QBE Insurance Group Limited (QBE) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our half year results presentation. Our first priority in responding to the COVID-19 pandemic was to ensure that all of our people were safe and healthy; and secondly, ensuring that all of our people could successfully work from home and continue to serve our customers. And overall, this worked remarkably well. Literally overnight, we transitioned almost all of QBE's entire workforce to work from home across all of our hundreds of global locations, including our shared service centers in the Philippines, which were previously thought to have little work-from-home capability. Much of that transition is a testament to our operations teams, our IT teams, our human resources teams and our leadership teams across the globe. But it also reflects the investments we've made in technology and collaboration tools over the last 2 years. That's given us technologies such as Microsoft Teams; virtual desktop infrastructure, VDIs, in the cloud; along with increased network capacity and resilience. And that made our work shift to working remotely very quick and, while not easy, relatively straightforward. Productivities remained exceptionally high across the business, and we've maintained customer service levels and Net Promoter Scores at pre-COVID-19 levels. And in some areas, even we've improved. We've also worked really hard to provide our people with the support that they need. We've shipped necessary equipment to their homes, screens, chairs, laptops, et cetera. We've also really ramped up communications from an already high level, but now including an array of things like virtual town halls; mass Yammer sessions; videos; what we call Pat chats, which are messages from me; lunch and learns; educational sessions, et cetera, et cetera. We've also focused on the health and well-being of our people, providing support, help lines, counseling, well-being poll surveys and even making the office space available for those people who didn't feel comfortable or safe working from home. Personally, I think it will be some considerable time before we're all back or even substantially back in the office. If it is the case, then QBE is very well equipped to work from home for an extended period of time. At the same time, we try to provide support and assistance for our customers. And obviously, this has been a tremendously difficult time for many businesses, particularly SMEs. There are a number of areas where QBE has provided direct customer support, often going above and beyond what other insurance companies are doing. I won't go through every single example across the group, but we'll highlight instead a few from here in Australia. For SME customers, we've been providing both 6-month premium payment deferrals and guaranteed renewals at expiring premium rates, so 0 cost increases; temporarily decreasing rates on SME, commercial motor and accident & health policies. And that contributed to the apparent slowdown in rate momentum in Australia Pacific during the recent half. We're also the only insurance company in Australia to proactively provide discounts on personal motor policies to all of our customers. There was very clear evidence of reduced motor claims frequency, particularly in the early period of lockdown. We felt proactively returning this benefit to all of our personal motor customers was the right thing to do. Once we've worked through our immediate priorities, looking after our people, looking after our customers and protecting the group's balance sheet, as a management team, we turned our attention to what this all might mean for the group's medium-term strategy. Firstly, I should say that all of the work that we've been doing on the cell review work, the Brilliant Basics program over the last 2 years has positioned us really well as we enter a period of clearly improving insurance market conditions. While other insurers are only just now trying to reposition and reunderwrite their portfolios, we've already done that. Having simplified and repositioned the business, we're now able to focus on getting rate increases and growing organically. And there were increasing opportunities for profitable growth right across the business and notwithstanding this environment. COVID-19 has also presented an opportunity to rethink our business model and accelerate our digital transformation. I'll talk a little bit more about that later and then much more about that when we get to year-end. From a performance perspective, we also had a lot happening in the first 6 months. With significant ongoing uncertainty not only in terms of the pandemic but also how global and, indeed, regional economies might recover, I'm pleased we successfully implemented our capital plan early on in the crisis. At June 30, our capital position is very strong. Regulatory capital is right at the top end of our range, and that is even after recognizing the vast majority of what we think will be the ultimate cost of COVID-19. Including the recent renegotiation of terms on some of our sub-debt, gearing is right in the middle of our 25% to 35% target range. We also have $1.5 billion of cash at the center. We have a low-risk asset portfolio and significantly enhanced reinsurance protection as we head into the U.S. hurricane season. All of that positions us to weather almost any scenario that can unfold from here, but also take advantage of any organic growth opportunities as they arise. And the pricing environment certainly continues to accelerate, with second quarter rate increases averaging more than 10% across the group, bringing the average for the first half up to nearly 9%. Alongside that positive premium rate environment, we're also seeing significant growth opportunities with organic GWP growth of 10% in the first half, probably the highest level of organic growth QBE has seen in 20 years. Obviously, the first half combined ratio was heavily impacted by the combined impacts of COVID-19, excess cats, particularly the Australian bushfires as well as the strengthening of prior year claims in North America. As you'll see in a slide later, our underlying first half combined ratio of 93.7% gives me real encouragement with respect to the group's future earnings power. It's also been good to see the strong rebound in our investment returns during the second quarter. Our high-quality fixed income book performed well, reversing nearly all of the unrealized mark-to-markets losses flagged at the end of the first quarter. We've also seen significantly fewer credit downgrades in our portfolio relative to the broader market. Just a couple of points on Slide 5. Obviously, you'll have seen that COVID-19 charges booked had halved during the half, had an impact on our combined ratio of 6 points. Notwithstanding that, our PCA remains very strong at 1.8x, which also includes a significant allowance for future COVID-19 claims that we've recognized in premium liabilities at the first half. Our attritional claims ratio took another step down to now be in the 45s, with cell reviews and Brilliant Basics driving further improvements to our underwriting profiles. And given the rate increases that we're seeing, I'm confident of achieving further improvements in our attritional