Good morning. Welcome to Beazley's H1 2023 Trading Update. If you would like to ask a question, please press star one on your telephone keypad. I will now hand the conference over to Adrian Cox, the CEO, for the update. Please go ahead.
Thank you very much. Good morning, everyone, and thank you for joining us for our Half Year 2023 Trading Statement. We're doing things, as you know, a little bit differently this year. With the introduction of IFRS 17, we're gonna present our full set of half year results separately from this trading update, and later than we expect in future years, on 7th of September. At that time, we will also update you on our claims numbers and our refreshed capital strategy and metrics. We've done a lot of work on this this year, and we're looking forward to sharing our conclusions with you in September. In this statement, we haven't updated our combined ratio of guidance, as we'll be doing this formally in September, and we're only partway through our half year process.
I can tell you that had events in H1 meant we would have had to needed to change our guidance, we would have done so today. The focus is gonna be on premium rate change and investment performance for the H1 of the year. I'll cover the key elements of the statement released this morning and then open up for some Q&A. I'm pleased to confirm that we have delivered growth in line with expectations at the beginning of the year, driven by a better rating environment in property, and exposure growth. We've added 8% so far this year, which is the highest we've generated for a while, and I'm pleased with that. The main driver of this, of course, is our property team, which added 44% exposure in the H1 .
Pleasingly also, cyber grew in the H1 of the year, less in the Q2 than the first, which is what we had expected and shared as such in the Q1 IMS. We did grow by just under 5% in the Q2 in cyber. We've also shared our net premium growth because we gave some guidance on that at the beginning of the year. That has accelerated to 28% for the half as we have bought less reinsurance following the capital raise. I can share, though, that the ratios of 1 in 10 and 1 in 250 property losses as a percentage of our earnings and equity, respectively, remain as we presented at the year end. The overall rate change of 5%, risk adjusted, is down a little from Q1.
The main driver of that is the cyber market, which is getting a little bit more competitive. I think it's a reflection that prices, which more than doubled since 2020, probably overshot a little bit last year, we remain very comfortable with the margin in that business. To go into some of the details a little more on some of the divisions. On the property, on the reinsurance side, we are growing in line with the plan, the opportunity remains pretty much as we had assumed at the beginning of the year. The potential outperformance in that division is very correlated to the level of reinsurance demand growth, I think insurers have carefully managed that so far this year, which has prevented further reinsurance market dislocation.
That has meant that insurers are retaining more risk, and the result of that, of which is tighter underwriting and pricing discipline, line size, and aggregate management in the property insurance market, particularly in catastrophe-exposed areas. We saw this in the Q1 , and this has continued to accelerate in the second, and we have capitalized on that. Our property insurance business has grown by over 80% so far this year. As we've mentioned a few times, the largest and longest term opportunity is in insurance, and I'm very pleased with what we have achieved so far this year. On cyber, as I mentioned, rates are slightly down in the H1 , about 3%. They do remain adequate, and we continue to add exposure.
The impact of the updated cyber war wordings, I think, was at its peak at the beginning of Q2. That is reflected in the growth rate, which has come down a little bit to 14%. As I mentioned earlier, our Q2 growth was still 5%. I think the noise around war is diminishing. The H2 of the year should be a little easier to navigate. What is pleasing, though, is the growth of our international cyber business, which is 28% this year. This reflects broader demand growth as that market is in an earlier stage of development. It is a less crowded marketplace.
Although there is noise in the market that the frequency and severity of cyber claims is up, that is not something we have seen yet in our book, and we're very comfortable with the rates that we are getting. Cyber is also the largest product in our Digital Risk team. The US SME segment has been particularly competitive this year. That is why that team is broadly flat so far. Moving on to MAP. As we've previously flagged, the restructuring of the Smart Tracker has meant that we no longer front for the third-party capital. So the majority of that business no longer comes in as gross premium.
I mentioned in the Q1 IMS that the bulk of that business renews in the Q1 . You can see that the impact at the half one, at -5, is less pronounced than it was in the Q1 . MAP has continued to perform exactly to our expectations during the H1 of the year, with continued demand growth for many of the products within that portfolio. In specialty risks, challenging conditions that we've been speaking about at the Q1 and at the year end, particularly in D&O, continued to persist in Q2. This is the primary reason that it is roughly flat year-on-year. Mildly encouragingly, though, the pipeline of IPOs is rebuilding.
