one market for our brokers across a wider proportion of our products, which is absolutely in line with our ambition and makes us a stronger business. We don't pursue growth for its own sake. We've always obsessed about underwriting profit. It is exciting, I think, that we're in a position with multiple opportunities for long-term profitable growth. Talking of which, we grew 30% last year.
24% of that was driven by rate. I'm satisfied we did manage to put some exposure on the books as we've been talking about doing that for a little while now. It's the right time to do that, and we'll continue to do so this year. Good reserve releases across the board of just over $200 million. Again, with a bigger engine now, these numbers should continue to grow, and Sally will go into that in a little more detail in a few moments. Our surplus capital is slightly in excess of our target range, the range of 15%-25%. Although that'll go back down to 22 post-dividend. I would note that the 27% does contemplate the funding of this year's business plan.
Lastly, as we were indicating last year, we will be paying a dividend of 12.9p, which is up 5% from the 12.3p we last paid in 2019. A few more thoughts on that in a second. Just before I move on to the next slide, I'd like to announce that we will be holding a capital markets day in May this year. There's a lot of stuff to talk about, a lot of exciting things going on here. Too much really to share in a year-end presentation like this. We thought we'd like the opportunity to spend some more time with you, sharing a bit more detail on topics like our cyber infrastructure, IFRS 17, and our new digital business.
If we look back at the five-year trends, it is evident, I think, that this performance is a better one than we've produced in a little while. What's pleasing about it is that we've done so in a period of heightened risk and claims activity. It's not just a benign claims environment that's driven this result. We've been working.
Sorry to interrupt. It appears we have lost the audio from the speakers. Please, can you check you aren't muted?
No, I'm not muted.
Apologies, ladies and gentlemen. Please bear with us as we reconnect the speakers. We'll now resume the call.
Okay. Good morning again, everyone. I do apologize for the technical difficulties we appear to be having. I think we lost the audio for a while. We're getting some texts in saying that the slides are jumping around, so I do apologize if you're having some difficulties. I'm gonna start again on slide six, which shows strong premium growth and the return to profitability. I was just saying, I think before we lost the audio, that you can see from the slides that last year's performance is a better one than we've produced in a little while, and we're pleased we've done it in a period of heightened claims activity.
It's not just a benign claims environment that drove the combined ratio, 'cause we've been working quite hard on this for a few years, and I'm pleased to see those efforts start to bear fruit. I'm gonna move on to our dividend policy. I discussed some of the principles around this at the half year, but I thought it'd be worthwhile going through them in a little more detail. Now they've been finished and signed off. We have retained a progressive dividend, and it remains a strategy that will return excess capital to shareholders. If we can't use the capital for profitable growth, we will return it to shareholders either through the progressive dividend or through a special, and we're gonna move from a twice yearly payment to an annual one. What is our thinking behind that?
Well, our primary aim is to invest in future profitable growth for the business, and the primary use of retained earnings is to do just that. Our planning cycle is an annual one, and it ends in December. Therefore in December, we'll have the optimal view of what the business needs are, what the investment opportunities are, and what our capital availability is. Which means we'll be able to make the most informed decision about dividends in January. For us, a single annual payment seems to make great sense. We chose to retain a policy that is progressive because we believe in the financial discipline that drives.
As I said, we continue to believe that if there isn't a good opportunity to invest our retained earnings in the business, we will return it to the shareholders either via the progressive dividend or through a special. However, fortunately, as I think I've been communicating, there is lots of opportunity for us to invest in the business at the moment, and we hope and believe that that opportunity will persist. With that, I'll hand over to Sally to present the financials.
Thank you, Adrian, and good morning, everyone. My name's Sally Lake, and I'm the FD here at Beazley. I am hopeful that you can see the slides. There is some confusion that they may be jumping around. So just to let you know, if that is happening, we will be putting them on the website. But please do bear with us if that is happening. Okay? So I'm gonna take you through the numbers in a little bit more detail, and then I'll do a quick focus on investments, followed by reserving, with ending on capital before handing over to introduce Bob. Adrian gave a lot of detail already, including the impressive growth that we've achieved over the past twelve months.
Slightly less when we look after reinsurance, as we continue to purchase some additional reinsurance in the areas where we are seeing growth significantly. It is pleasing to see our claims ratio also reduced significantly from its high of 2020, which was caused by our COVID-19 exposure. As we continue to grow, we are also seeing a steady reduction in our expense ratio, where we are able to take advantage of some operational leverage. At its height, at a very different point in the market, this ratio was 41%. While it's pleasing to see this reduction, we are also continuing to invest to ensure that we have the right systems, processes, and technology in place so we are well-placed to maintain our expense ratio at lower levels throughout the cycle. Onto investments.
The first thing I want to note is the overall investment balance has grown by over $1 billion in the past year, which is just another reflection of the overall level of growth that we are currently seeing. The investment balance at the end of 2021 was just shy of $8 billion. As ever, our portfolio makeup remains broadly consistent, with the majority of our assets being sovereign and investment-grade debt, and the remainder being held in capital growth assets. Similar to last year, we have continued to move from investment-grade to sovereign debt. This is a deliberate thing that we are doing as with falling credit spreads, the attractiveness of the investment-grade bonds has reduced. Let's have a look at the return that we saw.
I think given the backdrop of the investment market, particularly in the second half of 2021, the team have done a terrific job with a return of 1.6 in 2021. This was achieved through a number of management actions during the year. While our equity exposures ended where they'd begun, at around 3% of our overall investment, it's interesting to note that at points during the year, they were as high as 6%, as we took advantage of the strong rallies that we saw. We've also added some exposure to inflation-linked bonds within our sovereign debt portfolio, and this helped returns as inflation concerns have been growing. We also chose to reduce the duration of our fixed income exposures as yields rose later in the year, which helped reduce any capital losses.
First weeks of 2022 have brought headwinds to our investment returns, with fixed income years yields rising quickly and equity markets reversing some of their recent gains. We have kept our duration below neutral and reduced our equity exposure, which has helped to reduce the capital losses. We continue to hold a diverse makeup of capital growth assets. Also, whilst the increase in yield does give a short negative impact on a mark-to-market basis, it does improve outlook for future returns. As ever, we continue to remain within our risk appetite and use our management actions where appropriate to both protect the portfolio and search for ways to add return. Now onto reserves.
The reserve releases are usually a large contributor to the overall underwriting profit here at Beazley, and when I took over as FD in 2019, I was not happy with the reserve release position. We've been very, very focused on improving this picture through a lot of hard work around our underwriting actions, and I'm extremely happy to see the outcome continuing to improve this year and all the hard work beginning to pay off. Notably, for the first time since 2017, all divisions have seen redundancy in their reserves, and they've been able to contribute to a reserve release of over $200 million. It's also pleasing to see the line, which shows the overall reserve release as a percentage of net earned premium, on a nice upwards trajectory.
This year's result is around 7%, but this is still below previous good years, which yielded releases in excess of 10%. It's important to note here that particularly in times of significant growth, like the one we're seeing at the moment, there will always be a lag between that growth and the release of reserves within this business. This is because we wait until we have a good degree of certainty around the claims we are reserving against before we start to release the margin which is emerging. This is particularly true of our liability business within specialty lines and CyEx. Now let's look at the level of reserves that are on our balance sheet, and this is a graph that we've been showing for many years now.