claims ratio, notwithstanding some of the ongoing loss trends around the world. Worth noting that since we started our program, we've now taken nearly 9 points off the group's attritional loss ratio. And notwithstanding the first half loss, the Board declared a $0.04 interim dividend, recognizing their confidence in both the strength and stability of QBE as well as the promising outlook underpinned by the improving pricing landscape. And just on that, it's interesting to see the pricing in most markets around the world accelerate as the recent quarter progressed and, in some markets, significantly so. The prospects of lower-for-longer interest rates from a 0, increasing climate-related weather events, some continuation of heightened casualty loss trends and, indeed, losses directly arising from COVID-19, has left insurers with almost no alternative but to materially increase pricing. During the past half, this was particularly evident in the London markets, in the U.K. and in North America. Our average rate increase of over 10% in the second quarter is the highest group-wide rate increase QBE has seen since the aftermath of 9/11. And international rate increases accelerated to 14% in the second quarter, including particularly strong increases in the London market and the U.K. business. Global reinsurance markets have finally started to see some price increases, which started with the Japanese wind renewals in April and developed further with the Florida wind renewals in June. We expect QBE Re will enjoy improved pricing momentum going forward. There was also significant price momentum in North America, where we saw strong double-digit rate increases in property programs, accident & health, professional lines and aviation. Notwithstanding the significant bushfire claims at the start of the year and expectations of ongoing levels of elevated climate-related cats, rate increases in Australia slowed down slightly during the second quarter, albeit this was largely due to our decision to temporarily freeze those rate increases for SME, commercial motor and A&H renewals. Similarly, it was pleasing to see retention improve across the group. Looking forward, I certainly expect the pricing environment to remain supportive for the rest of 2020 and at this point, well into 2021. The industry-wide conditions I mentioned earlier will continue. And a number of very large global insurers, including Lloyd's market more broadly, will need a significant period of rate increases in order to return to a more acceptable level of underwriting profitability. In the February briefing, I said that in addition to driving further margin improvement, we would start to look to target a modest amount of growth in 2020. We clearly faced a much more challenging set of circumstances during the first half than we envisaged, but it's been great to see organic growth of 10%, supported by rate increases, improved retention and strong newer business growth. While most of the growth was driven by rates, we achieved top line growth of rate plus nearly 2%. There's been good growth opportunities emerging across most of our portfolios, notable areas in North America included, where we have our strongest franchises in profitability, accident & health, property programs and Crop. Our London market business grew 24% in the first half, supported by strong rates, improved retention and much more high-quality new business opportunities across multiple portfolios. And growth in commercial lines in Australia Pacific was offset by CTP market reform and some reduced workers' comp premium due to reduced payrolls. Cell reviews and Brilliant Basics remain integral to our program of work here and our long-term improvement in the attritional claims ratio. It was pleasing to report continued improvement across all 3 divisions during the first half. In North America, that was despite the impact on NEP of purchasing additional reinsurance, we saw an improvement of nearly 2%, with attritional -- most notably improving in accident & health and professional lines. In international, while rate earning through was the biggest contributor, we've also seen the benefit of greatly improved underwriting exposure profiles in property, commercial motor and financial lines. And Australia Pacific has seen the continuation of a very strong story there with the underlying claims improvement over an extended period of time. The first half saw a further 3.5 points improvement in the attritional claims ratio, bringing the cumulative reduction since we started the program to now 13%. Once again, there was broad-based improvement with significant reductions in engineering, commercial property and aviation. And the obvious part of our story in Aus Pac has been the significant improvement in the attritional claims ratio. But as you'll see, we've also seen a very large reduction in the large risk claims ratio at the same time. Now there's also been an improvement in the group's large individual claims frequency as well, but that's been somewhat obscured by our change in reinsurance arrangements at the end of 2018. But you see the trend here quite clearly. The improvement in the first half was underpinned by international and Australia Pacific. And if you look at the bottom there, we've unpacked a bit of detail on the improvements in Australia Pacific over the last 3 years. The chart shows Australia Pacific's total reported large risk claims over the last 4 half year periods. Particularly notable is the improvement -- a very significant reduction in the cost of commercial property claims. You'll remember, we've talked in the past about how we've improved the risk profile of our commercial property book there, exiting high hazard risks such as abattoirs, mines, a large portfolio of pubs and clubs. And this has led to a very significant reduction in large risk claims. And the ratio of large risk claims to premium has more than halved in the Aus Pac business. A couple of the other examples of Brilliant Basics at work. Firstly, on our North American programs business, where in -- where our property programs specifically cover wind and quake exposure, the key here is to manage your aggregate cat exposure, best measured by what we call the PML, probable maximum loss, against the revenue pool that you're writing and the rate that you're getting for that risk. Over the last 12 months, for that book of business, we've increased rates by 17%, grown GWP by 23%, while at the same time, by focusing renewals and new business in the right geographic areas, actually reduced our PML by 6%. The net result of this is a strong combined ratio, improved rate adequacy by 8% while also reducing cat volatility and capital intensity. On our U.K. commercial motor book, a few years ago, we had a combined ratio for this book running well over 100% due to both a high attritional claims ratio and excessive large claims frequency. For that book, in addition to a greater than 14% rate increases in the first half, we've also worked really hard to change our target exposures on that book, writing more of the lower frequency business like school contracts, charity minibuses, local authorities, community transport and a bit less of the higher frequency business like national bus services, taxis