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

Good morning, and thank you for joining us today for QBE's 2021 Full Year Results Presentation. Before we begin, I'd like to acknowledge the traditional owners of the many lands on which we meet today and recognize their continuing connection to land, waters and culture. I pay my respects to the elders past, present and emerging, and extend this respect to any First Nations people joining us today. I'd like to start by offering some initial reflections on the business since joining QBE last September. After which, I'll discuss the key features of the result before handing over to Inder to talk through the detail of the financials. Before Q&A, I plan to circle back, and I'm excited to be able to introduce our new purpose, vision and strategic priorities for QBE before finally commenting on the outlook. So let's start with some initial reflections. The past 5 months have been incredibly exciting as I've developed a better understanding of QBE, got to know its people and customers, although that has been quite challenging in this virtual world we're currently living in; and collaborate with the Group Executive Committee and teams at all levels across the organization on a new vision and strategy for the company. I feel confident that we can deliver our new strategy in large part due to the strong existing foundations. We have a great footprint and portfolio, which is diversified in terms of breadth of product. Our brand resonates well in our target markets, and we have strong relationships with our customers and partners. From these foundations, I see scope to improve returns and reduce volatility, which will be an ongoing focus of mine and represent a priority within our new strategy. With the benefit of supportive market conditions, we also see opportunities for targeted growth. Together with recent refinements to our pricing, underwriting and capital allocation capabilities, we hope to drive greater consistency across the organization and be able to seek out selected growth throughout the cycle. Key to executing on these priorities are our people and culture, which are of absolute -- absolutely of paramount importance to me. I've been impressed with the quality and depth of talent in the business, though recognize that to be consistently successful, we need to do a better job investing in our people, including succession planning, building sustainability into our culture and driving a more collaborative and enterprise mindset across the organization. On to Slide 4. It's been exciting getting around the business in recent months. And despite travel challenges, I've been lucky enough to spend time in each of our 3 divisions. Some parts of the portfolio are new to me. For example, I've enjoyed learning about crop insurance in the U.S., including a visit to Ramsey, Minnesota, and lenders' mortgage insurance here in Australia, while more generally building a deeper understanding of the Australian insurance market. Other parts of the portfolio, of course, are more familiar to me. For the last 2 decades, I competed alongside QBE in a number of the key Northern Hemisphere markets and as such, have a keen appreciation of the strength and quality across many of these businesses. As I noted earlier, the portfolio is well diversified, and we have a strong core. While we certainly have work ahead of us, you'll be pleased to hear that I see no need for another phase of material remedial activity. Our strategy is centered around building on the strong foundations we have in each of our 3 divisions, though I do want to ensure that we approach growth and capital allocation with an enterprise mindset and better leverage our skill set, knowledge and product capabilities across the group. On to the results and its key highlights. I'd like to start by noting how pleased I am with the improvement, which is clearly evident in 2021, particularly as this is my first QBE results briefing. We've made encouraging progress and have momentum building across the business, including impressive top line growth of 21%, underpinned by rate increases, improved retention and growth outside the rate increases. Profitability rebounded strongly over the year. Our combined ratio of 93.7% is over 10% better than the prior year, which was heavily impacted by COVID-19 and a very significant amount of adverse prior year development. The improved underwriting result supported a particularly noteworthy group adjusted cash return on equity of 10.3% for the year, the strongest result the business has generated in over a decade. While Inder will talk in more detail regarding the impact of COVID on the results, at the beginning of the year, we flagged the likelihood of a further $130 million of COVID-19-related costs in 2021. Encouragingly, the impact of COVID to date is much less onerous than expected, particularly in lines like LMI and trade credit. Accordingly, the result includes a $140 million net benefit from COVID largely due to the release of COVID-related risk margin, which we booked last year. Now turning back to the underwriting result. The whole portfolio saw an average rate increase of 9.7%, which should be covering current claims inflation. Higher natural catastrophe activity continued with 2021, likely to be one of the costliest years on record. Not surprisingly, given this backdrop, catastrophe costs of $905 million materially exceeded our planned allowance for the year and the $688 million of costs incurred in 2020. The adverse prior accident year claims development we reported today is disappointing. It largely reflects strengthening across our legacy U.S. E&S portfolio and Australian liability lines. Significant strength in these areas was partly offset by favorable COVID-19-related development in LMI, trade credit and business interruption. Overall, PYD broadly offset the $140 million of COVID risk margin release I noted earlier. On claims inflation more broadly, economic or CPI inflation has been making headlines across many of our key markets. While some components within these measures that have an impact on our business, it's important to note that we have a diverse portfolio of businesses, all of which have sensitivity to a range of unique inflationary attributes, for instance, social, wage, medical, raw materials, to name a few. Nonetheless, the operating environment will undoubtedly be challenging in the year ahead with respect to claims inflation. And I'll be continually challenging my teams to be vigilant and proactive. It is imperative that we pick up trends in claim inflation as soon as we can to feed into our underwriting. Inder will cover both our investment portfolio and balance sheet in more detail shortly, though I did want to stress that I'm pleased with both the shape and state of our balance sheet and encouraged that we've been able to present strong metrics in light of the significant growth achieved over the year. Turning now to rate momentum in a little more detail. Rate momentum remained strong through the second half and exceeded our expectations, culminating in the group achieving an average renewal rate increase of 9.7% for the year, which was consistent across both halves and broadly steady on the prior year. Encouragingly, pricing remains strong across all 3 divisions and importantly, continues to compound on rate increases achieved in prior periods. Retention was also up across the board and generally improved steadily over the course of the year, reaching levels not seen in over a decade. This not only speaks to the extent of rate momentum across the industry, but also the growing impact from our customer QBE initiative. Some noteworthy call-outs across each division. In North America, we saw rate improve during the second half of the year. Notable increases over the year were led by financial lines with rates up 26%, aviation up 13%, property programs up 17% and accident health up 10%. In international, some tapering of rate increase is more evident into the year-end that we'd previously flagged a high likelihood of this occurring given the division's bias to a number of lines, which drove the inflection in industry pricing, many of which are now into their third or fourth year of substantial increases. Increases were led by our International Markets business, up 13%, while our Continental European and U.K. businesses both saw rate increases of 11%. Our outlook for the division remains positive following the Jan 1 renewal season with European insurance, U.K. Property and QBE Re experiencing a better-than-anticipated renewal outcome. In Australia Pacific, rate increases improved over the year with the second half particularly strong as pricing recovered following customer COVID support initiatives in place last year. Within Commercial Lines, rate was up 8.5%, with double-digit increase in commercial property, strata and public liability. The obvious and difficult question at this juncture is where do we expect rate to trend over the coming year. And as always, this is not an easy question to answer with any certainty. Rate tapering will likely continue within those lines, which may now be entering their fourth or fifth year of increases. However, we do expect rate increases will remain above inflation following another year of elevated natural catastrophe claims costs and to reflect ongoing uncertainty around climate change, rising inflationary signals, particularly in short-tail lines and continued low interest rates. As mentioned earlier, it's imperative that we monitor these closely. Now if we turn to GWP growth. As already noted, we saw a very strong growth during the year with GWP up 26% to $8.5 billion or up 21% on a constant currency basis. As was well factored at the half year, our U.S. crop business had a standout year with growth of 51%, but even excluding crop, organic GWP growth of 17% was the strongest QBE has achieved in over a decade and restores premium levels not seen since the early part of the last decade. Premium growth has again been supported by the strong rate increases I noted earlier, though ex-rate growth has been a building feature of the year tracking at 10% ex crop, up from 4% in the prior year. This has been a function of targeted new business growth, exposure growth in many regions as the global economy rebounded and also, improved customer retention. While this feature of the result may have exceeded expectations, I want to ensure that where we have grown, we've approached all opportunities with the same return-conscious mindset, which has become more refined in recent years due to the cell review framework, which I think is excellent, alongside the investment we've made in improving underwriting and pricing tools and in how we allocate capital across the business. Our new strategic priorities will embed a more consistent growth discipline into our DNA. While we're unlikely to maintain growth at this pace -- the pace seen in this result, we certainly feel we're now better equipped to drive selected organic growth across the cycle, both in businesses where we already have scale and strong market share but also in some select lines where we're currently underrepresented. Part of our success in this area will be dependent on having the right operating model and structure in place. I want to approach growth and capital allocation more holistically as an enterprise, ensuring we're making the best decisions for the group, which will involve better leveraging skill set and capability across the organization to target new and/or underdeveloped regions and lines. It's difficult to set any medium-term targets on growth, as I believe it can lead to undesirable outcomes though we have already commenced efforts to strike a more appropriate balance in remuneration models to motivate underwriting teams to consistently seek out growth opportunities while at the same time maintaining an unrelenting focus on profitability. I will now hand over to Inder who will take us through the financials.

