Start Time: 04:00 January 1, 0000 5:02 AM ET
Hiscox Ltd (OTC:HCXLF)
Q3 2023 Earnings Conference Call
November 08, 2023, 04:00 AM ET
Company Participants
Paul Cooper – Group CFO
Conference Call Participants
Will Hardcastle – UBS
Andrew Ritchie – Autonomous
Kamran Hossain – JPMorgan
Freya Kong – Bank of America
Andreas Van Embden – Peel Hunt
Tryf Spyrou – Berenberg
Faizan Lakhani – HSBC
Nick Johnson – Numis
Anthony Yang – Goldman Sachs
Darius Satkauskas – KBW
Operator
Ladies and gentlemen, welcome to the Hiscox Q3 IMS Conference Call. I’m Sasha, the Chorus Call operator.
At this time, it’s my pleasure to hand over to Paul Cooper, CFO. Please go ahead.
Paul Cooper
Good morning, everyone, and thank you for dialing into Hiscox’s Q3 2023 Trading Update. I’m Paul Cooper, the Hiscox Group CFO, and I’m going to briefly walk you through the usual topics that we cover at this time of the year, namely top line growth, large loss experience year-to-date, and our investment result.
Let me start with growth. On a gross basis, so using our insurance contract written premium metric, ICWP for short, Q3 saw the Group deliver top line growth of 6.8% in constant currency. We continue to deploy capital in the attractive rate environment in London Market and Re & ILS, and to build scale through disciplined and profitable growth in retail.
Looking at net written growth, net insurance contract written premium, or net ICWP for short, increased even more by 11%, driven by the acceleration of net growth in Re & ILS to 23.6% and in London Market to 18.1%, reflecting our cycle management and capital deployment strategy to maximize potential earnings.
Before going into more detail, I want to preempt the question I know I’m going to get on capital return. We appreciate the importance of returning surplus capital to shareholders. But the timing depends on the market we see in front of us. Today, we are still in a hard market. As you can see, growth in our big ticket business has accelerated in Q3. So we are deploying capital at very attractive returns.
Just to give you an insight into the performance of our reinsurance platform. Hiscox’s ILS funds, which participate in the risks underwritten by our reinsurance business, have delivered record performance. AUM is unchanged since half year as the net capital outflows of 294 million in the third quarter were largely offset by the stellar returns generated by the ILS funds.
Now let’s take a closer look at how each of the segments have performed year-to-date, starting with retail. ICWP increased by 4.7% in constant currency with a couple of highlights to call out. Firstly, Europe continues to deliver. The region is once again the strongest growing business in the retail portfolio, delivering growth of 11.1% in constant currency. All markets are performing strongly, in particular, Benelux, France, and Iberia. Our new core technology rollout is progressing to plan and we are very pleased with the sustainability of growth in Europe.
Secondly, US DPD premium growth continues to accelerate, up 9.2% in Q3 from 8.9% in Q2 and 6.8% in Q1. Direct business has been live on the new technology since June 2022 and is showing excellent progress, delivering new business growth in excess of 50%. The recovery of growth of our digital partnerships business from its low point in Q1 is continuing as both existing and new partners increased production. Overall, US DPD remains on track to deliver the full year 2023 US DPD growth guidance towards the middle of the 5% to 15% range.
Thirdly, underlying growth in the UK remains robust. There is a lot of excitement amongst our UK colleagues as we launched a new brand campaign in September. It is a significant milestone as we look to increase awareness and the recognition of Hiscox in both our direct and broker channels. The creative thread running through the work is ‘Your story… underwritten by Hiscox’, a concept focused on recognizing the people and stories behind each policy.
Early signs suggest a positive impact on brand spontaneous awareness as well as good industry press coverage. And I hope one of you — one of the adverts caught your eye on your morning commute today. So these are the positives that give us confidence in the recovery of retail growth momentum. But there has clearly been some headwinds too. These are not new.
As flagged in August, retail growth has been tempered by our deliberate underwriting actions as we continue to exit non-core underwriting partnerships in the UK. This will be completed this year. We also adopted a disciplined approach in U.S. broker in response to the unfavorable rate environment in cyber. To mitigate the effects of this, we executed a growth initiative focused on our most profitable classes in U.S. broker. This has increased submissions and we have seen signs that the adverse impact of cyber has started to moderate in the fourth quarter.
The retail growth trend in October has been encouraging and we remain on track to deliver the full year 2023 growth guidance to be in line with the half year trend. And finally, just as a reminder, we have announced the agreement to sell the DirectAsia business as part of our active portfolio management and focus on key markets. The sale is expected to complete by the end of the year, subject to customary conditions and regulatory approvals.
