Earnings Transcript for BEZ.L - Q4 Fiscal Year 2023

Adrian Cox: Good morning, everyone. Welcome to the Beazley Annual Results for the Year 2023. I am Adrian Cox, the Group CEO, and I'm joined by Sally Lake on the right, our Group CFO; and Bob Quane on the left, our CUO. So here with the order of play, I'll take you through the highlights and Sally will then go through some of the details from the financial performance. Bob will take us through the underwriting performance. I'll share thoughts a little bit after that about how we think about long-term performance and give some guidance for this year for 2024 and then we'll move on to Q&A. We have a hard stop at 10 o'clock for 2 reasons I think. One, some of us have to get to Admiral for 10

Sally Lake: Thank you, Adrian, and good morning, everyone. My name is Sally Lake, I'm the Group CFO of Beazley. So I'm going to go through my usual trio. But to begin with, let's just have a quick look at the financial performance in a little bit more detail. So I'm pleased to present an outstanding set of results with PBT growth of 115% compared to last year and gross insurance contracts written premium have grown by 7% year-on-year and with an impressive growth in net premium of 24%. As Adrian spoke about, we've always planned to grow our net more than our gross during 2023. And it's really pleasing to see that these record profits are also driven by both insurance service results and also the investment performance where we saw an income of $480 million during the year. Our expertise in underwriting together with lower catastrophe experience in the year compared to 2022 has led to an impressive undiscounted call of 74%. This is despite quite an active catastrophe market. Higher interest rates in the first 3 quarters of the year have led to an increase in the discount unwind expense, hitting the IFE, coupled with a decrease in interest rates at the end of the year, meaning the impact over the year on the change in discount rates is reasonably flat. If we then move to expenses, coming back to the record profit, we have looked to remunerate our staff as well as ongoing digitization of our business. This has led to an increase in total expense ratio once we allow for OpEx as well and this has moved from 37% to 40%. And as Adrian mentioned, we've also announced a share buyback of up to $325 million. So this graph shows a make-up of the discounted combined ratio and undiscounted combined ratio and how -- and the different elements of that. The loss ratio has been split between the amount coming from current year claims and prior year releases. So the net current year loss ratio is 42%, which is an improvement on last year and reserve releases accounted for an improvement of 2.5%. A benign catastrophe season due to the underwriting -- as well as our underwriting expertise have been part of the driver of the improved combined ratio this year with the current year net claims ratio reducing from 63% to 44% on our property division. This coupled with the growth that we've seen in property this year have shown that we've led into market conditions at the right time. It's not just been the lack of catastrophes that have led to property making more profit this year, we've also seen an improvement in attrition year-on-year. There has been other improvements in the claims ratios in others of our larger divisions. So if we go into the reserve releases in a little bit more detail. So this graph shows where we've seen reserve releases and strengthening by segment on our LIC. Overall, you can see that reserve releases remained -- reserves remained stable over time with a percentile of 85% right in the middle of our range. Releases on past years have contributed to a strong service result. The overall past service reduced by $110 million during the year. And as I said, this corresponds to a 2.5% release. It's worth noting specialty lines here, specialty risk here, as Adrian mentioned, as there's been a lot of talk about social inflation and a lot of questions asked. Overall, you can see that specialty risk reserves, where the majority of our social inflation risk sets, has seen reserve release overall in 2023. We have seen some movements on prior years due to the ongoing effects that Adrian mentioned. And we've been telling you for a number of years that this has been a problem we've been highly alert to. We do minimize our exposure to these types of areas. And actually, in addition to that, we look to write on a claims made form, which reduces our exposure further still. We also write very little general liability business. In addition, we also buy an aggregate excess of loss reinsurance that has been placed for many years over those years that are affected as well. Whilst we have seen releases across most of our classes, there is an exception in cyber, which has seen a small strengthening due to some adverse development arising for some cyber liability claims. This has been almost entirely offset by more recent years having benign claims experience. Property risks has seen the largest reserve release of $78 million. And as we mentioned, due to favorable claims experience, improved estimates on past catastrophes along with the expiry of risk on the more recent years. Digital has seen reductions in estimates on specific losses, favorable attritional experience and cyber businesses in that division as well. And as I mentioned, our reserve percentile remains consistent in the middle of our range at 85%. So now if I move on to our investment portfolio, the first thing worthy of note is that it grew from $9 billion to $10.5 billion during the period as we continue to grow. And our investment team made some adjustments to our portfolio during the year, specifically adding to risks, while seeking out additional return. Exposures to high-quality corporate debt grew more than 10% with high-yield credit and equity exposures also increasing. The decisions added to our return this year. It's worthy of note that this is a rebalance to our more neutral asset allocation after a period of being slightly risk off in our portfolio. By aligning interest rate exposure to our investments with those on our liabilities, we can earn investment return which reflects a prevailing level of yield with minimal risk to our earnings. Our approach to investment strategy, which includes scope for tactical portfolio adjustments like this has been in place for a number of years and has served us well. So as I mentioned earlier, a $480 million or 4.9%, our investment produced the highest income in our history by some margin. Higher years prevailing at the start of the year, promised good returns, but performance remained modest for much of the period as yields continue to rise, generating losses on our fixed income investments. Most of the strong performance in 2023 occurred in the final 2 months of the year as yields begin to decline. Ultimately, the fixed income performance on the equity market. Yields are currently at similar levels to early 2023, suggesting that we may continue to see attractive returns for investments, although the global market remains uncertain. With interest rates likely to fall over the short to medium-term, by aligning the interest rate exposures of our investments to those of our liabilities, we can earn an investment return which reflects the prevailing level of yields with minimal risk to our earnings. Let's move on to capital. So you can see here movements in both our eligible own funds and our 1-year SCR over the year. You can see that we've had an increase in our SCR over the year in Q4, which as Adrian pointed, reserve risk, which has come through from our recent significant growth on a net of reinsurance basis, which also leads to an exposure to an increase in our SCR. Finally, the increase in SCR is also affected by changes to the model that we make over the year, which has had a small effect as well. Given the current position in the cycle and substantial capital above our aim to be above 170%, we have decided to return some excess capital to shareholders. Between the ordinary dividend and share buyback, we will aim to return up to $440 million. This still leaves a healthy group solvency ratio of 218%, which will continue to support our growth going forward. So let's just quickly walk through what has happened over the year. So firstly, our capital coverage has reduced as we increased the SCR, as I've described. We've also generated capital at the same time as we've made a healthy profit over the year. This leads us to a coverage ratio before any capital actions of 240% before we then talk about the dividend and the share buyback. And finally from me, the updates to our scenarios. The main point of note here is to show that we are now looking at our cyber sensitivity on a probabilistic basis and showing the 1-in-250 downside risk is the main scenario, which you'll remember we discussed in November at our Capital Markets Day. Previously, you have seen us referring to our largest cyber realistic disaster. For context, if I gave you the equivalent figure today on that same scenario, the sensitivity would have been 10%. And just so you know, we're not going to be sharing that anymore. We're going to focus on the 1-in-250 going forward to be more in line with what we show on the Nat Cat. To refer back to the previous slide where we continue to hold a capital ratio of 280%, we are in an uncertain world. And we can see that a 50 bps decrease in rates would lead to a 10% impact on the solvency ratio. And Nat Cat event would lead to 1-in-250 of 26% on the solvency ratio. And we continue to think about this when we look at the level of capital we want to hold, take advantage of emerging growth opportunities, especially in the very short tail lines like cyber where market conditions can evolve rapidly. And with that, I will pass over to Bob.

