Hiscox Ltd

Good morning, everyone, and thank you for joining us today as we present our interim results. I'm pleased to report growth in revenues and profits in every business. With our focus on quality of growth and earnings, we've maintained our commitment to disciplined underwriting and delivered an insurance service result of $221 million. That's an increase of 58%. And this combined with much improved investment income means we've achieved a near tenfold increase in our pre-tax profits. Now in a big ticket segment, against a backdrop of favourable market conditions, our focus has been on effective cycle management. And in this phase of the cycle, we've increased our capital allocation to these segments. And in turn, London Market and Rhian ILS have achieved strong growth in premiums and profits. And in retail, we're growing in every market and achieving sustained profitability in line with our operating framework. The group financial foundations remain robust with continued strong capital generation and a resilient balance sheet. And I'm pleased to announce an interim dividend of 12.5 cents per share, an increase of 4.2%. Now, the first six months of this year have been a clear demonstration of the strength of our business model and strategy. And this is a graphic that you're all quite familiar with now. The left-hand side of this represents our big ticket segments. Here, effective cycle management, disciplined underwriting, long-standing and deep broker relations, and agility are critical. For instance, in London market, we're experiencing favourable market conditions, but not everywhere. and we've been able to take our foot off the gas from the casualty portfolio, which has been a key source of growth over the last few years, and put the foot firmly down on the gas to drive material growth in our property and energy portfolios, which offer the highest risk-adjusted returns at this point in the cycle. In re and ILS, our capital strategy has enabled us to materially grow our net retained premiums and exposure, at a time when third-party capital capacity remains constrained. If I flip over to the other side, this represents our retail business, the red part of the diagram. And here we continue to see substantial long-term structural growth opportunities and our strategies to grow into these large and fragmented markets through the cycle, using the power of our brand, our technology, our long-standing relationships, all underpinned by excellence in underwriting. So the Hiscox portfolio of businesses allows us to operate in a number of different parts of the specialist insurance sector. allocating capital to those areas of expertise that offer the highest risk-adjusted returns. And that's enabled us to grow revenues and profits in every market at a group annualised return on equity of 20%. Now moving on to retail. Here we've grown revenues and profits in every business, as our investments in talent, technology and developing partnerships pay off. Now, looking at each of the geographies in turn, in the US, well, it's been a tale of two halves. I'm really pleased with the performance of our US DPD business. Here we've seen growth accelerating in line with our expectations as we continue to embed the business onto the new technology platforms. In contrast, in our US broker channel, we are experiencing a reduction in the top line as we maintain discipline in the face of intense pricing competition, in particular on cyber. In the UK, we're seeing growing momentum, with revenues increasing to 4% in constant currency, up from 1.2% at the end of the first quarter. Albeit the headline growth rate continues to be tempered by our decision to exit some non-performing underwriting partnerships. We're also seeing really good momentum in our UK E-Trade platform, which we launched at the start of this year. We now have over 200 brokers and 2,000 users live on the platform with new products being designed for launch in 2024. And in Europe, once again, we're seeing excellent momentum with revenues up 11% and each of the countries in growth mode. So when looking at the retail growth, headline growth overall at 5.5%, this is slightly short of our earlier expectations of trending towards the middle of our 5% to 15% range by the end of the year. Now, as you can see, we're delivering excellent growth in Europe, accelerating momentum in US TPD and growing momentum in our UK business. However, our underwriting decisions in the US regarding cyber and in the UK regarding non-performing underwriting partnerships are tempering that headline growth rate. So as we look forward to the rest of the year, these underwriting decisions will continue to have a moderating impact on the growth. As a result, our full year expectation is to be in line with the half year. Now, adjusting for these actions, the underlying growth is 7.3%. That's in line with our expectations. And it's these and other similar underwriting decisions that ensure that the quality of growth that we're driving is profitable. Moving on to USDPD. Now, as a reminder, our digital partnerships and direct business essentially comprises two large pillars, our direct-to-consumer business and our digital partnerships business. Now, you'll recall our direct-to-consumer business has been live on the new platform for a year now, and we've seen really encouraging improvement in operating metrics, with conversion rates up and also the number of products per customer rising as well relative to the old platform. That, combined with the uplift in marketing expenditure in the first half of this year, has really accelerated the growth in our direct-to-consumer business. In fact, our new business generation is over 30% up year over year. Now, digital partnerships business, if you remember, we started to migrate