Thank you, Andrew, and good morning all. Overall, I'm pleased with our financial results for 2021. It underscores our strong recovery in earnings and shows encouraging improvement across many of the value drivers in our business, including good premium growth, better underwriting margin and a higher running yield on our fixed income portfolio. I'll start on Slide 9 and make some remarks on the overall group P&L. Gross written premium for the year was $18.5 billion, a considerable 21% increase over the prior period. This reflects the benefit of compound premium rate increases, improved customer retention and strong new business growth. Net earned premium was up 12% year-on-year, reflecting stronger growth in more heavily reinsured lines such as crop, lenders' mortgage insurance and financial lines, as well as the natural lag in earning through of higher written premium growth in more recent quarters. Our statutory combined ratio for the year was 93.7%. To make it easier for you to compare year-on-year performance, we have adjusted this combined ratio for 2 items you can see referenced at the bottom left-hand side of the page. Firstly, our result includes a net $140 million benefit from a release of COVID provisions. This equates to around a 1 point benefit to our combined ratio. Secondly, the reinsurance of our Australian CTP portfolio has benefited our combined ratio by around 20 basis points. We have adjusted this out as it distorts the presentation of some of our key ratios. So on a like-for-like basis, our combined ratio has improved by 3.6 points to 95.0% versus 98.6% in the prior period. This equates to an underwriting profit of $695 million, excluding a roughly $300 million benefit from the move up in risk-free rates over the period. Just some context on the COVID movements. The overall operating environment has clearly been more benign relative to our outlook around a year ago when we established significant provisions for potential COVID-related claims. This is particularly the case in lines such as lenders' mortgage insurance, trade credit and our potential exposures to business interruption claims, both here in Australia and in the U.K. Across these portfolios, the probabilities attached to some of the more adverse risk scenarios in our modeling have now reduced. Moving on, our investment portfolio delivered an annualized return of 40 basis points or $122 million. Higher risk-free rates adversely impacted the portfolio by $260 million on a mark-to-market basis. And excluding this, the overall return would have been closer to $380 million or a yield of 1.3%. As you're aware, to manage interest rate risk, we look to strategically match the duration of our fixed income portfolio with our outstanding claims liabilities. During the year, we had a modest tactically short asset duration resulting in a $40 million benefit to the P&L, which, in essence, is the difference between the 2 numbers I referenced earlier, the $300 million benefit to claims and the $260 million mark-to-market impact on assets. Adjusted cash profit for the year was $805 million, a meaningful turnaround from the $863 million loss we reported in the prior period, and this supported a strong double-digit return on equity of 10.3%. The Board has declared a final dividend of AUD 0.19 per share, and this takes the full year payout to AUD 0.30 per share, which equates to $443 million or around 40% of adjusted cash profit after tax. I'll now step you through some of the key movements in our combined ratio on Slide 10. As you can see on the right-hand side of the chart, the group combined ratio was 95.0%, excluding COVID and the CTP reinsurance transaction I referenced earlier. And this is a 3.6 point improvement from the 98.6% recorded in the prior period. Walking through some of the movements from the left, the first block represents a year-on-year change in the ex-cat claims ratio. Now this is not a measure we have spoken to in the past, but it effectively represents our net loss ratio excluding catastrophe claims, prior year reserve movements, and risk margin adjustments. For ease of reference, we have included a table in the appendix showing a breakdown of this ratio. But going forward, we will simplify our claims ratio disclosures and adopt an approach that is more consistent with our global peers. As you can see on the chart, the ex-cat claims ratio improved by 1.4 points. This was primarily driven by the benefit of compound rate increases and lower claim settlement costs, partly offset by higher IBNR assumptions included in current year claims. Our expense ratio improved by 1.3 points, reflecting further cost savings as well as operating leverage through strong premium growth. We're making good progress on our efficiency initiatives, including the rationalization and modernization of our technology estate and the migration of existing applications to the cloud. It is worth noting that our reported expense ratio includes the benefit of some nonrecurring items this year, and our exit run rate is around 50 basis points higher. Having said that, we are well on track to achieve our target 13% expense ratio by 2023. The next block shows the commission ratio improved by just under 1 point. As I referenced earlier, we had strong growth in portfolios such as crop where commissions are reimbursed by the U.S. government, as well as classes which generate ceding commission from quota share reinsurance structures such as lenders' mortgage insurance and financial lines. Moving to the last 3 bricks in the chart. Catastrophe losses were again elevated at $905 million or 6.6% of NEP compared with an allowance of $685 million or 5.7% of NEP. Adverse prior year development was around $192 million or 1.4% of NEP compared to $366 million or 3.1% of NEP in 2020. Importantly, the numbers I just quoted all exclude the impact of movement in COVID provisions. The last block on the chart captures the year-on-year movement in risk margin, which had a 70 basis point negative impact on the group's combined ratio in the period compared to a 40 basis point drag in the prior year. This essentially reflects new business strain associated with the stronger premium growth we've achieved in 2021. Turning to Slide 11. Inflation is clearly an important topic for us, and we're very focused on the risk of this remaining at elevated levels over the near to medium term. As Andrew has highlighted, we have a broadly diversified portfolio of businesses across the world, many of which have their own unique, diverse drivers of claims inflation. While CPI inflation numbers are now printing meaningfully above pre-pandemic levels in many of our key markets, the translation through our business into claims cost is actually quite varied. We felt the most immediate impact of inflation in our short-tail property lines, particularly in North America. This is largely driven by input costs, notably lumber and other construction materials, such as plywood and copper, combined with demand surge for contractor labor. Another example is our accident health business that is exposed to medical cost inflation, which has been elevated. In this case, we are continuing to achieve premium rate increases to broadly offset this inflation in claims costs. As we sit here today, it is harder to be as definitive on the ultimate impact of inflation on our longer-tail lines of business. The weighted average term for settlement of our outstanding claims is around 3.5 years with our longer-tail liability lines being sensitive to social, medical and wage inflation. Our actuarial teams are very conscious of inflation risk when striking the estimated loss picks for each class of business. This ultimately determines the profile of profit emergence across the business over time. Another somewhat related topic on claims cost is the heightened catastrophe activity, which continues to be a feature across the industry. As many of you are aware, 4 of the last 5 years have been the most expensive years for the industry on record. Noting the recent cat experience but also our focus on reducing volatility and improving the consistency of our results, for 2022, we have increased our catastrophe allowance to $960 million. Whilst there's a degree of inherent volatility within our cat exposed lines, the updated allowance better reflects more recent experience and allows us to manage downside volatility in our financial performance going forward. The as-if analysis presented on the chart shows that the revised allowance, alongside our 2022 reinsurance program, would have been sufficient in 7 out of the last 10 years. I'll now turn to divisional performance, and I'll start with North America on Slide 12. Gross written premium of $6.3 billion was up 32% on the prior period, with strong growth across crop, our retail mid-market commercial business, financial lines and accident health. Crop premium grew 51% year-on-year, supported by higher commodity prices as well as successful organic growth initiatives. The year-on-year growth, excluding crop, was around 20%. As you can see on the chart, the North America region reported a combined ratio of 102.9%. Whilst this is close to 10-point improvement on the prior period, it is still a disappointing outturn. And we're very focused on delivering an underwriting profit in this business in the near term. The ex-cat claims ratio improved by 2.6 points, reflecting the benefit of rate increases, partially offset by higher inflation assumptions on casualty lines, as well as the wage and material inflation on the property-exposed business that I referenced earlier. Catastrophe claims were still elevated and above planned allowances in the region. The U.S. experienced its third most costly year on record for natural cats and cat claims increased to 7.7% of net earned premium from 7.1% in 2020. Andrew will touch on some of the actions we're taking to reduce cat exposure, particularly in our property programs book. Adverse prior year development was $148 million, down from the $305 million adverse result last year. The vast majority of this reflected strengthening in 2 portfolios, our excess and surplus lines business and [ Pro Health ]. We stopped writing new business in these portfolios around 18 months ago, and they are both now in runoff. We are pleased with the continued reduction in the total acquisition cost ratio, which improved by roughly 4 points with strong cost control and operating leverage resulting from significant premium growth. The combined ratio for crop was 93%, which was an improvement on the 95% we reported at the half year. And this translated into an underwriting profit contribution of around $87 million compared with $14 million in the prior period. I'll now turn to our International division on Slide 13. Gross written premium of $7 billion was up 15% on the prior period, supported by broad-based rate increases, higher retention, which improved from 83% to 86%, and strong new business growth of 10%. As you can see on the chart, the combined ratio for the year improved by 70 basis points to 90.6%, and this was despite the elevated catastrophe activity experienced during the year. The ex-cat claims ratio increased modestly with the benefit of ongoing rate increases, offset by higher IBNR held in longer-tail casualty lines to reflect inflationary risks. The total expense ratio improved by a little over 1 point, reflecting operating leverage and cost control plus the benefit of profit commission from reinsurers. The International result included positive prior accident year claims development of $66 million or 1.2% of NEP compared with 1.7% of adverse development in the prior period. This was primarily due to better-than-expected development in QBE Re casualty, U.K. motor, European liability and Asia, and this more than offset the further strengthening we took in the financial lines portfolio. Pleasingly, our business in Asia reported a combined ratio of 96.7%, representing the first underwriting profit generated in the region for a number of years. Moving to our home market of Australia Pacific on Slide 14. Gross written premium of $5.2 billion was up 17% on the prior period, with strong growth in our core commercial lines including commercial packs, workers' comp and engineering as well as in our lenders' mortgage insurance business. The combined ratio improved by 1.4 points to 91.4%. Within this, the ex-cat claims ratio improved by 2.4 points despite elevated non-cat weather claims. And the total acquisition cost ratio also improved by almost 2 points. The La Nina weather pattern continues to drive a higher level of storm and flood activity across Australia. And as a result, our catastrophe claims experience remain elevated through 2021 at 5.7% of net earned premium. Adverse prior accident year claims development of $111 million was driven by further strengthening in liability lines, including general liability and workers' comp. However, unlike in prior periods, releases in other parts of the business were not sufficient to offset the strengthening in these liability classes. I'll now make some remarks on our lenders' mortgage insurance business. 2021 has clearly played out quite differently to how we and many market commentators envisaged back in 2020. Significant nationwide house price growth and a strong snapback in economic activity supported strong top line growth as well as a much improved profile for the business, reflected through favorable claims experience on both current and prior accident years. As a result, LMI recorded a combined ratio of 20.0% for the year or 35.0%, excluding COVID-related reserve releases. With interest rate normalization on the horizon and noting the significant house price growth over the last 18 months, we continue to adopt a cautious outlook and have maintained 50% quota share reinsurance over this business through 2022. Turning now to Slide 15. We are pleased with our investment performance for the year and in particular, with the strong returns generated by our unlisted property and infrastructure holdings. The running yield on our fixed income book continued to improve through Q4 last year, and we exited the year with a running yield of around 68 basis points, up from roughly 40 basis points at the end of 2020. Statutory investment income was $122 million or $382 million when adding back the impact of mark-to-market losses on the fixed income portfolio as risk-free rates shifted up. Our funds under management grew by around 8%. And as you can see on the chart on the left-hand side, we've largely maintained a relatively modest exposure to risk assets through the period with closing asset mix of 94% fixed income and 6% in risk assets. In the early part of 2022, we have started deploying towards our long-term strategic asset allocation of 85% fixed income and 15% in risk assets, and we expect to reach our target investment mix at some point over the next 12 to 18 months. The chart on the right-hand side of the page provides some useful context on our investment portfolio repositioning. You can see that our 2021 exit whole of portfolio yield of around 1% would adjust higher by around 50 basis points at our target asset allocation. Just a couple more points on our target asset allocation. We expect the enhanced fixed income [ sleeve ] to account for around 5% of total assets or about 1/3 of our allocation to risk assets. This will include our allocations to high-yield debt, emerging market debt and private credit. The remaining 10% or 2/3 of risk assets will comprise growth assets, including unlisted property, infrastructure and developed and emerging market equities. Finally, before moving to the balance sheet, I wanted to make a brief comment about rising interest rates. As things stand, it would appear risk-free rates may continue to rise over the course of 2022. And this would indeed support a higher running yield on our fixed income portfolio. However, it will take some time for the impact of higher yields to translate into higher absolute dollars of investment income, given the 2.1-year duration of our fixed income portfolio. Moving now to our financial position on Slide 16. QBE's capital position strengthened during the year, notwithstanding the very significant organic growth in our premium base. Our PCA multiple improved by 3 points to 1.75x and remains in the upper bound of our target range of 1.6 to 1.8x. The Board has reassessed the group's dividend policy and now expects to pay out 40% to 60% of adjusted cash profit annually. This revised approach provides greater flexibility to balance our desire to reward shareholders with our capital generation profile, the outlook for organic growth and the broader dynamics of the global insurance cycle. In this context, our full year payout ratio of around 40% was struck with reference to both the near-term organic growth outlook and the ongoing deployment towards the target asset allocation within our investment portfolio. Our borrowings reduced further during the year with our debt-to-equity ratio improving to 31.8% pro forma for the prefunded redemption of the Tier 2 subordinated debt. In 2021, we also reviewed and revised our debt covenants, which are now anchored around a threshold debt to total capital ratio. And to align our covenants, our internal risk appetites and our external gearing level, we will now shift our preferred gearing measure to a debt to total capital basis with a target range of 15% to 30%. With that, I'll hand back to Andrew to talk through our outlook.

