Ladies and gentlemen, welcome to the Hiscox Q3 IMS conference call. I'm Sasha, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for a question at any time by pressing star one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Paul Cooper, CFO. Please go ahead.
Good morning, everyone, and thank you for dialing in to Hiscox's Q3 2023 trading update. I'm Paul Cooper, the Hiscox Group CFO, and I'm going to briefly walk you through the usual topics that we cover at this time of the year, mainly top line growth, large loss experience year to date, and our investment result. Let me start with growth. On a growth basis, so using our insurance contract written premium metric, ICWP for short, Q3 saw the group deliver top-line growth of 6.8% in constant currency. We continued to deploy capital in the attractive rate environment in London market and Re & ILS, and to build scale through disciplined and profitable growth in retail.
Looking at net written growth, net insurance contract written premium or net ICWP, for short, increased even more by 11%, driven by the acceleration of net growth in Re & ILS to 23.6% and in London Market to 18.1%, reflecting our cycle management and capital deployment strategy to maximize potential earnings. Before going into more detail, I want to preempt the question I know I'm going to get on capital return. We appreciate the importance of returning surplus capital to shareholders, but the timing depends on the market we see in front of us. Today, we are still in a hard market. As you can see, growth in our big ticket business has accelerated in Q3, so we are deploying capital and at very attractive returns.
Just to give you an insight into the performance of our reinsurance platform, Hiscox's ILS funds, which participate in the risks underwritten by our reinsurance business, have delivered record performance. AUM is unchanged since half year, as the net capital outflows of $294 million in the third quarter were largely offset by the stellar returns generated by the ILS funds. Now, let's take a closer look at how each of the segments have performed year to date, starting with retail. ICWP increased by 4.7% in constant currency, with a couple of highlights to call out. Firstly, Europe continues to deliver. The region is once again the strongest growing business in the retail portfolio, delivering growth of 11.1% in constant currency. All markets are performing strongly, in particular, Benelux, France and Iberia.
Our new core technology rollout is progressing to plan, and we are very pleased with the sustainability of growth in Europe. Secondly, US DPD premium growth continues to accelerate, up 9.2% in Q3, from 8.9% in Q2, and 6.8% in Q1. Direct business has been live on the new technology since June 2022 and is showing excellent progress, delivering new business growth in excess of 50%. The recovery of growth of our digital partnerships business from its low point in Q1 is continuing as both existing and new partners increase production. Overall, US DPD remains on track to deliver the full year 2023 US DPD growth guidance towards the middle of the 5%-15% range. Thirdly, underlying growth in the U.K. remains robust.
There is a lot of excitement among our U.K. colleagues as we launched a new brand campaign in September. It is a significant milestone as we look to increase awareness and recognition of Hiscox in both our direct and broker channels. The creative thread running through the work is: Your story, underwritten by Hiscox, a concept focused on recognizing the people and stories behind each policy. Early signs suggest a positive impact on brand spontaneous awareness, as well as good industry press coverage. I hope one of you, one of the adverts caught your eye on your morning commute today. These are the positives that give us confidence in the recovery of retail growth momentum, but there have clearly been some headwinds, too. These are not new.
As flagged in August, retail growth has been tempered by our deliberate underwriting actions as we continue to exit non-core underwriting partnerships in the U.K. This will be completed this year. We also adopted a disciplined approach in U.S. Broker in response to the unfavorable rate environment in cyber. To mitigate the effects of this, we executed a growth initiative focused on our most profitable classes in U.S. Broker. This has increased submissions, and we have seen signs that the adverse impact of cyber has started to moderate in the fourth quarter. The retail growth trend in October has been encouraging, and we remain on track to deliver the full year 2023 growth guidance to be in line with the half year trend....
Finally, just as a reminder, we have announced the agreement to sell the DirectAsia business as part of our active portfolio management and focus on key markets. The sale is expected to complete by the end of the year, subject to customary conditions and regulatory approvals. Moving on to our London Market division. ICWP increased by an impressive 12.2%, up from 10.6% at half year. Net growth is even stronger, at 18.1%, up from 14.2 at half year, as we retained more risk in the attractive market conditions. Property classes continued to enjoy a hard market, most notably in property binders and major property. Marine energy and specialty was the fastest growing segment of London Market, with ICWP up in excess of 40%.
Power and renewables has been the primary beneficiary from the large volume of construction taking place in the energy sector, as economies across the globe work towards their net zero commitments and strive to achieve energy security amidst the uncertainties of the current geopolitical environment. We remain confident that our strategy of targeting profitable growth through effective cycle management positions us well to deliver strong returns in 2023. Moving on to our final segment. Hiscox Re & ILS delivered strong net ICWP growth of 23.6%, up from 17.9% at half year, as we seized opportunities in the hard market to grow exposure and improve attachment points. Growth on a gross basis is more modest at 2.7%, in line with the trend highlighted throughout the year.
