Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Hello, and welcome to the Lancashire Holdings Limited First Half 2022 Results Call. [Operator Instructions]. Please note this call is being recorded. Today I'm pleased to present Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; Paul Gregory, Group CEO.
I will now hand over to Alex. Please begin your meeting.
Okay, thank you, operator. Good morning, everyone. We're going to follow our usual format today. So I'll give you a quick overview of H1. Paul will talk through what we achieved on the underwriting side and then Natalie will go for some detailed financials. So I think there's about 5 minor points we're going to talk about just on our first half year results.
I think firstly, I think what you're seeing coming through the numbers now is the benefits of the investments that we've made on the underwriting side. We've grown our product lines. We've hired a lot of good people in the last 4 or 5 years. And I think you're starting to see that come through. So I think that's -- it's very pleasing for us. The teams have grown well with the market opportunity and obviously continued harden of the race to benefit us as a business.
When you look at the first half year, it's not about incident. Obviously, we've got the ongoing war in Ukraine. There's been various weather events and some risk losses that were sustained as well. So to absorb them and produce a 78.2% combined ratio, it's very pleasing. So I think that's a very strong underwriting result in the current climate. Also what you're seeing as well is the profitable growth that's coming through, but that also helps our diversification play, and you're also seeing strong benefits on our expense ratio. So everything that we plan to do at this stage of the cycle will start to come through to the numbers.
Just moving to the current rate environment, we continue to see positive rate momentum in pretty much every class of business that we have. But also, I think our outlook is relatively strong. I think if we split it into 2, if you look at the cat portfolio, we're seeing continued hardening in the cat portfolio, and Paul can give you some of that detail later. But we expect that to continue and to continue into 2023, even if the hurricane season is kind to the industry, and that's mainly been driven by supply and demand for cat business.
We also expect rates to improve for our specialty portfolio. Clearly, anything that's affected by Russia and Ukraine is going to see some reasonable hardening in those markets, and that's a big part of what we do. So areas where we expect to see substantial hardening towards the end of the year and into '23, we have a significant market presence. So I think all in all, we're quite strong on the outlook for continued rate momentum in some key areas for Lancashire. And that all in all with our growth plans as well will help out our underwriting earnings for the next few years.
On growth, again it's been a strong quarter for growth. As you know, our DNA is to grow when the underwriting opportunity gets better and we've continued to do that. Some of that is existing business where we continue to get opportunity and rates. But obviously, as we said before, we entered '22 with a strong pipeline of new opportunities. And as I said, that's from existing teams and new teams. And our budgeting is relatively conservative when we go into new product lines. So I think it's a fair comment to say that most product lines have exceeded the relatively conservative budgets we had. So again, that's in line with our long-term strategy.
We spoke about growth in Q1. We do expect to grow throughout the whole of '22. We don't believe at this point it will be to the same extent as we did in '21, which was a material year for growth for us. But equally, we'll underwrite the opportunity in front of us. And aviation would be a good example where it's hard to tell how strong the opportunity will be today.
But if that opportunity is stronger than we think, clearly we're going to take the opportunity. So we're definitely going to grow strongly this year. To what degree, we don't know yet. But again, we will take the market as you see it. So all in all, our long-term strategy hasn't changed. We believe in growth at this stage of the cycle and the underwriting opportunity continues to strengthen. Therefore, you should expect us just to continue to grow into it.
Just moving on to Ukraine and Russia. As you can see from our losses from Ukraine, we're at the lower end of the range that we gave in Q1. We don't take too much credit there. It's not really an area where we have a huge amount of exposure. But obviously, these losses are very manageable.
When it comes to Russia, our position in Russia hasn't really changed, i.e., we don't really have any new news from Russia or for expose that we may or may not have there, but again I just want to reiterate that any exposure that we may or may not have is perfectly manageable. It doesn't change what we want to do as a business. It doesn't change our plans. So we're as comfortable today as we were when we made those previous statements. But there's not much of an update there because clearly it's an ongoing event.
We just turn to the investment portfolio. Obviously, now interest rates are rising quickly and our investment portfolio on a mark-to-market basis is impacted. So again, our duration is short. We're not unduly worried about that. But we will see the benefit of better investment returns helping our overearnings as a business so that we see that as a positive. And just a general comment, I think at the end of free money is a positive for our business. So I think interest rates going up is a good thing for us, but clearly, there's going to be a mark-to-market gap, which is also an industry problem.
Finally, I think in difficult times, having a strong balance sheet is key for a number of reasons, but I think in a difficult world, there's going to be -- we see opportunity in a difficult world and having a strong balance sheet is definitely important at this stage of the cycle, and that will help us to continue to expand our business.
So the general view is the uncertainty will bring opportunities. We're in a good position to take advantage of those and we'll continue to do what we should do as part of the cycle.
And with that, I'll hand over to Paul.
Thank you, Alex. At the beginning of the year, we expected to grow premiums ahead of rate. I'm pleased that we've been able to deliver on this. We have a very strong increase of nearly 35% in top line. We've been able to take advantage of growth opportunities in P&C reinsurance, P&C insurance and marine. In these areas, we've added significant new business comfortably in excess of rate.
