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

Good day, and thank you for standing by. Welcome to the QBE 2022 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Andrew Horton, Group Chief Executive Officer. Please go ahead.

Good morning, and thank you for joining us today for QBE's 2022 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. For today's briefing, I'll start with an update on our strategic priorities. After which, I'll just discuss the key features of the results before handing over to Inder to talk through the detail of our financials. Before Q&A, I'll provide some more detail around our portfolio optimization strategy and focus on volatility. After which, I'll conclude with some comments on our outlook. So let's move to Slide 3. I wanted to open with a handful of key messages about the result, our strategy and outlook. We delivered a combined operating ratio for the year of 93.7%. This is better than 94% as we originally intended and highlights improved resilience, noting the numerous challenges we've had to navigate including the record inflation, the Ukraine conflict, elevated catastrophe activity and a difficult crop season. Our strategy continues to come to life. 2022 has been about laying the foundations and embedding our new purpose, vision and strategic priorities. I think we've achieved a lot this year. Momentum is building, and our people are more engaged. As we move into 2023, benefits for our business, customers and partners will build if we can maintain this energy. Key to our strategy, QBE is working more effectively as an enterprise, bringing the enterprise together is the strategic priority, which I personally lead and, in my mind, our greatest opportunity. We ultimately need to better leverage our global footprint, diversity and scale. Today, we've announced a reinsurance transaction for reserves of roughly $1.9 billion. Capital efficiency and returns optimization with the primary motivation for the deal that will also reduce reserve risk and create bandwidth to focus on growth. The sharp increase in global interest rates through 2022 will materially benefit QBE. We exited the year with a running yield of 4.1%, which supports a much broader and more diversified earnings base. In the year ahead, we expect GWP growth in the mid- to high single digits and within our plan, expect a combined ratio of around 93.5%. Alongside current investment earnings, this collective equation would support a mid-teens ROE for the business in 2023. Moving to our strategic priorities in more detail. It's now been roughly 12 months since we launched our new purpose vision and strategic priorities, and we'll enter 2023 with the same strategy and a consistent set of strategic priorities. Attached to each priority is a coherent set of near- and medium-term goals. And as I've said before, I want to keep you informed of progress. We've had another productive 6 months under portfolio optimization, we focused on developing multiyear enterprise portfolio mix targets, which would be embedded into our planning process. These targets have been calibrated to our ambition for sustainable growth and to be a less volatile business. Secondly, we continue to make progress in bringing the enterprise together. The COO role, which is still relatively new for QBE is driving more collaboration and consistency across class of the business where we have a global footprint. Our cell reviews are pivoting more towards action-orientated underwriting discussion where we're making more decisions around growth, mix and investment as an enterprise. Finally, we're seeing the output of all strategic initiatives manifest through better outcomes in our Voice people surveys. We've seen steadily improving results across employee well-being, sense of belonging and employee engagement. Leadership stability has also improved. There's been no change on the Group Executive Committee and very limited change in our new leadership cohorts. While on the people front, I wanted to announce a new addition to our Group Executive Committee. We've appointed Julie Wood as Group Head of Distribution. Julie joins us having held various senior roles at Zurich and most recently, Marsh, and will work closely with me our divisional CEOs, our COO and our distribution teams. I see a great opportunity in being more strategic, consistent and aligned around how we manage distribution relationships. As we look forward, I think we have the right foundations in place, the right team and importantly, strong enterprise-wide engagement around a clear and consistent strategy. I think the opportunity ahead of us is exciting. Let's move on to Slide 5. We've recently refreshed our sustainability strategy, which is resonating well with our people, customers and partners. We continue to integrate sustainability across each of our strategic priorities. I want QBE to be a successful, sustainable insurer, and I'm proud of the progress we've made this year. We'll continue our focus on partnering for growth through innovative, sustainable and impactful solutions. In 2022, our impact from responsible investments grew with our premiums for good investment portfolio reaching $1.6 billion. We supported over 400,000 people through our QBE Foundation and have won a number of awards recognizing our progress on culture and workplace equality. We've also played a key role in the Net Zero Insurance Alliance over the past 18 months. The NZIA, as a reminder, is the key insurance industry group working towards establishing a consistent framework to measure underwriting emissions across the insurance industry. With this methodology now finalized, our focus from here will center around improving the depth and quality of our underwriting emissions data while work is progressing to set targets in accordance with the NZIA Target-Setting Protocol. We'll engage with you more around this topic over the course of the year. As you might imagine, measuring emissions across an underwriting portfolio comes with a number of challenges, particularly as our business deals predominantly with small- to medium-sized businesses. Nonetheless, this is an important and exciting process for the industry, and environmental and social considerations continue to play a large part in our planning and underwriting. We see great opportunity around, ahead surrounding QBE's role in supporting an orderly inclusive transition towards net zero. Moving now to the result on Slide 6. As I said, we've had plenty of challenges to navigate this year, and I think we've delivered a good result in that context. Thing I'm most pleased about is the improved consistency we're demonstrating, both combined ratio and ROE improved and being able to report a second consecutive double-digit ROE is excellent. We see scope for further improvement in both metrics in 2023. Premium growth was a highlight. Group-wide renewal rate increases averaged around 8% and combined with ex rate growth of 8% resulted in group constant currency GWP growth of 13%. Let's unpack some of the key drivers of the underwriting result. Catastrophe costs were in line with the revised budget we gave you in November at $1.06 billion and include our allowance for the Russia/Ukraine conflict. It was another elevated catastrophe year for the industry likely to settle at around $130 billion in insured losses. Our expense result was excellent while we benefited from a considerable amount of positive operating leverage and displayed good discipline in a high inflation environment. Following a number of favorable business interruption rulings, the result includes a favorable risk margin release of $160 million, representing the remainder of the Group's risk margin held for COVID uncertainty. Finally, on inflation, I'm pleased with the preparedness and response this year. While inflation has had a material impact on our business, I think, reacted quickly to push rating where needed and have done a good job capturing inflation exposures. Our experience remains fairly consistent with the comments made at the half year. Across most short-tail classes, we experienced significant increase in inflation this year that have tended to see rate respond and remain at or above inflation. Across our casualty classes, evidence of any step change in inflation is yet to emerge that we remain focused around the risk of both latency and persistency of inflation. To reflect these concerns, in 2022, we strengthened reserves by $141 million with the majority of adverse prior year development relating to proactive adjustments to back-book inflation assumptions to effectively bring them in line with the front book assumptions. Inder will cover both our investment portfolio and balance sheet in more detail shortly, though both themes are a great story for us, particularly in light of the volatility this year. Turning to Slide 7. We had a great year for premium growth with a global and well-diversified premium base, which has now surpassed $20 billion. Constant currency GWP growth of 13% was slightly above the outlook we gave you and importantly, represents another year of compound rate increases for the group. Over the past 3 years, we've delivered group GWP growth of almost 14%, with rate increases accounting for roughly 70% of the growth when excluding our North American Crop business. Net earned premium growth has kept pace with GWP growth now at $15 billion. Turning now to premium growth in a little more detail on Slide 8. Group-wide premium rate increases remained strong through the second half at 7.7%, resulting in a rate increase for the year of almost 8%. We've seen some further gradual moderation in rate increases. This continues to be a feature across a number of liability classes, which in general have experienced a material improvement in rate adequacy in recent years. Across liability, we think the market remains rational and disciplined. However, having seen rating soften more materially than anticipated in a couple of pockets, most notably in U.S. management liability, we have adjusted our appetite accordingly. Across most property classes, rating remained strong and particularly following recent developments in the reinsurance marketplace should remain very firm this year. I thought I'd take a moment to talk about our property focus into the year ahead. This is one of the hardest property markets in many years, and our capacity is in high demand. We've completed a full review and reassessment of our property exposed classes. At around 25% to 30% of the Group and given consideration to volatility and returns, we see property broadly around our long-term portfolio mix target and don't intend to actively grow into this market. Our focus this year will be to hold exposure broadly steady, albeit continued to drive improvement in quality. We still have a little too much stand-alone property exposure in each region. This is where we might be writing property, which isn't part of a package product and aren't leveraging the exposure into a broader customer relationship. I think we can capitalize on market dislocation this year to shed more of this exposure and replace it with higher-quality relationships while embedding further rate and better terms. One brief data point on our International division, where a lot of property exposure renews on January 1. Through recent renewals, we saw strong property rate increases across all segments to support growth and margin. Our reinsurance business, QBE Re experienced 1/1 rate increases on catastrophe-exposed property classes of around 40%. Group ex rate growth was 8% or around 4% of the 30% growth in Crop is excluded. This includes strong new business growth, further inflation-related exposure growth and another year of strong retention. International has had a very strong year where we've achieved growth across all focus areas, while performance in North America and AusPac was also good, albeit impacted by program terminations in the U.S. and lower domestic mortgage volumes for LMI. Brief comment on North America. Since providing the update in August, we've seen continued momentum in our middle market retail business, closing out the year with GWP of around $500 million. We've executed on the majority of planned program terminations and are working toward better outcomes on the remaining partnerships. We've added to U.S. leadership with the appointment of a new divisional CEO, Laura Coppola. Since joining, wanted to ensure strong capability in this function. And I think we now have great people in our Group's COO and 3 traditional COO roles. Finally, we've had good early progress with our new commercial casualty team, and otherwise, our metric around product, people and appetite consistency is getting greater notice. Achieving an appropriate risk-adjusted return on capital in North America remains a key priority for us, and it's encouraging to see the return to underwriting profitability this year. With that, I'll pass to Inder.

