Beazley PLC

LSE:BEZ

Earnings Call Transcript 2023-Q1

[Adrian Cox, executive]

Good morning, everyone, and thank you for joining us for our first quarter 2023 IMS. I'm going to cover the key elements of our trading statement, and then we'll open up to some questions.

So we're pleased, I think, with the first quarter's results, especially sharing the momentum that we've got in our property risk business, which underpins, I think, our confidence in reiterating our full year guidance for both expected growth and for combined ratio. Our overall growth rate of 12% is good. There are some seasonal effects in MAP, which means that it was always going to shrink in the first quarter. As we highlighted at the year-end, we've restructured the smart tracker so that we no longer front for the third-party capital, which means that 82% of that business no longer comes in its gross premium for us. Net, of course, is unchanged. 75% of that business is written in Q1, hence, the drag on overall growth this quarter. Actually, MAP was ahead of its sales budget at the end of the first quarter. On a net basis, growth is as we had anticipated, also reflecting the fact that we bought less reinsurance for our Cyber and Specialty Risks business in January.

Taking a step back, we've been saying for a while now that we are in an elevated risk environment. And whilst most of the pricing across our business reflects this, we do need to ensure that we actively allocate capital to reflect our current views of risk reward. And that remains true today. The first quarter has presented a number of both headwinds and tailwinds, some expected and some not. For example, the issues in the banking industry this year, whilst not of concern to us from a claims perspective, have continued to subdue the financial markets, which has impacted demand in D&O and other areas in specialty risks for which transactions, IPOs, merchant acquisitions, et cetera, are a material source of new business. Overall, we have delivered broadly in line with what we expected at the group level, and I think this demonstrates once again that our diversified business model allows us to adjust quickly as conditions evolve.

If we look at the divisions in a little bit more detail. On cyber, we flagged in our year-end results that updated cyber war exclusions were having a dampening effect, particularly for new business. And we expected that trend to continue into Q1. The deadline for all syndicates in Lloyd's to adopt that updated wording was the 31st of March, and that has indeed happened. This year, we've been working very hard with our broker partners and our clients. And I think whilst there remains some work to do, engagement is much more positive and collaborative. And we're beginning to see that dampening effect dissipate now, and so our expectations for the full year are unchanged in cyber.

We have added to our exposure base, and we're still excited both by the short and the long-term prospects for that business. We've highlighted many times now how much demand growth that remains for cyber, particularly in mid-market and SME business in the U.S. and outside North America, particularly in Europe. And our growth ex U.S. is particularly strong. And I'm very excited that we've -- I'm pleased that we've invested in our European platform. That's allowing us to capture that opportunity.

Having said that, the growth numbers for cyber in Q1 are slightly flattering. There are some prior year adjustments that have boosted premium. And the biggest impact on our business because of these new war winnings came at the deadline date to 31/3 and early April when that Lloyd's mandate took effect, and most of the moving of business by clients who weren't -- who -- two carriers who weren't using that new wording was happening. But as I said earlier, this is now beginning to dissipate. And so whilst we anticipate Q2 growth to be slower, our expectations for the full year are unchanged given that progress that I have referred to.

Within property, we've grown that division by 56%, which is in line with the plan we put together when we raised capital back in November. The property reinsurance market has genuinely reset and the insurance market is following suit. We don't see this as a short-term bubble. We do anticipate momentum continuing to build, and we do see this as a medium- to long-term opportunity for us, particularly in insurance. There have been improvements in rates, adequacy and our accuracy of insured values, deductibles and attach on point for reinsurance and other terms and conditions, all of which is very exciting and very needed.

On the claims front, catastrophe claims in Q1 were within our held margin. Within that, as you will have heard from other carriers, generally, claims from Hurricane Ian are improving and Winter Storm Elliot are still developing.

Moving on to specialty risks. I mentioned earlier, financial market volatility during the first quarter. That has continued to subdue financial markets, which closed following Russia's invasion of Ukraine last year. This, along with an increasingly competitive D&O market and a continuing challenging claims environment in areas exposed to social inflation, such as health care, has impacted growth in our specialty risk division. However, as we flagged during the year-end presentation, there are other opportunities for growth within specialty risks over the medium to long term. And we'll continue to work on diversifying that mix, and we will continue to make sure that we take risk off the table when the risk-reward is no longer attractive.

