Lancashire Holdings Limited (OTCPK:LCSHF) Q4 2022 Earnings Conference Call February 10, 2023 8:00 AM ET
Company Participants
Alex Maloney – Group CEO
Natalie Kershaw – Group CFO
Paul Gregory – Group Chief Underwriting Officer and LCM CEO
Conference Call Participants
Freya Kong – Bank of America
Will Hardcastle – UBS
Andrew Ritchie – Autonomous
Kamran Hossain – JPMorgan
Nick Johnson – Numis
Tryfonas Spyrou – Berenberg
Abid Hussain – Panmure Gordon
Operator
Hello, and welcome to the Lancashire Holdings Limited 2022 Year End Results. Throughout the call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. Please note this call is being recorded today.
Today, I am pleased to present Alex Maloney, Group CEO; Natalie Kershaw, Group CFO; and Paul Gregory, Group CEO.
I will now hand over to Alex Maloney, please begin your meeting.
Alex Maloney
Okay. Thank you, operator. I’ll just give a brief overview of 2022 and then I’ll be handing over to Paul, who will give you some details on our underwriting highlights of the year and then Natalie will give you the financials.
If you look at our growth for the year of 35%, it’s incredibly pleasing to achieve that level of growth for our business. As part of our long-term strategy, we very much believe that you have to grow in excess of the rate change at this point in the underwriting cycle. So clearly, if you just move with your rate change and actually grow you’re not moving our business forward. So it’s very important that we grow at this part of the cycle. And clearly, our belief is that other parts of the cycle has to shrink your business back or cut your risk levels. So we’re very much in a period where we want to grow.
Our premiums, of course our books, it’s very pleasing to grow for 35% to $1.7 billion of premium. In fact if you look at our business and what we’ve done since the market turned, at the end of ’17, we’ve grown substantially in excess of rate every single year and we’ve written more than $1 billion of premium since the end of ’17. So at the end of ’17 our business was relatively small, as $600 million of premium and went out to $1.7 billion.
We also expect 2023 to be another good year of opportunity for Lancashire, where we expect to grow in excess of rate for ’23 as well, but we expect the growth to be more muted than ’22 and more muted than our number in ’21. So that’s what we think we can achieve. We’ve added more product lines across our book. We’ve had lots of great people for more diversified business, thus allowing us to move our business forward.
When you look at ’22, clearly, it’s been another year where the increasing, sort of, a high level of loss activity. Hurricane Ian was the second largest catastrophe loss on record, very large events. Clearly the War in Ukraine or the conflicts in Ukraine has created some loss events and a very difficult loss experience or very different scenarios from that terrible event. We’ve also experienced some losses in our — in some of our energy lines for the year. So not a year without events and things to consider.
So to achieve the combined ratio of 97.7% when looking into all those things have happened during ’22 is incredibly pleasing. I think what it demonstrates as well that business is more robust. It allows us to navigate years such as this better and I think you’re seeing the true benefit of the growth and the diversification coming through to our book. So I think we just built a better business over time. It allows us to absorb year such as this and navigate through large loss events.
Obviously, ’22 was a year where the end of free money arrives rapidly and clearly, there was a change in our investment return, which was mostly unrealized during ’22, and clearly we will benefit from better investment returns throughout ’23. So if you think about it, we’re getting better margins on our underwriting portfolio, we could see more investment income into our books for ’23 again more margin in a system allows us to navigate any losses that may come into our ’23 book.
Just moving on to capital. We’ve always been very active managers of our capital whether that’s in a soft cycle or a hard cycle, and clearly with the changes to the reinsurance market 1st January with some better modeling that we’ve achieved through our book. There’s been a lot of movements in our capital base and clearly the benefit of diversification is clear to see now.
We also have very good support from long-term reinsurance partners. We spoke a lot over the years about having the right reinsurance strategy, where is the best long-term partners. As most of you will be aware, it was a very difficult renewal, whether that be for cat business or specialty RI, but we had a lot of good long-term support. We went early as we generally do and Paul can give you some more details later.
But lots of support from our long-term reinsurance partners allows us to continue with expanding our footprint, better use of our capital with the business, more diversification. And as I said some better modeling, which is all factored to a very, very strong capital ratio, which is exactly where we want to be. We want to be positioned for ’23. We want to be in the strongest capital position that we can, which we are gives us more opportunity, more flexibility as we look forward.
So with that, I’ll just hand over to Paul to ask him to give you some more data on our underwriting activities.
Paul Gregory
As Alex has described it’s been another year of full momentum that seen strong premium growth of 35%. Market conditions in every segment of the portfolio continued to improve with an overall portfolio RPI over 108%. We’ve now had five years of positive rate movement.
In line with our strategy of underwriting the cycle, we’ve grown our underwriting footprint significantly during this period. Since the start of the hardening market in 2019, as Alex has already alluded to, we’ve added over $1 billion of gross written premium. This growth has come from expanding our traditional product lines, as well as consistently adding new teams and product lines to the business.