It compares the level of reserves on our balance sheet to a consistent actuarial measure, which in itself has a level of prudence within it. We have a preferred range of above this measure of 5%-10%. Showing this graph aims to demonstrate that we are approaching our reserving consistently and prudently over time. Now, as I mentioned on the previous slide, the amount of reserves we have released has increased this year, but you can see that this wasn't achieved by reducing any strength within our reserving level on our balance sheet. This remains very consistent with the previous few years. It's worth mentioning at this point that we have IFRS 17 coming into effect in 2023, and we will be looking at how this affects our disclosures, including those in our reserving levels.
There will be more to come on this in future updates. Finally, onto capital. Nothing new to report on resources with a mix of Tier 2 debt and the banking facility, along with our equity making up the funding. As ever, we measure our capital requirements in a number of ways, but we continue to choose to speak around the Lloyd's, the Lloyd's ECR, which is the most onerous capital requirement and much more prudent than standard Solvency II measures. It considers the business to ultimate rather than over a one-year time horizon, and it also has a further 35% uplift. As Adrian already mentioned, we've already modeled the business that we are planning to write at the end of 2022 within these calculations above. In addition to the Lloyd's measure, we also show our U.S. insurance company, which is subject to a risk-based capital regime.
Now, you can see that the requirements have increased over the year, but they have not grown in line with our premium growth, and they are lower. This is because we are starting to see positive impacts of the rating environment beginning to benefit these requirements. We're also continuing to focus on writing business on the most capital-efficient platforms wherever possible. Now, where does this leave us? That we end the year at 27%, which is just above our preferred range of 15%-25%. This means two things. Firstly, it leaves us well-placed to reinstate the dividend that Adrian's already mentioned, and after paying this, the surplus will move to 22%.
Secondly, it means that if there are indeed further opportunities over and above those that we've already planned for in 2022, we have the capital available to take hold of those opportunities. Now over to Bob.
Thanks, Sally. Hello, everyone. My name is Bob Quane, and I'm the COO of Beazley. As I'm new to Beazley, I thought I would start by introducing myself. I've been in the insurance industry for more than 30 years. In addition to the United States, I worked in Europe for 13 years. In my last 12 years in New York, I've been in global roles. I've led personal lines and commercial line products and consider myself a deep generalist with strong understanding of individual products. I am a problem solver, and I believe I will bring a fresh perspective to Beazley. Today, I'll talk about the growth across all of our products, give an update on natural catastrophe, discuss our approach to climate change, and give an update on cyber.
We often speak about cyber, but I think it's important to let you know about our exciting growth across our other divisions. We can grow across a broad range of products, which gives us long-term opportunity for growth. We actively cycle manage and grow in the hard markets and show restraint in the soft markets. In the next two slides, I will compare gross premium growth against gross premium growth adjusted for rate, which is a proxy for exposure. Looking first at cyber and executive risk, growth is driven by cyber until 2019. The D&O market heightened, hardened, and we shifted the growth to D&O. In 2021, while we had dramatic premium growth in cyber, we reduced exposure at that time.
Turning to specialty lines, we've experienced a broad market positive rate change from 2019, and we have demonstrated consistent exposure growth across those products. Moving to marine and PAC, in 2020, we had an exposure reduced due to the collapse in demand for event cancellation insurance. Other than that, we've had consistent exposure growth. Finally, we have property and reinsurance. We've had exposure reduction since 2017, reflecting a poor risk-reward environment as losses have increased due to the impact of climate change. As you can see from these charts, we have grown across almost all of our products at Beazley, except for property. The story is much bigger than just cyber, and it illustrates that we are well-positioned for balanced growth. We will continue to move cautiously with property until we're confident that we're getting the right return for the risk.
This slide shows how we manage our risk appetite for natural catastrophe. As a percentage of net earned premium, the model loss at the 1 in 250 has been decreasing. You would see a similar trend on a gross basis as we have not made any material modifications to our reinsurance structure. In absolute terms, the 1 in 250 has been growing modestly, but the 1 in 10 has been shrinking since 2019. This will assist us in managing volatility of our earnings. This approach reflects relative deterioration in risk reward and active cycle management. We will continue to move with caution and manage risk appetite carefully as we navigate through the challenge of underwriting for climate change. As we work to get our arms around climate change, we have reduced exposure in property.
I've already covered this in previous slides, and we will continue to move with caution until we are comfortable. We are building capabilities to get our arms around the challenge. In terms of people and expertise, we are strengthening our pricing and modeling teams, and we're hiring a financial climate risk expert. For predictive tools, we are improving our raters, our underwriting tools and cat models. We are also exploring an external tool that will allow us to understand how climate change impacts the physical assets of our clients out to 2050. To account for climate change, we'll add a forward-looking view of risk to our predictive tools. We're making risk disaster scenario more robust for climate change, such as creating a scenario for greenwashing for liability. We will strengthen our client engagement to validate their commitment to ESG and understand their path to transition.
Climate change complicates underwriting and pricing, which will make products like property less commoditized. We believe this plays to our strengths. After we get our arms around it, we will look to grow property. This is an update to the graph and numbers we shared at the interim results in July 2021. It shows that the frequency trend continued in the second half of 2021. We implemented stronger underwriting standards in October 2020, and you can see the powerful impact it has had in reducing frequency on both a policy count and a premium basis. Comparing 2021 to 2019, our exposure has reduced. In fact, 2021 is on the same standard, level as 2018. We believe we have better risk, as evident by the materially lower frequency, and we have significantly more premium.
Before I hand it back to Adrian, I'd like to say more about our approach to cyber. Firstly, the downward trend in claims is driven by underwriting actions taken in October of 2020. This includes a range of tools, and we continue to evolve and refine them as we move forward. Secondly, climate conditions remain favorable. Demand for cyber products is increasing. Insurers are strengthening their underwriting and reducing their exposure, and reinsurers are also tightening their position. In the second half of last year, we saw rates more than double, and this has continued in early 2022. Thirdly, the investment in our cyber ecosystem are on track and continue to evolve. Some highlights include Beazley Cyber Council, a panel of global experts that advise us on cyber threats.
Warnings of ransomware attacks are delivered from threat intelligence and data partnerships to give our clients early notice of the risk. Client service portals, these help clients manage the impact if they suffer a cyberattack. The success of our cyber ecosystem responds directly to the final and perhaps the most important point. We are seeing strong and rising demands from our clients for more risk management support to improve their overall cyber resilience, to help them avoid an attack in the first place or to mitigate and manage the problem should the worst happen. In summary, we believe we are well positioned to remain a leader in cyber as we move forward. With that, I will turn it back to Adrian, who will talk about Beazley's outlook.
Thanks, Bob. Well, I think we've discovered the technical problem. We don't have enough screens in front of us. I don't think we're controlling them well enough. I'll switch this off.
Yeah.
Sally will control the slides. To conclude, we are feeling quite positive about the upcoming year and beyond. Yes, we remain in a heightened risk environment, but the market is allowing us to do our underwriting due diligence and to price for it, mostly. We can live with that. We're planning for continued growth well in excess of our long-term 5%-10% average, boosted by some positive rate change. I'm not sure we'll reach the quite heroic 30% that we achieved last year, but it should be comfortably in double- digits. As I mentioned earlier, we will be looking to add additional exposure to the books this year.