Moving on to our London Market division. ICWP increased by an impressive 12.2%, up from 10.6% at half year. Net growth is even stronger at 18.1%, up from 14.2% at half year, as we retained more risk in the attractive market conditions. Property classes continued to enjoy a hard market, most notably in Property Binders as major property.
Marine, energy and specialty was the fastest growing segment of London Market with ICWP up in excess of 40%. Power and renewables has been the primary beneficiary from the large volume of construction taking place in the energy sector, as economies across the globe work towards their net zero commitments and strive to achieve energy security amidst the uncertainties of the current geopolitical environment. We remain confident that our strategy of targeting profitable growth through effective cycle management positions us well to deliver strong returns in 2023.
Moving on to our final segment. Hiscox’s Re & ILS delivered strong net ICWP growth of 23.6%, up from 17.9% at half year as we seized opportunities in the hard market to grow exposure and improve attachment points. Growth on a gross basis is more modest at 2.7%, in line with the trend highlighted throughout the year.
I’m delighted to report that Hiscox’s ILS funds have delivered record performance, generating an increasing amount of fee income for the Group. Hiscox ILS assets under management of 1.7 billion are unchanged from the half year position. This includes net capital outflows of 294 million in the third quarter, largely offset by record returns generated by the ILS funds. Looking ahead to January renewals, we anticipate that the market will remain disciplined and will continue to be very attractive.
Now let’s look at our loss experience. The third quarter has been fairly active, as we saw several natural catastrophe events as well as manmade large losses, including wildfires in Hawaii and Canada, an earthquake in Morocco, several hurricanes and claims in our space book. Pleasingly, despite the frequency and nature of these events, the Group natural catastrophe losses during the first nine months of the year are within the Group’s budget.
As you know, our current pricing and reserving assumptions incorporate expected inflation, which is a multiple of experience seen in book historically. And this conservative approach means the increased premiums being collected through rates and indexation are keeping pace with our view of expected inflation.
Lastly, a couple of comments on the investments. The year-to-date investment result of 202 million compared to a 294 million loss this time last year and represents a 2.8% return year-to-date. The yield to maturity on the fixed income portfolio rose to 5.7% at the end of September. Bond coupons and cash income, which more than doubled year-on-year, contributed the majority of return and continued to increase as bond yields and interest rates moved higher.
To conclude, the first nine months of the year saw us deliver disciplined profitable growth across the Group, through a combination of management actions to improve the quality of our portfolios, increased capital deployment in big ticket and focus on the quality of growth in retail. We’re in the best position for many years to deliver strong risk-adjusted returns. This, in combination with a much improved investment result, means the outlook for the full year 2023 results is very positive.
I’ll now hand over to the operator to open the floor for Q&A.
Question-and-Answer Session
Operator
The first question comes from Will Hardcastle with UBS. Please go ahead.
Will Hardcastle
Good morning, everyone. Thanks for taking the question. Two of them. I guess, firstly, just on the premium data points, almost all of them show strong acceleration from the H1. The only one that didn’t was retail as a whole currency adjusted. You talked there about the remediation actions on the UK partnerships and cyber. Could you give us the momentum perhaps H1 versus nine months ex those remediation? Do you think it’s showing that trend? And you mentioned partnerships will be finished at pressure point come year end. Are we confident that cyber sort of exits as a pressure point barring the right momentum come year end in terms of portfolio remediation action? The second one, so this is a bit long winded on capital deployment over capital distribution. I think it’s pretty clear what the messaging is here. And we appreciate if you’re achieving 20% return on capital and consensus is looking for more than 350 million of retained earnings this year. Growth and retail looks like it’s a couple of 100 million, but I think the capital requirement is quite small. But it’s the London Market and Re & ILS as you say the big ticket. It looks like consensus is only assuming sort of 70 million of growth for next year. I guess the question is what do you think consensus is effectively underestimating the ’24, ’23 gross, or it’s under appreciating how you view the long-term duration of the growth prospects or perhaps just that you want to hold a higher stock of capital? I guess which one do we think it is?
