Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Hello, and welcome to the Lancashire Holdings Limited 2021 Year-End Results. [Operator Instructions] Please note this call is being recorded. Today, I am pleased to present Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; and Paul Gregory, Group CUO. I will now hand over to Alex. Please begin your meeting.
Good afternoon, everyone, and thank you for joining us. I'd like to start giving an overview of 2021, and then Paul will talk through the underwriting picture before Natalie goes through the financials. At the end, I'll talk through our outlook for 2022 before we open up for questions. Slide 5, please, Galena. 2021 was a challenging year for profitability. For context, insured loss estimates from various catastrophe events during 2021 of somewhere between $105 billion and $130 billion, making this one of the costliest years on record. Only 2017 produced a larger insured loss of around $150 billion for catastrophe claims. As we underwrite a significant catastrophe-exposed portfolio across our various businesses, we expect to be presented with significant claims from our clients in years such as this. It's disappointing to deliver a combined ratio of 107% and a loss for the year. But this is only the second time this has happened in our history. But these losses are within our risk solvencies and management's expectations, given the magnitude of these events.Importantly, too, we have taken our usual approach to reserving where we have a tried and tested process which has seen releases come through over time as the life of the claim matures. We have a track record of positive reserve releases and are generally on the rightsize of these claims. We have made great progress across our business during 2021, wherein on an underlying basis, we can see the benefits of the investments we have made since 2018 when the rate environment turned positive. During 2021, we enjoyed the fourth year of rating momentum across our entire underwriting portfolio, but the 2021 catastrophe events have masked the progress we have made throughout our business.I'll now move to Slide 6. On this slide, you can see the strong increase in premiums for the year in what has been a transformational year for Lancashire. We have achieved what we always said we would do, take advantage of the improved rate in the environment and grow our business at the right time in the insurance cycle. As well as rightsizing our positions, I'm also really pleased by the addition of the new underwriting teams and the quality of people we've been able to hire. They complement and join our excellent existing teams where we have been promoting strong individuals from moving. Looking at 2022, we continue to deliver on our strategy. Our capital position gives us optionality, and we will continue to add new teams and talent to the group. I expect these investments to future-proof our business at the right point in the cycle to deliver returns to our shareholders as they earn through.I'll now pass over to Paul to give you the underwriting picture. Thank you, Alex.
Thank you, Alex. Moving to Slide 9. I'll start with our underwriting strategy, which has not changed. Since the turn of the market in 2018 and in line with our long-held belief in cycle management, we've been expanding our underwriting footprint and building the Lancashire franchise. The fundamental principle has been to write more business as the rating environment improves in both existing and new lines of business. The ultimate goal of building a more robust portfolio that is better insulated from the inherent volatility that some of our products provide. Slide 9 clearly shows that we've grown the business as the rating environment has improved and stuck to our stated strategies. How and where we've grown depends upon the market opportunity. In the years preceding 2021, growth have been skewed towards some of the less catastrophe exposed lines in specialty insurance, classes such as aviation and energy. And then post COVID, we saw a more pronounced rate improvement in the catastrophe-exposed classes so we grew our footprint here. Unfortunately, improved rating never guarantees underwriting profitability. It simply increases the probability of profits, which is why we're prepared to take more risk when margins improve. We have been deliberately consistent with our strategy. Despite a challenging loss year, we have made significant progress executing the long-term strategy. From this perspective, 2021 is a transformational year for Lancashire. We've continued to build out our product offering and developed and strengthened our underwriting bank whilst delivering 50% year-on-year premium growth. We believe these investments are for the longer-term benefit of the Lancashire Group and will drive future profitability and help deliver a more robust portfolio of risk.Turning to 2021 premium growth, I'd like to highlight a few key areas. Our growth is down to 3 things: improved rating across our renewal portfolio; new business in existing lines; and expansion into new lines of business. On the improved rating, our healthy portfolio RPI of 109% is a blend of rate increases within each segment of the business. This is the fourth consecutive year of rate rises across the portfolio, and you can start to see this feeding through to the underlying loss and combined ratios Natalie will explain later. The P&C reinsurance segment saw by far the most growth in 2021. As previously signposted, we grew our catastrophe exposure insurance footprint during 2021 as rates accelerated. This segment also houses the 3 new lines of business, accident and health, specialty reinsurance and casualty reinsurance, which account for approximately $95 million of new business, which ended up comfortably ahead of our initial estimate of $40 million to $60 million.When it comes to 2022 outlook, there are a number of key points I'd like to highlight. Firstly, we anticipate a fifth year of positive rate momentum. Based on the recent run of loss activity, increased demand, reduced supply and evidence of market conditions at 1/1, property reinsurance risk-adjusted rate change remained in the high