Ladies and gentlemen, welcome to the Beazley first quarter interim statement conference call. During the presentation, you may do so by pressing star one on telephone keypad. I will now hand over to your host to begin. Please go ahead.
Thank you very much indeed, and welcome everyone to the 2022 Q1 Beazley IMS. Thank you for dialing in. I'll just start with a few comments and then hand over to some Q&A. Just despite the war, we're pleased with our start to the year. We're pleased with the growth. We have indeed maintained the momentum that we built up last year and continued to put some new exposure on the books, which is positive. You know, we had been guiding to mid double-digit growth. The fact that we're ahead of that for Q1 is a good thing. Rate change is also above plan, driven by Cyber, as you can see, but also positive across all our divisions.
As we note rate change is moderating across some lines. It is quite a dynamic market. We're not formally updating our full-year growth guidance, but we are pleased with how the year has started. The claims experience is also better than expected, which is also pleasing. No doubt that has contributed, I think, to the rate change moderation across parts of the book as claims experience ultimately does drive pricing. We mentioned that Cyber frequency continues to fall on both measures, premium and policy counts, an improvement from year-end, from 60%-65% by premium and 20%-25% by policy counts. The statement on better claims experience is not driven by Cyber.
Rather it's a broad improvement across the business, really reflecting the trends that we've been seeing these last four quarters. We discussed at year end when we saw claims releases across all divisions for the first time in a number of years. All good there, I think. Moving on to investments. As we all know, it was a very lively quarter. We're quite pleased with the 1.2% loss. The team were very actively managing the portfolio through a period of a choppy equity market and rising yields. The $92 million loss is all mark-to-market losses. We do look forward to taking advantage of the extra yield available, which was 2.3% as at the end of March, a little higher than that now.
We mentioned, I think in the text, that we've been using derivatives to manage duration. As of today, we remain net very short. I thought I'd make a couple of comments on that. We use derivatives because it allows us to change this position very quickly. It's not for capital management or any other purpose. We are actively, almost impatiently, looking to put duration back on the books. Once we believe that yields have stabilized, we will do so. We've had a couple of goes, but each time they started rising again, so we've had to go short again. We are hopeful we should be able to take advantage of that extra yield very soon.
I'd like to say a few words about the war in Ukraine before moving on to Q&A. You know, tragically, it appears we're only at the beginning of what could be quite a drawn out conflict. I'd like to underscore that everything we've said and I'm talking about is based upon facts and the situation as is. We haven't tried to predict what could happen, as I think that's pretty much impossible to do. The numbers that we're talking about today don't contemplate, for example, an invasion of Ukraine by Russia or any other escalation of the war. We have made an assessment of our exposures. I say exposures because we haven't had that many claims yet. We're looking at our aggregates and applying some loss factors on them to assess their potential impact on us.
That leads to the $50 million number that we refer to in the IMS. We list out the lines of business included in those numbers, and you can see that it's our first rather than third-party business, which I think makes some sense. It also doesn't include Cyber. Whilst there are concerns that this conflict would provoke increased hostile Cyber activity, what has happened so far is that's been concentrated in the geographies impacted by the conflict, i.e., Ukraine and Russia. Actually the level of Cyber activity on our client base has diminished. Whilst we expect that to revert back at some point to date, that hasn't happened.
Notwithstanding that, of course, we continue to work very closely with governments to keep up to date with the latest intelligence on likely activity, and ensure that we capture any new threats, and work with our clients to mitigate those. Continue, of course, to manage our portfolio of gross and net so that our systemic exposure remains within risk appetite. We also haven't included in that $50 million, our assessment of aircraft stranded in Russia. Why not? Well, because, mostly it's an extremely complex and uncertain environment, and there are a number of different ways that loss could play out, each of which could drive a different outcome to us.
However, what we can say is that none of those outcomes are material enough to warrant changing our full year guidance, which we hope gives some comfort as to their size. Are there scenarios somewhere that would change that? A couple, but they're very, very remote. For example, we have some exposure to Chinese-owned aircraft in Russia, which we've had assumed are not at risk. And there are some policies with seven days notice of cancellation, which we have invoked, and we're not assuming that those would be successfully overturned given the decades of market practice of working that way. What we have done in the assessment of our aviation exposure is to assume that there have or will be claims. Sanctions provision will not prevent payment of those claims, and they will fall either to the all risk or war towers of insurance.