The financial markets are beginning to reopen, there's been a little bit more new business in the last month or so. The market remains very competitive. I'll reiterate again that we continue to be bearish on the components of that portfolio that are particularly exposed to social inflation. I'm pleased we've been able to offset both those headwinds with other more attractive parts of that division. Especially risks diversification remains a key strength, I think. Moving on to investments. We earned slightly less in the H1 than we were hoping at the end of the Q1 . Our overall return has been impacted by volatility and risk for yields in our fixed income portfolio. The yield of 5.3% at the 30th of June should ultimately provide a good level of return.
Overall, I think we're pleased with how the H1 of the year has gone. We remain confident in our growth guidance for the full year, and we're looking forward to continued opportunity and growth into 2024. With that, I'll open up to questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Your first question comes from Freya Kong with Bank of America. Please go ahead.
Hi, good morning. Thanks for taking my questions.
Hi, Freya.
Morning, how are you guys? Just on the property rates that you're achieving, I think it was 22%. How does this compare to guidance that you or your expectations at the start of the year before you started this year? They seem to be coming in a little soft. Is there a mix effect that we're not appreciating? It's still good, but maybe not as good as you'd expected. Secondly, on the cyber war wording, any more color that you can give in terms of what competitors in the US are doing, and why you're more confident on the outlook for H2? Thanks.
Okay. Thank you, thank you for those questions. I think the overall the rates on property are slightly better than we had thought they were going to be at the beginning of the year. The book is mostly insurance, and so they will be lower than you'll see for reinsurers reporting on their property cat portfolios. If we bifurcate again between reinsurance and insurance, I think the reinsurance rates are pretty much as we thought that they would be. The property insurance rates have climbed more than we thought that they would do. The reason why it's lower is because of that mix. On the cyber war, when we look at business retention, our business retention has improved.
It was at its lowest at the end of March and beginning of April. It has improved steadily since then. We are seeing more insurers around the world, including in the US, move to new war wordings, There is increasingly collaborative discussion across the market with our brokers about how we can do this well together. We are hearing less noise. I think it will continue to reverberate for a little bit, but we are getting increasingly confident that we should be able to put this behind us relatively soon.
Thank you.
Thank you, Freya.
Thank you. Your next question comes from Cameron Morris with JP Morgan. Please go ahead.
Morning, Cameron.
Morning, everyone. Two questions from me. The first one is just on just touching on the property market again. Adrian Cox, you kind of, in your prepared remarks, you talked about kind of growth into 2024. Clearly, property on the insurance side seems to be doing quite well. How much of your kind of 2024 confidence is coming off the back of, you know, a stronger property primary market than you expected? The second question is on a kind of topic that's been in the headlines a bit in the last week or so. Could you maybe talk us through kind of Vesttoo? Clearly, the press has decided that you have some exposure, you might not have some reinsurance cover. Are there any impacts or any capitalizations that we should be thinking about? You know, do you have cover?
How should we think about that topic, in overall? Thank you.
Thanks, Cameron. Yeah, to short answer the property one, first, you know, we do think that the property insurance market is making a real shift to the fact that to align to the fact that the property insurance, particularly stuff that has catastrophe exposure, is more complicated and more changeable than it had previously been given credit for. We think that that demands a real shift in how it's underwritten. You know, there is evidence that that is happening. Yes, some of our confidence for 2024 is driven by the fact that we see that property primary insurance opportunity as being a long-term one.
When you listen to commentary around the market from the large reinsurers, they also remain confident that the reinsurance opportunity is gonna persist. If that continues, there'll be opportunity for us there as well. As I mentioned earlier, that is a smaller part of our overall property business, and we'll continue to capitalize on that as long as that opportunity does persist. On Vesttoo, you know, we don't share much about our reinsurance purchasing or comment about rumors on it. You know, I can say that we are very confident in the reinsurance cover that we've purchased across the business, and have processes in place to continually monitor and manage our cover and its effectiveness.
I think when we talk about reinsurance, as we have done before, we have a preference to trade with large professional reinsurers, with whom we've built up a relationship over a very long period of time. Whilst we do business with a lot of reinsurers, and a lot of alternative capital, our exposure is very correlated to the large professional reinsurers, who we've traded with, in some cases for well over 20 years. Our exposure as you move away from that cohort of reinsurers, goes down quite quickly. Hypothetically, if we had reinsurance with a counterparty whose collateral was impaired, noting, Cameron, that no loss has happened, what we could do is to cancel and replace that reinsurance with another counterparty.
The only thing at risk would be the premium that we paid the first counterparty, which we would then attempt to recover. Were we in that sort of situation, that is what we could and what we would do. Does that help?
That's perfect. That's very helpful. Thank you, Adrian.
Super. Thank you.
