Hiscox Ltd (HCXLF) Q2 2023 Earnings Call Transcript

Hiscox Ltd (OTC:HCXLF) Q2 2023 Earnings Conference Call August 9, 2023 5:30 AM ET

Company Participants

Hamayou Hussain - Group CEO

Jo Musselle - Group Chief Underwriting Officer

Paul Cooper - Group CFO

Conference Call Participants

Freya Kong - Bank of America Merrill Lynch

Abid Hussain - Panmure Gordon

Andrew Ritchie - Autonomous

Will Hardcastle - UBS

James Pearse - Jefferies

Andreas de Groot van Embden - Peel Hunt

Tryf Spyrou - Berenberg

Kamran Hossain - JPMorgan

Nick Johnson - Numis Securities

Ivan Bokhmat - Barclays

Hamayou Hussain

Okay. Good morning, everyone. And thank you for joining us today as we present our interim results. I'm pleased to report growth in revenues and profits in every business with our focus on quality of growth and earnings. We've maintained our commitment to disciplined underwriting and delivered an insurance service result of $221 million. That's an increase of 58%. And this, combined with much improved investment income means we've achieved a near tenfold increase in our pretax profits.

Now in our big ticket segments against the backdrop of favorable market conditions, our focus has been on effective cycle management. And in this phase of the cycle, we've increased our capital allocation to these segments. And in turn, London market and Re & ILS have achieved strong growth in premiums and profits.

And in retail, we're growing in every market and achieving sustained profitability in line with our operating framework.

The group financial foundations remain robust with continued strong capital generation and a resilient balance sheet. And I'm pleased to announce an interim dividend of $0.125 per share, an increase of 4.2%.

Now the first six months of this year have been a clear demonstration of the strength of our business model and strategy. And this is a graphic that you're all quite familiar with now. The left-hand side of this represents our Big Ticket segments. Here, effective cycle management, disciplined underwriting, long-standing and deep broker relations and agility are critical.

For instance, in London market, we're experiencing favorable market conditions, but not everywhere. And we've been able to take our foot off the gas from the casualty portfolio, which has been a key source of growth over the last few years and put the foot from the down on the gas to drive material growth in our property and energy portfolios, which offer the highest risk-adjusted returns at this point in the cycle.

In Re & ILS, our capital strategy has enabled us to grow -- materially grow our net return premiums and exposure at a time when third-party capital capacity remains constrained.

If I flip forward to the other side, this represents our Retail business, the red part of the diagram. And here, we continue to see substantial long-term structural growth opportunities. And our strategy is to grow into these large and fragmented markets through the cycle using the power of our brand, our technology, our long-standing relationships, all underpinned by excellence in underwriting.

So Hiscox portfolio of businesses allows us to operate in a number of different parts of the specialist insurance sector, allocating capital to those areas of expertise that offer the highest risk-adjusted returns. And that's enabled us to grow revenues and profits in every market at a group annualized return on equity of 20%.

Now moving on to Retail. Here, we've grown revenues and profits in every business as our investments in talent, technology and developing partnerships pay off.

Now looking at each of the geographies in turn, in the U.S., well, it's been a tale of two halves. I'm really pleased with the performance of our U.S. DPD business. Here, we've seen growth accelerating in line with our expectations as we continue to embed the business onto the new technology platform. In contrast, in our U.S. broker channel, we are experiencing a reduction in the top-line as we maintain discipline in the face of intense pricing competition, in particular, on cyber.

In the UK, we're seeing growing momentum with revenues increasing to 4% in constant currency, up from 1.2% at the end of the first quarter, albeit the headline growth rate continues to be tempered by our decision to exit some nonperforming underwriting partnerships. We're also seeing really good momentum in our UK e-trade platform, which we launched at the start of this year. We now have over 200 brokers and 2,000 users live on the platform with new products being designed for launch in 2024.

And in Europe, once again, we're seeing excellent momentum with revenues up 11% in each of the countries in growth mode. So when looking at the retail growth -- headline growth overall at 5.5%, this is slightly short of our earlier expectations of trending towards the middle of our 5% to 15% range by the end of the year. Now as you can see, we're delivering excellent growth in Europe, accelerating momentum in U.S. DPD and growing momentum in our UK business.

However, our underwriting decisions in the U.S. regarding cyber and in the UK regarding non-performing underwriting partnerships are tempering that headline growth rate. So as we look forward to the rest of the year, these underwriting decisions will continue to have a moderating impact on the growth. As a result, our full year expectation is to be in line with the half year.

Now adjusting for these actions, the underlying growth is 7.3%. That's in line with our expectations. And it's these and other similar underwriting decisions that ensure that the quality of growth that we're driving is profitable.

Moving on to U.S. DPD. Now as a reminder, our Digital Partnerships and Direct business essentially comprises two large pillars, our Direct-to-consumer business and our Digital Partnerships business. Now you'll recall our Direct-to-consumer business has been live on the new platform for a year now.

And we've seen really encouraging improvement in operating metrics, with conversion rates up and also the number of products per customer rising this well relative to the old platform. That, combined with the uplift in marketing expenditure in the first half of this year has really accelerated the growth in our Direct-to-consumer business. In fact, our new business generation is over 30% up year-over-year.

Now our Digital Partnerships business, if you remember, we started to migrate that onto the new platform towards the end of -- or in the latter half of 2022 and as expected, growth slowed down in Q1, but it is now beginning to recover into the second quarter. To accelerate technology adoption and also new business generation, we have implemented a number of tailored engagement programs for our established partners as well as some temporary financial incentives.

You'll also remember that after a two-year hiatus, we added 17 partners at the start of this year. Now they're beginning to start to produce revenues, and that will build up over time. And we also have a healthy pipeline of potential new additions.

So the combination of strong growth in our Direct-to-consumer business, combined with the recovery in our Digital Partnerships business, means we expect our U.S. DPD business to continue -- expected to continue to trend towards the middle of the 5% to 15% range as the year progresses.

Staying on the topic of DPD. Our ambitions in the U.S. are to become America's leading small business insurer, to be the destination brand for our customers' insurance needs by building out an SME insurance marketplace. And we took a big step forward earlier this year with the launch of a workers' comp product in partnership with a highly reputable multiline U.S. insurer.

As our micro and small business customers build out their businesses and acquire employees, their insurance needs grow to include workers' comp, which is compulsory in most U.S. states, but it's not a product that we manufacture. So this partnership means we can service the growing needs of our existing customers and also makes us more relevant in the market.

Now if you take a look at this chart here behind me, the pie chart on the left-hand side, this sets out the U.S. -- total U.S. small commercial premiums by product. Now the red segment is where we have reached today with our existing products of GL, PL, Cyber and BOP.

Now as you can see, with the addition of workers' comp to our shop front, our reach extends by a further third. So in short, this partnership increases our reach, our relevance in the market and introduces a new capital-light revenue stream in the form of commissions we receive for selling our partners' product.

Now we're in the soft launch phase at the moment. We launched this product about six weeks ago with our partner. The early results of the last six weeks have been very promising ahead of our expectations, and we expect to be in the full integrated launch over the next six months.