single to low double-digit range of 1/1. We expect specialty reinsurance to remain positive in most lines of business, albeit the rate of increase is slowing. This is not unexpected and something we've clearly signaled for the past 9 months. As we've said before, we'll focus on rate adequacy given the cumulative rate increases the market has seen over the past 4 years and the fact that the trajectory remains positive. Secondly, we will grow premiums ahead of rate in 2022 with more of this growth coming from capital-light products.On top of premium growth delivered by rate, we will have a pipeline of organic growth. Firstly, the new lines of business from 2021 will continue to mature and develop in their second full year. Also, for 2022, we've added construction and engineering, expanded our property insurance offering with the new Australian office and significantly expanded our presence in both marine and energy liability sectors. These new initiatives should deliver approximately $50 million to $60 million of additional gross premium in their first full year based upon current market conditions. Growth in catastrophe exposure products will primarily come from rate improvement. We rightsized our footprint last year, but we're happy to further optimize and take the improved margin that rate increases will deliver this year on our already expanded portfolio.We will, as always, we will adjust our underwriting to mirror the opportunity and have the capital to underwrite more risk, if warranted. And finally, we'll continue to develop our existing underwriting team and complement with new hires should the right opportunities present themselves. We've had a really successful run over the past few years at developing our own talent and hiring new underwriters and teams, which is something we'll continue to focus on during the course of the year. As always, any investments made has to fit 2 key criteria: They need to be accretive to group returns over the long term and fit within our underwriting culture. All of the above means that we have a positive outlook for 2022.I've already spoken about our investment in specialty lines, which began in earnest in 2018, the market started to move out of the soft market phase. A lot of these investments have been made within Lancashire Syndicate 3010. This has been a combination of new teams and expansion of existing product lines utilizing existing underwriting talent within the broad group. We have taken lines into writing approximately $30 million of premium to a fully-fledged multi-line specialty insurance syndicate providing more than $0.25 billion of premium, achieving light touch status at Lloyd's given its top quartile performance. 3010 has been a real success story and is a good demonstration of a number of strategic objectives we are trying to achieve during this phase of the underwriting cycle. Investment in these specialty classes requires patience and a longer-term view. It takes time for earnings to come through and be accretive.With new short-tail classes of business, our expectation on a mean loss basis would be for underwriting profits to not come through until year 3. In longer-tail classes, this period would be extended. This can be seen from the chart as Syndicate 3010 has started to see the fruits of these investments come through in the past 2 years. These special insurance classes often have a higher attritional loss ratio than catastrophe reinsurance products, but certainly less volatility and crucially are significantly less capital intensive. The capital allocated to 3010 from a group perspective has not meaningfully changed since 2018, yet the profits generated have. This has 2 benefits: Firstly, as we grow these product lines, it acts as a counterbalance as the natural volatility of our catastrophe business; and second, when underwritten profitably, they are accretive to ROE. 3010 is just one example of the specialty build-out that we've been carrying out over multiple platforms across the group, it does provide a neat illustration of what we're aiming to achieve.I'll now pass over to Natalie to discuss in more detail 2021 performance and guidance for 2022.
Thanks, Paul. Today, I'm going to talk through some slides on our losses, our strong capital position and our investment returns. Starting with Slide 14 the loss environment. As Alex has mentioned, 2021 has been estimated as one of the costliest years for natural catastrophes on record. Our overall total net claims, for where there were large losses, in 2021 was $306.4 million. This includes the previously announced losses for Hurricane Ida, the European storms and Winter Storm Uri as well as political violence claims from the riots in South Africa in July 2021. During the fourth quarter of 2021, we incurred further catastrophe losses for the Midwest storms and tornadoes and Australia hailstorms. Although the expense of the losses in 2021 is obviously disappointing for us, our efforts to grow the business and diversify our portfolio of products over the last few years were successful in providing something of an offset to the catastrophe losses. For comparison, Lancashire's 2017 catastrophe and large losses totaled $213.7 million, what resulted in a combined ratio of 124.9%.As mentioned last quarter, 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 unchallenged and assessed by representatives from across the business and across departments. For this year's events, we have been especially mindful of potential supply chain issues, demand surge and inflation. We have historically reserved conservatively for catastrophe events. We showed you last quarter that our initial loss estimates for the 2017 catastrophe events have run off favorably, whereas the initial PCS estimate strengthened. 