Good morning everyone, thank you for joining us for our first quarter 2023 IMS. I'm gonna cover the key elements of our trading statement, then we'll open up to some questions. We're pleased, I think, with the first quarter's results, especially sharing the momentum that we've got in our property risk business, which underpins, I think, our confidence in reiterating our full year guidance for both expected growth and for combined ratio. Our overall growth rate of 12% is good. There are some seasonal effects in MAP, which means that it was always going to shrink in the first quarter.
As we highlighted at the year end, we've restructured the Smart Tracker so that we no longer front for the third party capital, which means that 82% of that business no longer comes in as gross premium for us. Net, of course, is unchanged. 75% of that business is written in Q1, hence the drag on overall growth, this quarter. Actually, MAP was ahead of its phase budget at the end of the first quarter. On a net basis, growth is as we have anticipated, also reflecting the fact that we bought less reinsurance for our cyber and specialty risks business in January.
Taking a step back, we've been saying for a while now that we are in an elevated risk environment, and whilst most of the pricing across our business reflects this, you know, we do need to ensure that we actively allocate capital to reflect our current views of risk reward, and that remains true today. The first quarter has presented a number of both headwinds and tailwinds, some expected and some not. For example, the issues in the banking industry this year, whilst not of concern to us from a claims perspective, have continued to subdue the financial markets, which has impacted demand in D&O and other areas and specialty risks for which transactions, you know, IPOs, merger and acquisitions, et cetera, are a material source of new business.
Overall, we have delivered broadly in line with what we expected at the group level, and I think this demonstrates once again that our diversified business model allows us to adjust quickly as conditions evolve. If we look at the divisions in a little bit more detail on cyber, we flagged in our year-end results that updated cyber war exclusions were having a dampening effect, particularly for new business, and we expected that trend to continue into Q1. The deadline for all syndicates in Lloyd's to adopt that updated wording was the 31st of March, and that has indeed happened. This year, we've been working very hard with our broker partners and our clients, and I think whilst there remains, you know, some work to do, engagement is much more positive and collaborative, and we're beginning to see that dampening effect dissipate now.
Our expectations for full year are unchanged in cyber. We have added to our exposure base and, you know, and we're still excited both by the short and the long-term prospects for that business. We've highlighted many times now how much demand that growth there remains for cyber, particularly in mid-market and SME business in the U.S. and outside North America, particularly in Europe. Our growth ex-US is particularly strong. I'm very excited that I'm pleased that we've invested in our European platform that's allowing us to capture, you know, that opportunity. Having said that, you know, the growth numbers for cyber in Q1 are slightly flattering. There are some prior year adjustments that have boosted premium.
The biggest impact on our business because of these new war wordings came at the deadline date of 31st March and early April, when that Lloyd's mandate took effect. Most of the moving of business by clients who weren't to carriers who weren't using that new wording was happening. As I said earlier, this is now beginning to dissipate. Whilst we anticipate Q2 growth to be slower, our expectations for the full year are unchanged given that progress that I have referred to. Within property, we've grown that division by 56%, which is in line with the plan we put together when we raised capital back in November. You know, the property reinsurance market has genuinely reset, and the insurance market is following suit.
We don't see this as a short-term bubble. We do anticipate momentum continuing to build, and we do see this as a medium to long-term opportunity for us, particularly in insurance. There have been improvements in rates, adequacy of and accuracy of insured values, deductibles and attachment point for reinsurance and other terms and conditions. All of which is very exciting and very needed. On the claims front, catastrophe claims in Q1 were within our held margin. Within that, as you will have heard from other carriers, generally, claims from Hurricane Ian are improving and Winter Storm Elliott are still developing. Moving on to specialty risks. I mentioned earlier, financial market volatility during the first quarter. That has continued to subdue financial markets which closed following Russia's invasion of Ukraine last year.
This, along with an increasingly competitive D&O market and a continuing challenging claims environment in areas exposed to social inflation, such as healthcare, has impacted growth in our specialty risk division. However, as we flagged during the year-end presentation, there are other opportunities for growth within specialty risks over the medium to long term, we'll continue to work on diversifying that mix. We will continue to make sure that we take risk off the table when the risk award is no longer attractive. Moving to MAP, the team are ahead of plan to date, as I said. Demand growth has been strong for many of our products, particularly in political risks, political violence, war, and cargo.