Now moving on to our big-ticket segments, beginning with London market. Our London Market business has had an excellent first six months, driving double-digit growth top line, all at an undiscounted combined ratio of 83.7%. We continue to see favorable market conditions, in particular, in the Property segment. And as a result, we've increased revenues in our major property line by 75% in our household binder book by 68%.

We also see the Marine Energy & Specialty division as a significant growth opportunity and revenues here have increased in aggregate by 38%. Now as we reported earlier, market conditions in the casualty business in particular, D&O and cyber have become more challenging. Now in line with the wider market, generating new cyber growth has become more challenging following the Lloyd's mandated war exclusion. And in D&O, we're continuing to experience rate decline. This year, we've seen rate declines of about 10% or 11%. That's on top of the 10% to 15% we saw last year.

Now D&O portfolio continues to remain attractively priced. You'll recall that in the preceding sort of four or five years, we saw over 200% rate increase. So it's still rate adequate and attractively priced, but it's not an area where we want to continue growing exposure. So we've taken our foot off the gas.

So what you can clearly see in our London Market business is the combination of proactive underwriting, combining with improving market conditions, which have enabled our business to deliver an excellent result.

Moving on to Re & ILS. Here, again, we've delivered strong net growth of 18% driven by North American cat, marine and retro. We've been leaning into the hard market. We've allocated more capital, we've increased exposures. And at the same time, we've improved the quality of the portfolio by raising attachment points and decreasing our participation on aggregate programs. So here, once again, you can see the combination of active underwriting, improving market conditions, delivering an excellent result or an undiscounted combined ratio of 81.2%. And of course, as usual, you'll hear much more from Paul and Jo on the final points of our financial performance and the contribution of active underwriting into our results.

Now as we also reported in the first quarter, investment appetite from third-party capital providers remains constrained. And in the first half, we've seen $290 million of net outflows from our ILS funds. I expect that trend to continue into the second half and most likely into 2024 as well.

Now in contrast, we've added quota share capacity. So we've introduced new partners both at one-one and at the midyear renewals, demonstrating our ability to access different sources of capital. And finally, I'd like to leave you some examples of initiatives that are underway right across the group to ensure we can deliver on a sustainable basis, high-quality growth in revenues and earnings.

Now beginning with people. You'll remember from our earlier report, that in 2023, we were experiencing the highest colleague engagement we've seen for a long time for 10 years. So we continue to develop and nurture our talent while it's also bringing in some external -- some excellent external hires.

You also know that we appointed a new Chairman in May of this year, Jonathan Bloomer, who joined us. I'm delighted to say he brings a wealth of experience and a real passion for building business. We're also bringing in Fabrice Brossart, who's going to join as the new Group Chief Risk Officer. And I look forward to working with both of them to deliver on our strategy.

Innovation is part of the DNA of Hiscox. It's deep rooted within our culture. And you'll remember from -- again, from our earlier update, we launched an ESG sub syndicate in London market. That is now fully live and we've begun writing risks. So far, those risks include a U.S. solar farm and a European wind farm. There's been a lot of interest in the market, and we expect good momentum over time.

You just heard from me a couple of minutes ago that we're building out an SME insurance marketplace in the U.S. to increase our reach, our relevance and our revenues. Alongside this, we also continue to innovative manufacture products to meet the evolving needs of our customers. One example of that is in Germany, where we've launched a whistle blowing assistance program in response to new legislation affecting our customers.

Technology is a key ingredient of our business strategy. And over the years, we've been implementing technology platforms in our retail business to support significant customer growth and deliver scale efficiencies over time. And technology is also an increasing part of our risk selection and underwriting processes in our big-ticket businesses, ensuring that underwriters can be the best it can possibly be.

And finally, we're reinvigorating our brand. There's a new -- we're kicking off with a new brand campaign in the autumn of this year, starting in the UK. This is the first new brand campaign since 2018. This will be followed by a global rollout in 2024. There's quite a degree of excitement within the business. And I encourage you all to watch out for the new Hiscox brand campaign from the end of September onwards.

So thank you very much. I'll now hand you over to Paul to take you through our financial results, followed by Jo to provide insights and underwriting, and then I'll be back to wrap up and make final remarks on the outlook for 2023.

Paul Cooper

Thank you, Aki, and good morning, everyone. It's great to be here with you today presenting our first set of results under IFRS 17.

It's been a very strong first half. And as Aki already mentioned, a very exciting time for us all as a business has seen the most favorable market conditions in over a decade.

So what does this mean for Hiscox? The group grew revenues, insurance service results and profits across all three segments. Group net Insurance Contract Written Premiums or net ICWP insure, which is a net growth measure under IFRS 17, increased by 11.4% in constant currency to just under $2 billion, supported by a positive rate environment across all business segments and benefiting from our reshaped portfolio as we grew exposure into the hard market in reinsurance.

I'm particularly pleased with the underwriting result, which saw us deliver an excellent insurance service result of $221 million, up over $80 million or 58% from last year. It's also good to see the return of a positive net investment result of $122 million. And I expect more to come as the bond reinvestment yield has improved further to 5.6% as at the end of June.

Remember, the unrealized portion of the bond return is now offset by the discounting of our claims liabilities. And you will have seen, I've posted a short webcast on our website to provide you with a detailed explanation of this to help you in your modeling.

Finally, the board has recommended an interim dividend of $0.125, representing an annual increase of 4.2%, in line with our progressive dividend policy.

I will now take you through a more detailed view of each of our three segments, starting with Hiscox Retail. Retail insurance contract written premium or ICWP in short, the growth measure under IFRS 17 is up 5.5% in constant currency, underpinned by strong double-digit growth in Europe, improving momentum in the UK, an acceleration in U.S. DPD.

As Aki touched on earlier, active and disciplined underwriting decisions has meant that the growth rate is tempered versus expectation. And there are two reasons for this. We've seen increased competition and a decline in prices in cyber across the retail portfolio, notably in the U.S. And in order to grow sustainably, we therefore maintained pricing discipline and did not write business where pricing was below our technical floor.

And we've also continued to exit some noncore underwriting partnerships in the UK as flagged in our Q1 trading update. This is part of our normal course correction where we were not satisfied that some partnerships were performing in line with our expectations, and the impact of these will continue in the second half. Excluding these actions, underlying retail growth is 7.3% in constant currency, in line with our expectations.

Turning to profitability. Hiscox Retail delivered a 50% improvement in the insurance service result year-on-year and a strong combined ratio of 93.8% on an undiscounted basis, a 0.6 percentage point improvement on the prior period. The permanent definition of benefit from reclassification of some expenses to nonattributable combined with the negative impact of moving to an own share presentation broadly results in a small net benefit, which we've reflected in the restated range of 89% to 94% on an undiscounted basis.

Pleasingly, for the first half, we are within this range. And a more detailed explanation of the new ranges in the appendices to the new presentation. And while we no longer report results under IFRS 4, I can also say that the combined ratio achieved is within the 90% to 95% range.

Let me turn to London market. Hiscox's London market had a very strong first half, increasing ICWP by 10.6%. Net ICWP grew by 14.2% on prior year ahead of top-line as we've retained more risk in attractive underwriting conditions. And, I expect this positive momentum to continue through the rest of the year.

