Hiscox (LON:HSX) reported robust financial performance in the first half of the year, with a significant addition of $90 million to its top-line, driven largely by its retail business. The earnings call revealed a profit before tax of $284 million and a strong return on equity of 16.5%. The company has demonstrated disciplined capital management and a commitment to profitable growth, with a focus on technology and efficiency improvements.
The retail and big ticket markets have seen growth, and the London market has yielded excellent results. The company also reported solid growth in the US DPD and Europe, while the US broker business faced challenges. A strong solvency position and a progressive dividend policy underscore the company's financial health.
Key Takeaways
- Profit before tax reached $284 million, with a return on equity of 16.5%.
- Top-line growth of $90 million, with $77 million contributed by the retail business.
- Strong capital generation and completion of over 85% of share buyback.
- Interim dividend increased by 5.6% to 13.2 cents per share.
- Retail segment grew by 5% in constant currency terms.
- London market segment decreased by 2.8% due to non-renewed deals.
- RE & ILS segment saw a net ICWP growth of 10.5%.
- Investment return for the first half was $152.4 million.
- Strong solvency position with an estimated BSCR of 206%.
Company Outlook
- The company plans disciplined profitable growth by expanding its portfolio and offerings.
- Growth momentum is expected to build gradually in the second half of the year.
- Moderate growth anticipated in the London market's property division.
- The company is well-capitalized and prepared for events like the Atlantic hurricane season.
- A focus on high-quality growth and earnings using a diversified business portfolio.
Bearish Highlights
- The London market segment saw a decrease due to non-renewed deals and reduced premiums.
- The US broker business has faced challenging market conditions.
Bullish Highlights
- The retail business and big ticket markets have shown strong performance.
- Lloyd's Syndicate delivered market beating results.
- The company has attracted $300 million of new money into the RE & ILS fund.
Misses
- IFRS 17 discounting of claims liabilities resulted in a net impact of $26 million.
- The company's conservative reserving philosophy maintained a confidence level of 82%, indicating potential over-reserving.
Q&A Highlights
- Discussions on retail growth, tech innovations, partnerships, reserve and loss picks, and market conditions.
- Confidence expressed in meeting targets, with a strong US economy and the importance of insurance for businesses.
- Insights into IFRS 17 guidance and improvements in forecasts.
- The company's risk appetite in the reinsurance book remains unchanged, despite changes in third-party capital mix.
- The company intends to deploy capital for growth and consider additional cash distributions.
- Cyber rates stability and the impact of the recent global IT outage on margins and growth opportunities were discussed.
Hiscox has shown resilience and strategic focus in its operations. It is positioned to capitalize on market opportunities and continue its trajectory of profitable growth. The company's leadership has conveyed confidence in their strategy and the underlying strength of the business model, which is reflected in their financial results and outlook.
InvestingPro Insights
The company's financial health is further illuminated by key metrics and insights from InvestingPro. With a market capitalization of $5.13 billion and a P/E ratio of 7.19, the company is trading at a low earnings multiple, which suggests that its stock could be undervalued relative to its earnings potential. This is supported by the adjusted P/E ratio for the last twelve months as of Q2 2024, which stands at an even lower 7.03.
InvestingPro Tips indicate that the management's strategy of aggressive share buybacks aligns with the disciplined capital management highlighted in the article. Additionally, the company's commitment to returning value to shareholders is evident through its progressive dividend policy, having raised its dividend for 4 consecutive years.
Revenue growth also remains robust with a 15.73% increase over the last twelve months as of Q2 2024, signaling strong operational performance. However, it's important to note that despite this growth, the company has weak gross profit margins of 23.34%, which could be an area for improvement.
InvestingPro offers more tips on the company, which can provide further insights into its financial and operational status. For those interested in a deeper analysis, there are additional 6 InvestingPro Tips available at https://www.investing.com/pro/HCXLF.
These data points and tips offer a more nuanced view of the company's financial health and strategic direction, complementing the article's discussion of its performance and outlook.
Full transcript - Hiscox Ltd (HCXLF) Q2 2024:
Aki Hussain: Good morning, everyone. Thank you for joining us. Now, what you’ll hear today is that we are continuing to build positive momentum across the Group. In the first six months of this year, we’ve added $90 million to the top-line, of which $77 million has come from our retail business while maintaining high quality growth and we have delivered a strong insurance result in a more active claims environment. And the key to this is the high quality of pricing, reservation and cycle management on which you’ll hear more from Joe in a moment or two. And this has been combined with a lower expense ratio and Paul will elaborate on this in a moment. And we’ve delivered a strong and increased profit before tax of $284 million at attractive return on equity of 16.5% and I'm pleased to announce a5.6% increase to our interim dividend. Now what you can see here, a whole three themes that resonates and that are familiar to you from when I spoke about on capital allocation for philosophy in March. So as a reminder, first and foremost, we prioritize the proactive deployment of capital in the pursuit of profitable growth. So we're investing actively to capture the long-term structural growth opportunity in retail and at the same time, we are selectively deploying capital into attractive market conditions in big ticket. So by way an example, you can see on the top left that our property net premiums have increased by 40% over the last couple of years. Secondly, we maintain resilience and balance sheet flexibility. Our reserves are prudent and robust and our capital generation has been strong. And finally, we remain focused on balance sheet efficiency as demonstrated by a total capital return to shareholders, which has liked over 150% year-over-year including the share buyback. Now let's turn to our business performance and as usual. I’ll begin with retail. In our retail business, we're actively investing to achieve high quality growth and I'm pleased with the gradual improvement in momentum and the robust profitability demonstrated by our combined ratio. Now taking a look at each of the businesses in turn, in the UK, we're seeing a step up in growth rate albeit the headline rate is moderated by some one-time premium we booked in second quarter of 2023. The underlying performance of around 6% growth is a fairer reflection of the business performance in the first half and of the momentum we expect to see in a second. In Europe, we continue to post solid top-line growth. And in US DPD the momentum we were building and have been building during 2023 has continued into this year with our direct business