Good morning, everyone, and thank you for joining us for the Beazley quarter three statement. I'm gonna cover the key elements of our trading statement and then open up to Q&A. It's been a decent quarter, which has played out broadly as we flagged at the half year. We expected rate increases to moderate, and they have, particularly on cyber, which we expected. We expected growth rates also moderate, which they've done. We mentioned in our statement also that the frequency of our ransomware claims on our cyber book remains on a downward trajectory.
We've been reporting this metric now since July 2020. This is probably the last time we'll make mention of it in this format, given the fuller disclosure we've had since we separated out the Cyber Risks division in our numbers. While the cyber rates have moderated, they do remain significant, and we've been growing exposure as we said we would, taking advantage of the new business opportunities we're seeing in that area. Our initial view of the impact of Hurricane Ian is about $120 million net of reinsurance. This means that our year to date cat losses are within the catastrophe margins that we hold, which I think is positive given the elevated size and frequency of losses throughout the world this year.
I think it speaks to the significant work we've been doing on our property risk portfolio over the last five years. I think this leaves us more confident to take advantage of the upcoming opportunity which many carriers have been referring to in recent weeks. Market sentiment has moved materially in the property world, both insurance and reinsurance, and to a certain extent in the reinsurance world overall. We believe that market conditions for the rest of the year and into 2023 are, broadly speaking, more favorable than we thought they would be in the summer, and that'll be reflected in our business plan that we finalize at the end of the year.
As we stated at our capital markets day earlier this year, we will continue to be dynamic on where we write premium, focusing on where pricing dislocation exists and targeting those areas with the best risk reward. We hae also highlighted in the statement a moderation of growth in specialty risks, which has been driven by D&O, where the risk reward dynamics have changed here as the rate change has moderated. In fact, the rate decreases are now fairly common, and we have responded accordingly and have taken risk off the table. We continue to monitor inflation to ensure adequate pricing, and we remain cautious in areas where our product set is most exposed, for example, in hospital professional liability. The impact of inflation on our claims environment has been as expected, and pricing trends remain positive and outpacing claims inflation in most lines of business.
While we are planning for the reinsurance world to be a challenging environment next year, as we have said before, properly priced reinsurance and the disciplined reinsurance market is positive for the insurance industry overall. We think the shift is a positive thing and should encourage disciplined behavior in the insurance industry as well. We do expect to pay more for our reinsurances next year, but given the strong relationships we have with a strong core panel of reinsurers, we're confident that our programs will retain their integrity in 2023. We've been indicating for the past 18 months or so that we're anticipating an opportunity across our property insurance and reinsurance books as the industry adjusts to taking account of climate change and with having a forward-looking of climate risk as recognizing there's a role for specialty insurance in property.
That opportunity has emerged faster than we originally thought, which is a good thing and is something we will look to capitalize on. On the investment side, the volatile conditions the first half of the year have persisted into the third quarter, driving the mark-to-market losses, which at the end of September stand at just over 3.5%. This will have an impact on our full year P&L because of the way we have to account for losses, but the extra yield, 4.6%, as at the end of September, will be a significant tailwind for us next year. I'll now pass over to Nadia to open up to Q&A.
Thank you. Our first question today goes to Will Hardcastle of UBS. Will, please go ahead. Your line is open.
Morning. Thanks very much. Look, it looks like the high eighties reiteration of the combined ratio is very impressive actually. I think it should drive some confidence here. How much of this is, you know, continuation of the rate benefit, the underlying improvement that's giving you the confidence to do this versus, I guess, the reserve release strategy that happened at H1 relating to IFRS 17? Just as an understanding, was that a one-off moment that happened or could there be more of that in the second half? And then can you talk me through, I guess, some of the extent of the capital deployment the full year expected for the cat opportunity? You know, you are actually giving a nice front foot message there, which has been a bit mixed from some players.
It sounds like you're talking about reinsurance and insurance. I guess, what's the binding constraint here for growth? Is it hard cat exposures? And do you think that this is gonna be quite broad-based? Thank you.