The $1 billion of premium growth during this five-year period has been split pretty evenly between expansion of those traditional product lines and the addition of new teams. For 2022 we guided to $50 million to $60 million of additional premium from the new teams that joined during the course of 2022, and we ended up marginally above the top end of this range. These product lines will continue to mature over the coming years.
The aim of the past few years growth has been to build a more robust and balanced portfolio that can better absorb the natural volatility of our products. We are now seeing the benefits of this strategy with the portfolio remaining profitable, despite the second-largest U.S. windstorm on record and the Ukraine, Russia complex the impact multiple lines of business in which we specialize.
In the next two slides, I’ll cover off our reinsurance and insurance segments. We will cover off a few highlights of 2022 and then look forward to 2023 and our view of how it may evolve.
Moving to reinsurance first. In 2022 we have once again seen very strong growth in our reinsurance segment as rates continue to improve. The majority of premium growth came from the continued build-out of our casualty reinsurance segment and the lines of business that sit within this.
For classes within the casualty reinsurance segment, RPIs were marginally positive. Rating adequacy remains robust and we are very happy with the progress we’ve made over the past two years building out this segment of our portfolio.
Moving on to property and specialty reinsurance classes, RPIs were approximately 110%. As previously guided, our intention in the natural catastrophe expose classes was to maintain a stable footprint and take the improved margin. We are successful in this regard with these classes growing marginally ahead of rate. For specialty reinsurance classes such as aviation, energy and marine, we grew ahead of rate as we continue to build out these product lines.
Now moving onto our 2023 outlook for the reinsurance segment. In summary, we expect a continuation of these trends. The casualty segment, we anticipate stable market conditions as rating levels that remain very robust. We witnessed this at 1/1 and our anticipation is that this continues through the year. We will continue to mature our casualty reinsurance during the year, albeit likely at a slower rate than the past two years, given the progress made thus far.
Specialty reinsurance particularly for aviation and political violence hardened significantly at 1st January with rates and retention increasing and terms and conditions tightening. We aim to grow our specialty reinsurance during 2023 as market conditions remain favorable.
For the catastrophe exposed reinsurance lines, we entered a true hard market. The imbalances demand and supply had already been building during 2022. And Hurricane Ian just push the market over the precipice. There was a significant pricing correction, a reset of attachment points and restriction of terms and conditions, all of which feed into a very healthy RPIs we saw at 1/1. These are undoubtedly the best trading conditions we have seen for many years.
Broker reports placed risk adjusted rate change for property cat and retro in the range of plus 30 to plus 60, and this ties in with what we saw in our book. Just as a reminder, our property cat and retro has recently made up approximately 20% to 25% of our gross written premium. Our plan for 1/1 was to maintain a broadly similar net cat footprint in news market conditions to optimize our inwards portfolio and significantly improved margin.
As a result, we took the decision to retain more risk by buying less retro protection, as we optimize our inwards portfolio accordingly. This puts us in incredibly strong capital position with dry powder for the remainder of the year. Our anticipation is that the robust market conditions endure, which will provide plenty of future opportunities.
I’ll now move on to our insurance classes. We continue to grow the insurance segment ahead of rate with 22% premium growth and an RPI over 108%. Almost all of our insurance sub classes had positive rate movement, and for some of these classes, 2022 was the six-year of positive rate movement. As a result of this and as previously guided, the rate increases of some sub classes has slowed albeit importantly is still improving. A large proportion of growth came from property insurance class due to the addition of the construction team and the opening of our property offering in Australia, and also a very strong rating environment.
Every class within the insurance segment grew premiums year-on-year. For 2023, we expect to see continued rate improvement in every product line as dislocation in the reinsurance market flows through. We expect to see more significant rate increases in classes such as aviation, terrorism, political risks and property insurance as well as more gradual rate improvement across marine and energy.
To conclude, I’m very pleased with the 2022 underwriting result in the context of the loss activity. The investments and decisions of the past few years are paying off. More importantly, we see a significant opportunity in 2023 to further build out and enhance our portfolio, whilst importantly maintaining portfolio balance and ensuring we continue to selectively underwrite the opportunity.
Market conditions in many of our product lines are excellent and the catastrophe exposed classes the best we’ve seen for many years. For underwriters this is an exciting market and provides a fantastic opportunity to build on the work of the previous years, and more importantly, improve the underwriting contribution to ROE.
I’ll now pass over to Natalie.
Natalie Kershaw
Thanks, Paul.
Summary of our results for the year is laid out on Slide 10. 2022 has allowed us to demonstrate the benefits of our successful growth and diversification strategy in the last few years. We are now much better equipped to absorb significant catastrophe losses such as Hurricane Ian and still return on underwriting profit.
This is a positive development for the business. The benefit of our growth over the last few years comes through the net premiums earned. These have increased by 42% since last year. With additional premiums written this year, yet to earn three, we will continue to see the benefit of this year’s growth over the next few years.
Some of the newer lines of business that we’re writing, such as casualty, tend to earn over a longer period than our historical book and with our prudent reserving, we expect to deliver profits over a longer period. Our operating expense ratio is lower than in previous years at 13%. This reflects the benefit of the increase in net premium. The small increase in dollar terms in G&A expenses is largely due to higher employment costs, which were somewhat offset by the favorable sterling to dollar exchange rate.