Thank you. Your next question comes from Tryfonas Spyrou with Berenberg. Please go ahead.
Hi, good morning, Adrian.
[inaudible]
Thank you for taking my questions. Just on property, can you maybe share a little bit more color on as to where exactly you're growing? It, it is mainly a sort of US E&S expansion. I appreciate the market there has been very sort of favorable. Any color on where exactly?
Yeah.
W hich market and geography you're expanding? On cyber just coming back to growth there, I think July is a big renewal for cyber. Can you maybe give us any sort of comments on how is that sort of faring compared to sort of Q2, Q1? Should we sort of expect a re-acceleration in terms of the growth? Then lastly, I just have one last question on, I think there'd been some headlines that you are moving part of your Lloyd's business onto sort of the US platform. If you can speak a little bit about to the rationale. I'm not sure if it's to do with, you know, saving sort of some acquisition costs or sort of lower commissions.
Any color as to that move? Thank you.
Y ou saved the best question to last, didn't you? I'll take them in order. Property, our insurance business is mostly North American. The vast majority of it is North American. It's all E&S business, so we don't write any US-admitted insurance business within our property division. It's all E&S, it's mostly US and mostly North American. The reinsurance piece is more international. It's about 60% to 65% North America, and the rest international. Well, one of the reasons why we write the reinsurance business is because it does give us that geographic diversification. Cyber, you know, you're right, July is a big month for us. You know what?
I think we're feeling better as we head through July. As I mentioned, some of the noise is dissipating. And we're hoping to find it an easier time of it in H2. What I was also trying to highlight in the sort of prepared bit earlier was, you know, a lot of our growth this year has come outside the US. And, you know, we've spent eight years investing in our platforms outside the US, partly in preparation for the time that cyber demand, you know, would really begin to build, and I'm delighted that it has. You know, the, you know, that market's at an earlier stage of its development. The growth rates are much higher.
It's much more ubiquitous across, you know, mid-market and large risk, and it's a less crowded marketplace. That's been very useful for us. Hopefully, if the, you know, as the war wordings begin to increase, we'll see a little bit more opportunity in the US and continued strong demand growth internationally, which we've invested a lot in. I'm very pleased with how that's worked out. The Lloyd's question is so something that we weren't planning to talk about quite yet because nothing's actually happened. I think what we're doing is being misinterpreted by the market, so I'll gladly share what we're doing.
As we talked about at the Capital Markets Day last year, what we're moving to is a three-platform strategy that we outlined. The first is our wholesale platform, i.e., the business that we write in London, Singapore, and Miami, which is the largest chunk of our business. Alongside that, we have our two retail platforms in North America and Europe. What we've decided to do is to simplify and tidy up our structure so that it reflects those three platforms. Fundamentally, what that means is that we want to write our wholesale platform business on Lloyd's paper and our retail platform business in Europe and North America on our own insurance company paper.
In Europe, that's our European insurance company, BDAC, and in the US, that's our two admitted insurance companies. We are in the process of starting a new E&S company, which is going through regulatory approval as we speak. Currently, our underwriters in the US, if they're writing on admitted, in the admitted market, they use our admitted paper. If they're writing in the E&S market, they write on Lloyd's paper through an MGA that we own, Beazley USA. From next year, that business will be transitioning, we hope, from that MGA writing on Lloyd's paper to our new E&S carrier, which should start trading, if we get regulatory approval, from the first of January next year.
That means that all the business that we write onshore in the US, we write onto our own company paper, which structurally, internally makes us more efficient and makes us a simpler and easier to understand structure. That's the benefit of it. What we're not doing is changing our distribution strategy or changing what products we write where or what we do where. All the business that we write in London, and Miami, and Singapore, we will continue to write in London, Miami, and Singapore. We're not moving any business out of the London market. No one's gonna be doing anything differently next year, apart from the fact that our US underwriters, when they write E&S business, will be writing it onto our own company paper rather than Lloyd's paper.
We've been working with the US regulators to start the [inaudible].
No, super clear. Thank you. Just maybe, I think your line was a bit cut off previously when you were talking about the claims environment in cyber. Can you maybe repeat what you sort of alluded to in terms of we've seen a general pickup in frequency and severity? I'm not sure what you said on your experience or what comments you made there. I think the line was a bit funny at the point. Thank you.
Okay. Yeah. You know, we've been hearing in the market and from the from the advisors that we have, and the companies that we talk to, that there has been an increase in frequency and severity of cyber claims, particularly on the ransomware side. We are aware of that, and we're prepared for that. We haven't really seen evidence of that in our own portfolio as yet. As far as we're concerned.