We've looked at the implications of that on our book, that led to the conclusion that our year-end guidance would not be impacted. The takeaways we'd like to leave with you are growth and rate change is better than expected. Claims activity has been better than expected, which has offset the exposures we have to the war, which means we're able to maintain our guidance of a full-year combined ratio of around 90%. Although that war is a horrific human tragedy, in terms of the amount of our business impacted, it's relatively small. The rest of it, the majority of our business, is performing well to date. With that, over to Q&A.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on telephone keypad now. We have our first question from Kamran Hossain from JP Morgan. Please go ahead.
Morning, Kamran.
Hey. Morning, Adrian. A couple of questions from me. The first one is just on, I guess, thinking about the guidance and kind of where you stand now versus where you stood at the full year results. I guess the full year results you talked about, you know, around 90% combined ratio for 2022. You've absorbed the impact of kind of $50 million of claims from, I guess, the conflict, but the guidance is still the same. I guess the implication is that the lower combined ratio, you know, that the combined ratio should be lower than 90. How? What has moved things so quickly since kind of, you know, early February and early May? That's question one. Just also trying to think about what to bake into numbers for next year.
The second question is on aviation and the stranded planes. Could you maybe give a little bit more detail on the kind of ground up process, that led you to kind of, you know, issue the statement that, you know, even if it, you know, apart from a few very remote scenarios, the guidance will be unchanged. I think it's, you know, been a key topic of discussion in the market in the last couple of months. Thanks.
Yeah. Okay. The first one, essentially what's happened is we've written a bit more business, this year than we planned. The rate change is better than planned, and that's all helpful. The claims experience in the first quarter was also lower than we had planned for. The combination of those three things on our financials essentially offsets the impact of the war that we had. It's just simple. It's just no more complex than that, Kamran.
The ground up process that we went through is essentially to look at our aggregates on the war and the oil risk side, assume that there is or will be a claim, and that we will be able to pay it, discounting those remote scenarios that we talked about, and then running that through our reinsurance program and figuring out what the net impact to us will be, and running that against the tolerance of around 90%. That's all within it. You know, I think what that tells you is that perhaps our aggregates in aviation, all risk and war aren't as big as they could have been.
Fantastic. Adrian, that's very reassuring. Thanks very much.
Thank you. We have our next question from Freya Kong from Bank of America. Please go ahead.
Morning. Thanks for the color on the aviation. If you're happy to reiterate the around 90% combined ratio target, that means potential aviation losses, even if the range is wide, shouldn't be too unpalatable. Is there any reason why you're not sharing this range today? Secondly, just on the rate slowdown in specialty lines, it looks like it's been quite meaningful. Could you give us some color on what's driven this bigger slowdown and generally how you're feeling about rate adequacy across the book versus the higher inflationary backdrop? Thanks.
We're just pulling up the rate change information. What was the first question again? Sorry.
If you're happy to reiterate the combined ratio guidance, why aren't you sharing the range?
Yeah. Yeah. That's a good question. I think it's because there are a number of different possible outcomes. You know, the numbers are different. The situation is extremely complex and no one's releasing those numbers yet because they. The range could be anywhere from naught to something else. Because of that uncertainty, we didn't think it was terribly helpful to release a range. We did want to give some comfort, and that's what led us to the approach that we have. Rate change on specialty lines is down. I think that's mostly driven.
It does vary. It's very correlated to where the claims environment is going. As others have commented, I think the area where competition has increased the most in specialty lines is across international D&O, which was very positive for most of last year. Towards the end of the year and into this year has got a bit more competitive. That's probably the biggest factor.
I'll just add that for the first time, we're showing you specialty lines excluding the Digital business which we've separated out, which is shown separately, has a rate change of 19%. That's actually where some Cyber business that was previously written within specialty lines sat until this disclosure. As you can see, overall the rate changes in Digital, which needs to be included in SL is higher. With splitting those SL, specialty lines look slightly lower than it would have done previously.