Overall market conditions have remained favorable. In some instances, as Alex has mentioned, we're now seeing the rating environment improve more than we initially thought at the start of the year, and we anticipate our year-end RPI to be stronger than our half year RPI of 106%.
On the following 2 slides, I'd just like to focus on a few key things from our business segments. First of all, our newer products, casualty and financial lines reinsurance and accident and health, are key growth drivers within P&C reinsurance. Pleasingly, and as Alex has alluded to, these are maturing faster than we forecast. In catastrophe-exposed reinsurance lines, 2022 has been about optimizing the portfolio that we grew in 2021, whilst taking the benefit of improved rate.
In these cat classes in Q2, there was clearly a positive step change in rating. RPI has moved from high single-digit increases that we saw in Q1 to double-digit rate increases. There is noticeably less capacity available, which is squeezing rate rises higher.
Now turning to the classes that were impacted by potential losses from Ukraine, in P&C insurance, terrorism and political violence rates have now started to turn. Rating in Q1 was broadly flat, but we're now starting to see rate rises slowly improve each month. We fully expect rates to continue their upward trajectory. H1 for aviation is never particularly material from a premium perspective and doesn't traditionally set the time for market conditions. Obviously, there are a lot of dynamics at play in the aviation sector currently, and we expect a very different marketplace by the time we reach the year-end renewal season.
There are some more competitive pressures in some of the subclasses of energy, particularly things like downstream energy. But importantly, most of the subclasses within energy, we're still seeing positive RPIs albeit increasing at a slower pace than in recent years.
Quickly turning to our new teams in construction, marine and energy liability in Australian property, these have gotten off to a good start, and we are maintaining our guidance of $50 million to $60 million additional GWP for 2022. So to sum up, our outlook for the market is more positive today than it was at the beginning of the year.
As the new product lines we've been investing in continue to mature, we're starting to see the desired impact. We fundamentally believe that there are attractive returns to be made in catastrophe-exposed products through the cycle. We also acknowledge that these products are inherently volatile. Building out the non-CAT products provides a more robust portfolio to help dampen this volatility.
Within the catastrophe-exposed products, we've always aimed to take a conservative approach to our modeling and pricing of risk. We've always been believers that the model is only one tool in the toolbox of an underwriter. However of course, we want to make sure this tool is as capable as possible.
Throughout our history, we've constantly evolved our modeling and tried to employ lessons learned by applying loads for various different risk factors. As you can see from the chart on the slide, the recent BMA study showed that our loading factors we apply are significantly more conservative than our Bermuda peers. This does not mean we won't continue to refine our modeling or indeed that it guarantees that you can generate profits. It just demonstrates that we have a more prudent approach to risk management when underwriting catastrophe-exposed business.
Quite rightly, the industry has been focused on inflation as an increased risk factor. We're acutely aware of the risk that inflation can bring. That said, we do believe that we're pretty well placed to manage this. And just a few key points to make here. The vast majority of our portfolio is short tail and renewed annually. That portfolio renews over the course of a year. Our clients provide us with updated valuations at each renewal. We compare these updated values with our own view of inflation to ensure that the inflationary impact is captured within our exposure data. Our catastrophe model includes a general load for inflation on top of these valuation changes already factored in.
And when we report our RPIs to you, these are risk-adjusted rate changes. More generally, we've underwritten classes of business that face severe inflationary and deflationary pressures since our inception. There's no better example of this than in the energy sector where the oil prices deviated from $100 to $30 and back again. And also it's important to remember that inflation is certainly not all negative. The positive to inflation is that as values increase, our clients buy more cover. That is limits required increase, which brings more demand to the market. So inflation is certainly a heightened risk, but risk we believe we understand reasonably well and have the portfolio and tools to manage appropriately.
I'm now going to pass over to Natalie.
Thanks, Paul. Our overall results for the quarter are summarized on Slide 13. I'm very pleased with our underwriting performance for the first half of 2022. Our combined ratio was a solid 78.2%. This translates into a profit after tax of $74.4 million, an increase of 56% compared to the same period last year.
The benefit of our growth over the last few years comes through in net premiums earned. These have increased by 40% to $440.5 million. With additional premiums written this year yet to earn through, we will continue to see the benefit of this growth over the next few years. Some of the newer lines of business that we are writing such as casualty and financial lines tend to earn over a longer period than our historical book. And with our conservative reserving, we'll continue to deliver profits over a longer period.
You can also see the benefit of our growth in the operating expense ratio, which has reduced to 15.5%. The small increase in dollar terms in G&A expenses is largely due to higher employment costs, which was somewhat offset by the favorable sterling to dollar exchange rate. The acquisition cost ratio is higher than the same period last year, 24.8% compared to 21.3%. As our business mix changes, you might continue to see some fluctuations in this ratio. I expect that the total expense ratio for 2022 will be consistent with the year-to-date and in the region of 40%. Overall, this is in line with previous guidance given.