once again putting solid double-digit growth. Now overall US DPD growth has moderated in the second quarter and that's been largely due to some variable performance in our digital partnerships as a couple of our most established partners, our production from a couple of our established partners has slowed in the second quarter. Now we're actively working with those partners to build momentum in the second half. And in our US broker business, revenues decreased by 4.8%, as a couple of our special signs continue to face challenging market conditions and we maintained our underwriting discipline. I expect this growth gap to narrow as the year progresses and as those market conditions ease. And the overall momentum we are achieving in our retail business is the result of many initiatives we’ve implemented over the last few years. And you can see sample of this openly on this slide. This is by no means a comprehensive list and indeed many of these are already in play and having a positive impact on our business performance. And I’d just pull out a few. Across UK and Europe, we are now winning distribution deals at a fast pace than we’ve done for many years. Now the deals that we have won of the last 12 months on full activation are estimated to deliver in excess of $40 million of incremental new premium in 2025. Our investment in brand will continue to compound. Many of you will have experienced our award-winning brand campaign in the UK, which we launched in launched last year in September. That's been incredibly successful, not only has it won awards, it’s increased our brand awareness, our spontaneous brand awareness is up almost 40% and it's driving increased flow into our UK platform. And finally, we continue to innovate in product, in building out our underwriting specialist expertise and in the use of new generation technology and I'll come back to this last point in a moment. In London market, our colleagues have delivered an excellent result achieving a combined ratio of 86.9% in a more active claims environment. And a key underpin to this is our disciplined approach. We are growing where we want to where we see attractive market opportunities and we are managing the cycle or the microcycles across the London market, portfolio. We regard the Property segment as continue to be attractive and expect this to grow in the second half of the year. In D&O and Cyber, we continue to manage the cycle as rates continue to fall. And in marine, energy and specialty we regard the power and renewable segments as providing the potential for structural growth and we're well positioned given our investment in engineering and underwriting expertise. We are well-positioned to lead more business in this space our colleagues have delivered a fantastic result growing the network by over 10% at a combined ratio of 77%. We've deployed additional capital into attractive property and retro markets and the portfolio is well positioned to deliver strong returns in a mean growth environment. Now as you know, in Re & ILS we have an established third-party capital management strategy it’s been in place for well over a decade comprising co-shared partners, ILS Funds, more recently a cat bond fund and side cars. In the first half of this year, we've attracted $300 million of new money into the fund. Now this will go a long way towards offsetting the planned returns of capital in this year. Now, the third-party capital management strategy not only gives us scale in our reinsurance business, it's also a key source of fee-based income, which this year has increased from $28 million to $44 million and as you can see is a key contributor to our overall reinsurance profits. Now I want to spend just a moment longer on our overall big ticket performance. Now our flagship Lloyd’s Syndicate, Hiscox Syndicate 33 is the longest continuously operating Lloyd’s Syndicate still trading today. It's over 120 years old. And it’s into syndicate that we write all of our London market business and almost half of our reinsurance business. What you can see plotted here is the performance of all the large Lloyd’s Syndicates those writing over a billion pounds of premium per annum over the last three years. And what’s plotted here is the profitability and the volatility of that profit and the quadrant on the top right represents those are the most profitable, and the least volatile. And as you can see the Hiscox Syndicate in the conformity within that quadrant. This is enabled as a result of our dynamic capital allocation framework, our deep underwriting expertise and our disciplined approach. This has enabled our colleagues to deliver market beating results over the last three years. Now as you know, the sector that we're in is inherently volatile. So this is relative volatility. We are remaining absolutely focused we are taking this. We're not we're not being complacent at all. We're absolutely focused on managing that volatility and maintaining our disciplined approach. And then finally on technology. Technology is an increasingly important underpin to creating and maintaining competitive advantage. And as a specialist insurer, we believe to fully realize our potential, we have to maintain a competitive advantage in at least these four areas. Firstly, the ease and speed of doing business. Secondly, the deep customer understanding, third the quality of pricing with selection and cycle management capabilities, and finally the ability to grow our business to scale our business efficiently. Now all of these are enabled and helped by technology. And we at Hiscox have been investing for many years to build market-leading capabilities in auto underwriting and in digital connectivity allowing our customers and intermediaries to place their business with us quickly and efficiently. Our many years of operating as a specialist insurer and collecting data enables us to develop a deep understanding of our customers and their risk management needs. That data that we've collected is now being superpowered to the use of latest data analytics platforms , which further improves our capabilities to price and select risk and indeed to develop more products. Of course, there's a long way to go in this, in this area of using data. And finally, we are just at the early stages of using latest generation technology or AI to augment and improve our processes. There is very initiatives and innovations across the Hiscox group and one of which you heard about when we spoke in May, which has been the Google (NASDAQ:GOOGL) cloud collaboration with London market, which if you remember we had established or built a proof-of-concept which reduced the time from submission, to quote from up to three days for the sabotage and terrorism line to EMEA three minutes. Well since then, the teams have been looking diligently, taking that proof-of-concept to build a production model. And I'm pleased to say we went live as of late yesterday evening and have now begin to actively quote business through this new enhanced AI augmented platform. So very pleased and congratulations to our London market team. We see this innovations and doing at least two things. Firstly, increasing productivity while secondly creating new opportunities for growth, I look forward to updating you over the coming months and years. As these innovations take hold. So with that, I hand over to Paul to take you through a more detailed financial analysis of our performance and then you'll hear from Joe who will provide an update on underwriting and then I shall be back to make final remarks on outlook.