I'm delighted to report that Hiscox's ILS funds have delivered record performance, generating an increasing amount of fee income for the group. Hiscox ILS assets under management of $1.7 billion are unchanged from the half year position. This includes net capital outflows of $294 million in the third quarter, largely offset by record returns generated by the ILS funds. Looking ahead to January renewals, we anticipate that the market will remain disciplined and will continue to be very attractive. Now let's look at our loss experience. The third quarter has been fairly active, as we saw several natural catastrophe events as well as man-made large losses, including wildfires in Hawaii and Canada, an earthquake in Morocco, several hurricanes, and claims in our space book.
Pleasingly, despite the frequency and nature of these events, the group natural catastrophe losses during the first nine months of the year are within the group's budget. As you know, our current pricing and reserving assumptions incorporate expected inflation, which is a multiple of experience seen in the book historically, and this conservative approach means the increased premiums being collected through rates and indexation are keeping pace with our view of expected inflation. Lastly, a couple of comments on the investments. The year-to-date investment result of GBP 202 million compares to a GBP 294 million loss this time last year and represents a 2.8% return year to date. The yield to maturity on the fixed income portfolio rose to 5.7% at the end of September.
Bond coupons and cash income, which more than doubled year-on-year, contributed the majority of return and continued to increase as bond yields and interest rates moved higher. To conclude, the first nine months of the year saw us deliver disciplined, profitable growth across the group through a combination of management actions to improve the quality of our portfolios, increased capital deployment in big ticket, and focus on the quality of growth in retail. We're in the best position for many years to deliver strong risk-adjusted returns. This, in combination with a much improved investment result, means the outlook for the full year 2023 results is very positive. I'll now hand over to the operator to open the floor for Q&A.
We now begin the question and answer session. Anyone wish to ask a question may press star and one on your touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone wants a question, may press star and one at this time. First question comes from Will Hardcastle with UBS. Please go ahead.
Morning, everyone. Thanks for taking the question, two of them. I guess firstly, just on the premium data points, almost all of them show strong acceleration from the H1. The only one that didn't was retail as a whole, currency adjusted. You talked there about the remediation actions on the U.K. partnerships and cyber. Could you give us some momentum, perhaps H1 versus nine months, ex those remediations? Do you think it's showing that trend? And you mentioned partnerships will be finished, that pressure point come year end. Are we confident that cyber sort of exits as a pressure point, barring the rate momentum come year end in terms of portfolio remediation action? The second one, sorry, this is a bit long-winded on capital deployment over capital distribution. I think it's-...
It's pretty clear near term, what the messaging is here, and we appreciate if you're achieving 20% return on capital, then consensus, you know, is, is looking for more than GBP 350 million of retained earnings this year. Growth in retail looks like it's a couple of hundred million, but I think the capital requirement is quite small. But it's the London market and Re & ILS, as you say, the big ticket. It looks like consensus is only assuming sort of GBP 70 million of growth for next year. I guess the question is whether you think consensus is effectively underestimating the 2024 vs. 2023 growth, or it's underappreciating how you view the long-term duration of the growth prospects, or perhaps just that you want to hold a higher stock of capital? I guess, which one do we think it is?
Yeah. Okay. Look, let's deal with... So, your first question, Will, around retail, it's worth sort of unpacking. So you're right. So if we start with the half year, for retail growth, we were up 5.5%, and we've guided to say that the full year, we expect to be in line with that trend, consistent with what we said at the half year. If you look at Q3, we're at 4.7%, and if I unpack the various components and look at the geographies, Europe is going from strength to strength, so that is double-digit. We delivered 11.1% year to date, and the sustainability of that growth remains strong in all markets, all of the European markets.
If I then think about the U.S., what is very pleasing is that momentum is being gained in U S DPD. So we've progressed from that 6.8% in Q1 to 8.9% in Q2 as discrete quarters, and then 9.2% in Q3. And what we're seeing is some really healthy signs. So if you see, if you take, direct to consumer, you know, new business growth is up in excess of 50% in Q3, and we're firmly in that double digit growth territory, to give you a sense of trend and momentum. Now, the U.S. broker business is worth turning to. And what we've said at the half year is, and this remains very much the case, is we are focused on disciplined underwriting and profitable growth.
And what that means and how it's manifested itself is, you know, we told you about the competitive conditions that exist in U.S. cyber, in the broker space. And that has been, you know, the drag on growth in U.S. broker for a half year and into Q3. Now, we are seeing signs that that competitive environment is moderating in Q4. I think the other aspect for U.S. broker is we've launched a number of growth initiatives for our most profitable U.S. broker classes of business, and the signs are promising on that basis. The submissions are already increasing in those areas where we have those initiatives. I think the last aspect is looking at U.K.