We have the capabilities to capture the opportunity that this market presents, and I expect growth and opportunity across our wholesale platforms in London, Singapore, and Miami, and our domestic platforms in North America and Europe. We will be growing our cyber business, and in premium terms, it will represent more than 15% of our business this year. However, when we rebase those premiums back to 2020 terms by taking out the rate change, it is in line, it will remain in line with the diversification principles that we believe in. We do remain firm adherents to the benefits of a well-diversified business, and in exposure terms, our business will remain that way this year. Given all the above, we're expecting a combined ratio of around 90%, given average claims, which is more in line with our long-term experience.
The investment yield that we show at the end of 2021 has risen a little, as Sally has said. Lastly, I'd like to reiterate the invitation for our capital markets day on the eighteenth of May. It will be the hottest ticket in town, so do book early to avoid disappointment. With that, I'll hand over to Q&A.
Thank you very much. If anyone would like to register a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. That's star followed by one on your telephone keypad to register a question. Our first question is from Freya Kong from Bank of America. Freya, your line is open. Please go ahead.
Hi, good morning. Two questions if I can, please. Firstly, if I normalize for above average cat losses this year, I get to around a core of around 90%. How does that square with your effectively flat guidance for 2022? Could you walk us through the moving parts or assumptions within this? Secondly, just on higher inflation, where are you closely monitoring inflation, and which parts of your book are most vulnerable to potential wage inflation? Thanks.
Okay. I'll take the second question first, if I may. We moved our loadings this year from fears of COVID claims and recession to inflation. We have loaded our loss picks for that. Slightly different parts of the book are affected by inflation than were recession and COVID. Really it falls into two broad buckets. One, social inflation, that we've been talking about for a while, which we continue to load for. More retail price inflation, which affects more of the asset classes. We have adjusted our modeling and our pricing and our loss picks accordingly.
Inflation in and of itself doesn't create a problem for us. It is unexpected changes to inflation cause an issue. Once we've factored it into our loss picks and our pricing, so on and so forth, we're generally able to cope with it fairly well. As far as wage inflation is concerned, we did see a slight rise in attrition levels last year, mainly because we think they've been so low previously, you know, during the first few lockdowns, very few people left because people weren't doing much at all. We're still very comfortable with our attrition rates and with our culture and the feeling of the organization. While we are seeing wage inflation a little, it still remains very much under control, I think. Sally, do you wanna talk us through the combined ratio?
Sure. I'll do the next one. Bob, can you maybe share your iPad? 'Cause apparently we keep going back to investments, which, we don't know what's happened to the slides. It's all very exciting, but focus on our words, not our slides at the moment, guys. Freya, it's a good point around an average cat. If I think about what happened during the year we started 2021, saying that we were expecting low 90s. We ended at 93%. We can talk for hours about whether 93% is a low or a mid, depending on your preferences.
I think that in an average cat, the past year, 2021 would have been probably quite a good low 90s, but I definitely see a delta between an average cat in 2021, our expectation in 2020. I do see some improvement. You're right, Freya, that with an average cat, I think the way we guided during the year was that we've seen claims as expected at a low 90s. Slightly higher than average cats led us to a 93%. I'm not gonna comment on what that is. Then next year, with an average cat, we're expecting nearer to 90%. There is not a huge difference, but a definite improvement between how we entered 2021 and how we're entering 2022.
That is driven by the fact that it takes us a while to start to release our long tail reserves. That's why the delta is perhaps slightly less than you might have thought.
Okay, great. So I guess, yeah, just thinking about the rate improvements then, you've got 24% in 2021, and it should be quite strong in 2022. How should we think about that earnings or into the combined ratio, net of claims inflation, any other assumption changes?
I think it feeds into the combined ratio of around 90% that we've guided to, Freya. You know, the result this year is a combination of what we do this year and what happens to previous years. It's the latter that has the bigger influence on our combined ratio, and that's what we are hoping to guide towards. Hope that makes sense.
I guess going forward, Freya, if you're thinking, what should you be expecting beyond 2022, you're right that if we're writing business at a higher rate in 2022 than in 2021, you would see, all else being equal, improvements on our short tail book, of which I include cyber. They normally take two years to come through. On our longer tail book, which is generally most of SL and the Ex of CyEx, I would suggest that would start taking positive movements after three years. Obviously, we've been seeing those improvements for a number of years now. Given that we are continuing to see positive rate improvements, you should see that incrementally coming through beyond the end of 2022.
Okay, great. Thanks, guys.
Thank you very much. Our next question comes from Kamran Hossain from JP Morgan. Kamran, your line is open. Please go ahead.
Morning. A few questions. I guess just following up on Freya's point, I guess thinking about reserve releases and the combined ratio going forward, should we think about reserve releases both growing in an absolute amount, but also kind of a greater amount relative to NEP going forwards, given that there is this kind of unwind of prudence over time. The second question is just on capital position and the use of reinsurance. I know your capital position came in above the top of your range. I guess after dividend it, you know, it's now within the range, but given that strong position, do you intend to keep a little bit more of the business this year or what are the plans going forward. And the third question, still on capital, how should...
I mean, you know, you've got this new dividend policy today. How should we think about excess capital? Is it anything over 25% or is it gonna be far more vague than that? Thank you.
Okay, let's go through those in turn. First question, the answer is yes, Kamran . You know, as Sally pointed out in a chart that we may be able to show you of the reserve-
If we use the right computer.
If we use the right computer. That one. You know, our reserve releases as a percentage of NEP are up, but they're still lower than they were, when we were throwing out the 90% combined ratio more regularly. If we do perform as we expected, those are the trends that we should see again. As I mentioned, we're a much bigger business now than we were, and so the dollars will increase also, if that is correct. The answer to your first question is yes.
Yeah. I think just to follow up on that, I think the three things that are gonna drive the underwriting profit are exactly what Adrian said around reserve releases. What happens in terms of nat cats versus the average cat margin that we're holding and how we open our reserves as well. I note the third one is generally we do open consistently over time. However, given what's happened in cyber in the last couple of years, you will see that we've opened CyEx slightly higher because of that, so that will also impact the underwriting profit. There's not a direct correlation between just the reserve releases. It also is dependent on our opening position as well and clearly nat cats as well. Sorry.
No, you're good. Second question around use of reinsurance. You're right, we have been using proportional reinsurance to support our growth areas where they are particularly high and capital intensive. I think we will continue to use reinsurance. We are greedy, of course, to keep business on our own balance sheet where it makes sense, and part of that is growing our capital base, part of that is optimizing the business mix, and we do both, and we wanna make sure that net, the business remains properly diversified and optimized. All other things being equal, we will be buying slightly less reinsurance going forward while we maintain that optimization as we grow retained earnings. Part of it also depends on what happens to demand, Kamran.
Because you know, if demand continues to increase as we have seen it, then the growth rates that we are able to achieve in those businesses will exceed the rate at which we're growing capital ourselves, and we'll continue to use the reinsurance to do so. It's a relatively dynamic picture. I think if what you're fundamentally asking is, as we grow bigger, do we wanna keep more? The answer is, yes, we do. And then lastly, your third question around excess capital. Yes, absolutely. If we have more capital than we can usefully invest in the business, we will continue to return that to shareholders, as we have always done, either through growing the progressive dividend or through a special dividend. We're very actively capital managing.
We always have done, and it's a good discipline to have and one that we commit to. Sort of as I was trying to intimate, though, in the presentation, there's lots of stuff going on at the moment, lots of opportunities. We are hoping not to need to return capital to shareholders for the next couple of years at least, 'cause there's lots to invest in. As and when that changes, and it's a cyclical business, then we absolutely will do.