Paul Cooper: Great. Thanks Aki, and good morning, everyone. It's great to be here with you today presenting another good set of results. The Group grew insurance contract written premium by 3.3%, driven by a sustained growth in retail and in big ticket property by deploying additional capital into continuing attractive market conditions. Our focus remains on profitable growth and underwriting discipline and the Group delivered a strong insurance service result of $241 million at a 90.4 combined undiscounted in a more active loss environment. The Group is benefiting from its diversified business model, with strong and consistent profit contribution from each of our business units. Also pleasing is the continued improvement in the expense ratio, which reduced by more than two percentage points year-on-year. This is partially driven by our disciplined cost control and expense management, partially mix and partially due to timing. We continue to focus on cost management, including tight headcount control, realizing savings from procurement and vendor management and driving economies of scale in the business. The insurance service result was supported by the investment result of $152 million which was driven by higher bond yields earning through. Together, these underpin a strong profit before tax of $283.5 million, which results in a return on equity of 16.5%. Capital generation has continued to be strong over the first half of the year. We have made good progress with our share buyback with over 85% completed at the period end. Given the strong performance in the first half, the Board has approved an interim dividend of 13.2 cents per share, an increase of 5.6% from last year. Delving into these results a little further, starting with our retail segment. Retail ICWP increased by 5% in constant currency with growth within the target range and contributing $77 million of the $90 million Group ICWP growth in the first six months of the year. We continue to see strong momentum in Europe and US DPD and a pleasing step up in the underlying UK growth. The UK headline growth reflects some non-recurring premium recognized in June 2023. US broker continues to contract with the rate of decrease slowing in Q2 versus Q1. The retail undiscounted combined ratio is 93.8, which is pleasing given our continued investment in marketing to seize the structural growth opportunities. Moving on to London market. ICWP decreased by 2.8% in London market. This is driven by three factors. The decision to non-renew certain large binder deals, our proactive management of the underwriting cycle in casualty lines and a reduction in space premiums as there were fewer risks in the market and we took a decision to reduce line size due to heightened recent loss activity. Despite a more active loss environment, our London market business delivered an excellent insurance service result of $74.2 million and an undiscounted combined ratio of 86.9, the fourth consecutive half year in the 80s range. Turning to RE & ILS. We deployed additional capital early to capture the attractive market conditions with net ICWP growing by 10.5%. ICWP was up 3.9% as growth from additional quota share capacity and our own capital deployed were offset by a reduction in ILS capital. The market remains disciplined at mid-year renewals with attachment points in terms and conditions broadly holding firm while rates on some business has decreased slightly, these were from generationally high levels and the market remains attractive. This is demonstrated by a strong undiscounted combined ratio of 77.3% for the first half, together with an excellent insurance service result of $43.5 million. As a result of gross capital inflows from new and existing investors of $300 million into our side car and ILS funds AUM was $1.7 billion at the 30th of June and following a planned return of capital to investors on the 1st of July, AUM reduced to $1.4 billion. Looking at investments. The Investment return is $152.4 million or 1.9% for the first six months of the year. Coupon income and cash returned increased by nearly 50% year-on-year. The reinvestment yield has risen to 5.2% with the book yield increasing to 4.8% from 4.3% at year-end as we continue to reinvest the portfolio. We have also extended duration to 1.9 years to lock in higher yields for longer. The strong investment results should continue to provide a tailwind in the second half of the year. Moving on to the highlight of today's presentation. IFRS 17 discounting of claims liabilities. For the first six months of 2024, the net discounting impact was $26 million. As you can see, the IFFI unwind is $79 million. This is at the higher end of our previous guidance issued in March. We are continuously refining our IFRS 17 forecasting processes and as a result, we are slightly updating our full year 2024 guidance range to $135 million to $165 million. We have updated the sensitivity to interest rate changes to reflect market conditions and the balance sheet as at the 30th of June. Looking at reserves. Our conservative reserving philosophy remains unchanged with a confidence level of 82% within our 75% to 85% range. The risk adjustment is $262 million. In addition, our OPTs cover over 42% of gross casualty reserves for 2019 and prior and provide protection from inflation and other pressures. Turning to reserve releases. Reserve releases is $51 million for the first six months of the year continue the positive release trend. Our long track record of positive reserve releases demonstrates our prudent reserve philosophy. And finally an update on capital. The balance sheet remains strong with an estimated BSCR of 206%, following the deployment of additional capital into property, payment of the final dividend for 2023 and completion of over 85% of the buyback at the reporting date. And as you can see, capital generation remains strong in the attractive market conditions. This is a strong solvency position. I will now hand over to Joe who will provide you with an update on underwriting performance and priorities.
