Good day, and welcome to today's Beazley's Half Year 2024 Results Conference. Throughout today's recorded presentation, hosted by Adrian Cox, CEO, and Barbara Plucnar Jensen, CFO, all participants will be in a listen-only mode. Later, we will conduct a question and answer session. You may register for questions by pressing star one on your telephone keypad. And now, I'd like to hand you over to Adrian Cox. Please go ahead, sir.
Thank you. Good morning, everyone, and thank you for joining us on the call to go through our 2024 half year results. It's been a busy week for insurance results, and it's a busy day today, so we very much appreciate your taking the time to dial in. I'm Adrian Cox, CEO, and I'm joined by Barbara, our CFO for the first time. So welcome, Barbara.
Thank you.
So here are the contents. I'll go through some highlights. Barbara will take us through some more details on our financial performance, and then hand back to me to talk a little bit about some of the underwriting. And then we'll finish with an outlook and then move to Q&A. Please note the disclaimer. And so, it's been a very positive year so far for us. Our six-month profits of just under $730 million are, by some margin, our best ever for a first half, and it's pleasing to note that.
Just as for the full year, last year, all the parts of the Beazley machine have been contributing a good investment result, a good underwriting result, with profits coming from all the divisions across the group. I think it speaks both to the underwriting DNA at Beazley, and the fact that, despite the fact that this is definitely not a benign claims environment, we are getting paid properly for the risks that we are taking. So we have an insurance service result of $558 million, up from $342 million last year.
Investment income of $252 million, up from $144 million last year, and an undiscounted combined ratio of 81, markedly better than the 88 that we posted this time last year. Our growth of 7% is in line, I think, with the high single digits guidance we've been giving, and the net growth a little bit higher of 10, as we complete our strategy of aligning our reinsurance purchasing to the larger balance sheets that we now enjoy.
Property continues to lead the way, growing by about 25% as we make the most of that opportunity, and we do believe that the complex challenges that property insurance and reinsurance present make that class an excellent investment for a specialty insurer like us. We mentioned in our Q1 IMS that the launch of our new E&S carrier in the U.S. had begun well. That strong performance continues, and we now expect over a third of the business that we have been writing on Lloyd’s paper will transition over this year, and that we’ll complete the whole thing in the three-year horizon that we had targeted.
The E&S marketplace is an exciting one. It continues to grow as business moves across from the admitted space, so it can benefit from the underwriting and flexibility that that market allows. In addition, this year, we've brought together our in-house cyber breach response team and our cybersecurity consulting business to create Beazley Security, so that all our consulting, risk management, and incident response capabilities are under one roof, and that has gone down very well with our clients.
Last month, of course, the world experienced a cyber event of a magnitude to date unseen when an update from CrowdStrike malfunctioned. This is exactly the sort of scenario that we model and we underwrite to, but one of the smaller ones. And I'm pleased that we were able to understand the impact that it would have on our business quickly and update the market within days, that this would not, in and of itself, impact our full year results in a material way. I'll share a couple of data points on this in the underwriting section, later.
On the subject, though, we continue to be very active in building and helping to grow the cyber catastrophe reinsurance markets, and we launched a second tranche of our PoleStar bond in June, in addition to the one we did in January, to reach $300 million in total, and I think that's starting to demonstrate that this market can develop genuine scale. It's an important tool for us and for the cyber market overall as it continues to grow and provide vital risk transfer solutions for one of the key businesses, one of the key risks, sorry, that businesses face across the world.
Lastly, I'd like to highlight that we are continuing to execute our share buyback program. We expect that to complete in the fourth quarter of this year. Capital management is an important discipline for us. We've had consistent feedback from investors that it's important to them, too, and so I'd like to emphasize that our approach to investing in growing the business when it hits our hurdles and to return capital when those opportunities are less than the capital that we have will persist as they always have. So with that, I will hand over to Barbara for the first time to take us through the financial performance in more detail.
Thank you very much, Adrian. I'm very pleased to join you today, especially as we present an exceptional set of half-year results reflecting our underwriting expertise and strong investment performance. We have grown our gross premium by 7%, in line with guidance despite the moderating rate environment. Robust risk selection, supporting better-than-expected claims experience, which has resulted in an increase of the insurance service result of 63% and a combined ratio of 77%, driven by an improved claims ratio of 45%.
In addition, our total expense ratio, including operating expenses, has improved from 41%- 38%. This is consistent with where we were at the half year of 2022. At that time, it was 37%.... Last year, we had an increased expense ratio due to the growth targets that were in place. But as we progressed through 2023, we reduced these growth targets, and as has been reported today, we are successfully meeting our growth targets for 2024, and our expenses are matching this.
Overall, this is an outstanding underwriting result, and is coupled with an excellent investment result of $251.7 million, up 75% compared to the same half year last year. The combination delivers, as Adrian said, a record half year profit before tax of $729 million, demonstrating that the key drivers of our business are performing incredibly well. Now, please turn to slide nine, where we will be looking at our reserves. Our consistent strength in reserving continues. We aim to remain within the 80th and 90th percentile, and as you can see on this slide, we co ntinue to be comfortably within this preferred range.
Please remember that at half year, the ultimate risk adjustment also includes the business that will be written in the second half of the year, and the allowance that is held in respect of the upcoming catastrophe season. As we progress through the second half of the year, we gain more certainty, and as we discussed back in 2023, with all things being equal, we expect the half year percentile to reduce by year end. Looking forward, we expect to continue to remain within our preferred range. Please turn to slide 10 regarding our investments.
I'm pleased to say that almost all of our assets in the investment portfolio delivered strong results in the first half of 2024, and hence, our investments deliver a fantastic result of $252 million, which equals to an annualized return of 4.8%. Our diverse asset portfolio is growing and is now $10.7 billion. Our fixed income portfolio yield was 5% at the end of June. Overall, a very strong first half investment return for Beazley, making a great contribution to the overall earnings in the first half of the year. On slide 11, you will find an overview of the asset allocation in our investment portfolio.
