Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Hello, and welcome to the Lancashire Holdings Limited Third Quarter 2021 results. [Operator Instructions] Please note, this call is being recorded.Today, I am pleased to present Alex Maloney, Group CEO; Paul Gregory, Group CUO; Natalie Kershaw, Group CFO. I will now hand over to Alex. Please begin your meeting.
Okay. Thank you, operator. Good afternoon, everyone. As usual, we'd like to start with a series of slides, which we believe demonstrate the continued deployment of our long-term strategy throughout the third quarter. After that, we will go to questions.We go to Slide 3, please. During the third quarter, we witnessed a number of large losses, consistent with what we've already disclosed. We have set claims reserves for these losses, utilizing our detailed account-by-account process, which we believe helps to insulate us from potential reserving creep. Although it would be unwise to guarantee any release at such an early stage, I would point you to our track record of prudent reserving. In the past, this has seen future releases when we have a much better idea of the final claims quantum. An example would be 2017 cat claims of Harvey, Irma and Maria, where we have reduced our estimates over time, as you saw in the first quarter of this year. Other large claims from this year are such as Uri and COVID from last year remained stable at this point.Our year-to-date premiums continue to grow as we continue to see positive rate change across the majority of our underwriting portfolios. This will support our profitability as premiums own through. Most classes of business we underwrite are now in their fourth year of positive rate change, which we believe continues into 2022. Therefore, we expect to grow our premiums further during the 2022 underwriting year. The continuous investment in our business since 2018, where we've invested in many new product lines will continue to build during 2022, where we have a pipeline of premiums coming on stream. The positive rate environment, coupled with these investments in talent, will aid our long-term plan to better utilize our capital, improve our return for shareholders, reduce our expense ratio and future-proof our business.When we look at our expectations for the 2022 underwriting opportunity, we ask ourselves, what does that mean for capital? As you know, that forms part of our DNA. Do we have too much or do we have too little capital for the underwriting opportunity? A simple view of opportunity. Following 2 years of positive capital actions and based on our view of the 2022 underwriting opportunity, we are very comfortable with our available capital levels to fund our future plans. We have a strong capital position, which Natalie will further outline for you. We believe that following the active cat year of 2021 and the expected reduction in supply of products such as retro, pricing for 2022 will be attractive. I know some of our peers have talked about retrenching, but based on our current view of the attractiveness of the 2022 cat opportunity, we expect to maintain our cat footprint for that year. Equally, we would always be driven by the underwriting opportunity as we are across the whole underwriting portfolio.We accept 2021 has been another challenging year, but we continue to deploy our long-term strategy at this stage of the underwriting cycle. As demonstrated in Q3, we cannot control the timing of claims or the weather, but we can navigate the Lancashire Group for the long term. The investment in our business and people will continue. And to give you a bit more detail on our business, I'll now go to Paul.
As Alex has mentioned, we've continued to execute our underwriting strategy throughout the third quarter. Before I talk to you through our premiums and future business opportunities, I wanted to address the underwriting performance and loss environment in Q3. Whilst it's never pleasant to provide you with sizable loss estimates, it's important to say that it's down to the natural volatility of the products that we sell. Most importantly, these events are within our expectations and risk tolerances. I want to remind you that the profitability of our specialty book of business, where we've been growing both organically and through the addition of new teams since 2018 continues to provide balance to our catastrophe business.For our industry as a whole, increased volatility within the catastrophe exposure products has been evident over the past 5 years. This has resulted in underwriting returns that have not been sufficient to generate acceptable returns for both us and the broader industry. This increased volatility means that the industry will continue to charge more for these products, and we are positive on the rating environment for 2022. 2 points support our view. On the supply side of the equation, capacity appears to be shrinking as a number of market participants have flagged their reduced participation for 2022 already. And on the demand side, loss events tend to highlight the value of our products, leading to more cover being purchased.Now turning to our gross premiums written, as shown on Slide 4. These increased by 47% year-to-date, which is a combination of rates, new business, continued build-out of the new product lines as well as inwards reinstatement premiums in Q3 following the catastrophe losses. The rating environment across all the segments has remained positive, and we expect it to remain positive the remainder of the year and through 2022. As already flagged earlier this year, there are some segments where the acceleration of rate has slowed, but as can be seen from the chart, the trajectory remains positive and the cumulative effect of multiyear rate improvement is significant.The P&C reinsurance segment is where we've seen the majority of premium growth. This comes from both rate and new business within the property reinsurance sub classes as well as the development of the 3 new classes of business, casualty reinsurance, specialty reinsurance and accident and health. At the start of the year, we signaled that these 3 new classes of business would contribute between 40 and $60 million of gross premium written. At the end of Q3, these product lines are already marginally ahead at the top end of that range. Q4 is not hugely significant in premium terms for any of these lines of business, but we will end the year ahead of plan. We're very happy with our start in these new lines with both market conditions and broker and client support being better than planned. These lines will continue to build out over the coming years and to reiterate, all of these are capital light.Other than marine, all segments continued to grow in line with our strategy. Rating conditions continued to improve in P&C, insurance, energy, aviation and marine. As mentioned last quarter, the Marine segment has not grown due to a number of nonannual contracts not yet due for renewal, plus our decision to nonrenew a small number of high premium value accounts where renewal terms were not sufficient.The fourth quarter is especially significant for the aviation segment. And whilst there's certainly more