I think in the past when we've returned, it's not necessarily been above a certain number necessarily because it tended to be how we feel about our prospects at the time as well and the other opportunities that are out there. We've never necessarily always targeted a certain special divvy percentage after. It's a lot to do with how we're feeling about our prospects going forward. Unfortunately, we're not gonna give you a number to model there because I really think it's dependent on the situation.
That's great. Thanks very much.
Kamran?
Thank you very much. Our next question comes from Derald Goh from RBC. Derald, your line is open. Please go ahead.
Thank you. Morning, everyone. I've got a few questions, please. The first one is just in terms of the growth levels. I mean, I know you mentioned double- digits, but can you be any more specific about that? I think you previously alluded to a mid-teens net growth of 2022. How has that changed? Also within that, what level of rates have you kind of assumed? Second question is on cyber. I mean, on one hand I hear that, you know, you're quite constructive around the market conditions, but then it sounds like you're gonna keep your exposure flat. Maybe, you know, how do I square the two elements there? Maybe also, you know, explaining a bit more around the capital reallocation. You know, what have you done differently from before?
If you know, the reduction in cat risk frees up any capital at all. Thirdly is just around reinsurance purchases. The contingent quota share that you got last year, has that been fully utilized yet? If I heard you correctly in your introductory remarks, you said that you bought additional reinsurance this year. Maybe you could elaborate on what those new reinsurance programs are, please. Thank you.
Okay. All right. Do you wanna take the capital reallocation one first? Doing anything differently on our capital deck?
I think what you're asking there in terms of capital reallocation is are we moving, say, more capital towards cyber versus nat cat. I think that's probably more the question than capital.
Okay.
Back over this side of the table.
Yeah. I think as we've seen over the last few years, we have been keeping our property exposures-
I think the line's gone. I cannot hear management.
Yes.
Oh, go on.
We've lost the management's audio. Please bear with us as we reconnect them.
Wow. Exciting.
It may be different for people that are in. If people are listening.
Hello, can you hear me?
Hello?
Yes, Daisy, we can.
Can you hear us, Daisy? For those listening that aren't asking questions, you may be able to hear us because there may be a different line between those who are asking questions and those who are just here to observe this very exciting slide and audio journey that we're on.
If there was any doubt that it was live.
I know. Just proving that we didn't pre-record.
There you go.
Daisy?
Now we can't hear her. She can hear us.
It was the last time she hung up and reconnected, I think.
Yeah.
Mm-hmm.
It sounds like that line.
On the line. Thank you everyone for your patience.
Right. Good morning again. Many apologies for the continued technical difficulties. As I mentioned earlier, if there was any doubt that this was a live broadcast, there should be none now. Let's go through the questions that were asked. Growth levels. Yeah, I mean, net growth levels of around the same that we achieved this year, roughly. Sort of the same mixture of rate change and exposure, I think, roughly. It's more of a mixed environment in terms of rate change than perhaps it was a year ago. It's quite difficult to predict where some rates will go, you know, across various bits of the business. Overall we're thinking it'll produce same sort of result that it did this year.
Cyber, you know, we're expecting rate increases to continue there. Certainly a chunk of the premium growth this year will be rate. We are hoping to put a bit of exposure back on the books this year and start to grow our policy count again. Because you can see it's, you know, back down to where it was sort of a third of the way through 2018 currently. The ambitions we have are to get that client base back again once they've invested appropriately in network security.
We will do that according to, you know, what's happening in the marketplace and the risk reward we can get, and the continued growing confidence we have that the re-underwriting and the support that the cyber ecosystem has, provides us with the necessary confidence to put exposure back on the book. As we learn more, we will continue to act. Like much of the plan actually this year, it's gonna be quite dynamic and dependent upon what's happening to the opportunity and how confident we are that the results we have are things that we can continue. On capital reallocation, you know, this is something that we do actively each year, make sure that we optimize the allocation of capital net. We get the best mixture of volatility, contained volatility, and return on equity. We have been moving capital around.
I think what we were trying to show with a slide showing our 1 in 250 model, net cap appetite against net written premium, is that we've been gradually allocating less capital proportionally towards that as the risk reward has been deteriorating and there are increasing perils that we're not getting paid for. If we can start getting paid for taking those risks again, we'll absolutely move capital back the other way, and that's our aim. I think one of the things that Bob was saying was, you know, climate change does present opportunity, I think, for insurance companies that can get their hands around it well and provide the right solutions.
Hopefully there'll be opportunity to help our clients and grow our property book again, because it's a smaller part of our business than it was, 10 years ago. Reinsurance but, the reinsurance question, have we used the contingent reinsurance that we talked about last year? Yes. A bit of it, not all of it. There are some to go. There was plenty of enthusiasm in the reinsurance market for, the sort of partner reinsurance we buy, which we use to help us grow. It's worked well for us, and I think it's working well for our reinsurance partners. Does that answer the question?
Were there any?
Yeah.
Yep. Thanks, Adrian. Maybe just two quick follow-ups.
Yeah.
Firstly, were there any changes to your capital allocation towards systemic cyber? And secondly, on the reinsurance, were there any additional and new programs that you added on this year?
Yeah. We didn't report it, but it was reported in the press that we bought a quota share for our cyber book. We've always bought some proportional reinsurance on our cyber. We have bought more this year because our cyber book is growing and I think that's the right thing for us to do. We always buy. You know, as I say, we try to manage our net book so the business is optimized both in terms of ROE and volatility. Because cyber's growing, that is what we've done. Are we allocating more towards systemic risk? Not particularly.
We've always made sure that we spend a lot of time thinking about what the systemic risk is, what scenarios we are exposed to, what those mean to us, and make sure that we manage our portfolio gross so that we can control them, and that we manage our reinsurance hedges so that the net outcome of them is acceptable to us. We have continued to do that as the scenarios that we build change with the evolving threats and as the book changes.
One of the things that's actually happened this last 18 months or so is that as our policy count has reduced and our aggregate has reduced, and some of the additional coverages that used to be bought when the prices were cheaper have gone away, actually, in numerical terms, our systemic exposure has reduced, although the threats continue to change and evolve.
Yep. All right. Very clear. Thank you so much.
Thank you.
Thank you very much. Our next question comes from Faizan Lakhani from HSBC. Faizan, your line is open. Please go ahead.
Good morning. My first question is on the capital walk from half year to full year. If I'm correctly understanding, at the half year you had the 2022 growth in there, so the capital's moved four points. When I look at the capital requirements, they've stayed broadly unchanged. If we assume your combined ratio as guided from half year from 95% to 93%, probably explains about two points of that. Could you explain where the remainder of the walk stems from? The second question is on reserves. The CyEx underwriting year 2019-2020 continues to benefit from the aggregate excess of loss program. How much protection is left on those two underwriting years?
I guess just as a sort of second part or second question, the gross loss ratio on the latest underwriting of the CyEx has improved significantly since 2020. It still sits four points above sort of historical levels. From this, can we assume that more needs to be done to improve the CyEx performance? My final question is on the absolute growth in your admin expense base. Obviously, we've got inflationary pressures. We've got possibly that you're reinvesting the business. How much growth can we expect in terms of absolute terms going forward? Thank you.
Okay. Thank you. We've got four questions there. I can answer the first one really well, but probably not as well as you can. Why don't I pass over the-
Why don't I do-
Capital bridge to you?
Why don't I do the first and the last, and then you fill in the gaps?
Go on then.
