Good morning everyone and thank you for joining us today. It feels like it's only been a few weeks because it has only been a few weeks that you heard from us at the Capital Markets Day. Today we're here to update you on our first half performance and the progress we're making on executing our strategy and achieving our ambitions. Now turning to our business performance, the market conditions are evolving and we're once again seeing the benefits of our diversified business model. We've added $160 million of premium in the first half, capturing opportunities across each of our businesses and we're growing profitably, achieving a robust combined ratio of 92.6% in a period which included the highest ever losses from wildfires.
The diversity of our business model and execution of our strategy is leading to strong returns reflected in the group operating return on tangible equity of 14.5% in line with our mid teens target. These strong returns are delivering attractive growth in net asset value per share which is up 15% year-over-year. As you can also see here, over the last few years the group has generated significant capital. The step up in capital formation since 2022 is the result of strong rate adequacy in big ticket, a growing and increasingly profitable retail business and higher investment returns. The material earnings growth, in particular the expanding revenues and profitability of retail, have enabled us to step up in our progressive dividend twice in two years. We increased our final dividend per share by 20% in 2024 and we've committed to doing that once again this year.
The significant profit improvements in big ticket have supported substantial special capital returns to shareholders with a $150 million buyback in respect of 2023 and a further $175 million for 2024 which is currently being executed this year. Organic capital generation has once again been strong in the first half, supplemented by capital management actions signposted during the Capital Markets Day. As a result, the BSCR is substantially above our target range at the half year stage. Whilst we are in the midst of the hurricane season, I expect organic capital generation to be strong in the second half. The combination of organic capital formation and capital management actions create the flexibility to take further steps to improve our balance sheet efficiency and reward shareholders now.
We have announced a further $100 million special return of capital through upsizing our previously announced share buyback from $175 million to $275 million, and Paul will provide more detail in a moment or two. We expect the group to be in a strong position at the end of the year when we make our forward-looking capital allocation decisions, and we will apply our normal capital framework, prioritizing high quality growth, balance sheet resilience, and our commitment to a progressive dividend. Now turning to each of our businesses as usual, I'll begin with retail. Premiums are up 6% in constant currency, continuing the trend of accelerating growth year-over-year. U.K. growth has increased to 6%, and having just signed our largest distribution deal in recent times and continuing to build share in specialist niches, the business is well placed to build on this momentum.
Our European business continues to grow strongly with a positive outlook as you heard at the Capital Markets Day. Driven by product innovation, tech-enabled distribution, and geographic expansion, momentum in the U.S. is building with the strongest half yearly growth since 2019. The digital direct business continues to grow by double digits, and partnership momentum is improving. In U.S. Broker, the contraction has been halted. This is despite pressure from macroeconomic uncertainty delaying new business flows into a couple of our larger classes of business such as entertainment and architects and engineers. The cadence and intensity of our distribution platform continues to increase. This, combined with the momentum from recently won distribution deals in all markets, means we are on track to grow in excess of 6% at the full year. This positive momentum in top line is complemented by improving margins, with the retail undiscounted combined ratio at 92.7%.
Now let's turn to our London Market business. London Market has returned to growth, driven by a number of factors including a new high net worth property distribution partnership reported in Alternative Risk. We're also growing revenues in general liability and using the rate strength to manage line size. We're benefiting from strong flows in energy liability and personal accident. Overall, the London Market portfolio remains attractively priced, but with the rates moderating in some classes of business, we are managing exposures with our customary approach. For instance, in D&O and cyber where we've seen multiple years of rate reduction, we are now reducing exposure, and more recently in major property where rates have dropped 12% this year, we're walking away from some large account business now.
At the same time, excitingly, we're expanding into adjacent specialist classes of business, launching new products such as financial institutions and tech E&O where we have extensive experience in retail. This is now crossing over to London Market where we write more complex clients. In addition, we're leveraging our tech capabilities. In particular, our technology platforms are helping us access new markets, and we're using this advantage to expand into SME cargo and U.S. middle market property where we see attractive opportunities. Now moving on to Reinsurance & ILS. In Reinsurance & ILS, market conditions remain attractive, although rates have reduced from the peaks of 2023 and 2024.
We have selectively deployed modest amounts of additional capital for the mid-year renewals, and this combined with inflows into the ILS funds and increasing quota share support has enabled our gross and net premiums to increase, and the business has achieved a robust combined ratio of 99.5%. Absorbing the significant loss from the wildfires at the start of the year and now turning to our growth initiatives across all of our businesses, we're taking action to capture profitable growth. You can see here a selective snapshot of these initiatives across both retail and big ticket. We are responding to market opportunity and evolving customer needs by developing new products and propositions as we go deeper into our chosen sectors and expand into new segments, and Jo will provide more analysis on this in a moment.
On distribution, alongside winning new deals in each market, we're also leveraging the power of the group. For example, our London Market and European business collaborated to gain access to a significant opportunity that they otherwise would not have won individually. In addition to organic initiatives, we are selectively making small bolt-on acquisitions to expand our distribution, enter new geographies, and add new customer segments. As you know, we've now entered Italy through a small bolt-on acquisition of a digital MGA, enabling us to build growth through local knowledge, front-end technology, and an established regional distribution team. In the U.S., through a small specialist. In short, at Bolt on, we are accelerating our roadmap to expand our products and into new customer segments such as technology startups and life sciences, while adding cutting-edge technology in the broker channel to complement our investments in U.S. DPD.
