Lancashire Holdings Limited

Hello and welcome to the Lancashire Holdings Limited H1 2023 earnings call. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question and answer session. Please note this call is being recorded. Today I'm pleased to present Alex Maloney, Group CEO, Natalie Kershaw, Group CFO and Paul Gregory, Group CEO. I will now hand over to Alex Maloney. Please begin your meeting.

Okay, thank you, operator. Good morning, everyone. I will just give some brief highlights of our half-year results, then go to Paul for some underwriting, and then Natalie will cover the financials, and then we'll go to Q&A. So as I reflect on the progress our business has made during the first half of the year, I'm pleased to report that we continue to grow our business in line with our long-term strategy at the right time in the underwriting cycle. We continue to see the best underwriting conditions in a decade, for most classes of business we underwrite. Therefore, it's important that we grow our writings in excess of the rate change to maximise this opportunity. Our plan for the rest of 2023 is to continue to grow our business whilst continuing our work to diversify our underwriting portfolio. We see little ill discipline in the marketplace or new capital entering. Therefore, I expect underwriting conditions to be favourable for the foreseeable future. As our half-year results demonstrate, we are building a better, more diverse underwriting portfolio, which generates more profit against our capital base. We're using our capital more efficiently and remain in a strong capital position for future opportunity. As we enter this year's US hurricane season, our business is in a much stronger financial position than when we entered last year's hurricane season. Our profit buffer is multiples of where we were at this point last year. Our plan for our property cat and retro portfolios was to write a similar portfolio as we did last year. By that I mean to deploy similar capital to that space as we did in 22. We're already a major writer of cat business and therefore enjoying the better than budgeted underwriting conditions for these capital constrained classes of business. So we have a much better balance of capital exposed to the hurricane season and profit, which increases the probability of much better returns. So I'm very happy to report our business continues to deliver in line with our long-term strategy. We have a more diversified product mix where we aim to deliver lower earnings volatility, which should in turn produce better returns on capital. Therefore, we are growing our underwriting at the right time, using our capital more efficiently, and growing our earnings per share. Now I'd like to just pivot to Lancashire US. you would have seen the news that Lancashire will start underwriting in the US in 2024. This is an exciting opportunity for us and the next stage in the evolution of our business. We have, as always, been driven by the underwriting opportunity which currently presents itself in the US E&S market. We intend to offer product lines which suit our current appetite but do not find their way to any of our current underwriting hubs. Our intention is to very much write business that is brokered and underwriting in the US marketplace. We would adopt the same conservative approach to building our US business as we have done in other parts of our business that we have built out over the last five years. We always believe that you need to enter new product lines at the right time and with the right people, which is what we're doing in the US. So to summarize. Our long-term strategy of growing at this stage of the underwriting cycle and diversification of our underwriting portfolio is working. We continue to see underwriting opportunity for a foreseeable future, and Lancashire US will provide us with continued growth in the world's largest insurance market. I'll now hand over to Paul.