Our claims performance for the first half of 2022 is detailed on Slide 14. Excluding Ukraine, there were no individually material losses of note. Having said that, the half year was reasonably active from a weather perspective, and we incurred some losses from the Australia and South Africa floods.
We also incurred a number of risk losses across our energy book, some of which are attritional in size. Our attritional ratio at the half year is running at the high end of guidance. This is partly due to these small energy losses, but mainly due to business mix, which we have illustrated on the next slide. Given our current business mix, we will likely end the year at the top end of previous attritional guidance given.
I have said it before, but to reiterate, the business mix changes are accretive to ROE, which is key for us and our shareholders. The favorable prior year development for the half year at $64.4 million was positively impacted by IBNR releases from 2021 as well as releases from individual losses from the 2017 and 2018 accident years. Our history of strong reserve releases is down to our conservative reserving approach.
We are likely to end the year with higher releases and guidance given the first half performance. From an overall combined ratio perspective, we are tracking in line with previous guidance and remain happy with consensus for the year.
This slide shows how our business mix has changed since our inception. We have a clear strategy to grow when trading conditions improve. And you can see the extent of this growth as the underwriting conditions started to improve in 2017.
Although our catastrophe exposed premium has grown in dollar terms in the last few years, it is proportionately a much smaller part of our business than historically. As the proportion of catastrophe exposure and volatile business has shrunk, we have expanded our exposure to more attritional but still very profitable lines of business. These lines are less exposed to catastrophe or large losses and have a low capital requirement, though they do have a higher attritional loss ratio.
This means that these lines of business give us a stable earnings stream that is accretive to our returns. As Paul said, so far during 2022, we have been able to write more business than initially expected in the more attritional classes. We believe these changes will have a positive impact on profitability, although they do increase the underlying attritional ratio. This impact is more pronounced in the early years of writing new classes where we tend to be especially prudent on our reserving.
Slide 16, our investment strategy has not changed. We continue to keep our duration short in line with our liabilities and are less concerned with short-term volatility. In the first half, we had unrealized mark-to-market investment losses as interest rates increased. The yield curve also flattened significantly and spreads widened for investment-grade corporate debt and bank loans. We maintain a conservative portfolio with an overall credit rating of A+.
We aim to invest in largely low risk, short duration and liquid investments while taking more risk on the underwriting side of the business. We do not intend any material changes to our investment strategy in the medium term, and we'll keep the overall portfolio duration short to help mitigate inflationary impacts. The current market yield is 3.5%, which we will benefit from going forward. While short duration means we will benefit from the rising rates relatively quickly.
On to Slide 9, we ended the quarter with a very strong balance sheet, which gives us the ability to support our planned business growth over the remainder of the year. On Slide 9, the waterfall chart shows how our regulatory capital position has developed since the end of 2021 with an estimated position at H1 2022. This estimate incorporates the impacts of changes in business written plus some tweaks to our reinsurance program in the first half of 2022.
Overall, these benefit the PMLs used in the rating agency and regulatory capital models, resulting in a very strong capital position. Most importantly, this diagram shows that we still maintain a very strong regulatory capital position following a one in 100 year Gulf of Mexico wind event of $328 million. In line with our stated dividend policy, we are declaring our normal interim dividend of $0.05 per share.
With that, I'll now hand back to Alex to conclude.
Thanks, Natalie. So just to conclude, what you're seeing today is you're seeing the benefits of the investments we made in some of the product lines in the last 4 or 5 years of supermarket turned. You're seeing the benefit of compound rate increases, which we expect to continue. And obviously, we expect that to help our onus on a mean loss basis.
As I said earlier as well, higher interest rates is a good thing for our business. So we've got a number of things put in us hopefully to a better return for our shareholders. Also I think the world is pretty difficult at the moment. There's a lot of uncertainty. So having a very strong capital position is key. And we do believe we're going to see opportunity out of a difficult world. And with the people we have, the capital and the runway, I suppose, I think we see a lot of opportunity for this year and beyond.
So with that, I think we'll go to the operator for questions.
[Operator Instructions]. The first question comes from the line of Kamran Hossain from JPMorgan.
Three questions, first one is, I guess, on the outlook. It seems a little bit earlier than usual that you're calling out the positive kind of environment for 2023. So just interested on that. Is this kind of primarily focused on reinsurance cat or kind of other places to you just noting the capacity crunches that we saw at the half year?
The second question is on expense ratio. I understood on the kind of 40%, including the acquisition cost plus expenses. But when we think about the 15-ish percent that you had at the half year on, I guess, the G&A ratio, is there anything that would change that number materially for '23?
And then the final question, just around kind of attrition. I know you're going to move away from it or hoping to kind of move us away from this. But is there any kind of big distortions in the, I guess, in the ratio? You have called out things like Australia, but you haven't given us the numbers. Kind of what level of -- or what makes a loss large enough to call out? What's the size that we should think about there?