Super clear. Thank you.
Sorry. Okay, thank you.
Thank you. Thank you.
Thank you. Your next question comes from William Hardcastle with UBS. Please go ahead.
Morning, Will.
Hey, everyone. Hope you're well. Morning. A couple of questions. I guess I'm just trying to tie up how I should feel about the incremental changes on cyber.
Yeah.
You know, there's a lot of moving parts, isn't there? There's the negative rate momentum, as I see it. There's the continued growth challenge from the war wordings, and you mentioned that remains competitive comment, but then these war wordings are receding. There's a headline, headwind of it, and you said in that, in the comments that you know, the market's effectively overshot, so that suggests margins are gonna be great. I guess what I'm trying to get to is, do you feel incrementally more positive or negative than where you thought we'd be feeling at this point in time, you know, a few months ago? It's hard to sort of tie those things up. The second one is just trying to pick apart a bit of the specialty component.
You mentioned in the commentary there's some areas in that specialty that, you know, are less exposed to social inflation. If you could just give us that sort of split maybe on the D&O versus the others, and then, where those lines and opportunities are, that'd be great.
Okay. When we talked about the, you know, our expectations for the year on cyber, back at the year-end and Q1, we had said that we expected there to be some noise around the cyber war wording transition, but that would gradually recede. That was our expectation at the beginning of the year, there was always some uncertainty around that. You know, how do we feel now, six and a half months on? Well, it's played out as we thought that it would do. Our expectations haven't changed, but the uncertainty around those expectations has diminished. I'm happy with where they are, with where we are. It is where we thought we'd be, but the uncertainty around that isn't there any longer. I'm pleased about that.
There has been some a softening of rates. I think that's because it, you know, as we mentioned at the year-end, cyber insurers have got more confident that they've got their arms around the new exposures and that they've been repriced for properly. I do think there was a price overshot, so it's not surprising that rates are up a bit. We are very comfortable with the margins. I'm also very comfortable that we're not just fishing in the North American pool, that we're fishing in the international pool, and that's where the demand growth is stronger and the market is less crowded. I'm very pleased with that too.
Overall, I'm, you know, I'm happy with where we are in our cyber business, and we're very confident in the long-term opportunities that we've been talking about for a long time. Moving on to specialty risks, what areas of our book are most exposed to social inflation? Well, in our head, it's the sort of bodily injury exposed parts of our healthcare book and our employment practices book, which isn't a huge amount of it, but we've been bearish on that for a while. Within the healthcare book, particularly, it's the US hospitals, which we write very little of now in the grand scheme of things. We're, you know, we're growing other bits of our business.
We're growing our programs business and our treaty business. We're growing our environmental business. We're growing our M&A business. You know, all. There's a lot of diversification in that division, and we don't talk about it much. We can certainly provide you with some more color when we [inaudible] Put my teeth in. Next catch up, Will. I hope that helps.
No, that does. That's great. Thanks.
Thank you. Your next question comes from Ashik Musaddi with Morgan Stanley. Please go ahead.
Thank you, and good morning, everyone. Just a couple of questions.
Pleasure.
One is actually clarification. I mean, did I hear you correctly, that you mentioned that if you had to change the core guidance, you would have already done that? Did I hear you correctly on that?
Yep
Just for clarification.
Yep, That's exactly what I said.
Yep. Okay, perfect. Thank you. Second thing is, I mean, clearly, rates are softening compared to the Q1 . Q1 was 10, Q2 is probably lower because H1 is five. Whereas you are maintaining your growth guidance for the full year, which is more or less in line with the H1 . Is it fair to say that the mix, the growth mix is going to be more or less similar to what you have done at H1 ? And especially, I'm struggling with the specialty. I mean, because specialty and cyber pricing has come down, I think, sequentially, would you still be growing this, or is it going to shrink a bit more materially, especially specialty business, and probably cyber as well?
Are you taking more exposure on cyber because now the wording issue, the war wording issue is more or less done?
Let's break that down. The biggest moving part on rates is in cyber. You know, I think on a GAAP basis, there was... You know, in Q1, the cyber rates reflected the sort of last part of the year and the positive rate environment that were in there. You know, we had expected the market to be roughly where it is on cyber, and so the sort of rate changes we saw in the Q2 were consistent with what we had thought that they would be.
You know, as I mentioned, we're very comfortable with the cyber rates overall, given how much they've moved and how much, you know, how much they've moved since 2020. I do think they reflect the exposures that we have now. We've put some exposure on the books on cyber, and we continue to want to do that. You know, I'm comfortable with cyber rates. On specialty, I think our outlook for the year is broadly flat. You know, we will continue to be bearish if the D&O market stays competitive and prices continue to soften.