As you can see, many of these initiatives, particularly in retail, will go live in the second half of this year, mostly in the fourth quarter, reinforcing our confidence in delivering growth in excess of 6% in constant currency. Now looking at the progress of our Change Program which was unveiled at the Capital Markets Day. We are already seeing the impact and feeling the benefit of our Change Program. We're experimenting with technology applications in three key areas. Firstly, in new business automation in our broker channels, secondly, enhanced claims management, and third, improving productivity in operations. This is in addition to augmented underwriting, which as you know is an area we've been investing in and executing and making progress in for a number of years now. AI-enhanced new business tools have been deployed across the U.K., in Ireland, commercial, and U.S. brokered cyber with positive early results.
We're investing in our claims fraud and recovery capabilities. The actions we have taken to reduce fraud and improve third-party recoveries are already delivering significant benefits and that's prior to the full implementation of the technology solutions. We've launched a Technology Centre of Excellence in Lisbon to get the best out of our investments, reduce duplication, and improve efficiency. Finally, we are delivering on our commitments. We are on track to achieve retail growth in excess of 6% and as you've heard, we're investing in and making tangible progress in expanding product distribution and geography and entering new customer segments. As these initiatives come online in the second half, growth momentum will continue to build. With an operating ROTI of 14.5% despite a record natural catastrophe loss in the first quarter, we are in line with our mid-teens target.
We're also on track to deliver $25 million of operating efficiencies this year from our Accelerated Change Program. Finally, capital generation across our business is strong, creating the flexibility to invest for growth and return substantial capital to shareholders. We've announced a 9% increase to our interim dividend, and we have previously announced a 20% step up to our final dividend per share for this year. Our $175 million share buyback announced in February is being executed, and today we've announced we're upsizing it to $275 million and intend to complete the buyback program ahead of our full year results. With that, I'll now hand over to Paul to take you through the financial performance, followed by Joanne who will provide an update on underwriting, and I shall be back to wrap up.
Thanks Aki. Good morning everyone. It's great to be here with you today presenting another good set of results. You've heard from Aki about the highlights of our first half performance, so I'll dive straight into the numbers. Insurance contract written premiums increased by 5.7% or $160 million with all three business segments delivering growth. The group delivered an undiscounted combined ratio of 92.6%. An insurance service result of $196 million is a good outcome following the California wildfires. As a reminder, the majority of Re & ILS and London Market premiums are still to earn through in the second half. An investment result of $235 million reflects the growing asset base and the earning through of higher bond yields as outlined at the recent Capital Markets Day. We have introduced a range of operating KPIs to provide better insight into the underlying performance of the business.
Operating profit before tax is $262 million. This is down year-on-year mainly as a result of the California wildfires and translates into a strong operating return on tangible equity of 14.5%. The effective tax rate has increased 9.2 percentage points to 17.9% reflecting the implementation of the Bermuda corporate income tax on the 1st of January 2025. The interim dividend per share of $14.40 is in line with the new policy of paying 1/3 of the progressive prior year total. As a result of strong organic capital formation and capital management actions in the first half, we are announcing a $100 million increase to our ongoing buyback increasing it to $275 million. Now taking each segment in turn and starting with retail. Retail ICWP increased by 6% in constant currency and pleasingly all markets are contributing to our growth momentum following decisive management actions across brand, distribution, and technology.
The retail undiscounted combined ratio of 92.7% represents a 40 basis points improvement on the prior year driven by an improvement on both our market leading claims ratio and our admin expense ratio. As our Accelerated Change Program gains traction, the growth in operating profit reflects growing investment returns and the improvement in the undiscounted combined ratio offset by a lower discounting benefit. Moving on to London Market, ICWP increased by 3% as the business navigates the micro cycles across the market with growth driven by opportunities in each division. Though rates are down 4% in aggregate, significant rate has been taken over in recent years and our portfolio is rate adequate. Exercising our disciplined approach to cycle management has resulted in London Market delivering an undiscounted combined ratio of 87.9, the fifth consecutive year in the 80s.
Turning to Reinsurance & ILS, the business has grown net ICWP by 7.9%, primarily in specialty and pro rata lines, and as a reminder, the majority of this premium will earn through in the second half. Reflecting the risk profile of the business, ICWP growth of 7% was driven by deployment of new third party capital, and while rates have decreased during the year, terms and conditions have broadly held and business written remains rate adequate. The undiscounted combined ratio of 99.5 reflects the impact of the California wildfires. Our initial loss expectation for the wildfires is developing favorably. The result also includes reserve releases on prior year large catastrophe events as these reserves mature. ILS AUM was $1.4 billion at the period end, reflecting the impact of planned returns to ongoing investors and the impact of the wildfires.
The appetite of third parties to partner with Hiscox remains strong from both new and existing investors, and we raised over $300 million of new ILS capital and also increased quota share capacity. Now an update on our change program. As announced at our Capital Markets Day, the Group will realize a P&L benefit of $200 million in 2028 from an acceleration of our ongoing change program, and I'm pleased to report we are on track to deliver the $25 million benefit this year. In the first half, we've made strong progress through improvements in our fraud recovery, effective procurement management, and a streamlining of parts of our organization. Cost to achieve are also on track at half year. Turning to our investment portfolio, the investment result is $234.9 million for the first six months of the year, or a return of 2.9% year to date.