As mentioned before, the total portfolio is growing and is now $10.7 billion, with group financial assets increasing by $200 million in the first half of the year. Our well-diversified assets include 82% in cash and fixed income securities, with high credit quality and short duration. During the first half of 2024, we added value by increasing exposures to our capital growth investments, including equities that delivered a record high 14.5%, high yield credit and hedge funds, all of which delivered excellent returns on our investment portfolio.
Please turn to slide 12, where you'll find more details on our insurance finance income or the expense, otherwise known as the IFI. A line item showing the movements resulting from discounting over the period. Today, I'm going to go a little bit more into details on this slide, as this is only our second set of half year results under the IFRS 17 standard. I thought it might be useful to provide a reminder of the different parts. Firstly, we discount for the time value of money, and as we move forward in time, we unwind this discounting benefit.
This discount unwind is shown on the first bar on the waterfall. This will always be an expense, and for the first half year, first half of the year, this was $133 million negative. Secondly, we then need to account for the impact from the change in yield curves. This can be an income or an expense, depending on yield curve movements. In the first half of the year, there has been a modest increase to the yield curves compared to the year-end 2023, which resulted in an income of $64.6 million, as is shown in the first pink bar on the waterfall chart.
Finally, we have changes in other financial assumptions. This is shown in the second pink bar, and again, this can be an income or an expense. Under IFRS 17, there will be a difference in this line item, depending on whether the approach is PAA or GMM. PAA will not have a discounting on unearned cash flows, whereas in the GMM model, the methodology that we're using, you will need to discount for both earned as well as unearned cash flows. Changes in the financial assumptions could include the current interest yield environment.
The higher the rates, the bigger the impact. Differences between actual versus expected cash flows, and thirdly, and/or changes in the underlying payment patterns. We have seen all of these occur in the first half of the year, and this has driven the change in other financial assumptions income of $106.2 million. Overall, this has resulted in an increased finance income of $37.5 million. We acknowledge that this is hard to predict from the, or that it's hard to predict the performance in the assets.
However, we've provided some additional detail in the appendices, in today's presentation to explain what factors can impact each of these elements. On slide 13, you can see that we have a robust capital position at the half year, with a group solvency ratio of 245%. We update the capital requirement at year end, and so the group solvency ratio as at 30th of June is made up of, the previous year, year-end solvency ratio, plus the own funds generated in the first half of the year, minus dividend distributions. The year-end position considers the business plan for the following year.
However, the half-year position does not, and therefore, when our business is growing, we would expect to have a higher solvency ratio at the half-year point compared to the year-end. On slide 14, you can see that our capital remains resilient, and we carefully consider sensitivities when deciding on how much capital we want to hold. The graph here shows the impact of the key sensitivities to the SCR, and as you can see, we remain above our preferred floor of 170%, even with the impact of a sensitivity scenario, combining a 1 in 250 cyber event at the same time as a 50 basis points decrease in rates.
This demonstrates our strong capital position and ability to withstand a shock, which you might find reassuring after the interest movements in the recent days. Speaking of capital, on slide 15, we reiterate our capital strategy. As I just mentioned, we have an ambition to remain above an A- SCR ratio of 170%, and when deciding how much capital we should hold above that level, we consider a number of factors.
First and foremost, we're a growth company, and we seek to use our capital for sustainable, profitable growth, which can generate an ROE of 15% across the cycle, taking into consideration growth opportunities on a two- to three-year horizon. As I just described, as well as future growth, we seek to absorb volatility. When we'll have surplus capital after taking these factors into account, we'll take into consideration special capital distribution that could take place. Well, this concludes my part of the financial performance. I'd like to pass back to yourself, Adrian, to provide details on our underwriting performance, as well as the outlook for the remainder of the year.
Thank you, Barbara. Okay, so starting with cyber, the team grew by about 6% year to date. That was helped by some positive premium development from business we wrote last year. You may recall that we launched some partnership business in 2023 that we expected to grow this year. And in addition, a better renewal retention and new business generation now that the wordings issues of last year are receding.
The market did continue to get more competitive in the first half of the year, despite the background of increasing cybercrime activity, particularly ransomware, the emergence of some privacy issues that we discussed at the end of the year, alongside other smaller systemic events, including, for example, CDK, Change Healthcare. We remain comfortable with the overall rating levels, and I think the combined ratio of the cyber team of 73% this year testifies to that.
Our frequency of claims remains steady at lower levels, as previously disclosed, underscoring, I think, our underwriting emphasis on risk management and risk control. However, there has been, across the market, a notable increase in severity of claims in the large risk segment, which we do believe will mean that prices need adjustment going forward, and we expect the market to address this presently. However, I would like to underscore that we are fortunate that our business and our cyber strategy is geared towards the primary and low excess layers, which means the impact to us is more limited.
I thought it'd be useful to give a little context to the CrowdStrike event, and why we were able to give the reinsurance to the reassurance to the market that we did. We've had just under 200 notifications from clients. For comparison, this exhibit shows how many we've had for other single point of failure events, being Change Healthcare, MOVEit, CDK, and Blackbaud, and it is noticeably lower than all of them.
The vast majority of notifications do come within the first two weeks, given the speed at which these things move, and these other events have also not caused us to update our combined ratio guidance or the market. I think this demonstrates a couple of things. One, our emphasis on underwriting companies with an appropriate level of operational resiliency, risk control, and risk management. And secondly, that this incident was the result of a technology error rather than a cyber attack, and therefore, the fix was able to be produced and effected relatively quickly.
However, I think what this incident has done is give a data point to the world of the sort of thing that can happen and the impact that it can have. For us, it highlights the value that we can provide as an insurance market and the skills we need as an insurer to provide that value in a prudent way. Moving on to property, as I indicated earlier, strong growth again from that team. And whilst rate change is more muted than last year, we're comfortable with the rating levels that we're at.