competition than in previous years, the overall rating environment continues to be positive. Our aviation portfolio has remained incredibly robust in the face of the challenges of the aviation industry and the demand headwinds associated with that. Whilst this challenge has not disappeared, and our clients continue to navigate the various impacts of the pandemic, we are confident that our portfolio is very well positioned and is performing well.To sum up. Looking forward to 2022, our expectation is for rate improvement following yet another year of heightened loss activity. We anticipate growing premiums again and further building out the Lancashire franchise. The growth will come from 3 key areas.Firstly, rate increases on our existing portfolio, and it's worth reiterating that growth from pure rate does not require any additional capital. Secondly, those new underwriters and teams that will join us ahead of 2022 will further support growth. All of these product lines have very limited natural catastrophe exposure and therefore, require limited additional capital.Lastly, new business growth within existing lines of business, both catastrophe and noncatastrophe. It's only exposure growth within catastrophe exposed products that will require capital. And as we've repeatedly stated, our balance sheet and capital remain robust. We are more than adequately positioned to fund our growth ambitions in these products.As always, growth will be dependent upon market conditions, which will influence both the headline growth rate but also the ultimate business mix. Changes in business mix will impact various underlying metrics such as attritional ratio, acquisition costs, et cetera. But as always, our focus is on accretion to book value.I'll now pass over to Natalie.
Thanks, Paul. Today, I am going to talk through some slides on the loss environment, our strong capital position and our investment return. Starting with Slide 5. During the third quarter of 2021, we incurred catastrophe losses in the range of $165 million to $185 million from Hurricane IDA and the European storms. This level of catastrophe loss is well within our expectations for the type of events that has occurred, especially given the growth in our catastrophe exposed lines of business in the year. You will see from the slide that we have historically reserved conservatively to catastrophe events. For example, our initial loss estimate for the 2017 catastrophe events have run off favorably, whereas the initial PCS estimate strengthened as shown on the graph.We have maintained the same catastrophe reserving process for the current year events. The estimated loss is built ground up on a contract by contract basis and is then challenged in a first by representatives from across the business and across departments. For this year's events, we have been especially mindful of potential supply chain issues and demand surge. Because of the process we follow, we don't give you an assumed industry loss number. However, I think it's safe to say that it will correlate to the higher end of industry loss estimates that have been mentioned in the market.We also incurred losses in our terror book from the political unrest in South Africa. Again, this loss is within our expectations for this type of event and magnitude of industry loss. Our terror book has historically been one of the most profitable classes of business for Lancashire. It is core to what we do, and the book has not seen material losses to date. For completeness, our COVID and Uri loss estimates remained stable.Now turning to reserve releases. These now total $69.6 million for the year-to-date, ahead of what we guide for on an annual basis. The favorable prior year development has been positively impacted by the release of 2 large risk claims from older years in our favor as well as releases across the 2017 cat losses. As we have noted before, and given the lines of business that we write, we are exposed to large risk claims that can take a number of years to settle. Therefore, we are susceptible to relatively large loss movements from prior years that can move for or against us. Importantly, thus far, we have not had a single calendar year where we have seen reserve strengthening.Our underlying attritional ratio is running at the lower end of the 35% to 40% range previously given. Looking forward, we expect rate rises to feed into lower attritional ratios on our mature lines of business, but we expect continued growth in the new, more attritional lines of business to offset this somewhat.We have always reserved conservatively in the initial years of writing new lines. These newer lines of business do not expose us to catastrophe losses and are not capital intensive. They help to diversify our book and give us a stable income stream to help offset volatility from the catastrophe and large risk exposed business. And as we have said before, they are accretive to ROE.This year's premium growth will continue to earn through in 2022, and our net premiums earned will further benefit from the expected 2022 new business that Paul has spoken about. This higher premium level will benefit our overall combined ratio. We expect a reduced G&A ratio in the region of 18% for next year, notwithstanding higher dollar operating expenses as a result of the growth in our headcount. We currently anticipate that the acquisition cost ratio will remain broadly the same as this year.Moving on to Slide 6. We retain a strong and robust capital position. As a reminder, we started 2020 in a stronger than usual capital position as we retained earnings to fund growth. We then raised $340 million in equity capital in 2020 and an additional $123 million of debt capital earlier this year. Although we have used a substantial proportion of this additional capital to fund our growth in the last couple of years, we retain sufficient capital to fund our current planned 2022 growth.We have rightsized our cat-exposed book as rates have increased and are happy with our current level of catastrophe exposure. Put simply, growth in this area that is generated by rate rises is not expected to increase our capital requirements. As for our specialty book, growth in 2022 incurs a much lower capital charge and is, in some cases, diversifying. The waterfall chart shows that we still maintain a strong regulatory capital position following the current quarter's losses. And we expect our BMA solvency ratio to be comfortably above 200% going forward.Finally, to investments. Slide 7 illustrates our relatively conservative portfolio structure with an overall credit rating of A plus. So far, in 2021, our investment performance is marginally positive at 0.4%. The overall return was driven by the sustained low yield environment and the slight widening of credit spreads, particularly at the short end of the yield curve. The fixed maturity portfolios had slightly negative returns on a year-to-date basis, with the majority of the risk assets continuing to have positive returns, particularly the bank loans, hedge funds and private debt funds. We do not anticipate major changes to our investment portfolio in 2022. With that, I'll now hand back to Alex to conclude.