Okay. First question first then about the high eighties guidance. I think the A vs. E in losses in the first half of the year was better than expected. I mentioned that our cat activity year to date is within our cat margins. Having said that, Hurricane Ian was bigger than our Q3 cat margin. And so you know, if you net those things off, our incurred claims in Q3 was also slightly better than expected, which kind of offset that, which meant that we could reiterate the high eighties guidance we gave at the half year. Does that make sense?
Yes, it does. I guess just trying to understand whether as well the IFRS 17 extra reserve release from H1 is gonna be?
Yeah.
A thing as well.
There is no IFRS 17 effect in the statement we made today, no.
That's great.
Looking on to the property opportunity next year. I think it's both reinsurance and insurance. We expect the reinsurance market to shift significantly at 1/1 and beyond for the reasons that we have outlined. You know, I do think that will have an impact on the insurance world. You know, we've been sort of flagging for a little bit. I think that as the property insurance world adjusts to having to write for the changing risk environment that climate change has provided, you know, that will give us, as a specialty insurer, more opportunity. I think that is coming into view. I think the insurance market will adjust and give us an opportunity. I think the reinsurance opportunity is probably first.
That's great. Thank you.
Thank you, Will.
Thank you. The next question goes to Kamran Hossain of J.P. Morgan. Kamran, please go ahead. Your line is open.
Thanks. Thanks, Nadia. The first question is just on, I guess, the outlook that you gave for growth at the first half results. You talked about 2023 probably growing mid-teens%. Given what's going on in the market, could you maybe give us a feel on whether you feel more confident, less confident, you know, obviously reinsurance and pricing is gonna be more challenging, but just interested in whether, kind of you see this as a net positive, for probably for top line for next year or whether it kind of rounds out or kind of nets off against each other. The second question is on cyber. Clearly rates have kind of moderated a little bit from the first half.
I guess at this point we're seeing kind of rates are very strong rates this time last year. Are you seeing new money coming into that market yet? Just interested in kind of whether you are seeing increasing competition. Thank you.
Yep. Thank you, Kamran Hossain. Morning. First question. Yeah. We did guide to mid-teens growth in the summer. I think given the shift we have seen in the property market, there's probably some upside to that moving into next year. If only because, you know, rates will be stronger in property reinsurance and insurance next year. So I think, yes there is definitely upside to the mid-teens growth there. On the cyber side, you know, we are still getting rate increases. As we sort of mentioned in a statement, the frequency of cyber losses continues on its downward trajectory, which is all positive.
I think we are seeing the market open up again a little bit on cyber, not necessarily new money to the marketplace, but the existing carriers also being a bit more positive about cyber than they were in the first quarter.
Thanks, Adrian.
Super. Thanks, Kamran Hossain.
Thank you. The next question goes to Freya Kong of Bank of America. Freya, please go ahead. Your line is open.
Hi. Morning. Two questions, please. I guess asking Will's question from another perspective, to what extent have you seen better than expected claims experience that might be considered good luck or won't be repeated next year? I think you flagged some of that at H1. And secondly, I guess Beazley has remained fairly cautious towards property and reinsurance lines in the last few years. What is your overall view on rate adequacy now? And could you give us more color on how much capital you intend to deploy and how this impacts your year-end capital ratio expectations? Thanks.
Thank you. Sorry, what was the first question again? First question.
The first question was.
How much was.
Oh, I see. Yeah, yeah.
Luck in the numbers?
I guess how much was the better than expected A vs E in the third quarter? I mean, sometimes it's over, sometimes it's under, isn't it, in A vs. E. So I think it's good that we've been having better than A vs. E for a few quarters now. We can't expect it, you know, always to remain that way. I guess it's a bit of both. In terms of, you know, our plans for next year. You know, we've been flagging as I have said that, you know, we think property is an opportunity that is coming into view.