Robert Quane: Hi, everyone. Great to see everyone here today. I am Bob Quane, and I'm the Chief Underwriting Officer here at Beazley, and I'll be taking you through the underwriting section of today's presentation. I am proud of our underwriting teams and the success that they had in 2023. They have shown agility and insight in the delivery of risk management expertise to their clients, while focusing on underwriting profitability through actively managing the cycle and achieving a 4% increase in rates across our business in 2023. Property shows a very strong growth as we leaned into the hard market. Specialty had active cycle management within the team. You can see, they're close to flat. But as we navigated the very soft D&O market, we grew in other niche profitable products within the team. MAP, if we normalize for growth, actually had 15% growth. It's showing a reduction here due to 5623 becoming a standalone syndicate in 2023. We had strong markets and more political risk, terrorism and contingency. Cyber, we had a modest growth, but we're very proud of that because we achieved that despite us leading the charge and updating the war exclusion. We had good new exposure growth internationally, especially in Europe. Our focus is having the right people in the right places, ensuring that our subject matter experts are close to where the risks are being underwritten. This provides us with the best possible market access and intelligence. In 2023, we moved this forward as we further balanced our business across the portfolios. North America is 40% of our portfolio. And as you can see, we focus in the non-admitted market, which we have more flexibility in our terms and conditions. And it also has a rate that's above the market trend in terms of growth. Europe has had fast pace growth. And Europe is 7% of Beazley's portfolio, but we see a multi-year growth opportunity here. Global Wholesale remains the largest part of Beazley. And we have a growth rate that reflects a mature market segment. Property Risk had a standout year and it grew by 64%. This was driven by a 22% rate increase and also strong exposure growth. The capital raise in 2022 really enabled us to achieve this growth and we're delighted about what we were able to accomplish. As we've said in the past, climate risk makes property more complicated to underwrite. And it makes it less commoditized and more specialized, which plays to our strengths. The investment the team made during the soft market into understanding the impact of climate risk and effectively managing property valuations paid off as the rating environment improved. In addition to our strong growth, we improved the core by nearly 30 points. The attritional loss ratio was better than we expected in our initial guidance. And the catastrophe activity was much better than both last year, meaning 2022, and also much better than an average catastrophe year. The improvement in core compared to '22 was driven by a combination of these 2 points. We expect the market to be positive as we head into 2024, although the rate change will not be at the same magnitude or the same pace that we saw in 2023. We believe climate risk will keep property more discipline than we've seen in the past. North America grew by 85%. As we've said before, we see a long-term opportunity to grow our market share in the United States. All of our U.S. business in property is in the non-admitted market. As commercial property underwriting has become increasingly complex and more volatile, many brokers have shifted their clients' program to the non-admitted market. This market has the ability to adapt more quickly to fast-changing conditions and address complex risk more effectively than the admitted market. As a result, we are building our relevance in the market, accessing new clients that previously would have been unavailable to us. We expect this opportunity to persist throughout 2024 and beyond. We saw growth across both our insurance and our reinsurance portfolios, but we saw the vast majority of our exposure growth in the insurance book. You have seen these slides before, both the 1-in-250 as a percent of our capital and the 1-in-10 as a percent of our expected company's annual earnings have decreased into 2023. Over more than a decade, we have actively reduced the volatility to our firm and we will continue to maintain these lower levels of volatility going forward. We have seized the opportunity of the property hardening market with enthusiasm. And we've achieved that without increasing the volatility to our firm. Our cyber business continued to see demand-led growth in 2023 outside of the United States and especially in Europe. Undiscounted core of 72% is so well within our target range, and we continue to see an opportunity for profitable growth within cyber. We continue to believe in the importance of showing leadership in the marketplace where we were one of the pioneers. And in 2023, we launched the first markets cyber catastrophe bond. We've led the update on the cyber war clause to ensure -- to sustain -- to ensure the product sustainability and still manage to achieve growth despite the resistance to that change. And just last month, we announced the formation of Beazley Security, which will be a leader in delivering cyber resilient services to our clients. Today's cyber rating adequacy is good. Rates through 2023 did come off a bit. But as you can see, they're still materially higher than where they were in 2020, but that was due to the increase in exposure due to ransomware. The early signs of 2024 make us optimistic that the rates are heading towards flat. We are confident that this positive environment perhaps will into the demand-led growth, we will see the strongest growth markets outside of the United States. Outside the U.S., we had demand-led growth, especially in Europe. It grew by 27% and is now 12% of the total cyber book. It is our largest product on the European platform. As I said previously, this is where we expect to see strong exposure growth in 2024. We have been building infrastructure and attracting a talented team for several years, and we're ready to capitalize on this opportunity. North America is the largest part of our book, but we saw a slight downturn in growth. This was due to increased competition and our leadership on updating the work laws. Specialty Risks saw its combined ratio improved to 78%. We were especially proud of achieving that during the soft market. D&O will continue to be a significant part of Specialty Risk. But during the soft market, we become less dependent on this product as we've grown in other profitable niches within specialty. North America is more diversified with these profitable products, which is why you saw modest growth there. Europe and Global Wholesale are more dependent on the D&O product, which is why we saw negative growth on those platforms. Our MAP team continued to show the power and the expertise they bring to our clients during 2023. Across the division, they play a vital role in helping to keep business investing and trade moving despite ongoing geopolitical uncertainty. Specifically, to touch on ongoing geopolitical concerns, the situation in the Middle East and the Red Sea has not materially impacted our business so far. On a normalized basis, MAP has actually increased by about 15% despite the slide showing premium reducing in 2023. As mentioned already, this was driven by 5623, which is our smart tracker syndicate, becoming a standalone syndicate in '23. The division continues to have consistently profitable core. Global Wholesale is by far the largest platform for MAP risk. We had 15% growth if normalized for 5623 becoming a standalone syndicate. And the growth was driven by war, political risk, terrorism and contingency. Europe's growth was driven by the same products, but is off a much smaller base. We will continue to look for growth opportunities in Europe and North America during 2024.