I think from a U.K. perspective, what we've seen, you're right to highlight, again, a focus on disciplined underwriting, has been that we have turned off and non-renewed various underwriting partnerships in the U.K., and that will finish at the end of the year. To enhance growth, there are two main things that are worth highlighting. One is on broker eTrade, where we're getting you know, we launched that in March. We're getting good feedback from brokers. We've got more than 2,000 users on that platform. And also, you would have seen, hopefully, around the U.K., our launch-relaunch of the brand and refresh of the brand, that's very distinctive, and I think sets us apart from the broader U.K. market. And the signs, the feedback from the press and again, brokers, has been very encouraging early on that.
Now, clearly, there will be a lag on growth from that brand spend. I think if you sort of step back and say, well, what's the underlying growth ex cyber in the U.S. and ex the underwriting partnerships? We are in that 5%-15% target range. I think the other aspect, and I commented it in my sort of preamble, is, you know, the signs for October have been encouraging for the retail growth perspective. So I think that gives a sense of the outlook for 2023 and why we're confident in holding our guidance for the full year. If I then think about your second question around capital, I think it's a great question. So one of the things that I've been very pleased about is deploying capital into a hard market.
Now, our diversified business model gives us lots of optionality, and I think what you've seen from the big ticket business is that we have deployed capital and grown not only in Re & ILS, where rates are up 30% or in excess of 30%. Now, that growth has accelerated in Q3 from the half year at around 18 up to, you know, nearly 24%. And then London market itself has also increased from 14% to 18%. So we are deploying capital into a hard market at attractive returns.... Now, I think it's sort of a little early to turn attention to 2024 and kind of give growth guidance for the big ticket business.
But what I would say is that, there is sort of, if you look at the outlook, what we've said is we anticipate, and we've got to see how the market develops. But we're currently in what many would say is the best sort of underwriting conditions for a decade, maybe 20 years. Rates are up, you know, as I've said, in excess of 30%, and the outlook is that rates will be, you know, in our view, steady to modestly increasing. I think also we're seeing in London Market, continued attractive growth opportunities, not only in property where, you know, you would have seen that rates are up in excess of 20% on either binders or major property. And also, you know, in the marine and energy and specialty division, growth has been very compelling.
So the opportunity to deploy capital remains very strong. That said, and I did mention that I'm sort of preempting the capital question is: you know, from a surplus capital perspective, I think it's a question of timing. You know, we continue, as you see, to deploy capital into Q3, and if you look at the sort of capital generation that underpins that, you know, just standing back, we delivered, you know, a near 20% ROE at the half year. We are within our cat budget year to date. We've got record ILS fund performance, and the read across there, given we've got an alignment of interests, and we write the majority of reinsurance business in ILS on our own book, gives you a sort of read across of the capital generation coming out of Re & ILS.
Then lastly, you know, what's particularly appeasing to me is we're generating capital from the asset side of the balance sheet, so at nine months, more than GBP 200 million. So I think taking in that round, you know, we're positive about the capital generation. We're positive about our ability to deploy capital into a hard market, and, you know, we will return surplus capital. It's a question of timing. So hopefully we'll... There were two long questions and two pretty long answers, but I hope that that gives you the comprehensive picture on those two areas.
Yeah, that's brilliant. Thanks, Paul.
The next question comes from the line of Andrew Ritchie with Autonomous. Please go ahead.
Oh, hi there. I wonder if you could just give us some sense of the attritional claims experience across the group. Paul, you focused a lot on the Nat Cat. You mentioned one or two claims in London Market, but I'm just trying to judge sort of relevant size and some sort of color on the attritional claims experience, preferably, well, it's London Market and retail, where attritional really matters. That would be useful. Second question, you gave us some indications on US Direct. Can we just get an update on partnership business? I'm just looking at the half year, you said you added 17 new partners in H1, and there was a healthy pipeline of further opportunities.
I guess maybe just for color, presumably a lot of those new partners, just remind us what the sort of, the downtime is before they come on stream, as I'm guessing maybe they're not being that impactful yet. And what is the pipeline, looking like in that business as well? And I can assure you that I have been exposed to lots of Hiscox new adverts in recent weeks. Maybe to clarify, I'm assuming that was all part of the budget in terms of any increase in marketing spend. You seem to be spending a lot on radio advertising, in particular. Thanks.