I think the fact that the reinsurance market tightened across many of these specialty areas at 1/1 has helped market conditions this quarter, and we've benefited from that. Digital has had a good quarter. We continue to roll out automation and digitization. That pace of rollout is increasing. We recently relaunched our US cyber portal, which has greatly enhanced capabilities and is very exciting. Within digital is our SME cyber business, which has been impacted by the wording issues I mentioned for cyber more generally. Overall, our claims experience in the first quarter has been in line with expectations. On investments, you know, as you know, we had a loss last year driven by, you know, both fast rising and volatile interest rates, particularly in the U.S.
These conditions resulted in improved yield at year-end. We've seen the benefits of that with investment income of $102 million in the first quarter and a yield on our fixed income portfolio at the end of March of 4.6%. Those are the opening remarks. With that, I will open up to Q&A.
Thank you. If you'd like to ask a question, please press star then One on your telephone keypad. We have Andrew Whitney of Goldman Sachs.
Morning, Andrew.
Hi. Morning, Adrian. I'm trying to understand, when I look at the cyber price change, how do you incorporate the changes of wording in that price change? If you see what I mean. Is it a sort of like for like, or, if I don't know. I'm not sure how I'd go about incorporating it 'cause obviously the terms are very different with the new wording. Could you.
Yeah.
Just indicate, in terms of the pushback.
Yeah.
Is it because there are other carriers willing to write, outside of Lloyd's, without the same wording, and they're attracting business? Is it just a sort of standoff where there's a lot of discussion with brokers and clients just to really understand what the new exposure is? You've probably explained that before, but apologies if you just need to revisit. I'm just not quite sure I understand.
No.
That aspect. Final... Second question, just on D&O or specialty lines, would you expect the rate momentum to improve for specialty overall? I mean, given that you're pulling back on some of the softer lines, the lines with the softer pricing, I mean.
Yeah.
Focusing on lines which... Where, I guess, pricing is more resilient. There's some signs that maybe pricing might rebound a bit even in that class. I mean, what's your expectation there? Thanks.
Yeah. Okay. Let's go to cyber to start with. We have not adjusted the rate change numbers to account for the updated war clause. We could have done, I suppose, essentially what we're trying to do is explain the way that we wanted to interpret the war clause anyway. We, you know, we didn't attribute any rate change to that. I think there's, you know, as we mentioned at year-end, there's been a lot of discussion about what war and quasi war exclusion coverage there should and shouldn't be. That discussion is still ongoing. I think it's a lot more collaborative now than it was. Clients and brokers are very engaged with the issue.
I think part of the noise in, you know, this year has been getting clarity about what exactly we're trying to do and we're not trying to do. Different markets and different carriers have moved at different speeds now, Andrew. There are, you know, many carriers that have updated their war exclusions to be similar to the Lloyd's mandate ones and our ones. There are, you know, a handful left that still haven't. Most clients are happy to accept the new war exclusion and the clarity that that gives. 'Cause fundamentally, what we're trying to do is to be as clear as possible about what coverage there is and there isn't.
You know, as we mentioned, I think at year-end, the insurance industry tends to get itself into trouble when there's not clarity of cover. I think we're making some good progress. Does that help?
Yeah. It's really a timing issue. It isn't the case that there's any class of carrier, I'm thinking outside Lloyd's trying to come in and say, "You know, look, we're gonna offer a much broader cover." That's not really happening. This is just a sort of stasis, as it were, overall in the market as people digest what they can buy and what they can't buy.
Yeah. There are one or two carriers that are still saying that they are happy to write on the old war wording. Some clients are, you know, would rather do that. I think the majority of the market is moving to try to update their wordings. I think that momentum is continuing to build. You know, I mentioned that there are a number of forces at work here. You know, I think firstly it's carriers themselves, thinking through how they can most clearly explain what coverage they're offering and what coverage they're not around war. There's also increased regulatory scrutiny of this issue because, you know, obviously there is systemic risk there.
There's increased reinsurance scrutiny because a lot of this exposure goes back to reinsurers. You know, I think it's a combination of all those stakeholders that are driving this forward.
Okay. On the specialty side?
Yeah, on the specialty side, you know, I think, as I mentioned, the D&O market has continued to get more competitive. I think that the first quarter, there was... there is some speculation that, you know, following a year of rate decreases, you know, would the market begin to stabilize? I think that's just speculation. It's very difficult to predict how the market's gonna react in the short term. What we have said internally is, you know, what would help from a quantitative perspective is the financial markets opening again and, you know, putting more demand back into the system. We have no idea when that's gonna happen. You know, that's completely outside our controls.