Okay. I'll just give you some high level and then Paul will, I'm sure, add some context. I think that on -- if we just split it into cat and specialty is the easiest way to do that, I think on the cat side, there's been some quite public retrenchment of cat capacity. And like when you get past the jargon in our industry, it is about supply and demand. And we just believe that there is going to be less supply of capital supporting catastrophe business, mainly driven by climate change and people's appetite there.
And equally, on the flip of that, clients want to buy more cover or even with inflation, you're seeing clients needing to buy more cat cover. So it's the classic supply is going down, demand is going up. And as I said, I think even a clean cat season won't change people's minds. So I think that's why we're stronger than we normally are coming. You are right in that. And then I think on the specialty side, I wouldn't say that every single specialties line is going to increase its rates.
But areas that have been affected by Russia and Ukraine, which is areas that where we sort of have some pretty decent market presence, already we're seeing material changes in reinsurance purchasing. I think that when you get to the depths of the Lloyd's planning season, I'm pretty sure you're going to see people pulling out certain classes of business, particularly on Terra.
There's been probably a mismatch of premiums versus reinsurance costs and some really poor underwriting and some broken facilities that remind me of some of the things that happened in the energy market in the late '90s. So I think when you've got all of that evidence in front of you, I think it does lead you to a stronger view of the future than we would normally give us, I suppose.
Yes. Kamran, on the expense ratio question, obviously we'll update guidance for 2023 towards the end of this year. But I would say that we do expect the expenses will increase, but they will increase less than we expect the earned premium to increase going forward. And on the attrition, the -- we're at the high end of the guidance given. That's mainly due to business mix. And if you think about that, that's a positive thing because it implies we've written more business than we were expecting at the start of the year. And on your specific question about dollars, I think we've said before that we take any large risk losses above $5 million out of the attritional ratio.
The next question comes from the line of Freya Kong from Bank of America.
Three questions, please. Firstly, in your regulatory capital waterfall chart, you showed that business mix changes and reinsurance has positively impacted the capital position. Could you give us a sense of the relative impact of both changes? And can we assume a similar benefit also applies to your AM Best credit model?
And secondly, you've reduced your cat exposed GWP from around 40% of the group to less than 30%. Given your continued growth outlook in non-cat lines, how do you see this business mix evolving, say, in the next 5 years? And lastly, is there any guidance you can give on your 2023 tax rate given OECD reforms that were passed at the end of last year?
Okay, so on the first question on the regulatory capital waterfall chart, the main impact on that is really the changes in reinsurance purchasing on the slight tweaks that we made there. So as we've mentioned before on previous calls, we've got a higher first event retention, but we did buy more aggregate protection and tail risk protection, which benefits the 1 in 250 PMLs and the required capital for regulators and rating agencies.
You can't make a linear interpolation between the regulatory capital in BSCR and the A.M. Best model. In particular, the A.M. Best model takes a 1 in 100 or risk PML off your capital. So it's probably more similar to look at the stress position that we have on the slide there after we've taken our Gulf of Mexico wind event off the BSCR.
And then I'll take your tax rate question, we don't expect any material changes next year. The OECD tax rate change is not going to come in for another couple of years, I wouldn't expect.
On your business mix question, Freya, I think look, the answer is always from us will be it will depend upon what the opportunity is in the market. Now clearly, we have been growing our non-catastrophe lines as the market has been improving since 2018, and we fully expect to continue to do that. Exactly what the business mix will look like in 5 years, to be honest I'm not going to sit here and give you an answer because I just don't know what the market conditions will be. But our underwriting philosophy is very simple, is if we see a good opportunity to make better returns for shareholders, then we'll take advantage of those opportunities. In Q4, for example, as we've spoken about, we anticipate a reasonably dislocated aviation market. And if that transpires, we'll happily write a lot more aviation business if the rating environment is appropriate. So sorry, I can't answer your question exactly, but our underwriting principles remain unchanged.
Okay. Can I just follow-up on that A.M. Best move? So your 250-year PML has come down, but your 1 in 100 year goes up. What is the net benefit or, yes, what's the net benefit on your A.M. Best capital because there are 2 moving parts there?
Yes, I think, Freya, that we don't give any guidance on the A.M. Best capital.
The next question comes from the line of Will Hardcastle from UBS.
Two or three questions. The first one, on that solvency bridge, unlike the reason you said that effectively your numbers step up because of the business mix and reinsurance. It's something like the big step-up when we backdated the full year I guess. Is it just mix that happened in Q2 on the revised update?
The second question is just thinking about throughout the renewal period, anything you can say regarding that? And potentially, how would Demotech-rating downgrades impact the book? I appreciate this now it looks like it's been deferred, but any commentary there? And the final one is, can you give us a bit of the detail on the older events where the reserve releases were stemming from. It appears they start reducing their reserve buffer above best estimate due to IFRS 17. Have you done anything of the same or is that on the cards?
Okay, Will on your first question, the step-up that you see in the BSCR ratio in Q2 is largely due to some additional reinsurance purchases we made in the quarter. But we are seeing benefits of business mix, which I think I did say last quarter, we do get some diversification benefits in the model as well, which aids the capital, but it's largely due to reinsurance.