Joanne Musselle: Thank you, Paul and good morning, everybody. As you've heard, we've grown and delivered a solid underwriting performance, combination of the composition of our portfolio, the actions we've taken and market conditions. We continue to benefit from a portfolio both balance and choice, enabling us to lead in a favorable way to the attractive markets in our in our reinsurance & ILS market and also executing in parallel, the structural opportunity we have in retail. If you look at this chart, this is a chart of our segments and what we go through is from a small and retail commercial we've grown back 6% and we can continue that year-on-year compound growth. Art and private client is at 7% and that's a combination of both rates and exposure. Both of those portfolios are adding net new customer growth and we have now well over 1.5 million customers globally across retail. In reinsurance, we're continuing to execute on the most favorable market in over a decade and we're growing our top line 3% and our net over 10%. London market property is also favorable and we'll look for growth in the second half as we continue to deploy our Aggregates. In our London market specialty lines, we’re growing terror, kidnapper ransom and personal accidents and by executing discipline in product recall as react to some wider market conditions and claims activity. Marine and energy, favorable competitive, but we do see a growth opportunity in our power renewables and we're investing in our lead underwriting capability. And in global casualty we'll have to spend in many years building a well-rated and well-managed portfolio we're now exercising discipline, as some of those segments start to soften. So overall, I'm really pleased with our portfolio management and the underwriting performance it’s delivering. Moving on to rates. So the rating environment remains positive. London market rates are up an additional 4% and the attractive reinsurance property rates are holding. As a reminder, earlier rate rise in the segments offset deal of risk. But more laterally has improved the margin, which is evident in the results. Retail is up a further 3% and most generally a less cyclical portfolio, rates has been necessary over the last few years as we dealt with a heightened inflationary and environments. You may recall we priced for a robust view of inflation with claim assumptions in multiples of the historic past and what we can see is was claims inflations - actual claim inflation is a lagging indicator, we're starting to see the emergency that came off through our portfolio at a slightly lower rates than those assumptions. And this is an example on the right hand side of some example portfolios across our Group. Claiming flotation as moderated, the claims activity has actually been pretty busy and the landscape in the first half has been busier than this time last year. We are managing and paying claims is exactly what we're here for. Some of this will have been headline news others not. But our proactive management of all is really vital to the customers that we protect. We have exposure to the Baltimore Bridge disaster and we've reserved $28 million net based on the $2 billion industry loss. The first half has seen significant natural catastrophe activity with sources for an insured loss above $60 billion and higher than the 10 year average. We ourselves have claims from the Dubai floods, the severe German weather and hurricane, Beryl and we've also been dealing with a number of risk losses through our specialty portfolios. So whilst it's been a pretty busy, six months it is not without - it is within expectation. And there's nothing on this page that we don't contemplate when we underwrite our portfolio. And our job is to understand risk, the exposures they represent and price for them starting with the decades of data that we have. We answered this the latest digital and technology capability to augment this experience. In our big ticket businesses, we dynamically allocate capital through the cycle depending on the market conditions. In retail, the vast majority of our portfolio is automatically underwritten, which enables to us to put through prices or product changes at scale and remain nimble. And then technical excellence, this is our build out of processes and frameworks to enable us to take a forward-looking view of risk. And all of this underpinned by people in our technical excellence with experience through the cycle and across the whole value chain from reselection to claims management. And it's a combination of all of these that is responsible for our underwriting performance, So what you have here is the last 10 years that I disclosed combined operating ratio for the Group as a whole but also our reporting segments and maybe I'll make a few observations. So the first is, we operate in a volatile sector and we don't always get it right. The second is the composition of the Group over this last 10 year period has delivered a combined operating ratio of 93% excluding COVID and 94.6% including COVID despite many of those years been a recognized off market. The second thing that maybe I'd say is the volatility of the different segments, ourreinsurance being the most volatile and our retail business being the least volatile. The next observation is the power of the portfolio how that volatility is moderated at a Group level in which the opportunity to deliver returns through the cycle. And then, maybe lastly, the last observation is the most recent past where we've had both an improving and a consistent performance moderating of volatility of our results, which has been our ambition. So, that's what we've done. But we're about the future? Well, this slide is probably where I have been just spending the majority of my time over the next 12 months. Firstly, on emerging trends. We can't predict the future, but stay in half a step ahead is vital reacting to those emerging trends in the future landscape from both a risk and an opportunity point of view. Building out the future of underwriting, so that's continuing our investments in technical excellence and also our Underwriting Academy, which is our training program for underwriters. And then, lastly disciplined profitable growth. It’s about doing two things. It's about growing in a disciplined way the portfolio that we've already built but also delivering new saying yes to more customers will already seeking solutions from us and building out our products and our propositions for the future. I'll now hand back to Aki.
Aki Hussain: Thank you Joe. Through the strength of our diversified portfolio ,we remain well-positioned to deliver high quality earnings through the rest of the year and beyond. In retail, the last couple of years have been about laying the foundations for the long-term. Now looking out to the rest of this year, growth momentum will continue to build gradually into the second half of the year as management initiatives take effect although this momentum is not expected to be linear. I expect London market to return to moderate growth in the second half led by the property division. And in RE and IL&S we have now written over three quarters of the business for the year and I expect the strong net growth that you’ve seen in the first half to continue to exceed ICWP for the rest of the year. Now going into the Atlantic hurricane season. The Group is well-capitalized with a high quality portfolio, well, underwritten at attractive rates. And so to wrap up, we remain focused on achieving high-quality growth and earnings using the strength of our diversified business portfolio. As ever, thank you very much for listening and we'll now open the floor to questions.
Operator:
A - Aki Hussain: So we will begin with Evan.
Unidentified Analyst: Hi, thank you, very much for the presentation. I think my first question would be related to growth in retail and maybe if you could first comment a little bit more on what you mean by non-linear acceleration? And secondly, I mean clearly linked to the ramp up in the marketing spend, I'm just wondering what's the relationship there? Do you need to spend a lot more to get to the higher end of the of the 5% to 15% range? Are there any other reasons that stops you from getting there, especially as rates might moderate with inflation moderating because right now you've been growing at fixed rates contributed half to that if I'm not wrong? And maybe secondly, just also related to retail, you've mentioned the tech innovation. Are you seeing your peers coming up with new products, new solutions that make your existing platform make it more difficult for you to compete.