Adrian Cox: All right. Two thoughts to share on long-term value creation. The first is our performance against an internal target. So we have an ambition to grow our net asset value per share, including the impact of dividends and capital actions at a rate of between 10% and 15% above risk free. Our strategy is directed at being able to build compounding value over time. And what we've shown here is our performance over the last 10 years. The blue [cornett] shows the upper and lower boundaries of that range above the risk free rate since 2014 and the pink diamonds, our actual performance during those years. And what it shows, I hope, is that throughout the last decade, despite all that has been thrown at us between climate change and natural catastrophes, COVID, war and a soft market, we have managed to achieve that compounding value. And following last year's performance are now at the top of that range. The company's long-term incentive plans are exactly aligned to these targets and they've performed well this year in a way I think that aligns well with our shareholders' interest. The second way we think about performance is benchmarking ourselves against a range and a basket of U.S. and Bermudan peers. When we think about our major competitors, they tend to be from that cohort. Specialty insurers or composite insurance with a big specialty division against whom we compete generally in the U.S., in London and beyond. Whilst we're described generally as a Lloyd's or a London market insurer, we tend to see ourselves as a global or international specialty insurer. Yes, based in London, but with a bias towards North America marketplace and 3 vibrant platforms here in the U.S. and in Europe. And it's this group of peers, therefore, that we tend to pay most attention to. And you can see that list at the bottom of the page. We've also charted the last 10 years comparing total shareholder return generation over that time. And you can see the outperformance that we had in the mid-teens. You can see the impact of COVID on that performance and that value creation, a lack thereof, and then the recovery thereafter through growing both our premiums and our margins in the business. And I think we can see that over the last 10 years, we have kept up well with that cohort of peers to which we compare ourselves. On to outlook then. So I think the world is increasingly complex and risky whether that's new threats to cybersecurity, weather or growing political -- geopolitical volatility. And to prosper in that environment, businesses need the sorts of products, services and risk transfer that we offer. And we believe that the demand for specialty insurance will continue to increase over the next few years because of that. And I think that creates a persistent long-term opportunity for specialty insurers like us with the right levels of expertise, commitment and financial strength. As I think Bob was outlining, the cornerstone of our business is and will always be disciplined underwriting. We combine this with a long-term outlook, very aggressive cycle management and a high conviction approach. So we respond quickly to new opportunities. We're also fast to take risk off the table when the risk reward deteriorates either because of market cycles or changes to exposure. I do think that access to risk is vital in insurance. We spent 20 years building our business in North America, building trust with clients and with our broker partners and patiently adding product and resource organically over those 2 decades. We're doing the same thing in Europe. Why, because as Bob said, having the right people in the right place, getting our subject matter experts closer to the business, closer to the retail broker gets us better intelligence and better access to risk, and I think that is a competitive advantage. I do think that the property opportunity will continue, as we've said. I also think cyber demand will persist over the next few years. And therefore, despite a relatively complex market, I do think there is growth available this year, and we're estimating high-single-digits gross, a little bit higher net. That disconnect that we've seen between gross and net is going to ease a little bit. So the marked decrease in proportional reinsurance we're buying has mostly come to an end. So the net will be a little bit higher, but not very much. And we're estimating an undiscounted combined ratio in the low-80s, which the eagle eyed amongst us will notice is what we said this time last year. The logic for that I think is relatively straightforward. Rates at an overall level have roughly kept pace with loss cost. We got about 4% last year. It's low-single-digits again this year. 2023 did benefit from lower than expected catastrophe activity, also lower than expected attritional, but we have to expect both those to normalize this year. And hence, we're back to where we started in the low-80s. And lastly, I'm very pleased to be able to announce that we have a new CFO called Barbara Plucnar Jensen, who will be joining us late in the second quarter this year. As some of you will know, until late last year, she was Group CFO at Tryg. She comes with over 25 years' experience in the financial services industry. I think she'll be an excellent fit at Beazley, and we very much look forward to welcoming her. And with that, we'll move on to Q&A. Thank you.