On the reserve releases, the reserve releases we've got in the older years '17 and '18 relate to specific events. You see this throughout our history that specific events can go either way. But generally, over time, they tend to move for us positively because of our reserving approach, which is conservative. At the moment, we don't expect to make any significant changes on the -- when we put IFRS 17 in. But obviously, we look at it ongoing over time, and we'll aim to maintain our conservatism going forward.
Will, sorry, could you repeat question 2? I've got the back end of it, but not the start. I think you were asking about renewals in Florida, but can repeat the question, please?
Yes, Florida renewal period, just any comments on outcome? And I guess the back end of that question was, would -- there's a pending rating downgrade potentially from Demotech. Just how will that impact your fitness at all from a premium or a rebate perspective?
Yes, sure. Okay. Fine. Yes, so the plan for us going into Florida was pretty much aligned with our overall plan for cat for the year, which was to broadly maintain limit and take margin and optimize the portfolio in the areas that we could. As has been well publicized, there was some quite meaningful rate changes in Florida. Our book was no different to that. However, there was one large account that we nonrenewed because we didn't feel that the renewal terms were adequate.
So actually, we did finish up with limiting Florida specifics down slightly year-on-year, albeit given the rate environment, our premiums were up. On the second part of your question look, our focus is always -- from our portfolio, our focus has always tended to be on the better capitalized Florida players. So at the moment, I don't foresee any particular issues for the business that we've written.
The next question comes from the line of Faizan Lakhani from HSBC.
This is Faizan Lakhani from HSBC. My first one is on net cat exposure. From your slide, I can see the net cat exposure as a percentage of gross written premium has come down in 2022. But on a tangible capital view, it's risen for all perils. Was the correct way of thinking about this be that on a written basis, exposure is down, but an in-force or earned basis, it's up going the target season?
And I guess sort of bigger picture question, although your mix has shifted away from cat-exposed premiums since 2017, if I look at your PMLs in the last year, they've gone up quite significantly. How do I sort of tie that?
My second question is just coming back to reserve releases, very, very robust reserve releases, and it seems to come in part from property and casualty reinsurance in terms of absolute dollar amount. How much of this is from an unwind prudence on your new lines of business versus the general IBNR release?
Faizan, I'll try and answer the first question, which I think I understand. So look, on the cat portfolio, the moving parts are pretty much in 3 areas to start with, as we said at the start of the year, our intention was to broadly maintain our cat footprint and the shape of the inward portfolio is broadly similar to last year. We have taken the opportunity in some areas to optimize the portfolio.
And as I just mentioned on the previous question, there are sometimes areas where the renewal terms aren't adequate. So sometimes limit comes down. The example I just gave being Florida. But as a general comment, the inward portfolio remains broadly the same, and then we get the benefit of margin coming through on the increased rates.
Post 11, we did talk about on the outward side, having a higher first event retention on our outwards protection, which is primarily due to market conditions. And this is where you see this -- the kind of small increases coming through in the 1 in 100 numbers, which you can see in the financial supplement. We also spoke about, and Natalie already alluded to, we also bought more aggregate in tail protection. So, this both sits on top of those core reinsurance programs and to the side of those reinsurance -- core reinsurance programs.
And this is where you start to see the benefit come from in the 1 in 250, which as you can see, are down reasonably significantly, but also helped, as Natalie just explained, both rating agency and regulatory capital. So hopefully, that gives you the picture of the moving parts.
Okay. On the reserve release question, yes, if you look at our releases from the previous underwriting year, we generally release there. And we say it's down to IBNR releases, which are -- it's almost the same thing as talking about prudence. You will see because we do reserve for our new line of business very prudently in the first few years. Given that level of prudence, you would expect to see a good idea in our releases coming through in the following underwriting year. Hopefully, that's helpful.
Can I just come back very quickly to the first question. That was very helpful in terms of detail. Just sort of thinking very simplistically, does that mean you're exposed more to higher frequency, lower severity events going forward?
No, not necessarily.
The next question comes from the line of James Pearse from Jefferies.
It's just three from me too please. So the first one is just on the potential losses from the aircraft stranded in Russia. I know there's a lot of uncertainty here and that we're not going to know what the ultimate loss is for quite some time. But would you expect the industry, including yourselves, to start recognizing some sort of provision for any losses sooner than these claims actually being settled?
And if you do, what do you think the catalyst will be for insurers to start recognizing and disclosing those provisions? Next one, sorry, it's another one on capital. How should we think about the capital requirement strain as a percentage of premiums going forward? Should we expect that to be broadly flat relative to premiums or will it continue to reduce given, I guess, rate increases and further growth in less capital-intensive lines?
And final one, just based on your current capital ratio of 270%. So assuming we have a relatively normal year from a cat loss perspective, it feels like you should have a decent amount of excess capital. So I'm just interested to hear what your preference would be in terms of how that capital is deployed?
Fine okay so on Russia, I'll start, and then Paul can add if he wishes to. I think if you look at the commentary from some of our peers, I think we would agree with that. It's an ongoing event. It's a difficult situation. And I think ultimately, what happens is most complex claims, it will probably take a number of years to settle whether and the quantum loss is very debatable.