2021 was the first year since our inception that we incurred losses of any significance in our tail and political risk book due to the political unrest in South Africa. This loss is within our expectations for this type of event and magnitude of industry loss. Our tail and political risk book has historically been one of the most profitable classes of business for Lancashire. That's not to say it can never have a lot.Turning to reserve releases. We have had overall favorable prior year loss development in every calendar year since the company was formed. For 2021, our total favorable prior year development was $86.5 million in excess of the previous guidance of $45 million to $60 million. The favorable prior year development was positively impacted by the release of 2 large risk claims from old 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 see movements from prior years. However, given the growth in both our premium and loss reserves this year, I would estimate prior year releases for 2022 to be higher than previous guidance in the region of $70 million to $80 million.Turning to Slide 15. This slide is a reminder of the inherent volatility of catastrophe business, which has always been a significant proportion of the business that we write. The first chart shows the pattern of catastrophe losses over a long time horizon. Insured catastrophe events were much higher in the last 5 years than the 5 years preceding those. And over time, there appears to be some clustering of catastrophe events. The second chart shows the relative components of our combined ratio over the last 10 years. This demonstrates inherent volatility in our returns from the catastrophe business that are necessarily impacted by catastrophe losses in years of high conductivity. However, since Lancashire's inception, the net loss ratio for our property catastrophe and other such classes of business, well under 50%. And although we will have years of volatility, we expect that these classes will continue to be profitable for us over the long term.As I said last quarter, we expect continued growth in the new more attritional lines of business to offset the volatility in catastrophe losses to some extent. Although these will have a dampening effect on the underlying attritional ratio as we tend to reserve new classes conservatively in the initial years of writing. These newer lines of business are far less exposed 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 on the catastrophe and large risk to exposed business. And as we have said before, they are accretive to the change in fully converted book value per share. Without these new lines, our own premium would be lower, and this year's catastrophe events would have resulted in a higher combined ratio than overall loss for the year.Moving to the next slide. A number of you have asked us to look at the underlying combined ratio. Removing the benefit of reserve releases and adjusting for catastrophe and large losses, you can see the positive impact of rate increases on our combined ratio since 2017. Our attritional ratio was 36% in 2021, running at the lower end of the 35% to 40% range previously given. For 2022, with increased rates across the majority of our business, the attritional ratio guidance range has improved to 33% to 37%. The actual ratio will very much depend on the business mix that we write, which is itself dependent on the market opportunities that we see. 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 the G&A ratio in the region of 18% for next year and anticipate that the acquisition cost ratio remained broadly the same of this year.Moving on to capital on Slide 17. Even given the losses in 2021, we retained 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 in early 2021. Although we have used a substantial portion of this additional capital to fund our growth in the last couple of years, we retained more than sufficient capital to fund our current plan 2022 growth. We still maintain a strong regulatory capital position following the year's losses with a solvency ratio of 222% at Q3 2021.Our year-end position is likely to be slightly higher than this as we expect that our 2022 reinsurance program will be beneficial of the regulatory loss return periods. We will provide the final year-end regulatory position at the Q1 earnings call. As I previously noted, we generally expect that our BMA solvency ratio will be comfortably above 200% going forward. At this level, we are more than sufficiently capitalized from a rating agency perspective. In line with our stated dividend policy, we are declaring a normal final dividend of $0.10 per share.And finally, to investments. Slide 19 illustrates our relatively conservative portfolio structure with an overall credit rating of A+. Our 2021 investment performance, including that from realized losses was marginally positive at 0.1%. The significant increase in treasury yields, particularly between the 2-year and 5-year treasuries resulted in losses in our fixed maturity portfolio. These unrealized losses were mitigated somewhat by the majority of the risk assets, which generated strong returns, notably the bank loans, hedge funds and the private debt funds. We do not anticipate major changes to our investment portfolio in 2022. Slide 21 provides a summary of guidance previously given how we performed in 2021 and the new guidance for 2022.With that, I'll now hand back to Alex to conclude.
Thank you, Natalie. We'll go to Slide 22 on the outlook. You've already heard me say that our strategy remains unchanged. We're in an underwriting-focused business, and we'll continue to underwrite the opportunity in front of us. Our balance sheet is strong and allows us the flexibility to navigate the insurance cycle. But saying that, our franchise is more resilient now due to the investments we've been making since 2018. Our noncatastrophe capital light lines are lowering the volatility of our results even in challenging years. So our outlook is positive for 2022, as highlighted by Paul's commentary and the improved guidance Natalie gave you. We expect to grow this year as long as we see the underwriting opportunity to improve our returns. We will do this through the rate increases we expect, the growth of the existing teams we had and the addition of new underwriting teams. Lastly, I'd like to thank all our shareholders for their support and all my colleagues for their continued hard work to making our company what it is today. And with that, I'll hand back to the operator for questions.
[Operator Instructions] Our first question is from Faizan Lakhani of HSBC.