Aki Hussain: Thank you for those questions, Evan. So, in terms of non-linear simply that growth is non-metronomic. In terms of marketing, we - as you can see, we have substantially increased our marketing this year again for the first half we spent $15 million which is up over 30%, compared to same time last year. Now the last majority of this increase is on brand marketing. Brand marketing doesn’t have a one-for-one relationship immediately with growth. This is part of laying the foundations for the long term. As you know, over the last preceding few years, which really cut back and it’s time to reinvigorate the brand in all of our territories. We have seen a step up in momentum compared to, say the period pre-2022 I'd expect that momentum to continue to build slowly over time. And we're very pleased with the recognition that we're getting for the brand investment in the UK. We will continue to compound this investment we think that we've been able to do that while whilst delivering a robust profit outcome for the retail business with a robust combined ratio. In terms of Tech Innovations, we've - if you think about our business and how we've executed our strategy over many years, there have been certainly over the last decade or so of two constant pillars, one is the investment in underwriting and underwriting capability and secondly the investment in technology to ease the use of sort of ease how people customers intermediaries can do business with Hiscox. So we're trying to do two things here through the use of technology. Make it really easy for customers to place business with us, but also to further augment our underwriting pricing and resurrection. Those are the kind of key drivers, as well as being able to build scale efficiently. I would say, in tech innovation in many, many places we have been ahead of the market and continue to be ahead of the market. In terms of our ability to auto underwrite that's been at the heart of our - the success of our retail business which we've been able to give customers a fantastic experience of being able to respond to their submissions and their request for quotes in seconds as opposed to hours and days. The innovation that London market has been meeting again is ahead of this. This is the first lead algorithm that we underwritten platform in the London market. So we're very pleased with that.
Unidentified Analyst: I think a follow-up on the 5% to 15%, would you expect to be within that range this year and next, sorry on the 5% to 15% range?
Aki Hussain: I expect to be within the 5% to 15% range for this year.
Unidentified Analyst: Upper or lower end or no comments?
Aki Hussain: Within 5% to 15%.
Faizan Lakhani: Hi, this is Faizan Lakhani from HSBC (LON:HSBA). Thanks for the detailed presentation. You mentioned in your comments that you've seen slow down in some of your key partners and you're investigating that. Can you give sort of an early indication of what potentially drove that? And if that's more sort of transitory or do you think any more structural there? And second on the new partnerships, qualitatively, can you provide some sort of indication on what the economics are relative to your key partners? And effectively, what does that mean for your acquisition cost ratio going forward? Thank you.
Aki Hussain: Again, thank you for those questions. The slowdown in the digital partners segment essentially is transitory, we believe. These are the same partners that do the double digit growth for us in the first quarter. So I think as I've mentioned in the past for some of our most established and large partners they can be very, very large corporations with the corporate set and what we present to them is a very healthy and almost risk free income if they get effectively a commission clip on the business that we are underwriting. From time-to-time, that continues the market focus and we believe that’s what’s happened in the second quarter. We are actively engaged with those partners and frankly just wanted to partners to develop joint marketing campaigns for the rest of this year and I would expect that momentum to begin to come through. But it will be gradual over the year. In terms of economics for new partners, as we mentioned the same as existing partners is a clip that they get on the way in as we write business. And that effective commission rate is broadly the same for our partners. And just keep going along, Anthony
Anthony Yang: Thank you. It’s Anthony from Goldman Sachs (NYSE:GS). Actually, my first question coming to the large ticket business. How should we think about the undiscounted combined ratio from here given your micro cycle or disciplined growth there? And then secondly, just on the under reserve can you update any – can you give us an update on any - update on the loss peaks including, say the casualty lines? Thank you.
Aki Hussain: Okay. So in terms of reserves and loss picks, I think somewhere between Paul and Joe they will cover that that question. And in terms of big ticket undiscounted combined ratio, as you can appreciate, I'm not going to give you forecast on that. We believe the market conditions in both London market and reinsurance continue to be attractive. The way I describe our reinsurance business is that 2023 was the best market in over a decade, 2024 is the second best market in over a decade. And conditions continue to positive as we look out from here. London market again, I would describe overall as being in a good place, right? London market, due to the nature of the business is just more complex. They are more diverse. There's more diversity in the lines that we write. And there are pockets that are continuing to harden. So the Property segment continues to see rate increases and we're positive about that. D&O and Cyber is a continuation of the trends that we’ve seen over the last few years. I think from its peak D&O for us, we've seen the rates fall by almost 30%, Cyber? I think around 20%. So these are still risk adequate given the fairly large Price increases we saw prior to that it’s just not a time for us to grow in those segments. It's time to take the floor off the gas. And the remaining divisions again, we remain positive on. So, it's a overall positive market. Loss takes clicks on casualty.
Joanne Musselle: Yeah, so maybe, I will start. I mean, from a reserving point of view, I mean you've seen the results. There's nothing new to report. We've obviously gone through our reserve and exercise and we've had another year of positive reserve releases continue in our - I think I'm broken record of reserve releases. And then also, above that we're holding at the 80 percentile in terms of our risk margin, I think more broadly in casualty, as you as you know, we whilst not immune to those sorts of social inflation trends that you are seeing more broadly, the majority of our portfolio is not as effective. We don't really see that trend in UK and Europe. The US portfolio is very much focused on that SME, that micro segments. And so we don't really see that trend in the same way, where we have seen the higher inflation is in our London market casualty and of course that's most – cap you just been referring to which is being significantly re-rated over that period. And so, from your analyzing point of view pretty pleased where we are in terms of the loss picks and I think maybe just the last thing to say just in terms of casualty reserves as we've also entered into if you will recall a number of loss portfolio transfers predominantly, they were in casualty lines of business and so we have significant protection for 2019 and prior for that whole casualty inflation.
Aki Hussain: So little bit dark in here. I think that's Will over there.
William Hardcastle: Good spot. Will Hardcastle, UBS. Just following up on the US DPD, just what is actively working with the partnerships mean exactly that's my naivety. And how much of this is in your control? So sort of driving growth versus its dependent on what they're focusing on at any given time. And just linked with that this week's been a bit violent from a market perspective. US macro growth, potential slow down. I guess how comfortable are we with the targets in that context? Second question just about, sorry. Is the ratio in your FPV investment result it's changed on a 100 BPS is this because you've increased the duration on the asset side? Or is it something else and what was the mistake or something's changed clearly in that new guidance for this year? What was that related to? Thanks.
Aki Hussain: Okay. Thank you. Thanks for those questions Will. Paul is delighted to receive the question I presenting.