Q - Freya Kong: Freya Kong from Bank of America. So the SCR grew 31%, would you be able to give us a rough breakdown of the various elements you talked about contributing to this increase? And mostly, can you explain the increase in the net reserve risk charge a bit more? And previous guidance I think was for SCR growth to be in line with net growth plans, would this still hold for forward-looking? Second question on gross growth split between rate versus exposure. Based on your comments, it sounds roughly half-half. Is that fair? And last question on reserve releases. 2022 was a little strange given the adjustments made to transitioning to IFRS 17, but is 2023 a pretty good starting point to look forward to?

Adrian Cox: Well, the first and the third are you.

Sally Lake: Yes. Do you want to do this?

Adrian Cox: The middle one?

Sally Lake: Yes.

Adrian Cox: Yes, probably, roughly. Yes. So growth is probably half rate, half exposure, roughly. So well estimated.

Sally Lake: Okay. So on the SCR, so a step back. If you look back at SFCR, sorry, there's a lot of acronyms in what I'm going to say, you can see that last year, our SCR over the year grew by about 7%, 8%, but that was with an expectation of net growth being much higher than that because that was at a time when we were estimating net growth in the 20s, which we achieved. So your question -- to answer the last bit of your first question first, over time, and we've said this throughout, over the medium-term, generally speaking, the SCR will move with net growth. However, when you look at individual years, that can vary, and that really depends on how the net growth is coming in. And so what we've had is a number of strong years from a net perspective, which has an impact in the first year, but also has a secondary impact in the second year as reserve risk come into the SCR. So overall, it's a good guide, but on an individual year, you can have those effects. In terms of the elements, I would take them in order. I would probably say that the vast majority of the increase is a mix between current year expectations and growth. And as Adrian said, it's high-single-digits gross, slightly higher net, but not to the extent that we've seen in the past. And then secondary, the effect around the net reserve risk and then there's a small amount due to model changes.

Adrian Cox: One of the things we were talking about earlier is that the move that we've had to the new way of talking about capital means we're going from an ultimate version of capital, which ECR is to a 1-year version. So we're getting these effects for the first time visibly because we always used to project to ultimate. And that's one of the results of that that you can see.

Sally Lake: And then on to reserving in -- from '22 versus '23, short answer, yes. So whereon, Jahan Anzsar, couple down to you, so you can bother him afterwards on the detail on this. I do that because [Martin] you threw it to me when I was Jahan. But so now we've moved over to the new way that we reserve under IFRS 17. 2023 is a good indicator of how we reserve. We've put in our loss development tables for the past 5 years. Obviously, the reserving has been different. So that's on a best efforts basis. We will give you a good indication of how to think about it. But actually, as we build that up, that will become more useful.