$187.2 million is recognized in operating profit. As a reminder, the operating KPIs are adjusted to exclude the impact of market movements on fixed income investments. For the first half, this adjustment was to exclude a + $47.7 million. Group invested assets have risen to $8.9 billion, driven by profits and the debt issuance. Assets remain conservatively positioned, with the fixed income assets having an average credit rating of A at a duration of two years. The bond reinvestment yield stands at 4.4% at the end of the period. Now, looking at the impact of IFRS 17 discounting, the net impact of discounting for the first six months was a - $11 million. The IFFE unwind was $73 million and our prior year guidance is unchanged at between $125 million and $155 million. As with investments, the impact from changes in rates is also excluded from operating KPIs.
For the first half this was to exclude a negative $8.1 million. We have updated the sensitivities to interest rate changes to reflect market conditions and the balance sheet as at the 30th of June. Turning to reserve releases, reserve releases of $132.1 million for the first six months of the year continue. Our long standing record of positive reserve development releases are higher than in recent years, mainly driven by the runoff of prior year large catastrophe losses such as Hurricane Ian. A long track record of positive reserve releases demonstrates our prudent reserve philosophy. Turning to reserves, our conservative reserving philosophy remains unchanged with a confidence level of 83% within our 75%- 85% range. The risk adjustment is $279 million and sits on top of an already conservative best estimate.
In addition, LPTs cover over 36% of gross casualty reserves for 2019 and prior, providing protection from inflation and other pressures. Finally, an update on capital, the BSCR stands at an estimated 239% at the end of the period. The increase since full year reflects strong net capital generation and our debt refinancing, which added 8 percentage points. In June, the Group refinanced its subordinated debt, redeeming GBP 261.2 million and issuing $500 million at a coupon of 7% with a leverage ratio of 18.4%. The group continues to operate comfortably within historical levels and has significant financial flexibility. Shareholder returns of 9 percentage points consist of the 2024 final dividend and our progress on the existing share buyback.
Looking ahead across our announced capital returns, namely the payment of the interim dividend, completion of the upsized share buyback and payment of the 2025 final dividend, we will be returning an estimated 21 percentage points of BSCR to shareholders. As a reminder, through the cycle, the group intends to broadly operate within 190% to 200% BSCR range, depending on capital deployment and investment opportunities at the time. Decisions on excess capital will be taken by the Board ahead of the full year results. Thanks for listening. I'll now hand over to Jo , who will provide you with an update on underwriting.
Thank you, Paul, and good morning everybody. An active environment with elevated natural catastrophes and heightened geopolitical tension, but robust underwriting and generally favorable market conditions has led to opportunity for profitable growth. I'm delighted how we navigated each one of our segments, growing our portfolio 5.7% and strong underwriting returns. As a reminder, our underwriting strategy aims to manage the cycle in our big ticket businesses by leaning into opportunities where we see profit and exercising discipline where we don't. This is balanced by the less volatile retail part of our organization where we look for structural growth. This strategy gives us the opportunity to expand profitably through the cycle and it creates a balanced and diversified portfolio across geography, line of business, and risk size. Where are we in the cycle and how favorable is the market? This next slide should be familiar to you.
The exhibit on the left is our rates indexed back to 2018 across our three segments. The purple line, which is our retail segment, is just less sensitive when it comes to the rate. Cycle rates are up 2% and each line will have its own dynamic, but pricing across U.K., Europe, and the U.S. remains in great shape. Our big ticket business of London Market and Reinsurance is still in an attractive part of the cycle. However, for the first time in a number of years we are seeing rate decline, albeit from decade highs, and importantly, terms and conditions are broadly held. The blue line, which is our property cat reinsurance, at the 1:1 renewals we saw rates decline 8%. This is moderated as we've gone through the year and we've gone through the mid-year renewals where we achieved rates particularly on loss-affected accounts.
Across the whole of Re & ILS, rates are down 6% but cumulatively they're up 81% since 2018. We believe the portfolio is well rated to deliver good returns in a mean loss environment. You can see this with the exhibit on the right where we believe our portfolio is priced adequate plus for 70%, an additional 25% adequate. In London Market, which for us is a combination of 16 different lines across four different divisions, rates are down 4%, slightly more than the 3% we talked about at the 1:1 renewals as property particularly has continued to soften, although remains sufficient. Again, rates are up aggregate 67% since 2018. You can see on the right-hand exhibit the vast majority of the portfolio is rated adequate or better to deliver a good return.
We do have a small part of the portfolio that we now believe will deliver insufficient returns in a mean loss environment, and we're managing accordingly. You can see this on the next slide. Going from left to right, retail rates are good. We want to continue that year-on-year compound growth, and in retail commercial, we've grown that portfolio over 5%. We've seen some great double-digit rate premium growth in things like health and wellbeing and commercial liability. This is offsetting some headwinds in property and in crime. Health and wellbeing is a fantastic example of our sector expertise, where we're leaning into expert distribution and underwriting. We've grown that segment 17% in the first half of this year. Our other retail segment is our art and private client, and again it's had a good year with growth of 9%.
A lot of that growth is delivered by policy count growth in our high net worth business in the U.K., where we continue to benefit from our brand expertise and also an AI solution that's helping our underwriters. Our reinsurance segment, as I said, the rates are still attractive, albeit slightly softening, but it's still an attractive market. We've grown our portfolio at 7%, leaning into things like crop and pro rata while also a net premium growth. If I look at our net PMLs, they're actually flat or reduced as we benefit from some additional retro protection. In London Market, we continue to have different lines in different parts of the cycle, and we're managing those accordingly. In property, we're up 11% as we execute on a high net worth opportunity and we benefit from the aggregate that we deployed in the last half of last year.