When you go back in our history, property used to be a bigger part of our portfolio than it has been for a while. And you know, for the first 20 years of our existence, it was a jewel in our crown. If property does become a specialty line again, and we think it can be once more. It appears that the conditions are appearing for us to be able to do that. You know I do think there is potential strategic opportunity for us to grow, property franchise both in London and offshore in the US. I think that's gonna emerge more quickly than we thought it would be, and that's very exciting.
And then impacts on capital ratios.
Yeah, I mean, we signaled at the half year that we expected our capital surplus to be about 28%, which is, you know, three points above the range we like to be in, and we remain confident in that capital position. You know, our business plan for next year is with Lloyd's now, and it's been approved, and we have got the capital to support that plan. You know, we are seeing a significant opportunity in the property market, which we are well positioned for. Given the you know, the work we've done on that portfolio over the last few years.
Okay. Thank you.
Thank you. Our next question goes to Andrew Ritchie of Autonomous. Andrew, please go ahead. Your line is open.
Morning, I guess, Adrian, t he first question, there's been a few carriers flagging adverse D&O claims experience, particularly in the 2019 and 2020 accident years.
Yeah.
I mean, clearly you are still running.
Yeah
Confidently, I just wanted your perspective on that. Particularly, I'm contrasting that with there is a bit more claims experience emerging. Yet the market is softening. Just some perspective, your perspective on the sort of D&O claims/pricing situation. The other question was, I appreciate what you're saying that property has been bigger in the past. It just, when I look at your exposure in property lines by things like the realistic disaster scenario or even the year loss versus equity, I don't see you seem to be already quite exposed and therefore I'm thinking, is the strategy mostly to maintain the overall sort of net exposure but collect meaningfully higher prices? Or do you feel there is actually room to grow the net exposure? That's what I'm sort of questioning. Thanks.
Okay. Morning, Andrew Ritchie. Thank you for those questions. On the D&O product. Yes. You know, we have seen in the Q3 results some carriers talk about adverse development on the 2018, 2019, and 2020 accident years actually. I think, you know, we have been saying consistently that the drivers of heightened claims activity, you know, which we started to flag sort of 2016, 2017, have not gone away. We expect a period of elevated claims across much of our liability business, including D&O, and that is persisting and it's manifesting itself.
The reasons for the D&O market softening, I think, are quite particular. You know, and it's essentially because the flow of new business into the D&O market stopped abruptly when Ukraine was invaded. I think that's had a particular impact on demand and supply, which has been frustrating and disappointing. Which is why we have taken some risk off the table and we're writing significantly less D&O than we planned to at the beginning of the year. Because we believe it remains an elevated risk and we need the pricing to reflect that. You know, if these trends persist, Andrew, we'll take more risk off the table because we absolutely don't think that the claims environment for D&O is any better than it was in accident years 2018-2020.
On the property side, you know, I do think there is a strategic opportunity for us, which we will look to, you know, build on. We will make sure that as we do that, we manage our capital position as prudently as we always have done, and make sure that we are not exposing, you know, our shareholders to outsized risk in any one of our key risks, cyber, casualty or property. And will make sure that we do that. I do believe there's a, you know, both a near term and a strategic opportunity for us in property insurance and reinsurance.
Sorry, just to be clear, that's to grow exposure as well as obviously collect the higher prices. It's more than just collecting the higher prices for the same exposure.
Yeah, we are looking at that. If we can grow our exposure in a prudent way, Andrew, we absolutely will do. Yes.
Okay. Thanks very much.
Thank you.
Thank you. Our next question goes to Derald Goh of RBC. Derald, please go ahead. Your line is open.
Morning, Adrian. A couple of questions, please. The first one is just going back to cyber. Can you confirm that you are still on track to write GBP 1.3 billion for the full year? Because if I look at the third quarter, probably would have expected a bit more, but maybe there's a bit of seasonality in there. And also for the cyber growth in 2023, is it fair to say that, you know, this growth in property CAT is actually a diversifier to your cyber exposure growth as well? Second question is just on reserving.