Moving to MAP. The team are ahead of plan to date, as I said. Demand growth has been strong for many of our products, particularly in political risks, political violence or/and cargo. And I think the fact that the reinsurance market tightened across many of these specialty areas at 1/1 has helped market conditions this quarter, and we benefited from that.

Digital has had a good quarter. We continue to roll out automation and digitization. That pace of rollout is increasing. We recently relaunched our U.S. cyber portal which has greatly enhanced capabilities and is very exciting. Within digital is our SME cyber business, which has been impacted by the wording issues I mentioned for cyber more generally. Overall, our claims experienced in the first quarter has been in line with expectations.

On investments, as you know, we had a loss last year driven by both fast rising and volatile interest rates, particularly in the U.S. These conditions resulted in improved yield at year-end, and we've seen the benefits of that with investment income of $102 million in the first quarter and a yield on our fixed income portfolio at the end of March of 4.6%.

So those are the opening remarks. And with that, I will open up to Q&A.

[Operator]

[Operator Instructions] We have Andrew Ritchie of [indiscernible]

[Andrew Ritchie, analyst]

Could you just -- I'm trying to understand, when I look at the cyber price change, how do you incorporate the changes of wording in that price change, if you see what I mean? Is it a sort of like-for-like -- or I'm not sure how we go about incorporating it because, obviously, returns are very different with the new wording. And could you just indicate, in terms of the pushback, is it because there are other carriers willing to write outside of Lloyd's without the same wording and they're attracting business? Or is it just a sort of standoff where there's a lot of discussion with brokers and clients just to really understand what the new exposure is? You've probably explained that before, but apologies if you just need to revisit. I'm just not quite sure I understand that aspect.

And second question, just on D&O or specialty lines. Would you expect the rate momentum to improve to specialty overall? I mean, given that you're pulling back on some of the softer lines -- the lines with a softer pricing, I mean, I'm focusing on lines, which were, I guess, pricing is more resilient. And there are some signs that maybe pricing might rebound a bit even in that class. But maybe what's your expectation there?

[Adrian Cox, executive]

Yes. Okay. So let's go to cyber to start with. So we have not adjusted the rate change numbers to account for the updated war clause. We could have done, I suppose. But essentially, what we're trying to do is explain the way that we wanted to interpret the war clause anyway, and so we didn't attribute any rate change to that. I think there's -- as we mentioned at year-end, there's been a lot of discussion about what war and quasi-war exclusion coverage there should and shouldn't be. That discussion is still ongoing. I think it's a lot more collaborative now than it was. Clients and brokers are very engaged with the issue. And I think part of the noise in this year has been getting clarity about what exactly we're trying to do, and we're not trying to do. And different markets have -- and different carriers have moved at different speeds now, Andrew. So there are many carriers that have updated their war exclusions to be similar to the Lloyd's mandate ones, and there are ones -- there are a handful left that still haven't.

Most clients are moving to -- are happy to accept the new exclusion and the clarity that, that gives because, fundamentally, what we're trying to do is to be as clear as possible about what coverage there is and there isn't. As we mentioned, I think, at year-end, the insurance industry tends to get itself into trouble when there's not clarity of cover. And I think we're making some good progress. Does that help?

[Andrew Ritchie, analyst]

Yes. So it's really a timing issue. It isn't the case that there's any class of carrier I'm thinking outside Lloyd's trying to come in and say, "Look, we're going to offer a much broader cover. That's not really happening. This is just a sort of stasis as it were overall in the market as people digest what they can buy and what they can't buy.

[Adrian Cox, executive]

Yes. There are one or two carriers that are still saying that they are happy to write on the old war wording and some clients are -- would rather do that. I think the majority of the market is moving to try to update their wordings, and I think that momentum is continuing to build. I mentioned that there are a number of forces at work here. I think, firstly, it's carriers themselves thinking through how they can most clearly explain what coverage they're offering or what coverage they're not around war. There's also increased regulatory scrutiny of this issue because, obviously, there is systemic risk there. And there's increased reinsurance scrutiny because a lot of this exposure goes back to reinsurers. And I think it's a combination of all those stakeholders that are driving us forward.

[Andrew Ritchie, analyst]

Okay. And on the specialty side?