If there is a loss at all, I think that -- and obviously, I can talk about it because it's public. If you look at AerCap being the world's largest leasing company has submitted the claim to the market. I think people are going to keep a very close eye on what happens there. And maybe that will be the path that others take. So I think at this point, as you said, there's no real change to our position. We're crystal clear on why our exposure may or may not be.
It doesn't affect anything we want to do in our business, but it's just going to take some time to come through. So yes, maybe end of this year, I just don't know. We changed our view on reserves when we have proper evidence and in fact patterns and nothing has changed from Q1 from our point of view.
James, I think potentially, the answer to your question is 2 and 3 is really the same thing in that we write the conditions that we see in front of us. So the capital requirement going forward will very much depend on the market that we see in 2023. It's really the same answer for your third question on if we have excess capital, what are we going to do with it.
We'd always prefer to use it for underwriting. And if the market is good, that's what we will do. And if not, we've made the usual consideration of a special dividend or share repurchases, but we make those decisions after wind season at the end of the year.
The next question comes from the line of Andrew Ritchie from Autonomous.
I think most of my questions have been answered, but could I just follow-up on the PML changes. I just understand that you've taken -- obviously I can see that the benefit of the reinsurance of the 1 in 250. But I'm just trying to understand that your additional aggregate protection that you bought. I mean it kicks but resume below 1 in 100. I see the 1 in 100 have gone up, but I'm just trying to understand, I suppose, a rerun of a hurricane season type with a multiple 1 in 10 type events?
Would you -- do you have material additional protection relative to what you used to have because you said in answer to an earlier question that you're not necessarily exposed to more frequency because the way you presented it is that the 1 in 100 jumped up in some perils quite a lot, but 1 in 150 hasn't so I'm sort of left of the impression you're quite exposed up to multiple 1 in 100 events. Maybe just reassure me that's not the case, if you could?
And then some of those PMLs growth, there was a lot of growth in certain perils and not in others. Is that just how it's fallen out with the shape of the reinsurance or you think things like, for example, European Windstorm and all the Japanese perils are much better priced than Gulf of Mexico. And then there are 2 questions but quite specific ones on certain classes. On energy, I admit I'm just a bit confused on energy. I see lots of trade articles saying that pricing is softening a bit. And yet I'm hearing about lots of losses?
I mean maybe losses haven't affected you that much, but there seems to be quite a lot of large risk losses. There's, possibly some inflationary aspects in that particular class also. And I'm just confused why is pricing sort of not sort of behaving better there? And then final question on aviation, can we really get a dislocation in the market without clarity on the loss? Maybe just explain how that would be the case?
Okay, I think they are all for me, Andrew. So on the first point on reinsurance, but the 1 in 100 is obviously a singular event, singular current metric. So if we take more retention on our first event and obviously aggregate kicked in beyond the first event. You're not going to see any benefit from the aggregate protection there. The 1 in 250 change is driven by the additional tail predominantly driven by the additional tail reinsurance that we've spoken about previously.
And then yes, the aggregate is effectively kicked in when you have a number of catastrophe losses. So you then get the benefit of that if you ended up having more than 1 so second, third, for example. So that's how that works. On energy look, there's, lots of parts of the energy book and each sub class is performing differently at the moment. So I think the subclass that's seen probably the most competitive pressure, albeit I would say rates are broadly flat and are flat following a number of years of pretty decent rate momentum in downstream energy.
And quite simply, like everything in our market, the market environment is driven by demand and supply. We have seen there has been some well-publicized losses in the downstream market quite recently. So it will be interesting to see if that flat rating environment continues, but it will ultimately only be driven if people's appetite reduces. But what I would say is those great years of rate increases we've seen since 2018 has obviously pushed that market into a better rate in adequacy position.
In things like upstream, we've been very clear in our view that whilst we've been getting small rate increases for the past 4, 5 years, it's not really getting back to a level where we want to increase our appetite to write more risk. We're just taking the rate because we feel from an adequacy perspective, the market gave up so much, rate during the soft part of the cycle that we're not back to a position where we can really broaden our risk appetite, and nothing in that class is particularly changing.
We're still seeing small single-digit rate increases the 2 areas where we've seen better rate increases, albeit in one of them is probably slower than we think. The full power is still seeing good rate increases for a number of years of good rate increases. So I'd say that market is still interesting for us and energy liability, which is a new sector, which gets the effects of the broader casualty hardening that we've seen in recent years. The rate environment there is still reasonably strong.
So lots of different things impacting the overall energy book, we're still moving in the right direction, albeit some classes, there's a little bit more competitive pressure. We're very aware of the inflationary impacts that can impact those various subclasses within the energy sector. We're used to dealing with those. We've dealt with those for a number of years. I think as I said in my script, we've seen oil price from $120 down to $30, and it's now gone back up the other way. That does bring risks. We're aware of those risks.