that onto the new platform towards the end of 2020 or in the latter half of 2022. And as expected, growth slowed down in Q1, but it is now beginning to recover into the second quarter. Now, to accelerate technology adoption and also new business generation, we have implemented a number of tailored engagement programs for our established partners, as well as some temporary financial incentives. You'll also remember that after a two-year hiatus, we added 17 partners at the start of this year. Now they're beginning to start to produce revenues, and that will build up over time. And we also have a healthy pipeline of potential new additions. So the combination of strong growth in our direct-to-consumer business, combined with a recovery in our digital partnerships business, means we expect our U.S. DPD business to continue to trend towards the middle of the 5% to 15% range as the year progresses. Staying on the topic of DPD, our ambitions in the U.S. are to become America's leading small business insurer. to be the destination brand for our customers' insurance needs by building out an SME insurance marketplace. And we took a big step forward earlier this year with the launch of a workers' comp product in partnership with a highly reputable multi-line US insurer. As our micro and small business customers build out their businesses and acquire employees, their insurance needs grow to include workers' comp, which is compulsory in most US states, but it's not a product that we manufacture. So this partnership means we can service the growing needs of our existing customers and also makes us more relevant in the market. Now, if you take a look at this chart here behind me, the pie chart on the left-hand side, this sets out the total US small commercial premiums by product. Now, the red segment is where we have reached today with our existing products of GLPL, Cyber and BOP. Now, as you can see, with the addition of workers' comp to our shop front, our reach extends by a further third. So in short, this partnership increases our reach, our relevance in the market, and introduces a new capital light revenue stream in the form of commissions we receive for selling our partner's product. Now we're in the soft launch phase at the moment. We launched this product about six weeks ago with our partner. The early results of the last six weeks have been very promising, ahead of our expectations, and we expect to be in a full integrated launch over the next six months. Now, moving on to our big-ticket segments, beginning with London Market. Our London Market business has had an excellent first six months, driving double-digit growth, top line, all at an undiscounted combined ratio of 83.7%. We continue to see favourable market conditions, in particular in the property segment, and as a result, we've increased revenues in our major property line by 75%, in our household binder book by 68%. We also see the Marine Energy and Specialty Division as a significant growth opportunity, and revenues here have increased in aggregate by 38%. Now, as we reported earlier, market conditions in the casualty business, in particular DNO and cyber, have become more challenging. Now, in line with the wider market, Generating new cyber growth has become more challenging following the Lloyd's mandated war exclusion. And in DNO, we're continuing to experience rate decline. This year, we've seen rate declines of about 10 or 11%. That's on top of the 10 to 15% we saw last year. Now, our DNO portfolio continues to remain attractively priced. You'll recall that in the preceding sort of four or five years, we saw over 200% rate increase. So it's still rate adequate and attractively priced, but it's not an area where we want to continue growing exposure. So we've taken our foot off the gas. So what you can clearly see in our London market business is the combination of proactive underwriting combining with improving market conditions, which have enabled our business to deliver an excellent result. Moving on to Re and ILS. Here again, we've delivered strong net growth of 18%, driven by North American CAT, Marine and Retro. We've been leaning into the hard market. We've allocated more capital. We've increased exposures. And at the same time, we've improved the quality of the portfolio by raising attachment points and decreasing our participation on aggregate programs. So here, once again, you can see the combination of active underwriting, improving market conditions, delivering an excellent result or an undiscounted combined ratio of 81.2%. And of course, as usual, you'll hear much more from Paul and Joe on the finer points of our financial performance and the contribution of active underwriting into our results. Now as we also reported in the first quarter, investment appetite from third-party capital providers remains constrained. And in the first half, we've seen $219 million of net outflows from our ILS funds. I expect that trend to continue into the second half and most likely into 2024 as well. Now, in contrast, we've added quota share capacity. So we've introduced new partners, both at 1.1 and at the mid-year renewals, demonstrating our ability to access different sources of capital. And finally, I'd like to leave you with some examples of initiatives that are underway right across the group to ensure we can deliver, on a sustainable basis, high-quality growth in revenues and earnings. Now, beginning with people, you'll remember from our earlier report that in 2023, we're experiencing the highest colleague engagement we've seen for a long time, for 10 years. So we continue to develop and nurture our talent whilst also bringing in some excellent external hires. You also know that we appointed a new chairman in May of this year, Jonathan Bloomer, who joined us. I'm