Yeah.
in previous form, which is a secondary effect in addition to what Adrian just said.
Yeah. Thank you, Sally. In terms of rate adequacy, which we also measure, we are fine with rate adequacy across the book pretty much. I can share with you that although overall we're ahead of expectations for premium, there are areas that we are under and areas that we are over, and they do correlate to where the rate change is stronger or weaker. You know, we are under budget in areas where rates are falling faster than we had anticipated or not increasing as much as we had anticipated.
Okay. Thanks, guys.
Thank you. We have our next question from Tryfonas Spyrou from Berenberg. Please go ahead.
Morning all. Morning Adrian. Morning Sally. Just a couple of questions from me. Could you please give us a sense of the gross to net premium development given you had a higher gross premium this quarter? Would this have a proportionate impact on your net growth as well? A second question on Cyber. Given the trends continue to be quite positive, has your plan or appetite for adding more exposure to the book changed at all since year-end? Thank you.
I'll take the second question first because I think Sally's gonna take the first question second. Our Cyber experience continues to be positive. I think part of that is because of the new ecosystem which we rolled out, you know, whatever it was, eighteen months ago now. We are getting more confident in that. I do think there has been an impact because of the war. There's a lot of Cyber activity concentrated in Ukraine and Russia right now, so I do expect those trends to change back at some point. I think, you know, there are some temporary trends there, and there continue to be new threats emerging all the time.
Our central plan for Cyber hasn't really changed this year. We're comfortable with that. What we're really doing in Cyber at the moment is figuring out what our three-year plan is and what sort of business we want to build. Ultimately, we'll share some more details about that in future calls. Do you wanna take the first question?
Yes. Thank you.
Yeah.
Thanks for the opportunity. We don't update our net at Q1 and Q3. We'll give you more of an update at half year. That said, generally speaking, the vast majority of our net premium that the reinsurance that we buy is proportional. I would generally say that it grosses up. The simple math would be that nets are broadly in line. It won't work out like that perfectly, but that's how I would guide you to think about it at the moment.
It will be similar to last year, isn't it?
Yeah.
In terms of ratio.
Exactly. Yeah. That's where we'd guide you. We'd give you more of a full update at the half year. I think Adrian said earlier that, you know, we guided double digit growth this year, and then in the first quarter we've seen obviously, higher than our guidance. I wouldn't take the performance in the first three months to be an indication of what we're now expecting for the full year. I think it's very driven by the current Cyber environment, which can change, both ways very quickly. I would think about gross net relationships in that way, and we'll give you more of an update at the half year. Sure.
Okay. Thank you.
Thank you. We have our next question from Will Hardcastle from UBS. Please go ahead.
Morning, everyone. First one just on the aviation. I guess the color's really helpful, so thanks for that. Is there any potential on those remote scenarios that you mentioned that those aggregate towers that you talked about could be exceeded, or is that just not in any of those scenarios so that could happen? The second one is just, can you help me? I'm probably being really stupid here. I'm just trying to understand the derivative implications and, effectively, when you get the bounce back in the yield coming through the P&L. Is it you have to then sort of wait for that to run through and durations come through? Or is it you take the derivative off and you effectively bounce back to the 2.3% class as of today upon that moment? Thank you.
Thanks, Will. I'll do that first. The answer is the latter. What the reason we use derivatives is to enable us to move extremely quickly. Yes, as soon as we feel yields are stabilized, we'll unwind those, and we'll get the benefit of the increased yield immediately, which we are impatient to do. Those remote scenarios that you described will have different levels of impact. We have discounted them because we think they are genuinely remote. I you know wanted to share them with you, too, so that we could all understand how remote those scenarios are.
Because, you know, quite frankly, we are trying to learn from the experience that we had a couple of years ago when we perhaps didn't share as much detail on our assumptions behind our COVID losses as we could have done. You know, we believe those scenarios are extremely remote, and you can make your own judgment as to that.
No, that's really helpful. Thanks.
Thank you. We have our next question from Nick Johnson from Numis. Please go ahead.