We continue to see business moving in the U.S. from the admitted to the E&S market, driven by the more complex exposures that property presents now, and we remain excited by that opportunity. The combined ratio is better at the six-month point than this time last year, because partly of prior year reserve releases, and also the fact that the business is growing less fast than it did in 2023, and the seasonal effects that we discussed last year are less pronounced in 2024.
Our loss experience for the first six months has been positive, both on the attritional side and the catastrophe, which were better than we planned, despite the continued heightened levels of natural pass across the world. Our active approach to reinsurance is not limited to cyber business, and while we're careful not to overreact, we have increased our reinsurance protections this year to limit the impact of a higher incidence of hurricanes, given the climate conditions in the Atlantic this year.
Lastly, I'd like to share that our one in 10 and one in 250 exposures relative to profit and equity, respectively, remain steady despite the continued growth of the book. Moving on to specialty lines, our full year guidance in terms of growth for this team remain unchanged. We do expect some modest growth overall, and as we discussed at Q1, the growth was unlikely to be an accurate guide then, and we think that the slight contraction at the half year is also a bit of interquartile noise.
There are some early signs of D&O rates beginning to stabilize, but not enough for us to change our plan for that business, this year. As we mentioned a few times, there are lots of products in this division, and we're very focused on growing those with more favorable risk reward, like environmental, as we mentioned there, programs and safeguard. The combined ratio for this team has increased year-over-year.
The biggest driver of this has been reinsurance. Our aggregate reinsurance contract that we've mentioned before has an adjustable feature, which has impacted both the premiums we paid this year and the recoveries that we booked. However, I would like to underscore that this program remains intact, it's performing the role for which it is intended, and this is a one-off impact for us, this year. Moving on to MAP. The business has actually grown this year by about 6%, as demand for these products continues to grow.
As we've been flagging, increased risk awareness and economic growth are big drivers for our marine energy contingency political risk offerings. But as part of the restructure of our U.S. business, our third-party syndicate at Lloyd's, 63, is getting a larger portion of this business, which is written in London, hence the 3% reduction as far as the Beazley group is concerned. An excellent combined ratio of 64%, reflecting both positive prior year development and the current levels of pricing that we're able to get.
Again, I'd like to reflect that the profitability here is a reflection of the pricing and the underwriting, rather than a lack of claims. The Baltimore bridge collapse, marine war losses, and very large fires in shipyards demonstrate that the risks that this team are underwriting are very real. On to outlook then. As I said at the beginning, we're not in a benign claims environment, in marked contrast to a decade ago. We are rather in an era of accelerating risk.
However, we're also in an era where this is well understood, and so we're getting properly rewarded for it, and I think this plays to our strength as a specialty insurer and one that really focuses on underwriting and claims excellence. Our diversified portfolio, both by product and distribution, helps as it mitigates volatility and gives us options as market conditions change, and we're in a dynamic set of markets. We remain genuinely excited by the property opportunity in the US E&S market, and believe that long term, this opportunity may extend beyond the States.
Our expectations on long-term demand growth in cyber remain undiminished, and I think the CrowdStrike event serves to highlight the value of insurance here. Our yield at the end of June was 5%, and while that has reduced in the last couple of days, it remains a powerful engine for additional profit generation for us, particularly as our assets under management continue to grow. As I mentioned at the beginning, our claims activity in the first half of the year was better than expected on the attritional side and catastrophe activity.
From a guidance perspective, our expectations for H2 remain as they were at the beginning of the year. But recognizing that outperformance to date, we are moving our combined ratio guidance from low 80s% to around 80%, assuming average catastrophes in the second half of the year. Our growth guidance is unchanged, noting that the market remains very dynamic, but high single digits% growth and a little higher than that looks reasonable. And lastly, we will be hosting a capital market session on cyber and systemic risk on the first of October 2024. So please book early to avoid disappointment. And with that, I will open up to questions.
Thank you, sir. As a reminder, to ask a question, please signal by pressing star one on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. And please make sure the mute function on your phone is switched off to allow a signal to reach our equipment. Again, please press star one to ask a question. And our first question comes from Kamran Hossain from JP Morgan. Please go ahead.
Hi. Good, good morning. Two questions from me. The first one is just on the combined ratio guidance change. I think when we would look back to kind of the full year, when you gave the guidance for 2024, there are a few surprises that maybe you hadn't factored in, you know, the attritional claims being lower like you'd seen in 2023. It feels like maybe that's been the case again in the first half of this year. Has that been the case, and why haven't you included that in the guidance? I'm just interested in thoughts on that. The second one is on, is around capital and kind of demands on the business going into 2025.
Now, clearly, the outlook for deploying more capital is probably a little bit more complicated this year than it has been for several. But last year there was a fairly large uptick in the SCR because of the reserve requirements, from memory. Just trying to think that through, should the increase in requirements be probably lower than it was at the full year results because you've had lower growth this year than you did last year? So just any kind of directional views on kind of where capital goes around that would be very helpful. Thank you.
... Great. Okay. Thank you, Kamran. Good morning. So why haven't we adjusted our expectations for attritional losses? I think it's because we are not in a claims environment where losses are absent, right? We do see large losses and incidents occurring around the world. I think we have we've navigated that pretty well, so we have outperformed. The majority of the outperformance from a loss perspective this year was on the catastrophe side rather than the attritional side, but both were better than expected.
But given what we see around, it seems prudent to keep with the original guidance for the second half of the year, which is why we've brought down the overall guidance to around 80. Because, you know, beating consensus by 4% in the first half, if you assume an average second half, brings it down by 2 points overall, roughly speaking, so that was the, that was the logic. And I think as long as we're clear about how we've arrived at that changed guidance, people can take their own view, can't they?
As far as capital requirements, you know, we were careful to say, I think at the end of last year, that, although they did increase more than we grew last year, we do expect capital requirements to grow roughly in line with premium. And there's nothing that we've seen so far this year or planning to do that's sort of changing that overall.