Right. To summarize on Slide 8. Everything we do is for the long term, and we are happy with the strategic progress we have made year-to-date. We believe we have the capital, talent and opportunity to deliver our future plans at this stage of the underwriting cycle. Therefore, we will maintain our DNA, maintain our focus on our franchise and stay focused on the fundamentals. Our business is better balanced as we grow.Our specialty non-cat business continues to grow, which will add more diversification in active cat years. This provides a steady underwriting result to balance out the natural volatility of our catastrophe book. I want to reiterate, though, that we are totally focused that each product line must make underwriting sense over the long term. Diversification over profit is not something that we are interested in.The 2022 underwriting opportunity will improve again as we expect to continue to see positive rate movements. Therefore, we expect meaningful growth next year but not as profound as 2021. All the time pricing improves we expect to grow, all the time, we can find new profitable opportunities we expect to invest. Our 100% focus is to deploy our long-term strategy to maintain our DNA. Growth at this point of the cycle as rates continue to rise, will future-proof our business and help us to navigate the more difficult parts of the underwriting cycle. I'll now hand back to the operator for questions.
[Operator Instructions] Our first question is from Faizan Lakhani of HSBC.
Congratulations on a good set of results. My first question is, I understand that Darren has left Kinesis. Can we potentially see a strategy change there in terms of how you deal with third party capital? And just briefly, how is the AUM developing there? The second question is, would it be possible to provide a breakdown on how much of the growth in Q3 came from RIPS?And the final question is, so on a written basis, the business written has shifted heavy towards short-tail lines this year. And I appreciate this is a crude simplification. But how much of that attritional loss ratio improvement that you've seen so far can be attributed to the shift in business mix?
Okay. Faizan, I'll take the LCM question. Yes, it's right, Darren, will be leaving the business in 2022. Our strategy for LCM remains the same. LCM is a fundamental part of the group and the group's strategy. I'm stepping in on an interim basis as CEO of LCM. I'll be supported by the existing LCM team and the broader Lancashire reinsurance team, which has always supported LCM.The focus at the moment, obviously, is, we're in the middle of fundraising for the 1st of January renewals. That's the focus at the moment. And then we will see where we are there. We'll come into the new year. And then obviously, the medium-term plan will be to hire in -- to replace Darren on a permanent basis.
Sorry, how much of the AUM do you currently have for Kinesis?
So we don't disclose AUM in LCM and never have, I'm afraid.
And then the second question was on the reinstatement premium. I think the most important thing to realize on the reinstatement premium is that we did have some inwards from the catastrophe losses in Q3, but these were offset almost completely by the outwards reinstatement premium on our reinsurance line, so there's no net impact from reinstatement premium so far on the year-to-date. On the attritional ratio, there's 2 things really going on, on the attritional ratio.On the mature Lancashire book of business, we've seen attritional ratios decreasing since 2017 as rates have been rising. But as you know, we've also entered into a number of new lines since 2018. And these new lines are more attritional in nature. And as I said in the script, we also tend to reserve conservatively for new lines in the first few years. So these lines have had the impact on dampening the overall attritional ratio. The most important thing to note is they require minimum capital and improve our overall ROE. So hopefully, that answers your question on the attritional?
Our next question is from Freya Kong of Bank of America.
3 questions, if I can. Firstly, just to clarify on you talking about maintaining your footprint in property cat. Does that mean just potentially growing with rates next year? Second question, could you give us a steer of the potential additional premiums you'll get from the new underwriting teams during -- for the year-end? And third question, just on the attritional loss ratio, again, moving into next year. Could you give us a sense of the relative moving parts from that 36% or that lower end attritional loss ratio starting point? Is pricing going to have a net positive effect though dampened by business mix changes?