It also brings more demand to the market and therefore, more premium. So again, it's not all negative. And then on your aviation question, I think first of all look -- we're positive the market will change in Q4, the level to which it will change we can't say at the moment and suggest what that's going to be, but we do expect dislocation.
The reason we feel that it will change irrespective of what happens with Russia is, I think people's perception of risk is different from what it was before. And for me, perception of risk is generally what dislocates market more than the actual dollars of loss. So that's the reason we feel that there will be a change in the aviation market in Q4.
Okay that's great. Maybe just on the PML question just in simple terms, Paul, I imagine a rerun of 2017, would your gross -- would your net versus gross loss be lower with the new reinsurance in place so that was 3 events, wasn't it?
I think it was actually more because you had things like earthquakes in Mexico look trying to ride.
Sorry, so in aggregate across multi-peril then I thought it was just U.S. winter okay?
I think trying to get into the specifics of rerunning losses with inwards portfolio has changed. The dynamics of the reinsurance has changed. What I can tell you is we've got more aggregate protection than we did back then. But trying to get into the specifics of how the portfolio would perform exactly is quite difficult to do and there's more advantages in expanding it.
Also you have brought it also though you have about 50% more rate in the portfolio than you have in very good point though.
Yes, fair point.
You can never really as if cat seasons because it doesn't really work that way, but we've definitely got a lot more margin in the book as well.
The next question comes from the line of Ashik Musaddi from Morgan Stanley.
I have just a couple of questions. I mean first of all, if I think about the capital now capital has been growing while you've been growing your business. I mean first, earlier this year, it was supported by the diversification benefit. This time it's supported by the reinsurance protection. So how do we think about this capital going forward? I mean, if you keep growing the business in second half and next year, I mean, would you say that the capital is now normalizing to a lower level?
I mean, all I'm trying to understand is, I mean, are you actually using more capital to do more growth or would you try to find some other ways to do the growth because in that case, we can get some visibility about some surplus capital return. So that's the first question. And second thing is, I mean, as you mentioned that the casualty business and the -- sorry, non-cat business is becoming a bit bigger and it has a different earn-through so any visibility on -- how do we think about that duration of the earn-through of the non-cat business in the next say couple of years?
Okay Ashik on the second question on the earnings, I would say that on the new lines of business, we're looking more in the region overall, the 2 to 3 years where I think previously we said on our historic book more like 12 to 18 months. So it does earn out a little bit longer on average. And on the capital question, I think it really means the capital headroom more than the actual capital.
But as we've said, we'll look at that at the end of the year, see what we think the conditions will be like next year, what we need to write and what capital we need to write into those conditions, and then we'll make a decision on what to do, anything to additional Paul?
Okay. But I mean, maybe just one follow-up I mean, would you say that there are more tools you have or you're considering to further improve the headroom or more or less you're done in terms of taking your own actions to improve the capital?
Well, the one thing that will improve the capital headwind is the continued diversification that will give us benefit from a headwind perspective going forward as well as the reinsurance purchasing interest. It's something that we look at all the time.
The next question comes from the line of Tryfonas Spyrou from Berenberg.
I just have a quick question on reserve releases. Can you give us a sense on how to think about this going forward, perhaps next year? Clearly, you're much bigger business now. And as you mentioned, there is a lot given the level of conservative and building these new lines. So I was wondering where we should expect to see sort of a step-up change in the absolute amount of reserve releases and whether what we saw -- at the half year is perhaps started this?
Tryfonas, so I think for this year on reserve releases, you really just need to take the excess at the half year and add that on to the previous full year guidance to come up with a reasonable range for this year. And then going forward, as we said, we'll update guidance at the end of this year for next year when we have a better view ourselves.
The next question comes from the line of Andreas van Embden from Peel Hunt.
I just had a question -- or 2 questions. One is on your reinsurance book. I just wondered now you've been growing the casualty book for I think nearly 2 years now. I just wonder how large that proportion that is within your property cash to reinsurance book. I mean just that growth alone in the first half of this year, it seems to me that within that sort of 6-month premium, you've got already 1/3 of that portfolio is casualty classes, but I just want to double check whether that's the case? And if not, what proportion it is?
And also what type of casualty business are you writing at the moment? You've mentioned FIG, but is that a really diversified book? Why are you growing in some concentration -- more concentrated lines of business such as FIG? And the second question is actually on the insurance probably casualty insurance book. You're saying most of this growth is coming from D&F, and I just wondered, you're keeping your product reinsurance exposure flat? Are you moving your cat exposure towards the insurance classes? And does this give you some diversification benefit in your capital model?
Okay so on the first point, Andreas, you're right, a lot of the growth in P&C reinsurance is indeed coming from the casualty reinsurance portfolio. I think -- I mean we don't split out those premiums. But what we have said previously on casualty reinsurance or casualty lines that we anticipate it to be at mature state in and around 10% to 15% of overall GWP. I think it's still a growing book it's 18 months. We've been in it.