The success of our disciplined underwriting strategy that Aki outlined earlier can be seen in the consistency of our strong insurance service result of $75.5 million with an undiscounted combined ratio of 83.7%. The undiscounted combined ratio is a 4.2 percentage point improvement on the prior period. And I'm delighted that it marks the fourth consecutive year in the 80% range.

Moving to our next segment. Hiscox Re and ILS saw net ICWP grew by 17.9% in the first half to $345 million. The group has allocated incremental organic capital to the Hiscox Re and ILS business, resulting in meaningful exposure growth mainly in U.S. and Caribbean windstorm and earthquake in the best rated reinsurance market in a decade, materially increasing expected profits in a normal loss year. ILS assets under management of $1.7 billion at 30 June '23, and the funds are performing at inception-to-date highs as a result of rate improvements, heightened interest earnings and modest loss activity in the first half of the year.

We continue to see net outflows from our ILS fund. And while we expect this trend to continue, our ILS offering remains well positioned to support any new incoming demand.

I'm very pleased with the insurance service result of $32.7 million delivered in an active first half loss environment. And remember, this is somewhat lower under IFRS 17 compared to IFRS 4 due to seasonality of earned premiums, which we'll earn through during the second half of the year, in line with the risk profile of the business.

Re & ILS delivered a combined ratio on an undiscounted basis of 81.2%, benefiting from better-than-expected loss experience despite a relatively active first half, reflective of disciplined underwriting, providing a better shield against attritional losses. This is an excellent result, especially when considering the impact of seasonality.

Moving on to our investment performance. After a strong first quarter, our investment portfolio made modest gains in the second quarter, delivering a positive investment result for the half year of $121.8 million, a stark contrast to 2022 and which saw a loss of $214.1 million, so a much better result with the rate of return also back up at 1.7%. I'm very happy with this outcome given the continuing macroeconomic uncertainties that persist.

Rising coupon and cash returns, combined with gains from equity exposure were sufficient to offset mark-to-market losses on the bond portfolio caused by rising yields. Our corporate bond return was positive given only limited movement in credit spreads over the first six months of 2023. And our portfolio remains conservatively positioned with no defaults in the first half. We maintained modest exposure to selected risk assets with no direct exposure to commercial real estate. And we expect the investment result to continue being a tailwind for the remainder of 2023 as bond reinvestment yields reached 5.6% at the end of June.

Now let's take a look at our balance sheet where reserve resilience continues. The group remains conservatively reserved with a confidence level of 77% within our stated target range of 75% to 85% and broadly similar to our year-end position of 78%, highlighting the continued prudence within our reserves.

And as you can see on the slide, our risk adjustment of $211 million sits on top of our already conservative best estimate of $3.6 billion, which includes units under IFRS 17. And meaning in total, we are holding $3.8 billion of undiscounted reserves, demonstrating our continued commitment to maintaining a robust reserve position.

We continue to benefit from the protection of the LPTs in place. At half year 2023, LPTs provide protection of 25% for '19 and prior gross reserves. LPT recoveries form part of the best estimate you can see on the slide. And as a reminder, my IFRS 17 webcast provides a more detailed explanation of how LPTs impact certain lines in the financial statements to help you with your modeling.

On the next slide, you can see how our prudence translates into favorable prior period runoff. And as you can see, in the first half of the year, our bottom line benefited from reserve releases of $62 million. You can see from the slide that our 2023 release is broadly in line with 2022, which we've restated under IFRS 17, demonstrating the consistency of our reserve releases on a like-for-like basis.

Inflation assumptions in pricing and reserving models remain strong and above our loss experience. And we continue to mitigate inflationary pressures through a combination of exposure, indexation and rate increases.

Now let's look at our capital. Hiscox remains strongly capitalized from both a regulatory and ratings agency perspective. The Hiscox Group Bermuda Solvency Capital Requirement, or BSCR ratio is estimated at the 30th of June 2023 to be 199% in line with the full year result of 2022. And as you can see, capital generation exceeded capital consumption despite the group growing nat cat exposure leaning into the hard market.

We remain comfortably above the S&P A rating threshold and significantly above the regulatory capital ratio requirement. Even post a severe loss scenario, our solvency position remains consistent with the S&P A rating.

As you might recall from our IFRS 17 restatements, our leverage number is lower than under the old basis due to the uplift in shareholder equity on transition to IFRS 17 and at the half year is coming in at 18.9%. In line with our strategic goals, we continue to maintain a well-funded and liquid balance sheet.

I'll now hand over to Jo, who will take you through the underwriting performance of the group.

Jo Musselle

Thank you, Paul, and good morning, everybody. So you've heard how we've grown each one of our segments whilst delivering an insurance service results of $221 million. And I'm delighted with the underwriting, testament to a lot of hard work by so many across our organization.

In our London market business, we are growing as we lean into the hardening market in many of our lines. We growing 15.7% in constant currency, slightly ahead on a net basis, slightly ahead of growth whilst delivering those attractive returns.

In our Reinsurance division, we've got excellent net growth of 20% in constant currency as we lean into that hard market deploying more of our capital. And in Retail, growth momentum continues, 5.5% growth, 7.5% on a net basis as we deal with the embedding of our technology and account for some headwinds in cyber, but delivering within our target combined operating ratio range.

The next slide shows the power of our portfolio, where we continue to benefit from balance. This gives us the opportunity to grow but not the necessity to grow, which is essential for really good cycle management.

The first observation I'd make is we have six out of our seven segments in growth mode that compared to five out of seven at the year-end, where we were shrinking London market property and specialty. Now London Market property, you've heard from me before, we did not believe that, that was price adequate, and we've been taking aggregate off the table for a few years. That has now reversed as we lean into a hard market. And you can see we're growing that line.

As Aki mentioned, our casualty portfolio is actually been at the peak of a hard market been significantly rerated over the last five years, but now we're starting to see softening. And here, underwriting discipline is key.

And then our Retail segments of commercial and art and private clients are less cyclical. And here, we're looking for growth between 5% and 15% depending on the market conditions.

So what are those market conditions? Well, from an external point of view, they remain pretty complex. Geopolitical tensions and other risks like the inflation and recession paradox and energy security are shaping the environment. And from a sector-specific viewpoint, heightened inflation persists. Whilst headline inflation may have peaked, we're still seeing inflationary pressures through our view of risk for things like climate, societal, supply chain as well as some legal pressures on word and coverage.

And it's the same external market conditions that are continuing the rate momentum. A familiar slide to all, you will see that our rates are up yet again across all of our segments, up 9% in London market, at 34% in Re and ILS. And this is on top of the sizable rate increases that we've achieved since 2008. And on the right hand of the chart are our Retail segment, where we and our customers look for more consistency of pricing through the cycle. However, inflation has necessitated rate increases. And you can see in Aggregate, we're up 6%.

So in summary, I'd say the market is attractive, but actually remains somewhat complex. And so therefore, proactive underwriting, effective cycle management and investment in the long-term is key.

So proactive underwriting is so much more than taking rates. In addition to managing our portfolio, we have invested over the last few years in terms of risk selection, exposure management through to capital claims and our reinsurance strategy. And we're able to quantify some of the differences that these changes have made.

So as an example, the first half of this year has been pretty active from a catastrophe point of view. In the U.S. alone, there's been 42 events with an industry loss of around $33 billion, but we have actively managed our portfolio to reduce our exposure to secondary parallels. So in our Reinsurance division, we've pretty much exited the traditional aggregate product. And we've moved up our attachment point to a minimum of one in 10 year. And those two proactive actions as avoided significant loss in the first half.