Okay. On point 1 Freya, I'll start that and then Paul may add some views. I think what we're saying is that we are happy with our cat position as a business. And I suppose our mindset is always to follow the underwriting opportunity. And I think we've been very clear about -- we believe that 2022 is going to be another year, particularly for cat business, where you're going to see further rate change.So I think it would be counter to our DNA to cut back when we see the underwriting opportunity getting better, but what we would also always say on any product line which is driven by the opportunity. So it's following any kind of active cat year, it's very hard to call the market into '22. It's going to be a late renewal. We know that. I definitely believe cat rates are going up for '22, but how far they go, I don't think anyone really knows at this point. But I think what we're trying to say is that we wouldn't be cutting back at this point, that's a logical to us, but we'll always be driven by the opportunity.
On the second question about those new lines that we'll start underwriting from the beginning of 2022. Just to recap on what they are. We have a new construction team joining. In fact, they joined this week in readiness for 2022. We're expanding our property insurance offering with some hires in Australia. We're expanding 2 lines of business that we're already in, but in a relatively minor way, which are marine liabilities and energy liabilities.Our marine liability underwriter has actually been with us for a few months. In terms of guidance for premium for next year, it's actually the same range that I gave on the new lines we started this year, which is approximately $40 million to $60 million, albeit, as always, it will be driven by the market opportunity. We won't be driven by meeting that range if we don't build the opportunities there. And by the same token, if the opportunity is better, a bit like we've seen in the new lines, we ended this year, we're perfectly prepared to write more, but if that would give you a range.
Freya, on your last question on attritional ratio. As Paul and Alex have just been saying, we're really going to respond next year to the opportunity we see in front of us. And as that will have a significant impact on the business mix, it's very difficult to say at the moment exactly where the attritional ratio may end up.I think what is really important, though, is that our net premiums earned will definitely increase. So as I mentioned in the script, this will have a positive impact on the overall combined ratio, and we do expect to see our expense ratio coming down to around 18% for G&A.
Our next question is from Andrew Ritchie of Autonomous.
A couple of questions. Alex, you alluded to the debate going on right now in the industry on cat with some people withdrawing. I understand the pricing is going up, and therefore, you can see it's not logical to withdraw. But it's hard for me to convey to investors, and I wonder if you could, why it's the right price, which I think is the debate? And really what kind of returns do you think can be made in that? Or why do you view -- because there are some long-established cat writers who are, as you say, effectively going up. Why are they wrong and why are you right I guess?If you could allude to what kind of returns you think you can make in the cat business. The second question is political risk markets or it's within your terror book, you're a market leader. Obviously, there was quite a big loss on the Sasria account this quarter. Do we expect pricing to respond in that market? And I guess I ask because this loss is unusual because we can see what the client paid because they have to disclose it, not to you specifically, but to the market. And it looked like a very low rate online for the payment they've ended up getting.So do we think there's some proper correction in pricing going to occur in that market in the political risk market? My third question was, can you give us some reassurance on your outwards retro program for '22, given retro is dislocated? I'm not interested in your inwards, just your outwards and confidence in placing that.And I guess the final question, you talked consistently about a focus on growing book value per share, and that's been a hallmark of Lancashire. Some of your industry peers have acknowledged that the ROI on their own shares may be a better opportunity for deployment of capital than continuing growth. Can you just assure us, that's how you think as well? I mean, given the shares have come down, it would strike me the hurdle rate for deploying capital into growth must have gone up.
Okay. We're going to do it in reverse order. So I think on point 3 -- is your point 4? Sorry, on point 4, I think when we think about capital, all those things, it all starts with what's the best return for our business. So is that underwriting? Is that cat business? Is it non cap business? Is it share buybacks? Is it raising more capital? So yes, of course, all those decisions are things that we think about all the time, and we think about capital all the time. So it's not lost on us, our current price to book, but equally, it's not lost on us what we see as the 2022 opportunity. So those things are always things that we consider.I think it was kind of linked to the capital view and why are we happy with our cat book and why we say the comments we're making, which are contrary to some others. I suppose, the first thing I would say is, it seems illogical to me to decline an opportunity before you even see it. We sit here today, nothing's really been priced for '22. The pricing environment could be stronger than we think, it could be worse than we think. So I think all we're trying to say is that we don't believe our cat footprint is wrong currently. When we look at the losses we've had, they don't surprise us for the type of events we've had.So I suppose there's no surprise from our end. It's clearly always disappointing not to make money for shareholders. There's no one more focused on that than us at this end. But equally, cat business does bring uncertainty. But when premiums are going up, obviously, your probability of losing money comes down. So I think it's in our DNA to look at cat as we do any other product line and when premiums are going up, we see that as an opportunity.But equally, we're not going to grow our cat book if we don't think we're getting paid for it or the rates don't go up sufficiently. In the same way that in a very soft market if we had a win that went clean, and that was a really good return for shareholders, but the rates went down, we didn't grow because we'd made money the year before.So I think you've got to take a longer-term view of product lines, and Paul will give you a lot more details on the Sasria but it's kind of linked. Our terror book in the history of Lancashire has been highly profitable for our business. And because a client has a claim -- good clients still have claims that does not make them bad clients, and you have to take a longer-term view. And everything we're trying to do is to take a longer-term view.But again, we equally accept the last 5 years hasn't been easy for the industry and investors are asking a lot of questions, and that's absolutely fine as well. But we do believe in our convictions, which is why we are saying, based on our view of the 2022 opportunity, we're going to hold our position, but we will be driven by the underwriting opportunity.