Paul Cooper: Thank you, Will. On the - on US DPD, I mean, simply speaking we're working with the partners we have developed. Some joined marketing activity, which is we’ll be going by right imminently in a few days and weeks. And we expect that to begin to rebuild the momentum. That’s it in essence what it means. And then in terms of how much control? But this is like any business, business it's about account management. And we are - we continue to work with our partners. The value that we bring to them is being able to provide a better and more comprehensive service to customers that come to there to that portals and the opportunity to create a high return on equity income stream. So it's in their interest to work with this and we also deliver fantastic service. And so, one of the very, very few companies that can provide pretty much instantaneous quotes for what is complicated insurance for small businesses. So that we have joint interests in their goal congruence for that to that to occur. In terms of you’re the other question is about the US. I guess the recently cited sort of macro concerns. I don't think you'd expect me and I am not going to stand here and say, no matter what happens I think it’s going to be good. We are not immune to the economic volatility. But there's two three things I would say, firstly, new business formation in the US remains particularly strong. Over the last 12 months right up until the end of June this year it’s increased by a further 4.5%. So we now have around $33.5 million businesses to target in the US. The US economy has been remarkably dynamic, particularly the SME segment and I would apply the same description actually for UK and Europe, as well. This segment tends to remain robust and when faced with challenge and we saw that during the course of ‘20 and ’21, many businesses pivot. Because they tend to be the main breadwinners in the home. This is not a - this is their business and you don’t give at that lightly. And finally the product that we provide is not a luxury product. It’s almost a prerequisite to undertaking business. So people don't give up insurance easily. So what's not immune? We feel good about the business. Paul?
Paul Cooper: Yeah, to your IFRS 17 question, Will, so, I mean, as a reminder, it's only 18 months old. So, it's still a relatively young standard and you can see sort of the middle bar was where we came in sort of from the top of the range of our forecasts. So in essence, the main reason we put this slide up is just to help you guys model out sort of expectations for the various components of what is a complicated calculation. So IFFI unwind it's dependent upon rate, dependent upon the opening reserves and it's also dependent upon payout patterns. And quite simply, what we've been doing is, improving our forecasts over the time. So in essence the previous guidance that we put out was 120 to 1550 given where we came out we’ve refined our forecast as we will continue to improve this process and hopefully that standard will mature and firmly bed in across the whole sector. But we've moved it from 120 to 150 and up to 135 to 165.
Aki Hussain: Andreas.
Andreas van Embden: Thank you. I just had a few questions on the reinsurance business. I can see your changing the mix of third-party capital. So you are doing more quota share and obviously you're paying back your third-party capital to investors. Is that changing the risk appetite within your reinsurance book? I.e. does that change the mix between what you are underwrite in cat and non-cat reinsurance? And the second question is, you commissions and fees are quite attractive coming through that ILS third-party capital structure. Moving to more towards quota share are the seeding commissions you get on the quota share book equivalent to the fees you are getting on the ILS capital? Or is it going to be a mix shift and in that fee income structure. Thank you.
Aki Hussain: Okay. Thank you Andreas. I guess, in short, there is no change in risk appetite as a result of the changing mix in third-party capital. So there's no change there. Our a main focus has been for many years. Property and retro and it continues to be property and retro with some additions. In terms of fee income, the fee income that we received from ILS funds oriented quota share partners, the exact quantum or basis points is different. The structure is very similar. And there is not a significant difference between what we would receive regardless with this quota share or ILS for equivalent performance. Nick.
Nicholas Johnson: Thanks. Good morning Nick Johnson from Deutsche Numis. Couple of questions. Firstly, on marketing investments, so the $50 million spent against $77 million of premium growth in the first half. I mean our face value that doesn't seem like a great return on investments. How do you think about the lifetime value of growth from marketing investments? Is there a magic ratio so how much you spend versus lifetime value expect to achieve? And secondly on London market, you mentioned second half this year we should see some further growth in London market from property. I think that's right. Do you see that growth continuing into 2025? Or is 2024 likely to be the peak for the top line on London market? Thanks.
Aki Hussain: Okay. Thank you, Nick. I guess, in terms of marketing, the $50 million to $77 million is not an appropriate way to think about it. The $50 million is made up of what we call acquisition marketing, where there is frankly a one-to-one relationship and what we're driving is immediate growth. And for brand that's about laying the foundations for a much longer term strategy about reinvigorating the brand, creating that brand awareness, which over time actually makes the acquisition costs more efficient. The most significant increase in expenditure actually last year and this year in particular has been in brand spend rather than what we call acquisition marketing. So the relationship is a little bit different. But in terms of lifetime value, that's exactly how we think about it. The with the retail business one of the significant benefits driven by our specialist nature and frankly the service that we provide is that retention rates tend to be pretty high, which means if once customers join us, they stay with us for quite some time. And therefore, from a lifetime value perspective, which is a key measure for us we are very satisfied with the money that we are spending and the investment return that we are achieving. In terms of London market property, rates continue to hold up well. We are very pleased and I expect the business to grow in the second half of the year. As far as what will happen in 2025, I think we’ll give you a much better update later on this year. To help you can ask Paul when we do the Q3 update. Tryf.
Tryfonas Spyrou: Well, thank Tryfonas Spyrou from Berenberg. I just want to come back to the sort of partnerships retail. And the PK that’s obviously, the comments you made some of your partners obviously getting with sweetened terms and you talk about you together driving marketing, so you won’t obviously drive more growth. So it doesn’t fit like they are not doing their part of sort of driving that. So I guess, my question really is what are the semi structural difference which is on the products they are selling on your behalf versus what you are doing on the direct side, because clearly there is a discrepancy between the two growth rates. So the second question is on, I guess you touch on the London market growth trends for next year. I was wondering you have any sort of early comments on whether you can literally expand the capacity on the Syndicated fee clearly showed us the profitability question there are a landmark market growth plans for next year. I was wondering you have any. Any sort of early comments on whether you can do to expand the capacity on this indicator 33 clearly showed us the probability being quite strong. And appreciate capacity stop capacity has been flooded the number of years so any thoughts around you potentially going that next year. And then, last question maybe one for Paul. How much limit or headroom do you have still available on the LPT? And how has your US liability reserve position touched that moved during the first half. Thank you.