Thank you, Andrew, and good morning all. As Andrew said, the operating environment in 2022 was quite challenging, and I'm pleased that we were able to navigate many of these challenges and deliver a strong financial result for the year. This is the second year in a row where we've delivered a double-digit return on equity. The business is now on a much stronger earnings footing. And with this result, we've taken an important step forward in terms of consistency of our financial performance. Before I step through the 2022 result, I would note that 2023 has started well. We've got good organic growth momentum across all of our key markets, and our people are more motivated, engaged and aligned than I've seen during my time at QBE. On to our 2022 results, and I'll start with the P&L on Slide 10. Premium growth was really one of the key highlights for the year. We reported GWP of $20.1 billion, representing a 13% increase over the prior period and comfortably ahead of our guidance of around 10% growth. Our statutory combined ratio for the year was 94.2%, which as outlined in August, includes the impact of the Australian pricing review and the E&S reinsurance transaction. Consistent with the half year, we have adjusted out the impacts of these items to give you a better basis for year-on-year comparison of our business. Our adjusted combined ratio was 93.7%, which was consistent with the revised outlook we provided in November. This equates to an underwriting profit of $933 million, excluding the significant $1.2 billion benefit from the increase in risk-free rates over the period. The investment result for the year was a loss of around $800 million. This included the adverse impact of $1.3 billion from the sharp move up in risk free rates. Excluding this risk-free rate impact, the investment return was around $570 million. It's just worth referencing that our income tax rate for the year was 15%. This was lower than the low to mid-20% guidance we normally provide, and included a $95 million benefit from bringing to account some carryforward tax losses in North America. This benefit is primarily driven by the higher running yield on our investment assets going forward. Adjusted cash profit of $847 million was around 5% higher than 2021 and supported a group return on equity of 10.5%. This is the strongest return that QBE has reported in over a decade. Our capital position has strengthened over the course of the year with the PCA multiple moving up from 1.75x to 1.79x and is now at the upper end of our target range of 1.6x to 1.8x. This includes a small headwind associated with the 2023 reinsurance renewal and is before any incremental benefit from the reserve transaction we're announcing today. The Board has declared a final dividend of AUD 0.30 per share, which brings our full year dividend to AUD 0.39. This equates to a headline payout ratio of around 48% or 45% if you exclude the impact of the Australian pricing review. I'll now step you through some of the key drivers of the Group results on Slide 11. The chart across the bottom of the screen walks through the key movements in the combined ratio versus the prior period. Our ex cat claims ratio deteriorated by 80 basis points or around 20 basis points if we exclude the impact of a difficult crop year. Premium rate increases were at or above inflation, but these were offset by slightly higher claims frequency with economic activity returning to more normal levels, higher non-cat weather claims here in Australia and a higher frequency of larger property claims in North America. The net cost of catastrophe claims for the second period -- for the period was in line with our revised guidance provided in November at $1.06 billion. This is around $100 million than our original full year allowance, largely reflecting the estimated claims cost related to the Russia/Ukraine conflict. Adverse prior year development was around $140 million or 1% of net earned premium. This is primarily driven by an adverse COVID-19 business interruption judgment in the U.K. and higher inflation assumptions across many lines. Further strengthening in financial lines and discontinued programs was offset by releases from lenders' mortgage insurance, trade credit and CTP. Just to reconcile back to the comments we made around prior year risk in November, we referenced that we would be increasing inflation allowances in our long-tail classes by around $130 million in the second half. And as we close out the year, some of this inflation uplift was better attributed to the current accident year and the remaining prior element was partly offset by reserve releases and some of the lines I just referenced earlier. This reduced the net second half prior year development to around $70 million. Also, as flagged in November, we released the remaining COVID risk margin totaling $160 million. This followed a series of business interruption court rulings in the U.K. and the favorable High Court ruling here in October. The risk margin release resulted in the Group's probability of adequacy on outstanding claims reserves returning to 90%. Operating efficiency has been a real highlight. Our Group expense ratio improved by around 100 basis points in 2022, and this was on top of the 100 basis point improvement in 2021. We are clearly tracking ahead of schedule relative to our guidance of a 13% expense ratio by 2023. While our efficiency agenda has delivered material technology and operating cost savings, positive operating leverage has been more material than we had anticipated when we first established the targets. This improvement in operating leverage now affords us greater flexibility to increase investment in the business. And in 2023, we have announced a series of projects to accelerate modernization and support a healthy pipeline of long-term growth opportunities. Our modernization agenda is primarily focused on improving connectivity and ease of doing business with our customers and partners, supporting the digitization and efficiency of our underwriting and claims processes, better leveraging data across our organization and providing better tools for our employees to meet customer needs. Many of these initiatives will require a level of up-front investment. Over recent years, we have funded some large up-front technology investment and related rationalization costs through restructuring charges. Going forward, we'll be supporting the modernization initiatives I just referenced through an expanded change envelope, which is included in our operating expense line, and all our plans have been calibrated to an expense ratio of around 13%. Turning now to Slide 12 and the very topical discussion around reinsurance. Many of you are aware of the dynamics that played out through the 2023 reinsurance renewal across the market. On the one hand, you had many insurers looking for additional capacity following a number of years of elevated cat losses and significant exposure growth due to rising inflation. And on the other hand, you had reinsurers trying to address profitability challenges and capacity constraints due