So touching on the political violence loss that we had, Andrew, and your question was around -- is that going to have any impact on the market environment. My view on that -- our view on that is, markets in our world are only ever driven by demand and supply shifts. My honest opinion is that I do not see any dramatic reduction in supply in that market in 2022. So I do not anticipate significant price increases.I'd also say that, as Alex has alluded to, that part of the portfolio for us, but also for the whole market, has been incredibly profitable for a long period of time. And as a result, that's why I do not see people stepping away from that product line, unless, of course, we have significantly more losses and frequency and severity increases. Obviously, there will be exceptions within the portfolio.But as a broad comment, I do not expect to see within the terrorism book material pricing changes. At the same time, I don't expect to see any material reductions. On our outwards retro, in answering that as shortly as I can, I've got complete confidence that we'll be able to renew all of our reinsurance protections at the 1st of January.Most of our reinsurance protections renew at the 1st of January. Obviously, we're not immune from the broader market dynamics. And I'm sure in retro, for example, there'll be discussions around pricing and level of attachment and shape of product, for example. But for our core protections, we've consistently bought them from core partners over an incredibly long-term period. Initial discussions, those thus far, are all positive. Will some of them get rate increases?I'm sure they will. But I think for most -- with most of our core reinsurance partners, we sit in a pretty good spot. And -- and I'm encouraged by conversations thus far, and I don't have any concerns around placing what we need to place at the 1st of January.
Our next question is from William Hardcastle of UBS.
I guess just following on to that last question on the outward reinsurance retro protection, first of all, then. You're confident that you'll be able to get the business placed and priced, albeit with maybe a price increase. But I guess, it begs the bigger question, are you comfortable with where right now or the type of protection, just thinking about the volatility of your earnings stream.When we take a step back on a 4, 5-year view, is there anything -- hindsight's wonderful, obviously, but is there anything that you think you might change in that structure, whether it be frequency type protections or anything like that, if available? And then secondly -- sorry, it's another one on the attritional. I think you've given so much color on it. But I just want to share -- you've moved to the lower end of the range for this current year.Should we be rolling off from that level when we're thinking about our '22? Or is it more bespoke to the current year that perhaps Q3 was so benign, that, that's moving to the latter end, but the starting point should be more to the midpoint for next year?
Okay. Well, I'll take the first one on outwards reinsurance. I think, look, you're right in whenever you look at what you've purchased and you have events within a year, you can always look back with hindsight, and there obviously will always be ways you could have bought your reinsurance better, and that's something we look at on a continual basis and always have done.Obviously, what the difficult part is predicting exactly how the losses fall in the next calendar year. Is it going to be 1 big one, 3 smallish ones? You just don't know. But obviously, we have an idea of what our inwards portfolio -- we want it to look like next year, and the process will go through and what we're going through at the moment is designing a reinsurance program that sits around that.It's then about, is that product available as we want it, and we'll only find that out in all honestly, over the coming weeks as we speak to our core reinsurance partners. But we look every year at evolving our reinsurance strategy as the company changes and evolves. So that's absolutely something we look at. So we won't just look at the past 3 years and decide to try and cater for that event because, obviously, as I said, there can be very different events in the future.
Yes. And on that, I think, as Paul said, it is a sort of hindsight, but I don't think -- what I can say is that you always have to be really careful designing a reinsurance program for what happened in that year. Because as Paul said, you can kind of bet your life saying different will happen next year.I think what I would say, though, is looking at what's happened this year, and looking at various different products that we could have bull. I don't think that would have made a massively material difference to the outcome anyway. So it's not like we're sitting here saying there would have been a different outcome. And clearly, when you have 3 sizable cat losses in a year, for everyone in the industry that's going to be hard to absorb. So I don't think that there's anything we sit here and say, there's a product that we should have built that would have made a material difference to this year.