My first question is on the S&P rating model changes. They are in process collective comments on the revised capital model, in particular, on the focus on nat cat. Could S&P become the binding constraint going forward? Any color on this would be great. The second is on the attritional guidance. I wanted to understand how I should think about disaggregating the impact of business mix shifts and what's been achieved in 2021 and the rate impact? If I look at the shift on gross written premium, the proportion of property has increased to 63%, and that still has to earn so just understanding that would be helpful. And the final question is on the cat loss ratio. Is this still a good proxy to use historical performance given the fact that you've had a quite strong shift in business mix, and we've had the change in the claims environment?
Okay. Faizan, I think I'll take all of those. The first one on S&P. Yes, so obviously, they haven't released the full model in Excel format, which is not massively helpful. So it's quite difficult to assess the full impact, but we don't anticipate a significant change to our rating. And actually, we don't expect S&P to become the binding constraint for us. What we do think is that the increase in risk charges will be offset by diversification benefits. And we'll also get a capital benefit on our new model for the allowance of deferred acquisition costs. And just as a reminder, the debt refinancing that we did in early 2021 was all Tier 2 debt. So that's all fully allowable in the new S&P model. On attrition, one thing I can tell you is that the improvement that we've seen so far in the attritional ratio has been dampened since what we written -- the new lines of business written since 2018. If you were to exclude those new lines, the ratio has decreased more directly in line with rate increases. And we would estimate in '21, as an example, that the new lines in the business increased the attritional ratio in the region of 6 percentage points, if that's helpful.
That is.
And then on the cat performance, I think we normally state to look at those last 10 years average cat percentage loss ratio than we previously given 15%. If you look at the last 10 years now rolling average, it's maybe just under that.
Is that still relevant given the fact that you've grown very strongly in the last year? And that talk about climate change and claim inflation, does that still work that sort of rough guide?
Yes, I think that still works because we are obviously in the process of growing the more attritional lines and the specialty book as well. So it's not just the cat lines that we're growing.
Our next question is from Freya Kong of Bank of America.
I've got 3 questions, please. Just on your attritional loss guidance of 33% to 37%, this is quite a wide range. Could you give us some more color on what sort of conditions you would need to see this hit the bottom of this range or coming closer to the top? My second question is on business mix. If the opportunities are available to you, what would be an ideal long-run business mix for Lancashire? And third question is just on reserve releases. So you've guided for $70 million to $80 million for 2022. Is this 2022 specific or guidance for an ongoing basis?
So I think -- on business mix, I think we've always been very clear on this one that we've always said that we sort of underwrite the opportunity that is there at the time. So we've never been wedded to percentages across our whole underwriting portfolio. And I suppose this year is a great example isn't it, of where we've got a better balanced of portfolio, but we're happy to hold that cat footprint. So I think we just try and look at the opportunities. We're not wedded to any product line. We're just looking to generate better returns across our whole portfolio. So we've never been wedded on business mix. I think on attritional ratios, what I would say, just to remind you that you have to understand the business that we write, and we still write big ticket specialty items that can move around. So for us, on nutrition, it's always going to be very difficult to really sort of get to the granular data that maybe you're looking for. But clearly, what we demonstrated in the last year or so is the improvement in our portfolio, improvement in our attritional ratio, you're seeing the benefits from 5 years of rate change now. And obviously, as the capital light lines sort of earn through, you're seeing the benefit there. So it's very hard for us to give you a pinpoint number. And clearly, our numbers can move around has always been the case at Lancashire. But I think you are now -- we've now given you positive improvements and better guidance, which I think is a real demonstration of our conviction of the portfolio we've built.
Freya, on the reserve releases, I would say just keep that number into next year. We will visit it this time next year and give updated guidance that obviously, theoretically, as premium increase and your reserve lines increase and your reserve releases will also increase as well, given there's no change to proven methodology.
Okay. Great. And sorry, just a follow-up on the business mix. I mean, yes, you've been investing in specialty lines since 2018 and trying to -- and building that out quite successfully. Do you see that trajectory ongoing or because you need to balance the volatility of the cat portfolio. I just want to get a better understanding of what sort of business mix is ideal for you guys?
Yes. I think there's 2 separate things. We've invested in these product lines because we believe that they improve our returns over time. So all the time we can find new people, all the times that we can expand into more specialty classes, we will continue to do that and that will inevitably change the business mix. And you are correct, that will help balance out the volatility, the inherent volatility of the cat portfolio as you've seen this year. Our result is still over 100, which obviously is not ideal. But I think the point what we were trying to make earlier is that we have more balance across our business, and we have more sort of nonvolatile business. But ultimately, remember, the only time we enter any product line is to improve our returns. That's the sole purpose of everything we're trying to do.
Our next question is from Nick Johnson of Numis.