It's a really good question. I would add two things to the movement between half year and full year. Firstly, the capital surplus is done on a Solvency II basis rather than a GAAP basis, which is what our combined ratio is on. What you see there is earlier recognition of the positive rate changes coming through than we would see on our GAAP. I just discussed earlier that when we see positive pricing improvements. I'm gonna keep going as we see positive.
Sorry. Sorry, you cut off there. Sorry.
Okay.
Can you repeat the last just second? Just that.
Let me check we've got rid of some background noises. We just make sure we get rid of it before we start again. The capital calculation, 'cause it's on a Solvency II basis, it will see the benefits of the positive rate change quicker than GAAP, though, because it doesn't have a margin, as we showed in reserving as such. Though actually the positivity you see coming through on a GAAP isn't always exactly the same as the movements in the capital ratio 'cause they're on slightly different bases. When you're seeing a positive rate environment, Solvency II recognizes that faster. That's one thing to note.
The second thing to note that we have finalized between half year and full year is that we set up a captive in the U.S. to do a loss portfolio transfer of our admitted business last year. We transferred our 18 and prior accident years from the end of 2020. We transferred the 19 accident year in the end of 2021, and that will also have a positive benefit on the U.S. RBC calculation as well. They're the other things to add to the math, which I don't disagree with how you went about the math, but they're the other things to think about. That was on the capital. In terms of expe-
Can I just follow up on that quickly?
Sure.
Firstly, in terms of the captive change, the actual captive absolute number hasn't changed all that much, to be fair, between half year and full year. In terms of recognition rates, has your view on rates changed since half year? Or is this the sort of future premium that is coming through in the calculation that has better rates?
In terms of the captive, what will have happened is that any additional growth that we would have seen in the U.S. has been offset by that captive movement. It's not just that nothing happened. Two things did happen there. In terms of rate expectation, I think that I would suggest that between half year and full year, our rates did increase, primarily driven by cyber. That will have changed our thoughts around the profitability of the cyber business in particular that we were writing, which would have an impact on the capital, both, sorry, for 2021 and also how we're feeling about rates going into 2022. I'm hoping you're hearing this because I'm getting a lot of background noise.
Yes. No, no, thank you very much. Yeah. No, that's helpful.
Then I'll go to expenses. I think the question was: What do we expect going forward in terms of expenses? I pointed out that we, you know, with our high, we're at about 41, at a more difficult expense point in the cycle. We're at 35 this year- end. I'm not expecting to see any significant improvement in the short term from that 35%. I think our aim should be to keep it relatively flat. The reason being that we are investing and continuing to invest heavily in things like technology. We've got our digital business, etc.
Our aim is to enable ourselves that when we aren't in a position where we're growing by 30% a year, which I think we can all admit, we're not expecting to be cross-cycle, we're able to set ourselves up in a position where we can maintain a lower expense ratio. When rates aren't where they are at the moment, the creeping up of the expense ratio doesn't happen to the extent that it's done in the past.
Right. Reserves. Yes. We do continue to benefit from the aggregate excess of loss reinsurance that we bought. How much is there left? Enough is the answer. We're not going to disclose how much we bought or how much is left there, but we are quite satisfied that there is more than sufficient. The loss pick for CyEx remains slightly above where it was, slightly better than it was the year before. That doesn't reflect a loss of confidence in the business or the fact that there's more to do. I think it's the fact that we're naturally prudent and cautious in our opening loss picks.
While evidence is coming through that our re-underwriting is working, and therefore we're confident to put a little bit more exposure on the books, we still want to open with a prudential margin above that. That's just our natural caution coming through, I think. Hopefully the background noise hasn't interfered too much. Did you get those answers?
I did. Thank you. That's super helpful.
Brilliant. So like. Great. Thank you.
Thank you. Our next question comes from Andrew Ritchie from Autonomous. Andrew, your line is open. Please go ahead.
Hi there. Thanks. Congratulations, Adrian, on your very strong first year. A couple of
Thank you.
I think they're quite simple questions. First of all, for Sally. Sally, I remember a discussion, probably two years ago now, where you mentioned there was some negative impact from falling interest rates on your economic solvency position. Is that working the other way up? I mean, I guess I'm just trying to understand what the sort of economic impact of higher interest rates are. Clearly I can see how, you know, the running yield improvement will come through earnings eventually. But from an economic point of view, is there a gearing? That's, I guess, the first question. Second question.
At the risk of delving down to a complicated rabbit hole, in economic terms, you're recognizing the improvement in earnings, as you mentioned, in Solvency II terms, because that's on a best estimate basis. You know, it's coming through more quickly. If I take that logic though, it would imply that the reserve buffer should be trending up because you're not recognizing intentionally all of the better embedded margin in the business. Now, I appreciate there was some usage of the cat margin in the second half, but is that logic not right? Shouldn't the reserve margin be trending up at the minute because there's a big lag between what's happening on a best estimate basis versus what you're choosing to recognize.
The final question, just on capital management. In the past you've said as you exceed your target level, the first priority would be looking at the debt structure and potentially either refinancing the short-term debt facility you're still using, part of which you're still using, or repaying that. Now I think the message is you'd pay a special dividend first. Is that the change of message there? Thanks.
Okay. Do you wanna do the first one?
Yep, sure. There would be some positive impacts because we do discount on a Solvency II basis. As interest rates go up, I wouldn't necessarily spend a great deal of time modeling it. It would probably be more apparent for a life company because our liabilities, although we do write liability business, don't have that longer term. Short answer, yes, but not too significant, I would suggest on the first point. On the second point, you are right. The nuance around saying that if benefits coming through to the best estimate quicker, then the margin should go up. I think that's right.
The one thing I would say is that the graph that we show isn't against the best estimate, and there are different assumptions those wonderful actuaries do between the best estimate reserving that they do and the Prudential Actuarial methodology that we use to show our consistent reserving method. One of those is that a best estimate would be quicker to recognize than one with a more Prudential margin. The theory that you show is right, but it's probably more to do with the fact that we compare. It's not a full best estimate within that one. On the third, you asked about the debt levels as well. It is something we're conscious of within the debt levels. I think that we will be continuing to look at opportunities.
As Adrian said, I'm not sure we're imagining that opportunities for growth are gonna go away very quickly anyway. During that period, we'll be measuring our leverage and ensuring that we're happy with that before we're returning anything to shareholders. I don't see that happening in the next 12 months because of the opportunities ahead of us. I don't think I've changed my position, Andrew. I know that conversation. I don't think we've changed our position that the leverage that we have, in particular the banking facility that we have, is something that we utilize in times of significant capital growth, and it's not necessarily something that we'd have cross-cycle. We don't have any firm plans in the immediate future to do anything on that yet. But obviously we'll share that with you if that changes.
There's no implied.
Great. That's good. Good.
That wasn't intended to change.
That's very helpful. Thanks. Cool. Can I just clarify one comment Adrian made just in the previous? Did you say, Adrian, you expected net growth to be similar in 2022 versus? I wasn't sure whether-
Yes.
You were talking about growth or net.
Yeah. No.
Net.
Net net growth in about net.
As in net written. Okay.
Yeah. Yeah.
Brilliant. Thanks very much, guys. Thanks.
Thank you.
Thanks, Andrew.
Thank you very much. Our next question comes from Will Hardcastle from UBS. Will, your line is open. Please go ahead.
Hey. Morning, everyone. First of all, just a quick follow-up on that net growth similar to gross. Just how do I think about that if cyber's growing and there was an additional quota share? I just thought the net would be lower, but is there other moving parts elsewhere that changes that?