Will, so back on attritional. The attritional ratio -- the underlying attritional ratio for this quarter was good. But given the lumpy nature of the business, we write, it doesn't really make sense to look at the ratio on a quarterly basis.Having said that, the improvement in the quarter was due to both underlying earnings coming through as well as it being a relatively quiet period for underlying losses, if you exclude the cat losses that we saw. And secondly, I think we are planning to do some more detailed discussion on how to think about attritional ratios at the analyst call next week. So we can go over in to more detail then as well.
Okay. But the year-to-date one at the low end is a decent starting point for us to roll into next year? Or you'd still say use the 35% to 40% as a starting point?
Will, we will give you as much time as you want on one day, and we can talk about [indiscernible]
Our next question is from Andreas van Embden of Peel Hunt.
I just want to ask on your insurance book. So we put the reinsurance book to one side. I just wanted to see where are you seeing rate increases running well above loss cost trends? And are you satisfied with rate adequacy? And in which parts of that book are you still dissatisfied and you need further rate increases? I'm talking more about the mature core book rather than the new business.
Okay. Andreas, I'll take that. I'll start with -- there's probably one obvious line of business that we feel that the rate rises that we've been getting over the past few years whilst are good and their rate rises are not necessarily getting us to a point where we really want to broaden our shoulders, and that would be the upstream energy book. The market probably gave off 40 to 50 points in rate in the soft cycle.Since the turn of '18, we have been getting rate rises, but they've been in the low to mid-single-digit range. And a lot of -- we shrunk to our core book there. We've held on to that core book, and we've taken the rate, but we haven't materially grown outside of that because we just feel that there's more work to be done on rate in there. Outside of that, you've seen our growth in aviation over the past few years, and you've also seen the rate environment.If you look at our RPIs in that line of business over the last few years. So clearly, that would indicate a lot more business has been hitting rate adequacy for us. As I did mention in my script, aviation is one that you probably won't see the same pace of increase going forward, given the cumulative rate increase we've seen, but we still expect to see positivity in the fourth quarter, but it all comes back to rate adequacy.And then there are other parts of the energy book that are seeing good rate momentum in prior years and continue to see positive rate momentum. I should add, things like downstream energy and our power book. And again, we've grown these in line with the opportunity. The Marine portfolio has seen good rate growth over the past few years. And again, that continues. The movement in premium there, as I mentioned, is more down to some timing issues. And also, we still underwrite -- if they was come in and they're not adequate, then we're perfectly prepared to walk away from them despite the company being in growth mode. Does that give you some color?
Yes. So generally, would you say, excluding the energy upstream book, the -- would you expect significant rate increases in your insurance book to continue next year if you're already sort of coming close to being -- or above rate adequacy already? What was going to drive rate increases further across your mature book outside of the upstream energy, of course, which is linked to just the demand side?
Yes. Sure. Look, we -- I'm not sure I'd necessarily use the word significant. We're definitely expecting rates to continue to improve in a number of lines that I mentioned. There may be a slowing of increase. But as I spoke about, it's about the cumulative effect and also rating adequacy.
Our next question is from Tim (sic) [ Iain ] Pearce of Credit Suisse.
I have one on cat budgets. Obviously, there's quite a lot of moving parts in this in terms of rate, retro, business mix changes. Just a high-level as a proportion of net earned premiums, how do you think cat budget should be trending for your book? My second question was on retro as well. Last year, when you renewed your retro, you sort of indicated that you were able to…
Iain, I'm so sorry, we can hardly hear you. We can't really hear your questions properly. Is there any chance you can come closer to the microphone or the -- we really can't hear you.
Sure. Is that any better?
Yes, much better. Thank you.
Sorry, I'll try again. The first one was on cat budgets, where looking at sort of the moving parts of this with rate increases, business mix changes, obviously, the changing retro program. At a sort of high level, how do you think cat budget should be trending as a proportion of premiums for your book?The second question was on retro. Last year, you sort of indicated that you were able to purchase more retro than you initially expected heading into the renewal. Is the plan to expectation that you're going to revert just to that core program for the full year? And then my third question was just on the capital position. In terms of the capital position you disclosed at the end of Q3 -- I guess there's no -- or assume there's no incorporation of future growth train into the capital requirement as yet?