Absolutely. Andrew, I'm pleased that you've seen it, but certainly what I can attest to is the business case and the effectiveness of marketing, not only for brand, but also obviously the direct acquisition costs, gets a great deal of scrutiny, not only from the divisional CFOs, but from myself. But thank you for that. I'm glad you've noticed them. I think, dealing with the question first. So, you know, I think what you can take, we've commented on the cat budget. Your question was around attritional, but we are within. I think, you know, the point around large losses is they're notable really by their absence. So we didn't call out. There are - there have been several sort of mid-sized losses in the space area for a number of satellites, but they are...
They're not really sort of notable. And what I would say, you know, for London Market as a whole, but for that, that class, what we're expecting is some significant re-rating. I mean, at least sort of doubling of the rates prospectively, given the loss impact to that, that segment. I think then you're looking at sort of, the attritional. Now, we get into. We don't comment on, sort of the attritional losses at sort of. But what you can do, and what I'd anchor back to is, if you look at the half year, which is only a sort of three months ago, you know, the half year combined ratios were in the eighties for London Market.
You know, clearly they were at sort of something like 93.8 for retail, and there's no change really to the outlook for those combined ratios. The second question on U.S. direct. So, yeah, if we, if we break it down, you've got about a third is direct to consumer, and then 2/3 is partners. We're very pleased with the performance of the direct to consumer. As I mentioned, you know, new business is up more than 50%. We're in the double digit territory. I'm very pleased with that. From a partners perspective, I think what's useful to cover off is, you know, we did highlight that there would be a the low point of growth for partnerships would be in Q1, as all of the embedding takes place on the new technology.
If you then see what we've seen then is a recovery of growth in subsequent quarters, Q1, Q2, Q3, albeit it's sort of a more modest recovery. What I would say is, you're right to highlight, we added something like 17 new partners in the first half of the year. We've continued to add new partners in Q3, and the pipeline remains strong in Q4, and indeed, going forward. I think there's sort of two aspects. The growth we do expect to come from, or the majority of the growth, continues to be delivered out of our existing partners. We've got, what I would say, is the larger or largest partners from a distribution perspective. We already have them, so it's more a question of working them a lot harder.
Indeed, what we've done is some very tailored partnership engagement and also some temporary partnership incentives, along with some specific training to really drive that growth forward, from a partnerships perspective. I think from a sort of new business sort of new partner generation, that the pleasing thing is production is up, both from an existing partners, but importantly, the new partners that we've put on board. I would say it does take time for new partners when they come on board, to get the sort of the growth going. So there is a lead time. It is, you know, at least several months. And that arises from, firstly, all of the training and familiarization that they need to do, but also the marketing that they need to do to their customer base as part of it.
But that is, as I said, it's been encouraging.
Okay, great. Thank you.
The next question comes from the line of Kamran Hossain with JP Morgan. Please go ahead.
Hi. Morning, Paul. Two questions from me. The first one is just on coming back to the cat claims and kind of your comment around being within budget. I just wanted to, kind of, just square something, I guess. You know, you've mentioned that ILS performance, you know, has kind of produced a record result or, you know, you've had record performance, which should be very good for ILS. But your comments around being kind of within sounds a little bit muted compared to that. So I'm just trying to work out if there's something going on in the market, or actually just you're just being very cautious with your wording. I'm reading far too much into the word within. The second question is on surplus capital.
I know you're keen to deploy and there will be opportunities for next year, but what's the best way for us to think about surplus capital? Is this rating agency, BSCR or something else? So just some kind of ways to think about it without getting you to promise that you're going to do something at year-end. Thank you.
Yeah. Thank you, Kamran, for both of those questions. Yeah, so from a cat budget, let's unpack that a bit. So, you know, what I would say is, we are absolutely within. And if you think about the distribution of that cat budget for the group, the vast majority of it, or certainly a significant majority of that cat budget, resides within Re & ILS. And what you've seen from Re & ILS is, firstly, a significant rate increase across the year, so rates are up in excess of 30%. You've also seen a significant tightening of terms and conditions. So we've gone up in terms of higher attachment points. There are higher retentions for cedants, and also we've non-renewed a significant number of aggregate excessive loss programs.
So that moves us, you know, in general, for Re & ILS, away from the activity. The sort of read across that I was trying to encourage and what's implicit from a profitability perspective is that if you look at the ILS funds, as I said, there's a sort of an alignment of interest, and therefore, the risks that the ILS funds, the vast majority of that portfolio, we are also writing. And given their record performance levels, you can sort of interpret sort of what's going on for Re & ILS as a business unit. So hopefully that gives you enough to sort of give you an impression of what within means.
I think, I think then from a sort of surplus capital perspective, you know, we are, you know, so what we clearly publish and are focused on is two elements. One is the sort of regulatory capital, which is the BFCR. You will have seen at the half year that we've got a very strong balance sheet at around 200%.... And then also the binding constraint here is really the S&P rating. And there you can see, again, if I point you back to the half year, we've got a sort of significant margin over where we think that that starts to bite, which is around the, the sort of equivalent, is the sort of 155-165 territory.