Thank you, Alex. As Alex has just mentioned, market conditions have continued to be favourable through the second quarter. and we've continued to execute on our long-held strategy of growing when the market opportunity is there. We have now seen 22 consecutive quarters of positive rating momentum. The rating environment we saw in Q1 was maintained through Q2 with a very healthy RPI of 117% for the first half of the year. More than just the headline rate, we are extremely happy with the profitability of the portfolio. First half of the year from an industry loss perspective was far from benign as there have been numerous CAT and non-CAT losses. As a result, the combined ratio of 79.2% is very pleasing, but our real focus is on the additional dollars of profit this produces given the larger premium base against a broadly similar level of capital. Importantly, we continue to see the benefits of the numerous investments made over the past five years. You'll recall I first talked about our investments in new classes back in 2018. It takes time for our investments to reach critical mass, but since then these classes we have entered have gained profitable scale and are now contributing to the bottom line. That is also our hope for the investment we're looking to make in the US too. It will take a bit of time, but it will ultimately help us deliver a more resilient underwriting contribution over the longer term. Whilst there is never a guarantee of profitability, as we're in the risk business, the market conditions and our decision to build out a more diversified underwriting footprint at the correct time just enhances the probability of healthy combined ratios and ROEs. And the portfolio we put in place should be able to absorb losses, yet still deliver less volatility and healthy levels of profitability. Most importantly, it should improve our ROE across the cycle. In the next two slides, I'll briefly touch on the market dynamics in both our reinsurance and insurance segments. The market conditions we saw in Q1 have remained during Q2 for all of our reinsurance lines. RPI for the reinsurance segment was 123% for the first half. We continue to build out the casualty portfolio and rating was broadly flat. We are very happy with the rating adequacy given we entered at the peak of the rating environment and continue to reserve this class extremely prudently. The specialty reinsurance portfolio also continues to grow in what is a strong market. Specific sectors such as aviation reinsurance have seen significant rate improvement as the year has progressed, helped by market losses and a retraction of retrocapacity. We anticipate specialty reinsurance being a core growth area for us in the coming years. In catastrophe-exposed lines such as Property Cat and Retro, the buoyant rating environment continued. The market was far more orderly than we saw at the 1st of January, but this didn't detract from the rating conditions. It's found its level, and there were no signs of softening during Q2 renewals. Our insurance segment continued to see strong rating momentum with an RPI of 111%. Of particular note, the property portfolio has seen continued strength in rating levels and even stronger demand. We've spoken much about the threat of inflation composed, but we've also tried to highlight there is a positive to inflation. It increases demand for our products, and increased demand at a time of limited supply only helps the market dynamics. The effect is clear as seen in property insurance, and this has given us the opportunity to grow in one of the best property markets we've seen. All other classes with the insurance segment continue to have positive rate momentum as the upward rating trajectory we've seen for the past five to six years endures. Classes such as aviation, power, marine, liability, and energy liability are all still seeing strong double-digit RPIs. Looking forward, we remain optimistic that market conditions will remain robust with rating adequacies in a really strong position. With new ventures such as the US, we anticipate a good runway for growth in the coming years with a foundation of strong underlying rating to support this and the future underwriting contribution. I'll now pass over to Natalie.