Thanks for that, Inder. I now want to spend some time walking you through our new purpose and vision and the 6 strategic priorities, which will guide us through the medium to long term and apply across the whole group. Let me start with our purpose, which you can see here, QBE enabling a more resilient future. This resonates well with our people, particularly after the past 2 years and the world we're in now. We've also landed on a new vision to the organization, which is to be the most consistent and innovative risk partner. I believe that insurance is a long-term game and consistency is key to success. It's a simple notion that many failed to execute on this and I think if we can do it, it will set us apart from our competitors. We've had a great response to our purpose and vision internally having launched it just recently. While it's going to take some time to transition and embed the new vision into our DNA, I'm certain it's going to resonate well across all of our people and in turn, will translate into improved outcomes for our people, customers, partners and shareholders. I'll now take you through the 6 strategic priorities, which underpin our purpose and vision. So firstly, on the left-hand side of the slide, portfolio optimization. This is all about more actively managing the future direction of our business by making deliberate choices about the mix of products we offer, the business lines and geographies we operate in and the types of customers we support. This will be informed by a better understanding of the mix of risks we're assuming, a desire to better contain volatility across the business, and through better portfolio balance, drive more consistency. We'll be developing a globally consistent framework to apply across the company to monitor and manage this. To give you an early example of where we're already acting on this strategic pillar, the potential volatility with North American property programs is high due to their exposure to cats whilst returns have been challenging. While we consciously avoided adding exposure in this class in 2021, we will look to more actively reduce exposure in 2022, which will support our broader strategy to reduce volatility in the North American division. So if we move on to sustainable growth. While we're thinking more broadly about our portfolio mix, we'll also develop a plan to achieve targeted, consistent and sustainable growth in each region, customer subset, industry and channel. Our goal is to harness the depth and breadth of product knowledge and expertise we have across the group and to focus our efforts where we have an advantage. We'll also continue to innovate new products -- innovate with new products, improve digital capabilities and with risk solutions that solve customer needs and enable resilience. Thirdly, bringing the enterprise together. To achieve our vision and live our purpose, we need the right operating model and structure in place. It needs to bring the enterprise together and ultimately help us organize, manage and leverage our capabilities across all markets. We also need to simplify what we do and remove complexity in how we do it by driving consistent processes and having clearer governance. Linked to this, modernizing our business to ensure we're a future-fit and modern insurer, we must complete the modernization of our foundational systems and processes. We also need to accelerate development and investment in our digital capabilities to make things easier for our customers, partners and people. We will invest in differentiating capabilities that drive insight and support innovation. Fifth will be our people. We're focused on becoming an employer of choice in our chosen markets and building and empowering a sustainable and diverse pipeline of leaders. Our strategy also depends on our ability to enhance the link between the performance, culture and the way we reward our people and so we're doing further work on this. We'll also be investing in more targeted workforce planning and succession practices to ensure we can harness the talent we already have and help to build the capabilities we'll need now and in the future. And finally, very importantly, culture. We'll focus on becoming a more purpose-led organization. We need to strengthen the alignment, trust and collaboration that takes place across the enterprise. So those are our 6 strategic priorities in a nutshell, and we'll give you updates as these progress. Turning now to sustainability. I want to briefly touch on our sustainability framework. Our aim is that sustainability will be integrated throughout our strategic priorities and business. I've been impressed with a number of initiatives underway at QBE, and pleased that we can now confirm we've committed to a net zero emissions target by 2050 for both our underwriting activities and our investment portfolio, having recently become a member of the UN-convened Net-Zero Insurance Alliance. We've also committed to net zero across our operations. However, I recognize we want to be a leader in this space, which is my hope and intention we need to do more. Building on our sustainability credentials, we're refreshing our approach in the coming months to build a consistent and well understood sustainability strategy across the whole business, which will extend to our employees, customers, partners, investments plus broader operations and procurement. As we continue to enhance our capabilities, I'll be personally focused on embedding our sustainability framework across our underwriting activities and want to drive greater momentum on this front over the coming year. I want to ensure we have a consistent approach across all industries and regions, which will include our role in supporting customers on their pathway to a net-zero economy. I want to conclude this section by noting that each and every member of the Group Executive Committee will be accountable for embedding our strategic priorities and sustainability framework into their respective functions as well our broader leadership network. I also want to ensure you we will update you regularly on the progress we make in our strategy, the changes generated across the group and where possible, I want to ensure we attach some targets and milestones to our strategic priorities, so you can gauge our progress. Before we move to Q&A, I'd like to run through our 2022 outlook. This slide provides you with an exit view of our current accident year combined ratio of 94%. As Inder noted, since our '22 catastrophe allowance was broadly in line with our '21 catastrophe experience, the exit view is a fairly straightforward one this year. On to the financial outlook. Firstly, on the outlook for premium growth, as noted in my comments earlier, we expect the operating environment to remain conducive for further targeted growth this year, though we would not expect to repeat the growth achieved in 2021. At this stage, we think it's fair to assume that constant currency premium growth should be in the high single digits, and we'll look to update you on how we progress on this through the year. Secondly, on our combined ratio. In building on recent progress, our strategy centered around resilience and consistency should result in the business being capable of delivering a consistent low to mid-90s combined ratio. In 2022, we'd expect further improvement relative to our '21 exit combined ratio. And finally, on investment returns, while we can't predict where financial markets will end the year, we hope that we provided some useful context regarding the potential investment return uplift associated with the high [ year ] and running yield on our fixed income portfolio and a gradual repositioning of our investment portfolio over the coming years. I'll now draw to a close and before opening up to Q&A, I'd like to reiterate how excited I am both to be at QBE and about the opportunities we have ahead of us.