Three questions, please. Firstly, on reinstatement premiums. Just wondering how much of the outwards reinsurance in '21 is reinstatement? Just wondering if you could quantify that if fossil please to get a better sense for the underlying? And secondly, on tax rate, what should we be assuming for '23 tax rate given the OECD 15% agreement? Just wondering what signals you're hearing from the Bermuda authorities -- apologies if you already answered that question before, but wondering if there's any update. And lastly, on investments, just wondering if you can say anything about the risk asset performance in the year-to-date? Are we in negative territory on those assets or are they holding up okay?
Okay. So I'll take the first 2, and then I'll hand over to Denise for the investment question. On reinstatements, what I can say is there was a relatively small proportion of both the inwards and outwards premiums, and they actually virtually offset each other, so there's no bottom line impact on those. On the tax rate changes, obviously, we're maintaining a watching brief on that. We don't have any updates from previously certainly -- and certainly, we're not expecting a change for 2023.
Nick, it's Denise here. Yes -- no, our risk assets really diverse the portfolio quite well. They had positive returns year-to-date. So it was beneficial to the fixed maturities that were hit by the increase in treasury yields. So yes.
Okay. In positive territory, Okay, that's great.
Positive, yes. They were good returns.
Our next question is from Andrew Ritchie of Autonomous.
Thanks for the additional detail in the presentation today, it's very welcome. First question, I think you implied you -- the cat business, to the extent you'd grow in 2022, it's purely rate, not exposure. In that context, should I assume when I look at your PMLs, which clearly went up dramatically with the growth in '21, they won't go -- they'll stay where they are, all other things being equal in 2022? So that's the first question. Second question, when would you get comfortable on releasing some of your COVID reserves? Because I think, particularly on the type of exposure you would have had, there should be some finality now on those claims? The final question, I'm intrigued, I should understand what this means, but the footnote on Slide 17, I don't really know what it means. It says, our year-end position is slightly to be higher than this as we expect our 2022 reinsurance program will be beneficial. What do you mean by that? I guess, linked to that, can you give us some color on the placement of your protections for 2022, both reinsurance and retro, given it's been clearly a much tighter market.
Sure, Andrew. So if I take questions 1 and 3 and then Alex will take question 2. So yes, your assumption on PMLs is correct. Obviously, PMLs do move around for a whole host of reasons, but as a broad comment, if we keep our cat footprint the same, you would expect the PMLs to be much more stable than they were last year, so that's a fair assumption. On reinsurance, I think it's best if you split this into 2 parts. As you know, we buy a lot of our reinsurance for the first -- not all of it, but the vast majority of it at 1st of January, and we should really split this into kind of catastrophe exposure reinsurance protections and non-catastrophe exposed. So for the catastrophe exposure insurance, our experience in the market was broadly similar to the general market dynamics, albeit we were a little insulated given the vast majority of our reinsurance is generally from rated carriers with limited limit purchase from ILS markets. In general, for the cat products we purchased, we paid more for our cover in line with market dynamics and our retentions on our core programs did increase a bit, albeit we purchased a little bit more limit, which is where you're seeing some of the benefit come from a capital perspective. And also, we were able to purchase more limit on an aggregate basis, which again provides greater protection from loss frequency but also provide some additional capital release. On non-cat side, on the specialty reinsurance side, the market was a lot more stable than the catastrophe space. So very simply, it's broadly similar to last year in terms of spend and broadly similar in terms of structure.If you think from a spend perspective, much like last year, the dollar amount of spend will probably go up 2 reasons. We've paid more for cat protections. And secondly, again, we're adding more teams and there comes a disproportionate percentage spend on reinsurance with the new teams. But as an overall percentage of inwards premium much like last year, we'd expect the ratio to go down again given the anticipated growth in top line.
Okay. So just to -- sorry, can I just clarify on that. So the reason there's a regulatory benefit is because you bought more essentially, more limit?
More and more -- there was a little -- there was some more limit purchase, correct, but also as we bought more aggregate protection, which it didn't affect more limit that works, that has worked quite well from a capital perspective.
So in other words, in effect then your nat cat exposure has gone down then? Well, at least the model says that.
Well, it's broadly stable year-on-year.
Right. Okay. Sorry, Alex...
Sorry, on COVID, I mean, I'll make some comments about our own book, and then I'll give you sort of a wider view. I think for our own book in the same way that any other reserve can move around is that we've seen nothing's changed our view, i.e., no evidence to reduce our current Covid reserves. So -- and that's why they've been stable for a long time now. And my personal view on our book is that we are nowhere close to the end of the process of assessing the claims that we have and the reinsurance we have available. So there's no reason for us to change our COVID reserve. I was surprised that some others are bringing their COVID reserves down now. That doesn't really make a huge amount of sense to me, obviously, different carriers have different books of business and they are reserved in a different way, but it does feel premature to me for anyone really to be moving their Covid numbers down at this point. As I said, clearly, they may have different process to us and different portfolios of business.