[Adrian Cox, executive]

Yes. On the specialty side, I think -- as I mentioned, the D&O market has continued to get more competitive. I think the first quarter, there was -- there is some speculation that following a year of rate decreases, would the market begin to stabilize. I think that's just speculation. It's very difficult to predict how the market is going to react in the short term. What we have said internally is -- what would help from a quantity perspective is the financial markets opening again. and providing -- putting more demand back into the system. And we have no idea when that's going to happen. That's completely outside our controls. And we'll just react to what happens rather than try and predict it from that perspective. There are lots of businesses within specialty. I think we mentioned environmental liability in the IMS itself. We're just concentrating our efforts on growing exposure where we think it makes sense and making sure that we're there to react either positively or negatively when things change within markets like D&O.

[Operator]

We now have Kamran Hossain with JPMorgan.

[Kamran Hossain, analyst]

Two questions for me. The first one is on the cyber itself. We've seen kind of headlines, comments in the quarter around ransomware making a bit of a comeback after going away for a little while. Can you just comment on kind of what you're seeing on a kind of claims trends in cyber frequency and kind of whether ransomware is hitting your book yet or not or there's some reason that you think it might not be?

And the second question is on the retention -- I guess, on the change in retention. So I think if I look at Q1, you retained like 78% of the business, [ it's ] half versus 70% last year. Can you maybe call out kind of what that looks like by different classes? I'm particularly interested in kind of cyber and property given the pricing dynamics and kind of the levels of profitability in those two classes.

[Adrian Cox, executive]

So the 78% retention you're referring to is what, net to gross premium?

[Kamran Hossain, analyst]

Yes, net to gross, yes.

[Adrian Cox, executive]

Got it. Okay, fine. So there's certainly been some noise around that, ransomware frequency is increasing again. As you know, amongst other things, we have a Cyber Council that advises us, which has got people across the technology and security and industries and various government agencies. They've been telling us that they've been seeing more activity and there is some noise in the market that there is that -- we have been saying for some time that part of the reason for a subdued ransomware activity has been that a lot of activities been directed towards the war in Ukraine. At some point, that was going to revert back to the mean. That's what we're sort of hearing.

With our own book, we haven't seen that yet. And I think it's too early to speculate why that might be, and I think we have to expect at some point this is going to revert to the mean. But we haven't seen that within our own book yet, but we are hearing some noise. From a retention perspective, within cyber and specialty risks, we are buying less reinsurance this year, so the net to gross is going to increase as we wanted it to. When we think about the net to gross in property, we are taking an increased retention on our property catastrophe treaties this year as we had flagged, but we bought the reinsurance we intended to buy at 1/4. I don't expect the net to gross premium rate to change very much in property.

[Kamran Hossain, analyst]

Can I maybe just follow up on -- you'll probably say no, but if I think about the retention overall, so 70% was the number for Q1, do you think cyber was higher or lower than that number? You might tell me at the half year.

[Adrian Cox, executive]

Yes, I think that's a half year question. We do expect net to gross for cyber to increase this year. There are some -- Q1 is a funny quarter, isn't it? Because it's only three months and there are some effects in prior year activities and so on and so forth, as I've mentioned. So we'll be able to give a clearer picture on that at the half year, and we will explain and how the changes in our reinsurance strategy in cyber and specialties will play out during the year. Broadly speaking, we expect it to be fairly evenly distributed because most of our cyber and specialty reinsurance is proportional.

[Operator]

We now have Freya Kong with Bank of America. .

[Freya Kong, analyst]

Just a follow-up on the reinsurance changes. Have these mostly been on the proportional side quota share? Or have you also made changes on the aggregate covers as well? I'm just thinking about the one that sits across cyber and specialty as well as the group cash cover. And also, could you just clarify what you meant by prior year activity impacts benefiting cyber? I'm not sure I understood that. And just last question, if I may. On D&O, so D&O prices have come off maybe 25% year-to-date -- sorry, year-on-year in Q1. How do you expect, and given the business mix that you have in specialty risk, how do you expect to manage the rate momentum here?

[Adrian Cox, executive]

Okay. So -- your first question was around the reinsurance mix for cyber and specialty risks. The changes we made through insurance this year are just on the proportional side. So the aggregate covers that we have bought, the catastrophe covers that we bought those remain as was. It is simply the proportional sharing of risk that we have decreased because we have more capital to take that ourselves now.