and nonconventional transport. They have also implemented a series of high-quality data analytics and portfolio monitoring tools. And taken all together, that's resulted in a significant impact: A significantly reduced attritional claims ratio; a much lower large claim frequency, you can see, it's halved there; and an improved combined ratio now down to 87%. Let me finish up by talking a little bit about the COVID-19 impacts. Obviously, we preannounced the expected impact of COVID-19 a couple of weeks ago. We'll give you a little bit more detail today. Just as a reminder, the first half results includes $335 million underwriting impact. And that splits as follows: an explicit risk margin charge of $115 million; reserves for U.K. business interruption claims of $70 million, net of reinsurance; a net cost of $80 million for all other claims, and that spans multiple classes, including reinsurance, workers' comp, casualty, including D&O, and accident & health, and that's primarily in international and North America; and premium refund events and associated expenses totaling $70 million, including private motor refunds here in Australia. As you can see from the chart, most of the prospective claims are expected to emerge in LMI and trade credit, and I'll show you some supporting scenario analysis for this in a moment. Before I do, I wanted to point out a couple of points here. When you take our first half cat experience and the amount that goes to our cash aggregates, you can see there's now only $20 million of downside risks to our second half cat allowance. If you take the first half cat allowance that goes to the aggregate, add in our planned second half cat allowance that goes to the aggregate, we're only $20 million away from our attachment point. This also means there's only $20 million of downside risks to any further business interruption claims arising anywhere in the world. For prudence, we even added in that $20 million into our ultimate $600 million COVID estimate. Just a little bit more on business interruption itself. First of all, look, I think it's worth reminding that the fundamental premise of insurance is to ensure diversified pools of risks, such that an insurer we can afford to cover a bunch of risks on the basis that they don't all give rise to a claim at the same time, the whole concept of diversification. That's true whatever form of insurance product you're talking about. It's clearly impossible to indemnify events where all the policies play out spontaneously, and this is one of the main reasons why insurance companies are so insistent that nearly all business interruption policies and policy wordings don't and never intended to cover business interruption caused by pandemics. In North America, you will have seen from industry-wide reporting that policy wording is clear. They require physical damage. And certainly, in our case, all policies also have clear virus exclusions. And international policy wordings are a little bit more varied. And indeed, we have a small number of wordings in the U.K. and Europe where we think we should and will pay business interruption claims. We've reserved for the cost of these claims in our first half reserve of $70 million. You'll no doubt be aware of the FCA test case in the U.K. And while we're awaiting the outcome of that case, it would be inappropriate for me to comment any further other than to reiterate that our exposure to U.K. business interruption claims is limited to that $70 million that we've already booked as a result of our property cat reinsurance. Here in Australia, it's worth noting that as a result of the APRA's stress tests back done following the SARS pandemic back in the 2000s, all domestic insurers included specific pandemic virus exclusions in all of their policies. These virus exclusions specifically name and exclude SARS, worth noting that the medical name for COVID-19 is SARS-CoV-2. And while there is some technical debate about policy references to the Quarantine Act, as amended, versus the Biosecurity Act, both acts specifically and categorically exclude COVID-19. And we remain highly confident that our policy is never intended to nor do cover pandemic. Again, though, worth reiterating, any business interruption claims arising from COVID-19 here in Australia or anywhere else are covered by QBE's reinsurance protection program. Just on the program, the reinsurance program, whether it's our main cat vertical tower, our cats aggregates or the cats' top-and-drop treaty, they were all purchased on an all-perils basis. What does that mean? It means that all perils are covered, unless there's something specifically excluded and there is no pandemic exclusion in our reinsurance treaties, thus different from other cheaper named perils reinsurance that other companies may buy, which only covers those perils which are specifically named. The classes of business covered by QBE's cat treaties include property material damage and business interruption, which means you don't need property damage to trigger the cover, and business interruption is covered in its own right. So business interruption claims covered by COVID -- caused by COVID-19 are absolutely covered by our cat reinsurance program. When we announced our capital plan back in April, we showed you a couple of scenarios for LMI and trade credit. Since then, reflecting a combination of the government stimulus packages as well as in the case of trade credit, some of the government backstops in Europe, the more extreme downsides of those scenarios now appear as a little less likely. Indeed, at the present time, we're not actually seeing additional claims activity in either LMI or trade credit, albeit we still envisage claims to emerge over time. On LMI, our $600 million ultimate cost of COVID-19 estimate included $150 million of incremental LMI claims over -- emerging over a 3-year period, and that broadly correlates with a worsening of unemployment to around 12% and an average cumulative house price decline of around 20%. We think this is appropriately cautious scenario for the time being, while the outlook for both the virus and the Australian economy remains uncertain. It's again worth noting that either of my scenarios are mooted by the significant loan-to-value buffers embedded in almost all of our underwriting years and also by the fact that we earn LMI premium over 9 years, which means there's nearly $400 million of earned premium to offset claims. Similar on trade credit, we've seen little, if any, adverse claims activity so far. Since April, there's been a number of favorable developments in our portfolio. We further reduced policy limits, which are now down 30% since the beginning of the year with higher limit reductions for our higher risk industries. Government stimulus from most major economies have kept more money flowing, particularly in the SME sector. And a number of the governments in Europe have announced backstops to trade credit insurance, including the U.K., France, Germany and the Netherlands. The combined impact of these developments is to reduce our forecast incremental trade credit claims to around $150 million. With that, thank you. I will hand over to Inder to walk you through the first half results in a little bit more detail.