More broadly, in our London market business, there's been a significant number of large risk losses this year, some we've been on and some we've not. For some that we haven't been on, sometimes it is just luck. But at the times disciplined, maybe we were not on it because of the rate adequacy. And then for those that we have been on, our effective line size management has played dividend.

It's not just the risk selection where we look to proactively take a position. As an example, RMS has released a major model change to the North Atlantic hurricane increasing frequency and severity. Our own Hiscox's view of risk has already accounted for a significant amount of this uplift. So again, our proactive position has meant that, that impact more moderated.

And then if we look across the rest of our business, sometimes it's taken a proactive view can mean your countercyclical. And cyber is a good example. We, like others in the industry, have seen a frequency reduction in cyber following the conflict in Russia-Ukraine. Now we believe that to be temporary and not structural, and therefore, we came into this year looking for rate momentum in our cyber line. However, others have taken a different view and we've seen rate -- rating pressure.

And when you become countercyclical, you've got a couple of options. You can follow the market or you can maintain discipline, and we've done the latter.

So proactive underwriting lead you to what you want to write at what price. But clearly, we operate in a market, and we can't always do what we want to do. And so therefore, that's where effective cycle management is key, particularly in our big ticket businesses.

I showed earlier the headline rate growth across London market and really in aggregate, it's positive. But if we look at that by segment, Property Casualty and Specialty, you can see we've got different parts of our portfolio in different parts of the cycle. So property rates were up 33%. We believe this is an attractive part of the cycle. We want to grow, and you will see that in terms of our deployment of capital. And you can see in the appendix, our box and whisker where we're taking additional nat cat. Why? Because we believe we're getting paid for it.

Casualty, as I mentioned, is actually in a softening part of the cycle. However, we have a very well rated and very well-managed portfolio over the last five years. And here, we want to maintain our portfolio, but if rates do go below rate adequacy, then we will shrink.

So knowing where you are in the cycle is key. We're actually being able to manage the cycle is essential. And a few other things that we've done over the last few years as well as take rates and tighten our terms and conditions is enabled us to take more underwriting control. So how? By leading more risk, and also delegating our underwriting less and also building out a digital and agile capability so we can make changes quickly.

Moving on to Retail. So Retail is much less cyclical. And here, we look for structural growth through the cycle by investing in our propositions and also technology brand and capability.

So starting with the customer, we strive to bring out products and propositions that our customers value and reward us with their loyalty, all of that underpinned by an outstanding claims service. With our new technology, we've rolled out modular products, so we're able to service all of our clients' needs in a single policy.

In our UK Digital business, we sell on average 2.5 products per customer. In Europe, that's 1.5 and in the U.S., 1.2, but growing as our technology embeds. Creating lifetime value, customer retention is key, and we've got impressive customer retention across all of our Retail business and underpinned by an award-winning claims service, where our Net Promoter Score following a claim is market-leading.

Next, investment in knowledge, whether that's our own continuous learning or utilizing the external world. So we continue to invest in our underwriters, things like the faculty of underwriting, which I've talked about before, but also we've launched a new underwriting academy in the UK, where we've accelerated time to competence of our underwriters by about 40%. Utilizing the external landscape and data, we bring in external databases to help us understand more about our customers and the risk without having to ask needless questions.

And then lastly, utilizing the external intelligence to do things like what are the professions of the future. We have a portfolio of emerging professions, we need to keep up to date with the professions of the future so that we can pull out our propositions to best reflect that.

And then lastly, our technology investments through driving value through operational leverage and also seamless distribution and risk mitigation. So from an underwriting point of view, our operational leverage is driven through automated underwriting. And as an example, in our U.S. Digital and Partnership business, 95% of our business goes through without needing to go through an underwriter.

Seamless distribution through APIs is obviously great from a distribution point of view, but also good from an underwriting point of view because we can maintain control of the underwriting and the pricing in one place. And then lastly, building customer resilience. So we're utilizing technology to help our customers become more resilient to claim.

So a good example would be in our UK, we've rolled out 10,000 LeakBot devices to our customers' property, helping them become more resilient to escape of water claims.

So in summary, our strategy of creating profit generation through effective cycle management and creating value through investing for the long term in retail is back on the front foot. I believe that all three of our segments are well positioned to capture the opportunities ahead.

And I'll now hand back to Aki.

Hamayou Hussain

Okay. Thank you very much, Jo. Now as you've heard today, our diversified portfolio is well positioned to deliver high-quality growth and earnings. In Retail, the long-term structural growth opportunities remain significant. And we will grow into these opportunities through a combination of our own balance sheet, underwriting and technology as well as through select partnerships.

Our Retail businesses continue to see positive growth momentum, albeit tempered by delivery actions not to prioritize growth at the expense of quality of earnings. As such, we expect the full year headline growth to be in line with the half year trend. In the U.S., we expect DPD growth to continue building momentum towards the middle of a 5% to 15% range.

We continue to experience very positive market conditions in our Big Ticket segments. In London market Re & ILS, we believe we have the best quality underwritten portfolio for over 10 years. I expect our London market business to continue growing at its current trajectory. In Re & ILS, we're well capitalized ahead of the U.S. wind season and with a high-quality portfolio written at attractive rates.

So to conclude, in the first half of this year, our business has delivered growth in revenues and profits in every business unit. As the years of underwriting action, combined with favorable market conditions come together, our portfolio of businesses positions us well to continue delivering high-quality growth, high-quality disciplined growth and earnings.

We will now be happy to take any questions you might have. Freya, you were first off the mark.

Question-and-Answer Session

Q - Freya Kong

Can you hear me?

Hamayou Hussain

Okay. Thanks for taking my questions. Maybe we could focus on the Retail growth outlook for 2024 and beyond. Does a 5% to 15% target range for ICWPs don't make sense? And should we expect it to stay at the bottom or trend towards the middle of this range?

And on the retail undiscounted combined ratio guidance of 89% to 94%, which is a direct translation from IFRS 4, so you hit the top end of this target range last year. Should we expect to see further improvement from here? Or will you look to sit at the top end of this range, balancing growth and margins in DPD? Thanks.

Hamayou Hussain

Thank you, Freya. So I guess taking the first part of the question. You've just seen the results we've reported. We're reporting very strong growth, excellent growth in Europe, improving and accelerating growth in our U.S. DPD business. And as you know, we continue to expect that business to trend towards the middle of the 5% to 15% range for this year.

And then beyond, we expect that business to grow faster as that technology system properly embeds and the business gets firmly back onto that front foot.

And in the UK, we are seeing improving momentum. It's up from 1.2% up to 4%. And even that 4% as being tempered by our decision on non-performing underwriting partnerships, which is a temporary factor. We will lap that by the end of this year.

So I think there's a natural momentum within the business that will cause the revenue to rise. So I think -- and when you then think about the overall context, we still have -- and you can recall back a couple of years when we presented this analysis, over 50 million small businesses in our target market and still growing. The new business formation remains strong, particularly in the U.S. So target market is still large. It's still fragmented. It's still underserved. And the structural growth opportunities remain.