[Operator Instructions] Your first question comes from Nigel Pittaway with Citi.

Just first question, I'd just like to understand if possible the sort of reconciliation between the sort of 92 -- in broad terms between the 92.9% current [ accident ] combined ex COVID and ex CTP 94% exit rate. What are the principal factors that sort of adjust that for the extra 1.1%?

Yes. Nigel, so probably the main factor there is the exit run rate in expenses, which we said is meaningfully higher than what we've actually printed at 13.3%. And there's also some movements around the risk margins trend, which we have noted in our exit. But in essence, I don't think we're starting exactly at 92.9%. We're sort of walking down from the 95% down to the 94% exit, but happy to take you through that.

All right. That would be good to understand. And then secondly, just on these E&S top-ups, I mean you did $40 million last year. You had to do more this year. It does seem to have been an ongoing and long process. When can we -- when do you think we'll see the end of these reserve top-ups in the E&S closed portfolio in the U.S.?

Nigel, that is a great question. And I wish I could give you a definitive answer on it. We saw claims tick up in the second half of 2022. And we thought we'd taken a good position on claims a year ago. We think we've taken a reasonable position. Of course, we have it reviewed by external actuaries. It is very hard to determine with the types of claims in that portfolio where it is ultimately going to end up. We are also having a third party look at what we're doing from a claims management point of view and trying to get another view of where it could end up, and they are even struggling to determine where it can be. We think we've taken a reasonable position this year. There is a possibility that it could deteriorate again into 2023. Of course, it is becoming a smaller part of the total portfolio. But I wish I could give you a definitive it has ended at this point in time and everything will be fine, but it's just impossible to do with the types of claims, which are relatively long-term liability claims.

Okay. And it is right to think you've still got that sort of around about $100 million social inflation provision in those U.S. reserves still? Is that correct?

Yes. Nigel, we've used some of that. But I'd say of the $100 million we referenced, we've probably still got around that $60-odd million number. But that's across the portfolio, Nigel.

Okay. Fine. And then maybe just finally, in terms of -- you had in the past talked about sort of taking out more reinsurance over the crop portfolio. I wasn't clear whether or not you've actually done that or whether that's still sort of in the planning? Or will you change your mind on that?

I think we've taken out a similar amount of it. I think it links to look at the volatility of the book, Nigel. And crop can be relatively volatile, although its drivers are somewhat different from other parts of the book. So we are reinsuring through quota share it, relatively heavily in 2022 as we did in '21. And the overall net exposure may grow a bit, but it's not growing a lot. Is that a fair...

Yes. So I think what you'll see, Nigel, in 2022 is a further uptick in GWP, just given where current outlook for crop prices, et cetera, are sitting. We've exited 2021 with a net earned premium of around [ $1.2 million ]. But what we're trying to do is effectively make sure that -- what may be a decent tick up in GWP is probably going to be a smaller tick up in NEP because we'll take a quota share position, which we're actually still just working through as we're in the middle of pricing for the crop business now. So we'll have a further update for you at the half year.

Your next question comes from Kieren Chidgey with Jarden.

I've got a few questions. Maybe just starting on claims inflation. I know it's very difficult to provide an average number across the business. But can you just talk to the broad level of the inflation you're seeing across each region? And also, you've flagged that you've tried to make some allowances for that and the idea now is strengthening in the current accident year. So just wondering how material that has been in terms of its impact on that underlying combined ratio for this year.