The operating expense ratio has also benefited from lower variable pay in 2022 as well as in 2021. The acquisition cost ratio is higher than last year, this is due to business mix changes with more proportional business written. This tends to have higher commission rates. Our overall expense ratio, just under 40%, is in line with initial guidance given.
Moving onto losses on Slide 12. Catastrophe and weather-related losses for the year was $718.4 million. These losses included impacts of Hurricane Ian, the Eastern Australian and South Africa floods, U.S. Midwest derecho storm and Winter Storm Elliott.
In addition to the catastrophe and weather losses, we also incurred large claims totaling $90.4 million, including $65.8 million related to the ongoing conflict in Ukraine. The increase in Ukraine related reserves in the fourth quarter incorporates an additional management margin over the previous estimates. To case the potential indirect exposure as a result of the conflict, weather remains a high level of uncertainty. The remaining large losses defined as risk losses over $5 million relates to few losses in our energy and power lines of business. These are well within our expectations for these classes.
Despite the active loss environment, we delivered a healthy combined ratio of 97.7%. This is a clear demonstration of the successful implementation of our long-term strategy to better balance our business.
Turning to reserve releases. We have had a overall favorable prior year loss development in every calendar year since the company was formed. For 2022, our total favorable prior year development was $100.5 million, in excess of the original guidance of $70 million to $80 million. The favorable prior year development was positively impacted by IBNR releases from 2020 and 2021, as well as releases from individual losses from earlier accident years. Our history from reserve releases is done for a prudent reserving approach.
Now turning to Slide 12. As we’ve been talking about over the last few years, continued growth in the new more attritional lines of business will offset the volatility of our catastrophe exposed classes to some extent. Although these will have an impact from the underlying attritional ratios. The underlying attritional ratio for 2022 was at the top end of our initial guidance. It’s around 37% compared to 36% in 2021. The impact are changes for business mix, increase this ratio in the region of 11% compared to 2021, which more than offset the benefit of rate rises across book.
The charts on Slide 13, demonstrate our improved ability to absorb catastrophe losses, reinforcing the benefits of our growth and diversification strategy. As we have said before, our new lines of business are far less exposed to catastrophe losses, and are not as capital intensive as catastrophe exposed classes. They help to diversify our book and give us a stable income stream to help offset volatility from the catastrophe and large risk exposed business that we write. They are accretive to the change in fully converted book value per share. Without these new lines, our earned premium would be lower, and this year’s catastrophe events would have resulted in a higher combined ratio.
Our investment return increased slightly in the fourth quarter, resulting in a negative portfolio performance of 3.5% for the year-to-date. The negative returns for the year, with the result of significant rate rises, and the widening of credit spreads, resulting in losses across our portfolio. The majority of these losses are unrealized and should unwind fairly quickly given the short duration of the portfolio. Our investment portfolio remains relatively conservative with an overall credit rating of AA minus. We aim to invest in largely low risk, short duration and liquid investments, whilst taking more risk on the underwriting side of the business.
We do not intend any material changes to our investment strategy in the medium term and we’ll keep the overall portfolio duration short. Given the short duration of the portfolio, we will start to see the benefit of interest rate rises relatively quickly. We do not anticipate major changes to our investment portfolio in 2023.
Moving on to capital on Slide 15. Even given the overall comprehensive loss in 2022, we retain a strong and robust capital position. We finished the year with an estimated solvency ratio of 300%, which would reduce to approximately 250% following a 100 year Gulf of Mexico wind events. The increase in our solvency ratio in the year is due to changes in our inwards business mix and outwards reinsurance, as well as modeling enhancements in the second half of 2022.
As I previously noted, we generally expect 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.
Finally, moving on to forward guidance. With the implementation of IFRS 17, 2023 is a tricky year to provide forward-looking guidance. For simplicity, we will focus guidance from the underlying combined ratio, excluding catastrophe losses and reserve releases. We will then be able to update this guidance on an IFRS 17 basis, post the publication of IFRS 17 interim financial statements in August.
On the current accounting basis, we expect the underlying combined ratio for 2023 excluding catastrophe and large risk losses to be in the region of 74% to 79%, with reserve releases in the range of $100 million to $110 million. Catastrophe losses are impossible to predict, but with better pricing and improved terms and conditions, plus the growth in our non-catastrophe exposed lines of business, it is reasonable to expect that we will continue to be able to absorb higher dollar amounts for cat losses on historically.
With that, I’ll now hand back to Alex to conclude.
Alex Maloney
Okay, thanks Nat.
So just to summarize, our long-term strategy doesn’t change, the underwriting opportunity look strong. So we expect to grow our business again this year. As you said, the capital base is very strong. We expect to probably use some of that capital to grow our cat book this year, if we see the opportunity there. So I think everything that we — everything where we want to be we are. So our position is exactly where we want to be. And we expect some really good opportunities for the [2023] year.
So I’ll now hand back to the operator for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Freya Kong from Bank of America. Please go ahead. Your line is open now.