Paul Cooper
Yes. Okay. Let’s deal with — so your first question, Will, around retail, it’s worth sort of unpacking. So you’re right. So if we start with the half year, for retail growth, we were up 5.5%. And we’ve guided to say that the full year we expect to be in line with that trend consistent with what we said at the half year. If you look at Q3, we’re at 4.7%. And if I unpack the various components and look at the geographies, Europe is going from strength to strength, so that is double digit. We delivered 11.1% year-to-date. And the sustainability of that growth remains strong in all markets, all of the European markets. If I then think about the U.S., what is very pleasing is that momentum is being gained in US DPD. So we’ve progressed from that 6.8% in Q1 to 8.9% in Q2 as discrete quarters, and then 9.2% in Q3. And what we’re seeing is some really healthy signs. So if you take direct to consumer, new business growth is up in excess of 50% in Q3, and we’re firmly in that double digit growth territory, to give you a sense of trend and momentum. Now the U.S. broker business is worth turning to. And what we said at the half year is, and this remains very much the case is we are focused on disciplined underwriting and profitable growth. And what that means and how it’s manifested itself is, we told you about the competitive conditions that exist in U.S. cyber in the broker space. And that has been the drag on growth in U.S. broker for the half year and into Q3. Now we are seeing signs that that competitive environment is moderating in Q4. I think the other aspect for U.S. broker is we’ve launched a number of growth initiatives for our most profitable U.S. broker classes of business. And the signs are promising on that basis. The submissions are already increasing in those areas where we have those initiatives. I think the last aspect is looking at UK. And I think from a UK perspective, what we’ve seen, you’re right to highlight the gain of focus on disciplined underwriting has been that we have turned off non-renewed various underwriting partnerships in the UK. And that will finish at the end of the year. To enhance growth, there are two main things that are worth highlighting. One is on broker e-trade, where we’re getting — we launched that in March, we’re getting good feedback from brokers. We’ve got more than 2,000 users on that platform. And also, you would have seen hopefully around the UK looking to re-launch of the brand and refresh of the brand that’s very distinctive, and I think sets us apart from the broader UK market. And the signs — the feedback from the press and again brokers has been very encouraging early on, on that. Now clearly there will be a lag on growth from that brand spend. I think if you sort of step back and say, well, what’s the underlying growth ex cyber in the U.S. and ex underwriting partnerships? We are in that 5% to 15% target range. I think the other aspect, and I commented on it in my sort of preamble, is the signs for October have been encouraging for the retail growth perspective. So I think that gives a sense of the outlook for 2023 and why we’re confident in holding our guidance for the full year. If I then think about your second question around capital, I think it’s a great question. So one of the things that I’ve been very pleased about is deploying capital into a hard market. Now our diversified business model gives us lots of optionality. And I think what you’ve seen from the big ticket business is that we have deployed capital and grown not only in Re & ILS where rates are up 30% or in excess of 30%. Now that growth has accelerated in Q3 from the half year at around 18%, up to nearly 24%. And then London Market itself has also increased from 14% to 18%. So we are deploying capital into a hard market at attractive returns. Now I think it’s a little early to turn attention to 2024 and kind of give growth guidance for the big ticket business. But what I would say is that there is sort of — if you look at the outlook, what we’ve said is, we anticipate sort of 1/1, and we’ve got to see how the market develops. But we’re currently in what many would say is the best sort of underwriting conditions for a decade, maybe 20 years. Rates are up, as I said, in excess of 30%. And the outlook for 1/1 is that rates will be, in our view, steady to modestly increasing. I think also we’re seeing in London Market continued attractive growth opportunities, not only in property where you would have seen that rates are up in excess of 20% on either binders or major property. And also in the marine and energy and specialty division, growth has been very compelling. So the opportunity to deploy capital remains very strong. That said, and I did mention that I’m sort of preempting the capital question is, from a surplus capital perspective, I think it’s a question of timing. We continue, as you see, to deploy capital into Q3. And if you look at the sort of capital generation that underpins that, just standing back, we delivered a near 20% ROE at the half year. We are within our cat budget year-to-date. We’ve got record ILS fund performance and the read across there, given we’ve got an alignment of interest. And we write the majority of reinsurance business in ILS on our own book gives you a sort of read across of the capital generation coming out of Re & ILS. And then lastly, what’s particularly appeasing to me is we’re generating capital from the asset side of the balance sheet, so nine months more than 200 million. So I think taken in that round, we’re positive about the capital generation, we’re positive about our ability to deploy capital into a hard market. And we will return surplus capital. It’s a question of timing. So hopefully, we’ll — there were two long questions and pretty long answers. But I hope that gives you the comprehensive picture on those two areas.
Will Hardcastle
Yes, that’s brilliant. Thanks, Paul.
Operator
The next question comes from the line of Andrew Ritchie with Autonomous. Please go ahead.
Andrew Ritchie
Hi, there. I wonder if you could just give us some sense of the attritional claims experience across the Group. Paul, you focused on the net cat. You mentioned one or two claims in London Market. I’m just trying to judge sort of relevant size and some sort of color on the attritional claims experience preferably, but it’s London Market and retail where attritional really matters. That would be useful. Second question, you gave us some indications on U.S. direct. Can we just get an update on partnership business? I’m just looking at the half year. You said you added 17 new partners in H1 and it was a healthy pipeline of further opportunities. I guess maybe just for color, presumably a lot of those new partners — just remind us what the sort of downtime is before they come on stream, as I’m guessing maybe they’re not being that impactful yet and what is the pipeline looking like in that business as well? And I can assure you that I have been exposed to lots of Hiscox new adverts. I’m assuming that was all part of the budget in terms of any increase in marketing spend, be spending a lot on radio advertising in particular. Thanks.