As I mentioned to Will, there are some businesses which we continue to grow, like the M&A, like environmental, like some of our program and our treaty business, where the rates are more steady, and there isn't social inflation exposure that we are concerned about. Those two sorts of things offset each other.
Very clear. Thank you. Thanks.
Thank you.
Thank you. Your next question comes from Andrew Ritchie with Autonomous. Please go ahead.
Morning, Andrew.
Hi there. Morning. This might be a stupid question. I might have asked it at Q1. Does the cyber rate change, do you think, fully reflect the tighter wording, or is there a sort of risk adjustment sort of on top of that, I feel like, or maybe it's not really reflecting that? Just to remind me, like, you, I think you might have answered that on Q1, but maybe if you just answer why, if that, if that's the case or not?
Yeah.
The other question on property, have you used the hard markets, very hard market, especially in E&S property, to refine any distribution? I'm talking here, examine maybe some of the delegated authority business, any sort of binder business where, you know, there's been more issues across the market. Has there been any sort of.
Yeah
... repositioning-
Yeah
Open market versus delegated to try and refine the quality of the book as well as the straight price?
Two great questions. Thanks, Andrew. The updated war language that we're using on our cyber is to reflect the way that we would have interpreted the contract anyway. We're just trying to make it clearer. As such, we haven't taken any credit for that in rate change. We could have done, but we thought it was cleaner not to. If you... Yeah. That's, yeah, you can kind of argue that one both ways. We decided not to reflect that in our-
Mm-hmm
... in our rate change. In terms of refining our distribution, actually, you've hit the nail on the head. When we look at our London business, we write less delegated business generally than our London peers. Overall, our delegated business is about 15% of us, and, you know, that compares to a much higher average amongst the Lloyd's peers of sort of 40%-ish. We've been, like others, have been managing that down over the last few years. We're not really a delegate. We're not a huge delegated market.
We have done a little bit more delegated this year, but the vast bulk of the growth has been in open market business, both here and onshore in the US Onshore in the US, what we have done is shifted our distribution strategy from what was purely a wholesale one, because, you know, our property business was started by an MGA that we bought back in 2009, called First State, that was only wholesale. What we've shifted that to over the last few months is to start building more retail relationships onshore in the US, and writing more of that business, and that's been very successful actually.
What you'll see over time is that onshore US property business being more retail-focused, and I think, you know, I think that's an advantage for us.
Okay, that's great. Thanks very much.
Thank you.
Thank you. Your next question comes from Ivan Bokhmat with Barclays. Please go ahead.
Hi, good morning.
Good morning.
I've got a couple questions, some of them follow-ups. Firstly, on the property, I just wanted to understand in terms of the types of businesses that you're writing. Couple it with a comment that your ratios of 1 in 10 and 1 in 50 exposures as a % of equity remain as of year-end.
Does that mean that you're mainly writing high attaching layers, and therefore less exposed to frequency rather than severity in the type of business that you're writing? Maybe the, you know, link to that, a question on capital deployment. I mean, you clearly were writing with a very strong capital surplus in Q1. Do you think that we're now, you know, closer to the, you know, where the range used to be, or it's more of a question for September? Then maybe final question, also related to capital: Does that move of your E&S business from Lloyd's to the US, would that affect the capital that you would need to hold at the entity level and at the group level? Thanks.
Okay. Thank you for those . Yes, no, our 1 in 10 property exposure as a % of earnings, and our 1 in 250 exposure as a % of equity are unchanged from year-end. The reason I mention that is because, you know, we've been talking for a while that we've bought less reinsurance overall as a business. What that hasn't done has affected those particular property ratios 'cause we're quite keen to keep those as they were. Interestingly, our book on the insurance side is mostly primary rather than high excess. 'cause we find it easier to portfolio manage with our primary business on the insurance side than with high excess business.
On capital deployment, you're right, we will be talking about this in September. You know, you can see from the growth rates that we have, that we are deploying capital, and we will share with you what that looks like in September, and what our plans are in terms of thinking about how we measure capital and our plans next year then. Sorry to keep you waiting, but it will be worth it. The third question in terms of does the move to start an E&S carrier and move the business that we're writing onshore to that carrier, does that have any capital implications for us? No. Not at the group level.
Not at the group level, no.
Not at the group level, no.
I t's writing the same business, via different platforms. There'll be some movements around between entities, but at overall level, we're not expecting material shift. We can talk about.
Yeah
More in September.
Thanks.