Freya Kong
Hi, good afternoon. Thanks for taking my questions. Firstly, could you talk us through the moving parts of your regulatory ratios, which was up 30 points in the half, despite the impact on shareholders’ equity? How much of this was a reduction in exposure of cat, driven by reinsurance changes or how much of this was due to the modeling changed and this is factor in forward looking assumptions?
And secondly, could you just give us some color on the modeling changes that you’ve made and how much of this benefit transfers into your credit rating models? Thanks.
Natalie Kershaw
Hi, Freya. It’s Natalie. I’ll take those questions. So, first one on the regulatory ratio, as we’ve said in the scripted remarks, we were looking to retain about the same amount of cat risk as we had last year. So the change in the ratio that you can see since Q3 is predominantly due to modeling enhancements rather than any change in the risk in the underlying portfolio. And then what we’ve done on the modeling side, we’ve been looking over the last few years to try and get a better view of secondary perils, such as flood and fire.
So the modeling enhancements that we have done actually increased results for those types of events, that lower return periods, but they also lower results for extreme tail events extreme end. So that means the PMLs effectively that drive the capital models have come down and you can see that in the PMLs as well that we publish in the financial statements.
So I think — you said, that they are forward looking, they use the PMLs at 1/1. So yes, so that — to that extent they are forward looking.
Freya Kong
Right. Okay. But the PMLs published are as at year-end, correct?
Paul Gregory
Yes. PMLs are published at 31st of December.
Freya Kong
Okay. Thanks.
Natalie Kershaw
And then you don’t get the same benefit exactly in every single capital model, but it save a few while benefits across the capital models.
Freya Kong
Okay. Thank you. And when you’re saying — when you say you want to retain the same net cat footprint, is this ’22 versus ’21 or ’23 versus ’22, just to clarify?
Paul Gregory
I think Nat that was making reference to ’22 versus ’21 which is, if you remember at the start of the year, that’s what we guided to for last year.
Freya Kong
Okay. Thanks.
Operator
Our next question comes from Will Hardcastle from UBS. Please go ahead sir. Your line is now open.
Will Hardcastle
Oh hi, everyone. Thanks for the questions, first of all on the BSCR just trying to understand how much of this move was denominator versus numerator you’ve touched on it a little bit I just struggle to get my estimate my estimate probably looks a bit silly now. Trying to understand really that capital requirement has reduced materially year-on-year or whether it’s to benefit from assumed future profits?
And the second one is thanks very much for the attritional guidance, I guess just trying to reconcile that to 2022 would that look to be around 77% in 2022 and so it sort of pointing to the same mark or could my math gone a bit right? Thanks.
Natalie Kershaw
Okay so, on the first question. The BSCR doesn’t assume future profits at all. The benefit that you’ve seen between Q3 and Q4 is largely due to the enhancements we’ve made to the model, so that’s the capital required benefit that you’re seeing. And that would have been very hard for you to model correctly, because obviously, we didn’t give any indication that we were looking to enhance the modeling last time we spoke. And on the guidance here, we’re looking at the combined ratio guidance. The underlying combined ratio guidance is pretty much in line with this year give or take.
Will Hardcastle
Okay. And I guess just as a challenge on that. I guess with all – I appreciate the mix change, but with all the growth in the better pricing would you consider there is extra conservatism in that guide or – what would be being not to sort of including – because it would be quite simplistic maybe to assume that that would improve year-on-year?
Natalie Kershaw
Yes, I think what, when the pricing goes up at beginning of the year, that does take a while for that come through. And I think Paul is talking about the pricing. Remember that’s only on about 20% of the portfolio and that’s part of the portfolio that doesn’t really impact the attrition either because we’re talking about and – he’s been talking about cat and retro. So it’s really predominantly business mix. There are a lot of earnings coming through from this year into next year and earnings from this year will come through over the next like 18 to 24 months.
Will Hardcastle
That’s clear, that’s very helpful. Thanks.
Operator
And our next question comes from Andrew Ritchie from Autonomous. Andrew, your line is open. Please go ahead.
Andrew Ritchie
Hello, can you hear me?
Alexander Maloney
Yes.
Paul Gregory
Yes
Andrew Ritchie
Yes sorry, I didn’t quite hear the operator. First question, I didn’t quite understand. You made a comment about dry powder talking about. I think you’re talking about retro that you didn’t use, you took a bit more risk on your book net that – to me, that would be the opposite of dry powder if you’d used that more capital. But can you just clarify what you meant? I think maybe did you mean there’s some unused retro capacity for later renewals. But just clarify that first of all?
Second question, if 2022 happens again with respect to cat losses, based on what you’ve seen in renewals and what’s likely to happen on things like attachment points. Do you think your cat loss would be lower? And then the final question you’ve helpfully provided the underlying combined ratio ex casualty. I think it’s on Slide 12. My math is going to be proved here, but when I back sold, I’m getting to an underlying loss ratio for casualty of about 95, which still seem very, very conservative. Can you just confirm that’s about the right number? Thanks.