If I then think about sort of capital into just where we are for the second half of the year, you know, the, the sort of main writings for, 16 and obviously 17, that drives a lot of the capital requirement, is embedded in that half year capital number. We do expect, for all of the reasons I, I responded to in Will's question, to generate capital in the second half of the year. But also, as we continue to deploy capital, the required capital obviously is increasing, but not to the same extent as the first half of the year.
Well, that's clear. Thanks very much, Paul.
The next question is from Freya Kong with Bank of America. Please go ahead.
Hi. Thanks for taking my questions. Firstly, could you talk a bit about the SME environment in the US and I guess how that feeds into your growth outlook for the US DPD business? Are you seeing any signs of the consumer struggling? And if we were to see this downturn happen, what impact would that have on your growth expectations heading into 2024? I think you previously guided for US DPD growth to accelerate beyond 15% after all the replatforming. Is this a trajectory we should still expect? And secondly, it's good to see really strong net growth on the big ticket business, London market up 18%, Re & ILS up 24%. And you've talked quite positively about the underwriting environment, which suggests you will push for growth in 2024.
So how should we think about net growth next year versus this year, given that one of your peers has flagged a clear slowdown in the environment? Thanks.
Yeah, so look, let me take the second one first. I'm glad you've highlighted... I think the key points around net growth. So, you know, certainly for 2023, you can see that we are deploying capital, given the net growth that we've highlighted in London Market and Re & ILS. I've highlighted, Freya, again, where we're seeing the sort of growth opportunities and the general sort of outlook where we see that's attractive, and our ability to deploy capital at attractive returns. I think sort of guidance for 2024 for big ticket from a growth perspective, let's wait till year end, and we'll tell you about that and give you a more thorough update then.
I think from a sort of SME U.S. perspective, I think firstly, you know, if you look at the U.S. economy, it seems to be remarkably resilient, as a whole, is a sort of first point. One data point we measure as a sense of health of the sort of SME environment is new business formation, and that continues to be strong in 2023, and it's elevated and still greater, at sort of post-COVID levels. So I think that the health, the lead indicator from a sort of SME U.S. SME perspective from that new business formation, remains strong and positive. I think then that, you know, if you look at recession, I think there's a couple of things to sort of highlight.
One is that, you know, while we have to see how any recession is, how deep it is, how long it is, and clearly no one is immune from it. But if you look at sort of the profile of our book, firstly, insurance is not a luxury purchase. You know, we are—operate significantly in the U.S. at the small and micro end of this, where insurance is either needed on a sort of contractual basis or that they want significant peace of mind and therefore want to take that out because it's a meaningful—it protects a meaningful part of their income. So, and also if you look at sort of the average premiums, they're sort of around, I think, $1,000, you know, $700-$1,000 in, certainly in US DPD.
So as a consequence of that, when you break that out to sort of, an average spend or what it is as a proportion of, you know, the average business's expenditure, it's not a large component. It's not like energy, let's say, or power or, other components. So there should be some resilience just by the inherent nature of why people are buying that insurance cover. I think then, you know, you've got to look at the market opportunity, and, you know, we did say that sort of on our own balance sheet, that sort of target addressable market is in excess for the U.S. of 30 million customers from an SME perspective. So the market remains large, it's very fragmented, it still remains underserved, and from a DPD, US DPD perspective, you know, we are the market leader in that space.
So there's a lot of room to grow. And you would have seen from the half year that we've expanded sort of the reach, relevance, and revenue for USDPD by partnering with a well-known U.S. carrier to essentially offer their workers' comp product on our platform, and obviously generate some risk-free income as a consequence of that. Now, the signs of that soft launch, and it's only through our call center, are extremely promising. We've already bound more than 1,000 policies from that soft launch at Q3. What it does do is expand our target market from, you know, the 32 million or so up to 50 million, or around 50 million. So, hopefully that gives you a sense of the opportunity that lies ahead of us.
And then I think sort of from a growth perspective itself, you know, we're very pleased with the momentum that's being obtained in DPD. You would have seen the quarterly progression that I've talked about both in the statement and today. And I look forward to the time where we're seeing US DPD return to being the strongest growth performer across the retail division. The outlook's strong. But we're not gonna quote on 2024 today.
Okay, thank you. Could I just follow up on the expected trajectory of the pickup, given the replatforming is largely done, or done in direct and in partnerships now? Do you still expect to see a similar sort of acceleration as you expected previously?