Super. Thank you.
Thank you. Your next question comes from Anthony Yang with Goldman Sachs. Please go ahead.
[inaudible]
Thank you very much. Hi, good morning, Adrian. Just two questions from me. Firstly, just a follow-up on property. I think my sense is the growth is more driven by the primary property than reinsurance. I think you indicated that Beazley still prefer the primary property side. I just wanna kind of follow up, say, will that be continued as part of the plan going forward? Will Beazley continue to tend to probably grow more on the reinsurance property reinsurance? That's the first question. The second one, just on cyber. I think you indicated international region, i.e., outside US, seems to have a strong underlying growth. But also it sounds like it's kind of at early stage.
I just wanna just wonder, is it kind of contributing materially now, or will it be in the future? If so, what's kind of the planned timeframe for that? Thank you.
Brilliant. Thank you. On the property side, yes, our growth is more on the insurance side than on the reinsurance side. Essentially, what we've done is taken the rate change on the reinsurance, we've grown our premium in reinsurance effectively by the same that we're getting rates. We haven't added exposure, we've just taken the better deals. Our exposure growth has come on the insurance business. Although rate change has been higher for reinsurance than insurance, I think insurance started the year at a better place. Insurance has been better rated than reinsurance on the property side for some time. Even though the rate change this year for reinsurance has been higher, we think that overall insurance remains the better trade.
That's where we wanted to put the growth. Our expectation is over the long term, insurance will grow faster than reinsurance, but we will respond to where the best risk reward is each year. If it moves to reinsurance, then that's where we'll put more of our chips. You know, I think that being able to do that quickly and agilely is one of the things that we try to do well. On the cyber side, yes, you know, that is a meaningful part of our business now. The bulk of the growth is in Europe, including the UK. That international business is several hundred million dollars this year.
It does, yes, it moves the needle in terms of the overall size and shape of our cyber book. That's been the result of many years of hard investment.
Thank you.
And we're delighted with it. Thank you.
Thank you. Your next question comes from Darius Satkauskas with KBW. Please, go ahead.
Morning, Adrian and Sally.
Morning, Darius.
Two questions, please. One on property, one on cyber. The first one, property. You talked about how the reinsurance market driving primary property, particularly cat exposed.
I suppose since US reinsurance renewals are mostly in June and July, would you say that the opportunity to grow in the primary property lines in the E&S, could be even great in the H2 compared to what you saw on the, in the H1 ? How do you think about the seasonality here, this year? On cyber, my understanding is that cyber market in the US is becoming somewhat saturated, but I'm curious about the demand growth. What's your latest view on the cyber market demand growth potential in the US going forward, even though supply is sort of meeting demand right now? Thank you.
Great stuff. Thank you. Yes, there's definitely seasonality on the property business. You know, Q2 on the insurance side is certainly the largest one. Q3 is relatively quiet. We have quite a big Q4 book on property, so there is certainly more opportunity to grow in the H2 of this year. It'll be more Q4 than Q3 . Most of the treaty business is now written for the year. On the cyber side, is the US market saturated? No, I don't think it is. There are elements of it that are getting there. You know, we divide the US market into three: large, mid-market, and SME, you know, small and midsize enterprises.
On the large side, I think insureds have either bought it or decided not to buy it, so there's not much organic growth there. Mid-market, I think the penetration is relatively high there. There's still some way to go. It tends to be in the lower parts of the mid-market. The real opportunity in the US in terms of scale is in the SME world. That's, you know, it's one of the reasons why we're building out our digital business there, so that we can capture that as best we can. There is certainly demand growth that remains.
It is more concentrated in the lower mid-market and the SME business, which means that, you know, our per insured premium is going down because the new companies that we take on tend to be smaller than they have been in years gone by. The international business is completely opposite of that. Whilst there is demand growth everywhere, it is more concentrated in the upper middle market and the large risks. Our, our average per-risk premium is higher internationally at the moment.
Thank you.
Thank you.
Thank you. Your next question comes from Nick Johnson with Numis. Please go ahead.
Morning, Nick.
Hi. Morning. Thank you very much. Hi there. Couple of questions. On specialty, sorry, just to come back to this. Just trying to get a sense for underlying growth, excluding D&O, which is obviously a drag in the H1 . You say you're seeing good growth opportunities, and you mentioned, I think, financial markets picking up. Just wondering if you see specialty growth returning to perhaps historic levels of around 10% in the future, once the D&O drag begins to fade? So that's on specialty. On property, I mean, the weather news seems to get worse and worse. I just wondered if that gives you pause for thought on the property growth, or is what we're seeing consistent with your updated risk models?