Tryfonas Spyrou: Tryfonas Spyrou from Berenberg. Just on the growth outlook, I was wondering if you can maybe help us unpack the assumptions per line of business backing that high-single-digit, maybe appreciate property is still growing fast, maybe specialty lines there now a little bit lower. Is cyber still an uncertainty when it comes to the growth? So maybe any more color on what underpins those assumptions? The second one is on capital return outlook. With the risk of not being greedy, clearly, maybe you can help us understand more how you think about capital returns. Clearly, the ordinary dividend payout is around 15% looking forward. So everything else being equal, should we expect more special capitals being financed out of really high capital generation in the next few years?

Adrian Cox: Right. So the first question, Bob, was can we give a bit more color on growth by division in '24? Is it property first then cyber then everything else?

Robert Quane: Yes. I mean, property is growing. We expect it to grow the most. We have single-digit rate there and continued exposure growth in property. Cyber also has growth, but that's exposure growth that we're looking for there. And then MAP has both mild rate, low rate, but also growth. So it would be in that order. Specialty risk will be more flat.

Adrian Cox: So we're hoping that some of the headwinds that we had last year in cyber will dissipate. The war conversation is getting behind us now. That was quite noisy last year, particularly in North America. So we'll see. Capital returns. So I think what we've done is kind of lay out how we think about things and then what that resulted in. So if 2024 is a rinse and repeat to 2023, you'll see the same thing again. But if things change during 2024, either in terms of how much capital we generate or what the prospects are or what happens to our tail risks, then those -- that may come out with a different answer. But if you paint a scenario where we're in an area of good capital generation and lower rate, then you'll see -- you may see more of what we did this year.

Sally Lake: The strategy hasn't changed. The outcome this year is different because the environment has changed.

Ivan Bokhmat: It's Ivan Bokhmat from Barclays. I was just wondering, in your mid -- low-80s combined ratio guidance, maybe you could try to provide us something of a large loss budget. I mean, we've been asking for a little while. Now the property is the second largest business, you've started to provide the P&Ls. Maybe you can at least try to quantify what the benefit was in the 2023 from low large losses or alternatively maybe provide a combined ratio indication for property specifically? I mean, that would be helpful. And secondly, I just wanted to ask your thoughts about how do you feel about opportunistic reserve additions that some of your peers have done in Q4 in 2023? You've obviously had a very strong results and you could have taken advantage of that as well. So maybe something conceptual, how would you think about that in the future?

Adrian Cox: Okay. I'll do the second one. Why don't you do the first one?

Sally Lake: Okay. So I'll do the first one. Okay. So when we look at -- so we're not -- we don't guide to -- sorry, we don't guide -- the CFO doesn't guide to individual divisions from a budget basis, I know it would be nice. But I would say, when I look at the property results, it is -- the attrition was better than we expected. The cats were much better than we expected, I think would be my words. And obviously, we've reloaded both when we look at the guidance, but that would be how I'd think about it without numbers. And now Adrian's going to talk to you about reserving, which I'm excited about.

Adrian Cox: So we have a policy of keeping our reserve confidence level between 80 and 90, and it's bang in the middle of it. And I think that seems sensible. So it didn't seem that -- there will be no logic for us to apply an opportunistic increase in reserve levels when we're bang in the middle of our target range, which I think tells you all you need to know.

Sally Lake: Sorry, I was never not going to add. So the other thing is that we've been talking about social inflation since 2017. And so we've been looking at that. And we've been updating on a quarterly basis when we're thinking about all our reserves, but in particular, social inflation. And so I think there are 3 things to remember here. We are -- the exposure we have is there, but it is minimized given what we write and we write on a claims-made basis. So the ability to cut that off is quicker in the things that we write as well. And it's one of the reasons we write on a [Indiscernible] basis. And the third thing is since the mid-20 teens, what you call them, we've had this aggregate excess of loss in place across cyber and specialty risk, which covers more than the social inflation areas, but we do have some hedging against a deterioration within there. So we've been looking at this. So what we've seen this year isn't a new thing for us. We've been thinking about it for a while. So to take a significant change on what we've been doing this year, wouldn't be congruent with what we've been doing for the last few years and the experience that we've had.

Faizan Lakhani: Faizan Lakhani from HSBC. The first is coming back to the fact that you are normalizing for attritional and Nat Cat for next year. Now I know you won't give what the Nat Cat aspect is, but why is it that you're normalizing for attritional for next year? Why is that not sustainable? If you could sort of help provide some color on that one. The second is, it's notable that you haven't seen the same uptick in ransom frequency like some of the peers have commented. If we were to assume a similar level of ransom frequency, which I'm not saying you will next year, what would that do to your cyber combined ratio? And the third one is the other income grew very strongly last year. How much of that is sticky and sustainable? And how much of that would you say is sort of normalize as profit commissions come down next year?