Hi. Thank you. Morning, everybody. Couple of questions, please. Firstly, on specialty lines, I'm just picking up on the earlier question about-
Yeah.
Sort of change in rates and specialty lines. You talked a bit about rate adequacy and the competition in D&O. Just wondering if you can talk a bit about how you feel about the growth opportunity going forward in specialty lines. Also on specialty lines. Just wondering if you have at the moment a rate change number for specialty lines in 2021 ex Digital. That's the first sort of question. Secondly on
Let me get to that first because I'm forgetting the first question.
Okay.
I get them all going.
Yeah. Great.
Let me-
Yeah.
Yes, you'll get year-on-year comparison at the half-year. We can.
Okay.
We can do that. I've forgotten the first question.
Just the growth opportunity going forward.
Yes.
as you see it in specialty lines.
So, you know, that, so there are two things going on generally. First, you know, we always need to make sure that we manage market cycle discipline. You know, as rates increase and then dissipate, you know, our enthusiasm for putting on new exposure and starting to shrink will change. You know, we've already started that. Our rate of growth in D&Os slowed right down, you know, as the rate change has moderated. We will be very fast to act as the risk reward changes, Nick. You can hopefully rely on us to continue to exercise that sort of discipline.
That having been said, you know, the way that we're trying to construct our portfolio is to invest in areas with long-term demand growth, and that fundamentally still remains, right? That's why you find us in areas where industries are growing. You find us in the areas of environmental and healthcare and technology and so on and so forth, because those are areas with long-term demand growth, which should enable us overall across the portfolio to maintain the sort of growth we're seeing in specialty lines while being able to exercise proper market cycle discipline. You know, I think our sort of long-term thesis for specialty lines and across most of the business actually remains unchanged.
Okay, great. Thanks. That's helpful. The second question was on surplus capital. Appreciate you don't publish the number at the Q1 stage, but just wondering if you could talk a bit about some of the moving parts in Q1.
Yeah.
Am I right in thinking that higher yields and so slightly better pricing incremental positives, and also obviously?
Yeah.
conscious of what, if any, impact the sort of mark-to-market losses have on the capital position?
It's slightly apples to oranges because of course the result, you know, we're comparing IFRS 17 and Solvency II. Broadly speaking, the rate change is better than expected. Claims experience is better than expected, and we've written more business than we thought, which we think is profitable. That's broadly positive on a P&L perspective and from a capital perspective. You're right. Rising yields gives us a mark-to-market loss. On our Solvency II balance sheet, of course, we discount our liabilities. Rising yields gives us a bigger discount, which is also a tailwind. You know, we don't share numbers at Q1 and Q3. You can see, I hope, that the winds are tailwinds rather than headwinds.
Great. Thanks. That's very clear. Thank you.
Thank you. We have our next question from Faizan Lakhani from HSBC. Please go ahead.
Thank you for taking my question. The first one, I just wanted to understand, in practice, how do we associate Cyber and its war exclusions? I understand that, you know, one, you've got to attribute the claim to firstly a war, but then also attribute it to someone who is acting as a state actor. How does that really happen in practice? Do you have certain support? Do you need approval from foreign agencies? That would be helpful. The second is on inflation. We've seen, you know, a growing trend of increasing inflation, particularly in the U.S. and potential risk of escalating wage inflation. What does that mean for your exposure in lines like healthcare liability and D&O?
Yeah, good question. You know, we've talked about inflation for a while now. You know, inflation shouldn't be a problem for an insurance company like us, provided that we can spot it and we're allowed to price for it. We're very active in building in inflation assumptions right across the business. From how we budget as a business for our own costs, but also in our capital model, in our reserving, and in our pricing. We've been very proactive in making sure that we update inflation assumptions, you know, as the world changes.
One of the good things that we have, and one of the reasons why our liability business is a claims-made business rather than written on an occurrence form, is because it allows us to adjust things like inflation much more quickly, right? Because on an occurrence form, you could be paying claims on things that occurred 15 years ago, and you don't get a chance to reprice it. On a claims-made form, of course, you get to update your pricing much more regularly. Provided you know you can change your pricing and provided you're factoring it in, inflation shouldn't be a problem. The issue comes when you either don't spot it coming or the market doesn't allow you to price for it properly. Fortunately, the way the market is currently, we have, we-
Mm-hmm.