So the 5% to 15% in aggregate remains an appropriate target range for us. And some of our businesses will be towards the upper end of that range. Others will get at the lower end, but the overall range remains sensible for our retail business.

Then in terms of the combined ratio, we have an operating framework, which is 90-95 now 89 to 94. There's no real benefit in trying to then narrow that range. That range is there because it gives us the flexibility to take the opportunities as we see them. If we're at the upper end of that range, we're generating very good returns for our shareholders.

If we're at the lower end of that range, they are really excellent returns for our shareholders. Our ambition is, again, to grow into that huge market that we have. And for that, we need flexibility. And from time to time, we want to invest in marketing and technology and so on. So that range remains again appropriate. And if we're within that range, it's a good return for our investors. Abid?

Abid Hussain

Aki, Paul, Musselle. Abid Hussain from Panmure. Three questions, if I can. Firstly, on capital. So given the ILS and the third-party capital levels are subdued, how much appetite do you have to write business on your own balance sheet on quota share? The second question is on rates. Are there any other areas where you see pricing becoming inadequate beyond D&O and beyond cyber? And if so, are there enough lines pricing is firm or hardening that you can pivot to?

And then the third question is on your nat cat budget. Can you give us a sense of what the nat cat budget for the full year is in terms of undiscounted call and how much have you used year-to-date? Thank you.

Hamayou Hussain

Sure. So you've got a question on capital, one on rates and one on nat cat budget. So in terms of capital, Paul, do you want to take that? Jo, if you can take the second one. And thirdly, if you can comment on that, albeit we don't tend to provide a lot of detail on the nat cat budget itself.

Paul Cooper

Yeah. So if I deal with the capital question, first of all, I mean, I think what you've seen play out through 2023 is given the strength of our balance sheet. We've deployed it into the hard market and really taken rate and grown exposure, particularly at one-one for our NIS book.

I think you've got to look at the dynamics and how they'll play out through 2023 to determine how capital might change, be it whether ILS chooses to come back or more meaningful capital comes back into the sector or not to determine whether or not we'll deploy more of our own capital on our own balance sheet. So what I would say is we've certainly got the balance sheet strength to execute on our plans. I think what we do need to see is how this year's cat season plays out, we're just at the start of it now.

And I think one of the things that we have observed and maintain, I think, is it seems that capital remains uncertain from an alternative capital perspective. And has remained thus far on the sidelines despite the very strong rating environment that we've seen and that we've benefited from.

So I think what we need to see is some proof points. If you rewind to let's say, the last five years, the reinsurance sector as a whole hasn't returned its cost of capital. And I think what ILS and perhaps other forms of capital wants to see is some proof points that this very, very healthy and positive rate environment is going to turn into some very good returns and then see that to see whether more comes in that I think will dictate, to some degree, our decision around what we do to deploy.

And that's all against the backdrop of the strategy of managing volatility. So we're not going to sort of go all in on cap nor would we.

Jo Musselle

And then if I pick up the rates. I think just as a reminder, we've been in a hardening rate market for now five years. You can see on that slide, we've seen substantial rate increases since 2018 across all of our businesses. So I'd say where we are today, the vast majority of our portfolio is rate adequate. I think what we highlighted was in things like D&O, where rates have started to soften, obviously, underwriting discipline is key, but we still believe that portfolio to be absolutely rate adequate. I think Aki said, rates have been up over 200%. And softened 11% this year, 10 last. So in aggregate, we still believe that portfolio to be rate adequate.

I think the one area that we highlighted last year that we didn't believe rate, that is rate adequacy within our London market property. And as Paul said, in terms of the reinsurance, we still felt that there was more to go. And then clearly, we've seen a seismic shift in rates in 2023 in both of those areas, which is clearly meant that we're leaning in to that hard market in both of those areas.

So yeah, in aggregate, I'm pretty pleased where we are in terms of the rating of the portfolio off the back of multiple reasons why rates have hardened over the last few years. And then in retail, we look for consistency of rating through the cycle. And again, happy with the rate adequacy in our retail portfolio.

And then the last question, which was on the nat cat budget. So as Aki said, we don't disclose our nat cat budget. However, what I will say is we're performing absolutely in line with that budget. And if you think about from an IFRS 17, from a seasonal earnings point of view, we obviously earn most of that nat cat budget in the second part of the year given the exposure. But yeah, despite the pretty heavy cat first half of the year, I think it was second highest on record since PCS began from 1985, but we're within our first half at nat cat budget.

Hamayou Hussain

Andrew?

Andrew Ritchie

Hi. It's Andrew Ritchie from Autonomous. A few questions. I wonder if you could just comment on tax. Maybe, Paul, I've just given some uncertainties raised yesterday on the Bermuda tax outlook. Maybe just reflect on any mitigants, et cetera, or possible impacts there?

Second question, I'm interested in the work comp partnership. I don't know if you've named who the carrier is, I guess, I can probably find that somewhere. But I'm more interested in the profit arrangement. Is this a pure fee, is there any performance, underwriting performance relationship or anything maybe just to clarify that.

The other question is, could you update us on the progress of settlement of UK COVID claims? There's been a number of court cases not involving Hiscox, but ongoing court cases, how is that affecting yours?

And finally, so I had an early question on Note 10, which is other income and operational expenses. I guess, first of all, surprised that the growth in other income, just remind me what that is. I'm talking year-on-year growth. And then I'm surprised that the lack of growth in operational expenses, including lower staff costs, which can't be great for morale. So maybe just clarify what's going on there, maybe it's FX, but is there some catch-up to occur in those items? Thanks.

Hamayou Hussain

Okay. Thank you for that composite question. No, many questions. So three parts to that. So in terms of tax and other income, Paul, can you take that? UK COVID claims, Jo, could you address that?

In terms of the workers' comp, we're really pleased with the progress that we've been able to make. And just to provide a bit of context here, one of the prerequisites to being able to develop this type of partnership is what I call the sort of gravitational pull of customer numbers. If you don't have customer numbers, partners aren't really that interested. But once you get to a tipping point, you don't know what that tipping point is, but for us, it seems to have been over 0.5 million customers, you then start to -- you start to become a marketplace where others are interested because they can sell their products there as well, particularly in this digital age.

So we're very pleased, and we're very pleased with the partner that we have. We haven't -- we don't comment, but I'm sure it won't be too difficult to find out who.

I won't comment on the profit arrangement. We're in the soft launch phase at the moment. As I said, it's going really well. It's ahead of our expectations. We expect to be in a fully integrated launch in due course, but we are not taking any underwriting risk. This is a pure sales process, a referral process to the partner.

So we're very pleased. And as I said, it does increase our reach and relevance in the market materially. And it will increase the profit signature for our Retail business over time.

Paul, do you want to take tax and OpEx and whether we're paying our people enough?

Paul Cooper

Yeaj, I would certainly hope so. Yeaj, if -- I take that -- if I take the tax one first. So there was an announcement by Bermuda yesterday about introducing a consultation around how they propose to implement the global minimum tax. Now the global minimum tax is essentially an OECD initiative to drive out a minimum of 15% globally, so that is being implemented by various jurisdictions.