delighted to say he brings a wealth of experience and a real passion for building business. We're also bringing in Fabrice Brossard, who's going to join us, the new Group Chief Risk Officer, and I look forward to working with both of them to deliver on our strategy. Innovation is part of the DNA of Hiscox. It's deep-rooted within our culture. And you remember from, again, from our earlier update, we launched an ESG sub-syndicate in London market. That is now fully live and we've begun writing risks. So far, those risks include a US solar farm and a European wind farm. There's been a lot of interest in the market and we expect good momentum over time. You just heard from me a couple of minutes ago that we're building out an SME insurance marketplace in the US to increase our reach, our relevance and our revenues. Alongside this, we also continue to innovate and manufacture products to meet the evolving needs of our customers. One example of that is in Germany, where we've launched a whistleblowing assistance programme in response to new legislation affecting our customers. Technology is a key ingredient of our business strategy. And over the years, we've been implementing technology platforms in our retail business to support significant customer growth and deliver scale efficiencies over time. And technology is also an increasing part of our risk selection and underwriting processes in our big ticket businesses, ensuring our underwriters can be the best they can possibly be. And finally, we're reinvigorating our brand. We're kicking off with a new brand campaign in the autumn of this year, starting in the UK. This is the first new brand campaign since 2018. This will be followed by a global rollout in 2024. There's quite a degree of excitement within the business, and I encourage you all to watch out for the new Hiscox brand campaign from the end of September onwards. So thank you very much. I'll now hand you over to Paul to take you through our financial results, followed by Joe to provide insights and underwriting. And then I'll be back to wrap up and make final remarks on the outlook for 2023.

Thank you, Aki, and good morning, everyone. It's great to be here with you today presenting our first set of results under IFRS 17. It's been a very strong first half and, as Aki already mentioned, a very exciting time for us all, as a business has seen the most favourable market conditions in over a decade. So what does this mean for Hiscox? The group grew revenues, insurance service result and profits across all three segments. Group Net Insurance Contract Written Premiums, or Net ICWP in short, which is a net growth measure under IFRS 17, increased by 11.4% in constant currency to just under 2 billion, supported by a positive rate environment across all business segments and benefiting from our reshaped portfolio as we grew exposure into the hard market in reinsurance. I'm particularly pleased with the underwriting result, which saw us deliver an excellent insurance service result of £221 million, up over £80 million, or 58% from last year. It's also good to see the return of a positive net investment result of £122 million and I expect more to come as the bond reinvestment yield has improved further to 5.6% as at the end of June. Remember, the unrealised portion of the bond return is now offset by the discounting of our claims liabilities and you will have seen I've posted a short webcast on our website to provide you with a detailed explanation of this to help you in your modelling. Finally, the Board has recommended an interim dividend of 12.5 cents, representing an annual increase of 4.2%, in line with our progressive dividend policy. I will now take you through a more detailed view of each of our three segments, starting with Hiscox Retail. Retail Insurance Contract Written Premium, or ICWP in short, the gross growth measure under IFRS 17 is up 5.5% in constant currency, underpinned by strong double-digit growth in Europe, improving momentum in the UK and acceleration in US DPD. As Aki touched on earlier, active and disciplined underwriting decisions has meant that the growth rate is tempered versus expectation. And there are two reasons for this. We've seen increased competition and a decline in prices in cyber across the retail portfolio, notably in the US. And in order to grow sustainably, we therefore maintained pricing discipline and did not write business where pricing was below our technical floor. And we've also continued to exit some non-core underwriting partnerships in the UK, as flagged in our Q1 trading update. This is part of our normal course correction where we were not satisfied that some partnerships were performing in line with our expectations. And the impact of these will continue in the second half. Excluding these actions, underlying retail growth is 7.3% in constant currency, in line with our expectations. Turning to profitability, Hiscox Retail delivered a 50% improvement in the insurance service result year on year and a strong combined ratio of 93.8% on an undiscounted basis, a 0.6 percentage point improvement on the prior period. The permanent definitional benefit from reclassification of some expenses to non-attributable, combined with the negative impact of moving to an own share presentation, broadly results in a small net benefit, which we've reflected in the restated range of 89% to 94% on an undiscounted basis. Pleasingly, for the first half, we are within this range and a more detailed explanation of the new range is in the appendices to the new presentation. And while we no longer report results under IFRS 4, I can also say that the combined ratio achieved is within the 90 to 95% range. Let me turn to London market. Hiscox London Market had a very strong first half, increasing ICWP by 