Earning through casualty is actually back to growth as we launch a couple of new adjacencies. We're taking rate in our general liability portfolio, and this is offsetting some declines in cyber and D&O. Our specialty is affected by our decision to reduce exposure in product recall as we react to some broader market trends. All of this is a result of our proactive portfolio management, and this is the framework that we use, a framework that is grounded in decades of data. We look at key qualitative metrics across the whole of our business at a systematic and a very detailed line of business level. Things like rate adequacy, but also exposure loss trends. We complement this with expert judgments on the market. These are qualitative metrics, things like broker behavior, demand, and sentiment. Both of those feed into what we call our underwriting ecosystem.
This is policies and procedures underpinned by technical experts with experience through the cycle and across the whole value chain from risk selection to claims. We overlay a forward-looking view of risk and then we react accordingly to any emerging trends in the market. Disciplined profitable growth means, of course, actively managing the portfolio that we have. It also is about seeking new opportunities for expansion. As Aki mentioned, we're looking to increase our capability in the development of our product proposition and speed to market. We're doing this across our whole portfolio in a number of ways, providing more solutions to our customers by going deeper into some of our chosen segments, by attracting new segments, and also some innovation around products and services. Let me bring this to life for you with a few examples.
In London Market, we have launched a technology E&O offering to sit alongside our cyber proposition. Technology E&O is not new to us. We've got decades of experience, we've written this for a very long time in our retail business, from micro to jumbo. Going deeper into this sector allows us to capture the more complex technology businesses that are finding their way to London and written on a subscription basis. Here we lean into not just our underwriting expertise or our expertise around claims management and risk management. When it comes to attracting new segments, in the U.K., we are expanding our health and wellbeing sector to vets and dentists. Again, leaning into not just our underwriting expertise, but our distribution expertise and risk management. New products and services, in France we've launched an innovative new product to protect reputation.
If this is successful, we'll look to roll this out more broadly across the group. In the last half of this year, we will be launching a new proposition for our micro cyber customers focused on services that are really focused on prevention and mitigation, helping our cyber customers become more resilient and also protecting the broader interests of society. These are just some examples of the new products and propositions that we're launching to fuel that future pipeline growth and to complement our existing well managed portfolio. I'll now hand back to Aki.
Thank you very much, Jo. As market conditions evolve, we are once again seeing the benefits of our diversified business model. Retail volumes are growing with the business on track to deliver growth in excess of 6%. As we go deeper into our chosen sectors, add new products, expand into new customer segments, and add new geographies in big ticket, we remain disciplined and will continue to be selective in deploying capital to capture attractive opportunities while actively managing the cycle where the market is softening. Through our change program, we are simplifying our business, increasing efficiency, and building scalable infrastructure to fuel our growth. This remains on track. Capital generation continues to be strong, and we have delivered a strong return on tangible equity of 14.5% in the first half as we continue to compound book value and return capital to shareholders.
The combined impact of capital returns through ordinary dividends and buybacks means we will be returning over $400 million of capital to our shareholders before the full year results, or around 11% of opening equity. Our balance sheet remains in great shape, enabling us to keep investing to capture the opportunities ahead and accelerate retail growth to double digits in 2028. Thank you very much for listening. I'd now like to open to questions. Kamran?
Hey, it's Kamran Hossain from JPMorgan . Are we two or three? Can't do three.
I want to go with it first and then we'll take it from there.
The first question is just on, I guess the sale of DirectAsia was a benefit to the retail combined ratio in the first half. There's in essence a change in scope of kind of what was there now, what's there now versus what's there before. Is there any reason that the 89/ 94 combined ratio range for retail didn't come down to adjust for this? What I'm really trying to get at is the 92.7 or there thereabouts a good level for us to start modeling from for the next few years. The second question is on the share buyback. Clearly a very welcome increase to that today. Is 275 the new base level for the next few years? I think you've explained your business is a lot more sustainable, consistent than it has been for a while. Is that the new level?
Just curious on London Market, you kind of got lost on the headlines a bit today with reinsurance doing much better than hoped in a difficult year and retail doing well. Do you think London Market can sustain an 80s combined going forward even with pricing pressure and given where it is now? Thank you.
Okay, thank you Kamran for the three questions in terms of London Market and the sort of underwriting conditions and sustainability of 80% core. I think Jo will provide a response on that. In terms of is 275 the new baseline for buybacks, Paul will provide a commentary on that. Just very quickly on DirectAsia and retail combined ratios, et cetera, the range is 89% to 94%. That is the range that you should model to. That's what we are aiming for. Just to provide a bit of context, in the retail business now we have three years of consecutive accelerating growth, right? 4% in 2023, 5% in 2024, 6% in 2025, and we've achieved that and have been achieving that at a time when the inflation-led spike in rates has been dissipating. X rate, actually the growth has been greater than that itself.
If you then look at the bottom line, the combined ratio, even if you X out DirectAsia, similar trend, three years of improvement. We are very happy with the way the business is performing and it's been doing that now consistently. As far as the combined ratio range is concerned, no change there.