We'll just react to what happens rather than try and predict it from that perspective. You know, there are lots of businesses within specialty. I think we mentioned environmental liability in the IMS itself. We're just concentrating our efforts on growing exposure where we think it makes sense. And making sure that we're there to react either positively or negatively when things change within markets like D&O.
Okay, great. Thank you.
Thanks, Andrew.
We now have Kamran Hossain of J.P. Morgan.
Morning, Kamran.
Hi. Morning, Adrian. Two questions from me. The first one is on cyber itself. We've seen kind of headlines, comments in the quarter around ransomware making a bit of a comeback, after going away for a little while. Can you just comment on kind of what you're seeing on and kind of claims trends in cyber frequency and kind of whether ransomware is hitting your book yet or not, or there's some reason that it's, you think it might not be? The second question is on the retentions, or I guess on the change in retention. I think if I look at Q1, you retained like 78% of the business-ish, half, you know, versus 70% last year. Could you maybe call out kind of what that looks like by different classes?
I'm particularly interested in kind of Cyber and property, given the pricing dynamics and kind of the levels of profitability in those two classes. Thank you.
The 78% retention you're referring to is what? net to gross premium?
Yeah. Yeah. Yes. Yeah. Net to gross, yeah.
Got it. Okay, fine. There's certainly been some noise around that, ransomware frequency is increasing again. You know, as you know, amongst other things, we have a Cyber Council that advises us, which has got, you know, people across the technology, and security and industries and various government agencies. They've been telling us that they've been seeing more activity, you know, and there is some noise in the market that there is. You know, we have been saying for some time that part of the reason for, you know, subdued ransomware activity has been that a lot of activity's been directed towards the war in Ukraine. At some point that was gonna revert back to the mean.
That's what we're sort of hearing. I, you know, I think it's too early to speculate why that might be. I think we have to expect at some point this is gonna revert to the mean. We haven't seen that within our own book yet, but we are hearing some noise. From a, from a retention perspective, within Cyber and Specialty Risks, we are buying less reinsurance this year, so the net to gross is going to increase, as we wanted it to. When we think about the net to gross in, in property, we are taking an increased retention on our property catastrophe treaties this year, as we had flagged.
We bought the reinsurance we intended to buy at 1/4. I don't expect the net to gross premium rate to change very much in property.
Could I maybe just follow up on that? You'll probably say no, but if I think about the retention overall, if 70% was the number for Q1, do you think cyber was higher or lower than that number? You mind if I make it a half year?
Yeah, I think that's a half year question.
Got it.
We do expect net to gross for cyber to increase this year. There are some. You know, Q1's a funny quarter, isn't it? 'Cause it's only three months, and there are some effects in prior year activities and so on and so forth, as I've mentioned. We'll be able to give a clearer picture on that at the half year. We will explain how the changes in our insurance strategy in cyber and specialty risks will play out during the year. Broadly speaking, we expect it to be fairly evenly distributed 'cause most of our cyber and specialty reinsurance is proportional.
Got it. Thanks, Adrian.
Thank you.
We now have Freya Kong with Bank of America.
Hi, Freya.
Hi. Good morning. Just to follow up on the reinsurance changes, have these mostly been on the proportional side quota share, or have you also made changes on the aggregate covers as well? I'm just thinking about the one that sits across cyber and specialty as well as the group clash cover. Also, could you just clarify what you meant by prior year activity impacts benefiting cyber? I'm not sure I understood that. Just last question, if I may.
Yeah.
On D&O. D&O prices have come off maybe 25% year to date. Sorry, year on year in Q1. How do you expect, and given the business mix that you have in specialty risks, how do you expect to manage the rate momentum here?
Your first question was around the reinsurance mix for cyber and specialty risks. The changes we made to insurance this year are just on the proportional side. The aggregate covers that we have bought, the catastrophe covers that we bought, those remain, you know, as was. It is simply the proportional sharing of risk that we have decreased 'cause we have more capital to take that ourselves now. The prior adjustments for cyber, which, you know, boosted Q1 premium. When we think about GAAP premium, there are two things that are gonna contribute to GAAP premium.