The prior year adjustments for cyber, which boosted Q1 premium is -- so when we think about GAAP premium, there are two things that are going to contribute to GAAP premium. The first is what we write this year. And the second is adjustments to estimates on business -- adjustments to estimated income on business that we wrote last year. So some of the business we wrote for cyber, we write on line slips and other facilities. And we estimate how much business is going to go on those facilities. We update those estimates as time goes by. And sometimes those estimates increase and sometimes as estimates decrease.

Those changes in our estimates feed through into this year's GAAP premium and that's what's happened here. So the estimates for business on facilities that we wrote last year have gone up in the previous 12 months, and that's boosted our 2021 GAAP cyber premium. So it's a bit detailed story. And as I sort of said to Kamran earlier, Q1, because it's so early, it's particularly susceptible to those sorts of movements. They kind of play out during the year, but you could -- they're relatively -- because the cyber growth number was so high in Q1, I thought it was worth explaining.

And then on D&O, we are -- we pay close attention to three things generally. Yes, we play close attention to rate change. We also play close attention to rate adequacy and rate adequacy in line with what we think is happening to the underlying claims environment. So what that's doing for us in D&O at the moment is that whilst we're still rate adequate, so we're comfortable with the business, there are -- as rates continue to fall, we have to make those decisions on a risk-by-risk basis, which is why generally premium income is going down in D&O at the moment. We will continue to manage that. We can't control the rate changes in the D&O market, but we can control the mix of business, as you alluded to, right? So the proportion of specialty risk as D&O is going down, just like a portion of health care, within specialty risk is going down, but there are other areas that we're continuing to grow that we think have more better rate adequacy and where we're comfortable with the claims environment.

[Freya Kong, analyst]

Okay. And that's environmental liability.

[Adrian Cox, executive]

That's an example. There a dozen more.

[Operator]

We now have Darius Satkauskas from KBW.

[Darius Satkauskas, analyst]

Two questions, please. So the first question is on your GWP growth. So as you see the market right now, how do you expect the sort of portfolio mix still look? I mean, should we expect the specialty risks book will be down at the end of the year and really you're trying to make up in cyber and property, et cetera? Any color there would be helpful.

And the second question is on social inflation comment about the health care book. Is anything unusual in the quarter compared to what you've seen last year or sort of a year before? I'm just curious why you're sort of flagging that comment right now.

[Adrian Cox, executive]

Yes. Okay. Thanks for those questions. So overall business mix, do we expect specialty risk to shrink overall this year? I think it's still too early to say. The market is quite dynamic across different areas. I hope not. But if the market continues to get more competitive, it might do. Certainly, as a proportion of the overall business, we expect it to reduce this year because other parts of the business are growing much more quickly, and we're very excited by those. I think what we're trying to say in the statement is yes, there are some headwinds across the business overall, there are more tailwinds and headwinds, and we think we've got enough levers to push and pull to make sure that we meet our overall guidance of mid-teens gross, which is why we're feeling pleased with the first quarter's results.

We've been talking about social inflation for a while. And for us, we think the parts of our business which are most exposed to social inflation lie within specialty risks and within the areas that have bodily injury claims, in particular. And for us, that is within our health care portfolio, particularly hospitals. And we don't think that, that exposure is being priced for adequately enough, which is why we're reducing exposure there, and we have been for some time. This isn't new. It's just persistent. And the causes of social inflation, which we were talking about a lot before pandemic, haven't gone away. And they continue to manifest test and we continue to adjust accordingly.

[Operator]

We now have Will Hardcastle of UBS.

[William Hardcastle, analyst]

Firstly, just a bit more clarity on the cyber wordings. Just to be clear, there is no less coverage in your view, it's just more clarity. Is that right? And so the 4% rate change is pretty much a fair reflection of the change in rate. And so is there any danger that if others do hold their current wordings and they continue to price as they are, there is a danger to accept lower prices or potentially lose volume? Or am I going too far in the extreme and on the negative side and you'd be much more upbeat than that? And just any quantity that premium adjustment would be helpful.

The second one is just trying to understand the investment portfolio growth. It grew about 1% quarter-on-quarter but in the context of a very large sizable net written premium growth. So I'm just trying to understand what were the moving parts there?