10.6%. Net ICWP grew by 14.2% on prior year, ahead of top line as we've retained more risk in attractive underwriting conditions. And I expect this positive momentum to continue through the rest of the year. The success of our disciplined underwriting strategy that Aki outlined earlier can be seen in the consistency of our strong insurance service result of 75.5 million, with an undiscounted combined ratio of 83.7%. The undiscounted combined ratio is a 4.2 percentage point improvement on the prior period, and I'm delighted that it marks the fourth consecutive year in the 80% range. Moving to our next segment. Hiscox Re and ILS saw net ICWP grow by 17.9% in the first half to $345 million. The group has allocated incremental organic capital to the Hiscox Re and ILS business, resulting in meaningful exposure growth, mainly in US and Caribbean windstorm and earthquake, in the best-rated reinsurance market in a decade, materially increasing expected profits in a normal lost year. ILS assets under management at 1.7 billion at 30 June 23 and the funds are performing at inception to date highs as a result of rate improvements, heightened interest earnings and modest loss activity in the first half of the year. We continue to see net outflows from our ILS fund and while we expect this trend to continue, our ILS offering remains well positioned to support any new incoming demand. I'm very pleased with the insurance service result of 32.7 million delivered in an active first half loss environment. And remember, this is somewhat lower under IFRS 17 compared to IFRS 4 due to seasonality of earned premiums, which will earn through during the second half of the year in line with the risk profile of the business. REE and ILS delivered a combined ratio on an undiscounted basis of 81.2%, benefiting from better than expected loss experience despite a relatively active first half, reflective of disciplined underwriting providing a better shield against attritional losses. This is an excellent result, especially when considering the impact of seasonality. Moving on to our investment performance. After a strong first quarter, our investment portfolio made modest gains in the second quarter, delivering a positive investment result for the half year of 121.8 million, a stark contrast to H1 2022, which saw a loss of 214.1 million. So a much better result with the rate of return also back up at 1.7%. I'm very happy with this outcome given this continuing macroeconomic uncertainties that persist. Rising coupon and cash returns combined with gains from equity exposure were sufficient to offset mark to market losses on the bond portfolio caused by rising yields. Our corporate bond return was positive, given only limited movement in credit spreads over the first six months of 2023. And our portfolio remains conservatively positioned with no defaults in the first half. We maintain modest exposure to selected risk assets with no direct exposure to commercial real estate. And we expect the investment result to continue being a tailwind for the remainder of 2023 as bond reinvestment yields reached 5.6% at the end of June. Now let's take a look at our balance sheet where reserve resilience continues. The group remains conservatively reserved with a confidence level of 77% within our stated target range of 75 to 85 and broadly similar to our year end position of 78%, highlighting the continued prudence within our reserves. And as you can see on the slide, our risk adjustment of 211 million sits on top of our already conservative best estimate of 3.6 billion, which includes Enids under IFRS 17, meaning in total we are holding 3.8 billion of undiscounted reserves, demonstrating our continued commitment to maintaining a robust reserve position. We continue to benefit from the protection of the LPTs in place. At half year 2023, LPTs provide protection of 25% for 19 and prior gross reserves. LPT recoveries form part of the best estimate you can see on the slide. And as a reminder, my IFRS 17 webcast provides a more detailed explanation of how LPTs impact certain lines in the financial statements to help you with your modeling. On the next slide, you can see how our prudence translates into favourable prior period runoff. And as you can see in the first half of the year, our bottom line benefited from reserve releases of 62 million. You can see from the slide that our 2023 release is broadly in line with 2022, which we've restated under IFRS 17, demonstrating the consistency of our reserve releases on a like for like basis. Inflation assumptions in pricing and reserving models remain strong and above our loss experience. And we continue to mitigate inflationary pressures through a combination of exposure, indexation and rate increases. Now let's look at our capital. Hiscox remains strongly capitalized from both a regulatory and ratings agency perspective. The Hiscox Group Bermuda Solvency Capital Requirement or BSCR ratio is estimated at the 30th of June, 2023 to be 199% in line with the full year result of 2022. And as you can see, capital generation exceeded capital consumption, despite the group growing NatCat exposure leaning into the hard market. We remain comfortably above the S&PA rating threshold and significantly above the regulatory capital ratio requirement. Even post a severe loss scenario, our solvency position remains consistent with the S&PA rating. As you might recall from our IFRS 17 restatements, our leverage number is lower than under the old basis due to the uplift in shareholder equity on transition to IFRS 17, and that the half year is coming in at 18.9%. In line with our strategic goals, we continue to maintain a well-funded and liquid balance sheet. I'll now hand over to Joe, who will take you through the underwriting performance of the group.