I guess as you conduct your year-end review, if your expectations, you know, whether it's inflation or not, continue as expected, and, you know, maybe all the other claims come in a bit better than expected as well, do you see an opportunity to maybe increase any, you know, excess loadings? Or do you feel that, you know, you are pretty comfortable with the loadings that you've already added to at half year? Thank you.
Okay. Right. On the cyber side, yes, our cyber growth did slow a little bit in Q3 as we thought it would. You know, if only because rates are coming off a bit. You know, will we come in at the $1.3 billion? Don't know yet. We have quite a big fourth quarter in cyber, so a lot of it depends on how that goes. It might be a bit under, it might be a bit over. I really don't know yet. It won't be a million miles off. And you're right.
You know, if there is an opportunity to grow our property franchise, that does provide, you know, apart from anything else, you know, the opportunity to obtain a good, healthy, diversified specialty business, and will help the other parts of the book to grow as well, which is a positive thing. We look at inflation every quarter. As we complete our third quarter review, we will update our inflation assumptions and our recession loads and all the other loads that we put on. In the light of what claims trends we've seen in the last three months. We haven't finished that process yet, but you know, it's something we do every quarter. In this dynamic environment, I think that's the right thing to do.
Great. Thanks, Adrian.
Thank you.
Thank you. The next question goes to Nick Johnson of Numis. Nick, please go ahead. Your line is open.
Thanks very much. Good morning, everyone. Two questions, please.
Morning.
Good morning. Hi. On specialty, so obviously you're saying that the growth slowed in the third quarter. Just wondering, is that all D&O? Just wondering if you could just talk a bit about what the growth conditions are like in specialty in other parts of that segment, and sort of how confident you're feeling about the growth outlook in specialty given price increases seem to be slowing. That's the first question. Secondly, on property growth. Just wondering, if are you seeing that the opportunity there is mainly in cat exposed property, or do you think there'll be a more broad-based opportunity, so sort of in non-cat property as well? Thank you.
Thanks, Nick. Specialty risks, the reason for the slowdown is predominantly D&O. It's not only D&O, but it's predominantly D&O. The rate reductions we have seen in D&O, you know, have contributed mostly to the lower rate change that we've posted. You know, specialty risk remains a diversified book in and of itself. There's lots and lots of products in there. You know, as we look back over the last 12 years-ish.
Mm-hmm.
It's been a strong driver of growth for the group. You know, I think it's encouraging actually that there are other parts of the book now which are growing stronger than that 'cause it shows the benefits of a diversified business overall. You know, there are lots of products within specialty risks which continue to grow strongly. You know, environmental insurance, for example. The D&O is a reasonable chunk of that, and it's providing some headwinds at the moment. Which is fine because we've got lots of other stuff to do. When we look at the property book, one of the things that we have been concentrating on these last few years is to get a better mix of cat exposed and less cat exposed business.
I think as we grow, if there is an opportunity to grow the franchise more strategically over the next three to five years, you know, we make sure that we have a good mix of business that is cat exposed and also stuff that's, you know, got more of a fire risk, a traditional fire risk to it. So, yeah, good spot.
Okay, great. Thanks very much.
Thanks, Nick.
Thank you. The next question goes to Ashik Musaddi of Morgan Stanley. Ashik, please go ahead. Your line is open.
Yeah, thank you and good morning, Adrian. Just a couple of questions I have is.
Morning.
Morning. Just first of all, like, if I think about next year, I mean, you would most likely be continuing to grow in cyber and you would most likely pick up a bit of extra growth in property cat reinsurance. If I understand correctly, these two businesses, the attritional is definitely much better than 90%. How do we think about the combined ratio for next year? I agree it's too early for to get a guidance, but just direction of travel, is it fair to say that the attritional for next year should be better than the attritional for this year just because you would have more proportion of cyber and property cat into that mix, basically? That's the first question I have. The second question is.
Actually, this one is just it. Thank you.