The first is what we write this year, the second is adjustments to estimates on business, adjustments to estimated income on business that we wrote last year. Some of the business we write in Cyber, we write on line slips and other facilities, and we estimate how much business is gonna go on those facilities. We update those estimates as time goes by, sometimes those estimates increase, and sometimes those estimates decrease. Those, those changes in our estimates feed through into this year's GAAP premium, that's what's happened here. The estimates for business on facilities that we wrote last year have gone up in the previous 12 months, that's boosted our 2021 GAAP Cyber premium. It's a bit detailed story.
As I sort of said to Kamran earlier, Q one, because it's so early, is particularly susceptible to those sorts of movements. They kind of play out during the year. You can, you could. They're relatively, because the cyber growth number was so high in Q one, I thought it was worth explaining.
Okay. Thanks.
On D&O, you know, we pay close attention to three things, generally. Yes, we pay close attention to rate change. We also pay close attention to rate adequacy and rate adequacy in line with what we think is happening to the underlying claims environment. You know, what that's doing for us in D&O at the moment is that, whilst we're still rate adequate, so we're comfortable with the business, you know, as rates continue to fall, we have to make those decisions on a risk-by-risk basis, which is why generally premium income is going down in D&O at the moment. We will continue to manage that.
We can't control the rate changes in the, in the D&O market, but we can control the mix of business as you allude to, right? You know, the proportion of specialty risks of this D&O is going down, just like the proportion of healthcare within specialty risks is going down. There are other areas that we're continuing to grow that we think of have more better rate adequacy and where we're comfortable with the claims environment.
Okay, thanks. That's environmental liability?
That's an example. There are-
Yeah.
You know, a dozen more.
Okay, thank you.
Super. Thanks, Freya.
Thank you. We now have Darius Satkauskas from KBW.
Morning.
Morning. Two questions, please. The first question is on your GWP growth. As you see the market right now, how do you expect the sort of portfolio mix to look? I mean, should we expect the specialty risks book will be down, you know, at the end of the year, and really you're trying to make up, you know, cyber and property, et cetera? Any color there would be helpful. The second question is on social inflation comment about the healthcare book. Is anything unusual in the quarter compared to what you've seen, you know, last year or sort of year before? I'm just curious why you're sort of flagging that comment right now. Thank you.
Yeah. Okay. Thanks for those questions. Overall business mix, do we expect specialty risks to shrink overall this year? I think it's still too early to say, you know. The market is quite dynamic across different areas. I hope not. If the market continues to get more competitive, it might do. Certainly, as a proportion of the overall business, we expect it to reduce this year because other parts of the business are growing much more quickly, and we're very excited by those. You know, I think what we're trying to say in the statement is, you know, yes, there are some headwinds across the business overall.
There are more tailwinds than headwinds, and we think we've got enough levers to push and pull to make sure that we meet our overall guidance of mid-teens growth. Which is, you know, which is why we're feeling pleased with the first quarter's results. We've been talking about social inflation for a while. You know, for us, you know, we think the parts of our business which are most exposed to social inflation lie within specialty risks and within the areas that have bodily injury claims in particular. For us, that is within our healthcare portfolio, particularly hospitals. We don't think that exposure is being priced for adequately enough, which is why we're reducing exposure there, and we have been for some time.
This isn't new, it's just persistent. The causes of social inflation, which we were talking about a lot before the pandemic, haven't gone away. They continue to manifest, and we continue to adjust accordingly.
Okay. Thank you.
Super. Thank you.
Thank you. We now have Will Hardcastle of UBS.
Good morning, Will.
Oh, hi. Thanks, everyone. Morning. Firstly, just a bit more clarity on the Cyber Wordings. Just to be clear, there isn't less coverage in your view, it's just more clarity. Is that right? The 4% rate change is pretty much a fair reflection of the change in rate. Is there any danger that if others do hold their current wordings and they continue to price as they are, there is a danger to accept lower prices or potentially lose volume? Am I going too far in the extreme and on the negative side, and you'd be much more upbeat than that?
Just any quantum on that premium adjustment would be helpful. The second 1 is just trying to understand the investment portfolio growth. It grew about 1% quarter-on-quarter, but, you know, in the context of a very large sizable net written premium growth. I'm just trying to understand what were the moving parts there. Thanks.
Let's, let's do the second one, second one first. You know, You know, the were some ups and downs in the quarter within the investment portfolio. I think broadly speaking, the returns that we got were not unexpected. Whilst it's difficult to predict what's gonna happen within the what's gonna happen over the next nine months, the vast bulk of our investments are in, you know, government fixed income securities, and will continue to be, and that will fundamentally drive what our returns are going to be. You know, we said we were broadly neutral at the end of the year, our default position. You know, I don't expect that to change overly.