Thank you, Pat. Good morning all. Clearly, our headline performance has been impacted by the extraordinary events associated with COVID-19. However, I'm pleased with both the operational resilience of our business and the further improvement in the quality of our underlying earnings. Pat has taken you through some of the detail of COVID-19 impacts, so I'll focus my remarks on the results excluding these impacts. I'll start off with the group P&L. Gross written premium was up an impressive 10% on a constant currency basis and excluding disposals completed in 2019. The combined operating ratio deteriorated by 2.2 points to 97.4%. This was due to heightened catastrophe claims in Australia as well as prior year development in North America. On a current accident year basis and with catastrophe claims held to our plan allowance, the combined operating ratio improved by more than 3 points, and I'll take you through this in more detail on the next slide. We recorded an investment loss of around $90 million, driven by the extraordinary market volatility we've seen over the course of the first half. Importantly, the $350 million unrealized mark-to-market loss we reported in our credit book in Q1 almost entirely reversed in Q2 as market conditions stabilized, and we saw a flight to quality. Our cash loss after tax for the half was $682 million, reflecting the impact of COVID-19 across both the underwriting and investment accounts. Our financial position remains very strong with a PCA multiple at the top end of our target range at 1.8x, and pro forma gearing reduced substantially to the mid-point of our target range at 30%. We've declared an interim dividend of AUD 0.04 per share. This reflects our confidence in the group's financial position, the improving quality of our underlying earnings and a better premium pricing environment. I'll now briefly walk you through the key components of the reported combined ratio. As you can see in the first 2 bars on the top chart, our current accident year combined ratio improved by more than 3 points to 93.7%. The key drivers of this, as illustrated on the bottom chart, were a 2.2 point improvement in our attritional claims ratio, a 70 basis point improvement in our cost of large risk claims and a more normal start to the year in our North American Crop insurance business. These are all important sustainable improvements in earnings quality and reflect a real step-up in our earnings power going forward. Walking from left to right on the remainder of the top chart, we have set out some of the nonrecurring items that have impacted our reported combined ratio. On the right-hand side of the chart here, you can see the impact of risk margin strengthening. This is in addition to the risk margin included in the COVID-19 impacts. In aggregate, the probability of adequacy of our claims reserves has increased to 91.2%. This is well above the midpoint of our range of 90% and also above our historical norms. Our estimated ultimate cost of COVID-19 is approximately $600 million, of which $335 million or 6 points, as shown on the chart, is booked in our first half underwriting results. I'll now turn to divisional performance in a bit more detail, starting off with North America. Gross written premium of $3.1 billion was up 14%, adjusting for the sale of our underperforming personal lines business. The current accident year combined ratio improved by around 1.5 points to 97.1%. Within this, the attritional loss ratio, excluding Crop, improved by 1.6 points. In addition, our Crop business has experienced more favorable planting and growing conditions this year after a very difficult 2019. The year-to-date financial performance of Crop is in line with our long-term average, and this has contributed around 1.7 points to the year-on-year improvement in the North America combined ratio. The cost of large risk claims increased by around 2 points to more prudently reflect inflation risk. Albeit year-to-date, we've seen a decrease in the frequency of reported large losses. We've strengthened prior year reserves in North America, primarily in excess and surplus lines and in multiline reinsurance. Both these books are now closed to new business. In line with industry experience, we've also seen some loss creep on Hurricane Irma from 2017. In terms of reserve adequacy, we've taken decisive action on underperforming portfolios. We're booking more prudent loss picks to reflect inflationary risk in relevant portfolios, and we're using better data and insight in our reserving processes through improved pricing and monitoring tools. These actions, along with first half reserve strengthening, increased our confidence in the adequacy of our reserves in North America. Separately, I'm really pleased with the progress we've made on our operational efficiency program in North America over the last 18 months. With the sale of personal lines, we now have a more focused business with a simple operating model and are continuing to rationalize our regional footprint and technology infrastructure. We're on track to deliver around $40 million in underlying savings in North America by the end of this year. Turning now to international. Gross written premium of $3.1 billion was up around 12% on a constant currency basis and excluding the impact of asset sales in Asia. This was driven by strong premium rate increases in both our London market business, up around 15%, and our U.K. regional business, up around 14%; and good new business growth in areas like natural resources and in property and liability classes in Continental Europe. As you can see from the chart, our current accident year combined ratio improved by an impressive 5 points from 97.7% to 92.5%. Within this, the attritional claims ratio improved by 1.7 points. The cost of large risk claims improved by over 4 points from around 15% to around 11%. This reflects the benefit of strong derisking and portfolio management actions we've taken over the last 2 years across financial lines, international liability, large account property and commercial motor. The expense ratio also improved by 80 basis points. Our cost-out initiatives are continuing to improve the efficiency of our operating platform both in Europe and in Asia, and we're also starting to benefit from economies of scale as market conditions improve. And finally, our home market of Australia Pacific. Gross written premium of $1.8 billion was up around 4% on a constant currency basis and excluding CTP. The current accident year combined ratio was a very strong 90.2%, down more than 4 points relative to the prior period. The attritional claims ratio, excluding LMI, improved by a further 3.5 points, which takes the total improvement to around 13 points since we first instituted cell reviews and Brilliant Basics in Australia Pacific in the second half of 2016. The large loss ratio was around 80 basis points lower, continuing the significant reduction in large loss frequency that Pat referred to earlier. Expense ratio improved by around 0.5 points, supported by disciplined cost management and efficiency initiatives. On LMI, the extraordinary measures from the government and the Reserve Bank continue to support credit quality for the time being. However, we remain cautious about the near-term outlook and have strengthened our LMI reserves to reflect potential claims that may emerge from current home loan repayment deferrals. In addition, we've taken a $50 million charge against regulatory capital through premium liabilities to reflect the likely further deterioration in credit conditions over the next 12 to 18 months. Turning now to the operational efficiency program we announced at the end of 2018. You'll recall that we're targeting around $200 million of gross savings, $130 million of net savings and an expense ratio of less than 14% by 2021. We're now at the halfway point of that program, and I'm pleased to say the delivery of our cost-out initiatives is running ahead of our original timetable. We've executed clinically against all the key initiatives set out in our original program of work. We have simplified our organizational structure and the operating models in each of our divisions. We've made meaningful progress in rationalizing and modernizing our technology estate. We've sold our inefficient personal lines business in North America. We realized process efficiencies across our businesses in Australia, in Asia and in our shared services center in the Philippines. And we've instituted strong expense discipline in managing and reducing our third-party consulting costs as well as travel and other discretionary costs. Excluding COVID-19-related expenses and the elevated risk and regulatory costs, which we highlighted at the end of last year, our reported expenses for the first half were $776 million. Our reported number does include some one-off savings, for example, a lower-than-normal level of spend on our change portfolio. I would say that our first half exit run rate is closer to around $825 million with an expense ratio of around 14.4% when adjusting for these nonrecurring items and the additional reinsurance buydowns we've executed as part of our comprehensive capital plan. Turning now to investment returns. We've also seen extraordinary levels of volatility in financial markets over the last few months. Against this backdrop, we took decisive action to derisk our portfolio and exited high-yield debt, emerging market debt and listed equities, where the risk of market dislocation remains heightened as the crisis continues to unfold over the coming months. We held excess asset duration through Q1, which not only insulated our P&L but generated around $100 million in excess risk-free rate gains following the substantial cuts to global cash rates. We continue to maintain a very high-quality and resilient investment-grade credit book. Around 85% of our fixed income is rated A- or better. We've had fewer rating downgrades at 10% versus 12% across the broader market. In our BBB portfolio, we've got fewer holdings on negative outlook or negative watch compared to the market. We have no fallen angels, and none of our credit is trading distressed. As I mentioned earlier, we reported around a $350 million unrealized mark-to-market loss at the end of Q1, and this is almost fully reversed in Q2. As you're aware, the outlook for investment returns has been reset lower over the last few months, and our fixed income running yield is now around 70 basis points. Whilst we're not providing guidance at this stage, we expect our portfolio, when rerated to a normalized investment strategy, to deliver a return of around 1.75% over the medium term. I'll conclude with some remarks on our balance sheet and capital position. During April and May, we executed a comprehensive capital plan that included a series of initiatives to strengthen our balance sheet, both to withstand the potential extreme scenarios of additional COVID-19 impacts and to give us the flexibility to grow organically as we start to emerge from the crisis. The execution of this plan included raising equity and Tier 1 capital, purchasing additional reinsurance and derisking our investment portfolio. As a result of these actions, our APRA PCA multiple at 1.8x is at the top end of our target range. This is despite a material allowance for up to $600 million in ultimate COVID-19 impacts, with the vast majority of these estimated losses either incurred in the first half underwriting results, accounted for in risk margin, or reflected as a deduction from capital through premium liabilities. Our S&P capital position remains strong and meaningfully above AA minimum capital levels. Our pro forma debt-to-equity ratio at 30.2% is now at the mid-point of our target range of 25% to 35%. This marked improvement in our gearing is a result of our sustained effort to manage down our borrowings over the last 2 years and also reflects the reclassification of our $400 million Tier 1 hybrid instrument out of borrowings into equity following the change of the non-viability trigger in that instrument on the 16th of July. Whilst we're pleased with the strength of our balance sheet, we are continuing to maintain a rigorous focus on capital and risk management in this uncertain environment, and we're using dynamic forward-looking stress and scenario analysis to inform all our decision-making. With that, I'll now hand back to Pat to talk through our priorities going forward.