Right. On -- as a general theme, let's just pitch it this way. As a general theme, what we've been doing since 2018 is growing a lot of non-cat lines. And yes, we have grown our cat book when we've done our equity raise and a further debt raise. But I think as a business, we are bringing more specialty business in overall, which should help balance out the volatility that anyone's cat book brings, there's natural volatility in a cat portfolio. So I think, overall, our business is more diversified.I would always say, we're only doing this to make more money. We're only doing this to improve the return on capital. Diversification for diversification sake is just a complete waste of time, and we've never done that. But we are becoming a more balanced business, which I think definitely leads me to the -- it would be illogical for us to cut back now. So I think our business is better. I think you're seeing more diversification, which allows us to absorb cat years on a better basis, which, for me -- I think it's just -- we're just a more balanced company.I think you're also right about there are a lot of moving parts and always following an active cat year. There's a lot of moving parts, and there's going to be, how much retro did we buy, how much risk do we write, how much capital do we raise in LCM. So yes, there's going to be a lot of moving parts. And again, there's a lot of assumptions at the moment. But I think that's all manageable. And that's just part of the process when you have a year like you have. So there's nothing that sort of troubles us.And then lastly, before Paul adds some views, obviously, as we get into one-one is obviously reasonably key, and there's a lot of European business. And obviously, that's been a difficult year. There's a lot of things that we will during the next 6 to 8 weeks. And then obviously, different parts of our portfolio come through '22, so we can give you a much better viewpoint of this post one-one.
Yes. I think the way to think about it on when we're buying reinsurance, whether that be retro or reinsurance on the specialty lines, that we'll always go into one-one with a plan. But a bit like how we underwrite our inwards book, you sometimes have to adjust that, depending on market conditions.So we'll have a plan -- for we have a plan for the 1st of January, and we have a view on what we want our reinsurance structure to look like for next year. But obviously, you need to be flexible. And if the market isn't quiet as we anticipate, then we'll make adjustments accordingly. Sometimes that means we can end up with a better protections than we anticipated, and sometimes, it means that you have to adjust slightly because the market is a bit trickier than you expected.But I think, as I said in answer to a previous question, we've traded with long-term reinsurance partners for a long period of time. The reason we do that is because when you get into more difficult markets, you can have sensible conversations about renewing your core protections, which are obviously fundamental to us as a business.
On the cat models, they tend to be on an ASAP basis, so they don't look forward into the following year. So there won't be any 2022 future growth on the capital requirements have been disclosed. I think just to reiterate what we've said earlier that on rate rises on cat business, there's no capital charge on there. And then on the specialty business there's significantly lower capital charges on the specialty business.
Our next question is from Derald Goh of Citigroup.
3 questions, please. So the first one is just on the cat footprint. I hear your point about maintaining it as it is today, but if the underwriting opportunity on cat line turns out to be better than you expect, would you come to market for positive growth ambitions? Or would you just grow in line with rates?And my second one is on cat exposure. I think in your opening remarks, you mentioned about some rightsizing. So could you maybe elaborate a bit more what you've done that, whether you've moved up layers or cut aggregate? And are there any more rightsizing that you'd like to do? And my third question is just on the global tax reform. Maybe some thoughts about any potential impact to think about?
So on the first point, I think the point we should make, which hopefully, we have made, but we'll reiterate, our capital position, we're really comfortable with it. And should there be an opportunity in the catastrophe market, and we would be able to take advantage of that. Obviously, you can have events that create severe dislocation and then that's a different story. But as we look at it now, if we wanted to -- if we thought the opportunity was there and the rate environment was there, we're comfortable with our capital position. Sorry, can I ask you to repeat the second question because you broke up a bit?
Yes, sure. Sure. It's just about rightsizing the cat exposure. I think that the remark made at the start about -- you've done some rightsizing as well. Maybe if you could elaborate a bit more on what specifically you've done there, whether you've moved up layers or you've cut out some aggregates?
No, no, no. So I think that comment was in line with our -- what Natalie said was that we've obviously -- when we raised capital back in '20, that was to increase our cat portfolio. So that wasn't rightsized in that we've changed it in that regard. It was growing the cat portfolio at the same time as growing the overall business and the specialty book as well. So that's where that comment came from.
Derald, on your last question on the global tax reform, we think it's too early at the moment to know for -- clearly what the implications for us are, and we're currently waiting for more detailed rules to be published, and then we will have a better idea on potential impacts.
Our next question is from Tryfonas Spyrou of Berenberg.
One question for me. Taking sort of helicopter view, can you give us a rough estimate of what proportion of your total book we made up from attritional lines at the year-end? And how should we expect it to develop in 2022? I'm just trying to get a sense of how the mix develop given the very new team and how much the new lines will offset the explosive growth you had in some cat expose lines this year?
Tryf, it's Jelena. As Natalie mentioned earlier, we're going to take all of this off the call. So we can talk you through exactly what we mean, because I think there's a little bit of misunderstanding. We're driven by ROE decisions at the end of the day. So what we'll do is, on Monday, we can go through all of these questions, go through the detail and hopefully answer your questions.
Our next question is from Abid Hussain of Shore Capital.