Going back to cyber, you know, it's quite a technical discussion about, you know, what exactly we've how the war exclusions have been updated. It is around the edges of what is war and what is quasi war, and what is the difference between state-backed terrorism and what is insurable and what isn't. We haven't tried to quantify that into rate change because we took the decision it was. It will be clearer not to, although, you know, there is an it is a term and condition which will have an impact. I think, you know, as I mentioned earlier, you know, there are some carriers that are still using the old wording.
I think they're in the minority now. I think the risk that the market doesn't move to an updated war wording, I think that risk is declining for us, which I'm pleased about. I think the engagement we've had with clients and brokers this first quarter about what is insurable fundamentally and what isn't insurable fundamentally has moved on in a positive way. I think that tail risk is diminishing. Because the bulk of the market is using updated war wordings, it's quite difficult to place any meaningful tower of business with carriers that aren't, because there isn't enough capacity.
I do think that risk that you refer to, you know, whilst it is still there a little bit, is dissipating, which is why we've been able to say today that we can reiterate our full year guidance, Will.
No, that's really clear. Thank you. Just coming back on that investment. What I was more thinking about wasn't sort of trying to pick apart the investment return. It was a good number. It was more about I'd have thought that the stocks or the pot of AUM would have grown more-
Yes
just given, you know, big net premium growth, and a good investment return. I just, I'm trying to understand if there was anything that I've missed, anything in terms of the growth and net change that should distort that going forward.
No. No. you know, the net to gross increase that we expect this year has been driven by a reduction in proportional reinsurance in cyber and specialty risks. That should earn relatively evenly through the year. The projections of increased AUM should be valid and, you know, not particularly skewed.
Okay. That's great. Thank you.
Super. Thanks, Will.
We now have Tryfonas Spyrou from Berenberg.
Oh, hi. Hi, Adrian.
Good morning.
I've got two questions. Morning. The first one is on the appetite for property reinsurance going forward, with given some parts of the specialty market are quite soft. Is the scope for you to allocate more capital and go sort of another leg up in terms of your exposures in the forthcoming renewals given the attractive conditions? Or are you relatively happy with the balance of the book as it is? I guess to that, can you maybe allude to what is the sort of PML growth year on year to help us get a sense of your exposures? The second one is, perhaps you don't wanna take too much credit on the cyber frequency topic.
Is there any reason not to believe that the reason you haven't seen as much ransomware claims pick up is due to the actions you're taking to improve your overall underwriting here and thinking about risk prevention and risk management, et cetera? Thank you.
Right. Let me get to the second question first 'cause I can remember it.
Sure.
We're obviously very happy that our own claims frequency hasn't yet been impacted by the noise that we're hearing. We cannot assume that it won't be. We have to continue to be quite vigilant in our underwriting to make sure that we spot new things happening, and we re-react to them quickly by figuring out what they are, what vulnerabilities that they're exploiting, and work with our clients to help close those vulnerabilities. I don't think we can say that we're immune to changes in the claims environment at all, but I'm quite happy it hasn't happened yet. We are extremely vigilant about that because I think that's the trick about writing cyber business. You know, are we willing to...
Do we have the appetite to grow our property exposures? Yes, we do. Have our PMLs grown? Well, we don't really reveal that at Q1. I think, you know, the graphs that we showed at our year end about what our one in 10 and our one in 250 exposures are, you know, I think illustrate our current thinking. If the risk reward for property continues to improve, would we take more exposure at the tail? Yes, we would. Yes, we would. It's too early to do that yet. As I said, there's only been three months. You know, we've been delighted with 2023 so far for property.
Okay. That's very clear. Thank you. Perhaps if I can squeeze one more, I guess on the.
Yeah.
-Cyber Wording. You mentioned there's a few carriers that are not putting through the updated wordings, and obviously reinsurance is a big part of why some carriers are putting through the wording. Would it be fair to assume that these would've been big carriers that don't tend to buy as much insurance, and is the risk that their actions sort of proceed going forward, or how should we think about that dynamic?
I don't really wanna comment too much on other carriers', strategies. I think most carriers that write cyber insurance buy a reasonable amount of reinsurance that is bought throughout the year. I think the reinsurers were expecting the insurance market in general to adopt new cyber wording at 1/1, and were fairly disappointed that they didn't, and are being quite vocal to that effect. You know, we'll see how that plays out through the year and into 2024.