Great. Thank you, Inder. Our priorities for the rest of the year are clear. Our cell reviews and Brilliant Basic programs are alive and well. We still do cell reviews. We still do them quarterly. They still have the same impact, and we're still driving improvements in how we do underwriting, pricing and claims from the Brilliant Basics program. As I mentioned earlier, going forward, we expect to see further improvement in both our attritional claims ratio and our large claims frequency. We also remain super focused on making sure that all of our people around the world are feeling looked after and feeling connected to QBE. Also, that they have the tools that they need to help service our customers and work closely with our broker partners. There's probably going to be some local and regional variations. And in time, we hope to see at least a modest increase in the number of people back working in our offices. However, our current assumption is that the majority of our people will continue to work remotely for the foreseeable future. Working remotely hasn't held us back in the first 6 months of 2020, and I don't think it will do in the future either. We've been putting an increased focus on our customer at QBE program, and I think you can start to see the benefits of that in our organic growth numbers. The fact that we're no longer focused on reunderwriting our portfolios, the fact that our broker partners see us as having a stable and clear underwriting appetite, and the ongoing work from the customer QBE program has provided the base for organic growth, albeit with a caveat, there remains substantial uncertainty in the general business environment going forward. And for the last 2 or 3 years, we've been quietly working away at modernizing our technology estate, retiring old applications, automating processes and building some actually quite cool front-end digital tools. And this has helped us to materially improve our expense ratio, and that should continue to be the case going forward. This program hasn't been about big policy admin conversions but more about how we build better digital tools, remove manual processes and how we could become the smartest and best users of data in commercial lines insurance. There's lots more that we can do in this space, and we're looking for ways to accelerate this program as we speak. As part of this, we'll soon start the program of work and reduce -- that moves the majority of our technology estate to the cloud. I look forward to updating you more on all of this with the release of our results at the year-end. Thank you. And Inder and I are now happy to take any questions you've got.