We have been able to spot it and we are able to price for it.
In terms of the reserving.
Unable to. Sorry.
In terms of reserving, what are the assumptions in terms of what are you expecting for inflation forward-looking versus?
Yeah.
How has that changed?
We put in a load across certain classes last year to bring increase in inflation. What we're doing, Q1 this year is actually increasing those loads because we think it's gonna last for longer than we did this time last year or in Q3 last year, because of the events that have happened this year. The particular load varies by product, by geography, by class. But we have updated them in Q1 because quite frankly, the war has meant that we think it's gonna last longer and be slightly more pernicious than we did in Q3 last year.
Okay.
Moving on to the Cyber question.
Mm-hmm.
You're right. In order for the war clause to trigger, there needs to be a war, which there is, and it needs to be attributed to one of the warring parties, which is a complex and resource-intensive process. Generally speaking, it needs the sort of capabilities of a nation state to do. What we've seen so far this year with the way the Western governments are treating this conflict is to do that attribution and to call out Russia in advance when they think they're about to do something. The messages we've been getting from government is that if there are hostile Cyber attacks from Russia, they will do the work to attribute those attacks.
Having said that, if they're unable to do so, or there's increased activity which we can't attribute to the war, they will absolutely be covered. What we've said to our clients is, we will treat each issue we have independently and depending on the facts. There may or may not be Cyber activity which gets caught by the war exclusion.
Great. Thank you very much. Thank you for the detail.
Thank you. We have our next question from Andrew Ritchie from Autonomous. Please go ahead.
Morning, Andrew.
Oh, hi there. First question. I'm still having a bit of a head spin on the derivatives. I see what you're doing, but if I forget sort of this year, I'm assuming those derivatives sort of run off naturally anyway. I would sort of plug in the higher yield in 2023. Maybe there's gonna be derivative noise for 2022.
Yeah.
That's the first question. The second question, just on Cat exposure, Nat Cat. You were sort of being quite thoughtful about that at the year end.
Yeah.
I can see obviously property has grown, but reinsurance hasn't. What in aggregate has your nat cat kind of positioning done, you know, combining the two sort of cat exposed lines year to date? I guess, the other question I had on the claims environment, I suppose my question is there a danger of declaring victory sort of too early? Because there seems to be differing opinions as to whether claims are still slightly unnaturally suppressed. I'm talking here.
Yeah.
Claims ex Ukraine.
Yeah.
There's a lot of uncertainty in the economic environment.
Yeah.
Some of the specialty lines could be vulnerable to a sort of recession type scenario.
Yeah.
I guess I'm just curious as to your view.
Yep.
You know, is there a danger we get a bit carried away and actually this is still, you know, it's a bit early to be that relaxed on the claims environment?
Yeah, no. Please don't take what we were saying as a sign that we're relaxed about the claims environment. Let's go through the three points one by one, Andrew. Yes. I think your assumptions on derivatives are broadly correct. I would put in the extra yield for 2023. We'll try to get that as soon as we can in 2022, and we are able to do so very quickly once we decide that it's safe to do so. You know, the claims environment becomes your third question. Second, the claims environment, you know, we said at year end, didn't we, that we are in a period of elevated risk across great chunks of our portfolio.
There is inflation there which we need to price for. There is social inflation which is definitely manifesting itself as the courts reopen in the U.S. and across the world. Climate change is making catastrophe risk, natural catastrophe risk even more complex. The difference between now and three or four years ago is that those issues are recognized by the market and therefore we are allowed to underwrite to them and price for them in a way that we weren't four years ago. I think what we're seeing in our claims development is evidence that we have been able to underwrite for the environment of elevated risk.
Hopefully, we'll be able to continue to do that successfully. Your second question was?
On just the Nat Cat positioning.
Yes. We have. I think again, at year end, we showed you what our risk appetite had done as a percentage of net premium across the years, and we said we will continue to moderate that this year. That is true. We continue to have to be quite restrained on our Nat Cat risk appetite. That hasn't changed since year end. I think again, we were slightly disappointed with the property reinsurance market at 1/1. We have written less than we had thought that we would do. The property reinsurance market continues to evolve quite quickly actually.