Okay. That's very helpful. Thanks. Thanks, Adrian.
Thank you. We now have Derald Goh of RBC.
Good morning.
Good morning again. It's Derald here. Two questions please, if that's okay. The first one, first direction on cyber. How are the reinsurance reacting to the wording so far? Do you see appetite kind of opening up, or do you think there's still a lot more work to be done? Second one on cyber, if rates were to stay where they are now, how happy are you to take on more exposure, of course, subject to diversification constraints and whatnot? Third one, what are the risks in your D&O book from the tech and banking fallout in the U.S.? I know you do a lot of claims made underwriting and such, I guess, is there anything that we should be worried about? Fourth one, the April renewals, what was your participation there?
I'm asking because I have the impression that your property growth is more US focused, but I'm not sure if that's the case. Can you also remind me how is your cat risk appetite? That is that PML as a % of capital. Thanks.
Okay. All right. Let me try and get to those in the order that I can remember them. The banking crisis that we witnessed in the first quarter was mostly a US issue. Other than Credit Suisse, I think has remained a US issue so far. Our financial institutions business is ex-US f rom a claims perspective, that hasn't impacted us. Although of course, you know that is one of the things that we underwrite to.
When we think about our property business, if we divide that into the reinsurance business and the insurance business, the business is mostly North American, because that's our default specialty for that and has been for a long time on the insurance side. Our reinsurance business is more global. It's about 60%-65% U.S . and 35% ex-U.S. In terms of PMLs and the sort of risk appetite that we have for property, there are some charts that we showed at year end showing what our exposure is to equity at a one in 250 basis, and what our exposure is to earnings at a one in 10 basis.
I think that gives you some good information about the level of risk that we're taking, and we can share that with you again if you'd like us to. With regards to the cyber rating environment, you know, as we mentioned at year-end, we think pricing is adequate. You know, the cyber business had a 79% combined ratio last year, which is, you know, a little bit less than the sort of long-term target we have. Which is why we are looking to put more exposure on the books this year, which we have been, and we will continue to do.
I think the thing to keep an eye on within the Cyber Business is not only what's happening to rates, but what's happening to the claims environment and the exposures therein. You know, as we see new threats emerge, if and when we see more activity begin to happen or different activity begin to happen, and that has an impact on what we think the exposures are, that's what will drive our feelings of rate adequacy as we compare that to what's happening to the market pricing environment. As we, you know, as of today, we remain confident that we're rate adequate and we want to continue to grow. There was a question about what reinsurers are doing, but I can't...
We had some background noise here. I missed that question. Would you mind repeating it for me? Sorry.
Yeah. Yeah, sure. Not at all. Just in terms of cyber reinsurers, have you seen any initial reaction to the updated war wording? Do you think sort of appetite is opening up already, or do you feel like there's still a lot more to be done for reinsurers to get more comfortable taking on more cyber?
Yeah. Are we seeing more reinsurance capacity coming into the market? You know, more and more reinsurers are interested in cyber, but they remain very aware of the risk and want to understand the downside risk and want to make sure that they're partnering with people who can manage that downside risk prudently and put the effort to understand about that. I think the progress the market is making with WAR will encourage that from reinsurers. We haven't seen lots of new capacity come in over the last three months. No.
Yep. Got it. Thanks. Just quickly to clarify the capital surplus range, presumably that's an update for H1 ?
Yes.
Okay.
Yes.
Got it.
All right.
Thanks. Thanks, Adrian.
Thank you. We now have Qifan Yang of Goldman Sachs.
Good morning. Thank you very much. Actually two questions from me. Firstly is on the property cat. I think you mentioned a higher retention there and openness to grow exposure if attractive. Can I ask, say, if Hurricane Ian happens again in this year, how should we think about the combined ratio volatility for 2023? The second question is on the core guidance. I think you know. You mentioned cyber claims was better last year, but you sound to remain prudent in this year. Can I ask the underlying assumption in the core guidance, do you assume better claims experience or normalized claims experience in cyber underneath? Thank you.
Yes, within our core guidance, we're assuming normalized cyber frequency. We're not assuming that we have a particularly remarkably benign year for cyber within our core guidance. You know, when we do some as if analysis on the treaty business that we're writing this year, and we look at, you know, what would have happened to a number of prior events, if the inwards reinsurance portfolio was structured the way that it currently is, it has a marked effect. Yes. You know, I think the narrative has been to try to make sure that the catastrophe treaties attach away from most of the secondary perils and are covering the primary risks only.