to significant mark-to-market losses on their investment portfolios. This led to a hard pricing environment through 1/1 and a challenging renewal process. In our half year briefing, we referenced the fact that we were conducting a review of our reinsurance program for 2023. The early and active dialogue with the market through this RFP proved to be important in helping us prepare for and manage the challenging renewal cycle, allowing us adequate lead time to work through with our partners and brokers and share our perspectives around inflation and exposure management. Based on where we've landed with the 2023 program, the dollar spent on our group cat and risk covers will be broadly flat year-on-year. For reference, while our reported reinsurance expense in 2022 was around $4.3 billion, only around $800 million of this related to the group cat and risk covers. The remainder related to Crop specific business line quota shares and other statutory schemes. The 2 main pillars of our program have remained consistent year-on-year. We've held a $400 million attachment on our main cat tower and also placed the 50% whole account Equator Re quota share. We will, however, have a higher cat retention as certain drop-down covers were not renewed and divisional retentions were increased. This higher retention, combined with inflation-related growth and property exposure will result in our cat allowance increasing from $962 million in the prior period to $1.175 billion in 2023. Collectively, the increase in allowance and the slightly lower spend amount to around $200 million headwind to our planned underwriting profit versus the prior period. The high cat retention has also resulted in a capital headwind of around 3 basis points, and this is captured within the 1.79x PCA we have reported today. A quick comment on our aggregate cover. As many of you are aware, the economics of these covers have been increasingly challenged in recent years. We entered this renewal with the benefit of our 2022 aggregate being placed well out of the money. We've opted to place only a small order on our aggregate cover for 2023, and we'll reassess its role in our 2024 program based on prevailing market conditions. This decision impacted our cat allowance by around $ 20 million. I'll now turn to Slide 13 and provide some context on the reserve transaction. We've announced today that we've signed terms with Enstar to reinsure portfolio reserves totaling $1.9 billion. This portfolio includes reserves primarily relating to North America and international financial lines, discontinued programs and our inventory reinsurance business, QBE Re. Almost all of these reserves relate to business underwritten between 2010 and 2018. We currently hold around $1.9 billion of undiscounted central estimate reserves against this portfolio. And under the terms of the transaction, we will effectively be seeding these reserves at a price slightly lower than the undiscounted central estimate. The transaction then provides coverage against any deterioration of these reserves up to a limit of around $900 million. The up-front P&L impact is around $100 million, which is basically the difference between the premium we pay, Enstar and the release of reserves and risk margin we currently hold against this portfolio. So as you can see on the chart at the top of the page, you start with a premium of $1.9 billion. And from this, you deduct the reserves, which we hold on our balance sheet at a discounted central estimate of $1.7 billion and the risk margin of around $130 million. And this gets you to the net impact of around $100 million. There is limited impact on forward earnings. While our investment assets will reduce by around $1.9 billion, we will lose -- and we will lose related investment income, our future underwriting earnings will improve by a similar amount as we will no longer have the discount unwind associated with these reserves. Our key objective here is to reduce earnings volatility, while our overall reserving position has improved significantly in recent years, this portfolio has accounted for around $600 million or 100% of our net adverse prior year development over the last 5 years. The $900 million reinsurance limit we have secured through this transaction derisks against further adverse development, particularly as some of these reserve classes carry outsized exposure to social inflation. In addition, this transaction will free up around $400 million of capital, which will improve our reported year-end PCA by around 6 basis points. The capital supporting these reserves is effectively generating a marginal return and reallocating this capital to support growth and other initiatives will help us optimize returns. I will now provide some further color on our divisional performance, starting first with North America on Slide 14. Gross written premium for North America increased by 16%, supported by rate increases of 9% and Crop premium growth of 31%. Excluding Crop, premium growth was around 4% with ex rate growth down 1%. And, as flagged earlier in the year, we commenced terminating programs, representing GWP of around $400 million this year. North America reported a combined ratio of 98.9%, which while representing an underwriting profit and an improvement from 103% reported in the prior period is still too high in the context of the group. We remain very focused on our strategy to ensure North America trends sustainably into the Group's target combined ratio range. The ex cat claims ratio deteriorated by around 3 points or 1.5 points if you exclude the underperformance of the Crop business, and this broadly reflects the impact of higher inflation and the increase in larger commercial property claims, we called out at the half. We expect this ratio to improve as some of the terminated program business rolls off. In Crop, the combined ratio of 95.5% was broadly in line with the 96% we flagged in November. We were disappointed with the late season deterioration we experienced in Crop which related to a poorer-than-expected harvest across a small number of states impacted by drought. We remain focused on managing the volatility in this business, and we are working on initiatives to achieve a better portfolio balance. For reference, we have maintained the external quota share on the same terms we placed in 2022. I'll now turn to our International division on Slide 15. Gross written premium was up an impressive 14% on the prior period, and this was supported by rate increases of around 7% and ex rate growth of around 9%. Each of our key insurance segments, including the U.K., international markets and Europe delivered double-digit premium growth, while our inwards reinsurance business, QBE Re reported premium growth of 25%. As Andrew noted, early indications from 1/1 renewals have been very encouraging for rate, growth and margin. The International division reported a combined ratio of 92.5%, a deterioration from the 90.6% reported in the prior period. This was primarily driven by reserve strengthening, which included the impact of an adverse COVID-19 business