Paul Cooper
Absolutely, Andrew, and I’m pleased that you’ve seen it. Certainly what I can attest to is the business case and the effectiveness of marketing not only for brand, but also obviously direct acquisition costs, gets a great deal of scrutiny not only from the division of CFOs, but from myself. But thank you for that. I’m glad you’ve noticed them. I think like dealing with the question first. So I think what you can take, we’ve commented on the cat budget. Your question was around attritional, but we are within. I think the point around large losses is their notable really by their absence. So we didn’t call out — there have been several sort of midsized losses in the space area for a number of satellites, but they’re not really sort of notable. And what I would say, for London Market as a whole, but for that class, what we are expecting is some significant rewriting, at least sort of doubling of the rates prospectively, given the loss impact to that segment. I think then you’re looking at sort of the attritional — now we get into — we don’t comment on sort of the attritional losses. But what you can do and what I’d anchor back to is, if you look at the half year, which ended sort of three months ago, the half year combined ratios were in the 80s for London Market. And clearly they were sort of something like 93.8 for retail. And there’s no change really to the outlook for those combined ratios. The second question on U.S. direct, so, yes, if we break it down, you’ve got about a third is direct to consumer, then two thirds is partners. We’re very pleased with the performance of the direct to consumer. As I mentioned, new business is up more than 50%. We’re in the double digit territory. I’m very pleased with that. From a partner’s perspective, I think what’s useful to cover off is we did highlight that there would be — the low point of growth for partnerships would be in Q1, as all of the embedding takes place on the new technology. If you then see — what we’ve seen then is a recovery of growth in subsequent quarters; Q1, Q2, Q3, albeit it’s sort of a more modest recovery. What I would say is your right to highlight, we added something like 17 new partners in the first half of the year. We’ve continued to add new partners in Q3, and the pipeline remains strong in Q4 and indeed going forward. I think there’s sort of two aspects. The growth, we do expect to come from or the majority of the growth continues to be delivered out of our existing partners. We’ve got what I would say is the larger or largest partners from a distribution perspective. We already have them. So it’s more a question of working them a lot harder. And indeed, what we’ve done is some very tailored partnership engagement and also some temporary partnership incentives, along with some specific training to really drive that growth forward from a partnerships perspective. I think from a sort of new business and sort of new partner generation that the pleasing thing is production is up both from existing partners, but importantly the new partners that we’ve put on board. I would say it does take time for new partners when they come on board to get the sort of growth going. So there is a lead time. It is at least several months. And that arises from firstly, all of the training and familiarization that they need to do but also the marketing that they need to do to their customer base as part of it. But that is — as I said, it’s encouraging.
Andrew Ritchie
Okay, great. Thank you.
Operator
The next question comes from the line of Kamran Hossain with JPMorgan. Please go ahead.
Kamran Hossain
Hi. Good morning, Paul. Two questions for me. The first one is just on coming back to the cat claims and kind of your comment around being within budget. I just want to kind of square something I guess. You’ve mentioned the ILS performance has kind of produced a record result or you had record performance, which should be very good for ILS. But your comments around being kind of within sounds a little bit muted compared to that. So I’m just trying to work out if there’s something going on in London Market or actually you’re just being very cautious with your wording and I’m reading far too much into the word within? The second question is on surplus capital. I know you’re keen to deploy and there will be opportunities for next year. But what’s the best way for us to think about surplus capital? Is this rate agency, BSCL [ph] or something else? So just some kind of ways to think about it without getting you to promise that you’re going to do something at year end? Thank you.
Paul Cooper
Yes. Thank you, Kamran, for both of those questions. So from a cat budget, let’s unpack that a bit. So what I would say is, we are absolutely within. And if you think about the distribution of that cat budget for the group, the vast majority of it, or certainly a majority of that cat budget resides within Re & ILS. And what you’ve seen from Re & ILS is, firstly, a significant rate increase across the year, so rates are up in excess of 30%. You’ve also seen a significant tightening of terms and conditions. So we’ve gone up in terms of higher attachment points. There are higher retentions for [indiscernible], and also with non-renewed a significant number of aggregate excessive loss programs. So that moves us, in general, for Re & ILS away from the activity. The sort of read across that I was trying to encourage and what’s implicit from a profitability perspective is that if you look at the ILS funds, as I said, there’s sort of an alignment of interest, and therefore the risks that the ILS funds, the vast majority of that portfolio, we are also writing. And given their record performance levels, you can sort of interpret sort of what’s going on for Re & ILS as a business unit. So hopefully, that gives you enough to sort of give you an impression of what within means. I think then from a sort of surplus capital perspective, what we clearly published and are focused on is two elements. One is the sort of regulatory capital, which is the BSCR. You would have seen at the half year that we’ve got a very strong balance sheet at around 200%. And then also the binding constraint is really the S&P rating. And there you can see — again, if I’d point you back to the half year, we’ve got sort of significant margin over where we think that that starts to bite, which is around the sort of equivalence is a sort of 155 to 165 territory. If I then think about sort of capital into just where we are for the second half of the year, sort of main writings for 16 and obviously 17 drives a lot of the capital requirement is embedded in that half year capital number. We do expect for all of the reasons I responded to in Will’s question to generate capital in the second half of the year. But also as we continue to deploy capital, the required capital obviously is increasing, but not to the same extent as the first half of the year.