[Adrian Cox, executive]

Okay. So let's do the second one first. There were some ups and downs in the quarter within the investment portfolio. I think broadly speaking, the returns that we got were not unexpected. And whilst it's difficult to predict what's going to happen within over the next 9 months, the vast bulk of our investments are in government fixed income securities and will continue to be, and that will fundamentally drive what our returns are going to be. We said we were broadly neutral at the end of the year, our default position. And so I don't expect that to change overly.

Going back to cyber. It's quite a technical discussion about what exactly we've how the war exclusions have been updated. It is around the edges of what is war and what is quasi-war and what is the difference between state-backed terrorism and what is insurable and what isn't. We haven't tried to quantify that into rate change because we took the decision it was -- it will be clearer not to, although there is a -- it is a term and condition which will have an impact. I think, as I mentioned earlier, there are some carriers that are still using the old wording. I think they're in the minority now. I think the risk that the market doesn't move to an updated war wording, I think that risk is declining for us, which I'm pleased about.

I think the engagement we've had with clients and brokers this first quarter about what is insurable fundamentally and what isn't insurable fundamentally has moved on in a positive way. So I think that tail risk is diminishing. And because the bulk of the market is using updated war wordings, it's quite difficult to place any meaningful power of business with carriers that aren't because there isn't enough capacity. So I do think that risk that you refer to, whilst it's still there a little bit is dissipating, which is why we've been able to say today that we can reiterate our full year guidance well.

[William Hardcastle, analyst]

That's really clear. Just coming back on that investment. What I was more thinking about wasn't sort of trying to pick apart the investment return. It was a good number. But it was more about -- I have thought that the stock or the positive AUM would have grown more just given big net premium growth and a good investment return. But just I'm trying to understand if there was anything that I missed, anything in terms of the gross and net change that should make -- distort that going forward?

[Adrian Cox, executive]

No, no. So the gross to net -- the net to gross increase that we expect this year has been driven by a reduction in proportional reinsurance in cyber and specialty risks. That should earn relatively evenly through the year. So the projections of increased AUM should be valid and not particularly skewed.

[Operator]

We now have Tryfonas Spyrou from Berenberg. .

[Tryfonas Spyrou, analyst]

Adrian, two questions. The first one is on the appetite for property reinsurance going forward would be given some parts of the specialty market are quite soft. Is the scope for you to allocate more capital and go sort of another makeup in terms of your exposures in the forthcoming years given the attractive conditions? Or are you relatively happy with the balance of the book as it is? And I guess to that, can you maybe allude to what is the sort of P&L growth year-on-year if you have that to get a sense of your exposure.

And the second one is probably you don't want to take too much credit on the cyber frequency topic. Is there any reason not to believe that the reason you haven't seen as much [ ransomware ] claims pickup is due to the actions you've taken to improve the overall underwriting? Here I'm thinking about risk prevention and risk management, et cetera.

[Adrian Cox, executive]

Right. So let me get to the second question first because I can remember it. We're obviously very happy that our own claims frequency hasn't yet been impacted by the noise that we're hearing. We cannot assume that it won't be, but we -- and we have to continue to be quite vigilant in our underwriting to make sure that we spot new things happening and we react them quickly by figuring out what they are -- what vulnerabilities that they're exploiting and work with our clients to help close those vulnerabilities. I don't think we can say that we're immune to changes in the claims environment at all, but I'm quite happy it hasn't happened yet. But we are extremely vigilant about that because I think that's the trick about writing cyber side of the business.

Are we willing to -- do we have the appetite to grow our property exposures? Yes, we do. Have our PMLs grown? Well, we don't really reveal that at Q1. But I think the graphs that we showed at our year-end about what our 1 in 10 and our 1 in 250 exposures are, I think, illustrates our current thinking. If the risk reward for property continues to improve, would we take more exposure at the tail? Yes, we would. Yes, we would. But it's too early to do that yet. As I said, there's only been three months but we've been delighted with the 2023 so far for property.

[Tryfonas Spyrou, analyst]

Okay. That's very clear. And perhaps if I can squeeze one more, I guess, on the cyber wording. You mentioned there's a few carriers that are not putting through the updated wording. And obviously, reinsurance is a big part of why some carriers are pushing through the wording. So would it be fair to assume that these would have been big carriers that don't tend to buy [ material terms ] and so it's a [ risk ] that their actions sort of persist going forward? Or how should we think about that dynamic?