interruption judgment, higher inflation assumptions across the business and elevated catastrophe costs. This included our allowance for the ongoing Russia-Ukraine conflict. The performance of QBE Re was impacted by a number of significant catastrophe losses, including Hurricane Ian. We're focused on building a more balanced portfolio in this business. And given the hard market conditions through the 1/1 renewal, we were able to leverage our cat capacity to broaden our relationships and gain access to attractive new business opportunities across casualty and specialty lines. In property, the growth in premium, through strong rate increases, will be partly offset by the nonrenewal of a number of lines and our shift to higher attachment points across the book. Finally, our Asian business delivered another improved result with a combined ratio of 92%, following the 98% recorded in the prior period. Moving now to our home market of Australia Pacific on Slide 16. Gross written premium increased by 9%, supported by strong premium rate increases of 9.5% and stable retention. Ex rate growth was modest at around 2%, though it was impacted by a 40% reduction in LMI volumes alongside lower volume in general liability classes, and if you exclude these lines, the ex rate growth was closer to 6%. The combined ratio improved by roughly 1.5 points to 90.1% with favorable prior year development and an improvement in the expense ratio offsetting elevated catastrophe costs and deterioration in the ex cat claims ratio. The prolonged period of wet weather and the rapid acceleration in inflation during the year were the key drivers of the ex cat deterioration. With higher rate now earning through in property classes, we expect this ratio to improve through the course of 2023. Our lenders' mortgage insurance business delivered a strong performance and credit quality continues to remain resilient. With the outlook for the housing market likely to remain topical this year, I wanted to reemphasize that we remain focused on LMI tail risk. We continue to actively review and manage our risk scenarios. And relative to our current plan, our 3-year claims delta in both the one in 20 and one in 40 stress scenario is now around $80 million and $130 million, respectively. Both these numbers equate to a relatively modest earnings impact for the company. We have retained our 50% quota share for the 2023 underwriting year. Turning to the investment result on Slide 17. Further to our Q3 update in November, I'm pleased to report that we delivered strong investment performance in the last 3 months to close out what was a very volatile year. Excluding mark-to-market losses associated with higher risk-free rates, the investment return for the year was $570 million. The running yield from the book was part -- partially offset by adverse credit spread marks of around $130 million, and risk assets delivered a return of 1%, well below our long-run expectation. Our fixed income running yield increased by more than fivefold over the course of the year to an exit of 4.1%, and this is now providing a meaningful earnings tailwind for the group into 2023. Given the recalibration across asset classes and the extreme volatility, we did ease our pace of rerisking in the second half of the year. We continue to target a long-term strategic asset allocation of 85% fixed income and 15% risk assets, and we will continue to selectively reposition our portfolio over the coming months. I'll now move to balance sheet and capital on Slide 18. This slide really does paint a very strong picture of QBE. Our regulatory capital position improved from 1.75x to 1.79x and now stands towards the upper end of our target range. Adjusting for the impact of the reserve transaction and also the final dividend, our capital position would be around 1.8x. While the sale of the Westwood Insurance Agency bolstered capital by 5 points, we are very pleased to be at the top of our target range given the premium growth we've achieved, the gradual re-risking of our investment portfolio and the headwind from our recent reinsurance renewal. Debt to total capital improved 70 basis points and is around the midpoint of our target range. I'll now make some comments around our transition to IFRS 17 on Slide 19. In 2023, the insurance sector in a number of geographies will move to the new IFRS 17 accounting standard. We're in a relatively good position due to the similarities between our current accounting standard and IFRS 17. In fact, all of the key accounting concepts behind the new standard are very comparable to what we do today. Therefore, the hopefully welcome news for you is that there won't be a great deal of change for QBE both in the mechanics of our accounting and in the presentation of our results. Commercial impacts are expected to be limited, group profitability plus both the shape and recognition of profit will remain broadly unchanged. We don't see the new standard driving any difference in relative profitability across our regions or sales nor do we expect any solvency or dividend impacts. In short, our fundamentals should remain unchanged. Moving to Slide 20. As we transition to IFRS 17, we are required to retrospectively apply the new standard to our 2022 result. Any change to our net asset position as a result will be booked as a transition adjustment to our 2023 opening equity balance. Based on our preliminary exercise, which retrospectively applied the standard to our 2021 balance sheet, transition adjustments were limited and contained to a 2% impact on net assets. This impact includes some changes around discounting, our LMI earnings pattern and onerous contracts. This is the IFRS 17 version of the liability adequacy test. There's more detail on these impacts in our annual report. The second item I want to address is our approach to reserving. Our approach to the central estimate under IFRS 17 will remain consistent with what we do today. And hence, there will be no change in our central estimate nor any transition impact. Turning to the risk margin. IFRS 17 requires a version of the risk margin called the risk adjustment. The underlying concepts are very similar, albeit the calculation of each is quite different. The risk adjustment is defined as the compensation required for varying the uncertainty that arises from nonfinancial risk, and the balance is calibrated to provide a high degree of certainty that we can fulfill our contracts with reference to our cost of capital. rather than a PoA range, the risk adjustment will operate within a target range, which we've set at 6% to 8% of the central estimate. We enter 2023 with our risk adjustment balance at 8%, which is at the top end of this range. This means that the absolute balance from risk margin to risk adjustment will not change. I'll finish on IFRS 17 here. We intend to hold an IFRS 17 investor update in May, where we'll have more time to work through some of these concepts, plus provide prior year restatements so you can start to adjust your models well ahead of our first half results in August. With that, I'll hand back to Andrew.