Well, what I would say is, you know, what we told you about is that growth would be lower in Q1, and it would return in Q2 and Q3. And the guidance is that we'd be towards the middle of that 5%-15% range. And you can see from the trend, quarter-on-quarter, there is good progression. The momentum remains strong for that, and I'm very pleased with it.
Okay, thanks.
The next question comes from Andreas van Embden with Peel Hunt . Please go ahead.
Thank you, good morning. For two questions, please. The first one is on the London Market business. Could you maybe comment on your business planning for next year, particularly around Syndicate 33? Would there be any change or increase in your capacity that you're writing at Lloyd's? And can you also comment on the reunderwriting process within your binder book at Lloyd's, whether that now has been completed? The second question is about Hiscox Re. Assuming rates remain, you know, very healthy in the property reinsurance market next year, given, you know, the capital generation you're likely to generate in 2023, would you consider growing your reinsurance book on a gross basis next year?
i.e., would you lean into the hard market on a gross basis as well as a net basis into 2024? Thank you.
Thank you, Andreas. So, look, it's useful to just you've commented on, say, the capital base underpinning London Market. Now, it's important to bear in mind that Syndicate 33 writes both reinsurance that goes into Re & ILS, and also, the vast majority is London Market, just to sort of set a scene around how that business divides. Now, you're right, you know, our stamp remains consistent with that of 2023 going into 2024, but what's important to note is there is headroom and has been headroom, from a growth perspective of where we are. So the utilization of that stamp capacity was below where it is, and going forward, it's sufficient for our immediate plans and our immediate outlook.
And there is no limitation from a sort of stamp capacity on our ability to deploy capital in this attractive market. Now, you know, prospectively, if we did need to increase capacity, we can do, we can do that. There is the ability through Lloyd's to have, you know, midyear preemptions, for example, outside of the usual planning cycle that Lloyd's dictates. I think your question, I think is sort of part two of your question was around the, the binder book. Now, I think it's just useful. We, we said that, you know, if you rewind to 2022 and prior, we had, you know, we had been updating for London Market property business.
We had been updating our view of risk year on year on year, over a period of several years, and at the same time, still increasing the rate that we were charging in that property book, while reducing exposure in property. That was because although we were obtaining a return, we thought prior to sort of 2023, that that return wasn't sufficient for our capital, return on capital sort of hurdles internally. Now, prospectively, if I look to 2023, you know, rates are up, as I said, in that sort of binder book, in excess of 20%. We are growing exposure on the household binders, so we're pleased with the way that that business has, the attractiveness of that business has changed in terms of its profile in 2023, and remains attractive going forward.
I think your last point on the Re and would we lean into the growth top line? I think it's an interesting question. I think the way that we look at it is to essentially bifurcate it into the business that we're writing on our own balance sheet, and the business that we write either through quota share partners or through ILS. Now, if I look at our own balance sheet, you've seen our willingness to deploy capital in these attractive market conditions, and that in turn will impact sort of the net growth, but also the sort of gross growth component. What is masking somewhat that gross growth component is the interaction of third party capital. From a quota share reinsurance perspective, that's more the sort of traditional partners. There remains strong appetite.
We have good relationships with those quota share partners, and we have modestly added to the volume, i.e., the number of quota share partners we have. That in turn will be a driver of gross premium for Re & ILS, depending clearly on their appetite going forward to write in these attractive conditions. I think where there is less certainty for us is that, you know, the appetite for from the sort of ILS or alternative capital markets. And I think from that perspective, you've seen an environment where there has been, I think, an absence of meaningful capital entering into 2023. I think it's questionable, given we're in November, whether there will be any meaningful capital coming into the reinsurance market in 2024.
And I think you have seen some sort of, some capital come in via cat bonds. That's clearly much more a sort of non-traditional product. But I think, from my perspective, as far as I can see, it doesn't seem that sort of alternative capital is coming in in any meaningful way, for one. And clearly what that does help to do is, you know, whilst it's restricting supply, it does help to maintain a healthy rating environment, and in turn, that drives the attractiveness of writing business on our own balance sheet.
Excellent. Very clear. Thank you very much.
The next question comes from the line of Tryfonas Spyrou with Berenberg. Please go ahead.
Well, hi there. I've got two questions. Sorry to come back on capital, but I guess my thinking is that unless there's a meaningful sort of acceleration and step up in volume growth ahead of rate in capital intensive lines next year, I struggle to understand why you couldn't return at least some of the capital generated this year, as it appears to be significant, given your comments, unless you look to grow while keeping against your PML to 2% of equity flat. I appreciate you mostly mentioned timing, but my question is why the decision should be binary? Why not balance the two? And the second one is on the sale of Asia, the Asia business.
I was wondering if you can update us on the timing of closing, and how should we think about the proceeds you receive and capitalization with regards to those? Thank you.