Again, it's a difficult one to answer. So I'll have a go and perhaps, Inder can do a better job than I can on claims inflation. But how I see claims inflation, the real key to claims inflation is what's going to happen over the next few years while claims settle on premiums we have just written. So that is the most important thing. So we can have a view of what we've seen in current claims and the claims inflation, which is fine and it's ticking up a bit. But it's then what happens over the next year, 2, 3 on premiums we've written. And that is the thing that could really impact us negatively if claims inflation continues to tick up. So in current pricing, we're putting more into our pricing because we've seen inflation -- claims inflation tick up. What we've now got to focus on is what actually happens from here on in and the potential impact that can have on us and feed that back into our underwriting as quickly as we can into further pricing. So that's why I was trying to say earlier on, we think current pricing is current -- covering current claims inflation. Our concern is where claims inflation goes into the future. We're building some uptick in it, but we may be right, and therefore, we're being cautious or we may be -- sorry, we may be right, then we're fine; or we may be wrong, and we could either be cautious or not cautious on it. So it's a really hard one to answer because I'm concerned comparing current claims inflation with current pricing as though that's a perfect match when it's not. I'm interested in future claims inflation. I know it's hard to tell that against current pricing. So I'm not sure we can give you exact numbers because it varies by line by region, but that's how we should be seeing it. And Inder, you have anything [ you want to add there ]?

No, I think that covers it. It's difficult when you start applying broad-brush numbers across divisions because you're really mixing and matching across a number of these lines of business. So -- and mix changes will impact that as well, but nothing specific to add to what Andrew said.

Right. But I appreciate sort of you're trying to take that multiyear approach when you're putting up your reserves to the current accident year that you've just gone through, but I mean how material have been those revised inflation assumptions into outer years that feed into that current accident year combined ratio?

I'm not sure we can be precise in it. I think what -- we're building in higher inflation into our numbers and taking those into our reserves at this point in time and holding them until we see whether that claims inflation comes through or not. I'm not sure that's answering your question. I wish I can give you a precise number, but I'm not sure I can because it varies so much based on line and division. So we have built higher claims inflation into current reserving and pricing and that's our estimate for it. But as I say, I think it's a good thing to do until we know what's truly happening in it. And I think over the past year or 2 people's view of inflation, is it's going to be higher for longer, and we need to be aware of that.

Okay. And Andrew, on your current sort of views then around inflation, broadly as sort of you think about the premium rate environment, do you think on a written basis, you'll be able to achieve premium rate rises through FY '22 as it stands at the moment that sort of cover off on the -- on your inflation outlook, should we still expect real positive premium rate raises?

Well, we'll find out -- obviously, we'll find out in a few years whether it was real or not, but I think it's one of the drivers for rate rises in 2022. So why the market is going to stay in a pretty good place from a rate increase point of view because it's not only the large cats we've all borne in 2021, it's also the concern the industry has around inflation. And you can see that with almost every announcement. Everybody is worried about inflation, and I think my view is going to maintain premium pricing.

And you've seen a version of that -- I was going to say, you've seen a version of that when we updated you at the half year, right? We were kind of cautious about the outlook for premium rate increases in the second half. We've actually seen rates hold up well, a, because we've had quite a lot of cat activity in the second half of last year. And secondly, this inflation thematic started to feel a lot more real and I think the industry is starting to price for some of that. So I think that's why we sat here today probably feeling a little bit better about 2022 than maybe what we had sort of said at the half year around the continuation of decent rate.

Yes. And then just a question around sort of the interaction between the very significant cat budget uplift and reinsurance and NEP growth outlook. So the $962 million outlook, I see that you have significantly increased the attachment points of the aggregate from $625 million now to $800 million. So I presume that's been a key factor within that very big uplift in the cat budget. But just wondering what sort of overall impacts there are on reinsurance costs as a result of some of those changes into next year, whether or not there are any savings or still sort of net increase on a like-for-like basis in reinsurance costs? And also more broadly, how we should be thinking about NEP growth relative to the high single-digit GWP growth just given some of those factors and the crop sort of additional quota share you talked about earlier?

So there's a number of points in there. So I'll pick up 1 or 2 and then hand over to Inder. So on the aggregate, not surprisingly, we've seen a lot of commentary about aggregates have been difficult to place in the beginning of 2022 because they've been impacted so much, not only in '21, but in previous years. So we're pleased we've got good reinsurance support to have the aggregate in place. They wanted the retention to go up, not surprisingly because based on the chart, we're showing the amount of catastrophes we've seen over the past 5 years were greater than the previous 5 years. So not surprisingly, we had to take an increased retention. I mean pricing on our reinsurance placement in total was within what we expected. So generally, if I sweep across the board sort of low single digits increase in pricing across the board, and the reinsurance program this year is very, very similar to the reinsurance program last year. I think it is something that we are going to look at, Sam Harrison, Inder and I, in 2022 whether we can adjust the reinsurance program for the future, and that will be something we'll start in the second quarter. But generally, we're quite happy with the reinsurance we've got. It's just hard to get low attachment point aggregates in place because those reinsurers have borne a fair bit of pain. We're pleased still to have it. And of course, that does impact what our cat budget is because it's going to kick in at a higher point. So our aim is to manage the overall cat budget within having that retention in the aggregate. [indiscernible]

Yes, maybe just picking up some of the specific numbers, Kieren. So you've got the aggregate attachment moving from $625 million to $800 million, so that's $175 million, and you've got the allowance moving from $685 million to $960 million. Now there's a bit of currency in some of that, but in essence, the allowance is moving up meaningfully more than just the aggregate attachment. And as you know, the aggregate works excess sort of $10 million as well. So the -- I would say we've built in a bit more resilience into the cat allowance in addition to the uptick in the aggregate. And that's why we've shown you the ASF analysis. When you roll back, it probably reflects a better version of more recent experience. Now we're not saying it's going to be good in every single year, but it should be good in most years, at least as we sit here today in terms of our understanding of exposure. The net increase in cost from our reinsurance program, what we call the core corporate program, is around that $50 million mark, which is very similar to what we had last year, if you look at year-on-year. And that, to Nigel's point earlier and the walk between exit, et cetera, that is another modest drag when we look at year-on-year exit as well, so that's that $40 million to $50 million. So that's being managed. You got to look at the reinsurance program both for the terms and the cost as well. So obviously, the attachment point moving up is a part of that. On your question around NEP, we would continue to see NEP probably lag a little bit the GWP point we've mentioned just because of the things like the crop quota share, et cetera. LMI is going to be running at a 50% quota share. So we'll see some of that dynamic probably still continue to feature through the first half.

Your next question comes from Andrew Buncombe with Macquarie.

I just had 3, please. The first one is a pretty easy one, but just confirming my understanding. You've said high single-digit GWP growth in FY '22. Can I just confirm that definition includes U.S. crop?

Yes, it does.

Perfect. The second one, so Standard & Poor's are in the process of rolling out some capital changes at the moment. Can you give us some color on how that may impact QBE?

Yes, Andrew, so early stages in terms of making sure we work through that with S&P. We're not seeing any material issues emerging from that. As you know, we continue to hold capital within a AA level for S&P as relative to our rating of an A+. So we feel pretty comfortable about that. Obviously, we'll work through the changes with S&P. There are obviously a broader set of changes around cat models, et cetera, around cat risk. So this is a normal feature of our industry and what we're dealing with, but nothing to flag at this stage, Andrew.

Got it. And then just the final one from me, please. Over maybe the last 6-plus months, QBE spoken about reducing the global catastrophe exposure. Can you give us an idea of what's happening to your P&Ls at the moment?

I don't think we've changed the global exposure that much into 2022. So it's stayed relatively flat between '21 and '22.

Yes, and it's...

And we look to rebouncing -- sorry, we look to rebalancing from some pockets to others, but overall, at the extreme levels, it's very similar. Sorry, Inder, over to you.