Kamran Hossain
That’s clear. Thanks very much, Paul.
Operator
The next question is from Freya Kong with Bank of America. Please go ahead.
Freya Kong
Hi. Thanks for taking my questions. Firstly, could you talk a bit about the SME environment in the U.S. and I guess how that feeds into your growth outlook for the US DPD business? Are you seeing any signs of the consumer struggling? And if we were to see this downturn happen, what impact would that have on your growth expectations heading into 2024? I think you previously guided for US DPD growth to accelerate beyond 15% after all the re-platforming. Is there something that — is this a trajectory we should still expect? And secondly, it’s good to see really strong net growth on the big ticket business, London Market up 18%, Re & ILS up 24% and you’ve talked quite positively about the underwriting environment, which suggests you will push for growth in ’24. So how should we give out net growth next year versus this year, given that one of your peers has flagged a clear slowdown in the environment? Thanks.
Paul Cooper
Yes. So, look, let me take the second one first. I’m glad you’ve highlighted. I think the points around net growth, so certainly for 2023 you can see that we are deploying capital, given the net growth that we’ve highlighted in London Market and Re & ILS. I’ve highlighted, Freya, again, where we’re seeing the sort of growth opportunities and the general sort of outlook where we see that’s attractive, and our ability to deploy capital at attractive returns. I think sort of guidance for 2024 for big ticket from a growth perspective, let’s wait till year end and we’ll tell you about that and give you a more thorough update then. I think from a sort of SME U.S. perspective, I think, firstly, if you look at the U.S. economy, it seems to be remarkably resilient as a whole is a sort of first point. One data point we measure as a sense of health of the sort of SME environment is new business formation. And that continues to be strong in 2023. And it’s elevated and still greater at sort of post COVID levels. So I think that the health, the lead indicator from a sort of U.S. SME perspective from that new business formation remains strong and positive. I think then that if you look at recession, I think there’s a couple of things to sort of highlight. One is that, well, we have to see how any recession is, how deep it is, how long it is? And clearly no one is immune from it. But if you look at sort of the profile of our book, firstly, insurance is not a luxury purchase. We operate significantly in the U.S. at the small and micro end of this where insurance is either needed on a sort of contractual basis, or that they want significant peace of mind, and therefore want to take that out, because it’s a meaningful — it protects a meaningful part of their income. And also if you look at sort of the average premiums, they’re sort of around I think $1,700 to $1,000 certainly in US DPD. And so as a consequence of that, when you break that out to sort of an average spend or what it is as a proportion of the average business’ expenditure, it’s not a large component. It’s not like energy, let’s say, or power or other components. So there should be some resilience just by the inherent nature of why people are buying that insurance cover. I think then you’ve got to look at the market opportunity. And we did say that sort of on our own balance sheet, that sort of target addressable market is in excess for the U.S. of 30 million customers from an SME perspective. So the market remains large. It’s very fragmented. It still remains underserved. And from a US DPD perspective, we are the market leader in that space. So there’s a lot of room to grow. And you would have seen from the half year that we’ve expanded sort of the reach, relevance and revenue for US DPD by partnering with a well known U.S. carrier to essentially offer their workers comp product on our platform and obviously generate some risk free income as a consequence of that. Now the signs of that soft launch, and it’s only through our call center are extremely promising. We’ve already bound more than 1,000 policies from that soft launch at Q3. What it does do is expand our target market from the 32 million or so up to 50 million or around 50 million. So hopefully that gives you a sense of the opportunity that lies ahead of us. And then I think sort of from a growth perspective itself, we’re very pleased with the momentum that’s being obtained in DPD. You would have seen the quarterly progression that I’ve talked about, both in the statement and today, and I look forward to the time where we’re seeing US DPD return to being the strongest growth performer across the retail division. The outlook is strong. But we’re not going to quote on 2024 today.