Thanks, Paul. Our results are presented for the first time on an IFRS 17 basis and are summarized on this slide. I'm exceptionally pleased with our underwriting performance for the first half of 2022. Our undiscounted combined ratio was a healthy 79.2% or 71.4% on a discounted basis. This translates into a net insurance services result of $188.8 million, an increase of 33% compared to the same period last year. With a positive investment performance also contributing to results, our overall profit after tax is $159 million, resulting in a 12.2% increase in diluted book value per share for the half year. These results put us in an incredibly strong position going into the second half of 2023. The benefit of our growth over the last few years comes through an insurance revenue and ultimately profit. Insurance revenue is a new metric introduced by IFRS 17 and its component parts are detailed on slide 11. Earnings will continue to come through this line from the additional premiums written in the last few years. The rate that premiums earn through its insurance revenue will vary depending on business mix, which impacts the period over which premiums are earned, as well as the quantum of related commissions. The allocation of reinsurance premium is a similar concept to insurance revenue, but for outwards reinsurance. i.e. it comprises seeded earned premium, less outwards reinstatement premium, less of commission. The main driver of the balance is our outwards reinsurance spend, which is $331.8 million, compared to $315.5 million in the first half of 2022. Although our outwards reinsurance spend is higher in dollar terms, it has reduced as a percentage of gross premiums written compared to the same period last year, from 34% to 28%. We are generally retaining more risk across the business as pricing has improved. Our claims performance for the first half of 2023 is detailed on slide 12. On an IFRS 17 basis, the insurance service expenses and allocation of recoverables from reinsurers total to a net insurance result. This incorporates expenses directly attributable to underwriting, discounting, and reinstatement premiums, as well as the pure loss numbers. Although the market loss environment was reasonably active in the first half of 2023, we did not incur any individually material catastrophe or large losses. The total undiscounted net losses, excluding reinstatement premiums, from catastrophe and large loss events was $49.5 million. There is no change to our reserving approach or philosophy under IFRS 17, and we expect the reserving confidence level to remain in the 80th to 90th percentile. unless there is a change to our risk appetite. IFRS 17 does provide more visibility on our conservative reserving with the new required disclosures. The reserving confidence level at 30th of June is 87%, and the net risk adjustment is $217 million, or 21% of net insurance contract liabilities prior to the risk adjustment. For the current period, favorable prior ultimate loss development totaled $46.3 million, primarily due to releases on the 2022 and 2021 accident years across most lines of business. On an IFRS 17 basis, total prior year releases include the release of expense provisions, as well as the impact of reinstatement premiums. These increase total releases to 72.1 million. Turning to our investments, the investment portfolio returned 2.2% in the first half of 2023, as we started to see the benefit of higher rates on our investment income. Book yield is now 3.7% and market yield is 5.6%. The investment portfolio remains relatively conservative with an overall credit rating of AA-. We do not intend any material changes to our investment strategy in the medium term and will keep the overall portfolio duration short. On slide 14, we have provided two bridges to walk through the results on an approximate IFRS 4 basis to the IFRS 17 basis. On an undiscounted basis, the combined ratio is fairly similar, with a 3% reduction largely due to the differing IFRS 17 treatment green statement premiums, which are netted off claims, and commissions, which are netted off premiums. Comprehensive income on an IFRS 17 basis is $11.7 million higher than the comparable IFRS 4 basis. The discount benefit is the main driver of the increase in profits on the IFRS 17 basis. The waterfall on slide 15 shows the discount benefit on initial reserves was higher than the unwinded discounting from prior years, leading to an overall benefit for the period. Moving to guidance on slide 16. I am happy with the full year guidance previously given. As I have mentioned in the past, there is some seasonality in our underlying combined ratio, which tends to be higher in H1 than for the full year. The ratio can also fluctuate due to shifts in business mix. For example, the amount of new casualty business we underwrite. Still, it doesn't change our view for the full year. I also want to stress that we do not manage to these ratios on a quarter by quarter basis. Our core focus has always been on group ROE. It remains so going forward. The initial guidance on an IFRS 4 basis was for the underlying combined ratio, excluding catastrophe and large losses and reserve releases, to be between 74 and 79%. On an undiscounted IFRS 17 basis, we would expect the equivalent guidance to be around one percentage point lower on both the top and bottom ends of the range. The approximate prior year ultimate loss development of 100 to 110 million for the full year is still appropriate on an IFRS 17 basis. In addition to the ultimate loss movement, the IFRS 17 prior year development also includes the reverse of prior year expense provisions and the impact of reinstatement premiums. The net relief is in the first half of 2023. included the reversal of recoveries on previous catastrophe events, which made the impact of outward reinstatement premiums relatively pronounced. I would not necessarily expect to see such a significant impact from reinstatement premiums going forward. Finally, moving on to capital on slide 17, we end the half year with a strong balance sheet, which gives us the ability to support our planned business growth over the remainder of the year. Our regulatory capital position at 30th of June is an estimated solvency ratio of 312%, which would reduce to approximately 268% following a one in 100 year Gulf of Mexico wind event. The increase in shareholders' equity due to profits in H1 has more than offset increased capital requirements due to business growth. With that, I'll now hand back to Alex to conclude.

Okay, thank you, Natalie. So, just to summarise, we see lots of opportunity for our business remained really well capitalized. And we are doing, we're sticking to our strategy of growth at this point in the underwriting cycle, which I just believe is essential. So I think we are completely on track. I'm excited about a half year, and we'll see what the rest of the year brings for us. So happy to go to questions now.

Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press star 1 1 on your telephone keypad. Once again, please press star 1 1 to register for a question. There will be a brief pause whilst questions are being registered. Our first question today comes from Will Hartcastle. Please go ahead.

Hey, afternoon, everyone. Hope you're well. First question, just thinking about the PMLs haven't moved too much from the fall year to 30th of June, US particularly. Just remind me, does this include the July renewal impact at this point? Anything you can say on that? And then just thinking about the shape of the book, you're underneath the one in 100. Obviously, you put on a lot of gross. It sounds like the vast majority of that in cash exposed is price, but is there sort of any one in x type area that we should be expecting a bit more exposure year on year second one just about i guess just thinking about the bscr development with more business written in 1h is the business growth consumption sort of front half loaded or isn't that how it works i guess i'm just trying to understand if we've got a a bigger pickup to come all else equal in 2h thanks