Adrian Cox: Okay. So when we thought about the low-80s combined, you obviously normalize for cat. If you take a big step back, our business mix is not changing that much and rates aren't changing that much. So the most sensible thing to do is just to reset the assumptions where they were. What we tried to do with our combined ratio guidance candidly is to explain our thinking and say, here's the number we got to. Here's why you can interpret that as you will, right? And so what we're saying is business mix not changing very much, rates not changing very much. Therefore, we reset the clock back to 2023. And you can do with that information what you will, right? I think...

Sally Lake: And we'll be updating.

Adrian Cox: And we'll be updating quarterly. Ransomware, if the frequency normalizes or I'm not quite sure what normalizing is given how much has been up and down over the last few years. I think all I would point to is that the combined ratio that our cyber division produced last year is significantly below the sort of long-term target that we have. So were attrition to increase, we have the ability to absorb it without breaching that $85 million in old money that we used to talk about. Other income, Sally, do you want to go out through that?

Sally Lake: Yes. So the increase in other income this year is largely due to the profit commissions due from syndicate 623, which is our third-party backed syndicate. And so that's the main cause of the increase. So what will happen next year, it depends on what profitability on 623 happens. 623 is very much based on our wholesale market business, which is running well at the moment. I'm not going to give you a guide on it.

Faizan Lakhani: Sorry, can I just come back to the first point you made that the mix isn't changing a great deal, but you've grown very strongly in property, specialty is coming off a little bit. And as that ends through, I would have assumed the combined ratio would improve next year. So why is that not really a business shift?

Adrian Cox: The difference in growth in '24 isn't as marked, there's a difference in growth in -- as the growth in '23 was.

Andrew Ritchie: Andrew Ritchie from Autonomous. So first of all, nerdy question, as I'm known for. Just explain the $139.4 million IFE funding, which you described as a change of assumptions, do I think of that as effectively a PYD, but it's within the IFE rather than the service result or just maybe just -- I'm just curious to know how I should think about that? Secondly, on the prior year, I haven't seen gross versus net triangles here. I don't know if you're giving us them, but you mentioned you've still got recoveries happening on the XOL from the prior year deterioration. Just give us some reassurance again on remaining limit there, because I think it's the third year where you've been recovering on that? The only other question I had -- 2 other questions. I'm curious in specialty, D&O you're shrinking still, but where are the areas of growth that in specialty which are mitigating that? And then the final question, again a nerdy one. You show a negative sensitivity on the Solvency II from a fall in interest rates. That's sort of not really true, though, is it? Because I think the footnote is that's just showing the SCR impact. But in reality, you're sort of matched I think on interest rates in principle on the risk-free side. So I shouldn't really think of interest rate sensitivity for capital, should I?

Sally Lake: So do you want to do the nerdy ones?

Adrian Cox: No, you've got one, I'll add.

Sally Lake: Okay, all right. So no, it's a great question on the IFE. There are only great questions on the IFE in my opinion. So is it a prior year, no. Obviously, it's impacted by prior year, but it's also current year as well. So it's made up of 2 main things. One is any change in payment patterns that you see over the year, because obviously, then you would change the way that the financial assumptions apply to that. And then secondly, it's also impacted by our actual payments that we made during the year versus what we expected. So those 2 things will have an impact. This will be volatile and it is hard to model. And we were talking earlier about the fact that we can explain what's happened when it's happened. But knowing what's going to happen going forward is very difficult. I would only say, I'm sorry, it's hard for us too. And so that's what's happened this year. And because our ASC was better, you're seeing that impact. And that for us comes through the IFE. People do it differently, but that's what happens.

Andrew Ritchie: Just assuming [Indiscernible] I mean, I can't model that.

Sally Lake: Yes. So you've got -- well, unless you wanted to start taking views, you've got to assume that what we've put within our model is what we expect to happen. Yes, that's what we assume as we start. Do you want to go on that?

Andrew Ritchie: Yes. So do we have any remaining limit left on the reinsurance for the back years and especially risk for cyber?

Sally Lake: Yes, we do.

Andrew Ritchie: And thinking about specialty risk mitigation, lots and lots of products in specialty risk we've got.

Robert Quane: Yes. The ones that we're growing profitably was environmental, crime, U.S. programs which is cover...

Sally Lake: Did I miss the key question?

Andrew Ritchie: Yes. Sensitivity to interest rates.

Sally Lake: Yes. Sorry, yes, that was right. I think it's prudent to show a negative for the SCR. But yes, you're right, that broadly, we are -- we do aim to be matched. But we do -- there is a reason for that footnote. So we do want to say that we don't do it own funds calculation along with that. But yes, we are -- we do aim to be broadly matched.

Adrian Cox: But we might not be at any one point.

Sally Lake: Yes, no one has ever perfectly matched.

Kamran Hossain: I'm Kamran Hossain from JPMorgan. 2 questions for me. The first one is just back on the SCR. Obviously, you've kind of outlined there was a bit of a lagging effect on SCR growth just to move to Solvency II and versus the old approach and how we used to kind of think about that. Is there another lagged effect to come in 2025? I know lots of things will change, but will that again mean that the SCR grows faster than net growth in '25, just kind of all other things being equal?

Sally Lake: It depends what happens to net.