Freya Kong
Okay. Thank you. Could I just follow up on the expected trajectory of the pickup, given the re-platforming is largely done, or done in direct and in partnerships now, do you still expect to see a similar sort of acceleration as you expected previously?
Paul Cooper
What I would say is, what we told you about is that growth would be lower in Q1 and it would return in Q2 and Q3, and the guidance is that we’d be towards the middle of that 5% to 15% range. And you can see from the trend quarter-on-quarter, there is good progression. The momentum remains strong for that, and I’m very pleased with it.
Freya Kong
Okay. Thanks.
Operator
The next question comes from Andreas Van Embden with Peel Hunt. Please go ahead.
Andreas Van Embden
Thank you. Good morning. Two questions, please. The first one is on the London Market business. Could you maybe comment on your business planning for next year, particularly around Syndicate 33? Will there be any change or increase in your capacity that you’re writing at Lloyd’s? And could you also comment on the underwriting process within your binder book at Lloyd’s, whether that now has been completed? And the second question is about Hiscox Re. Assuming rates remain very healthy in the property reinsurance market next year, given the capital generation you’re likely to generate in 2023, would you consider growing your reinsurance book on a gross basis next year, i.e. would you lean into the hard market on a gross basis as well as a net basis into 2024? Thank you.
Paul Cooper
Thank you, Andreas. So it’s useful to just — you’ve commented on say the capital base underpinning London Market. Now it’s important to bear in mind that Syndicate 33, right, both reinsurance that goes into Re & ILS and also the vast majority is London Market just to sort of set a scene around how that business divides. Now you’re right. Our stamp remains consistent with that of 2023 going into 2024. But what’s important to note is there is headroom and has been headroom from a growth perspective of where we are. So the utilization of that stamp capacity was below where it is. And going forward, it’s sufficient for our immediate plans and our immediate outlook and there is no limitation from a sort of stamp capacity on our ability to deploy capital in this attractive market. Now prospectively, if we did need to increase capacity, we can do that. There is the ability through Lloyd’s to have midyear preemptions, for example, outside of the usual planning cycle that Lloyd’s dictates. I think to your question I think — sort of part two of your question was around the binder book. And I think it’s just useful. We said that if you rewind to 2022 and prior, we had been updating for London Market property business. We had been updating our view of risk year-on-year-on-year over a period of several years and at the same time still increasing the rate that we were charging in that property book whilst reducing exposure in property. And that was because, although we were obtaining a return, we thought prior to sort of 2023 that that return wasn’t sufficient for our return on capital sort of hurdles internally. Now prospectively, if I looked to 2023, rates are up, as I said, in that sort of binder book in excess of 20%. We are growing exposure on the household binders. So we’re pleased with the way that that business — the attractiveness of that business has changed in terms of its profile in 2023 and remains attractive going forward. I think to your last point on the Re and would we lean into the gross top line, I think it’s an interesting question. I think the way that we look at it is to essentially bifurcate it into the business that we’re writing on our own balance sheet and the business that we’ll write either through quota share partners or through ILS. Now if I look at our own balance sheet, you’ve seen our willingness to deploy capital in these attractive market conditions. And that in turn will impact sort of the net growth, but also the sort of gross growth component. What is masking somewhat that gross growth component is the interaction of third party capital. From a quota share reinsurance perspective, that’s more than sort of traditional partners. There remains strong appetite. We have good relationships with those quota share partners. And we have modestly added to the volume, i.e. the number of quota share partners we have. That in turn will be a driver of gross premium for Re & ILS depending clearly on their appetite going forward to write in these attractive conditions. I think where there is less certainty for us is that the appetite from the sort of ILS or alternative capital markets. And I think from that perspective, you’ve seen an environment where there has been I think an absence of meaningful capital entering into 2023. I think it’s questionable, given we’re in November, whether there will be any meaningful capital coming into the reinsurance market in 2024. And I think you have seen some capital come in via cat bonds, that’s clearly much more of sort of non-traditional product. But I think from my perspective, as far as I can see, it doesn’t seem that sort of alternative capital is coming in, in any meaningful way for 1/1. And clearly what that does help to do is, whilst it’s restricting supply, it does help to maintain a healthy rating environment and in turn that drives the attractiveness of writing business on our own balance sheet.
Andreas Van Embden
Excellent. Thank you very much.
Operator
The next question comes from the line of Tryf Spyrou with Berenberg. Please go ahead.
Tryf Spyrou
Hi, there. I’ve got two questions. Sorry to come back on capital, but I guess my thinking is that unless it’s a meaningful sort of acceleration and step up in volume growth ahead of rate in capital intensive lines next year, I struggled to understand why you couldn’t return at least some of the cover that’s generated this year. It appears to be significant, given your comments, unless you look to grow what’s keeping against your P&L 6% of equity flood? I appreciate you mentioned timing, but my question is why the decision should be binary, why not balance the two? And the second one is on the sale of Asia, the Asia business. I was wondering if you can update us on the timing of close and how should we think about the proceeds you will receive and your location across those? Thank you.