[Operator Instructions] The first question today comes from Nigel Pittaway from Citi.

Just a couple of questions. First of all, on the investments, you obviously said that either the target return when you get the growth assets back to 15%, what do you think you would need to see before reallocating your investments like that?

Gosh. I think we'll know when we see it, Nigel. It's -- look, there's still a tremendous amount of uncertainty in the world, and it doesn't feel like we're about to reset our asset allocations right now. So obviously, there's tremendous amount of uncertainty with the progression of the pandemic in all of our major markets, including Australia. There's obviously -- there's economic uncertainty that's associated with that, how the world responds as the government stimulus packages start to unwind. And obviously, there's political uncertainty as well. So look, I think at the moment, don't assume we do that anytime soon and probably, at this stage, I would say not in the second half.

Secondly then, with the -- with just the initiatives you've taken in Australia to suspend premium increases, I mean, why is it that, that's an appropriate action in Australia, where you're sort of still putting through significant rate increases elsewhere in the world? Is it just mix of business or is it marketing? Or why are you taking that approach in Australia, which seems to be in such contrast to what's going on everywhere else?

So a couple of things. I said in my remarks, I was only really showing the examples in Australia. There equally will be examples of payment deferrals, of 0 increases in other markets in the world. In fact, we had actual premium reductions in lines like workers' comp in the U.S. So it's not that there's been an absence of examples elsewhere. I think there are a couple of other things. So as I said, we've got more SMEs in book of business, generally in the economy here and more in our book of business. So they've obviously been disproportionately impacted. And thirdly, that the insurance market conditions have changed more markedly in the northern hemisphere, where rate momentum has just accelerated, notwithstanding the measures we are taking, the rate momentum has just accelerated much more broadly in the northern hemisphere than it has here. So we are taking measures. It's just those other things offset it.

Okay. And then maybe just finally, I mean, obviously, with reinsurance pricing sort of having put on a spurt in the first half of the year, you do write, obviously, reinsurance and sell reinsurance. I mean, are you going to sort of expand that business now that the rate environment is more conducive?

Selectively. So Richard and the team have really kept a very tight watch on the reinsurance business over the last few years. And we've renewed, on a number of occasions, kind of opportunities for growth and concluded on each of those occasions that the right conditions didn't justify it. That's changing now. So there are definitely opportunities for us to selectively write a little more business. There's areas where Continental Europe hasn't moved as much yet so far, so probably not there, but other parts of the world where there is better rate conditions. So we're not going to go gangbusters, but there will be yet some more opportunities to write more reinsurance business, yes.

The next question comes from Matt Dunger from Bank of America.

I just wondered if I could ask a question on Crop. There has been some improvement in soy and corn yields. Your combined ratio is below 80%. You've previously talked to 92% as a long-term target. Has this changed at all given your high-yield quota share, reinsurance arrangement and your expectations longer term? And how are you seeing this book at the moment?

Yes. Thanks, Matt. So look, there's a few things at play with Crop. So we showed, I think before, that the long-term average -- 10-year average crop is still around that 90% to 92%. Obviously, last year was a year that was a much higher combined ratio than that. This year looks a much better year. There's actually been a little bit of hail activity recently in the last couple of weeks in the Midwest. But you may remember, we bought protection against hail. So that's sort of proven to be kind of timely protection for us. So broadly, no, we booked at 90% at the half year. We will have years where that's -- it's -- last year, it was occasionally worse than that. And in a good year, it will be better than that. We'll do in the 80s.

Great. And if I could just ask on the price increases you're putting through in property, accident & health that you talked to in North America. What's the risk of further adverse development in these books, given what you're seeing on social claims inflation?

Yes. Look, maybe -- Inder talked a bit about that in the script, so I'll ask him to pick that up.

Yes. Thank you. Look, I think in terms of the prior year that we saw come through in the last half, it's really come through from a couple of specific areas, the excess and surplus lines and assumed re multiline insurance, both businesses we've sort of talked a bit about earlier, and we've now closed new business. Look, there is a bit of social inflation around. We've been very careful and selective about where we're writing business. In these areas where we're growing, particularly accident & health, we've got really good data science. We're getting plenty of rates, and that's far in excess of claims inflation. Similarly, in program property cat, we've got a good handle on claims inflation in that and obviously got decent allowances in place for cat activity. So we're trying to avoid areas in which there's some elevated claims inflation, and we're very conscious of kind of how that's developed in the last half.

The next question comes from Andrew Buncombe from Macquarie.

Congratulations on the results in obviously a very difficult period. Just a couple of quick questions from me, please. The first one, do you have any derivatives hedging corn prices at the moment?

Yes. Inder, we took out protection at the start of the year on corn and...

Yes. Very similar to what we do every year, Andrew, nothing different. What we've seen so far in terms of crop prices from the base price of corn is down around 17%. So we're starting to get into the territory where we've got some value in the hedging. Having said that, the yields are looking a lot more promising. So ultimately, we are providing a revenue guarantee. And so as long as there is -- sort of they're moving in sync, so higher yields, lower prices, that's broadly neutral for us. But we've got the normal hedging in place to cover where we see a disconnect between pricing and yields.

Excellent. Just for the next one for me, you mentioned the decision in Australia to lower pricing under terms and conditions at June. If you can just give us a bit of color on what you're thinking is about potentially extending that program on a selective basis as these troubles roll on?

Yes. It's a really interesting question for us. I think we're minded to probably continue for a little bit of time. I think obviously, a lot of businesses are still working through difficult sets of circumstances. And whether that be the premium payment deferrals and/or kind of renewing at 0 increases, that just feels like kind of a good thing to do. So it's something we'll keep kind of continually under watch. But obviously, we're very sympathetic to the ongoing economic challenges out there.

The other question that I had was just if you can give us some -- actually, there's been some commentary out of the U.K. that Lloyd's may require syndicates to hold more capital next year. Do you have an idea of the quantum of this potential change for your book?

Look, I mean, again, I'll let Inder to jump in there. They've changed a lot of things. They've changed the proportion of the capital you can hold by LOCs over the last couple of years, have changed which banks you could use for those LOCs recently. And we're up-to-date on all of those changes.

Yes. Look, we've been evolving the way we fund that business over the last 2 to 3 years. We brought down the kind of implicit gearing in that business. We've also tweaked the syndicate of banks. So look, we feel good about some of the changes they're making. They're obviously under a bit of pressure from rating agencies, et cetera. But we feel that, that business is funded really well. They've got a good banking syndicate, supporting it in a good structure that's modern and kind of reflective of some of the changes that Lloyd's is trying to make.

The next question comes from Andrei Stadnik from Morgan Stanley.