No, Will. Sorry. We
Second question. Yeah.
No, carry on. Yep.
It's like, are you sure? Okay.
Yeah. Yep. Go on.
Second question. Just thinking about that capital surplus, just so we're clear going forward, is the 15%-25% target range pre or post-dividends, just so we can think about moving parts in future, not for now. Then regarding cyber and reserve releases and the prudence point and recognition later, I guess just a quick one. It could just be FX or something like that. 2012-2015 years on a net ultimate claims basis for the line seem to have deteriorated. It's nothing much, but I was just wondering what the reason for this and why that wouldn't necessarily marry up with those comments. Thanks.
Okay. I think in terms of the net and gross written premium, what I said was when I was asked to give a bit more clarity about what sort of growth rates to expect, what I said was our net premium growth in 2022 is gonna be roughly what it was in 2021. I didn't comment on what the gross number would be. I wouldn't assume that gross equals net, because you're right. You're right there. When we talk about 15%-25%, it's pre-dividend. And we will look into the 2012-2015 underwriting years. Well, it's CyEx, so it's a mixture of executive risk and cyber. There is some long tail in there. I don't think we thought there was any deterioration, so it could just be FX. If there's anything other than that in there that's material, Will, we will let you know.
Yeah.
There's nothing to read into it, I don't think.
Yeah. At that level of years, it's not a cyber effect going on in that. We'll clarify the reasons for that. It's always important to remember the CyEx. The Ex in CyEx is still a significant part, so I'll take that away for you.
Yeah. Okay, that's great. Just coming back to that pre-dividend 15%-25%. Effectively, I mean, we've got a you know, scenario analysis type thing, but you know, it looks like the dividend impact is broadly 5 points.
Yep.
You know, essentially, there may be a year where you'd be willing to take that down to 10 immediately post-dividend. Is that a fair assumption? Because that would look very low, you know, when we consider that relative to, let's say, potential catastrophe losses, et cetera, I'd have thought.
The 15%-25% has always been pre-dividend and has been seen as good since we brought the regime in. I don't see that as a problem. One of the reasons why we've changed the dividend policy so that it is a single annual payment and progressive as it is so that we have a little bit more flexibility around it, so we can make sure it's appropriate to our surplus capital.
Okay. That's helpful.
One of the things that we've done when we looked at where to reset it was we compared what the dividends could be to what our expected profits were and the implications that would have for our surplus capital. I think the level we set to that should be very affordable for us.
Thanks.
Thank you very much. Our next question comes from Ivan Bokhmat from Barclays. Ivan, your line is open. Please go ahead.
Hi. Thank you very much. I have three small questions, please. The first one is just about the reinsurance. Maybe you could just update us on the excess of loss limit that you have. Not necessarily referring to that aggregate program. But what has changed in terms of your purchasing? And you've also communicated that you've spent 24% of premium on outgoing retro in general sense. Where should this be going for next year? And the second question is also, you know, a bit of clarification on the admin costs. I understand that the 35% includes both acquisition and your admin expenses. Are you seeing any pressure on your acquisition costs potentially? And what does the, you know, the mix towards writing more cyber, for example, does for that?
The third question is just on reserving. I'm just wondering this current 6.4% buffer. I mean, we're still in a hardening market environment. I'm just wondering if we should think about this number returning towards the top end of, you know, towards 10%. Would that be the appropriate thing to do? Or even if that's the right question to ask in the context of IFRS 17. Maybe, you know, to put it in a different way, does the 90% combined ratio imply some reserve buffer additions?
Sorry, can you
A change in-
In reserving philosophy?
Yeah.
Okay. All right. Well, let's start with that one first, shall we? No, it does not. I think, you know, one of the reasons why we keep that graph up there is to show that we can produce a decent combined ratio and maintain the same prudence in reserves. You know, again, as Sally said a few minutes ago, this is not a 6.4% above a best estimate. This is a 6.4% above an actuarial best estimate that we have. Which in and of itself has some prudential margin. As a percentage of our best estimate, it's considerably higher than that. IFRS 17 will change those disclosures so that we will have to make sure that our reserving policy is fit for purpose for that, won't we?
The way that we talk about reserves will change under IFRS 17. We'll be talking about that a great deal in the coming months to take you through that. Our guidance for 2022 doesn't take any of that into account. That's on a like-for-like basis. It doesn't assume that we're doing anything different from a reserving perspective or that the margin would move either north or south significantly. We haven't taken a view on that in order to come out with our guidance of around 90%.
With regards to acquisition costs, we have been working quite hard on making sure that our acquisition costs remain appropriate. You'll note that they have been coming down these last couple of years. It's not really a business mix issue, it's more the fact that we've been particularly as prices have been rising, making sure that those acquisition costs remain appropriate.
One of the things that we've been very vocal about these last few years, and we've been working well with all our partners, is to figure out how we can take frictional costs of placing and administering insurance down through improving our systems and processes so it costs less, so that we can maintain our long-term ambition for those costs to come down because there's just less expensive work to do, and we will continue, we'll continue to work on that. Our business mix is not being influenced by what we want our acquisition costs to be. Those are two slightly different things. Again, on the reinsurance side, no change to our strategy.
The way that we structure our reinsurance and the sort of limits that we buy across various books of our business haven't really changed. We buy in the same way to the same sorts of levels that we always have done, influenced by how much risk we're taking gross, and you know how much aggregate we have. There's nothing really to say around any changes to the sort or the amount of reinsurance we buy, other than what we've already talked about, which is that, you know, as in certain quite capital intensive lines where there's a lot of growth, we'll buy proportional insurance to help us do that.
Thank you very much.
Thank you. Our next question comes from Nick Johnson from Numis. Nick, your line is open. Please go ahead.
Thank you. Good morning, everyone. Two questions, please. Firstly, on specialty lines. It looks like the growth in that segment decelerated materially in Q4. Just wondering what the moving parts are within that, and whether the Q4 growth rate is indicative of the sort of run rate out for 2022 in specialty lines. Secondly on D&O. The share price collapse in some parts of the U.S. market so far this year presumably raises the risk of class action. Just wondering how far outside normal expectations is the current environment around that. How is the D&O book positioned in this environment? I think you mentioned that there was exposure growth D&O during 2021, but I might have got that bit wrong. Thank you.
Okay. SL growth slowed down in Q4. Yes, it did a bit. You know, I think as Bob was saying, there's been relatively consistent growth in specialty lines for a long time actually, 'cause we tend to invest in areas where there's natural demand growth, which is why you find us in things like healthcare and technology and environmental and so on and so forth, 'cause we're in those specialist areas where the pool's always growing and it's a good long-term prospects for us. One of the things we've been capturing within specialty lines is a real opportunity in international financial lines, so FI and D&O.
When that market dislocated in 2019, I think that growth spurt, as we moved to more of a tier one position, is reaching its peak now, and that's sort of driving the reasons for that slowdown. We're delighted with our position in international financial lines, but I don't think it will continue to grow at the same rate that it has since 2019. Good question on D&O in the U.S. You know, we have been saying for a while, as in across our business, that we are in a high risk environment, and that's how we're underwriting. It's what we're pricing for.
Our underwriting and our pricing contemplates a very active, both SEC and other sorts of D&O, claims activity. We wouldn't be surprised to see that pick up following share price falls this year, and we've underwritten to it, Nick. Our results should contemplate that. That?