I think I've got 2 possibly 3. The first question is on risk models and your view of risk. So you're telling us that you're -- essentially, you're 1 in 20, 1 in 30 and 1 in 100 model risks are capture the appropriate level of frequency and severity of the perils that we're seeing.But -- so when I look across the industry, there seems to be an increasing body of dividends, suggesting that these models are cat driven the effect of climate change. So I'd just like to get your thoughts on that, please, and a request associated with that as well. If you could start disclosing your 1 in 30-year PMLs going forward, that would be helpful as well, please?And the second question is on capital. So you've got a lower capital position, I think, around 225% you're disclosing today. It doesn't seem to be really impacting your growth and business mix plans for next year. If you could just sort of clarify that. And linked to that, how low are you willing for the solvency ratio to drop down to in the pursuit of growth, given there seems to be plenty of opportunity around?
Okay. I'll take the first one. I think let's just -- there's been a lot of commentary following these losses and obviously, the last sort of 5 years on how good the modeling is for cat classes. I think the first thing that we would always say is that when you underwrite any risk or a portfolio of risk, the model is part of the tools that you use to assess the opportunity. I think we would always say -- I think we've always said that you just can't take a model view of risk on any classes of business.We have other models for other classes of business, and we don't just underwrite by models. I think that would be a mistake. And clearly, people have to understand that every single cat event is unique, and the model can only take you so far. So I think for us, when we think about any risk or any portfolio risk, yes, we're going to look at some third-party vendor models.We're going to add our own loads. We can look at -- we pre-model these type of risks, we can add various loads, we can do things on an individual basis. But the -- the bigger point I'm trying to make is that the models can only take you so far. And the industry can't -- if you're an underwriting company, you can't just underwrite by models and we don't just underwrite by model. So I think it would be naive to think that the model is just going to give you the answer. And I think you need a blend of the best underwriters with the best technology.And if you can end up somewhere in the middle and learn from events and equally really understand what's not captured in the models, I think that's where you need to get to. So I think it doesn't matter how good the models are, you cannot underwrite just by models, but equally, remember that the cat event are -- every cat event is unique.
So is it safe to say that you're incorporating all your learning to climate change, so there's an increase of frequency in the verity in your loadings?
Yes. What I'm saying to you is, we just don't take vendor models and look at the output and go, that's the answer. We have our own view of risk, whether that's on a portfolio basis or on an individual risk basis, and that's our job to do that. And every -- that's what every underwriting company does do in fairness to various different degrees based on our view of risk -- we have our own view of risk.
And just one last thing is, obviously, we're fortunate in that most of our business is written on a 12-month basis. So if events do happen, you can learn from those events. You can take -- you can constantly look at your view of risk and on an annual basis, you can adjust accordingly, whether that be more risk, less risk, different pricing, et cetera.
I'm just conscious of the time. We probably only have 3 minutes left on the call, Abid. I think Natalie has already answered the capital question. So perhaps…
No, actually, I'd just say one thing, Jelena. We don't consider internally that the capital -- the regulatory capital ratio of 225% is low, which I think was one of your -- was your initial comment.
No, no. I was saying how long would you -- I didn't suggest it was low, I think it's fine, but how low are you willing for it to go, was the question.
As Natalie mentioned earlier, we're likely to remain above 200%. So I think we've covered that already. Perhaps we can move to the next question.
Our next question is from Ben Cohen of Investec.
If you can hear me. Not to sort of labor the point on the catastrophe side of things. But I just wonder if you could put into context how you would see this year, because, obviously, it's great if you're getting good pricing on cat. But if we have high frequency of severe cats, you're clearly not going to hit any kind of targets versus the benchmarks that you set when you raise the capital. So I just wonder -- give us a bit of your sense in terms of the confidence that actually the assumptions you're making are the right ones really to average your target return on equity?
I think you sort of answered part of that yourself, Ben. I think clearly, you can't just look at 1 year. And clearly, we are looking on a long-term basis. I think another way to answer your question is that when you have loss-making years on your cat portfolio, that's one thing when you have profitable years on your cat portfolio, you don't tend to change your assumptions.So I think you're trying to look over the long term. I think when -- I sort of covered some of this earlier, when rates are going up, clearly, your probability of losing money is going down. So again, that would seem illogical to us. And look, quite frankly, even for the whole industry, you could have a huge increase in premium next year and still have an active cat season. That's the nature of what we do.So I think it doesn't -- the biggest thing I'm trying to say is I don't think it changes our longer-term assumptions. I don't think the losses that we've assumed this year surprise us for the events that we have. As Paul has said a number of times, we are as prudent as we can be on reserving. So again, we've -- this is not our first rodeo, if you like. So I think it hasn't really changed our view, but equally, when premiums go up again next year, it's an - and I do like to say there's an opportunity. But, we'll always be driven by what the actual outcome is. And that's just -- that's never going to change in this business.
There will be no further questions at this time. So I'll hand back over to our speakers for any closing remarks.
Okay. Thank you very much for your questions, and that's the end of the call.
This now concludes our presentation. Thank you for attending. You may now disconnect.