I think that's happening. Hurricane Ian was a large primary risk hurricane. You know, I think even under today's terms and conditions, Hurricane Ian would impact the reinsurance market. What that would do to the, our combined ratio, we haven't done that work and sort of share that sort of detail. I think the attachment point work that the reinsurance market has been doing has been to get away from the secondary perils rather than the primary ones, if that makes any sense.
Cool. Thank you.
We now have...
Thank you.
Nick Johnson of Numis.
Morning, Nick.
Hi, Adrian. Good morning. Couple of questions, please. Firstly, on property, on the. Just a question around the growth mix in the first quarter, in terms of how the growth looks between the reinsurance segment and insurance segment in property. I would assume that reinsurance growth is. Has been easier to get and insurance in property takes a bit more time to grow. Just wondering if that's the case in Q 1. Cause I think you've previously mentioned that you want to use the strong market conditions in property to grow your US locally underwritten property business. Just wondering if you could update on that and if there's anything to add.
Yeah.
The second question is on cyber. We've heard anecdotally from one or two corporates recently that they're not buying cyber insurance anymore because it's too expensive and they think it's poor value. Just wondering if you're seeing evidence of that. Is that an emerging headwind in the segment? Thanks.
Well, I'm struggling not to take affront at the thought that cyber insurance is poor value, Nick. To go back to your first question, the growth mix in insurance and reinsurance. you know, you can see from the rate change versus premium numbers that we have put some exposure on the books in property risks. Actually, the bulk of that's come from the insurance business rather than the reinsurance business. We've grown our exposures faster on insurance. Yes, a reasonable chunk of that has come from the business that we're writing onshore in the U.S. That is, you know, that's exactly what we had hoped for. The premium growth for treaty has been very encouraging.
I think they've done a great job, but the bulk of the exposure has come from growing the insurance business. Is cyber too expensive? You know, We've had this question a few times. I think the cyber pricing reacted to the fast changing and increasing exposures that, you know, are out there, particularly around cybercrime and particularly around ransomware as being the most pernicious of them. I think that the pricing broadly reflected the increase in exposure that we all have to deal with. One of the things that's happened over the last couple of years is that as those exposures have...
You know, insurers have demanded or been more doing more due diligence about what the controls are that each individual company has and how well risk managed their cyber exposures are. I think, generally speaking, risk management and controls have improved a lot across the world, you know, as cyber has become a genuine business risk. The premiums that get charged by the cyber industry really do reflect the individual controls and risk management that a company has. If they're not there, you know, and if they're not appropriate for the risks that company has or the size or complexity of that company, the cyber insurance premiums will reflect that.
You know, we have had a couple of clients that have said to us, "Actually, we'd rather invest the money in risk management and come back to the Cyber Market when we've done that." We've said, "Yes, and you'll find that the premiums will reflect that investment." They have. I think, if some of your clients are finding that cyber insurance is very expensive, that may well partly be a reflection of the controls that they have, rather than the cyber market being irrational.
Great. That's very clear. Thanks very much, Adrian. Thank you.
Super. Thanks.
Thank you. We now have Faizan Lakhani of HSBC.
Good morning.
Good morning.
I have some follow-up questions on Cyber. I apologize. I know you've answered quite a few on them.
No, that's fine.
The first one just comes back to the fact the majority of the market has now moved to the updated wording. I just want to understand the shape of that. Did that happen at the back end of Q1 when you strip out Lloyd's market, or was it earlier on? The second question is on the sort of broader sort of picture in terms of cyber capacity. Demand is very strong, but I just want to understand, has there been sort of any incremental capacity coming into the cyber market? The third one's a rather silly question, but I thought it'd be worth asking. You've had year-to-date rate changes of 4% in cyber. Now, I'm assuming that is relative to Q1 2022 business.
Given that rates accelerated significantly in Q2 last year, if rates will stay the same as they are, would we expect a decrease in rates year to date when it comes to this point of H1 in cyber?
I'm not sure I'm gonna be able to answer that third question. Sorry.
Yeah, no.