Our next question is from Iain Pearce of Credit Suisse.
I think they are largely 2 follow-ups on what Andrew was asking about. The first one was on catastrophe appetite. If I'm just trying to understand sort of rates being up again on a risk-adjusted basis this year, if you're thinking about the underwriting opportunity, why you wouldn't be growing your cat book this year when you would last year significantly? Is that a business mix thing? Is that something to do with PMLs being at the upper end of where you want them to be? Just trying to understand -- or is there no opportunity that you grow the CapEx this year as a result of sort of business mix considerations? And then on the reinsurance changes, I think Natalie talked about favorable benefits or key regulatory return periods. Which regulatory return periods are sort of seeing the most benefit as a result of the changes in the reinsurance program?
Okay. Look, I think I said this on our last call, we'd never sit here and say we'd never grow our cat book because until you see the opportunity, you can't make those calls. So I think there are circumstances where we would grow our capital. If you think where we are today, we've only seen the 1st of January so far, which has a huge amount of attention. My personal belief is that the meat of the cat portfolio is the U.S. renewals. And until we see those renewals, we won't get a true picture of the opportunity, which could be better than we think it is. I don't think it will be worse than what we planned for in any circumstance, but it could be better. So we could grow our cat book. But equally, as we've said at the start of the call, your cat portfolio brings the inherent level of volatility to your overall business. So there will be a point where any carrier is just going to make a decision that you've just got enough cat business. So I think as you can see from this year, we run a fair bit of volatility already. There's not an unlimited appetite for cat, but we do have the capital and the ability, if pricing moves on again to write more cat business. So I think by the time we have our next call, we'll have a much better view of the market and the opportunity, and we can update you over from that.
Iain, sorry, can you repeat the second question, please?
Yes, sure. Just on -- you talked about the benefits of the different regulatory -- key regulatory return periods from the reinsurance changes, sort of which of the key regulatory return periods that you're seeing the benefit?
Yes, some of the reinsurance that we bought, particularly the aggregate cover that Paul's mentioned, gives us more benefit kind of in the tail of the risk. So kind of more extreme end of the return period and that's why it benefits the rating agency and regulatory models. You won't necessarily see the same benefit on our just normal occurrence PML when they come out at Q2. Perhaps a bit more if you want in that...
That's great. And Alex and Paul, if I could just follow up on the cat business. I think last year, you saw a big European PML growth. So at 1/1 is that the sense to assume that, that PML growth won't be significant based on the sort of appetite that you have at the moment?
Yes, I think as we answered to an earlier question, it's a fair assumption to think that our PMLs are going to be broadly stable this year this year versus last. There are things that happen within models that aren't necessarily always intuitive. So you do get things that move around, but as a general statement, you would expect our amounts to be broadly similar.
Our next question is from Ben Cohen of Investec.
I have 2 questions, please. Firstly, I was interested in your view of the pricing adequacy in catastrophe business, particularly for sort of secondary perils maybe where, I guess, large parts of the market, including yourselves arguably were caught out last year. Is your view on the pricing of those perils, has that changed over the course of the year? And secondly, I'd like your view on the relative pricing of catastrophe risk between the reinsurance book and the insurance book? And maybe you could give us some indication in terms of how you're looking to shift that balance between the 2 over the course of this year?
Yes. Look, Ben, I think secondary perils have certainly been highlighted in more recent years. But I think there's always been an acknowledgment that the models have struggled to capture them and it's one reason to be honest. We've never solely relied on modeled outputs for pricing risk, given that no model is perfect. And part of underwriting is understanding those weaknesses within models and one of those weaknesses is certain secondary perils. And absolutely, we've seen a number of secondary peril losses through the course of '21. I mean, obviously, we're seeing risk-adjusted pricing at 1/1. I think pricing is one tool.I think another thing there is a market we forget to talk about enough is attachment point of risk. And I think this is particularly important on secondary perils. And I think there was a lot of focus certainly at the 1st of January on getting clients to assume more risk at the bottom end of the programs. And I think a lot of that was as a result of trying to move away from the impact of the secondary perils. So you're clearly in a better position in 2022 versus 2021, the combination of price increases and level increases. And then your second question -- sorry, was that the balance between how we see reinsurance and property insurance?
Yes, that's right.
Yes. Okay. Over the past couple of years, we've been growing both. You'll recall that our property insurance product was predominantly sold from our Syndicate. And then the 18 months, 2 years ago now, we expanded that to also offer from the company platform. So we've been gradually building that out as the market improves. We obviously saw more significant growth on the reinsurance side last year as that price momentum kicked. We saw pricing increasing certainly start earlier on the insurance book, and that momentum has continued. I'll go back to what we always say, obviously, it will be driven by market conditions this year, but I'd probably expect to grow a little bit more in property insurance versus reinsurance in 2022. But as we know, things can change quite quickly. And if the opportunity is different, then we're more than happy to pivot between the 2.