There may be a bit more opportunity for us in the year end, and the treaty team may make up a bit of lost ground. We have not increased our risk appetite as a result of that. It remains where it was at year end.
Okay. Thanks very much.
Thanks, Andrew.
Thank you. We have our next question from Freya Kong from Bank of America. Please go ahead.
Hi. Sorry, just to follow up on the assumptions in your aviation range. One of the assumptions is that policies that have been canceled cannot be overturned. How confident are you that your policy cancellations will stick given likely legal challenges coming from the leasing companies? In a worst case scenario where these don't stick, presumably in the war market, could this still be contained by the reinsurance that you have?
We're very confident that those exclusions will hold because they fall on the back of decades of market practice, and it's the way the war market works. You know, you can buy war cover in two different ways, right? You can go to the marine aviation war markets, and you can buy it very competitively priced, knowing that if war does break out, the policies are canceled, and you have to renegotiate them. Or you can go to the political risk and political violence world and buy non-cancelable war coverage, but it's more expensive. Customers have a choice of markets to go to according to how they want to structure their coverage, and both markets have worked very successfully for decades. We remain...
We are very confident that the structure of the policies works. We just wanted to share, mostly because of this, because we had a couple of years ago when we didn't share our assumptions, the sorts of assumptions that we had made, and we do remain very confident in those. If for some wildly remote reason they don't hold up, our losses will be bigger.
Okay, thank you.
Thank you. We have our next question from Ben Cohen from Investec. Please go ahead.
Oh, good morning. Thank you. I just wanted to firstly just to follow up on the comment that you made, Adrian, in answer to an earlier question about I suppose whether Cyber activity has sort of remained concentrated in Russia and Ukraine and therefore hasn't sort of been impacting your clients as much. I just wonder the extent to which you sort of can kinda quantify that benefit in the first quarter, separate to the sort of remediation work and the pricing benefits that you've been getting through. I guess then the degree to which your assumptions going forward, how quickly you think that would normalize. Well, I'll leave it there. Sorry, I then had a follow-up on something else.
Okay. I think that's very difficult to unpick, Ben. I think the message that we were trying to give was that, you know, there were some concerns at the beginning of the year that what one of the attack vectors that Russia would use, you know, as part of its strategy with Ukraine were broad-based cyberattacks. That hasn't happened. We have noticed more activity, you know, as I mentioned in Russia and Ukraine. I don't think it's. We haven't tried to unbundle those two things at all. You know, but we do note the fact that it's happening, and we have to expect that at some point that's gonna change again, and we just have to remain vigilant.
That's why, frankly, we haven't changed our plans for Cyber this year.
Sorry, just to be clear, just so I'm not misinterpreting it, are you suggesting that there has been this displacement or have I got that wrong? Is it just that frequency elsewhere is better because of pricing and things just haven't got worse because of Russia-Ukraine?
I can tell you we've noticed more activity in Russia and Ukraine, and that kinda makes sense. I can tell you that our frequency continues to go down, and we had been preparing it to go up. I can't unbundle it any further than that, Ben.
No, that's clear. Thanks very much.
Thank you. We have our next question from Will Hardcastle from UBS. Please go ahead.
Thank you. Just one follow-up. It's a really quick one. Just there's no mention of, you know, catastrophe losses outside of Russia-Ukraine here. Is there anything you can say? Can you perhaps remind us of what would you know, what size loss it has to be in order to be disclosed? Thanks.
Yeah. I mean, we've had, you know, so the sort of main accidents in Q1 were some winter storms in Europe and some in Australia. We have a small exposure in Australia and very little in Europe, all of which is well within the cat margin that we have in Q1. We were disclosing the thing that caused us to change our guidance and none of that is anywhere near it.
Very clear. Thanks.
Thank you. As a reminder, ladies and gentlemen, to ask any further questions, you can press star followed by one on your telephone keypad now.
All right. Well, thank you very much indeed, everyone, for dialing in. Good to talk to you all. We look forward to doing so again at the half year. Thank you very much indeed.