Great. Thanks, Inder. So let's turn to Slide 22 for an update on portfolio optimization and volatility, we've spoken to you a lot through the year around our focus on both improving returns but also reducing volatility. Many of you have asked what we mean by reducing volatility and how we're going about it. Our goal here is to ultimately reduce volatility at low return periods and increase the confidence level around achieving our financial plan. Insurers tend to put a lot of energy into care taking the impact associated with higher return periods like one in 100, one in 200-year events as this ultimately informs a number of regulatory capital considerations. I'll hopefully not enjoy one of those years over my tenure at QBE, could quite feasibly see a one in 5, 10 or 20 downside year. And this is where I want the business to be better prepared and more resilient. We've done a lot of work to refine our view of earnings at risk, these lower-return periods. We have a good economic capital modeling team and have made a lot of progress to better integrate ECM modeling into our planning. And over the coming year, we'll push this further down into our cell review process. Across our 3 sources of potential volatility being current accident year underwriting, prior year and investment returns, we've looked to benchmark the potential volatility versus the outlook for returns and completed a volatility appetite reassessment across many parts of the business. We'll ultimately look to manage the business around a volatility framework, we're at a high level, we're calibrating our appetite volatility at these low return periods to thresholds around our cost of capital and also our through cycle combined ratio target range. This framework should ultimately reshape the distribution of potential outcomes around our plan, reducing both the probability of a master plan and the size of a potential master plan. This slide outlines some of the actions we've taken plus initiatives being explored to better manage volatility. More measured planning and business settings are our key input. Striving for greater balance in the portfolio is also important, while finally, we need to continue improving our underwriting tools. Our framework has been an important factor in a number of portfolio optimization decisions we've made this year. For instance, the recent decision to exit QBE Re small retro book and the program terminations in North America. This has helped to reduce our catastrophe risk and improve returns. I'll finish here by noting this is, of course, unfortunately not a perfect science, but I do believe organizing the business around a framework like this is important. It will drive better underwriting decisions and discipline, inform how we shape the portfolio and drive cultural change. Hopefully, this gives you a bit more context around how we're looking to drive greater consistency. Let's move finally, to outlook. We're excited about the year ahead. The market remains firm, and we see good opportunity for further targeted growth. We currently expect group constant currency GWP growth in the mid- to high single digits. We expect net earned premium growth should broadly keep pace with GWP growth. For our combined ratio, this year, we've opted to provide you with our plan rather than a range. As things stand, we're expecting a group combined ratio of 93.5%. The year is somewhat complicated by the move to IFRS 17. Our current expectation is that there should be a limited change to the basis or calculation of our combined ratio. We've effectively given you our planned combined ratio on AASB 1023 basis. And in May, when we provide more detail on our transition to IFRS 17, we'll amend our guidance for the new standard. If you think about the high-level drivers of the bridge to our 2023 guidance, we expect the benefit from earned rate and normalization Crop will more than offset the 2 headwinds we've spoken about today, being a slightly higher expense ratio and the higher catastrophe allowance. Finally, on investment returns, whilst we can't predict where financial markets will end the year, we'll again provide you with a view of our exit running yield. Collectively, our planned combined ratio and current investment settings should support a mid-teen ROE in 2023, which is great. With respect to the reserve transaction we've announced today, our teams have worked extremely hard in recent weeks, and we've just bedded things down in time for the result today. To this end, we've not yet included the transaction impacts in the planned combined ratio provided today. We expect an up-front cost for the transaction of around $100 million or around 0.5 point on the combined ratio, though as Inder suggested, there should also be some benefits from the deal. As we think about these issues, we'll incorporate the transition into -- the transaction into the plan following our first quarter re-forecast. I'll close on outlook there. Hopefully, you've appreciated some lift in transparency from us this year particularly around our 2 quarterly trading updates. I like the process and going forward, we'll continue providing these updates in May and November. You can diarize May 12, the same day as our AGM for our Q1 update this year. Over 1 year into the business now, really pleased with how we're tracking. We have genuine momentum behind us, returns are improving, and we're building a more consistent business. Our confidence in the medium-term outlook for QBE is high and has been building progressively over the year. With that, I wanted to thank you for joining us, and I'll pass back to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Kieren Chidgey of Jarden.