Paul Cooper
Yes. Thank you for both of those comments, Tryf. Look, I think just to — you’re absolutely right. It is not a sort of binary decision being one or the other. And to sort of repeat my comment, we are deploying capital and we’ve shown that we’re accelerating growth in very attractive conditions at Q3. And I think from our sort of capital returns perspective, it is about timing. When we come to the Board in February, the Board will make a decision on the sort of capital management aspect of that. I think from a DirectAsia perspective, just putting it in perspective, DirectAsia is sort of roughly less than or around 50 million of premium. It’s not material either to retail or indeed to the larger Hiscox group. And what I’m pleased about is our focus on portfolio management. And quite frankly, DirectAsia is just not non-core to the overall ambitions of our strategy, and we want to much more spend our time, effort, money and resources in the highly attractive rest of the business, either Re & ILS, London Market or the attractive growth opportunity that exists within retail. Where we’re up to is we’re looking at sort of the customary regulatory approvals. It remains on track and look forward to concluding that transaction.
Tryf Spyrou
Any comments you can make with regards to how much the business is being sold for I guess in terms of –?
Paul Cooper
Thank you, Tryf. It’s a Class 3 transaction, given its size. It’s tiny. I think you wrap up the overall capital considerations as part of the earlier conversation we’ve been having today.
Tryf Spyrou
Okay. Thank you.
Operator
The next question is from Faizan Lakhani with HSBC. Please go ahead.
Faizan Lakhani
Good morning. My first question is on inflation in retail. Are you seeing any signs of certain segments that are inadequate from an inflation perspective? And are there any pressures from putting rates through in certain states? Second question is you’re currently rewriting your UK book, and historically you’ve done your binders book? Are there any pockets that you’re currently evaluating be it in a small ticket with a big ticket that we sort of consider? Thank you.
Paul Cooper
Thank you for that, Faizan. Inflation, so, look, I did mention in my statement the way that we are looking at that. You will know that we have conducted periodic significant exercises of looking at inflation. Clearly, although CPI has been elevated for the last, I’d say, 18 months, you’ll know that the driver of that has been things like food and ag where there hasn’t been a real direct read across into sort of drivers of inflation in insurance. Our assumptions have been meaningfully higher than have been historically the case. And I think what you’re seeing pleasingly is that from a across both US, UK and Europe, it looks like inflation is tapering off from that CPI headline level. And you are seeing I think — even yesterday, there were signs that the UK rate, central banks are sort of the — or the markets as they’re factoring almost like rate cuts into 2024 as a consequence of that. So it looks like it’s abating. I’ll remind just everyone on the call that we do have indexation and we do rate across various classes on inflation type drivers, such as wages or turnover. And that continues to be the case. We continue to charge premium in line with or ahead of our inflation assumptions. I think then from a UK perspective, absolutely — the thing to take away on this call today is that we are absolutely focused on disciplined underwriting and profitable growth. And how that reads across is we’ve taken action in the UK underwriting partnership space. What I would say, and if Jo was on this call, is that we are always looking to course correct proactively. That is the nature of underwriting. We do drive that profitable growth proactively. But at the moment from a UK perspective, there’s no sort of course correction on the horizon of significance. And I’d say from a sort of big ticket perspective, we continue to exercise strong cycle management and portfolio management. You’ve seen that through driving growth in the attractive areas of property and energy in the sort of marine and energy and specialty, and yet we’re holding our line. It has taken our foot off the accelerator in areas such as D&O where rates are down something like 12%. So that will give you indication of our philosophy and approach on this.
Faizan Lakhani
So as a summary, there’s no real major pocket where rates are insufficient or underwriting quality is insufficient right now that you’re evaluating?
Paul Cooper
Correct.
Faizan Lakhani
Great. Thanks.
Operator
The next question comes from the line of Nick Johnson with Numis. Please go ahead.
Nick Johnson
Thanks very much. Good morning, Paul. A question on cyber. Obviously, very competitive at the moment I think particularly at the smaller end of the market. Question is really is it a segment that you see continuing to underwrite in the longer term? And how important is cyber to the overall SME offering? And really have you got enough scale in cyber to make it work profitably in longer term, or perhaps could it be a segment which might work better through some sort of partnership arrangement? Thanks.