And you're right, it is quite a dynamic market at the moment, so it's quite difficult to figure out what we think the opportunities for growth could be next year, 'cause there are a lot of, a lot of things moving in cyber and property and parts of the liability world. So, you know, we'll, we'll take a view as to what we want to do in terms of growing the business. You know, as we get to the end of the year, and we, we can have a clearer picture of that.
And I think, if I may add a point, I think we come from an environment where you have had hard markets, you've had the possibility to increase rates significantly, which has contributed to the growth. Obviously, being a specialty insurer gives us some opportunities in today's environment. There's a lot of uncertainty, as Adrian has also highlighted, during the call today, so we want to be where the opportunities are. So I think taking that into account, we obviously need to have the capital to support the further growth.
Fantastic. Thanks so much, and, congrats on a great start to the year.
No, thank you very much.
Thank you.
Our next question comes from Freya Kong from Bank of America. Please go ahead.
Hi, thanks for taking my questions.
Hi, Freya.
Morning. Congrats on a great update, and also welcome to Barbara. On the... I have a question about reserving. I know you've committed to giving us disclosures on reserve releases by the year-end, but are there any qualitative comments you can add on the reserve development you've seen in H1? Anything extraordinary that would've contributed to the results?
And then secondly, on cyber, I think rates are down 6%, and it doesn't feel like there's an obvious turnaround coming in the market. How much do rates need to fall from here for you to apply the brakes on growth and writing new business? And when do you start to get worried? Thanks.
Okay, great.
Should I start on the reserves?
Perfect.
Yeah. Well, thank you, Freya, for welcoming me. Regarding the reserve releases, obviously, we point towards the percentiles that we aim for, and as you can see, we are in a very comfortable place with the 88 percentile in this particular time of the year. I know we're used to providing the prior year/current year splits, but as we are still transitioning into IFRS 17, we thought we would like to have the comparables absolutely right. So, coming to year-end, you will get the splits and the information that you are used to.
I think, looking at the performance across different business lines, you can see that potentially, MAP is where we have seen some good releases compared to the prior years, because obviously we have had an environment where we have seen less claims coming through in that particular line.
Nothing extraordinary or anything to draw out qualitatively, no, no, Freya.
Okay.
Cyber, you know, we've got a combined ratio of 73 for cyber, so we're obviously comfortable with the level of pricing overall. I do think there's some adjustment on the larger end that I kind of discussed. What we said in the past when we were in the old GAAP world is that the sort of cross-cycle combined ratio we target for cyber is 85. When you put that into undiscounted IFRS 17, that's about 81 that we're kind of targeting, so we remain below that currently. I'm a little bit more optimistic than you about the cyber market going forward.
As I mentioned, there's a few things that it's wrestling with, you know, a number of systemic events rather than just a CrowdStrike. You know, with Change Healthcare and CDK, et al, there are more liability issues emerging that we kind of talked about last year and dealt with. And there've been some very large losses this year on the, in the sort of Fortune 1000 arena, and I think that will give some pause for thought, I think.
So, and generally, after a, you know, a major incident like CrowdStrike, cyber demand picks up some more because people realize the value of the product. So I think we're a little bit more optimistic than you are.
Okay, that's good. Thanks.
Thank you. We will now move to our next question from Derald Goh from RBC. Please go ahead.
Hey. Hey, afternoon, everyone. I've got a question. Okay,
Sorry, could you turn up your phone a little bit, Darrell?
Yep. Hey, is this, is this any better?
... Yes.
Yeah? Okay, sorry about that.
Sure.
Question one, specialty risk. You had a comment in your prepared remarks on slightly adverse performance year on year. Could you elaborate on what's going on there, and if that has anything to do with, you know, negative PYD or not? Question two, your profit commission, I've noticed so that's $45 million this first half, which is higher than the whole of 2023. Were there any one-offs within that? I'm just thinking about how do I project this going forward, because it seems like quite a material step up.
And my last question, you spoke about this change in payment pattern assumptions that drove this positive interest rate effect. Could you elaborate on that? Did it mean that, you know, the payments just came through a bit quicker than you expected? I, I guess, does this also impact some of your reserving underwriting or not? Thank you.
All right. Okay. Well, I think this splits quite clearly into you can do the PC and the FE, and I'll do specialty risks. So the biggest driver for the jump in the combined ratio was the reinsurance adjustment that I talked about. So we, you know, there is a feature in the aggregate contract where we pay a little bit more, and the attachment point goes up a bit. So that was the main driver of it. There have been some pluses and minuses within specialty risks.
We've been talking about areas that are particularly exposed to social inflation, where there's severe bodily injury exposure, or abuse of power exposure, which for us particularly is parts of the med mal book, hospitals in particular, and our employment practices book. You know, that continues to be difficult, but there are other areas of the business that are performing better than that. So, you know, there's nothing particularly to call out on specialty risks overall. And you'll get the data at the year end. Do you want to move on to the PC then?
Yes. So on the profit commissions, some of this relates to the other syndicates that track performance of the business. And also you can say as part of the platform strategy, where there has been a number of changes done during the last 18 months, there's been a one-off additional income which has been included in the profit commissions and other income, which is received from the syndicate in this particular half year. That item is not one that you should expect to be repeated. It is a one-off asset, so therefore don't anticipate that to recur again.
On the changes in the payment patterns, I think probably if I may sort of highlight what are actually the drivers of this particular item, because it is one which is new. Yeah. And there we have slide 27 included in the pack where we should provide you a little bit more details. And you can say, basically, just to do it very tangible, if you look at premiums coming in earlier than anticipated, that would obviously impact this. But also if you have a number of paid claims being less than anticipated, which is the case in this particular half year, obviously, that will also impact the actuals versus what was expected.
So therefore, it's down to how do you see the assumptions actually feeding through in the actual cash flows, because those are the ones that we are discounting. So, in this particular half year, where you've seen growth, you've seen a good premium come in, and at the same time seeing loss claims ratios, then you would have a positive in this particular line. I don't know if that makes it more clear.
Yeah, I, I think so. I think so. Just, just very quickly, can you quantify how big was that one-off in profit commission this, this first half?