A few questions. I might just start on reinsurance. Just wondering if you can give us an indication of sort of forward reinsurance costs ex, the one-off transaction of $100 million, considering risk retentions have gone up. But obviously, we've seen very significant rate online increases across the market. The Crop quota share you're saying is similar. So relative to the $4.4 billion of reinsurance costs in '22. Any guidance on how we can expect that to move into the '23 year?

Sure. I think in terms of the dollar spend, Kieren, putting aside this reserve transaction we're talking about. If you look at the cat and risk program, so I assume that's broadly flat, which is the $800 million, the terms of the Crop quota share are not changing. However, the ultimate costs we end up booking on reinsurance of Crop, depends on where we end up on GWP, et cetera, and how much we end up seeding to the Fed funds. So that's a very difficult one to guide on. At the moment, prices are holding up in Crop commodities, volatility factors are holding up. So we'd like to think that there should be some level of modest growth in the Crop business, so that will probably feed through in higher reinsurance spend on that. Most of the other quota shares were not changing terms, LMI we're not, MLPL, the quota share we have in North America, we're not changing terms. So we'd probably see some modest increase, mainly driven by Crop in that number in terms of the dollar spend, but it's a difficult one for us to be precise on the key things that go to margin, though, I think we've called out, which is really the impact on the cat allowance.