Alexander Maloney
Hi, Andrew, so I’ll take the first two of those questions and apologies. I wasn’t very clear in my script, but to clarify so 1/1 we kept our net cat footprint broadly stable. We proactively decided to buy less retro limit protecting our own portfolio going into 1/1 and retain more risk. And then we managed our inwards portfolio accordingly to end up in a position where we’re broadly at the same position on a net basis. And again, that’s something we’ve spoken about over the last three to six months.
Given our strong capital position that we have, if market conditions continue to remain strong and there are good opportunities to increase on certain client then we have the capital position to do it. That was the reference to dry powder. That doesn’t obviously mean we have to, but we just in a very strong capital position if those opportunities do manifest. So hopefully that brought to be a, – clarity there.
Andrew Ritchie
And sorry – because I just because want to speak to, when we talk about net cat footprint, you’re referring to limits of – it’s not premium it limits?
Alexander Maloney
Correct, limits yes that’s right. Yes, risk exposure yes.
Andrew Ritchie
Yes.
Paul Gregory
So if you – on your second question, of its first point I’d make is if you take something like Hurricane Ian which I think you’re referring to obviously, a large proportion of the book that would have been impacted by and hasn’t yet renewed. But let’s just assume a broadly similar inwards portfolio are you then kind of the things you need to think about. It sounds like you’re already thinking about.
On the inwards portfolio for both property cat and retro, retention levels have moved up and in some instances quite significantly so, very simply that pushes more loss onto the cadence and less loss into the reinsurance market. Offsetting this a little bit is, of course, we buy our own retro and we have retained a bit more also, we’re part of the retro market and we have to take slightly increased retentions ourselves, albeit they weren’t that material in all honesty.
So those two things combined I think in pure dollar terms, if you had exactly the same event, which never happens, by the way. You would be looking at slightly less dollars and also kind of [Hama Home], the point that we’ve been making through the scripts, you’re just going to have a more robust portfolio with the rate environment we’re going into the bigger business that we have, the broader spread of business that we now have. So the portfolio overall is obviously going to be much better positioned – to take those kind of hits.
Andrew Ritchie
Paul is actually thinking less about in a way, more about the other stuff. The other weather stuff, you know, Elliott?
Paul Gregory
Yes.
Andrew Ritchie
Aussie floods that stuff I kind of would hope maybe that’s not – that’s not touching at all now?
Paul Gregory
Yes look, I think on those smaller type events of which the market in – has a lot over recent years. I think that’s why you’re seeing the real focus on increasing retention levels at the 1st of January, which I completely expect to continue through the remainder of the year. And it is exactly those type losses that will be pushed back to cedence. There will always be types of losses that are of a certain level that could still find its way to reinsurance market let’s be clear about that.
But the level at which the market is now attaching and that applies obviously to our portfolio as well. We’re in a far healthier position. So your assumption is correct. The impact of those type of events at the levels we’ve seen will be both less material than we’ve seen in the past few years. It’s just worth noting as well. Obviously, we talk about rate increases on property cat and retro not all of that rate just country premium, a lot of that risk adjusted rate change has come through these movements in attachment points.
Natalie Kershaw
Hi Andrew it’s Natalie. On your third question, I think we’ve said over the last few years since we started writing the casualty book that we were going to start off and we’re saving it incredibly prudently and that that is what we have been doing.
Andrew Ritchie
Do you have any sense as to where you’d want to ultimately develop or will you expect it to be available?
Alexander Maloney
If you think about any new class of business for us, we’ll always start and we’re very conservative sort of loss pick, I think casualty is notoriously difficult we’re fully aware of that. So, I think we’re in no hurry to sort of change our assumptions. And I think our strategy is exactly the right one.
We definitely aim to that class of business in the right time, but we are more conservative on that class than any other class that we write and it will take a longer period of time. So we’re not in any hurry to change assumptions and we’re – I think our approach is 100% right on that portfolio.
Andrew Ritchie
Okay. It’d be useful to carry on what you said on Slide 12, if you could see it again in future periods that would be great. Thanks.
Alexander Maloney
Yes.
Natalie Kershaw
Yes, we could do. So you might have to rethink a little bit when we have IFRS 17 coming in because the way you disclosed losses the premiums and everything slightly different, but we can think about that for sure.
Alexander Maloney
Thank you.
Operator
And our next question comes from Kamran Hossain from JPMorgan. Kamran, your line is open now. Please go ahead.
Kamran Hossain
Hi, I’ve got two questions, the first one is just on the, I guess the underlying combined ratio and how to think about that. I guess within presentation you obviously highlight that cat is less an impact than it should that has done in the past. I guess my conclusion is therefore that catalyst assumptions should be materially lower for the group than they were in the past. I think 15 is always a number that was the historical average, not forward guidance. How much leverage do you think that number should pay now or how should we think about that, is it lower should it be lower [at potential] premiums? So that’s the first question.
The second question is on growth. I think in your opening comments, Alex, you said at this past year cycle, when rates are going up, and to increase exposure, you talked about property cat going up, we’re taking the midpoint of 45% and then appreciate some of that is retentions, changes in structures, et cetera. Would it be outrageous if I assume that 20% of the book at 45% gets you to 9% so you should have double-digit growth I’m just trying to figure as well. Just any thoughts around are they really interesting? Thank you.