What we've always maintained since this was first half it is that our effective tax rate will increase towards that 15%. We expect somewhere between 12% to 15%. Clearly, the clue or what we need to see play out is how that consultation actually lands. It's a day old. So -- but we expect Bermuda to continue to push to be an attractive destination, not only from a tax perspective, but also from a regulatory perspective and also the fact it's an insurance reinsurance hub.

So that's a tax perspective. On other income, I think that there's sort of several components to it. So on the Retail, we've got various sort of non-risk income arrangements that can be lumpy. London market, what you're seeing is, clearly, we have a 20 -- 72.5% ownership of the Syndicate [ph]. So as we make more money in London market, you're essentially going to drive out more income from that perspective, all things equal.

Now there might be some timing aspects to that. And then Re & ILS, it's really the -- some of the management fees and some of the valuation on that fund. Now clearly, what will happen and Aki's just referenced it is -- and it's very early days, but what you can see from a Retail perspective is where that workers' comp fee will land will be within the other income bucket on a prospective basis. So it's not premium income will come through the other income.

And then just from a cost perspective, I think if you look at the expense ratio, we expect a roughly similar perspective for the second half of the year. What I would say about cost is I think that there are good costs. So to the point about being happy with our people, we'll continue to invest in our talent.

We'll continue to invest in marketing and brand to grow the business. But at the same time, we will continue to focus on cost control. And really, the two aspects about that are controlling headcount overall and I think the other aspect is around really driving out the benefits of procurement and vendor management that we're seeing. So that's the sort of general focus on costs.

Jo Musselle

And then just picking up your last point, Andrew, just in terms of UK business interruption. So as you know, our own policy was subject to the FCA test case and obviously, we've got a Supreme Court judgment, which in effect said there was one third of our customers that had coverage and two third not. We've been settling claims in line with that judgment ever since and we're over 99% settled. Yes, there's a lot of active litigation in the U.K. courts at the moment, but we're not directly involved in any of the litigation.

Hamayou Hussain

Will?

Will Hardcastle

Thank you. Will Hardcastle from UBS. A couple of ones. Plenty of signs of effective cycle management. Just thinking about -- you have reduced the session year-on-year. It's another way of getting the deployment there. We're up to, I think, it was about 28% at the half year. Pre 2016, it was as low as 20%. I'm guessing just trying to understand, is there something structural different in the group that would never see us down there, but can we -- is there scope to go lower and retain more risk?

Second of all, on the Gulf of Mexico net RDS, it's risen 13% to 16% of net return as you've deployed. How do you think about headroom for more growth if the opportunity did arise? I guess how do we think about the binding constraint there?

Hamayou Hussain

Okay. Thank you for those questions. I mean, essentially, it's about cycle management and our ability to grow, take more cat risk. And I'll give you a moment to kind of reflect and answer that question in detail.

From an overall sort of strategy perspective, for us, we kind of triangle it between three things. One is capital, and you've heard from Paul, we have a pretty strong capital signature, particularly in this property segment, where the deployment turns into capital generation pretty quick, if you get it right.

Secondly, it's volatility. And what we mean by that, of course, capital itself is an output of volatility, but we're also then talking about P&L volatility, one in 10, one in 20, one in 30, which doesn't really affect capital. It's not a balance sheet event, but does become pain element. And finally, returns.

So when we think about where and how we're deploying capital and how much risk we can take, we're going to triangle it between those three factors as we make the decisions.

But Jo, do you want to comment specifically on North American cat in?

Jo Musselle

Sure. Absolutely. So thanks for that well. So if you look at Slide 43, in the back of the pack, this is a slide we introduced at the full year, and you can obviously see the updated view. So we have grown our exposure in -- at the half year, and obviously, you've grown it at -- from the full year.

What you're looking at there is the three different return periods. Obviously, the highest return periods at the one in 250 and then obviously, the moderate. What you can see there is whilst we've just taken more nat cat risk, I think, at that shorter return periods. Clearly, it's not a significant amount.

And as Aki said, this is really balanced by a few things. So one, yes, we're taking more risk, and we're probably up on an inflation index basis to the historic highs. However, I think we're balanced by a few things here. One is this is the rest you can't -- what you can't see here is what premium we're getting for taking that risk. So I think that's one measure.

The second thing that I'd say is we are at the top of a hardening market over many lines. We've got balance in this. We've got a very well rated and well-managed non-cat portfolio that balances that this risk out. And then the third thing is retail. If you go back to the start of the slide, our retail businesses were so much smaller. And so therefore, you've got that balance of retail.

But ultimately, to your question, where could this go? It comes down to what Aki says, three things: capital, what's our capital position look like. Clearly, overall volatility, what we want the sake of the group to look like and how much volatility do we want to take. And thirdly, market conditions. They are favorable. I'm not quite sure what they're going to do as we go forward to 2024. But obviously, we'll react to those conditions as we see.

Hamayou Hussain

James?

James Pearse

Hey, guys. James Pearse from Jefferies. So first question, clearly, you're seeing meaningful benefits from both higher attachment points and higher premium rate in real London market. Just interested to know kind of which one do you expect to have the most material upside, rising premiums or higher attachment points?

Second question is on property. So seeing strong rates across property overall. Where are you seeing the best rate of return right now? Is it in property insurance or property reinsurance? And then the third one is probably another early one. How does your risk adjustment plus the [indiscernible] in your best estimate under IFRS 17, how does that compare to the prudence in your liabilities under IFRS 4, is it smaller or larger?

Hamayou Hussain

Okay. Thank you for those questions, James. So the first two, Jo will cover, which is better, higher premiums or higher attachment points, and then where are we getting the best returns on property and reinsurance or insurance. And then the question that Paul has been waiting for all morning on IFRS 17.

Paul Cooper

Of course, yes. Wishes come true.

Jo Musselle

Okay. So if we just answer the first question in terms of what is better, the sort of the higher rate or the higher attachment, I think what I would say is go back to that sort of proactive underwriting side, they all work together.

So clearly, it's about risk selection. It's about exposure management, but also is about right rate, it's about lying sales management. And all of those things together is what we deem sort of proactive underwriting, which clearly work in partnership, rate doesn't make a poor risk a great risk. So it is a combination of all those things together.

In terms of where are we seeing the best returns, we're actually seeing great returns across both our big-ticket businesses, both in our London market and in our Reinsurance division, they both deliver and as you can see, significant returns on capital, particularly within our London Market division, it is the major property line that we're seeing the most attractive market. Hence, we're deploying more of our capital in that line. But yeah, in aggregate, we're seeing good returns both -- in both of our insurance and reinsurance division.

Paul Cooper

And yeah, the IFRS 17 question that I'm delighted to receive. So thank you. I think what's important is that we do need to move away, whether you look at that fortunately or unfortunately, away from IFRS 4. But generally, what we did and you would have seen, I mean, we've got it here, but we've restated the IFRS 4 equivalent and you're right to pull out the fact that within the best estimate now contains ENIDs. So if you were looking at old money, you'd sort of -- you'd add those two together to have a direct read across.

I mean I think the key point around reserving is that if you put IFRS 17 to one side for a second, our reserve philosophy hasn't changed, and it certainly hasn't changed in the last six months. We still reserve conservatively. We still have the LPTs in place. And you can see the protection that gives in terms of 25% of the '19 and prior. Now you got to remember that, that protects casualty reserves. So the casualty element is greater as a proportion of that.