Yeah, it's, it's approximately $19 million.
Dollars.
Yeah.
Okay. Thank you.
Our next question comes from Will Hardcastle from UBS. Please go ahead.
Hey, afternoon, everyone. I think we might need a bit of a detailed nerdy conversation on the payment pattern, et cetera, but I just want to get a really simplistic answer on it. Essentially, the benefit we've just seen in H1, does that unwind at all, so it's just a timing, or is that now a locked-in, one-times benefit, and nothing to think about going forwards other than future changes? Secondly, I guess I just wanted to confirm, in the guide that you've given, the revised guide, there is still no assumption for assumed attritional benefit from full year 2023 or the half year.
And I guess, would full year 2024, let's say we go through a decent cat period, the attritional still look good, is that the sort of juncture that you'd consider that in the future? Maybe another way of asking that is, what needs to happen for you to start thinking or giving a bit more credit to this underlying? Thanks.
Okay, I'm going to take the second one. And give Barbara applause, thoughts about the first one. But it is the FE is real profit. Just to underscore that. So the attritional piece, so we're not assuming that prior year reserves, reserve estimates get better. So we're not assuming that our pure loss ratios get better or worse, right? In our forecast. There's some stuff that runs off, there's risk adjustment and things, and ENIDs, all that kind of stuff that runs off, but we're not assuming that the pure loss ratios move up or down.
And we are assuming that there's levels of attritional loss activity in 2024 that we had expected at the beginning of the year are unchanged. So you're right, well, as we go through the year and we get into our third quarter reserve review and our fourth quarter reserve review, all those assumptions will get updated again. And we'll see where that leads us positively or negatively. Does that make sense?
Sorry, I am here. Yeah, just, just about.
Thank you. Right, onto cash flow.
Yes, onto cash flow. I would reiterate what Adrian just said, this is a locked-in benefit in the, for this half year. What you should think of, well, is, is how does this develop and, and impact our results also going forward? And obviously, you will not have a full view of what are the expected cash flows that we have, and thereby what is the delta and what we see. But we acknowledge that this is obviously hard to predict in, in your modeling and all of that, and we will try and see what we can do in terms of increasing the transparency in this particular item going forward.
But think of it in terms of, for instance, now you've seen a better underlying performance of the group, so that benefits the claims payments. So again, coming back to what would be expected ordinarily, as opposed to what has the actual development been. That is what creates the delta, and thereby, impacts the number in this line.
Thank you. Appreciate it.
We'll move to our next question from Tryfonas Spyrou from Berenberg. Please go ahead.
Well, hi there, good afternoon. I have a couple of questions. First one is on property, Adrian. I think it was good to see that you hedged some of the big risks a little bit going into this very active potential wind season. But I guess you mentioned that the one in 250 sort of return period percent of equity has remained steady. I guess, why would this not be down from year-end? And related to that, appreciate the comments you made on sort of raising the crime rate guidance. I think it's probably the first time you've done that at the half year, and appreciate you do not expect a better H2.
But I was sort of kind of wondering whether your decision to sort of hedge a little bit at second half gives you a little bit more comfort over doing that at this stage in time. Second question is on the CrowdStrike. A surprise, but also it's really good to see that you have very little sort of notifications. I just wondering as to what was the key driver, i.e., what is the nature of the event being sort of, you know, malicious, as you said, type of companies being impacted, and that's not sort of who your clients are, and whether you can sort of in a hypothetical scenario, if that was a malicious attack, how much bigger would that sort of... How many more claims would you expect to see? Thank you.
Property and CrowdStrike.
Okay.
How much bigger could CrowdStrike be if it was malicious? Is the question, was it?
Yeah.
Yeah, I think, yeah.
Yeah. Okay. So, it could have been a lot bigger if it was malicious, is the answer to that. And, you know, I think, the one in 250 that we show you in terms of the impact to us, shows that we do model for events that are a lot bigger than that. You know, could one of those events be a company like CrowdStrike being the subject of a very severe malicious attack? Yes, that is the sort of extreme event that we model. Yes, so it does show you the delta between what's actually happened and the potential that we have assumed.
It also shows you actually how much needs to go wrong to generate a very big cyber cat, because, you know, what happened over that weekend and the next few days was, you know, affected a big chunk of companies across the world, particularly in the larger risk end. On the property side, yeah, I think it was the prudent thing to do to buy a little bit more frequency protection. That does give us some more confidence.
You know, our 1 in 250 is steady. I think at the margin, it's... You know, again, if you look at the 1 in 250 as percentage of equity, now it's down a bit from where it was at the year end. It's down a little bit, but we're comfortable with where that remains, noting that the book continues to grow.
Let me just confirm whether the protection you bought was more of a, I guess, a repeat of Hurricane Ian, as opposed to a much larger sort of, 1 in 100 or 250 event?
Yeah, no, it was a frequency thing rather than a severity thing. Yes.
Okay, thank you.
Great stuff. Thank you.
Our next question comes from James Pearcey from Jefferies. Please go ahead.
Yeah. Hey, guys, it's James Pearce from Jefferies. Yeah, just want to echo everyone's comments. Congrats on the strong start to the year. So-
Thanks.
First question is just on CrowdStrike. So you're clearly able to get a very quick handle on your exposure there. Can I just ask, what's your kind of real-time visibility of your cyber partnerships book, which I think you've been leaning into more this year? Were you able to get granular details of your exposure from the partnerships business, or was it a case of getting comfortable with the remainder of the book, and that ultimately got you comfortable with your overall exposure?
Second question... Has there been any pushback on any of the kind of standard wording across your cyber policies, which helps mitigate your exposure since that CrowdStrike event? So I'm thinking about clauses such as the kind of minimum eight-hour period before business interruption claims kick in. Have there been any takeaways from that, from the event, that might result in changes to standard wording or any changes that you think still need to be made? And then I've just got one more question.