I wanted to ask a couple of questions in terms of your outlook and your appetite for writing business going forward. Just broadly at a group level, given the much higher pricing you've seen in U.S. and international, has the appetite changed in any specific lines of business? Because previously, you were more cautious on some of the liability lines and event cancellation. Do you see more lines becoming attractive at these rates?

To an extent, Andrei, it's a good question. So life's easier when rates are going up, and that's a startling revelation, I know. So it's easier to get the right rate that you need. It's easier to get 100% rate adequacy. So generally, what we're really focused on doing is obviously trying to provide good customer service, where we see a large number of opportunities, and then write business where we've got a good franchise ourselves, good underwriting capability, and we can drive business at rate adequacy. And that's -- we did that pretty well in the first half, I feel, where we've grown. It's where we've got a strong franchise, strong underwriting, and we're writing new business at strong rate adequacy. And that's really what we're focused on doing. Still -- and actually, with a better rate environment, that's true in more areas, to your point. Because rates are stronger, more new business opportunities are coming through at full rate adequacy than that was true in the past. You still need to be careful, though. There are still loss trends. So we showed in the example of property cat, you have to be really careful how much property cat you're writing and where so you don't accumulate too much cat exposures, cat aggregates. Financial lines rates are dramatically better, but financial lines loss trends are much heightened as well. So we're probably still cautious about writing a lot more financial writes, albeit we think our exposures, our underwriting exposures, are much better, and the rate adequacy is better. We probably would be cautious about significantly growing in financial lines still.

And the other question really, in terms of in Australia, the LMI business, what is your appetite in terms of writing new LMI business at the moment? Have you been able to reprice and/or tighten some of the term on your LMI book?

Yes. Look, I mean I think as you've heard from us half-on-half over the last few years, we've been relatively cautious in terms of the outlook for the LMI business. So we're being very selective. Year-on-year, I think if you looked at for the full year, we'll end up flat versus last year. We picked up a little bit of business out of National Australia Bank. But we've been sort of trying to be proactive on where we see opportunities to tweak our risk appetite or the need to do so. So for example, we recently put an embargo on new business and/or further drawdowns in sectors that are -- for people employed in sectors that are more exposed to the pandemic, so such as retail and leisure, et cetera. So look, I think we remain cautious. We're being measured in terms of trying to -- where we grow that business. We haven't got a huge appetite to grow that. So we're managing it the best we can given the environment.

The next question comes from Ashley Dalziell from Goldman Sachs.

I was just hoping you might be able to unpack the sort of 10% underlying GWP growth that you got in the first half for a little -- in terms of rolling that forward. I mean, obviously, very confident on the pricing side of the equation. But there's been pretty limited evidence, I guess, through the half and also pretty limited in your commentary. Any sign of, I guess, volume or demand slippage or a headwind as a result of the tougher macro? Are you sort of expecting that to become a bit more of a noticeable headwind as we go through the year?

Yes. You'll have obviously noticed, Ashley, as we went through the commentary that we gave probably a little bit more positive forward color on our price, attritional large and not much commentary on GWP going forward because it's just difficult to tell. I think you could sound the component parts. I think you could say that I feel that rate momentum will continue for all the reasons that we covered. General business activity is really tough to call, though, I think for any of us. We're still in the period of time where in all of the major markets, including Australia, government stimulus is keeping a lot of businesses going. And when that comes to an end, that's bound to have an impact. So I think we're still -- I mean I think for the second half, that probably -- that impact will be somewhat muted. I think government stimuluses will largely keep going for the second half of this year and rates should keep going. Next year is much harder to call at the moment. I would imagine there will be some impacts from lower business activity. I mean people still have to buy insurance. It's sort of interesting that -- and you can see this in the major broker results that people have to buy insurance. And if anything, people are valuing insurance and boards are valuing tail risk more than they used to. But there just will be lower business activity at some point, and I've got to think that will have some impact in 2021.

Okay. Very clear. Just a second comment on reinsurance. You spoke about stronger pricing, obviously, supporting QBE Re. But I guess the flip side to that argument is you have an upcoming renewal. And appreciate about half the program is already placed for next year. But I would appreciate any sort of evolved thoughts on how that renewal might play out, particularly in the context of the business interruption losses.

Yes. Look, so I will be helpful and unhelpful on that, Ash. I think -- I would imagine the renewal prices will be higher, I'm sure that's super helpful for you. What we're going to try and do is renew the program broadly in the same shape. So -- but clearly, the market conditions are very different from a year ago. So we might have to alter a little bit some of the attachment points, et cetera. And there'll be a trade-off between our underlying growth that we've got opportunities to grow, how that plays through to our exposures, how that plays through to the reinsurance program, what's available and price. So difficult to give too many more specifics other than to say, if you assume the structure of the program is similar or very similar, and it clearly is going to be, so the renewal will clearly be at a higher price with a double-digit increase, I would imagine.

Okay. Just a final question, I guess, on capital management or capital allocation, really. In terms of the thought process around re-weighting the investment portfolio, I'm just wondering how you're grading the return on incremental capital from that versus some of the potential growth opportunities in the market at the moment.

Yes. Good question, Ash. I think it's fair to say, look, in the near term, we remain cautious more broadly in terms of allocating and re-weighting, as Pat mentioned earlier. But when you think about the medium-term kind of financial framework we set up for the company, we're saying about 15% allocation to growth assets makes sense at the right time. But clearly, probably more in the near term, and this kind of depends how the second half and the first half of next year pans out, there are more opportunities to potentially grow some exposure in the right areas. But we've got enough capital that we don't have to make absolute trade-offs, Ash. So as you think about where the top end of our capital range, having absorbed a lot of the COVID-19 losses, let's see how the next half evolves in terms of do we have line of sight to that come the second half? And then if -- where we see opportunities to grow organically, that will probably take precedent over re-weighting and investments. But ultimately, we want to -- can do both.