[Adrian Cox, executive]

I don't really want to comment too much on other carriers' strategies. I think most carriers that write cyber insurance buy a reasonable amount of reinsurance. That is bought throughout the year. I think the reinsurers were expecting the insurance market in general to adopt new cyber war wordings at 1/1 and we're fairly disappointed that they didn't and are being quite vocal to that effect. And we'll see how that plays out through the year and into 2024.

[Operator]

We now have Derald Goh of RBC.

[Teik Goh, analyst]

A few questions, please, if that's okay. The first one, first direction was on cyber. How hard are the reinsurance reacting to the wording so far? Do you see [indiscernible] opening up or what do you think that's still a lot more work to be done? And then second one on cyber, so if rates were to stay where they are now how happy are you to take on more exposure, of course, subject to diversification constraints and whatnot? Third one, what are the risks in your D&O book from the tech and banking fallout in the U.S. I know you do a lot of claims made underwriting and such, but I guess is there anything that we should be worried about? Fourth one, the April renewals, what was your participation there? I'm asking because I had the impression that your property growth is more U.S. focused, but I'm not sure if that's the case. And can you also remind me how is your cat risk at that is that the PML as a percentage of capital?

[Adrian Cox, executive]

Okay. All right. So I'm going to -- let me try and get to those in the order that I can remember them. So the banking crisis that we witnessed in the first quarter was mostly a U.S. issue and other than Credit Suisse, I think, has remained the U.S. so far. Our financial institutions business is ex U.S. So from a claims perspective, that hasn't impacted us, although, of course, that is one of the things that we underwrite too.

When we think about the -- about our property business, if we divide that into the reinsurance business and the insurance business, the business is mostly North American because that's our default specialty for that and has been for a long time on the insurance side. Our reinsurance business is more global. It's about 60%, 65% U.S. and 35% ex U.S. In terms of PMLs and the sort of risk appetite that we have for property, there is -- there are some charts that we showed at year-end, showing what our exposure is to equity at a 1 in 250 basis and what our exposure is to earnings on a 1 in 10 basis. And I think that gives you some good information about the level of risk that we're taking. And we can share that with you again if you'd like us to.

And with regards to the cyber rating environment, as we mentioned at year-end, we think pricing is adequate. The cyber business had a 79% combined ratio last year, which is a little bit less than the long-term target we have, which is why we are looking to put more exposure on the books this year, which we have been and we will continue to do. I think the -- the thing to keep an eye on within the cyber business is not only what's happening to rates but what's happening to the claims environment and the exposures they're in. So as we see new threats emerge, if and when we see more activity begin to happen -- or different activity that begin to happen, and that has an impact to what we think the exposures are, that's what will drive our feelings of a rate adequacy as we compare that to what's happening to the market pricing environment. But as we -- as of today, we remain confident that we're rate adequate and we want to continue to grow.

And then there was a question about what reinsurers are doing, but we had some background noise here. So I missed that question. Would you mind repeating it for me, sorry.

[Teik Goh, analyst]

Yes, yes, not at all. Just in terms of cyber reinsurers, have you seen any initial reactions to the updated war wording? Do you think cyber appetite is opening up already? Or do you feel like there's still a lot more to be done for reinsurers to get more comfortable taking on more cyber?

[Adrian Cox, executive]

Yes. Are we seeing more reinsurance capacity coming into the market? I think more and more reinsurers are interested in cyber, but they remain very aware of risk and want to understand the downside risk and want to make sure that they're partnering with people who can -- who managed that down -- sort of risk prudently and put the effort into to understand that. I think the progress the market is making with war will encourage that from reinsurers. We haven't seen lots of new capacity come in over the last three months, so no.

[Teik Goh, analyst]

Got it. And just quickly to clarify, the capital surplus range is really that's an update for H1?

[Adrian Cox, executive]

Yes.

[Operator]

We now have at Anthony Yang of Goldman Sachs.

[Unknown Analyst]

Actually, two questions from me. Firstly is on the property cat. So I think you mentioned higher retention there and openings to grow exposure if attractive. Can I ask, say, if Hurricane Ian happens again in this year, how should we think about the combined ratio volatility for 2023? And then the second question is on the core guidance. I think you mentioned cyber claims was better last year, but it sounds to remain prudent in this year. Can I ask if the underlying assumption in the core guidance, do you assume better claims experience or normalized claims experience in cyber underneath?