Yeah, in terms of the buyback, I mean we've said on many an occasion the capital management philosophy is clear. Our priority is very much deploy capital for growth depending on the opportunities that we see ahead of us, maintain a strong balance sheet, pay a progressive dividend, and then once we've satisfied those conditions, evaluate any surplus for potential returns to shareholders. I think the sort of $275 million and the $100 million increase that we've announced today should be taken in the context of where we got to at the half year. We are at, as you've seen, 239% BSCR and that's off the back of very strong organic capital generation, both from underwriting and investment return, but also from the inorganic means that we saw in June.
When you put that together it was about a 25% addition and I think that led to the sort of flexibility that we had to immediately reward shareholders with the $100 million upsize. It's more a case of, you know, look at the circumstances around the half year but very much going forward, as is our custom, we'll evaluate the sort of potential for surplus returns very much on an annual basis in line with the annual results consistent with that capital management framework I've mentioned.
Yeah. With regard to London Market, we're pleased we've had a combined ratio in the 80s for the last five, six halves, which is really pleasing but it's a result of active portfolio management. I think there's a, you know, we talk about London Market but for us that's 16 different lines across four different divisions and each one is in a slightly different part of the cycle. We've got some lines that are still rate increase, some that have been softening and have been for many, many, for many quarters. As I said, our strategy is about effectively managing the cycle in our London Market. Of course we want to pursue opportunity where it's profitable but at the same time we absolutely will retreat where we don't believe we're getting paid for that. I'd say at a headline level the market remains really attractive.
We talked at the rate adequacy, the vast majority, 85%+ of our London Market portfolio we believe will deliver good returns in a mean loss environment. There is a part of our portfolio that we believe will deliver insufficient returns and we're managing that. We don't give a forecast for our combined ratio for London Market. How I feel about the portfolio is pretty positive. There's a lot of portfolios in there that are performing pretty well.
Thank you. If I might just add a comment on capital. What you should, I guess, understand in our position is that we are proactive and very focused, and particularly Paul, on ensuring that we have an efficient capital stack and maintaining overall balance sheet efficiency. That's a key priority for us. Andreas, and then we'll go to Darius and then Ivan.
[Andreas van der] , just on capital management in the second half of the year, could you sort of outline what else you could do to improve the capital efficiency of your book? Does this include any de-risking of your exposures within Hiscox, that is, in the next three years, will you be gradually reducing your exposure to CAT risk and grow that sort of specialty book within Hiscox? Is this where most of the capital is coming in from third parties? Is that all mostly allocated to that sort of non-CAT area in Hiscox, or are third party investors still putting capital to work in the property CAT market? Thank you.
Okay, Paul, do you want to provide a response on that?
Yeah, I mean, I think there's two aspects to your question, Andreas. I think in terms of the sort of options that we've got, you'll see from the strength of the balance sheet and the way that we've managed that is, as Aki's highlighted, very proactive. I'm very pleased with the position that we have going into the second half of the year. If you look forward, I talked in the aspect of my presentation that we've got something like 21% returning to shareholders over the course of those various actions post that is 218. The balance sheet is strong going into that. Of course, we've always got active mechanisms to control volatility and manage that. You would see that we issued the CAT bond at the start of the year. That's one of the means that we had available.
For example, I think in terms of the overall positioning of the portfolio, that goes back to that first aspect of the capital management framework I mentioned. It depends on what we see ahead of us in terms of capital deployment. The reality of it is, and towards the back of the pack, you'll see where our PMLs have gone. Essentially, 2023, 2024. Thanks for putting that up. Were exceptional times, the best. Two years in 10, 20 years in terms of rate environment, we lent into that heavily. You can see that in more recent times we've come off modestly in controlling our PMLs as a consequence. Now, looking forward, it would depend on where we are in the cycle and what we see once we get through wind season. I think that will dictate our appetite on the current trajectory.
We don't expect to lean in heavily into 1:1, but it will depend on conditions once we get through. Second aspect in terms of third party capital, we raised about $300 million in the first six months of the year. That is really all gone into sort of property cat exposed business.
Thank you, guys. I think Darius?
Hi, Darius Satkauskas, KBW. Two questions please. The first one is you generated roughly 17% of capital and then generated consumed capital was 6%. Net capital generation roughly 11%. Can you give us a rough idea how much of that was retail, if you can? The second question is just sort of broader, more philosophical question. Economic climate in the U.S. seems a bit more challenged or uncertain at least. Are you seeing any signs of sort of growing propensity to claim among small business owners, lack of new business formation, anything to help us sort of gauge how the medium term could look compared to the recent past? Thank you.
Okay. In terms of CapGen, we don't tend to break down the numbers by specific businesses. I think we've communicated in the past the retail business is the most capital efficient amongst the three, and London Market is a bit more capital intensive, and reinsurance, as you can imagine, is the most intensive. We're very pleased with the capital generation. If you want to make any m ore comments then?
yeah, I think just to echo those points at the 92.7% and you add on the investment return that comes through, the capital generation out of retail is very satisfying. You add on, you just look at the sort of changing profile of the group. We talked a bit about it at the CMD, but clearly we are growing the greater proportion of retail business that's less, less volatile as an overall proportion and by virtue of that, less capital intensive.
In terms of the economic climate, look, we read and see the same reports as everybody else. The tariffs have created some uncertainty. Consumer sentiment has declined in the U.S., but as far as the sectors that we target and the customer segments we target, we're not seeing any reduction in economic activity. New business formation continues to be strong and rising. We're very pleased with that particular trend. Just to put in context our business as well, we've been in the U.S. now over two decades. We've been operating our digital platform in the U.S. for almost a decade and a half. You heard on the 22nd of May some characteristics of that market. It is very large, it is fragmented, there's lots of underinsurance, no insurance, as well as people gradually shifting to adopting digital platform as a means for acquiring insurance. Those trends are in our favor.