Very clear. Great. Yeah, I think that that's clear. Thanks very much.
Thank you very much. Our next question is from Iain Pearce from Credit Suisse. Iain, your line is open. Please go ahead.
Hi. Morning, everyone. Thanks for taking my questions. The first one was just on the review of how you look at diversification across the business lines. You sort of said you were reassessing how you look at that in the Q3s. What's been the outcome of that reassessment, and how are you looking at diversification? Following on from that, is there any limit to exposure growth, particularly in cyber, based on sort of diversification ambitions of the group? Then secondly, just on cyber, you said previously, you know, you've been cautious in recognizing the positive claims trends you've seen since October 2020. Have you recognized any of those in the loss picks that you've made for the 2021 underwriting year? If you haven't, sort of when should we be expecting the potential recognition of that profitability improvement? Thanks.
Okay. Yes. I mean, we have been reviewing how we look at diversification. I think what, you know, what we've done in the short term is to rebase everything back to 2020 rates and look at it in terms of premiums then. In that way, we were comfortable to grow our cyber premium, which is what we'll be doing this year. You can see from the slide there that exposures are well down from where they were at their peak in 2020. There's lots of room for us to grow our exposure without breaching the sorts of diversification that we had back then.
Of course, not noting that, you know, we're a bigger business now than we were in 2019 anyway. There is lots of room for us to grow our cyber policy count without becoming less diversified than we used to be. I think we continue to think about how best to model diversification. As our thoughts progress, we'll keep you up to speed. We thought the most pragmatic thing for now was to look at it back in terms of 2020 rates and 2020 policy counts. Is there a limit to cyber growth? Of course there is.
We wanna make sure we manage a diversified business in the way that we always have, because I think that's one of the secrets of our long-term success. As you can see from that slide, we have lots of headroom before we get anywhere near there, so it's certainly not an issue for 2022. You know, have we begun to recognize some of the improvements that we've seen in our 2021 loss picks? Yes, but only a little bit. We should be able to recognize more at the next couple of years. Bye.
Thanks.
Thank you very much. Our next question is from Tryfonas Spyrou from Berenberg. Tryfonas, your line is open. Please go ahead.
Yes. Morning, everybody, and congratulations on a strong set of results. Just one question on cyber. The combined ratio for the CyEx segment is around 93%. Obviously, we don't know the split of cyber and D&O. When looking at the cyber profitability, do you think that is now adequate when viewed against the volatility in increased capital requirements of the class, or do you feel there's still room for improvement there? Obviously including the margin you still haven't earned, do you think that is now adequate? I guess, how is that reflected on your cautious plans for growing exposures this year? Thank you.
Yeah. You know, we are looking to put a little bit more exposure on the books as at now. We wouldn't be willing to do that if we didn't think the margin was right, and the return on capital was right, and that we had the and we weren't able to do that prudently. You know, and the degree to which we do decide eventually to put exposure on the books will be a combination of continued proof that our ecosystem is enabling us to select and work with the right insureds and that we can continue to charge the right amount of money. It is. It's quite a dynamic plan, this one. Not only in cyber, but generally speaking.
We will respond and change accordingly, you know, to what we see both on the demand side and how well our underwriting and risk selection is working. We get increasingly confident about that as each month and quarter goes by. Noting of course that threats change and evolve the whole time. One of the signals we want to send today about willing to put a little bit more exposure on the books is that we're comfortable with the margin we think this portfolio has now.
Very clear. Thank you.
Thank you very much. Our next question is from Abid Hussain from Shore Capital. Abid, your line is open. Please go ahead.
Oh, hello. Hi there. Thank you for taking my questions. I think I've got two very simple follow-ups. You may have actually answered them before, but apologies if you have. Just with the various connection issues, I'm not sure if I picked up on the answers.
Yeah, sorry about that.
The first one is on the investment portfolio. No, not at all. The first one on the investment portfolio and the rising bond yields. I just wanna. Just in very simple terms, I would have thought rising yields is positive for you just simply because, you're reinvesting at the prevailing rates, i.e. higher rates, and so your income levels should be higher going forward. I know there's a capital loss, but, is that more just a mark-to-market capital loss, or are you actually incurring trading losses? I suppose the question really, do you lot hold your bonds to maturity? Just a little bit more about the actual economics as opposed to the accounting treatment would be helpful on that side please.
Just coming back, secondly on the core guidance of 90% or around 90%. To my mind, and I think again this was asked earlier, it feels like it should be 90% or potentially better, just simply because if you do end up having an average cat year with the positive rates that you've been earning over the last year or so, and continuing to do so this year, earnings through similar expense levels, you're suggesting no change in reserving philosophy. You know, unless I'm missing something, PYB will be slightly lower. It feels like the core ought to be, you know, 90% or better. Any thoughts on that welcome, please.
On the first one, I couldn't have put it better myself, that, you know, the economics that you describe is exactly right. The fact is that because we mark to market, that were we to calculate our investor return as of today, the movement in the yields would have a negative impact year- to- date on that. You're completely right that, and I think we said it earlier, that generally speaking, overall, that's positive for us because that ever-growing large portfolio of fixed income is yielding higher going forward. It's been very low for a couple of years now, you're completely right about that. Everything you said, I agree with. Then on the combined ratio, I think we...
I think this is Fred that asked it earlier, but I'll say it again. I think that we started 12 months ago out with a low 90s guidance and then, you know, then the year happened, and I think we're starting out this year around 90%, which I see is one notch better than low 90s. I do see this as an improving picture compared to where we started out a year ago. You know, your hypothesis of if you're there and you're still getting improving rates, is there potential to deliver further in the future?
All else being equal, yes, because if we're at around 90s and we're still getting positive rates, unless we see a change in our expectations on claims, then there is a potential in the future to see that positivity come through. But we are very cautious about guiding to that, and more specifically because 12 months is a long time in our sector. That math would work, but I think we have to see what happens during this year before we can be more definitive on that.
Understood. That's very helpful. Thank you.
You point out a number of tailwinds which are all true, and we wanted to signal those tailwinds, as Sally said, by producing some guidance that was one notch better than we produced a year ago, which feels like the appropriate thing to do. All your comments are true.
I hadn't appreciated the one notch improvement in the guidance. That makes sense.
Thank you. Our next question is from Darius Satkauskas from KBW. Darius, your line is open. Please go ahead.
Hi. Thank you for taking my question. Just one. You might have answered that, but can you provide some sort of color on what catastrophe losses as a percentage of premiums we could expect in a normal year, given what you've got on the books right now? Any color would be helpful. Thank you.
We
We don't disclose that.
We don't disclose that. I would say that the way that I would talk about it would be that in 2021 we had overall slightly higher than average, but we haven't done that disclosure. We can't give that detail apart from to say that I would say 2021 was somewhat higher than average.
What we'd also point out, Darius, I think, and what we've got is. Yeah. What we're trying to explain was that that the amount of cat risk that we're taking, relatively speaking, has been going down quite steadily these last few years. It's flattened out a little bit these last 12 months because of what's happened to prices, but it is still a lot lower than it used to be. Which I think is the right place to be whilst we finish building our tools to be able to have a forward-looking view of risk for climate change.
Thank you. My second question, just to clarify your comment. You said you expect net written premium growth to be similar to last year. We're talking about 20%, right? Slightly higher at the gross level. Thank you.
Yep.
Ish.
I think in the past we've talked about mid-teens. In 2022 we haven't really updated that one though yet. Written and earned on net were slightly different. So it's of around that order net.