Sorry, Andrew, I thought you'd finish, but I was just going to point out, if you look at the -- our PCA table, PCA isn't a perfect metric. But you can look at the ICRC, the concentration risk charge, and that's broadly flat, Andrew. Year-on-year, there's a very modest increase. We're talking about reducing exposure in pockets we're more concerned about, and as Andrew said, reallocating some of that.

That makes sense. And maybe just a quick final one, please. On Slide 15, you said risk asset return of 5.5%. Am I correct in interpreting that as a reduction of the previous 7.5% on growth assets or are they not like-for-like?

Yes. So it's overall -- we've been fine-tuning the mix. And as we said, of the 15%, you've got 2 buckets. You've got a 10% bucket of growth assets and you've got 5% bucket of sort of, call it, enhanced fixed income. And when you blend the 2, Andrew, that's the 5.5% we're talking about across the 15%. So there's been some fine-tuning around the mix between -- and we're being more deliberate around the 10% and the 5% within that 15%.

Your next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions if I can. First, just on COVID, I was wondering if you could just perhaps give us a little bit of color on how COVID actually might have affected your attritional claims this year? Was there any impact as you see it? Does that impact the attritional ratios at the group level? I mean we have seen some of your peers make adjustments for it, but I was just wondering, is there any reason to think that there wasn't an impact and which way does it affect you? I mean, I understand that there's movements on the back book, but just on the attritional in particular, what was the impact of COVID and all the lockdowns, et cetera, on the results?

Yes. I must admit, it is becoming hard to split hairs on what impact COVID lockdowns in many different parts of the world or not and changing restrictions is actually having on current accident year loss ratios. We obviously have a very diversified book of business. So things like commercial motor or personal motor, for example, well, their future in our portfolio are actually a smaller part. So there probably is a modest level of benefit that we've picked up, but it's very difficult for us to say here's a precise number because of the uncertainties in the calculation of that. But again, we have thought about that as we thought about framing our exit, right, is to say, look, there probably has been a slightly lower than run rate level of activity across the world. That probably is playing through a number of our books of business. And we'll probably see a little bit of a normalization as we get into 2022 around claims activity, but it's difficult to sort of pin down an exact number on it.

Your next question comes from Matt Dunger with Bank of America.

I'm just wondering if I could reconcile the steady improvement from the exit core that you're looking for in FY '22 versus the consistent low to mid-90s combined operating ratio outlook. And are you able to talk to us about some of the components going into FY '22 versus what seems to be a medium-term outlook?

So if, again, if I look in sort of the total terms, the obvious thing that we need to improve is the North American combined ratio as the other 2 are already in the low 90s. And within that North American combined ratio, it has a couple of elements we're very focused on. One is the alternative markets and the cat exposure we talked about earlier. So trying to reduce the cat exposure in a North American number to improve its volatility with a lower downside. And the second element really within there is the growth of the retail book and the retail book is still running at a combined ratio of 100% not because of its claim -- not because it has a claims problem. It just has a scale problem and the expenses are too high at this point in time. So we need to put more volume in getting into that retail book. And we have good growth plans, and we seem to have started the year in 2022 well on it. So if we can get the combination of those 2 elements within the U.S. better and improving, then the overall U.S. portfolio will improve, and that will ultimately drive us into the low to mid-90s combined ratio on an ongoing basis. So that's the main focus. The other areas, of course, we're still interested in getting rate growth, if we can, in certain areas and perhaps can do better. But generally, it's a focus on the U.S. from my point of view. Sorry, go ahead.

Andrew, I just had a follow-up question. I was wondering if you could talk to how your priorities that you've set out today will filter down through the organization and whether you've had any time to think about what potential performance metrics might be built into performance reviews and scorecards?

Yes. So I mean, I think it's a great point and we're working on that. So the way we've structured it, we've got an executive responsible for each of the initiatives. We've made quite a lot of progress on them. The aim is to involve as many people in the organization as we need because we need the younger organization to actually understand why we're trying to do this. And some of them lend themselves to easier metrics than others, so much more quantitative and qualitative. And I think the portfolio optimization, of course, and the growth, it should be relatively obvious where we've actually made progress on those. The portfolio optimization, we need to understand the volatility in the various lines of our business as well as we can and then try to mitigate their volatility. And that volatility is sort of a short-term one as we underwrite and also potential prior year reserving one because some lines of business have longer tails than others. So we're just very much focused on that. And Sam Harrison, our Chief Underwriting Officer, is leading that. And the second one that's possibly easy to measure is with my colleague next to me, Inder, who's leading -- looking at where can we grow across the portfolio and are we pushing hard enough in certain areas because the rating environment is quite good. What I was pleased about in 2021 is the growth ex-rate. If we've had 3 or 4 years of rate growth, now should be the time to put more exposure onto our balance sheet because we're getting so much more than we were getting 3 or 4 years ago. That doesn't necessarily apply to all lines because some lines haven't gone up as much as they should, but the opportunity for putting exposure on the books is quite important in '21 and '22 and really focusing on those areas which do have the best margin and we do have a competitive advantage. So those ones, they should be easier to show how we're getting on. The other ones are probably more challenging of how we're doing on them, but the organization will feel it. So they're likely to be more qualitative in the feedback we get on have we improved governance, have we improved how we make decisions within the company and have we improved how we operate.

Your next question comes from Siddharth Parameswaran with JPMorgan.

Sorry, I was on mute for the second part of my question, which was actually just around just the changes in guidance. I mean, we've had allusions to this with some of the previous questions, but just -- maybe a question for you, Inder. I mean, you gave us an exit run rate of 95% at the end of last year. We had, for the first half, connected run rate of 93% for the combined ratio and now it's 94%. I mean, I do appreciate that they're moving parts, but the biggest driver should really be rates against claims inflation, and we've always been told that there was a gap of about 6% between those numbers. I mean, I appreciate there's an increase of a couple of percent per your allowances into cat allowances into next year, but it still seems like there seems to be a lack of consistency between those numbers. I was just wondering if you could just help us bridge just what might have changed. Is it inflation? Is there something else that has changed in your bidding?

Yes, I'm happy to pick that up. So Sid, just to make sure we're on the same page. We said exit 95% last year. We're saying exit 94% this year. We never talked about an exit 93% at the half year, that's the number we actually reported. In terms of the -- and we've always been cautious. We've sort of quoted in the past that observed inflation might be in the 4% to 5% range and we're getting rate higher than that, but in every earnings call, we've talked about you cannot just take the 10 and take the 5 off and assume the combined ratio is going to leg down. It's just not the way -- and Sid, you've been covering the industry for years and you know that is an actuary that -- the inflationary risk, as Andrew was talking about earlier, is a multiyear view. And the exits that we're constructing to give you a sense of where the business is at are struck on a very consistent basis when you look at the 94% exit this year versus the 95% exit last year. So -- but happy to take some of that offline as well, but that just gives you some context because the inflation risk cannot just be measured as the rate minus the observed CPI today.

Okay. Perfect. Maybe if I could just touch on something else you mentioned just around the running yield. You mentioned that it takes time for increases in rates to flow through to the P&L, but my understanding is, I mean, your balance sheet is discounted. Your assets are mark-to-market. So shouldn't any changes in yields really flow through straight away? I think you mentioned earlier that we'll take the duration of the -- of your assets for that to eventually flow through, which I think is 2.3 years or something? I thought it would be pretty immediate. So I was just...

Yes. We're just trying to -- yes, and that's a fair point. What we're trying to do is make sure people don't take the assets of $29 billion and they see the tick up in the running yield and apply it to the same asset number. The problem is obviously as rates are rising and as risk-free rates go up, the mark-to-market value of those assets comes down, right? So you might apply the high yield, but you apply it to a lower asset base, right? And so what we're saying is to get to that same dollar value of investment income, it just takes a little while for those to -- for that to earn through. So we're just trying to make sure that when people are applying higher running yields, they're applying it in the correct way. You either ease them in over the duration or you mark the assets down a new market against that lower asset starting point, that's all.