[Adrian Cox, executive]

Okay. So yes, within our core guidance, we're assuming normalized cyber frequency. So we're not assuming that we have a particularly remarkably benign year for cyber within our core guidance. I think the -- when we do some [ as if ] analysis on the treaty business that we're writing this year and we look at what would have happened to a number of prior year events if the reinsurance portfolio was structured the way that it currently is, it has a marked effect, yes. And I think the narrative has been to try to make sure that the catastrophe treaties attach away from most of the secondary perils and are covering the primary risks only. And I think that's happening.

Hurricane Ian was a large primary risk hurricane. So I think even under today's terms conditions, Hurricane Ian would impact the reinsurance market. What that would do to the combined ratio, we haven't done that work and sort of shared that sort of detail. But I think the attachment point were that the reinsurance market has been doing has been to get away from the secondary perils rather than that primary ones, if that makes any sense..

[Operator]

We now have Nick Johnson of Numis.

[Nick Johnson, analyst]

A couple of questions, please. Firstly, on property. On the -- just a question around the growth mix in the first quarter in terms of how the growth looks between the reinsurance segment and insurance segment in property. I would assume that reinsurance growth has been easier to get and insurance in property takes a bit more time to grow. Just wondering if that's the case in Q1. Because I think you previously mentioned that you wanted to use the strong market conditions in property to grow your U.S. locally underwritten property business. Just wondering if you could update on that and if there's anything to add.

The second question is on cyber. We've heard anecdotally from one or two corporates recently that they're not buying cyber insurance anymore because it's too expensive and they think it's poor value. Just wondering if you're seeing evidence of that. Is that an emerging headwind in the segment?

[Adrian Cox, executive]

I'm struggling not to think upfront at the thought that cyber insurance is poor value, Nick. But -- so to go back to your first question, the growth mix in insurance and reinsurance, you can see from the rate change versus premium numbers that we have put some exposure on the books in property risks. Actually, the bulk of that has come from the insurance business rather than the reinsurance business. We've grown our exposures faster on insurance. And yes, a reasonable chunk of that has come from the business that we're writing onshore in the U.S. And that's exactly what we had hoped for. So the premium growth for treaty has been very encouraging, I think they've done a great job, but the bulk of the exposure has come from growing the insurance business.

Is cyber too expensive? It's -- we've had this question a few times. I think the cyber pricing reacted to the fast changing and increasing exposures that are out there, particularly around cybercrime and particularly around ransomware as being the most pernicious of them. And so I think that the pricing broadly reflected the increase in exposure that we will have to deal with. One of the things that's happened over the last couple of years is that as those exposures have -- so insurers have demanded or been more doing more -- doing due diligence about what the controls are that each individual company has and how well risk-managed their cyber exposures are. And I think, generally speaking, risk management and controls have improved a lot across the world as cyber has become a genuine business risk. The premiums that get charged by the cyber industry really do reflect the individual controls and risk management that the company has. And if they're not there, and if they're not appropriate for the risk that, that company has or the size or complexity of that company, the cyber insurance premiums will reflect that.

And we have had a couple of clients that have said to us, actually, we'd rather invest the money in risk margin and come back to the cyber market when we've done that. And we said, yes, and you'll find that the premiums will reflect that investment, and they have. So I think if some of your clients are finding that cyber insurance is very expensive, that may well partly be a reflection of the controls that they have rather than the cybermarket being irrational.

[Operator]

We have now have Faizan Lakhani of HSBC.

[Faizan Lakhani, analyst]

I had some follow-up questions on cyber, so I apologize. I know you answered quite a few of them. But first, I just want to just go back to the fact that the majority of the market has now moved to the updated wording. I just wanted to understand the shape of that. Did that happen at the back end of Q1 when you strip out Lloyd's market? Or was it earlier on? The second question is on the sort of broader sort of picture in terms of cyber capacity. Demand is very strong, but I just wanted to understand, has there been sort of any incremental capacity coming into the cyber market? And third one is a rather silly question, but I thought it'd be worth asking. You've had year-to-date rate changes of 4% in cyber. And I'm assuming that is relative to Q1 2022 business. Given that rate accelerated significantly in Q2 last year. if rates stay the same as they are, would we expect a decrease in rates year-to-date when it comes to this point of H1 in cyber?