Thanks. Thank you.
Thanks.
Thank you. Our next question comes from Barry Cornes from Panmure Gordon. I will open your line. Please go ahead.
Yeah. Morning, everybody. Thank you very much for taking my questions. I've just got a couple. First of all, looking at reserve releases, it looks as if there's been quite a large reserve release in the marine area. I just wondered what's driven that. Looking at triangulations, it could be from 2019. The second question I had was in respect of the expense ratio in property. Seems to have gone up quite a bit to 44%. You have grown the book there. I just wondered if that's likely to continue that sort of level or if it's likely to pull back again. Thank you.
Okay. Couple of quick ones. Thank you for your question. Yes, you're right to point out reserve release in marine. They've had a very good year. You know, that marine book, including assets under investment at the moment. We do get quite a tailwind from a rising yield. Inflation isn't really a problem for insurers so long as we take it into account in our loss picks and our pricing tools, and the market allows us to price for it. What causes problems is unexpected spikes in inflation that we haven't priced for or considered and we haven't included in our loss picks.
You know, where we were back in 2016, 2017 when we started talking about social inflation was we had just begun to realize something that we hadn't seen before, and the market wasn't really allowing us to price for it. That's a more difficult place for us to be because there's some risk with that we've taken on that we didn't realize, and then once we did realize it, we weren't able to charge any more money for it. You know, where we are now, there's a reasonable consensus that inflation is here both on the RPI side and on the wage side, as discussed earlier, and on social inflation. We have taken those effects into account in our loss picks.
We've built them into our pricing tools, and the market is allowing us to price for them now, which is a very, very different place to be. You know, if inflation proceeds as we have assumed, it shouldn't really affect us too much. What will affect us is unexpected spikes that we haven't taken into account or are unable to price for. Which I don't think is the case at the moment.
Thanks, Adrian.
Thanks, Cornes.
Thank you. We have a question from Ashik Musaddi from Morgan Stanley. Ashik, your line is open. Please go ahead.
Thank you, and good morning. Just a couple of questions I have is, you mentioned that the rate renewal rates are up about 24% on the renewal book. Is it possible to get that number ex-CyEx? I mean, the reason I'm asking is, I mean, clearly CyEx has a reason we understand, like, why the rates have gone up, and it has gone up a lot, like 49% is a lot. Just trying to get a bit more sense as to how do we think about rate renewal on the other book, basically. I mean, I saw the individuals as well, like 10% on property book, et cetera, 13% on specialty book. So all these looks great. At the same time, I see that you're reducing cat exposure.
I think you were saying that specialty lines might be growing a bit less as well this year compared to last year, which I was a bit surprised, like 13% prices went up last year. I mean, everyone is still saying that, specialty lines pricing is still going up. What's the hurdle? It's kind of two questions. Rates, ex, and then why the other parts of the business like property and specialty are cutting back a bit.
Okay.
That's one.
Yep.
The second is. One more question, sorry. Combined ratio improvement like, say, low 90s-90s or around 90s. I mean, there is certainly a 2-3 point improvement implied in the guidance, I would say. But would you say it's solely driven by attritional, or would you say it's because of like either extra reserve releases or lower cat losses, because of your reduced cat exposure? Thanks.
Okay. Well, I'm gonna forget the last question if I don't answer it first, so let's go there. I think the reduction in combined ratio guidance is a mixture of all those things, right? It's a combination of what we expect to come through from the prior years, continued impact of rate on forward-looking attritional loss ratios and the fact that we've been growing, you know, and the disclosures we've already made around cat. It's a mixture of all those things that's driving that 2-3 point reduction in guidance. I think we've put up on the slide now rate change by division. Possibly.
Yeah.
Depending on
I can't do it in my head.
Yeah. Yeah. It's there.
It's there? It's okay.
Yeah.
Yeah. That's good.
Yeah.
That's shown there. You can see it is quite mixed. Which is why it's quite a dynamic plan looking forwards. Talking about growth, I'm glad you asked the question. You know, specialty lines has been growing, you know, year in, year out at a reasonable lick, despite changes in market. The reason for that is because fundamentally we've invested in markets that are growing year-over-year. We're not expecting specialty lines to continue to grow or to cut back. The only comment I was making was that the sort of bit of supercharging we've had on specialty lines has been driven by an opportunity we've taken in international financial lines, and I think, you know, we've largely taken that opportunity now.
The growth rates are gonna revert back a little bit. There is still good long-term opportunities for growth in specialty lines. You're right, the pricing environment is better than it was. You know, there is some social inflation there, so we have to be careful, but the pricing environment is better than it was. What we show on the property side is not that we're reducing premium or that we're stopping growing it's just we've been very careful in putting exposure on the books while we get our arms around climate change and pricing for that appropriately.
You know, what we were trying to demonstrate this morning is that we are very busily investing in building those tools because we're quite enthusiastic to be able to have a forward-looking view of risks so that we can be confident in our risk selection and pricing, and that we're pricing for all the perils appropriately so that we can grow our property exposures. We think there's a real opportunity for us there once we've got that done, and we wanna get that done quickly.
That's very clear. Thank you. Thanks a lot.
Thank you. We will take our final question, which is a follow-up from Derald Goh from RBC. Daryl, your line is open. Please go ahead.
Hi again. Don't mean to drag the call out, but I thought it'd be remiss not to ask Bob a question. Appreciate it's early days, but having been at another cyber insurer previously, just keen to hear your thoughts about any initial impressions about around the Beazley's cyber proposition. Perhaps anything you can say around the U.S. strategy and underwriting culture and things like that. Thank you.
Well, I think in terms of their cyber culture, I've been very impressed with how they're using third-party data to kinda understand the vulnerabilities or lack thereof of their clients. So they're using them to really help identify the best clients, and that's how you've seen the reduction in frequency. In terms of the U.S., in terms of cyber or generally?
Generally.
Whatever you want.
Guess a bit of both.
Yeah.
If that's okay.
Let's see.
Bit of both.
Yeah.
Both.
Yeah, no. In cyber, I think, you know, in terms of the SME market, we've moved to Beazley Digital, which I think is a great way to have people focus completely on the digital platform. I like that approach. I think that makes you more focused on reaching out to your customers in the digital environment. It's other products as well, but cyber is the big one on that. The whole team is focused on getting that right. In the middle market and the larger clients, we continue to grow and we're using the tools that we have for cyber to achieve that. We're making sure that Beazley Digital and cyber are working together.
In terms of other products, you know, it's a similar approach. What attracted me to Beazley to begin with was their strong underwriting reputation, and you can see in how they approach new ways and looking for new data to make the best risk. We're doing stuff on D&O in terms of, call it a leadership score, to figure out those things, third-party data, that can help us understand the quality of our clients better. This has been, you know, pretty impressive from my point of view. That's what stands out to me.
Thanks, Bob. Yeah, appreciate. Thanks Bob. All the best.
Thank you.
Thanks.
Thank you, everyone. This concludes the Q&A session. I'll hand back over to the management team for any closing remarks.
Cool. I think that we've prepared ourselves for, and as Sally said, I think hopefully we can do this face-to-face next time. There are fewer technical risks. You know, it was pleasing to be able to produce a result like this, you know, a return to some decent profitability, a return to dividend, which we've been, you know, trying to commit to, and we're relatively optimistic about the future. I hope those are the messages that we've managed to convey. Thank you again for calling in, and we'll see you next time.
Thanks, everyone.