The next question comes from Siddharth Parameswaran from JPMorgan.

A couple of questions, if I can. One is just on the price increase landscape that we are seeing around the world. And Pat, you mentioned that in Australia, the rate increases -- well, you aren't pushing much through at the moment. I was just interested in getting your perspective on how long you think the rate increases in the other markets can continue and whether there is scope to actually increase rates again in Australia, given the very, very tough past 6 months we saw for cats.

Yes. Look, I'll start with Australia first, Sid. There are still sectors where rate increases are going through, so commercial property, strata. And then each -- for the reasons that are kind of pretty -- the increase in weather-related cat events is fairly obvious. Those books still need more rate than they got today. In the short term, it's bound to be moved a little bit by the SME sector and naturally a little bit on things like commercial motor because there's still lower frequency on commercial motor. So I would imagine the net of that in Australia is still some rate increases because I think coming into this year, post the bushfires, there was a need for rate in Australia. Reinsurance costs are going up as well, but it probably will be dampened a little bit by the SME/economic impact. Market conditions continue to strengthen in most other markets in the world. So clearly, any business we can have -- London, its rates are increasing significantly. Part of that is -- I mean if anybody's got any idea when interest rates are going to go up from the virtually 0 that -- where we are and, indeed, everywhere in the world, I mean, that's a big drag on insurers' earnings. So you need to compensate that with underwriting. There is still casualty trends. There are still increased cat-related weather costs around the world. So insurers need to earn more on the underwriting account, and that's sort of been increasing in strength in the London market, broader U.K., certainly North America. Even the markets that were slightly slower, Continental Europe and Asia had started to get some rates in them. And I think, let's see, but it looks like that will continue for the foreseeable future.

Meaning a year or longer?

Yes. Probably, probably.

Okay. Okay. Just a question on your claims and the reserve increases we've seen, again, 2%. I mean I'm conscious a lot of it stems from the U.S. But maybe if you could just make a broader comment as to what you're seeing in terms of claims inflation on long tail in markets like Australia. We have seen some comments from others that there might be some inflation there. And also, just some comments about Europe as well, if you can. And then if there are any changes to how you're reserving on the latest accident there?

Yes. So look, I think that some exposures are different from ours versus others. Here, on long tail lines, whichever long tail lines you pick up, we are not seeing deterioration of reserving or even current year performance. Our long tail performance -- of course, pretty much all of our long tail books in Australia has been good. And that's something that we watch very closely. And then just other than stating the obvious that we've all stated before, that CTP will produce lower reserve releases going forward for the reasonably obvious reasons, probably not 0 but lower. Elsewhere in the world here, yes, I mean, social inflation is still kind of active. You have to be very careful with -- the claims development on the financial lines in the first 6 months was pretty benign. We think we've got on top of that in previous periods, but there's still a lot generally in the market of activity on financial lines. And social inflation has not gone away in this period. That's still alive and well on broader casualty trends, but we're very focused on that. We have strengthened our current accident year picks to pick up really to make sure -- I mean as we do our rate adequacy calculations, we've strengthened for reinsurance costs, loss trends along the lines we just referred to and, actually, for that matter, in terms of rate adequacy, lower investment returns as well. So the actuaries around the world are factoring that in.

Okay. Great. Okay. And just a final question for me, just on your large cat claims. Obviously, it seems to be above your expectations in the last half, obviously driven by Australia I assume. But given that we have seen, I suppose, the elevated activity for a little while, could you give us your thoughts on what you actually think your large loss allowance should be as a percentage of net earned premium, given the structure of your program?

Yes. Fair question. So I think you have 2 components, the large loss non-cat. I think we got a good trend and frequency, and we actually expect that to trend down over time. I think on the cat-related large losses, I think it's a fair point, and we'll look at that as we put together thoughts for next year and just what -- you could easily imagine that we'll have a slightly higher cat allowance for next year versus this year.

So overall, the combined effect of the 2?

Probably not a huge difference. I would imagine they'd probably net to close to this year.

This year, ultimately, Sid, it will depend also where we end up on reinsurance as well. So we'll have to look at it in the round.

The next question comes from Brett Le Mesurier from Shaw and Partners.

You've put together an indication of the results excluding COVID. But what is the outlook excluding COVID?

Sorry, Brett, did you ask specifically on profitability...

On your business as a whole. So you used to give the outlook with the combined operating ratio. So I understand the great significance of COVID. But since you can identify historically what your -- how your performance is ex COVID, presumably, you have some expectation of what it is going forward ex COVID.

Yes. Look, it's clearly more difficult to predict the future now than it used to be. So if I just try and pick apart the component parts. So on the top line, we've got positive trends obviously on pricing. Business activity at some point, as I mentioned, feels like it's going to have an impact. And the rate plus 2%, we saw it this first 6 months. I probably am surprised if we can get that as we get into 2021. Just it feels like business activity is sort of bound to slow down. In terms of kind of rate versus claims inflation, there clearly is claims inflation activity in terms of cat events, in terms of casualty trends, in terms of -- general inflation feels a tiny bit lower. Right now, we're getting rate in excess of that. So that's sort of a positive trend for us going forward. I mean the natural inflation, I would say, particularly when you add in a bit of COVID in there, is probably higher than normal. But clearly, when we're averaging rate across the group at 10, we would be carrying rate in excess of claims inflation. So that should have a positive trend going forward.

Right. So where do you get to for your combined operating ratio ex COVID?

Well, we wouldn't, in any event, normally update on that, Brett, at the half year and certainly in the middle of all of this. We'll come back to you again at the year-end.

At this time, we're showing no further questions from the phones.

Well, great. Thank you, everybody, and we look forward to speaking to you all again soon. Thank you.