'Cause it's quite dynamic. I think what, you know... You know, I think the rate change that we've shown, shows that the cyber pricing, broadly speaking, is flattish to year end, which is fine and adequate for us. We expect it to continue to react up and down to the claims environments, and we're comfortable with that. I'm not sure I'm gonna be able to answer that question. If we go back to the wording's changes, I think the market has moved gradually over the last four or five months. You know, there was an acceleration at 31/3 because of that Lloyd's mandate.
You know, when we think about carriers outside of Lloyd's and the rate at which they have adopted updated wordings, that's been a gradual thing. You know, as we mentioned, the biggest impact on our business when we look at new business flows and retention rates, the biggest impact on our business was at the beginning of April, you know, when that mandate came into place. It has since recovered a bit and I think the momentum is building nicely. There does remain some work to go. We're still talking a lot with clients and brokers.
I think that those conversations are a lot more productive and collaborative than they were six months ago, which is why we kind of reiterate our full year guidance there. Demand growth, you know, remains strong. We talked a little bit about this at year end. I think if you divide, you know, the market in two ways, you know, US and ex- US, demand growth ex- US is very strong, and particularly in Europe and in Australia. We're capitalizing on that nicely, and I'm very pleased with that. When we look at the US market, there's still lots of demand growth within the SME world.
A chunk left within the mid-market. The larger risk business is relatively saturated now. Most Fortune 500 companies will have decided whether they wanna buy or not. You know, we are adjusting where we're looking for new business accordingly, 'cause it's much easier to grow in blue water, isn't it? You know, is supply continuing to increase? Yeah, a little bit. I think, you know, as. It's mostly because existing carriers are getting more confident than lots of new suppliers coming in. I think, you know, we want that. We want a confident and active cyber market to meet that growth. We're, you know, we're comfortable with that.
Great. Thank you very much.
Thank you.
Thank you. We now have Punit Pandya of Citi.
Good morning.
Hi there.
Good morning. Just a couple more on cyber, please. The first one, would it be reasonable to assume that the RDS of $140 million comes down based on the exclusion criteria changes? The second one is, are you working on a standalone cyber war product?
Yeah. The second one is, yes, we are. We're hoping to come out with something in the summer. You know, it occurred to us as we were talking to our clients and our brokers. You know, we offer war within our political risks division as part of our political violence cover. We offer war for some of our aviation clients and some of our marine hull clients. If we have the appetite to write war business, why wouldn't we do that with some of our cyber clients as well? We're working on that product. That's just not a buyback of the changed wording. That is, you know, war coverage.
Have our RDSes gone down because of the updated war wording? No, but I think that one of the ways that RDS might have manifested has been, has gone away. If one of the ways that RDS could have happened would be through a nation state attack, that is not... That vector has now gone away. It's not the.
Right. Sure. Would that have been the biggest exposure on the RDS, the one that you mentioned on sort of state war?
I mean, It's certainly one of the, one of the credible, actors, isn't it?
Right. Would that be sort of the largest exposure on the RDS? Would have been at least before?
Yeah, I mean, you know, when we think about where that capability could lie, you know, yes, a hostile nation state is one of those credible vectors. Is it the most likely? You know, we've been very hesitant to put return periods on stuff with cyber that hasn't happened before, but it's certainly credible. I'm not gonna answer your question directly, sorry.
Okay. Thanks.
Thank you.
We now have James Pearce of Jefferies.
Good morning.
Hey. Hope you're well. It's just.
Yes, I am. Thank you. Hope you are too.
It's just one follow-up from me, kind of clarification point, on Anthony's question. You mentioned that the high 80s combined ratio guidance assumed normalized claims in cyber. Can you just give us an indication as to whether you've seen a normal level of claims in cyber year to date, or whether it's been a bit better or worse than your normalized assumption? Thanks. You know, year to date is only three months, so it isn't particularly credible anyway. You know, and, you know. Overall for the book, you know, it's sort of within our expectations. I think in response to one of the earlier questions, you know, have we seen a marked increase in frequency in cyber in the first quarter because there's noise in the market that there has been?
No, we haven't seen that yet on our book. That's about as much detail as I can give you. I'm sorry.
Yeah. Got it. Understood. Thank you.
Thank you.
As a reminder, to ask any further questions, please press star one on your telephone keypads. I can confirm we have no further questions, so I'd like to hand it back to the management team.
Super. Thank you. Well, thank you very much indeed, everyone, for joining us this morning. Thank you for the questions. A really good session. Thank you. Thank you once again, and enjoy the rest of your day. Bye-bye.