Our next question is from Will Hardcastle of UBS.
Just really thinking that the interest rates have moved. Obviously, it was a key factor in keeping the price momentum going. At what stage do growth will start tracking -- interest rates have moved using that against underwriters. And perhaps just also as an extension, just thinking about how with rising interest rates, could you really benefit your capital ratio and how that seems true to any sensitivity guidance?
Will, on that first question, we didn't really get that. But I think you said something about interest rates and brokerages against this. Was that correct?
Yes, that's right.
I think for our portfolio that we underwrite, the interest rate argument is just not one that's that prevalent with brokers when they come to us to broke their clients' deals, it fundamentally is more about what demand and supply there is in the market and using those dynamics to either pressure us to give reductions or ask us capacity, which means we can put pricing up. I think it's probably more relevant if you've got a longer skew towards a longer-tail classes, which at the moment, as you know, we have some, but it's relatively limited compared to the rest of the portfolio. So I'll be honest, it's not really something that we have presented to us from brokers as a reason to start giving rate reductions.
Okay. We didn't -- I don't think we quite caught the second part of the question.
It was just how higher rates even if it's just a short end benefit capital ratio, any sensitivity you could help.
So we are very short duration. Well, sorry, it's Jelena. We have a very short duration. If you look roughly a 100 basis point move is something like $15 million, $20 million impact that tiny income -- I mean it's a very, very small impact on -- for us. It's more of an impact, rising interest rates tend to be more of an impact for us on earnings as a positive as opposed to necessarily impacting our capital base.
And I think I would just add that with the short duration portfolio, we'll turn over very quick, and our reinvestment yield goes up very quickly.
Our next question is from [indiscernible] of Morgan Stanley.
Just one simple question is, clearly, the property book has gone up quite a lot last year, and most likely, it is going to continue to grow this year as well. Can you just give some color as to which geographies you're putting a bit more in terms of growth? I get it that pricing is what drives the focus, but if we can get some visibility as to, okay, out of the 50% growth, say, large half of that is coming from U.S., some from Europe. Any visibility on that would be very helpful. And is there any particular line of casualty where -- sorry, property where you are going a bit more exposure? So that would be very helpful as well.
I think, to be honest, as we mentioned, in property catastrophe exposed property business, whether it be insurance or reinsurance growth, we have rightsized our portfolio quite a lot during 2021. And I think as Alex mentioned, from a risk perspective, on an inward basis, it's going to be broadly similar this year. In terms of where we underwrite the risk, we have a global footprint when it comes to property catastrophe business. As with most markets, there is a lot of dominance from the U.S., but we obviously write business all around the world from Australia, Japan, Europe, et cetera. I don't expect the balance of that to change significantly year-on-year.
Our next question is from of Tryfonas Spyrou of Berenberg.
Just 2 questions. So the first one on marine. I think premiums grew by just 2%. RPI, was at 9%. I think you mentioned the impact of some of the contracts. So I guess, should we expect a catch-up in growth in 2022, given also you have the new teams in place? And the second question is on G&A ratio guidance around 18 points. If I apply this to a reasonable expected net earned premium figure for 2022, the absolute number of expenses comes up quite a lot. I was wondering if you could comment on this. I would have expected that to gradually come down a bit more given the growth you're seeing this year as well with premiums earning from 2021.
So on the first question, yes, you're quite right. The marine portfolio did have some multiyear policies in there that weren't due for renewal, and we would expect some of those to renew in this year 2022. Obviously, that would be subject to acceptable renewal terms, et cetera. And also -- as you said, we've invested specifically in the marine liability sector where our underwriter joined us kind of halfway through 2021. So we would expect that line of business to build out during 2022. So yes, you would expect to see some growth, certainly, larger than we saw in 2021 -- in 2022.
Okay. On the G&A ratio question, the ratio for the current year is probably around 2 percentage points lower than a normal rate because we have reduced the variable pay element of compensation due to the performance in the year. So it's kind of artificially a little bit low this year. Also, if you look into next year, the 18% as well includes some relatively conservative assumptions on headcount, which is the main driver of our G&A ratio and wage inflation. So the 18%, I would say, is relatively conservative, but you have to take into account that this year is also a bit lower than normal.
Our next question is from Ivan Bokhmat of Barclays.