Alexander Maloney
Yes, so on that I’ll let Paul answer that question. But my comment really is a strategic one in that if you believe in the cycle as we do so much. You have to point real growth now. So it has to be in excess of rate, you can’t describe the rate because there’s no real growth. But, I’ll let Paul answer your question on your assumptions.
Paul Gregory
Yes, I think it’s very fair to assume Kamran that will be growing this year. I don’t think it will be at the same pace as we’ve seen in the last two years in all honesty. And I think I had to look at the consensus numbers with Helena this morning, which would definitely suggest double-digit. And I’m very comfortable with the numbers in consensus just a couple of points to pick up on, just to add a little bit more color.
Obviously not all – and I did mention this a little bit earlier, but not all the rate change in cat reinsurance will be seen in premium. Be the risk adjusted rate change. So it does factor in things like increased retention level, tight in terms and conditions et cetera. And if you look at our inward retro portfolio a lot of the rate increase that we got on retro was actually driven by an increase in retention level on that portfolio.
So they’re where you’re pay quite high rates online, the clients the ATM which that we underwrite. And so a lot of them, we’ve got very strong risk adjusted rate change, but a lot of that came through levels. So you don’t necessarily see that flow through in premium. Some of the newer lines like casualty as I alluded to in my script, they will still grow at a slower pace, we made more progress than we thought we would in the last two years.
So again, to maturity quicker than we thought so that will slow the growth. It will still grow, but be slower than previously seen. And then just lastly, we haven’t currently added any new teams for 2023. Obviously, those in 2022 will continue to mature. This could change. We’re always looking at new opportunities and obviously we’ll update people and if we do bring in new product lines.
So in summary, yes, more growth this year consensus looks very sensible to me. But just remembering that point on cat, it doesn’t all flow through in premium. But I’m very happy that we get level, level is really important.
Kamran Hossain
Thanks, Paul
Natalie Kershaw
Hi. Kamran on the cat ratio question, as you know, we don’t guide for cat. Ratio and you write the 15% that we refer to is the historical average cap losses. But you’re also right that we’re seeing our strategies to grow the non-cat lines and we’re trying to become – or we are becoming a more resilient business and we’re better able to absorb cat losses than we have been historically.
Kamran Hossain
Sorry, so if I just put the two things together, it probably suggests that I mean, maybe I’m putting 10 tailing on 5, but the number should be lower if – I had. So if you’ve been growing your own statutory you know your cat footprint stays the same risk is – that number should come down?
Paul Gregory
I think the way to think about it is it’s more the impact of cat losses, right? So we got bigger business. We’ve got more revenue in the system. So we can absorb more dollars. But as you see, it’s very hard overlaying different years on to ’23. But I think all in all, I think the message we’re trying to say is that we can absorb more cat dollars is less disruptive to our business in the bumpy years due to the diversification plan and the other products that we now have.
Kamran Hossain
Okay. Thanks Alex. Thanks Natalie. Thanks, Paul.
Operator
And our next question comes from Nick Johnson from Numis. Please go ahead, your line is open now.
Nick Johnson
Hi, good afternoon, everyone three questions please. Firstly on property cat just similar subject I guess to what has already been asked but slight different perspective. When you take into account the additional rate you’ve achieved and high attachment points, what degree of risk-adjusted margin improvement should we be thinking about in property cat is it possible to quantify that?
And then secondly just a couple of small ones actually LCM the fees have gone down quite significantly, is that indicative of a similar reduction in assets under management. And then lastly, there has been an increase in intangible assets. Can you just talk about the reason for that? Thank you.
Paul Gregory
Okay Nick. So I’ll take the first one, I can start on LCM and then and I can probably provide a bit more detail. So look on property cat, it’s definitely fair to say that year-on-year within increased margin. Obviously, we’ve seen increase rate come through. We spoke about increased retention level. We have had to pay more for our outwards protections on our retro and retentions have gone up slightly.
We’ve of course decided to retain more as well. I’m not going to give you the specific increase in margin. Obviously, we’ve got a lot of the year to run as well. We roughly write about a third of our property cat business in Q1 so there’s approximately two-thirds less to go. But what I can say and confirm is our net expected margin on property cat has increased significantly year-on-year. On LCM, obviously, the fees we earn about could look in.
Some of it is impacted by timing, three things like profit commissions, et cetera. So it is not necessarily indicative of what’s happened. But you will recall in Q1, ’22, we were very candid that we’re in very difficult environment for raising funds. There’s a lot of the investor fatigue in the ILS world and our 1/1 draw for 2022 did go back reasonably significantly. We did have a raise it was significantly less than we’ve seen in prior years.
So that hopefully should all be known. Looking forward, for 2023, we did engage in a number of conversations. That fatigue in that world certainly hadn’t eased in fact I’d say, it got somewhat worse. So we did engage with both existing and new investors, but given the lateness and complexity of the renewal, we had to make a call at one point as to whether we were going to continue because we had to make decisions for inward clients as to obviously we’ve underwrite the business and we decided not to do raise for LCM at the 1st of January 2023.