Great. Thank you. You are right. We're not gonna provide any guidance for combined ratios next year. I think, you know, directionally, if we were giving guidance at the half year that we expect growth to continue in the mid-teens into 2023, that should imply some confidence in our business. The fact that we think the combined ratio should be at or better than our long-term target of 90, right? If we are guiding that that's, there's probably some upside to that into 2023. That should provide some guidance that we remain confident that, our combined ratio, you know, should meet or beat our, you know, long-term hurdle rates. I can't give any more guidance than that, I'm afraid.
It's okay. Thank you.
Thank you.
Thank you. Our next question goes to Abid Hussain of Panmure Gordon. Abid, please go ahead. Your line is open.
Oh, hi, morning all, and thanks for taking my questions. Two questions.
Morning.
If I can please. First, hiya. Just two questions. Firstly, coming back to the property book, I'm afraid. Just wondering if you can give us any more color on the outlook or of rates or the indication of rates that you're seeing in that market. Some indication that we've seen are rates in the sort of 20%-30% range, which are quite bullish. Just wondering if you're seeing something similar. Then just sticking with the property book, how much headroom do you have in terms of PMLs? Or put another way, can you write, you know, more than 15%, without increasing your PMLs? If you could just give us a little bit more color on that, please.
Secondly, just coming back to your cyber book. I'd imagine you wanna keep your total book beyond cyber diversified. I just wanna get a sense of, is there a limit in your mind to how much cyber should make up
Of all lines of your total book. Any thoughts on how you think about business mix would be helpful. Thank you.
Okay. Thank you very much indeed. So on the property side, you know, it's quite difficult to predict what we think is gonna happen to the overall rates next year. You know, on the reinsurance side, we have been hearing, you know, commentary, you know, from the mid-20s to the 50s and higher, as well as a significant change in attachment points and the like. I do think that the reinsurance market will go through a structural change at 1/1, and that will have an impact on the property insurance book. We're kind of updating our assumptions for rate change now.
We haven't come to the conclusion of that, so I can't give any guidance for rate change for property next year at the moment, unfortunately. You know, can we write more than we currently do as a percentage of the whole? I hope so. I think so. You know as I said to Andrew earlier in the call, you know, if we can grow our exposure base in a prudent way and make sure that our PMLs remain within tolerance, we absolutely will do. You know, as we get to the year end, we will provide more guidance as to what that looks like for next year.
On the cyber side, you know, we have said that we will write more cyber these next couple of years, you know, while that market goes through its structural change. You know, we have a long-term target that we've had historically of not being more than 15% any one product, but we'll tolerate a short-term elevated position, which I think we'll maintain in cyber for a little bit, but over the medium term, that should come back down to within the normal averages.
That's very helpful. Thank you. Thanks for the color.
Thank you.
Thank you. Our next question goes to Faizan Lakhani of HSBC. Faizan, please go ahead. Your line is open.
Thank you for taking my questions. My first is on you mentioned a comment about, you know, reinsurance going up in property and that potentially seeping through across broader reinsurance market. I understand you are a net-
Mm-hmm.
-beneficiary of improving rates, but given that you are relatively underweight in property, is there a risk of the higher reinsurance rate having a less beneficial impact to your sort of book? The second one, again, coming back to your point you made around combined ratio, the comfort you have around that. If I just put the question a different way, what would cause you to sort of become more pessimistic on combined ratio, stripping out any sort of one-off large events next year? I mean, if you were to see a step change in social claims inflation, is that sufficiently factored into your thinking combined ratio? My third question's a relatively short one.
When I look at the, we don't have the full detail, but when I look at sort of the retained earnings potentially in Q3 and Q4 post dividends, it appears that your leverage will probably remain around the same level where it was at the half year. Are you comfortable running into that, with that same level next year?
I will answer the last question first. Yes, we are on the property side. You know, if we think about the reinsurance dynamic, there's an opportunity for us on our inwards reinsurance book, which I think we'll capitalize on. The plan that we've submitted into Lloyd's on our property insurance book does contemplate us paying more for our reinsurance and also increasing our retentions because we think that's gonna happen overall. It still provides a very positive business plan overall. So you know, I think, you know, as we said before, you know, a healthy reinsurance market, it ultimately is good for everyone.