And good morning, everybody. So you've heard how we've grown each one of our segments was delivering an insurance service results of 221 million. And I'm delighted with the underwriting, you know, testament to a lot of hard work by so many across our organization. In our London market business, we are growing as we lean in to the hardening market in many of our lines. We're growing 15.7% in constant currency, slightly ahead on a net basis, slightly ahead of growth whilst delivering those attractive returns. In our reinsurance division, we've got excellent net growth of 20% in constant currency as we lean into that hard market, deploying more of our capital. And in retail, growth momentum continues 5.5% growth, 7.5% on a net basis as we deal with the embedding of our technology and account for some headwinds in cyber, but delivering within our target combined operating ratio range. The next slide shows the power of our portfolio, where we continue to benefit from balance. This gives us the opportunity to grow, but not the necessity to grow, which is essential for really good cycle management. The first observation I'd make is we have six out of our seven segments in growth mode, that compared to five out of seven at the year end, where we were shrinking London market property and specialty. Now, London market property, you've heard from me before, We did not believe that that was price adequate and we've been taking aggregate off the table for a few years. That is now reversed as we lean into a hard market and you can see we're growing that line. As Aki mentioned, our casualty portfolio is actually been at the peak of a hard market. It's been significantly re-rated over the last five years, but now we're starting to see softening, and here underwriting discipline is key. Then our retail segments of commercial and art and private client are less cyclical, and here we're looking for growth between five and 15 percent depending on the market conditions. So what are those market conditions? Well, from an external point of view, they remain pretty complex. Geopolitical tensions and other risks like the inflation and recession paradox and energy security are shaping the environment. And from a sector-specific viewpoint, heightened inflation persists. Whilst headline inflation may have peaked, we're still seeing inflationary pressures through our view of risk for things like climate, societal supply chain, as well as some legal pressures on wording and coverage. And it's these same external market conditions that are continuing the rate momentum. A familiar slide to all, you will see that our rates are up yet again across all of our segments, up 9% in London markets, 34% in RE and ILS, and this is on top of the sizable rate increases that we've achieved since 2008. On the right hand of the chart are our retail segments, where we and our customers look for more consistency of pricing through the cycle. However, inflation has necessitated rate increases, and you can see in aggregate, we're up 6%. So in summary, I'd say the market is attractive, but actually remains somewhat complex. And so therefore, proactive underwriting, effective cycle management, and investing in the long term is key. Proactive underwriting is so much more than taking rates. In addition to managing our portfolio, we've invested over the last few years in terms of risk selection, exposure management, through to capital claims and our reinsurance strategy. And we're able to quantify some of the differences that these changes have made. So as an example, the first half of this year has been pretty active from a catastrophe point of view. In the US alone, there's been 42 events with an industry loss of around 33 billion. But we have actively managed our portfolio to reduce our exposure to secondary perils. So in our reinsurance division, we've pretty much exited the traditional aggregate product and we've moved up our attachment points to a minimum of a one in ten year. And those two proactive actions have avoided significant loss in the first half. More broadly, in our London market business, there's been a significant number of large risk losses this year. Some we've been on and some we've not. For some that we haven't been on, sometimes it is just luck, but other times discipline. Maybe we were not on it because of the rate adequacy. And then for those that we have been on, our effective line size management has played dividend. It's not just the risk selection where we look to proactively take a position. As an example, RMS has released a major model change to the North Atlantic hurricane, increasing frequency and severity. Our own Hiscox view of risk had already accounted for a significant amount of this uplift. So again, our proactive position has meant that that impact more moderated. And then if we look across the rest of our business, sometimes taking a proactive view can mean you're countercyclical. And cyber is a good example. So