Obviously, we’ll continue to assess opportunities, et cetera, et cetera. But there were numerous opportunities for all parts of our balance sheet and we were still able to service and not or to worry which clients. So that’s kind of where we stand on LCM.
Nick Johnson
Just so when you say them to raise, just because does that mean that there’s no inflows or does it mean that there’s no money at all in LCM at the moment?
Paul Gregory
No, we didn’t say, if you recall Nick with LCM with LCM, we raised for every renewal period. We can do it outside of renewal periods as well. So we didn’t write any new business at the first of January. Obviously, there are older years that remain live, that will be managed, et cetera. But at the first of January, which has historically been the time when we’ve done our biggest raise, we didn’t raise any new funds.
Nick Johnson
Okay, yes thanks, intangible assets?
Natalie Kershaw
Yes Nick, its Natalie, there’s two drivers of the intangible asset, increase we purchased more of the names, capital Syndicate 2010 so that increase the intangible syndicate participation rights and then we have also been making a lot of investment into technology. So we’ve got some internally generated intangibles as well.
Nick Johnson
Okay thanks. Is the technology investment kind of ongoing for a few years?
Natalie Kershaw
Yes, it’s the ongoing over the next couple of years.
Nick Johnson
Great okay, thanks a lot.
Operator
And our next question comes from [Darryl Gold] from RBC. Please go ahead. Your line is open now.
Unidentified Analyst
Hi afternoon, everyone. Hi afternoon, everyone. Can you guys hear me?
Alexander Maloney
Yes.
Paul Gregory
Yes.
Unidentified Analyst
Yes hi all right a few questions. I’ll ask them one at a time, if that’s okay. The first one is just on that underlying combined ratio guidance of 74% to 79% what’s the expense ratio component within that, please?
Natalie Kershaw
Yes, so on that, we’re not going to split that ratio out going forward, because it just going to become really confusing with IFRS 17. So we’re just going to stick to the total underlying combined guidance.
Unidentified Analyst
Okay, that’s fine. And then secondly, the solvency ratio at 300%, does that already account for the gen renewals and any other retro changes?
Natalie Kershaw
Yes, as I said earlier, yes, that’s all taken into consideration in the solvency model.
Unidentified Analyst
Right, but I mean, that was for the retro changes in ’22, right? Does that also reflect any other changes that you did in ’23 along with any capital that you’ve deployed out of the general renewals?
Natalie Kershaw
Yes, it takes the PMLs out 1/1 for the year, so that it reflects all the changes made for 2023.
Unidentified Analyst
Right, right, got it. And lastly, just on that internal management restructuring, I mean, do you have any insight beyond that, please? Is that to improve operational efficiency or I mean, any comments at all there? Thanks.
Natalie Kershaw
So that’s the move to the insurance and reinsurance segments. Is that what you mean?
Unidentified Analyst
Yes, yes.
Alexander Maloney
Yes okay. So really that’s just to reflect how we look at the business on a day-to-day basis. You may recall the earlier in kind of mid-2022 we made gains through to James Irvine, CEO of Insurance and Reinsurance. So the changes in segmentation just reflects how we look at the business from an underwriting perspective internally.
Unidentified Analyst
Okay. Got it. Thank you.
Operator
And our next question comes from [indiscernible] from KBW. Your line is open now. Please go ahead. [indiscernible], your line is open
Unidentified Analyst
Oh, I didn’t hear my name. Thank you. Just one question. Is cat conditions really this good? Can you help us understand why you decided to maintain net cat footprint the same and highlight that you have dry powder? I’m just trying to understand if you’re sort of positioning for June and July when the U. S. renews or are you more focused on managing earnings volatility now meaning that your cat exposure will grow in line with the rest of the business? Thank you.
Alex Maloney
Yes, look, we’ve been quite clear over the past 12 months or so that the intent — certainly for 2022 is to keep our cat footprint broadly the same. We grew our cat footprint quite significantly in 2021, obviously following the capital raise in 2020.
So I think that’s been pretty well documented. Obviously, as we went into 1/1, there’s a lot of moving parts It was a very late renewal. It wasn’t entirely clear to very late in the day. What reinsurance protection you were going to be able to get. Exactly where the invoice portfolio is going to land. So our view was, if we can look to maintain broadly same net cat footprint, which we’ve successfully been doing, then that would be a very good start to the year and put us in a very strong position, which as you can see from our capital numbers is exactly the case.
We definitely do not want to unbalance the business after all the hard work that’s been done. But as I spoke to, there are still lots of opportunities outside of cat, our specialty insurance lines are continuing to see rate improvements. Our newer lines are still continuing to grow in things like specialty insurers where historically we’ve been quite light. We’ve had a very successful 1/1 and been able to grow our footprint there. That just allows us obviously along with a strong capital position to take a view on cat as we move through the year.