Yeah, thank you for both of those comments, Tris. You know, look, I think, I think just to ... You're absolutely right. It is not a sort of binary decision being one or the other. You know, and, and, you sort of repeat my comments. You know, we are deploying capital, and we've shown that we're accelerating growth in a very attractive conditions at Q3. And I think, you know, from a sort of capital returns perspective, it is about timing. You know, we'll when we come to the board in February, the board will make a decision on, the sort of capital management aspect of that. I think from a DirectAsia perspective, it, it's just putting it in perspective. You know, DirectAsia is, you know, sort of roughly less than or around $50 million in premium.
It's not material either to retail or indeed to the larger Hiscox group. And what I'm pleased about is our focus on portfolio management. And, you know, quite frankly, DirectAsia, you know, is just not non-core to the overall ambitions of our strategy. And we want to much more spend our time, effort, money and resources in, you know, the highly attractive rest of the business, either Re & ILS, London market, or, you know, the attractive growth opportunity that exists within retail. Where we're up to is, we're looking at sort of the customary regulatory approvals. It remains on track and look forward to concluding that transaction.
Any comments you can make as regards to how much the business has been sold for, I guess, in terms of shifting about?
Yeah.
sell, so.
No, I thank you, Tris. I look, it's a class three transaction. You know, given its size, it's tiny. I think, you know, you wrap up the overall capital considerations as part of the earlier conversation we've been having today.
Okay, thank you.
The next question is from Faizan Lakhani with HSBC. Please go ahead.
Good morning. My first question is on inflation in retail. Are you seeing any signs of certain segments that are inadequate from an inflation perspective? And are there any pressures from putting rates through in certain states? Second question is, like, you're currently rewriting your U.K. book, and historically you've done your binders book. Are there any pockets that you're currently evaluating and being, be it in a small ticket or the big ticket, that we should sort of consider? Thank you.
Thank you for that, Faizan . Inflation. So, look, you know, I did, I did mention in, in my, statement the way that we are looking at that. You will know that, we have conducted and periodic significant exercises of looking at inflation. You know, clearly, although CPI has been elevated for the last, I'd say 18 months, you'll know that the driver of that has been, you know, things like food and energy, where there hasn't been a real direct read across into sort of, drivers of inflation in, in insurance. Our assumptions have been, meaningfully higher than, have been historically the case.
And I think, you know, what you're seeing pleasingly is that from a, you know, from a, across both, you know, U.S., U.K. and Europe, it looks like, you know, inflation is tapering off from that CPI headline level. And, you know, you are seeing, I think, you know, even yesterday there were signs that the U.K. rate, central banks are sort of... Or the markets are, are factoring almost like rate cuts into 2024 as a consequence of that. So it looks like it's abating. I'll remind, you know, just everyone on the call that we do, have indexation, and we do rate across, various classes on inflation type drivers such as wages or turnover. And, you know, that continues to be the case. We continue to charge premium in line with or, ahead of our inflation, assumptions.
I think then that from a U.K. perspective, you know, absolutely the thing to take away on this call today is that we are absolutely focused on disciplined underwriting and profitable growth. And, you know, how that reads across is we've taken action in the U.K. underwriting partnership space. You know, what I would say, and if Joe was on this call, is that we're always looking to course correct proactively. That is the nature of underwriting. We do drive that profitable growth proactively. But at the moment, from a U.K. perspective, there's no sort of, you know, course correction on the horizon of significance. And, you know, I would say from a sort of big ticket perspective, we continue to exercise strong cycle management and portfolio management.
You've seen that through driving growth in the attractive areas of property and energy, and the sort of marine and energy and specialty, and yet we're holding our line, have taken our foot off the accelerator in areas such as D&O, where, you know, rates are down something like 12%. So that, that will give you an indication of our philosophy and approach on this.
So as a summary, there's no real major pocket where rates are insufficient or underwriting quality is insufficient right now, you're evaluating?
Correct. Correct.
Great, thank you.
The next question comes from the line of Nick Johnson with Numis. Please go ahead.
Thanks very much. Morning, Paul. Question on cyber. Obviously very competitive at the moment, but I think particularly at the smaller end of the market. Question is really, is it a segment that you see continuing to underwrite in the longer term? And, you know, how important is cyber to the overall SME offering? And really, have you got enough scale in cyber to make it work profitably in the longer term? Or perhaps could it be a segment which might work better through some sort of partnership arrangement? Thanks.
Yeah. Thanks, Nick. So, we do write cyber across all three of our segments, just to give you an indication, and one of the benefits of that is obviously, you know, we can inform the sort of underwriting expertise across that. If I look at sort of SME, you know, we do write it in each of the retail geographies. So, if I think about have we got the scale? Yes, I don't think that we necessarily have to jump straight to an alternative partner. Indeed, if you look at you know, the U.S., it has been competitive, but we are tailoring that cyber product in the broker space to be even more relevant to the you know, micro and small end of that space.