[Adrian Cox, executive]

I'm not sure I got to answer that third question, sorry. because it's quite dynamic. I think what -- I think the rate change that we've shown shows that the sale pricing, broadly speaking, it's flattish to year-end, which is fine and adequate for us. We expect it to continue to react up and down to the [ rate ] environment. And we're comfortable with that. I'm not sure I answer that question.

If we go back to the wording changes, I think the market has moved gradually over the last 4 or 5 months. There was an acceleration at 31/3 because of that Lloyd's mandate. But when we think about carriers outside of Lloyd's and the rate at which they have adopted updated wordings, that's been a gradual thing. As we mentioned, the biggest impact on our business -- when we look at new business flows and retention rates, the biggest impact on our business was at the beginning of April when that mandate came into place. It has since recovered a bit. And I think the momentum is building nicely. There does remain some work to go. We're still talking a lot with clients and brokers. I think that those conversations are a lot more productive and collaborative than they were six months ago, which is why we kind of reiterate our full year guidance there.

Demand growth remains strong. And we talked a little bit about this at year-end. I think if you divide the -- if you divide the market in two ways, U.S. and ex U.S., demand growth ex U.S. is very strong and particularly in Europe,and in Australia. And we're capitalizing on that nicely, and I'm very pleased with that. When we look at the U.S. market, there's still lots of demand growth within the SME world, a chunk left within the mid-market. The larger risk business is relatively saturated now. So most Fortune 500 companies would have decided whether they want to buy or not. And so we are adjusting where we're looking for new business accordingly because it's much easier to grow in blue water isn't it?

Is supply continuing to increase? Yes, a little bit. I think -- but it's mostly because existing carriers are getting more confident, then lots of new supplies coming in. But I think we want that. We want a confident and active cyber market to meet that growth. So we're comfortable with that.

[Operator]

We now have Punit Pandya of Citi.

[Punit Pandya, analyst]

Just a couple more on cyber, please. So the first one, would it be reasonable to assume that the RDS of GBP 140 million comes down based on the exclusion criteria changes? And then the second one is, are you working on a stand-alone cyber war product?

[Adrian Cox, executive]

Yes. So the answer to the second one is yes, we are. And we're hoping to come out with something in the summer. It occurred to us as we were talking to our clients and our brokers, we offer war within our political risks division as part of our political violence cover. We offer a war for some of our aviation clients and some of our marine [ whole ] clients. So if we have the appetite to write war business, why wouldn't we do that with some of our cyber clients as well? And so we're working on that product. And that's just not a buyback of the change wording. That is war coverage.

Have our RDS has gone down because of the updated war wording? No. But I think that one of the ways that, that RDS might have manifested has gone away. So if one of the ways the RDS could have happened would be through a nation-state attack, that is not -- that factor has now gone away. So it's not the...

[Punit Pandya, analyst]

Sure. Would that have been the biggest exposure on the RDS, the one that you mentioned on sort of state war?

[Adrian Cox, executive]

I mean, it's certainly one of the credible actors, isn't it?

[Punit Pandya, analyst]

Right. But would that be sort of the largest exposure on the RDS that would have been at least before?

[Adrian Cox, executive]

Yes. I mean, when we think about where that capability could like, yes, a hostile nation state is one of the incredible vectors. Is that the most likely? We've been very hesitant to put return periods on stuff with cyber, that hasn't happened before, but it's certainly credible. So I'm not going to answer your question directly, sorry.

[Operator]

We now have James Pearse of Jefferies.

[James Pearse, analyst]

Just one follow-up from me, a clarification point on Anthony's question. So you mentioned that the high 80s combined ratio guidance assumed normalized claims in cyber. Can you just give an indication as to whether you've seen a normal level of claims in cyber year-to-date? However, it's been a bit better or worse than your normalized assumption?

[Adrian Cox, executive]

So year-to-date is only three months. So it isn't particularly credible anyway. And -- but overall, for the book, it's sort of within our expectations. I think in response to one of the earlier questions, have we seen a marked increase in frequency in cyber in the first quarter because there's noise in the market that there has been? No, we haven't seen that yet on our book. That's about as much detail as I can give you. I'm sorry.

[Operator]

[Operator Instructions] I can confirm we have no further questions. So I'd like to hand it back to the management team.

[Adrian Cox, executive]

Super. Thank you. Well, thank you very much, indeed, everyone, for joining us this morning. Thank you for the questions. A really good session. Thank you. Thank you, once again. And enjoy the rest today. Bye-bye.