Kamran Hossain: Yes, I know lot of things are happening there.

Sally Lake: So say, if net growth goes down further -- so where we are at the moment is net growth in '24 is expected to be lower than net growth in '23. If -- and so what you'll see in the SCR is a weighted average between current year and prior year growth. So depending on what will happen next year, you will see a combination of '25 and '24 broadly. So it really depends on that expectation. If it's the same in '25 to '24, which is not guidance, it's a scenario, then you would expect -- you may expect some lag coming through from the back end of this significant growth, but much, much less marked.

Kamran Hossain: Second question is just on the share buyback. Do you have any promises on what price you're willing to do? I know you're probably not going to tell us what that is, but how should we think about this? Is this a firm commitment to up to $325 million?

Sally Lake: Yes and yes. You can disagree if you want to.

Qifan Yang: It's Anthony from Goldman Sachs. The first question is, I appreciate all the comments on U.S. E&S. Could you give us a color or indication on what's the profitability in that compared to your Group core guidance? And then secondly is again coming back to the core, should we -- again, on the seasonality, should we expect higher core in 1H '24 and then come down again in full year '24?

Adrian Cox: Good questions.

Sally Lake: So the second one is yes, but probably not as marked. But yes, we would definitely expect that because we have 2 seasonality effects in property. One is to do with the earning of the premium and the second has to do with the run-off in the risk adjustment and that happens more in the second half of the year. And we're also in a high return, which leads to our cost of capital, which drives our risk adjustment going up. So yes.

Adrian Cox: On the E&S business, so all of our property business is written in the E&S market, whether we write it here in London or in the U.S. So the profitability shouldn't be that much different between the 2 because they're both written in the same marketplace. There is generally a trade-off between admitted and non-admitted, which is, the admitted you get better access to risk as you see it first. But because you have more underwriting freedom in the E&S, it can be more profitable. And that is generally the trade-off, which is why we're more in the E&S market than we are on the admitted. It's about that trade-off between access and flexibility. Does that makes sense?

Darius Satkauskas: Darius Satkauskas, KBW. 2 questions, please. So the first one is, you benefited greatly from the flow of programs in E&S markets in the recent past. Is that slowing down or are the trends still continuing? At what point do you expect that wave to sort of turn? And the second question is just a different angle on Kamran's question on the buyback. So do you see there being a decent amount of headroom to the share price and we should be willing to do the buyback? So if there were to be capital returns going forward, we should expect a buyback ground the special?

Adrian Cox: So let me answer the question in a slightly different way. So why are we doing a buyback? We're doing a buyback for a number of different reasons rather than a special dividend. One, it's increasingly common market practice. Two, when we speak to our investors, there was an increasing preference for it for a variety of different reasons. But around the world, there is increasing preference for it. And also when we look at our share price and compare it to consensus' share price, there is a big delta. And so for all those reasons, it makes sense for us to do a buyback this year. There remains quite a big delta between consensus and our actual share price. So that's why we're relatively confident that we should be able to complete the buyback as we have planned to do. Does that make sense?

Darius Satkauskas: So is consensus target price is driving...

Adrian Cox: There are a number of different factors, one of which is the intrinsic value of the company versus the -- and the consensus price versus where we're actually trading at, yes, but it's one of many.

Sally Lake: The consensus price is the one that everyone knows. So that's why we referred to it here.

Robert Quane: He asked the last question, the market flows.

Adrian Cox: Flows, yes, of course, sorry. So we're seeing no signs that flows are slowing down. I think the mix of business flowing into the E&S market is probably slightly different. So there's more smaller mid-market business flowing in because that's the business that is written by the big admitted insurers that they're still having to non-renew whilst they figure out how to underwrite a property in an admitted world. I think it's going to take them a little while to figure that out. Changing risk and underwriting risks that are changing in that admitted framework is hard. I've no doubt, eventually, it will happen, but I don't think that flow is going to slow down for a little bit, but the shape will be different.

Robert Quane: It might stabilize, but I don't see it slowing down. And I think cyber will probably get more complicated. Property is going to stay more complicated for a long time. So I see the E&S market continuing to grow.

Sally Lake: It's worth saying we also do have an admitted carrier, which we do apply some cyber on as well. So it's not -- it's just worthy of note.

Abid Hussain: It's Abid Hussain from Panmure Gordon. I have 3 questions, if I can. First one is on cyber reserves. There was a small reserve strengthening on cyber and that's sort of despite the current year margins being relatively stable. So just wondering what's driving that adverse experience on the back years? Is it something structural or is it one-off? I'm thinking is it sort of Generative AI hacks or is it just -- is it -- are you sort of seeing something scary or is it just literally one-offs? Any color on that would be great. And then the second one is on the cyber market. Clearly, it's a big market and the outlook is positive. You mentioned growth in Europe. I'm just wondering what's the pricing power that you have there? And how does that compare to, say, the U.S. or the U.K. market in terms of cyber pricing power and margins? And then the final question is just coming back on capital. You're looking to move the solvency ratio down to 170%. Is it fair to say that's a multi-year journey, i.e., it's not a 2-year journey, it sort of stretches beyond that?