On the combined ratio side, you know, what would cause us to change our mind? I think, you know, either a period of adverse A vs E, you know, or some danger signals or red flags that the claims environment has some exposure to it that we need to adjust to. You know, as I've mentioned a few times, I think we take a close look at inflation and the impact it's having on our claims every quarter, and make those adjustments, and compare those adjustments to the prices that we're getting. You know, throughout this year, we still remain confident that the prices do contemplate adequately the levels of inflation that we are seeing in most parts of our book.
You know, there are parts, particularly within bits of specialty risks, where we don't think that that makes sense, and we're taking risk off the table there. Overall, you know, I think our combined ratio we are comfortable with.
Thank you very much.
Thank you.
Thank you. Our next question goes to Ivan Bokhmat of Barclays. Ivan, please go ahead. Your line is open.
Hi. Good morning. Thank you very much. I've got three full questions.
Mm-hmm.
The first one on the hurricane, on the Hurricane Ian loss, I was wondering if you could maybe give a little bit of color. Of the 120, can you indicate how much was in your D&O book, sorry, in your D&F book, and how much was in the reinsurance portfolio? The second question, a little more broad. I suppose, a bunch of...
Large reinsurers are still carrying substantial COVID IBNRs. I was just wondering if you could give some high level thoughts about what do you think about the recoverable for you. Have you already received all that that you believe you were due? I mean, there's been a bunch of court decisions also in the last quarter. Maybe you could give a little color on that. The final question, very minor. Just wondering if you think that the letters of credit, you know, in the current higher interest rate environment is still an appropriate tool to use for capital management. Thanks.
Yeah. Okay, the split of the loss between the various bits, well, but we don't disclose the split. Sorry. I can't help you there. Apologies for that. On COVID IBNR, do we still have some IBNR for COVID? Yes. But as we've you know talked about, the vast bulk of our COVID losses were from our event cancellation business, and that's pretty much done now. Our COVID remaining COVID liabilities are relatively small now. There's no particular reinsurance issue. Do we believe that the LOC strategy remains an integral part of our capital strategy? Yeah, we do.
You know, as with all things, you know, if the cost changes, we'll, you know, do the cost benefit analysis and adjust accordingly. LOCs are, you know an intrinsic part of the Lloyd's market and how they are capitalized. Like most people in the Lloyd's market, there is no reason why it shouldn't remain a part of what we do. Like everything, we'll take a look at the costs, you know, as and when they renew.
Thanks, Adrian. Appreciate it.
Thank you.
Thank you. Our next question is a follow-up from Derald Goh of RBC. Gerald, please go ahead. Your line is open.
Morning, everyone. Thanks for the opportunity. Two quick follow-ups, please. The first one, can you give a sense of the capital requirement for each dollar of premium between property cat versus specialty of cyber? And secondly, could you also remind us what are the external reinsurance structures that you have in place, and if they all renew at one one or are they a bit more spread out across the year? Thank you.
Okay. I'm gonna disappoint you on your first question. No, we can't. We don't disclose that. I do apologize. On the second question, what sort of reinsurance do we buy? Broadly, there is sort of three components, four components to our reinsurance strategy. We buy reinsurance to give us the line size we need, so that we, you know, we have the firepower that we need within the markets that we are in. We buy catastrophe reinsurance to manage peak risks. We buy some aggregate reinsurance to manage frequency.
Then the fourth part is, you know, we partner with reinsurers to on lines of business where we can manufacture more business than we wanna keep our own balance sheets and help to optimize our net business mix. Do they all renew 1/1? No, we buy at 1/1 full and some in the summer. You know, our plan for next year, you know, as I said before, contemplates the changing reinsurance market that we see.
Perfect. Thanks, Adrian.
Thank you.
Thank you. We have no further questions. I will hand back to you, Adrian, for any closing remarks.
Thank you, Nadia. Well, thank you very much indeed for dialing in this morning, everyone. I hope that was useful. Any other further follow-up questions, please contact Sarah Booth. Enjoy the rest of the Friday, and have a good weekend.