A decade and a half later, still more than half the customers that buy insurance from us are buying it for the first time. That tells you there's just a literal demand out there that needs to be serviced and we have to go find those customers and make sure that they're aware of the products that we're providing. That's kind of the background context. Economic activity, I mean, the U.S. economy is just dynamic. Yes, all those indicators suggest that maybe there should be a slowdown. We're not seeing it yet. What I might do is just provide a—if you kind of just look back and there's a couple of—there's certainly one imperfect event in the recent past that might give us some indication. That was Covid. During 2022, economic activity did decline quite a lot.
Again, if you think about the segments that we target, we actually saw a spike in new business formation because as people moved away from their corporate, they then set up business for themselves because that is the nature of the economic paradigm in the U.S. There's less of a welfare state. What are you going to do? You come up with a new idea and new businesses set up. Generally, the U.S. economy still seems to be firing and as far as Hiscox is concerned, it continues to be an incredibly attractive market for us. Two areas where we have seen some moderation, and that's—there's two specific classes of business that we write in our U.S. Broker channel. One is architects and engineers, which supports very small construction firms. We saw a bit of a slowdown in the second quarter. Slower starts or suspension of starts.
I think that's beginning to ease. The other one is entertainment, where again, it's a specialist class of business for us. We're one of the market leaders in that small entertainment program segment. This is largely because many of the productions outsource or have activities outside of the U.S., and the tariff noise, shall we say, just created a degree of uncertainty, but it's really isolated to those particular areas. The vast majority is performing very, very well. Ivan?
Thank you very much. It's Ivan Bokhmat from Barclays . My first question would be on the distribution agreements. You mentioned the big distribution sign in the U.K. Maybe you could give a bit more context of what products that could be and in general from those new distribution arrangements across the franchise. How much of an impact did you expect on new business production? Second question is probably for Paul related to the prior year development. Maybe you could help us give a split between what you've released in the first half. Are we seeing any stronger run rate outside of Re & ILS in those books? Maybe the third smaller question. Jo, you've mentioned that some books are still seeing rate increases.
What we've heard from some of your peers across the pond is that we are starting to see the effect of withdrawing capacity in markets like D&O or perhaps cyber, where rates may have been a lot softer before. I don't know if you're seeing that or maybe there's some other specific books where rates have shifted or surprised you.
Okay, thank you, Ivan. As you rightly pointed out, Paul will comment on PYD and Jo will comment on the rating environment. In terms of distribution agreements in retail, think about our distribution engine in at least kind of two parts. In terms of what is driving the rate, the growth acceleration and what will continue to drive the growth acceleration, I say multiple parts. Firstly, there's just the cadence and intensity of the platform. That's our core business policy. By policy, what are we writing? That is improving across the piece. That's improving across the piece. As we launch more products, as we've backed the business with more marketing over the last three years, we have doubled the amount of marketing that we spend. If you go back to, I think, 2021, we were spending about $50 million. We're now at about $100 million.
Interestingly, just going back to an earlier point, and the combined ratio is coming down, you can see some of the scalability that we're beginning to build into the business here. There's just that policy by policy that is improving. Secondly, over the last sort of two to three years after a hiatus, for many reasons, we are on the front foot and have been winning distribution agreements, whether that's positions on panels or distribution partnerships. Many of them are not really mature yet because typically when you win a partnership or a distribution deal, it will take 18 months to two years to begin to mature. Those are only just beginning to have an impact. The core of the business will be just policy by policy. The distribution deals add in, again, a bit of a point or two here and there.
Two of the factors, and Jo spoke about one of them earlier, which is the number of new product launches that we have, that we launched in the first half, that we will be launching and are launching in the next few months, whether it's dentists and vets in the U.K., e-reputation in France, or entering new customer segments such as tech startups and life scientists, all those factors are going to drive increased growth for our business, in our retail business. Paul, over to you for PYD.
Yeah, so reserving and prior year development. Just to talk about reserving. At the half year we have a consistent approach that remains unchanged. Very conservative and that has led to our 18 year track record of positive PYD. If you look at what happened, the actuaries run their usual review. At half year you do some deep dives and the outcome of that is we saw a number of historical catastrophe losses start maturing and run off. Hurricane Ian's a really good example. In 2022 the industry losses were going out in the region of $50 billion- $60 billion. I think the market commentaries that I've seen have really come in that and therefore you've got redundancy versus the initial loss pick that we put up for that. There are other losses in the 2017 to 2022 that are similar from that perspective. Obviously they are property in nature.
The vast majority of that is weighted towards Re & ILS. There's nothing unusual in the other sort of London Market and retail to sort o f report exceptionally around that.
With regards to rates. Yeah, there's a lot of narrative to say cyber and D&O particularly plateaued and it's the bottom of the market. We're not seeing that yet. The rate of decline has definitely slowed, but we are still seeing a slightly negative rate in those areas and obviously we're managing accordingly and we've shrunk our portfolios over the last couple of years. I've read the same narrative that we're at the plateau and obviously we move up from here. In terms of areas that has changed and we are achieving rates, general liability is probably a good example. There is rates, we're putting rate through our own portfolio. I think that has been driven probably by the narrative, the wider narrative in the market around general liability and prior year reserves, et cetera, more generally. Therefore, that's pushing through rates.