And then I think if you look at one of the demonstration of the reserve robustness within that balance sheet is that consistency of runoff. So we are experiencing and continue to experience positive reserve releases. And you can see the $62 million that we generated in the first half of this year.

Now in terms of reserve strength, which goes directly to your question, let's get on to the new basis. On the new basis, the confidence level is more appropriate. I mean the last sort of margin over best estimate was there I said, a quite accrute measure of reserve strength. This gives you a sense of sort of percentile strength. And you can see it's pretty consistent with the closing rate 78 versus 77. And you'd expect it to be so because if you look for the last -- first six months of the year, not a great deal has actually happened.

Hamayou Hussain

Andres?

Andreas de Groot van Embden

Yes, good morning. Thank you. Just going back to your Hiscox Res sort of reinsurance protection program with the decline in the ILS and the increase in your quota share partnerships, can you maybe talk about your quota share partnerships in that business? How long is that capital available for? What kind of deals do you have there? And is it replacing the decline in the ILS capital one-for-one? Or would you need to increase sort of your outwards on your quota share partnerships to increase your cat appetite in the future?

Hamayou Hussain

Thank you, Andreas. So I mean I won't go into the detail of the nature of those deals. But I think what we've been able to demonstrate is that for expert capital, so these are organizations that are already participate in the insurance and reinsurance sector. They're recognized on our underwriting quality and secondly, the favorable conditions in the market. And as I said earlier, we added capacity at one-one and at the midyear renewals.

It is not a one-for-one. The capacity particularly as I look forward, because we expect more net outflow some of the ILS funds, the capacity we've added thus far will not be a one-for-one replacement. However, we also have a number of inquiries that we're dealing with where further quota share capacity may well come onboard between now and January.

So I can't give you a forecast whether it will be a one for one, but it's not there at present. But the deals, and as you know, our sort of philosophy when putting together these core partnerships is long term. And many of the partners that we have on our panel have been with us for many, many years. That's our intent, but we'll see how this plays out. One of -- at least one of the partners is new to us, but the intent is to go long term.

Hamayou Hussain

Tryf and then Kamran.

Tryf Spyrou

Hi. This is Tryfonas from Berenberg. Two questions. The first one is on the -- you previously gave some sort of guidance or thoughts around the combined ratio for land market and Re & ILS. So I was hoping to get that your views on discounted sort of combined ratio on IFRS 17?

And the second one is on cyber. And I was just interested in terms of your thoughts there. It looks like you're getting a little bit more cautious. Rates are down sort of mid-single digit perhaps. But then in the context, and we've got scheme of things, they're up almost three-four of the last three years. So I was just trying to understand why are you turning more cautious in whether you can comment on the combined ratio of cyber versus the wider on the market segment and how that fairs. Thank you.

Hamayou Hussain

Sure. So in terms of cyber question, Jo will deal with that. In terms of the combined ratio sort of expectations we'd set out on a mean basis on an expected basis.

If you recall, I mean, last year, we delivered a mid-80s London market today and a low 80s for Re & ILS, on an IFRS 4 basis and I had commented that actually, given the market conditions, that mid-80s, we expect it to improve a little bit in an average year. And the reinsurance, again, in an average loss year would probably start with the 7%.

Now you can kind of translate all of that into what it means in IFRS 17, but suffice to say, the expectations that were in my mind at the time in terms of rating, terms and conditions, they have come to pass. We're still very positive, remain very positive about both London Market and Re & ILS.

You've heard Jo, Paul and me talk about the various aspects of the market that are either very hard or very good. We are deploying capital and as you can see, in the half year results, both of those businesses have been a material contributor to the results with a significant part of the earned premium, particularly in Re & ILS yet to come. So we remain confident and optimistic.

Jo, do you want to deal with the question on cyber?

Jo Musselle

Yeah, so I think you'll recall us saying before that we're a Tier 2 cyber underwriter, and that's not to do with our underwriting expertise, but just to do with the fact that it's a modest part of our total portfolio. And you're absolutely right. If you go back a few years, that cyber portfolio for the market was not performing. There was significant increase in things like ransomware claims and we, like the rest of the market needed to drive significant rate, rate through, which clearly we did.

In our big-ticket businesses, we moved up, we repositioned our portfolio, much higher attachment points. And in our Retail businesses, we moved down, focusing on the smaller segments.

And as we came into this year, that we were looking for that rate momentum to continue, certainly nowhere near the highs that we've seen historically. But clearly, there's also a slight increase in inflation going through that portfolio as well. So we were looking for great momentum. However, as we came into the year and as we've gone through the year, clearly, others have taken a slightly different view.

And I think that's a combination of a few things. Yeah, we've seen a reduction in that frequency post Russia-Ukraine. Our view is that was -- that's more temporary than structural so that we've not really taken that into account. I think there's definitely been an increased capacity, particularly in the U.S. There's been significant capacity that's come in.

And I think the last thing is the strengthening of the workloads that clearly, we support, but others have taken a slightly different view. And so all those things together has meant that what we intended to do, clearly, we were facing a market where that was proven more difficult, and so that discipline.

I think the thing that I would say, though, if I look at the Retail portfolio, I know we've signaled the headwinds in cyber, but it has a disproportionate. What we're talking about here is sort of single-digit millions across a $1.3 billion portfolio. So while small in its nature, it just has dispersed because of mass. It just has a disproportionate thing on growth, just because of the mass. But really, we're talking single-digit million.

So the market remains, say, competitive. And clearly, our view is we want to remain disciplined. So it's not that we believe our portfolio to be rate in adequate. On the contrary, all of that rate that we've driven over the last few years, we believe it's driving rate adequacy, but it is just about that discipline and rate erosion.

Hamayou Hussain

Kamran?

Kamran Hossain

Hi. It's Kamran Hossain from JPMorgan. Three questions. Coming back to the workers' comp kind of soft launch and potential there. I'm just interested in kind of -- I mean, you've obviously suggested that you increased your kind of target market enormously. How do you think about partnering with other people? Obviously, you're just starting as a soft launch, but that 33% isn't just from one partner. So how do you think about in the future partnering with other people and why capital light versus manufacturing the product?

The second question is on capital and kind of what's going on there. Obviously, you've got a very good ratio. You've got lots of headroom. You -- if I look at your dividend is up 4%. It's less than 20% of the H1 earnings. If you get to end of the year, you hit your targets, you go with a 20% plus or 20% return on equity. How are you going to think about capital management at the year-end? Are you going to set or deploy? Or how do you think about that framework? I know you're not going to promise anything now, but how do you think about that?

And then the final question, I guess we very rarely talk about Hiscox U.K. Obviously, at the beginning of last week, we saw the FCA consumer duty come into place. My understanding is that Hiscox's APRs are very, very low or nothing. What's the -- has there been any change in approach on premium finance at Hiscox UK? Thanks.

Hamayou Hussain

Okay. Thank you for those questions. I mean as I said earlier, we're very pleased with the partnership that we've launched with respect to workers' comp, soft partnerships, soft launch at the moment and will become fully integrated within -- in the next sort of six months. But for the moment, there are no plans to add. But of course, we remain vigilant and interested in how we can continue to serve the needs of our existing and indeed prospective customers.