Hi, Will. I'll take your first two questions. So on the first one, no, the PMLs that we release are 30th of June, so all business written up to and including the 30th of June. So any cap business written on the 1st of July or after isn't incorporated into those numbers. We publish a revised set at the full year, But in terms of what we've communicated on net cat appetite at the beginning of the year was broadly similar net cat footprint, which as you can see thus far, that's pretty much what we've done. And there's no change on that. In terms of the shape of the cat book, I think what we've seen, and we spoke about this a bit at the last update, what you've certainly seen, particularly in the property data, catastrophe market and to a similar degree the retro market, which are obviously big drivers of our cap footprint, you've seen the whole market try and move up level. Obviously some of that inflation has helped, but also the number of smaller to mid-sized losses that have impacted the reinsurance market over the past five years have driven this. So I think we'd be very similar to others in that your cat book is further away from those kind of losses. It doesn't mean you can't get them, of course. But the book has moved up level. For us, if you think about where we write our particular property cat portfolio, it's more evidence in our syndicate portfolio, which is traditionally lower down the curve, and you've seen more level come into that book, which is something we were aiming to do, but the markets obviously allowed us to do it. And then if you look at our Bermuda portfolio, that tended to be further out in the curve. So you're seeing less change in level there. But hopefully that answers those two questions for you.

Hi, Will. I'll take the third question on the BFCR. I mean, you're right that because we write most of the business in the third half of the year, you do get most of the impact from the cap book already in the H1 and the impact from PMLs. What you will see coming through, though, in H2 is any increases in reserves or increases in premiums. Not as significant, but you would expect some increase in H2 in capital requirements, just from the growth that we're putting on.

That's great. Thanks, guys. We are now going over to our next question. And the next question comes from Freya Kong from Bank of America. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Firstly, I was wondering if you could give any comments on the Bermuda Tax Consultation or Pillar 2 in the UK. Is there an effective tax rate we should be looking for for 2024? And then secondly, just on, I guess, thinking about growth and capital intensity, and how the portfolio has evolved over the last three years. How should we think about capital intensity going forward in terms of premium written per capital requirement? Thank you.

Hi, Farah. It's Natalie. On the global tax rate, obviously Bermuda came out with its consultation only two days ago, so we're still working through the detail on that. We're pleased that Bermuda have said they want to remain competitive and are looking at offsetting deductions such as payroll tax. We shouldn't see any impact from any of this in 2024, though, that the UK regime doesn't impact us at least until 2025. And we'll just continue to look at the most efficient corporate structure for our business and where we can make the best returns for our shareholders, as we always do.

I'll take the second question for you. I think, look, as we always say, the real driver of capital for us is any of those lines of business that have catastrophe exposure. So, you know, some of the property insurance lines, obviously your property cap and retro. That's not to say other lines of business are capital free and they're what I call capital light. So, look, we've been quite clear this year, I think, about maintaining our net cap footprint, which you can see from the PMLs. That's pretty much what we've done. The remainder of the year is kind of non-cap lines, such as aviation, that obviously have much less of a capital requirement. And then, look, what we'll do, we'll get towards the end of the year, get through wind season, see what the market conditions are, and then give you some more guidance about future years at that point. But it's always going to be obviously driven by the market opportunity and not deviating from the strategy we've been employing over the past few years.

Okay, thanks. So is it fair to say then about the 20 points of deployment year-to-date has mostly just been in property insurance?

Sorry, Freya, you broke up there on the question. Can you repeat that, please?

Is it fair to say then that the around 20 points of deployment you saw year-to-date was mostly in property insurance?

Freya, it's Jelena. We wouldn't ordinarily comment on exactly what percentage of the... The SDR ratio relates to sort of anything. As you know, we are ultimately driven by the A and best ratings, and that's what we focus on, where we do have substantial headroom, and that will be our focus. We wouldn't ordinarily sort of look at individual lines of business, because naturally you will have some offset in that overall number from diversification and so on. So it's a little bit more complex than just looking at the headline number.

Okay, that's fine. Thank you.

And we're taking our next question. This question comes from from JP Morgan. Please go ahead, sir.