Aki Hussain: Okay. Great, thank you. Thanks for those questions, Tryf and Paul, you will cover the question on LPT.
Paul Cooper: In terms of products, that there is no difference in the products that we sell direct to customers or through the partnership channels the same products. In terms of London market growth and Syndicate 33 capacity, we have a headroom in the capacity currently. And we will see how the year – how the rest of the year unfolds and how will the market outlooks looks like for 2025. I think the key thing is, I would use there from is that the capital position remains very strong. We will deploy capital, where we see attractive opportunities and if needed, we will increase the capacity. Yeah, and then on LPTs, it is relatively net. If you have a look across all of the contracts that we've got in place in aggregate, lots available. And then, as sort of Joe referenced earlier, when we touched on the earlier comment, nothing significant around US reserving. You can see that from the combination of where we end up with the confidence level similar to last year, year end and reserve release it still remain strong coming out.
Aki Hussain: Okay, we’ll move in the room, Abid.
Abid Hussain: Hi, good morning all. It’s Abid Hussain from Panmure Gordon. Thanks for taking my questions. I’ve got two questions. The first one is on capital. You just reference the capital position is very strong. It does from the outside feel like it's very strong. Just wondering if you have a sort of target range that you like to operate to and how quickly you might want to get down to that target range and whether that’s through deploying for growth or perhaps through additional cash distributions. So that's the first question. The second one is slightly less question is on cyber rates and the outlook there. Just wondering post cramp strike outage, if there is any stabilization in rates or if margins are looking sort of attractive enough for you to pursue that as an avenue of growth going forward? Great. Thank you Abid. So Paul will kill the capital question and Joe will address the cyber rates question.
Paul Cooper: Yeah, so capital as we said remains strong. You can see on the chart we very pleased with the 206% BSCR position. We don't have a range. So, we’ve being operating in and around the 200%, but we don't have a target. What we have been very clear on and particularly around last year end, if you can cast your mind back around our capital management policy, so very much deployed a capital for growth and you've seen that we've done that last year and this year. That's not only to drive the retail business, but also to deploy into attractive market conditions. So from a reinsurance perspective, we've grown that net business double-digit. Last year it was strong similarly. We maintain a strong balance sheet. You can see the strength of that, we've got the scenario up on the chart around, the stress around it. It is a pretty extreme scenario continue to pay a progressive dividend, I am pleased around the 5.6% increase and then consider any surface to return. So we are in a pretty much mostly through the buyback that we announced to turn year end.
Joanne Musselle: And then from a further point of views so, yeah, I think the global IT outage in July was at the time you remind that this type of risk shows no sort of geographical or indeed industry The Seas respond to non malicious events in our own retail core policies. Don't respond to non malicious events. As an example, I think the other thing that was quite interesting. Was you know the geographical it came on the time basis a time update. As a you know Asia pack was most affected and then into Europe and then obviously it was largely done and dusted by the time the US woke up. Again from up for our point of view we have very little in Asia PAC and the majority of our businesses written in the US and obviously and in Europe and I think there were other things about that event which was quite interesting one was obviously it was contained really quickly. Those Microsofts and not see what growth come up pretty quickly. So most people who are affected we're up and running on actually, so maybe one day outage and again, within the market and our own policies, there's waiting periods. So from our own point of view, we might anticipate a bit of activity, but our London market business is written high access. So significance of waiting periods before it will be affected, but that was your quite question about price. I think it probably just two things. I think it absolutely drives the need for cyber. I think consumers, customers, businesses will be looking at that thinking how reliant they are on technology. And so I think the propensity of people to buy will increase. This event I mean the sorts of cyber cube so one of the main vendors here coming out with us with an industry loss of. 3.4 and what 1.3 so, whilst not a significant events in terms of some of the RDS. So yeah, that has to scores before it can either drive a people being more cautious because they've seen this test into this aggregation or they may say, we'll actually it tested it and actually it's not going to be a significant market industry loss. And so therefore that might fuel. So I think it's difficult to tell, but I think it definitely will drive propensity of people to buy this product because it really highlighted the risks.
Aki Hussain: Okay, Kamran.
Kamran Hossain: Hey, so it's Kamran Hossain from JP Morgan. Just wanted to touch back on the partnerships again. Just intrigued about the partnership concentration risk that you really have. So I think you've got I mean it's very difficult for the so I just see whether this is a small handful of partners that have maybe a disproportionate effects on volumes in Q2 or not, so just interested in that. The second question, I'm just kind of thinking longer term about DPD. You are referencing it was 33.5 million potential customers. I know you probably not going to give us your market share, but you think that's gone up or down in the last five years as the market kind of what direction it went. And that's gone all the number would be amazing. And the third question is, just coming back to the slide that Joe put up which basically showed you've got a really diverse mix of business. You've just gotten RE & IL you've got London market you've got retail. But you stick it all together you can come up with a very smooth result at what point will you move to a single combined ratio guidance for the Group? Thanks.
Aki Hussain: Thank you for those questions Kamran. In terms of partners, we have at last count over 150 partners. I think the way to think about it is a typical sort of distribution. There will be sort of 20% account for – these aren’t the specific figures but 20% account, 20% of the income. So the distribution is no different from that. But we are actually quite happy with actually, I would say with the last few years the diversification within the partnership propensity increased. If you go back a few years, it was perhaps more concentrated. But we've added more and more partners. A few of those have become quite established and large with us. So I'm – we are pleased with that. In terms of market share, I guess, the short answer is I can't give you a stat, but I will tell you it's gone up because our growth if you compare to others and we have a period five, six years ago, our growth rate has been faster than the market growth. And then, in terms of a single combined ratio, not yet. Darius and then we'll go to Freya.