So you've spoken in the past about seasonality and earnings in your property risks division, as a result of the risk adjustment being quite front-end loaded, and I think that was particularly pronounced last year just due to the significant growth in that business. I just wanted to check if we should still expect that seasonality, as growth moderates this year and in the years ahead, or should we expect that seasonality to normalize as growth moderates? Thank you.
Okay. Seasonality?
Yeah, we can start with that. So I think, thank you, James, on the question. You should still expect the same pattern with the front loading on the risk adjustment. And also as you see the earnings coming through over the year, that will impact the seasonality in general. So, despite both being slightly less than what you saw last year, you should still expect the pattern to apply to the property business.
Yeah, on the premium and the-
Premium and the return.
Yeah, absolutely. So yeah, no, we're comfortable with the granularity of data that we have on the partnership business, James, so we're able to get a reasonable handle on that fairly quickly. For the white labeling stuff that we do, the amount of business interruption coverage that we provide is very limited as well. And that's quite useful. I think the answer to your question is the wordings for this sort of event operated exactly as intended.
So the sort of 8 waiting periods of between 8 and 24 hours, you know, did what they were intended to do, which is to respond when an issue got serious for a company, rather than something that's more kind of BAU. And so I think, they've proved their worth, they've done exactly what they were supposed to do. And we got involved when it was a serious issue for the company, rather than just something that's more regular. So I... It's not gonna make us, I don't think, look at what coverage we provide, 'cause I think the insurance did exactly what it was supposed to do.
I think it does highlight the importance of understanding all the coverage that you provide, and by that I mean business interruption, and dependent business interruption in particular. Because it could be the dependent business interruption that is impacted by this. And I think it's very important that companies maintain a watchful eye on how much of that coverage they are providing, 'cause that can add up very quickly.
And, you know, I think one of the things we've called out in the cyber market before is the fact that those limits have been increasing quite quickly, and that does drive accumulation risk. And it's something we've been managing for a long time now, and I think it's shown its worth.
That's very clear. Thank you.
Thanks, James.
We will take our next question from Anthony Yang, from Goldman Sachs. Please go ahead.
Hi. Hi, thank you for taking my questions, and, congrats on the results today. My first question-
Thanks, Anthony
... is coming to the thanks to the cyber premiums. So I think at 1Q 2024, you guided, you expect, moderate growth, for cyber in 2024 for the rest of 2024. Just to confirm if, if there's any upgrade or that remains unchanged? And then secondly is, on the, how should we think about the net IWP and the net insurance revenue growth, for the rest of 2024, given the comments on the use of reinsurance in property rates?
And lastly is, actually on the solvency capital. So I think the sensitivity to the 1 in 250, remains, 1 in 250 in cyber remained unchanged. Should we expect that to decrease, if, if, if with the use of, cyber cat bonds? Thank you.
Okay. Do you want to do the net IWP one?
Yeah, I can do that.
You get all the fun ones.
Yeah, I get all the fun ones today. So as a starting point, Anthony, guidance was stated that the IWP growth would be in the high single digits, with net growth being a little bit higher as we complete the last steps of really reducing our quota share reinsurance spend. And to do so, I mean... Sorry, let me just see. I just need to have... Yeah. In order to do so, I mean, that is coming back to, yeah, that there will be an impact by the quota share reinsurance spend.
Yeah. So I don't think that the additional reinsurance that we've bought for property is gonna change the difference between the gross and the net for the year end. We haven't spent that much money on it.
Thank you.
Our guidance for cyber premiums is unchanged. I think, you know, moderate growth for the year. It is possible that, you know, demand ticks up and the market changes a bit, given all the stuff that I was discussing earlier with Priya. And if that happens, then we'll take full advantage of it and grow, 'cause we have an appetite to do so... but there's nothing, there's not enough evidence of that yet for us to change our moderate cyber growth guidance. And then the last question was around solvency capital, and the 1 in 250 cyber risk.
I think if, you know, if we do see an opportunity to scale more at reasonable prices our ILS sponsorship, we certainly will look at that very seriously. Yes, and that would indeed impact the impact of our 1 in 250 on our solvency.
Thank you.
Our next question comes from Darius Satkauskas from KBW. Please go ahead.
Hi, yeah. Thank you for taking my questions. So the first one is on CrowdStrike. Are you able to disclose any, any sort of metrics on concentration, such as what was the average loss for you per impacted policy? Also, did the affected policies exhaust the limits, or did the limits sort of provide sufficient coverage? Yeah, any color here would be helpful, I think, in terms of gauging your exposure and how you got away with such a loss.
Second question is, I think last year you guided to the first half combined ratio being higher in the first half than second half because of the risk adjustment linked to property growth. Your guidance now implies similar second half combined ratio to first half, but you grew materially in property this year again. Should we not expect second half combined ratio to be lower than first half? Thank you.
No, because we're assuming that the second half combined ratio was as we, as we had assumed at the beginning of the year, rather than updating it because of the first half year's experience. So we've been quite explicit in our, in our around 80% guidance that we're reverting back to January 1 assumptions for the second half of the year, and we don't see a need to, to update that,
Particularly taking into account the hurricane season and everything that-
Yeah, yeah. And the fact that we're, you know, we're in a world where, you know, claims are happening and losses are happening. In terms of the, so color from the CrowdStrike losses, I think there is no evidence yet, and I don't think and we have no reason to assume that there will be that this is an event which is regularly blowing in insurance towers or the limits of insurance that companies buy. We haven't given any disclosure on total quantum for us or individual losses.
I think there are more losses in the larger risk environment than the smaller ones, because CrowdStrike's clients tended to be larger companies. Larger companies, of course, buy larger towers of insurance. And so I think there will be some individual, quite large losses from companies that were severely impacted. But in general, I think the insurance functioned as it should do, and it's been a modest loss, which is what it was, 'cause for most companies, they were fixed in a matter of days, and so it shouldn't be a big loss.
Thank you.
Great stuff. Thank you.
Our next question comes from Abid Hussain from Panmure Gordon. Please go ahead.