Two questions and maybe just one follow-up. The first one is just on the US setup. Are there any sort of capital implications of doing this? I assume that if you're going to be writing business, you're probably going to set up a carrier and the carrier has to have a minimum size, et cetera. So just wondering kind of if you can maybe set out what you think those requirements might be or how much capital you might have to put aside to do that. The second question is on the, I guess, the casualty book where you've hopefully said that you're being very prudent. Can you talk about claims experience so far? on kind of what you've seen on that book um and at what point do you really release kind of conservatism so i know that you know it's only been going for a few years you wouldn't recognize anything yet but just interested in when that might start to come through and then the third question is on the global minimum tax in bermuda um if i try and think about the size of your operations you just simply fall below the kind of threshold i think it's 750 million for units of businesses in Bermuda. So just interested whether you've thought about that at all yet. I know it's very early days.

Thanks. Sure. Okay, Cameron. So I'll start with the U.S. question. So I think, look, we're clearly going to need some capital to expand into the U.S. That will be driven by the product mix. But if you look at the capital position we're currently in, you know, we're more than comfortable that we can set up in the U.S., come up with a business plan based on the opportunity, based on who we hire in some of those roles, and fund that expansion. So, yeah, we would definitely need some capital to write in the US. That will be driven by the business plan that we finally settle on when we start underwriting next year. But, and again, just one other thing on that, you know, we're at that nice point where we've got lots of opportunity across the group. we will just deploy capital in the best place for our shareholders, whether that's in our London book, our Bermuda book, our US book. You know, we're back to that point where the business is competing for capital. But the ultimate point is we have plenty of capital, plenty of headroom to fund the growth opportunity in the US.

On your casualty question, Cameron, I think, obviously, the first point is, you know, we started writing casualty reinsurance at the beginning of 2021, so we're only just over two years into that. And I think that it's too early to really comment on any loss trends. But what I would say is there's nothing there that gives us any cause for concern, particularly given how prudently we're reserving that portfolio, which we think is obviously wholly appropriate. I think in terms of when will we start to review that prudence, I think we've said before when we enter short-tailed classes of business, we tend to have a look about three years in and on casualty. Again, we've said this before, I think the minimum time period to be looking at is five years. And that's obviously something that happens in the meantime that would mean we'd need to look at it again. But I think that should hopefully give you some kind of timeline.

That's cool. Hi, Cameron. Back onto the tax question. That particular exemption you mentioned wouldn't apply to us. There are other exemptions in the regulation that we're currently working through. Hopefully, we'd have some more information at the next call.

Thank you. We're going over to our next question. And this question comes from Darrell Goh from RBC. Please go ahead.

Hi there. Good afternoon, everyone. I hope you can hear me okay. Just two questions, please. So the first one is just on the U.S. platform. I appreciate it's very early days. Can you maybe expand a bit about, you know, the lines that you're expanding into, you know, the potential diversification effects as well, and maybe also a rough kind of top line number that you're targeting at the moment? And the second one, just going back to capital, so it's 310% at the moment, and it sounds as though there's going to be a much stronger build in second half. Now, assuming that, you know, we have a normal hurricane season, and I know that, you know, it's got its U.S. expansion as well, Is it fair to say that, you know, you'll be ruling out the potential for any excess capital returns for this year already? Thank you.

So I'll take the first one and I'll ask Natalie to ask the second one. I think our view is that what we're looking to achieve in the U.S. is product lines that we're very comfortable with, so similar to some of the products that we currently sell. So let's just pick property as an example. I think that dependent on the size of the opportunity, will drive the ultimate product mix, which will just drive the opportunity. But I think it's going to be things like property. It's going to be marine business. It's going to be energy casualty, the classes of business that we currently underwrite. So I just see the U.S. as a natural extension for us on product lines we're very comfortable with. you know, someone internally that already works for us, that's got a lot of experience, is going to run the operation and accessing a pool of risks that currently don't come to London. So that will require some capital. It will depend on who ultimately we hire. We have started hiring people already. And any guidance on the size of the opportunity will be given at the end of the year when we give you our guidance for 2014. We probably won't start underwriting until April 24, but that depends on how quickly we can get set up. But we'll give you all the guidance when we give you our yearly guidance for 24.

Hi, it's Natalie. There's no change to our approach to capital management this year, so we'll get to the end of the year post-win season. I'm looking to next year. including the US, to determine how much capital we need, but we're certainly not ruling out a special dividend at this point. It's far too early to say that.

Hello, this is the operator. Do you have any more questions?