we, like others in the industry, have seen a frequency reduction in cyber following the conflict in Russia-Ukraine. Now, we believe that to be temporary and not structural. And therefore, we came into this year looking for rate momentum in our cyber line. However, others have taken a different view and we've seen rate rating pressure. And when you become counter cyclical, you've got a couple of options. You can follow the market or you can maintain discipline. And we've we've we've done the latter. So proactive underwriting leads you to what you want to write at what price. But clearly we operate in a market and we can't always do what we want to do. And so therefore, that's where effective cycle management is key, particularly in our big ticket businesses. I showed earlier the headline rate growth across London market and in aggregate, it's positive. But if we look at that by segment, property, casualty and specialty, you can see we've got different parts of our portfolio in different parts of the cycle. So property rates are up 33%. We believe this is an attractive part of the cycle. We want to grow. And you will see that in terms of our deployment of capital. And you can see in the appendix, our box and whisker, where we're taking additional NAPCAT. Why? Because we believe we're getting paid for it. Casualties, as I mentioned, is actually in a softening part of the cycle. However, we have a very well-rated and very well-managed portfolio of over the last five years. And here, we want to maintain our portfolio. But if rates do go below rate adequacy, then we will shrink. Knowing where you are in the cycle is key, but actually being able to manage the cycle is essential. A few other things that we've done over the last few years, as well as take rate and tighten our terms and conditions, is enabled us to take more underwriting control. How? By leading more risk and also delegating our underwriting less, and also building out a digital and agile capability so we can make changes quickly. Moving on to retail. So retail is much less cyclical. And here we look for structural growth through the cycle by investing in our propositions and also technology, brand and capability. So starting with the customer, we strive to bring out products and propositions that our customers value and reward us with their loyalty. All of that underpinned by an outstanding claims service. With our new technology, we've rolled out modular products, so we're able to service all of our clients' needs in a single policy. In our UK digital business, we sell on average 2.5 products per customer. In Europe, that's 1.5, and in the US, 1.2, but growing as our technology embeds. Creating lifetime value, customer retention is key, and we've got impressive customer retention across all of our retail business. and underpinned by an award-winning claim service where our net promoter score following a claim is market leading. Next, investment in knowledge, whether that's our own continuous learning or utilizing the external world. We continue to invest in our underwriters, things like the Faculty of Underwriting, which I've talked about before, but also we've launched a new underwriting academy in the UK where we've accelerated time to competence of our underwriters by about 40 percent. Utilizing the external landscape and data, we bring in external databases to help us understand more about our customers and the risk without having to ask needless questions. And then lastly, utilizing the external intelligence to do things like what are the professions of the future? We have a portfolio of emerging professions we need to keep up to date with the professions of the future so that we can pull out our propositions to best reflect that. And then lastly, our technology investments through driving value through operational leverage and also seamless distribution and risk mitigation. So from an underwriting point of view, operational leverage is driven through automated underwriting. And as an example, in our U.S. digital and partnership business, 95% of our business goes through without needing to go through an underwriter. Seamless distribution through APIs is obviously great from a distribution point of view, but also good from an underwriting point of view, because we can maintain control of the underwriting and the pricing in one place. And then lastly, building customer resilience. So we're utilizing technology to help our customers become more resilient to claim. So a good example would be in our UK, we've rolled out 10,000 leak bot devices to our customer's property, helping them become more resilient to escape of water claims. So in summary, our strategy of creating a profit generation through effective cycle management and creating value through investing for the long term in retail is back on the front foot. I believe that all three of our segments are well positioned to capture the opportunities ahead. And I'll now hand back to Aki.