So it's unlikely to be the end, but there's no plans at the moment. We're very pleased with the partner that or the partnership that we have. I think it has a lot of potential.

In terms of why capital light versus manufacturing ourselves, this is -- we're a specialist underwriter. So we want to stick to our specialisms. This is quite far removed from what we do. It's not adjacent. If it was adjacent, it's something that we could consider. And frankly, our partners are very credible, very high quality, one of the leading underwriters for this product in the U.S. And this arrangement actually works for both of us.

In terms of capital dividend, et cetera, I think the half year dividend is formulary equal yet to go into the hurricane season. There's a lot to go between now and the end of the year. But I think, reflect on where we are within the market in terms of market conditions, we see huge structural growth opportunities in Retail. That just should continue to grow for the foreseeable future year-on-year out, and we continue to invest to drive growth in that business.

We are in a genuine hard market. You've heard the words bundled around seismic shift at the start of this year, a hard market in reinsurance. We're leaning in, we're deploying capital. And then finally Re -- insurance, we're also experiencing very favorable conditions.

So when it comes to the end of the year, and we are confident that in an average loss season, the business will generate significant capital and significant earnings. The way we and the board would think about that is, firstly, what are the market opportunities, and we see significant opportunities at the moment.

And if we can see ongoing significant opportunities that allow us to generate the sort of ROEs that you can see at the half year, and I'm sure you and our shareholders would agree, keep going. And that's essentially the framework, what are the opportunities, what are the returns, how much capital do we have?

And as you can see and as you've heard from Paul, we run a pretty tight ship when it comes to capital. All the capital we deployed this year has been entirely organic. We've not raised anything.

And then Hiscox UK Consumer duty. Look, we -- Consumer duty has not been a big lift and shift for us in our UK businesses. As you know, we've consistently targeted and trying to deliver good customer outcomes. That's just part of the philosophy, that's part of the DNA of our business. We don't do premium financing. We don't charge for whether you pay by installment or in one lump sum. So that's not something we do.

For us, consumer duty has been really frankly brushing up on our paperwork, making sure we have the right sort of frameworks in place to demonstrate an evidence or the activity that actually goes on within the business, no tangible change to product or the way we do things.

Nick?

Nick Johnson

Thanks. Conscious of time, I'll be quick. Nick Johnson from Numis. Just a few questions on marketing spend, if I may. So firstly, to what extent is growth in marketing spend a lead indicator for growth in the Retail business? And with that in mind, perhaps you could possibly give us some numbers around growth in marketing spend in the first half this year and what your sort of growth in marketing spend budget is for the second half?

And also, to what extent is marketing spend above or below sort of normal as an expense drag in the combined ratio in the first half? Thanks.

Hamayou Hussain

Thank you, Nick. The marketing spend -- remember, 20 -- mark, if you go back a year, I think I said that our plan was to increase our marketing expenditure as we were coming out of the pandemic and people coming back on to the streets as it were. That's exactly what we've done. In the first half, you've seen our marketing expenditure go up by 19%. And we should expect that in the second half probably to accelerate a little bit more than that as we launch our brand campaign, which we kick off in the UK.

So -- and in terms of going forward for the next few years, I would expect that, that marketing expenditure will continue to rise. So this is not above trend. This is recovering from a below trend sort of level. They expect the marketing expenditure to continue to rise, whilst we continue to remain within our operating framework for the overall Retail business.

And in terms of whether it's a lead or a lag, well, look, the uplift in marketing expenses are not entirely, and it's not all in the U.S., but has been a key driver of, frankly, very substantial growth in our U.S. DPD business, which, as a reminder, we saw new business increase by over 30% in the first half of this year. That's a combination of being back up -- being on the new technology platform with improved customer journeys, improved customer experience, helping increase those conversion rates, but also greater awareness of Hiscox through that increased marketing.

I think we covered everybody. Yeah?

Okay. There's a question on the phone. So whoever it is, can you go ahead?

Operator

Thank you. We have one question on the phone coming from Ivan Bokhmat from Barclays. Ivan, your line is now open. Please go ahead.

Ivan Bokhmat

Hi, good morning. Thank you very much. Sorry couldn't meet in the room. I have a couple of questions follow-up, please. One, just related to the U.S. broker channel. I mean the revenues were up in first quarter. The second half, they were down 4%. And I think the lines you specifically called out was cyber. But if I remember correctly, U.S. broker channel was about half of your total U.S. business. Maybe you can comment a little bit more about what you're selling there? What has been the specific underwriting decisions that you've taken that have resulted in this growth headwind?

And then the second question, I think, is quite minor. But when I look at the extreme loss scenarios, I also see a little bit of an increase of kind of casualty related scenarios. Is that the effect of the higher retention, growth and exposure or maybe anything to highlight? Or is there some kind of a view of risk change that's happening?

Hamayou Hussain

Okay. Thank you, Ivan. So question on the U.S. brokerage channel and the impact of the decisions there. And the second one, which Jo will take, which is on the extreme loss scenario relating to casualty. You're right, in Q1, the business was in aggregate, still growing. What we've seen in the second quarter and I wonder as much of a surprise to me as it is to you, is we saw a rapid deceleration and indeed, a decrease in the pricing for cyber as a result of additional capacity coming into the market.

And there might have been a time where either we didn't have the visibility or we delayed action. We have done neither. The visibility of business performance and what's going on in the underwriting portfolios, led by Jo has significantly improved over the last two to three years. So we get to know about things sooner than perhaps we would have done a few years ago.

And secondly, we're determined to deliver high-quality growth that's going to deliver high-quality earnings, not just now, but in years to come. You know how insurance works. We could write this now and then hope that it performs better in a year or twos time. That's not what we want to do. We don't want to deliver based on strategy and hope.

So that's a decision we've taken. We have our view of risks on Cyber. The current pricing environment in the U.S., it is isolated to the U.S. for the moment is that pricing is currently below our technical rate. And therefore, what you've seen is not only a reduction in new business, but we've seen a rapid reduction in retention. And that's why it seems to have a disproportionate impact on the growth rate.

I would just echo what Jo was saying in absolute numbers, you're still talking about single-digit millions in a business that has generated $1.3 billion at the half year and probably double that for the full year.

In terms of the extreme loss scenario, Jo, could you cover that?

Jo Musselle

Of course, these two are loss scenarios that look at casual -- look at casualty, One is on the casualty reserve deterioration, and that's seen a modest increase, and that's just a function of growth obviously, as our reserves grow, then that number gets bigger, I think it's up about $25 million on the half.

The other one is the economic collapse, and we've seen a reasonable increase there of over $50 million. Again, that's a function of two things: growth as we grow our portfolios, our casualty portfolio is clearly, that has an impact. And also, there's some specialty business that we write in our reinsurance. It's not casualty business, but it does contribute to this economic collapse, and that's contributed to that increase as well.

Hamayou Hussain

Okay. Thank you very much. We will wrap at this point. So to conclude, once again, that the first half of the year -- in the first half of this year, our business has delivered growth in revenues and profit in every business, right?

It's a combination of underwriting action or the underwriting actions over the last few years, combined with favorable market conditions, we've come together to generate the result that you can see in front of you now. And our portfolio of businesses positions us well to continue delivering high-quality disciplined growth and earnings.

So thank you very much.