Yep, that's all from my side. Thank you.

Thank you very much. We're now going over to our next question. And the next question comes from Andreas Emden from PL Hunt LLP. Please go ahead, sir.

Hello, good afternoon. Just a question around your property cat book. You mentioned that in your introductory remarks that you said there was an increased probability of much better returns this year. Is there any way you could talk about those returns on the property cat reinsurance book? What is the IRR you will be able to generate on that portfolio in 2023 and how does that compare to 2022? And maybe with, you know, the change in the attachment point and the rate increases you've pushed through, could you maybe also talk around the break-even point? Whether, you know, what percentile, you know, on the curve you would be breaking even and how does that compare with last year? Thank you.

Hi, Andreas. So first, just a point of clarity. My comments around overall profitability were obviously around the overall portfolio and were not necessarily... specific to the property cap book, albeit with the market conditions we've seen, obviously the same kind of logic applies. I know I'm gonna frustrate you with this answer, but we don't give out those kind of metrics on particular lines of business. So I won't be doing that here now. But look, what I can say is obviously on the property cap portfolio, The whole market, including ourselves, have increased level of attachment point, which pushes you further away from some of those smaller to mid-sized losses. There's clearly more premium coming through the system with increased rates. And all that does is put you into a position where your overall cap footprint is just in a much better spot. So directionally, We're going in exactly the right direction. We're really happy with what we've seen on all areas of our cat book, not just the property cat book, in terms of the market dynamics. And we're really happy with the portfolio we've ended up with. As we always say, there's always events out there that can come in and create us and the market problems. But just overall, we're in a much better spot. And apologies, I'm not going to give you the answer that you want.

All right. Okay, thanks for clarifying a little bit. May I have one follow-up then? Just thinking about your U.S. business, you mentioned you were writing this on company projects. paper in the UK. Does this mean this is going to be written outside of Lloyds and if so what drives that decision not to sort of just have a binder contract between your syndicates at Lloyds and your new US operation? Thanks.

So yes it will be written outside of Lloyds on our sort of London company paper and we just feel at this point that that's the most efficient way for us to access the US market. That may change over time. We may utilize the syndicate paper. We have multiple options, but we just feel at this point in time, this gives us the best and the quickest access to market that we want. So it's a moment in time thing. It may change. As you know, Andreas, we're not too fussed about where we write business or what platform we write business on. We're just trying to maximize the opportunity.

Okay. What's the cost advantage of setting up a U.S. platform versus just writing it out of Lloyds, aside from accessing the business that doesn't come to Lloyds? Is there any major cost advantage?

No, no, no. It's not about cost. It's about accessing business that doesn't come to Lloyds. So there would be absolutely no point in us going to the U.S. to write business that comes to Lloyds or our Lancashire platform. This is solely about writing business that stays in the U.S. So let's just go back to property. you know, the more complex, large risks for the property market tend to find, you know, their way to the London market. And in the U.S., you probably write more vanilla property business that just doesn't need to leave the U.S. So our approach is very much, you know, setting up onshore U.S. to write business that doesn't come to London.

Okay, so it's not going to cannibalize your syndicates or Lloyds?

That would be insane. I mean, there would be no, I mean, yeah, I've seen that happen before, but we're not setting up to compete with ourselves.

All right. Okay. Thank you very much.

And we're taking our next question. The next question comes from Faiza Lakhani from HSBC. Please go ahead, sir.

Hi, thank you very much for taking my questions. The first is just coming back to the point on the insurance revenue. I understand different lines of business will have different earning patterns. How should we think about the shape of that and the earn-through, especially as that business mix changes? The second is on the operating expense growth. If I've calculated correctly, it seems to be up 30%. given that you plan to grow in the U.S. and through various portfolios, should we assume that the absolute growth level should be similar in the outer years as well? And finally, I just want to understand the combined ratio guidance. You mentioned there's some seasonality half and half. How much is that roughly in a normalized year? And if you could just sort of provide a qualitative update on how much the combined ratio has benefited from stronger rates versus business next shift. Thank you.