Oh, hi. Afternoon, everyone. I've got a couple of questions to the left. One on cyber, on cyber product, actually. Just wondering, how are you responding to the demand and possible uptick in demand following the CrowdStrike outage? Has it, for example, highlighted any gaps in cover or areas that you might wanna pursue going forward? So are there any sort of avenues for innovation, product innovation on cyber?
And then the second question is on the balance sheet and the capital. I appreciate that we're going into the peak hurricane season, but your solvency ratio is very strong, 245%. Your ambition is to stay above 170%. Looking at the disaster scenarios, you're still above 200% in post-disaster scenarios. So I suppose the question is, do you wanna... Are you hoping to sort of stay above 200%, or is there some room when you reach the full year stage to sort of stay above 200% and potentially provide an additional capital return at the full year?
So I think the answer to that is it all depends on what the prospects are for 2025 and beyond, right? You know, so the stages are, take the 170, we have a look at the sensitivities, we have a look at the prospects for growth, and then we see how much capital we've got after that. And, you know, I don't think the sensitivity is gonna change that much.
The 170's not gonna change. So it's all about what the opportunities are in 2025 and 2026. And as we kind of said earlier, it's quite a dynamic market at the moment, so it's a bit difficult to make that call. But we will when we get there. It was a really interesting question about CrowdStrike and a coverage gap.
Mm.
I think the insurance has responded exactly as it was supposed to. You know, it is a covered event. It's the sort of thing that we should be covering, and I think it's responded well, so there weren't any real gaps, I don't think. But on the reinsurance side, there are some reinsurance coverages that don't cover non-malicious events. And I think it's highlighted that perhaps on the reinsurance side, there are some gaps which carriers may need to want to fill.
We've always been careful to make sure that our cat cover includes both because we modeled for both. But we may see some additional demand or maybe some additional demand for a fuller reinsurance going forward, because it highlights that gap on the back end.
Yeah, and I think in terms of potential, also the whole risk management and prevention agenda is very important. Because I think everyone's dependent on technology these days, and being prepared and having systems that can avoid having issues like this is very important. So, I think there is potential still in the area around risk management and prevention-
Yeah.
- as we're also providing to our clients.
That's very interesting. Thank you.
Our next question-
Thank you.
comes from Andreas van Embden, from Peel Hunt. Please go ahead.
Yeah, thank you. Good morning.
Hello, Andreas.
I just had to, two, two questions, please. First of all, on your property book, I mean, it's, it's now a third of your, your, your premiums, at least at the half year stage. I'm just interested in the mix of, of that sort of 25% growth, so far this year. Are you making a conscious decision to, to grow in, in non-cat lines, or is there a balance that you're aiming to achieve in that portfolio between what is, you know, E&S cat exposed and, and, non-cat?
And also, in terms of, of, of mix, is this expansion... You know, are you targeting sort of the larger ticket business in the E&S market, or are you looking more to the mid-market or SMEs when you're, when you're growing at this, at this rate? My final question is on casualty, on your specialty book. The 98 combined ratio, I mean, if I add back to that, the other expenses as well, I think there was sort of an underwriting loss during the first half.
Aside from that sort of, you know, your cat, your aggregate sort of protection program and the way that sort of works, was there anything else in the way you've looked at your initial loss takes in the first half of the year for the U.S. casualty market? Have you increased that at all? Are you becoming more prudent? And on your reserving, you know, the comments coming from the U.S. on casualty reserving in recent years, you know, claims inflation is, has been higher than assumed. Is, is this something you're seeing as well in your reserve, reserve development? Thank you.
Great stuff. All right, let's start with the casualty side. So yeah, as we look at our opening loss picks across specialty risks, the stuff that we do think is exposed to social inflation, we are being prudent with our loss picks. Yes, we are. And I think that, yeah, yes, for all the reasons that you mentioned. When you look at the reserve deteriorations that there have been on U.S. casualty, if you split it in the two classes and the two buckets that the U.S. insurers do in terms of other liability occurrence and other liability claims made, the bulk of the deterioration has been on the other liability occurrence business, i.e., and on the commercial auto.
So, you know, general liability, excess casualty, umbrella, that sort of thing. There has been some deterioration in the OLCM, the other liability claims made bucket, but the bulk of it's been in the other liability occurrence, and we don't do that business. So the impact on us has been less severe than it has for companies that do write that sort of business. It is more concentrated in the areas that I mentioned. But we are very cautious on it, yes, both in terms of how we underwrite it and how we provision for it in terms of our reserves, Andreas. So, Andreas, that's so you're spot on. We're certainly not immune to those trends, but in terms of the mix within specialty lines, we're fortunate-
Yes.
We're prudent. The business in property is still 75% insurance, 25% reinsurance. The reinsurance is all cat. I think Richard and the team have done a good job on the insurance side of growing ex cat as well as cat-exposed business, which is why we've managed to grow the PMLs more slowly than we've grown the underlying business, even when you strip out the impact of rate change. And we go from the very small to the very large. You know, so we do some high-value homeowners, we do some SME business.
We're growing in the mid-market, which we traditionally haven't had much of in the insurance side, and we write some shared and led business. And again, I think Richard and the team have done quite a good job of having a good mix of that, continuing to diversify the book and have it less cat exposed. Noting, of course, that more of the territory across North America is cat exposed than it used to be, because things are happening, you know, in more areas. But I think that diversification has been a very useful thing for him to have done.
Okay, perfect. Thank you very much for your answers.
Thanks, Andreas. Thank you.
Our next question comes from Faizan Lakhani from HSBC. Please go ahead.
Hi there. Thank you for taking my question. The first one is coming back to the IFI, and you did a very good job of trying to explain it. But one point I just wanted to clarify, you mentioned that the IFI, the change was real profit. But I just want to clarify, it doesn't come through the capital generation Solvency II, which is what's going to keep you driving capital returns. I'm just trying to do the math going forward, assuming that this is sort of cut and stone payment passes. Would it be correct in saying that the half-yearly IFI on Y should be about $160 million going forward?