Your next question comes from Andrei Stadnik with MS.

I wanted to ask 2 questions if I could. Firstly, just around the reserve and top-ups, which do seem conservative versus some of the global peers that have called out claims inflation but haven't made exclusive top-ups. Can you -- to be more specific, you mentioned that for the 2020, 2021 years, you've taken larger IBNRs. Can you give any figures and numbers, dollar numbers around just how conservative or what kind of extra allowance you've made in those 2 years' worth of IBNRs?

I mean, just as a general comment. It's -- I think it's quite hard, as I see it, to be conservative in the way we actually do our reserving. We're relatively consistent and I quite like it. And I think when I spoke to everybody in November, December that it's consistency, which is quite important. So we are trying to reserve consistently. There is an element maybe of prudence in the claims inflation number, and therefore, we want to ensure we don't get caught up by claims inflation, but we are trying to reserve consistently year in, year out. And of course, within an organization like ours, we get a number of external parties checking are we consistent or not as well as our own actuarial function. So that's what we're trying to do. Of course, we can never get it right because the number is massively large and it's impossible to say the claims are exactly right, but that's definitely what we've tried to do and how I feel we've done it as we've gone through the year-end. I don't know, Inder, if there's any more precision you can give than I've just...

I was just going to say, I guess we're talking about 2 separate points. One is we have taken reserve top-ups in areas where we've seen actual claims experience emerge that we're reflecting, right? So the E&S book, per the discussion earlier, has continued to deteriorate beyond our original expectations. So the reserve top-ups are not a general buffer for inflation. That's actually observed claims experience. Same with the Pro Health book in the U.S. Again, a booking runoff that we've picked higher. And similarly, with the AsPac liability book, we're continuing to see some deterioration in pockets of the book around accident year '16, '17 in particular. And we've sort of said, okay, look, maybe some of that is going to continue right through to '18, '19, et cetera. And that's not a QBE thing. It's an industry thing, right? There is emergence of some additional claims in work and worker liability, et cetera, and particularly with the prevalence of use of contract labor. So there are some issues that are very specific that linked to the reserve strengthening we've done, and then there's a separate discussion about the claims inflation. And what we're saying is we -- our exit IBNRs, both last year and this year, we're probably carrying a high level of IBNR in the current accident year, both last year and this year, than we have ordinarily done, and that reflects the greater uncertainty around inflation going forward.

And my second question, in terms of that high single-digit GWP growth guidance, you've said in proper side, what are the lines of business you expect to see the growth come from? And are there any lines of business you think you'd be substantially underweight and you'd like to see more growth?

That's a great question. I mean we're hoping in 2022, the plans are that all 3 divisions have growth opportunities in them. So we expect growth across all of them. I've got a flag in the U.S. I mean the retail book has started from a relatively low level, so that definitely has an opportunity to grow. We think reinsurance rates have improved over the past few years, and therefore, we're keen that QBE Re can grow its footprint across the organization. But there are a number of those. I'm just highlighting 1 or 2. I'm sure there are others in that we've got -- those were relatively major, more chunky growth opportunities going forward. I would like to see if the products we have in any of the divisions that we could share with others, and that's why we're talking about the enterprise-wide view. So if we're doing something great here in Australia, is it a product that we could launch in the U.S. or in the U.K. or vice versa in that. And I would like to see if we can look at complementary products to what we have. So there are certain things that may be complementary to what we're doing in each of the divisions. And I think I see those as being relatively safe growth areas, but I don't want to give Inder complete objectives. He's running the initiative himself. So I probably listed out the things he will be looking at anyway. So we're bringing the organization together to look at where the best growth opportunities are. The plan looks in good shape for 2022 with plenty. I think there are probably others we could also look at. It's quite hard to be definitive at this point. Things that are complementary, things we do elsewhere that we can do across the platform or across the business would be good.

[ Your next question comes from ] Scott Russell, UBS.

Scott Russell here. Can you hear me okay?

Yea. Hi, Scott. You're just a bit faint.

Yes.

Yes, dropping in and out. The first question I had is just about catastrophes. And the higher attachment point obviously implies more cat ball in the future. So I was hoping just to drill into last year's cat losses at $900 million, a little bit more. It appears the second half was actually lower than the first half despite the fact that most of the events you're calling out actually occurred in the second half of the year. So I was wondering whether maybe you could case study Hurricane Ida in isolation, perhaps to quantify what the gross and net costs were there.

Sure. Happy to do some of that, Scott, offline. So when we set our cat budget, we obviously have a first half, second half profile to that. As we get further into the year, obviously, we start -- in the instance of 2021, we've attached into the aggregate, right? So as the gross losses continue to write up, your net losses, you start to then hit a cap, right, effectively because you're then into the aggregate. So looking at it first half, second half, the gross losses in the second half with Ida and with the storms in Europe and with some of the activity in Australia are very significant. We had an unusually high first half this year because of the Texas -- in 2021 because of the Texas event, but I'd still say, on a gross basis, the second half was higher. But on a net basis, you might see some of that moving around a bit because we've attached meaningfully into the aggregate protection.

Okay. And if we were then to sort of drill into frequency versus severity, I can see clearly that severity of these events is clearly rising over time, particularly in more recent times. But perhaps around the severity that you're seeing below the big headline events, how has that been trending?

Sorry, you mean the frequency? So the severity, as you said, taking in the frequency?

The frequency of these large events, yes. I mean, obviously, we can see -- if I use Australia as an example, we can see a very long list of smaller events that still qualify as catastrophes, but I guess I'm referring to the rest of the world. Is that similar with what you're seeing? Is that also driving up the cat budget?

I'll give you a view, which is more of a feeling rather than numbers because I'm sure many of the larger insurers have probably listed out every single thing that's called a catastrophe in 2021 and 2020. We can probably give you that analysis at a later point. I don't feel the -- there are obviously different events that happened over the past few years from my time within insurance. And I don't feel there are necessarily more of them. They just cost more. So I would say the severity is the one that's been driving up, from my view, I'm going back over a 20-year period where a North Atlantic hurricane only cost a few billion dollars and now it's almost impossible to have a few billion-dollar North American hurricane. You just have a sort of a light breeze in one of the major cities and it costs you several billions. So everything has changed to some extent. But these events just cost a lot more than they used to, and I think that's the major issue. So there has been more severity, I feel, in the events than frequency, but there may be stats we can show you whether that's true or not.

And Andrew, you've referenced wanting to reduce exposure to North American hurricane season. I think that's been a goal of QBE's in the past. How long would you envisage that takes place? Is it a step down during this year or should we expect that over a few years?

Yes. It happens this year and it starts earning through -- some of it will start earning through this year, but more of it earns through in 2023. I mean, you've hit a key point. You change your cat exposure. Unfortunately, you can't do it overnight, and therefore, it takes time to do that. So the exposure will be coming off during this year and the earnings will be more in 2023 than 2022. That's why I think it's quite important to have a similar reinsurance program this year to last year because in effect, we will have similar exposure this year to last year.

Okay. I got it. While I've got you, can I ask you a sort of a bigger picture question about the group and its geographic mix? Over the past decade, QBE's simplified and shrunk from over 50 countries to I think it's 27 now, but it's still a very complex and sprawling organization. You're planning to optimize the portfolio. And as you go through this, when you're thinking about countries and geographies, can this be simplified further? What's the right geographic mix for QBE?