I'll take those questions. On the earnings through into the revenue, you should really just think about that in the same way that you would have previously thought about written coming through into net premiums earned. So I think we used to say 12 to 18 months with the additional casualty are probably looking at slightly longer than that. So it's important to note, I think, that we're still seeing the benefit of the increase in premiums we wrote last year and even the year before that, that's still coming through. On operating expense growth, it's really all payroll-related, so it's headcount to support the growth in the business, as well as inflation. As well as inflation last year, obviously inflationary... Impacts last year were pretty high. We wouldn't necessarily expect to see that going forward, but we do expect a certain amount of headcount growth, especially with the U.S. business.

Okay, so I guess effects will be lower growth.

Yeah, I mean, the expense in dollar terms will continue to increase, but as a percentage of revenue, it will decrease, which is the main point. It's still profitable. And then on the seasonality point, We always give guidance for the full year. And we generally finish the year with a lower underlying cost than at H1. This is due to a couple of factors. One is that we tend to release conservatism in a loss ratio through the year. So we'll start off the year with a higher level of margin than we finish the year with. And the other factor is that as we're growing, you're getting higher earnings coming through in H2, which also serves to reduce your expense ratio. So there's two things going on there, as well as business mix with things like casualty, which tend to impact the ratio as well. If you want it as an indication of an impact, you could potentially look at last year and the difference between the underlying at H1 last year and the full year.

And in terms of the benefit on the combined ratio from rates versus from shift in business mix in H1, any indication on how that sort of played its part?

Well, I think the main indication there that we've given is the 5% hit from casualty. So if you take that off, most of the rest of it will be coming down to the impact of rates.

Perfect. Thank you very much.

Before we're going over to our next question, let me please remind you, if you have a question for our speakers, please press star 11 on your telephone keypad. If you find your questions is already answered, please press star 11 again to remove your questions from the queue. So if you want to ask a question, please press star 11 now. We're going over now to the next question. This question comes from James Pease from Jefferies. Please go ahead.

Hi, thanks for taking my questions. Hope you're all well. Have you been surprised by the absence of meaningful new capital in the traditional reinsurance market so far this year? And do you expect that to change if 2023 proves to be another elevated cut loss year and property reinsurance continues to harden? And maybe just as a follow up to that, when and under what circumstances do you expect meaningful capital to return to the ILS market. And then I just had another question on your AM-BEST capital model. Is there any impact from IFRS 17 on your capital model, i.e., are IFRS metrics now feeding into your AM-BEST models, or is there no change? Thank you.

So I'll just start on the new entrance of capital, and I think PJ will talk about ILS I think if you went back in time in our marketplace, in times such as this, when the underwriting opportunity seems strong, you would historically get start-ups, particularly in Bermuda. So I am somewhat surprised you haven't seen any start-up companies, but I think it's a bit more complex than maybe prior cycles. I think the sort of great climate debate is obviously... climate is an opportunity or a threat. And I think that's a big debate for some people. I think just a change in cost of capital and other opportunities for investors make the current underwriting opportunity difficult. And I just think just the old-fashioned basic, the industry hasn't made any real money for five years. So I just don't think there's enough evidence of a much better market for people that are not currently in our world. So clearly we think it's a great opportunity. Clearly we can see the forward, you know, it is a great cap market, it's a great overall market, but I think investors want to see a bit more evidence before capital flows into the system. I don't think that happens after one year either. So I don't think that if, The current hurricane season is benign. I don't think you get a massive influx of capital into the system after one clean cat year or a benign cat year. But over time, if the industry can prove that returns are there, which are meaningful when looking at the margin over the risk-free, I think... you should expect more capital to come in. But I think you need, the industry needs to prove that sustainable returns are there that are far in excess of risk-free, which is quite generous for not doing much.

Yeah, and to be honest, it's kind of going to echo the same points re-ILS. I think whatever form of capital it is, they're just grappling with the same issues, i.e., a number of years with the industry where performance hasn't been good. I agree with Alex that one good year is not going to be enough for suddenly loads of capital to flood into the market. The market probably needs to prove itself more, and the same applies in ILS. And I think also what's happening, it's not just what happens inside our industry, but what is happening elsewhere. And I think in the ILS market, you've seen some investors with what they perceive to be other opportunities elsewhere that are more compelling and perceived to have less volatility. So, you know, I think what our industry does is one factor and what else is happening around the world and in the global economy is another and just seeing similar trends.