Yes. Okay. That's clear. So fairly flat with a bit of uncertainty around where Crop lands. On the reinsurance transaction, sort of the clear with $400 million capital release assets are moving off balance sheet. So you lose the investment income, and I understand you also don't have the discount rate unwind on those reserves going forward. Are you suggesting that profit neutral ex the $100 million cost one-off into outer years? Or is there also sort of a loss of some of the additional yield benefit you'd get through credit spreads and growth assets?

Kieren, you've done well to kind of process all of that this morning. So you're pretty spot on. $100 million upfront, right? And then forward earnings because we discount our reserves at risk-free, so in essence, the unwinded risk-free comes out. But clearly, we earn a small margin above risk-free in our investment income. So that's why we sort of said marginal. So it's the delta above risk-free, which isn't going to be that material on that level of assets given our total pool of profitability. But yes, we do lose that slight excess return above risk-free net-net.

All right. And second question, just sort of around the pricing backdrop. The fourth quarter premium rate trend edged down to 7.1% from 8.4% in third quarter. There was some commentary, I think, from both yourself and Andrew around the 1 January renewal, perhaps being a little bit more solid, particularly in the international business. Just wondering if you can give us an idea for what you have seen year-to-date. I know we're very early in the year and there's mix issues for the March quarter, but how you're feeling about the premium rate backdrop, particularly after a very tough global reinsurance renewal at [ one gen ]?

I think you're right. I mean what we've seen most which we touched on is a reason that a property insurance and reinsurance reduced in the first quarter but on everything else is spread over the year. So we do believe the increase in reinsurance costs, particularly on property programs, is going to maintain that -- those rates, so we see property insurance and reinsurance, maintaining high rate increases. Where we saw things fall off last year, particularly international was more on the fashion negligent liability lines, and we expect that sort of rating to hold this year. It may fall a bit further. I mean, it was a surprise to us that capacity came pouring back in. But those lines had seen heavy rate increases over the previous 3 years. And at some point, it has to come to an end, and the market obviously believes at this point in time for D&O and other lines such as that, the rating is okay at this point to come back. So it's hard to say on other contrary lines in 2023 because we haven't written that much off them yet. It's not a 1/1 renewal line of business.

Yes. I appreciate that. And Andrew, with the $400 million sort of capital release, your PCA goes up to the top end of your 1.8x sort of top end of your PCA target range. What areas are you looking to deploy capital and grow organically? Can you just highlight sort of what classes of business look interesting, globally?