I think it's a good question. I mean, I would like to see if we can build on what we've got. I'd also like people don't call QBE complex and sprawling at some point. So we are not that. And I think we're on a few places. If you look at our European footprint, there are 1 or 2 countries with reasonable size insurance markets that we could try to replicate what we've been doing in some of the other European countries. So I wouldn't mind being open to -- opening up in 1 or 2 places, but I think the footprint looks quite good at this point. I think Inder made a comment that it's great to have Asia. It's just 4 countries now, isn't it? It's really cut back over the years. It's delivered a profit and we seem to be able to grow there, which is great. So I think the footprint seems to be sensible and something we can build on. Haven't got a view of putting lots more flags down in the world and start building out a geographic footprint. I'm a great believer, let's look at what we've got at this point in time and see if we can add to what we've got, add more products in some of the countries we've got where we have expertise and see if we can build our positions into them. If we can't, then you have to assess why you're in that country. If you can't become relevant we'll get to any size or get to the right returns, you do have to question whether you're relevant. But a counter to that is looking at other countries with reasonable size insurance markets. So if we have something that would be useful in that country, why wouldn't we enter it? I know that sounds so broad-brushed, but it seems to be a sensible building approach as opposed to having I've got a view of this country we should be in or that country we shouldn't be in.

Yes. I follow. I mean, it's an industry that rewards diversification.

Next question comes from Doron Kur with Credit Suisse.

Sorry to go back to the core again. I've got a lot of questions there. Just if we look at the number reported, first half of 93.3% and end of the year 93.7%, would the main delta between that be the prior year reserve strengthening that we've mentioned on the call? Or are there other significant factors in there?

Yes. I mean that is one of the major reasons, isn't it? Of the move?

Yes, yes. I mean we're happy to walk through the actual exit chart, which we thought was quite clear from the 95% going down to the 94%. That obviously takes the full year and walks it down for the prior year, the risk margin movements, the expenses and the additional cat and reinsurance costs.

But yes, you're right with the prior year development in the second half because we had it in the second half, didn't we, the deterioration?

Okay. And on the expenses side, you've flagged that's been ticking up a bit this year. And previously, you'd spoken to restructuring expenses of another $121 million expected in '22. Well, I think it was [ like half ] for the next 18 months, and apologies if I missed that. Anyway, is that still the view now that some of those high expenses or are there other things in there?

Yes. So we said on the restructuring charge, we'd take $150 million over 2 years. So we've taken sort of $70 million to $80 million '21 and we'll take a similar amount, and that's really driving a lot of the IT rationalization that we've talked about. And we're seeing some great benefits come through on that. Like if you look at the earned premium of the company, it's gone up by $1.5 billion, the expenses on a constant currency basis has gone up by $7 million, right? So we're getting quite a significant amount of expense leverage play through. What we're saying is some of that is probably not a run rate that you can bake. We'll still see some of that normalize back a little bit into 2022, but we remain confident that once we're through this program of work, we can hit our 13% expense ratio by the end of next year.

And then maybe just one on the geographic mix question again. I mean, clearly, a lot of work being done in the U.S. and recognize a lot of the challenges there are related to prior accident years, but is there a time frame that you think about in your mind between how long -- how much longer you try to fix the U.S. before considering other more significant measures in that geography?

Okay. So just briefly, how I see the U.S., it's in 6 chunks. We've got a crop business, which is a very good business. It's probably the second largest crop business. It is probably the #1 crop business, has great relationships and can perform well. And we should be able to manage the volatility of the crop business on our overall balance sheet through quota share. And there's no shortage of reinsurers who want to take some of the crop exposure off our books. And we have the alternative markets. That's a mixture of third-party catastrophe and non-catastrophe. We just need to look at the balance in that and whether it's too catastrophe-exposed, and we talked about reducing the volatility in it. Then we've got the new financial lines team. That seems to be doing well, growing well. It's a good team. They've added to the team during 2021. We need to be cautious about financial lines where the rates come off. So far, it's had good rate momentum as it should have done because there have been some challenges in the financial lines markets in the mid-teens with claims. The A&H book, Accident Health has performed well over a number of years, and we have a very good team there. Aviation, we're sort of rebuilding. We've recruited a new leader in that, which is great. And then we have this retail book, which is subscale. And we're very focused on defining what appetite we have in that retail book, working with a number of partners and ensuring we stick to our appetite and don't expand the appetite. It should be easy to grow by giving up on what we like and what we don't like. So we're not doing that. And there's plenty of business coming our way on the back of it. So I see the U.S. as being 6 nice parts at this point in time. And we can focus on those and then we could add something which is complementary to some of those so financial lines can be broadened out. There may be some other products that you could add that still fall under the financial lines book and they have the expertise to do it. So I don't see why there should be a reason why that portfolio, which has balance in it and potential diversification, can't work if we can get the mix of it right and the quality of the business coming in to the same high standard. So I think we should be able to do that, focus on that and make it a successful business, but we need to be very disciplined on sticking with those business lines and stick to our appetite as we've laid it out and ensure the brokers give the business we want. That takes a bit of time to ensure you -- all of those work, but there is no reason why that cannot be a successful strategy. And my final comment is let's stick with that strategy over a number of years rather than changing our view after a couple of years and trying to grow quite quickly in different lines. I think aggressive growth is quite hard in any line of insurance, and our aim is not to grow aggressively in those 6 lines. It is to grow sensibly over the medium term. That's what I hope will happen. That's the focus we have at this point in time. And looking at them, there's no reason why that should not be successful. The market is very large. There's plenty of space for us in the markets we're in.

Great. And maybe just the last one, if I can, on reinsurance. So GWP looked a lot stronger in the half than I think the market expected, but NEP a bit lower. Was that perhaps people just maybe underestimating how much reinsurance is coming through in crop? Or was there anything related to exchange commission that we should be aware of?

Yes, look, it's crop. It's LMI. It's also financial lines where we've been growing, but we've had 50% quota share on that business. And it's important to note with these quota shares that we've got on some of these lines of business that we do get significant overrides. So it's actually very profitable for us to be writing the premium, maybe ceding some of that to manage the level of net exposure we want to retain. And so it's just about how we manage the portfolio, but also there's a bit of a lag in written premium sort of earning through as well because some of that growth has come in the second half and that will take some time to earn through. So that's probably the main drivers.

Your next question is a follow-up from Kieran Chidgey with Jarden.

I just had 2 quick follow-ups, Inder, around some financial numbers. So just on the -- and I might have missed a comment on this before, but the investment yield range you talked of 1% to 1.5%, just to be clear, that's based on actual yield sort of at 31st of December. Do you have a feeling for where that would sit today?

Yes. So the illustrative analysis we've shown you on the exit is at that 68 basis points on the fixed income book. And spot today is probably on that closer to 100 basis points. Now clearly, we've seen an uptick in the short-term yields in the last few weeks. But again, Kieren, I do caution that you can't take the delta and apply it to the asset base, right? But that's effectively the blended running yield on our book on a spot basis today.

All right. And the second question, just on the tax rate, just wondering if you can give some views as to how we should be thinking about that on a go-forward basis?

Yes. So I think consistent with how we've guided, the natural tax rate of the company is in that low to mid-20s range. And obviously, there's a lot of tax reform underway. You guys might be aware, I mean everyone's talking about both changing tax rates around the world and also kind of some restrictions around some of the movements of revenue and profits around the world. So I think we're feeling okay in terms of what we see panning out. It doesn't necessarily change our view in terms of what we think the long-term natural tax rate of the company is. It's probably still in that low to mid-20s. And we continue to have this benefit of off-balance sheet tax losses that we're continuing to earn through. So the reported tax rate is closer to 17%. So we would expect for the next couple of years, depending on the shape of profits that come through and particularly if North America earnings start to come through, that the tax rate will be a bit lower as we earn through those off-balance sheet tax losses over the next 2 to 3 years.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Horton for closing remarks.

Okay. Thank you very much, indeed, for those questions. And thank you for joining us today. I'd just like to reiterate how excited I am to be here at QBE and the opportunities we have ahead of ourselves. And I look forward to seeing you live at some point in the not-too-distant future. Thanks once again for joining us.

Thank you.