Hi, James. On the IFRS 17 and AMBES question, currently there's no change to the model as a result of IFRS 17. I do believe that AMBES are going to come out with some guidance on that in the next few months, but we don't expect to have a significant impact on our capital requirements.

Got it. Thanks, guys.

We're now taking our next question. The next question comes from Abbott Hussein from Panama Gordon. Please go ahead, sir.

Oh, hi. Thanks for taking my questions. But two questions. One, coming back on the tax question in Bermuda. So just, I guess, asking the same question in a different way. If your effective tax rate does indeed become 15%, would you still choose to operate out of Bermuda? So I guess... I'm asking are there any advantages other than tax for being in Bermuda? So, for example, is there any capital benefit for remaining in Bermuda? So that's the first question. And the second question is really a follow-on to the previous one on rates. Just trying to get more colour on how long you think these favourable conditions can endure in the markets. At some point, capital does need to come into the sector. Is this a multi-year story still from this point? So just any more colour you can give to that, talk to that point, please. Thank you.

I'll take the second question, then we'll come back to tax and Bermuda questions. So look, for me, it's not about putting how many years has the market got, it's how much aggregate return you make. So I think that if the industry has two absolutely standout years, obviously the market softens quicker. If the industry has two years which are fine but not standout, then it lasts longer. I think it's as simple as that. I think investors are going to want proof of good returns. If you look at what a good return is today, it's very different to what it was two years ago. So I think the bar has been set a lot higher. And these businesses need to make a lot more money. And I think until the industry can prove that those bigger returns are there, the market's not going to soften. So I think it's all about quantum of return. And look, let's be realistic. We are the biggest believers of the cycle. And the cycle is driven by great returns or bad returns. So I think the market will soften at some point. But no one's actually made any real money yet. So I think it's way too early. And as I said, if people don't make enough money, the market will hold longer. And if there's two standout years, the market will soften sooner. I don't think it's anything more complicated than that.

Just before you move on, is a standout year sort of 20 plus percent return on ROE or is it sort of 30 percent? Just so I can contextualize what a standout year might look like.

I think it depends on what company you are, what products you're selling. It's going to be very different for us to what an IRS would fund. But if risk-free is 5%, a standout year is not 15, is it? So it's got to be more than that. So yeah, I think north of 20 is a great return, but it's not... I just think the bar's moved so much in the last 18 months that I just don't think that's factored through the system yet.

Starting on the answer to your second point on Bermuda, I'm not qualified to answer on the tax side, but what Bermuda is is a fantastic marketplace for a lot of reinsurance products that we sell. There's really good talent on the island. It's a proper market, so there is definite value of being here and having an underwriting team here to access you know, those opportunities, whether that be casualty reinsurance, specialty reinsurance, you know, cat reinsurance, you know, a lot, almost all of the reinsurance business or the vast majority of the reinsurance portfolio that we underwrite is in Bermuda. And the reason it's in Bermuda is this is where the talent is and this is where the market is. So, you know, there's a definite advantage of being here on island.

And also to add to that, the Bermuda Regulatory Regime and the BSCR capital model is specifically designed for reinsurers and that's actually really helpful as well.

Okay, thank you.

We're now taking our next question. And our next question is from Trifona Spyro from Bamberg. Please go ahead.

Oh, hi. I just got a final question on growth. I guess, is it fair to expect that given everything you said on particularly the US and the platform there, that the 2.1 billion that consensus sort of expects for next year, I think it's around 7% growth year-on-year. Is it fair to say that looks relatively undemanding and growth again next year should be well into the double digits? That was all.

Thank you. Tristan, this is Jelena. I'm going to take this for the team. As you'll no doubt know, it's a little bit too early for us to talk about premium numbers for 2024. We've always said that we're fully driven by the market opportunity. And as both Alex, Paul, and Natalie, all three of them have already said, we'll give you proper guidance early next year Once we have reported our full year numbers, there's obviously still a good half year to go in terms of the renewal still to come and business opportunities to look at. So we'll give you a bit more detail early next year.

Okay. All right. Thank you.

At this moment in time, we have no further questions. I would now like to hand the call back to Alex Maloney for the closing remarks.

Okay, thank you very much for your questions today. We'll wrap up there.

Thank you all for your attending. You may now disconnect.