It is ahead of schedule, but it's definitely not outside of that range that we've previously given. I think going to the casualty book itself, I mean the playing casualty has very much been a macro one, and the vast majority of that portfolio is U.S. focused and quota share in nature so small shares of large U.S. companies, broad casualty book. So there's not any particular focus on individual areas. We've got a broad spread of all the casualty lines. And as you know, casualty is a very broad church, but by supporting core clients with quota share capacity, we're getting a spread of the broader casualty market risk.
On your second question on P&C insurance and growth coming through D&F yes, we have been growing our D&F portfolio. You'll recall a couple of years ago, historically, we've written this through a syndicate. We also expanded to offer this through our company platform. So that's been growing. Also within that though, some of the growth in P&C insurance is coming through our new operation in Australia also our property and construction team. It's probably worth noting that, of course, not all D&F okay exposed. There is obviously a fair amount of cat exposed, but not all that growth will just be pure cap. But as a general comment, when we talk about our cat footprint, we don't just refer to our reinsurance lines.
We are talking about our overall cat portfolio as a group, which does include our D&F writings. I think it's fair to say that protecting a D&F book is certainly easier from a market conditions perspective than protecting a KXL book because the retro market as we all know is hard and reasonably significantly in recent years. But as I said, when we look at our cap footprint, we take all of the lines of business that contribute into account.
And as we've said, our inwards portfolio as a whole is broadly the same shape as it was last year, but we -- but knowing of course, that we grew that reasonably significantly in 2021.
Yes Andreas, on the point on the cat models that you asked on the diversification, you don't really get diversification benefits between different types of cap, the benefit that comes between cat and non-cat, those lines of business.
Okay. So it's the casualty growth that giving in that diversification benefit?
Yes.
And those other lines of business that we invested in over the years, energy aviation, et cetera.
Yes, so just -- so with the double you mentioned double-digit rate increases in reinsurance at the U.S. renewals. Do you feel those rates are adequate or do you see the rate adequacy really being more attractive in the cap D&F book?
Yes look, we're really happy with what we've seen in the rate environment, both actually, both in the reinsurance lines and in D&F. And in fact, I'll take both of them have been better than we originally anticipated at the start of the year. So obviously, more rate just improves adequacy, and we're more than happy to take that margin.
We do have time for one last question. And our last question comes from the line of Iain Pearce from Credit Suisse.
I mean it just comes back to the optimization that you've done around the catastrophe exposures and the movement in the PMLs really. I'm just trying to understand the logic and what's driving some of these decisions because it feels like you're doing things quite differently to what we hear sort of most people are doing in the market or what's been reported, at least in the market?
In terms of people trying to write higher up layers, access to aggregate covers, people reducing those aggregate reinsurance covers that they have reducing limits on single loss events these sort of things. So it feels like you're doing something a little bit different from what's going on in the market. So really, what's driving that decision? Is it where you're seeing better pricing or better returns on capital or is it just from a capital efficiency perspective that writing with this sort of structure is more optimal?
And on the retro protections that you bought those aggregate covers, that -- is that going to be a core part of your overall retro protection going forward or was that sort of an opportunistic purchase that you made at the start of the year?
So I think at a high level, everything we're doing is what we plan to do at this stage of the cycle. So every product line we've gone into, we've got into because the underwrite opportunity has improved. We're in into casualty -- when that market was pretty horrible when there's, some material changes to the casualty market and we continue to do our cat portfolio as rates increase.
So I think when we think about how we underwrite and how we want to position ourselves is very much based on the underwriting opportunity. And then what you're seeing around diversification and everything else is kind of, I would say, a secondary benefit. So we don't look to only go into a product line because it's going to help our solvency ratio. But obviously, when we've been expanding the non-cat business, that's naturally what happens.
So your capital works better for you, but it has to start with the underwriting opportunity right in the right business at the right time in the cycle and making sure you take advantage of good underwriting conditions. So some people are going the other way for various different reasons. Some people have a different view to us, that's fine. But we fundamentally believe in the growth part of the underwriting cycle. And there will be a point when we don't grow as much or we grow very little and others will be much greater than us, and that's the cycle for you.
And just to clarify on a couple of points, and apologies if I repeat a few things that I said earlier. The shape of the invite portfolio is broadly the same as last year. As I said, there'll be certain tweaks in certain regions. But to be absolutely clear, we're not right in lower down the curve. The broad shape of the portfolio is similar to last year. And we obviously can't talk to other people's businesses, but from our perspective, that's what the inwards portfolio is doing.
In terms of the question on aggregate protection again, I think you have to add context. We haven't traditionally -- we've had elements of aggregate protection, but not particularly material in our overall reinsurance spend or program. So us buying more is not particularly difficult given that we saw it at a low base, it may be some of our peers had more aggregate protection, and therefore, it's difficult to source that because we know aggregate is difficult to buy.
And therefore, that may be the reason that other people has gone down, but they're coming from a different base. When it comes to reinsurance strategy that we assess the market that's in front of us a bit like we do on the inwards, and then we try and buy the most appropriate reinsurance structure for the inwards book we anticipate writing. So hopefully, that provides a little bit more clarity.
Okay. Thanks for your questions today, and we'll close the call there.
Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.