Thank you.
Thank you. There are two particular headwinds, especially out there at the moment. The first is around D&O. You know, at some point, that market will normalize again, because the losses haven't gone away. As the financial markets open up, there'll be a more normal level of demand and therefore, supply. At some point, we expect that to level out. At some point, the issues around social inflation will be tackled one way or t'other. You know, if you go back to some of the principles around specialty risks, is that we've always invested in businesses with strong underlying growth.
We like healthcare, we like technology, you know, we like environmental, we like M&A. It's all businesses that have strong underlying growth. Therefore, it should be possible to get back to those long-term rates of 10%. It's difficult to do that with 2 big headwinds that we have. Well,one big one in D&O and one smaller one in social inflation 'cause it's a smaller part of our business. It certainly has that potential, particularly as when we look at our European business, you know, the two big divisions that dominate that are cyber and specialty. That's, you know, we have more optionality than we did. I'm hopeful at some point that will get back.
On the property side, has any of the weather news that we've seen caused us to rethink our strategy? No, not yet. You know, I think that our view of risk reflects what is going on at the moment. You know, it hasn't reflected our guidance for the year. It hasn't affected how we're building our models. You know, you know, we had always expected the impacts of climate change to manifest more. That's one of the reasons why the property market has changed in the first place. Nothing has happened that so far has disabused any of our assumptions. No, Nick.
That's great. Yeah. Thank you very much.
Thank you.
Thank you. Your next question comes from Darryl Gove with RBC. Please go ahead.
Morning, Darryl.
Hey, morning, Adrian. Morning, Sally. A few questions left on my side, please. The first one, I'm conscious you'll be updating your capital disclosure on the 7th of September. Now, I don't mean to be jumping the gun, but I guess what can you share today, maybe qualitatively if, you know, I understand maybe not quantitatively today. Secondly, normally we would also get a growth outlook at this time of the year. It sounds like you're very optimistic on rates for 2024. I don't know if you can maybe quantify what your expectations are for next year, maybe on a growth on that basis or whichever way, you define it now. Thirdly, just on investments, as you said, it looks like it was a bit weaker.
Just wanted to clarify that these were just kind of fair value marks and there was nothing unusual behind that. Thank you.
Great stuff. All right, what can we share about capital? Well, my CFO is shaking her head. I think that says that. Hopefully, though, what, you know, what comes through is that the net growth that we have had that so far this year, which is higher than the mid-20s we'd originally guided to, means that we are taking on more exposure, and therefore, we are definitely using capital. We will show you how much and what our thoughts are around that in September. I think we've been rightly bold in how we've underwritten this year and the sorts of exposure growth that we've put on.
I don't think we generally give guidance for growth for the following year in the summer. We're not gonna be able to do that now.
We'll probably give a flavor of how we're feeling about the business plan in September, along with capital.
Yeah, we will in September. You know, we're expecting good opportunity next year as well. We'll clarify what that actually means, I think, in September. The investment, yeah, they were weaker because of, you know, the rising yields. The losses are all mark-to-market type losses rather than any actually realized losses. I think, We were relatively cautious in the H1 of this year in our disposition. You know, there was a bit of opportunity cost there as well, I think.
Thank you.
Thank you. Your next question comes from [inaudible] with HBC. Please go ahead.
Hi there.
[crosstalk]
[inaudible] from HBC.
Hey, how are you doing?
I had two questions following up on one side, one property, which is the theme today. Just looking back at your triangle from last year-end at cyber, you had a 56% gross ultimate loss ratio for cyber. Now rates have come down significantly, especially in Q2. And obviously, you'll have some level of sort of inflation and therefore, you know, higher frequency severity. How do I adjust that to 56% going forward? My sense was that, you know, 2021 probably wasn't profitable enough, and that was sort of 65%. I'm assuming that you still believe you're rising below that level? That's my first question. The second one was going back to sort of the primary side of property.
There's been a great deal of convective storms this year. It feels like the primary players have probably taken a bit more hits on that front. Would that be fair to say that, you know, we wouldn't be able to see this in your 1 and 250, you may be more exposed to this? I know you haven't given claims data. Any comment on that would be useful.
Yeah. Okay, I think the cyber rates were down... What was the percentage? 3, wasn't it?
Yeah, in Q.
I calculate low double for Q2, if you sort of adjust for Q1.