Just looking for some clarity and clarification on that one. ... The second one is a MAP. MAP is operating a very good combined ratio, 15 points below sort of the group level. How sustainable is that? What should we assume sort of cross-cycle for that business? And the final one, just clarification on the reinsurance. You said you bought a bit more reinsurance property cat. Could you give some sort of qualitative information on what the 150 or 1 in 100 looks like for you guys right now? Thank you.
All right. I'll, I'll take the last two. So sorry, we don't give any more disclosures on the 1 in 100 or the 1 in 50. Sorry, so I won't be able to answer that question. I think the MAP, the MAP result was a function of 2 things. 1, I think we do think the business is quite profitable at the moment, so the loss ratios we have for the current year are quite good. It has also benefited from, as Barbara mentioned, some good prior year reserve releases in the more recent years. And so, you know, we can't always expect them to persist. So that combined ratio, we don't think is a cross-cycle one.
We think we've had a particularly good year in MAP, just like as last year there was a one-off adjustment that we made that meant it was over 100 last year. So, but we do think it's business that absolutely fits what we are, and should be able to produce a decent return on capital over the cycle. Yes. Do you want to talk about the IFI?
Yes, and you broke up a little bit there, Faizan, so I just wanted to ask, was your question around the impact of the yield changes or was it around the payment patterns?
So it's two parts. One was on the payment patterns. I assume when you say real profit, it doesn't actually come through in capital generation on a solvency basis. Just want to clarify that. And the second-
Yes
... would be sort of a rough guide for projecting it forward. I've got a calculation about $160 million negative unwind per half year. Is that correct in that sort of level? Thank you.
I would say that on the guidance, it depends on a number of assumptions. So I would. If I may refer to, let's pick that up offline afterwards. That would be very helpful. On whether it impacts the solvency capital, I would say it shouldn't, as it sits in the other financial income.
So you're right.
Yes.
Yeah. So that would confirm your assumption.
Thank you. We will now take our last question today from Nick Johnson from Deutsche Numis. Please go ahead.
Morning, Nick.
Uh, hi.
Morning.
Afternoon, everyone. Yeah, it's probably not worth waiting for, I'm afraid, but back on IFI. Just want to check my understanding here. The cash flow timing benefit that relates to paid claims experience, does that mean that the reverse is true? So if you have a large catastrophe, you know, something of the size of Ian or Katrina, would we expect to see the sort of cat costs go through the combined ratio, and also have a negative in IFI, so kind of amplifying the bottom line impact of a catastrophe?
And if that is the case, do you think you will publish the IFI impacts when you sort of disclose large catastrophe losses on a sort of ad hoc basis if there are very big events? That's the first part of the question. Secondly, so on this cash flow timing issue, I just, you know, relating to sort of better claims paid experience, just wondering why that wasn't a positive in last year's numbers, because I would have thought that claims experience last year was also better than expected. So it is a sort of a timing issue around that feeding through into the IFI adjustment.
And then lastly, sorry, again, on IFI. Given that the change in yield since the half year date, can you possibly give us a feel for the sensitivity of IFI to change in yields? Sorry if I've missed that in the disclosures. I guess I'm thinking more about the, well, not the unwind piece, because that's fairly mechanical, but the mark-to-market yield impact in the other two components of IFI. Any, any-
Mm
... guidance on sensitivity to that, please? Thanks.
Yeah, well, I love the questions on IFI. No, I think it's good to have it clarified because, again, as we started saying in the my presentation, it is an area that we've obviously not been used to. IFRS 17 has introduced a new feature that we all need to try and understand, so absolutely glad that you asked the questions. In this context, I would say bear in mind that you have higher yields now than you did at the comparable time last year, so therefore, higher rates, you would see a higher impact on the impact from the updating of the yield curves.
Also bear in mind that you need to think, when you're looking at what is the size of, of the, updated yield curves, it depends on what are the claims sitting at which part of the yield curve. Because again, when you, when you, look at the, the, the mass, that will have an impact on the, on the actual calculation. So it's not just one, moving part, but you have a number of, of parts that is actually impacting the actual, number coming through here. When it comes to the change in, in financial, or the claims patterns... You're absolutely correct, that if we would have a nat cat, that would have a, you can say, impact on the, the cash flows.
Bear in mind, the timing would not be, if we had a large nat cat in this particular, let's say, H2 this year, it would not have an impact on the cash flows in the second half. That would be at a later stage, I would expect. So therefore, giving guidance in terms of what that particular nat cat would create is probably a little bit more difficult, as we have anticipated patterns related to the nat cats that we have in our assumptions going forward, already.
But as said, we do understand that this is a new feature and, again, we would like to be more helpful in terms of helping you on the predictions, so we will be looking at what can we give you of guidance, for instance, at Q3 when leading into the full year, modeling, and so forth. So we will, I think, commit to try and give you as much transparency as possible on these items.
And if there is a very large loss that happens, but we will disclose that we do disclose, and we think it will have an impact on the FE, we'll
Try and guide on that.
We'll try and guide on that, too.
Yeah. But I would say, as a starting point, think about the principles in terms of how does it look with growth and premium income, and how does it look with the claims patterns, and the claims ratios, as opposed to ordinary?
That's really helpful, thank you. Lots to think about over the weekend, when it arrives.
Yes.
And any sen-
Yes
... any sensitivity on the impact of interest rate changes to FE, or did I miss that? Sorry. Is that-
Hi, Nick. Sarah here. Those sensitivities are in the disclosure.
Are they?
Yeah.
Okay.
In the-
They relate to if we do then?
Yes.
Thank you. With this,
All right. I've been cut off. Thanks a lot. Thanks, everybody.
Thank you. With this, I'd like to hand the call back over to Andrew, Adrian Cox for any additional or closing remarks. Over to you, sir.
No, no additional remarks. I just want to thank you all for dialing in once more. I hope that was useful. Any other questions, please reach out to Sarah, and we'll make sure that we answer them. Enjoy the rest of the day, and have a good weekend. Thanks, everyone.