Adrian Cox: Got it. Okay, super. So the good news is that there's no Generative AI hack that have impacted our cyber reserves. We sort of alluded to it. Cyber losses come in 2 forms. There's a sort of first-party losses caused by cyber crime and ransomware. And then there are liability issues around what you do with your data, how you store it, what data you ask for, whether you sell it and so on and so forth. And those issues are beginning to emerge, again, having been fairly subdued for a while. The one that has been most press about is something called Pixel, which is a piece of technology that Meta use or sell to various clients who can then track what people are doing. That has raised some liabilities. And that's something we spotted in 2022. We've taken underwriting action to make sure we're not exposed that anymore, but there are some claims coming through that we're having to deal with, and that's what caused a very small increase there. And I think it speaks to the fact that you need to be able to keep an eye on emerging threats, both on the liability side and on the first-party side with cyber and then deal with them, seal them off, work with our clients to make sure that they're protected. So they understand what these threats are and then we can move forward, and that's a good example of them. Pricing power international versus U.S., I think our market share is slightly higher outside the U.S. than it is in the U.S. So our pricing power should be as good, if not a little bit better I think. And then on the capital side, we don't -- we're not targeting to 170%. We're saying we have an ambition to stay above 170%. The actual target that we'll have will be a mixture of the things that we think about how much growth prospects there are, what the sensitivities are, what 1-in-250 peak risks to be and so on and so forth. And so there should always be a gap between our minimum ambition and where we actually are depending on what's going on.

Abid Hussain: Can I quickly follow-up on that. So it sounds like you think of it more of a target range. Are you willing to share what the range is?

Adrian Cox: It's not a range. So how much above the 170% we want depends upon the factors that we listed out in the cyber strategy and they'll move year-on-year, right? And that's why there's no range because it's a dynamic environment.

James Pearse: James Pearse from Jefferies. So you recently announced Beazley Security, just interested to hear more about the ambitions there. Whether that could become a more material component of earnings over time on its own or does it just help fuel further cyber insurance growth? Second question is on U.S. D&O. So are there any early signs of sufficient capital leaving the market yet? And how far off are we from that being an attractive market to grow again? And how much of a capture needs to happen on pricing?

Robert Quane: Yes. So on Beazley Security, we had services inside our company who had [Indiscernible] that was more risk expertise and we brought these 2 together. So it's -- it will be effective on July 1. We think it will be a dynamic advantage that we have both of these working together. They do different things and that expertise will stay separate. But now we'll be able to leverage their expertise together and we think that brings a more dynamic service to our clients.

Adrian Cox: U.S. D&O, I think there's a lot of talk about rate decreases moderating and there are some signs that that's happening, particularly on the primary layers, but it's too early to call anything yet and talk is cheap, isn't it?

Sally Lake: And if you go to our plan, our plan isn't predicated on that changing significantly. I think that's a notable thing to say.

Faizan Lakhani: Faizan Lakhani. Sorry for another follow-up question, but this time on the solvency. It's pretty clear your guidance in terms of the way you sort of think about it. A hypothetical question. If the opportunity set stays very similar to what it is now, interest rates start to plateau, what does that do to your thinking this time next year in terms of the solvency ratio that you need to operate at?

Sally Lake: Repeat.

Adrian Cox: Yes, rinse and repeat I think.

Faizan Lakhani: So the 230%, 240% level is where you want to be at if we had the same opportunity set?

Adrian Cox: Well, we're at 218%.

Freya Kong: It's Freya again from Bank of America. Could you comment a bit about the competitive backdrop for cyber in Europe where you're pushing for growth? How are client demands and product offerings different from the U.S., which I understand is a bit more developed? And then secondly, just on the Red Sea disruption. How are you managing potential risk exposures here?

Adrian Cox: Okay. Do you want to take the second one? Red Sea.

Robert Quane: I thought it was cyber in Europe. I didn't hear the second one.

Adrian Cox: Okay. How are we handling the potential Red Sea disruptions to our business.

Robert Quane: I don't know that one.

Adrian Cox: Okay. All right, let's talk about cyber market in Europe. So the demand is at an earlier stage of development, as you say. So it is more large risk than mid-to-small, although we're starting to work with a number of brokers about selling at scale to the smaller end of their clients because the market is beginning to move that way. And the good thing I think about the international growth is that most of the large brokers have done this before. So they've been through a cycle of selling to their clients in North America where you start with the larger and you move into the mid-market and then small and they're rinsing and repeating what they did there in Europe and we're starting to work with them on that now. So it's a much more of a larger business. The new business is generally bigger ticket, but we're actively starting to go into the small market there, which is good. We're keeping a very close watch on our aggregates in the Red Sea. And so we're comfortable with that. As we said -- as Bob said, there's been no impact to us so far. We are in that market. So we are continuing to ensure trade and trade movement around there. I think it's an important part of what we do. But we do so in a way that means that the level of exposure to us is prudent and manageable. I think we're going to have to call a halt there. So thank you very much indeed for coming today, and good luck with the Admiral later.