Got it. You know, we're expecting cyber rates for the year to be down single digits. As I mentioned, you know, we're comfortable with that. We are not seeing currently any changes to frequency or severity in our cyber claims experience. You know, the sort of inflationary pressures that you see elsewhere because of rebuild costs or social inflation, we don't see that in our cyber claims, you know? You know, ransomware, criminal gangs obviously don't have the same kind of social inflation demands that plaintiffs do elsewhere. We're comfortable with the margin in that business.
I think if I just build on that, if you look at the slight softening that we've seen in cyber this year, which wasn't unexpected by us, when you compare that to what rates have done since ransomware a couple of years ago.
Yeah
Y ou know, where they've more than doubled, I think you have to take the overall rate movement in that context as well.
You do. Of course, the 56% that we're holding is the ultimate loss ratio, as at that point for that year. That isn't all paid. There's IBNR in that loss pick for 2021 may change as well, as that year continues to develop. On the property side, you know, as kind of Nick alluded to earlier, you know, there has been a lot of activity this year, you know, severe convective storms amongst others. One of the reasons why we're concentrating our property insurance play in the E&S market, is that you are better able to underwrite to that stuff in a, you know, in a bespoke way.
I think we've done that well, thinking about, you know, all the additional perils that manifest in losses, these days. The activity that's happened so far in North America hasn't caused us to need to update our guidance in terms of the sorts of combined ratios that we're targeting, nor has it made us pivot how we're underwriting. I think it's been exactly the sort of thing that we thought that there would be. I think us, you know, we're confident in our strategy there. On the reinsurance side, you're absolutely right. One of the things the reinsurance market has done by, you know, adjusting the attachment points at which treaties can come in, is to get away from some of that noise.
You know, we're underwriting through that, and we, along with the rest of the reinsurance market, has moved away from that noise, on the property cat side.
Thank you very much. Much appreciated.
Thank you.
Thank you. Your next question comes from Abid Hussain with Panmure Gordon . Please go ahead.
Hi. Morning. Just one question.
Morning, Abid.
... left from me, I think. M orning. Just one question. It's more for clarification and perhaps an observation. It's coming back to cyber, really, and your expectations on underwriting margins for the full year.
Yeah
W hether they've changed or not. I appreciate the comments that you've made already on the growth, so the top line and the rates. I just want to tie this all together. It seems like the coverage reduction is larger than the rate reduction, the implication being that the margins are, what? Not steady, but actually improving. I don't know if I'm misreading this or that, I just wanna get clarification on that.
Yeah. You know, as Andrew Ritchie, you know, asked earlier, do the rate changes that we're showing reflect the fact that our cyber war wording has been clarified? No, they don't. You know, should that benefit us? Yes, I think that clarification is useful if you get that sort of event. You know, that should help certainly the cat part of that, the underwriting margin. As we were discussing earlier, you know, the loss ratios that we share on cyber are the ultimate loss ratios, which of course, particularly in the more recent years, have a lot of IBNR in them.
You know, that will run off over the over time, and they may not end up where they are now. You know, good years tend to get better, and bad years tend to get worse. You know, overall, you know, we think that cyber is running better than it needs to, in terms of the sort of ROE-
Yeah
... it's producing, why we're continuing to add exposure.
Okay, understood. That's very clear. Thank you.
Thank you. Your next question comes from Freya Kong with Bank of America. Please go ahead.
Hi, again.
Hi, thanks for allowing the follow-up. Hi, again.
That's okay.
Can I just clarify your views on rate adequacy in property? Some of your US peers are saying that rates in property cat now look adequate. Do you agree with this? On direct property, you said that rates were better than expected. Do you think rates here are adequate or will need to go up further, particularly given all the losses we've seen in the US over H1? Thanks.
Yeah. Yeah, I think I read the same sets of comments that you did there, Freya. If you judge us by our actions, we've not grown our reinsurance exposure. We've grown our insurance exposure, which kind of gives you a clue as to where we think prices are more adequate. You know, it's a moving feast, isn't it, right? You know, climate change, in our view, will continue to make things more volatile and more active over time, and inflation builds year-on-year. You know, if prices stay flat next year, relatively speaking, they'll be less adequate next year because you've got to factor in new, increasing impact of climate change and increasing year-on-year inflation.
We think broadly speaking, they're okay for cat and attractive for insurance, but they will continue to need to adjust to reflect the, you know, the ongoing exposure changes that we don't think are gonna stop. Unfortunately, it's a moving feast.
Okay. Thank you. On a risk-adjusted basis, so adjusting for claims inflation, you think that adequacy is decent for both better and in primary than reinsurance?
Yeah.
Okay. Thank you.
Thank you.
Thank you. This concludes our question and answer session, and the conference is now concluded. Thank you for participating in today's presentation. You may now disconnect.