A couple of questions from me. First one is perhaps a bit cheeky. It's on growth. Obviously, last year, you've increased your book by 50%, 9% from rate movement I guess 12% from new teams that is $95 million and then 30% from exposure growth. And what you give us now for guidance is just on the new teams component. I was wondering if you could give some quantitative or qualitative feel of where the other 2 might go in '22? And then the second one is, I guess, a little more technical, but just drawing on the comparison, Natalie, that you made to the 2017 year. When I look at the triangles, the 2021 is 79% of your net earned premiums. But 2017 was far higher, was 94%, while actually the nat cat components as a percent of premiums, as you've highlighted, was actually quite similar. I was just wondering what's different between the way you've reserved for those 2 years? And how will the runoff look different?
Okay. So Ivan I'll take your question on growth, and it will definitely be more of a qualitative answer than a quantitative, I'm afraid. So I think, as I mentioned in my script, we definitely expect to grow ahead of rate this year, albeit certainly not to the same extent that we saw in 2021 when the growth was pretty exceptional. We're going to see growth from 3 principal areas. Obviously, as we mentioned, it's going to be the -- the fifth consecutive year of positive rate momentum. Rates are likely to be more pronounced on the catastrophe-exposed products and the specialty exposure products, albeit we still expect positive rate momentum in specialty. That's going to be the first area. Secondly, those new classes that we added in '21, those that contributed GBP 95 million in '21. Well, they're going to be in their second full year. So you're going to continue to see them mature. And then thirdly, it's the quantitative part that we've given you, which is those 4 new teams we mentioned starting underwriting in '22. And based on current market conditions, our current estimation is $50 million to $60 million of additional GWP. So look, we do anticipate good growth but we're obviously mindful to caveat that it certainly won't be to the same extent as '21.
Ivan, on your second question, it does sound quite technical, you might have to follow up after the call and what data you're looking at. But I would say that we were writing lower attritional business in 2017. So that might be the answer to your question, but I think maybe we should follow up after the call.
I suppose the level of -- also changed quite a bit. Okay. Maybe just a follow up on the first question, it's -- I suppose it would be pointless to try to highlight -- to guide you towards high single digit, low teens at guidance. Is it too early for that? I mean maybe just as an outcome the 1/1 renewals, you could suggest what that points toward? Sorry, for being persistent.
No, fine to be persistent, unfortunately, I'll be stubborn back then. I haven't -- I can't give guidance on that because the numbers that we haven't yet put out in the public domain. But obviously, when we come to our next earnings update, we're going to be able to give you a lot more color on that. And absolutely, the numbers we produce in terms of premiums for Q1 are going to give you a very good guide as to what you can expect for the balance of 2022. Sorry, I can't be more helpful.
We have time for one last question, and that will be from Barrie Cornes of Panmure Gordon.
I just got 2 questions. First of all, I just wondered if you could give us a feel of your appetite between quota share and excess of loss business and how attractive each one is relative to the other? And the second question was maybe slightly wider market question really. Just wanted to give 2021 losses, whether or not you think that this modeling needs recalibrating generally and if you take a view internally anyway?
Okay. Barrie, I'll take question one. Historically, and I assume you're referring to the reinsurance portfolio.
Yes.
Our appetite has been heavily skewed towards excess of loss business, whether that be property catastrophe or other areas. In the last couple of years, we have written a little bit more quota share business as some of those underlying rates with some of our cedents have improved, and we've partnered with a few clients where we have an excess of loss relationship as they build out their business. This is predominantly in the U.S., to be fair. We've done a little bit more of that 1/1, but it's still the minority of our business from a catastrophe exposed reinsurance lines. Obviously, we started underwriting casualty reinsurance last year, and it's the opposite -- the predominance of that business is quota share reinsurance as opposed to excess of loss. But obviously, the casualty reinsurance piece is still a relatively small part of our overall income. Sorry, your comment about models is interesting because there's a lot of commentary at the moment about models and how to are for cat business. And I think one thing we've always been very clear on over the years at Lancashire is that I think modeling aspect of catastrophe underwriting is only one part of the process. And I think that too much reliance on models is probably a dangerous as having no models at all. And I think that where you -- what you need to do or what any good underwriters need to do when they are underwriting a cat portfolio or a piece of businesses is that use the model for what you believe it's good for, but totally accept the parts of the model that are not -- are just not adequate for the process. So I think when people talk about climate change or they talk about unmodeled perils or secondary perils inflation.All these factors have to be factored into every underwriting decision. And what we've always tried to do here is take the modeling data, take the actuarial view, take the science but then overlay it with some experienced underwriting views, and we believe that gives you the right outcome. So I think people are expecting the model to give you the perfect answer on a catastrophe portfolio, they're kind of kidding themselves. And yes, models get better over time. And every time you have a loss, you can recalibrate your model, you can look at the things that are not good. Clearly, every loss gives you a new data set, but I think anyone over relying on the models are sort of kidding themselves they are going to give the answer. So I think our view is you just need that blend and that should give you a better outcome. Okay. Thank you for your questions, and we'll leave with that.