And I think also we're looking where we can to bundle that cyber product. It is our intention more strategically to be sort of the marketplace for insurance for SMEs. So, yeah, and that's borne out, I think, by, you know, the breadth of offering that we're supplying, let's say, in that initiative we're demonstrating via the workers' comp product, as an example.
Great. Thanks so much, Paul. Thank you.
The next question comes from the line of Anthony Young with Goldman Sachs. Please go ahead.
Good morning, and thanks for taking my questions. The first one is on the legacy transaction on the legacy reserve. Maybe could you offer any more color on what's the expected impact that this has on the earnings or capital? And also, if you could give more elaboration on the social inflation observation from these reserves, that would be helpful. Thanks.
Yeah, thank you, Anthony. So from the LPT, we've introduced and entered into a new LPT agreement. The point I'd make is it's relatively small. If you look at it, it's the... From a capital perspective, it's capital neutral. What it does do clearly is protect us from downside earnings volatility. So if you look at the LPTs in the round now, I think what's important is that as of Q3, about 28% of the 2019 and prior reserves are protected by the LPT. So essentially, adverse deterioration falls to those counterparties if there is adverse deterioration. And I think importantly, which I think leads into slightly your question on social inflation, which is, you know, our casualty business is protected to the tune of 41% of the casualty reserves for 2019 and prior.
So the LPTs offer, what I would argue, is a significant amount of protection, particularly around social inflation. Now, from a social inflation perspective, you know, I sort of perhaps your question was prompted by, you know, sort of recent articles in the press, and I've also read those. You know, what I would say is that we've been... You know, social inflation has been around for a long time, and we've been underwriting casualty classes that are exposed to social inflation for many, many years. So, we have the expertise that covers off social inflation as just one of the underwriting factors. What does seem to be a more modern phenomenon is, you know, litigation and the award of sort of jumbo awards by juries or, you know, even to the extent of nuclear awards.
What I would say is, and I talked about the profile of our book, you know, that our book is very, from a retail perspective, is very heavily skewed to the small and micro end. So there's sort of one and two man bands or person bands, of these businesses that typically have very low limits and are just not subject to, litigation in the same way. So hopefully that gives you a sense of, you know, the profile, our expertise, and also the sort of reinsurance protection from a casualty perspective that exists via the LPTs on that.
Cool. Thank you very much, Paul. That's really, really helpful.
The last questions come from the line of Darius Satkauskas with KBW. Please go ahead.
Morning. Thank you for taking my questions. Just two real quick. So the first one is, your ILS investors obviously see the performance of your funds. Are there any indications that, you know, their views are changing and the outflows could come to the end, or should we still expect outflows in the near term? And in your view, is the broader ILS funds market currently seeing outflows as well? That's it for me. Thank you.
Thank you, Darius. So I think that, I mean, I'd comment on the ILS sector generally. So, you know, we continue to see outflows, as you've highlighted, you know, despite those record returns for the ILS funds. I just think it's very interesting that we are in a market where we have demonstrated this is more generally the broader sector, but we're in a market where we've demonstrated rate increases of 30%+. Terms and conditions have tightened up very substantially. And, you know, you would have seen sort of the ILS performance. Against that background, there doesn't seem to be, from what I've seen, any meaningful capital come in from the ILS sector. What is true is that specifically for us, we are seeing a heightened degree of interest.
You know, our Re & ILS team are actively marketing the proposition and the fund performance that we have, and an interest is certainly there. But the broader sector seems to be, you know, sitting on the sidelines. And I think that there there are two drivers for that. One is that, from an underwriting perspective, the reinsurance market as a whole has failed to make its cost of capital for, say, something like the last five years. So they're looking for. My understanding is they're looking for a proof point in, let's say, the 2023 results, possibly even the 2024 results, before they are more encouraged to deploy capital back into the reinsurance sector.
And of course, you know, when ILS capital was very significant and growing, it was against the backdrop of a zero interest rate environment, where there was a hunt for yield. Clearly, we're at an environment where, you know, rates are up substantially, and you can see that in our investment portfolio. You know, our reinvestment yield is, you know, 5.7% as at September. And I think, therefore, the options and the hunt for yield has clearly sort of abated somewhat. So I think there's- that's the sort of dynamic that is playing out in that environment and how it pertains to us, but also the sector more broadly. Okay. I think, Darius, unless there's a follow-up, then I think that draws us... And we're actually, we're over time, so perhaps we should draw it there
Thank you very much for your attention and questions on the call today.
Ladies and gentlemen, the conference is now over. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.