Paul Cooper
Yes. Thanks, Nick. So we do write cyber across all three of our segments, just to give you an indication, and one of the benefits of that is obviously we can inform the sort of underwriting expertise across that. If I look at sort of SME, we do write in each of the retail geographies. So if I think about how we’ve got the scale, yes, I don’t think that we necessarily have to jump straight to an alternative partner. Indeed, if you look at the U.S., it has been competitive. But we are tailoring that cyber product in the broker space to be even more relevant to the micro and small end of that space. And I think also we’re looking where we can to bundle that cyber product. It is our intention more strategically to be sort of the marketplace for insurance for SMEs. And that’s borne out I think by the breadth of offering that we’re supplying let’s say in that initiative we’re demonstrating via the workers comp product as an example.
Nick Johnson
Great. Thanks very much, Paul.
Operator
Thank you. The next question comes from the line of Anthony Yang with Goldman Sachs. Please go ahead.
Anthony Yang
Good morning and thanks for taking my questions. First one is on the legacy transaction on the legacy reserve. Maybe could you offer any more color on what’s the expected impact that this has on the earnings or capital? And also, if you could give more elaboration on the social inflation observation from these reserves, that will be helpful? Thanks.
Paul Cooper
Yes. Thank you, Anthony. So on the LPT, so we’ve introduced and entered into a new LPT agreement. The point I’ve made is it’s relatively small. If you look at it from a capital perspective, it’s capital neutral. What it does do clearly is protect us from downside earnings volatility. So if you look at the LPTs in the round now, I think what’s important is that as of Q3, about 28% of the 19% in prior reserves are protected by the LPT. So essentially, adverse deterioration falls to those counterparties if there is adverse deterioration. And I think importantly, which I think leads into slightly your question on social inflation, which is our casualty business is protected to the tune of 41% of the casualty reserves for ’19 and prior. So the LPTs offer what I would argue is a significant amount of protection, particularly around social inflation. Now from a social inflation perspective, sort of perhaps your question was prompted by sort of recent articles in the press and I’ve also read those. What I would say is that we’ve been — social inflation has been around for a long time, and we’ve been underwriting casualty classes that are exposed to social inflation for many, many years. So we have the expertise that covers off the social inflation as just one of the underwriting factors. What does seem to be a more modern phenomenon is litigation and the award of sort of jumbo awards by juries, or even to the extent of nuclear awards. What I would say is, and I talked about the profile of our book, that our book is very — from a retail perspective is very heavily skewed to the small and micro end. So there’s sort of one and two man bands or person bands of these businesses that typically have very low limits. And they’re just not subject to litigation in the same way. So hopefully, that gives you a sense of the profile, our expertise and also the sort of reinsurance protection from a casualty perspective that exists via the LPTs on that.
Anthony Yang
Thank you very much, Paul. That’s really, really helpful.
Operator
The last question comes from the line of Darius Satkauskas with KBW. Please go ahead.
Darius Satkauskas
Good morning. Thanks for taking my questions. Just two real quick. So the first one is your ILS investors obviously see the performance of your funds. Are there any indications that their views are changing and the outflows could come to the end or should we still expect outflows in the near term? And in your view, the broad ILS funds market is currently seeing outflows as well. That’s it for me. Thank you.
Paul Cooper
Thank you, Darius. So I think that — I’d comment on the ILS sector generally. So we continue to see outflows as you’ve highlighted, despite those record returns for the ILS funds. I just think it’s very interesting that we are in a market where we’ve demonstrated — this is more generally the broader sector, but we’re in a market where we’ve demonstrated rate increases of 30% plus. Terms and conditions have tightened up very substantially. And you would have seen sort of the ILS performance against that background. There hasn’t — there doesn’t seem to be from what I’ve seen any meaningful capital come in from the ILS sector. What is true is that specifically for us, we are seeing a heightened degree of interest. Our Re & ILS team are actively marketing the proposition and the fund performance that we have. And an interest is certainly there. But the broader sector seems to be sitting on the sidelines, and I think that there are two drivers for that. One is that, from an underwriting perspective, the reinsurance market as a whole has failed to meet its cost of capital for say something like the last five years. So they’re looking for — my understanding is they’re looking for a proof point in, let’s say, the 2023 results, possibly even the 2024 results before they are more encouraged to deploy capital back into the reinsurance sector. And, of course, when ILS capital was very significant and growing, it was against the backdrop of a zero interest rate environment where there was a hunt for yield. Clearly, we’re at an environment where rates are up substantially. And you can see that in our investment portfolio. Reinvestment yield is 5.7% as at September. And I think, therefore, the options and the hunt for yield is clearly sort of abated somewhat. So I think there’s — that’s the sort of dynamic that is playing out in that environment and how it pertains to us, but also the sector more broadly.
Okay. And I think, Darius, unless there’s a follow up, then I think that draws — and we’re over time, so perhaps we should draw it there. Thank you very much for your attention and questions on the call today.
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