We are taking that rate, we're not significantly growing our portfolio, but we're using that rate to actually reduce some exposure. They're two areas. In our reinsurance account, I talked about the aggregate rate at 6% across. What we saw at the mid years was the two ends of that. We had loss affected accounts, so accounts that had been had losses of either Milton or Helene or indeed the Wildfire, they were seeing significant price increase, but then there were clean accounts that were going through at a reduction. What I showed you was the aggregate. We did see a relatively large spread at the sort of mid-y ear renewals.
Just to round out that reserve picture. I talked about reserve releases, but you would have seen in the presentation that the other aspect of it is where is the reserve strength? You'll see that we've got the 75% - 85% range. The 83% confidence level remains unchanged. What's interesting is the reserve margin has had a modest addition as well. We've maintained that real conservative approach.
Sorry, just a follow up on that. U.K. distribution, is it in high net worth individuals or more commercial side of things?
It'd be on the property side of the business.
Okay, thank you.
Ben?
Hi there, I'm Ben Cohen from RBC . Thanks for taking my questions. I wanted to ask about the growth that you talked about in U.S. middle market property. I think that's an area, and I realize it incorporates quite a lot, where some of your peers in the U.S. maybe have been talking about more competition coming into the market. Could you just say how's the distribution set up? How are you differentiating, is it particular cat exposed or whatever there? The second question was just in terms of your discussion of adequacy, just to be clear as to how you define adequacy, is that simply your kind of group ROE target adjusted for volatility and so then that's adequate. Anything adequate plus is materially above that. That was the clarification.
A third one, if I may. Just on Italy, is that going to be material to any degree in the next few years or is that really, even with the acquisition, just really in startup phase? Thank you.
Okay. Of course, in terms of defining adequacy, Jo will provide a bit of a highlight on that, and then in terms of middle market and Italy, we will divide that between us. In terms of Italy, it's going to be immaterial this year, but if you're looking out over the next five years, I expect it to be material. The acquisition that we made is very, very small, but what it does is it gives us a front-end technology. We've brought on board around 30 - 35 colleagues who have deep understanding of the Italian broker market, which is heavily intermediated, and we now have the sort of key ingredients, which is that local knowledge, a bit of technology, the Hiscox brand, and all our know-how, which are some of the key ingredients that we need to now see that business grow.
We're pretty excited about it. It's a blank space for us where there is a very large small commercial business community. In terms of growing our U.S. middle market, it's not something we've traditionally done. There's a very small amount, effectively, of the U.S. middle market property business that comes to Lloyd's, and for the moment, that's what we're accessing. The key to unlocking that for us has been the digitization agenda that Kate Markham, our London Market CEO, has been leading for a number of years. What that has enabled us to do is to access that business for the moment that comes to Lloyd's in a very efficient way, and that has been the prohibitor in the past—can we access what is typically low premium business in a way that's efficient and that meets our return hurdles.
This is one example; there are other examples as well where the technology investment that we've been making over the last three to four years in London Market is now beginning to open up. It's not just increased efficiency, but beginning to open up new opportunities that hitherto we just couldn't do because of cost or because of speed. U.S. middle market is one around efficiency. SME cargo is another one around efficiency and speed. Again, that's business that would traditionally not even come to Lloyd's, and we're creating a brand new opportunity there. That's really linked to technology.
Yeah. From a rate adequacy point of view, you're right. The way that we look at the rate adequacy is we want to deliver a return in a mean loss environment. Various parts of our business will have hurdle rates of what that return looks like. As a proxy, you could look at something like the core. That core of that hurdle rate would then take into account the volatility. Clearly, our retail business is much less volatile. We would run that to a higher core, and our London Market and our reinsurance, obviously, as Paul mentioned, are more capital intensive. Therefore, the combined ratio we would look for would be targeted lower. We then translate that to if it's delivering that return in a mean loss environment, that would be adequate.
If it's delivering an RV more than that in a mean loss environment, it would be adequate plus, and low would be not returning that return in a mean loss environment. It doesn't mean loss making. It just means there would be an insufficient return in terms of the hurdles that we're targeting across the group.
Okay, Will?
Will Hardcastle, UBS . O n the big ticket, y ou've historically used the management of gross to net heavily on the cycle. As that shifts, should we expect a continuation of that historical method? Would you agree that the cost program may delay some of that trend because effectively it will look adequate on a return of capital for longer? The second one's a really quick verification. It's on the 20% uplift on the DPS. To be clear, that's just the final DPS, isn't it? Not the full year. Thank you.
Yeah. In terms of gross to net, that remains a strategy. That is particularly the case for reinsurance and ILS is where we apply that. If you go back over the last five years, as you know, look back at it, the soft market, the gross to net for the business as a whole, for reinsurance and ILS as a whole, was we were retaining about 20%, 25% and ceding out 75%, 80%. That is now more like 50/50. That's a function of many factors, partly because capital leaves the market and opens up opportunity. As that opportunity opens up, as you saw from the PML charts earlier, we've deployed our own capital and that strategy has actually worked remarkably well.
When the market softens—we're not there yet, we're off peak rates—I wouldn't call it a soft market, but if that cycle continues, then naturally one of the ways that we, the strategy of the business is that, you know, we want to maintain our position with our customers, with our clients. As the profile that just that Jo laid out, as it moves down to adequate or maybe less than adequate, then we want to bring in other capital that we reduce out our average cost of capital and allow us to maintain that position. That will be unaffected by the Accelerated Change Program. I think the two, see those two things as separate. Darius, you want to have another go?