Darius Satkauskas: Hi, Darius. KBW Two questions please. In your BSCR waterfall, you show that the dividends and the buyback were not covered by the net capital generation in the first half. Is this because you execute most of the buyback in should we expect the repatriation to be fully covered by the year end? Or some of the buybacks should we expect it to come from the excess. So first question. Second question, I think you showed that as a percentage of reserves, your reserve releases have been coming down from 1.8% to 1.3% over the past two years. At the same time, your confidence level did not increase, it actually slightly came down from last year. I would have thought that the hardware insurance market would have allowed you to increase the overall buffers. So what is driving this when the reserve releases were actually coming down? Thank you.
Aki Hussain: Thank you, Darius I think that both of those questions are for Paul.
Paul Cooper: Yes, so, I mean you've got to think and this slide is really about the first half. So what you've rightly highlighted is the share buyback 85% of it is in the first half of the year. So we're still got the second half to go capital generation, we still expect to be strong all things equal we get through the wind season to be strong in the second half of the year. The interesting thing on the chart is if you look at the sort of capital consumed, because this is very driven by property cat. And the - both in reinsurance and in the primary basis, a lot of that is weighted towards the first half of the year. So more than 75% of the reinsurance business has been written as at the sort of 30th of June. So capital consumption for the second half, we expect to be relatively modest. Capital generation to be strong and therefore the overall capital generation overall will more than offset both the buyback and the dividend. That's sort of the first aspect. And then I think from the second component around sort of reserves, confidence level, I think it's a combination of different aspects. So, you're not going to just look at the sort of the rates and the hard market. You've got to look at the underlying composition of the reserves and sales the proportion of cat versus non-cat will play a part, but and then I’ll come back to the same part we conduct every quarter a comprehensive reserving review with our actuaries. We are at the top of that range 80% is pretty consistent. And you just reflective and you think about the hard market conditions. Just as a reminder, if you go back to the half year last year, we were at the 77% and that was the first time when we published it. So there has been a meaningful increase in terms of the overall confidence level. And Joe mentioned, that the earlier questioning the track record of reserve releases goes back to 20 years or more. So we're very comfortable around the reserving position.
Freya Kong: Hi, thanks for taking my questions. Freya Kong from Bank of America (NYSE:BAC). Just back to the retail momentum pick up you expect in H2, does this factor in your plans to work with these larger partnerships, which has fallen short in Q2 or is this reliant on the pipeline of partnerships that you have already planned to come online? And I guess a follow up to this is, how hard do you have to work each period to bring on new partners in order to sustain growth? And the second question is more on the market outlook. Given that inflation seems to be tracking below expectations for yourselves and probably for peers. Do you expect this could put downward pressure on pricing over the coming months? And on pricing adequacy, it seems like your comments on seems to match peers, that is quite satisfactory in most lines. Any comments you can share on the competitive dynamics you're seeing across the different lines of business. Or are you going to expect the plateau in rates or the peak in the cycle? Thanks.
Aki Hussain: Okay. So, I'll address the question on momentum pick up on retail. I think Joe will provide a perspective on pricing adequacy across our portfolios. In terms of momentum, a pick up in the second half of the year as I mentioned, we expect it to be gradual I expect it to be non-linear. And I expect it to be broad based across our retail business, not specifically or entirely driven by DPD. We are working, as I mentioned with our partners on improving momentum in the second half of the year. I would say that this is not, become a switch pawns are in play. They'll be implemented and then momentum will build over time. We have as far as adding partners to our portfolio, we are very pleased, as if we have over 150 partners, and we have actually a pretty healthy pipeline of prospects both sort of large medium and small opportunities that we're looking at. And frankly this is just part of the business proposition that we provide. We are not dependent hugely on those to maintain growth rates They are welcome addition and have definitely made an impact on our business performance in the first half of the year, but they are not the key drivers of short-term growth.
Joanne Musselle: Yeah, and then maybe in terms of rate efficacy we want to pick up the rate in slide. I think this brings it to live. I think from - when we look at our portfolio, the vast majority of our portfolio is in a really attractive market. What you can see on this slide is, those markets have been repricing for many, many, many years and driven by a combination of lots of different factors. So, unlike other sorts of cycles that are maybe be driven by a single catastrophe losses and that reassurance that then go flows into insurance. What we’ve seen here is, you investing interest rate environment which meant underwriting profit is being essential, soft markets and there been losses. So people are driving up their prices. We see a political instability. There's been so many different factors and obviously more recently a high inflation environment that is driven up these prices. I think the most important thing that you can't see on the chart is actually this is just relative up or down. The most important thing is how adequate is that is that portfolio? It's fine to take off five points of a portfolio that has 20% in addition to rate adequacy. Clearly it's different if it was just rate adequate and so therefore you would reduce the margin. So, I'd say from my point of view, most of our markets are in very attractive parts of the cycle. Rates are adequate and you can see that. It's evident in our results, the results that were posted. Of course there is always going to be part of the portfolio that is stronger than others and we talked about some of those of microcycles. But that's where we exercise our discipline. And we've done that before. We'll do that again. If we believe that the market is not pricing appropriately, that is when we will reduce and obviously you can see we've done that in some segments that are on the soften end. But yeah, overall the market remains pretty attractive.
Aki Hussain: Okay. I think we have addressed all the questions. Okay so, thank you very much for listening and thank you very much for your questions. And just to reiterate we are very pleased with the performance of our business. We're going where we want to by delivering robust profitability across the Group. The last couple of years have been about laying the foundations in our retail business. And we're beginning to see that momentum build in the first half and that will continue into the second half. So, thank you very much.
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