So we’re just in a really strong position. We can see how the market plays out. We definitely don’t want to imbalance the book, but that doesn’t necessarily mean we can’t also grow given what’s going on in the rest of the portfolio.
Paul Gregory
I think as well, but one thing to remember is that if you look at, we are – we did currently write a lot of cat business already. So it’s not that if we are not in the cat game, so we’re probably more leveraged than some to the cat opportunity already. So I think we just have to remember that as well.
Natalie Kershaw
Operator, could we go to the next question please.
Operator
[Operator Instructions] And the next question comes from Tryfonas Spyrou from Berenberg. Please go ahead, sir.
Tryfonas Spyrou
Hi. Just two quick questions from me. I guess taking everything into account on your inwards versus outwards book, how — should we expect the ceded premiums as a proportion of your gross to go down year-on-year? Just trying to be mindful of the fact that you’re purchasing less retro but obviously your retro cost is going up. So just maybe some color on the dynamic of that ratio.
And then the second question on reserve releases. I appreciate the guidance. It’s roughly the same year-on-year based on absolute number. But on my numbers, your net premiums earned should go up substantially next year. So how conservative is that guidance assuming some of the new short tail lines of business entered a couple of years ago should obviously start to mature as well. So just trying to start how you think about that guidance on the one-off. Thank you.
Alex Maloney
I’ll take the first question. Yes, look, the dynamics on the outward spend and remember, it’s obviously not just catastrophe protection. We buy a lot of protection for our specialty lines as well, but very simply pricing for those products did increase on the cat side. As I’ve mentioned, we did decide to retain a little bit more overall. And there are other lines of business continuing to grow, which obviously attracts increased reinsurance spend.
So in dollar terms year-on-year and this is going to be a very similar message in the last couple of years. In dollar terms, reinsurance spend will go up, but as a percentage of inwards, it will continue to reduce.
Natalie Kershaw
On the reserve releases question, you’re right, as a proportion of premium, the reserve release number that I gave might look low compared historical average. But remember, as we’ve been talking about, we’ve been reserving very prudently for casualty and some lines like that which will release over a longer time period than our historical more short tail book. And then also on reserve releases, because we have reserves there for some large risk losses and large cat losses, its quite hard to predict how they might run off and when you might get a release or even adverse development on those. And so that can impact the number year-to-year as well.
Tryfonas Spyrou
Okay. That’s clear. Thank you.
Operator
And our next question comes from Abid Hussain from Panmure Gordon. Please Abid, you line is open. Please go ahead.
Abid Hussain
Hello, hi. I think the line keeps cutting out. Can you hear me?
Alex Maloney
Yes, we can hear you.
Abid Hussain
Hi, guys. Thanks for taking my question. Just one question remaining, I think on growth. What are your constraints or to growing over the next couple of years if rates do indeed come in at the top end of your own expectations, and you write mix in line with your own plans or even broadly similar to this year. I’m assuming that you don’t tap the capital markets. I’m just trying to triangulate what else are you thinking about? I know you’re thinking about retrofit. But you have a sort of clear view, have you just gone through the 1 Jan renewals, and you have an intention to grow exposure. I’m just kind of wondering how hard it could be pushed in terms of growth. What are the constraints?
Alex Maloney
I think it’s more about balance. If you think about a lot of things we said on today’s call, it’s making sure that our portfolio is balanced correctly. So the message we have to go about, even on the cat book, we are going to grow start with maintaining the balance that we have across the portfolio. So clearly, it depends what happens to rates and depends on what classes of business growth.
So let’s just take an example of that Terra. If the Terra market gets super interesting, that’s a very capital light class of business. You can grow that materially. There’s no real sort of limit to your growth in Terra, it’ll just be driven by the opportunity. So — but I think on the cat book, we’re trying to say is we’ve built diversification into our portfolio. We’re a much more robust business. Clearly, cat losses can disrupt your earnings quite materially. So we’re just making sure that even with the growth in the cat book, we’re not undoing some of the work we’ve done in the last five years.
Abid Hussain
And just coming back to that, are you sort of — are you seeing the level rates that you had hopeful outside of cat. I know cat is the hot topic at the moment. But what about outside of that. Are you are you seeing adequacy there?
Paul Gregory
Yes. I mean, I think outside of cat, let’s talk about the insurance lines first. Most of those lines been improving for the last five years and will continue to improve next year. That will be six years of compound rate increase. So there’s always exceptions within that, but the vast majority of those product lines are really healthy rating levels. So we’re happy with where they are.
If you look at something like specialty reinsurance, which is again something with more recently started to expand in. The rate environment 1/1 was actually very healthy. So we will look to grow our footprint there as we move through this year, made a very good start doing that at the first of January. So in summary, we’re really happy with the vast majority of the non-cat lines and where ratings fit. We obviously would like them to continue to go up, but I think we’re in a pretty good spot.
Abid Hussain
Super. Thanks.
Operator
As there are no further questions, I will return the conference back to you.
Alex Maloney
Okay. Thank you, operator. Thanks for everyone’s questions today, and we’ll close the call there.
Operator
This now concludes our presentation. Thank you all for attending. You may now disconnect.
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