Just two follow ups. The first one is, Joanne, it sounds like you don't take into account the interest rate environment when you think about the rate adequacy. Is that correct? How do you capture the economic value of what you write if that's not at your level when you're choosing what business to put in the portfolio? The second question is, are you able to tell us what the risk adjustment release was in the first half? When I think about the PYD, how much of that is risk release, which is a bit more mechanical, and how much is the best estimate? Thank you.
Okay, Paul, if you have a go at the second one, let me just close off the first one. We do take interest rates, the investment environment, into account. What we're talking about is what can the underwriters control? What can't they? They don't control interest rates. We take that out of their equation. The analysis that Jo looks at and the hurdle rates are very much focused on underwriting. At the aggregate level, of course, we take in investment returns and therefore the overall value proposition that we're delivering for our business and for shareholders and for customers takes that into account. It's a strict policy within our business. We don't include it for the underwriters in our business.
In terms of the mix of, say, best estimate and risk adjustment, we've not broken it out, but the majority of it was just best estimate you've seen. If you look at the margin, you actually see that it's up +12 overall. We've actually strengthened the margin in total.
Good morning. It's Chris Hartwell from Autonomous. Just a couple of quick ones. First of all, in the release, there's quite a lot of commentary or comments around, I guess, brand campaigns and advertising. I was wondering if you could just sort of how should we think about marketing spend going forward and how that fits in with the sort of general comments within the plan on unattributable costs. Second one as well, there's a comment on wildfire experience today. Just wondering if you could just give a little bit more color on what you're seeing in terms of, I guess, speed and quantum of payout. Thank you.
Okay. In terms of wildfire experience, in terms of speed and quantum payout. Jo. In terms of brand, sorry, advertising and marketing spending in general. Chris, I guess as I just mentioned a moment or two ago, we're believers in this. We have over decades built what we believe is a distinctive brand in the insurance sector, in the specialist insurance sector. We have increased our marketing expenditure over the last three years from roughly around $50 million back in 2021 to around $100 million, over $100 million now, so roughly doubled it. That's all being absorbed within the combined ratio, which has also been coming down at the same time. Indeed, the expense ratio has been moderating at the same time as well. You can see the scalability we're building in the business. The whole marketing, advertising, or the marketing is split into essentially two: acquisition and brand.
Brand is the one that's been increasing materially. Acquisition has been as well, but brand has been a material increase and it's been a key driver for us of being able to maintain cost of acquisition. Just to go into a little bit of detail, particularly for our digital platforms, we have to bid for terms, general insurance terms, as people go and search online for insurance. If people go online and search not for business insurance, but search for Hiscox, the cost for us is significantly lower. Therefore, what the brand investment does is create that awareness, and we can measure that in a number of ways. For instance, in the U.K., our awareness has doubled over the last couple of years. In the U.S., in our targeted sectors, it has materially increased.
We compete with the biggest insurance companies there, but in our sectors we're very, very well known, so that helps reduce the cost of acquiring customers. Actually, the holy grail in this is they don't even search for Hiscox, they just go to the Hiscox portal, in which case it costs us nothing to acquire the customer. In terms of marketing spend, that's the methodology we use. There are a range of metrics that we then apply, such as customer lifetime value and various other metrics that tell us whether the spend is effective, and we manage that in a very close way. We regard this as being a core part of our strategy and it's enabled us to keep our cost per acquisition broadly flat over a number of years. We should expect to see that number continue to increase as the business continues to grow.
It'll be probably a little bit more in line with the growth of the business as opposed to the doubling that you saw over the last three years.
As Paul mentioned, our wildfire loss has trended favorably, which is not a surprise. We are quite a prudent reserver when it comes to looking at our exposure on events. That has come down in terms of speed of payments. For us, it was predominantly a reinsurance event. We said that we reserved $170 million and $150 million of that was in our reinsurance segment. The nature of the payment for us was actually very quick. When we reported our results at the full year in March, I think we'd already said then we had paid well over 60% and obviously that has sped up significantly since then, just given the nature of loss for us.
Okay, let's make this the last one then. Ivan?
Thank you very much. Just wanted to follow up on the new ILS capital that you've raised. You've seen a bit of volatility regarding the AUMs. Just wondering if you could help us understand going forward the fees and the economic commercial terms that you've raised this new capital. Is it very different to what was before? Should we expect sort of similar profitability?
Thank you, Ivan. Paul?
Yeah. The way that the fees break down in general, this is for quota share partners and ILS. You've got really a fixed component dependent on volume and then a performance component depending on clear underwriting profitability. The new capital that we've put up or signed up both from existing and new partners, the terms are broadly consistent. There's no material change in that. It's really about the blend for the full year and how the economics lie is how do you deliver your fixed. It's pretty steady overall, and then the variable overall is the profitability. Last year we had a 69% combined. Let's see where we get through win season and see how that impacts the PC component of the ILS fees and quota share partners.
Thank you very much. I think we can now bring this to a close, guys. Thank you very much. I guess just to kind of summarize, this has been a period for Hiscox of full creativity and progress, attractive growth, strong capital generation, immediate return to shareholders. As I said, we're looking forward to the second half of the year and beyond. Thank you very much, everyone. Cheers.