Inder and I were talking about this before. I mean the great beauty I think about the 2023 plan is we're growing across a spread of businesses. So we're seeing growth across the 3 divisions into this year. So it's not as though we've all suddenly got $400 million, and we're going to put it down on a particular line because we've also got our plans set for 2023. The issue is it's now at the top end of the range, which is still within our range. And I think we'd look at capital again when we get to towards the end of this year when we have a view of what the '24 outlook is going to be. It's always very hard to determine what the 2 years ahead is going to be. So we have a good idea of what '23 is going to be. It's hard to say what's going to happen in '24. When we have the plan set for '24, we know what the profitability for '23 is, then we look to see whether the capital is still within the range or not. But at the moment, I'm just comfortable with the company running at the top end of the range. It's a good place to be because if there are more growth opportunities this year, we can deploy it.

Our next question comes from the line of Siddharth Parameswaran of JPMorgan.

A couple of questions if I can. Just the first one is just around just inflation. If you could just provide some color around, just -- I think the update earlier which you gave in November last year. I think you mentioned that rates are still tracking ahead of inflation. I was hoping if you could just give us some comfort on what you are thinking inflation is doing at the moment in the different parts of your portfolio and how that's comparing against rate.

I do a general view. I don't know the numbers. It's always hard to share numbers on inflation because it's just not one number because, of course, as we've discussed before, various lines of business have different inflation assumptions in there. So I think on the property classes, we believe the rate is holding up against inflation. And it's sort of easy to talk about those because claims get settled in relatively short order. It's the casualty classes we've got to keep an eye on because it's hard to say definitively, rate is above inflation for the future. So we believe at the moment, rate is above inflation and the casualty classes because we're not seeing more social inflation come into them. But we need to keep an eye on that. And if we do see it, we need to move rate really quickly. So our aim is to be as prudent, cautious, sensible as possible on the casualty classes while keeping rate ahead of inflation on the short-tail lines. I mean I don't know whether we have any numbers. I mean our view is inflation is going to hold up for longer. General inflation is going to be holding up longer?

Yes. I think just to give you a sense of what we booked in 2022, we broadly came into the year. This is across the portfolio, right? We came into the year planning 5.5-ish percent inflation, and we've ended up booking probably something closer to 7% all in. Now clearly, there's a big difference between property motor. Motor has been very topical, clearly. I mean we've seen a spike up in inflation as we've gone through the second half into this year. We're not a big player in the motor space, whether here in Australia or in the U.K., in particular, we've got some commercial motor exposure. So in those books, we have seen high inflation and we've booked that. As Andrew said, I think the expectation coming into this year, more generally across the market is inflation should come down. We're not really baking in a significant moderation, right, because we see the risk of persistency. And whilst we are seeing some relief in supply chains, et cetera, we do have a mix that is across property, materials, goods and also services, right. So where wages inflation could be a little bit sticky going into this year. So we remain as we were at this time, last year, somewhat cautious around the outlook and how much in real terms will inflation actually moderate is to be seen.

And can I just clarify that, that 7% or so that you said that you've seen this year, is that per claim? Because I think your rates said are quoted per some dollar term ensure. Your rate movement of 7.9%, et cetera. So I mean, effectively quite a gap between those two. Would that be, am I reading that correctly?

Yes. So the way we calculate rate is on the exposure, right? So there's a bit of inflation built into the sums insured and then we get the rate on that. And then the calculations of the claims inflation is, in effect, the severity driver, right? So looking at that and sort of baking in higher assumptions on costs, particularly for property and motor. So, and look, Sid, I think it's not a perfect science because you've got deltas between written and earned in any particular year. But I think generally, we feel that rate is tracking at least in line, if not slightly ahead of where we see inflation coming through the book.

Okay. And just one more question for me just around the volatility framework slide on, I think, it's Slide 22. Andrew, I was hoping if you could just provide an update of how far you are through this journey? I mean, are you -- are we likely to see more action stemming from this? You basically flagging that this has led to some increases in assumptions. Is there a next stage? So it seems like there's certainly been more conservatism that's been built in applying this framework to some of your trends? And obviously, it will result in more stable profits going forward. But just how far are you through this journey? And should we see more actions? And what kind of actions would those be?

Okay. That's quite a broad question. So I'll have a go at it. I think we're moving through the journey relatively quickly. As I mentioned, we've got a good economic capital model, which, in effect, models every line of business and estimates the volatility. We've always got to appreciate there's a model. And generally, it's based on history. We do try and put a view of, is the future going to be different to it? Within our planning process, we are now trying to look at can we come up with a portfolio that gives us more chance of a higher return with less volatility? And of course, particularly focusing on the downside volatility, you want to try and avoid the downside volatility. And I was just touching on, we're very conscious that we've got to deliver at least our cost of capital. So what trends do we have of achieving greater than our cost of capital and can we manage to a portfolio that does that. So during this year, I mean, it's one of the reasons we're not growing property exposure in what some see as one of the hardest markets because property historically, although achieving our hurdle rate to return has had almost the motor volatility around it. And we're not exactly sure whether we are going to continue to see increased catastrophe claims as we've seen over the past few years. So it's difficult to determine how the market has seen for the past 5 years. That the property rates are okay. So we're comfortable with where we are with property at this point, and therefore, let's look at growing other lines of business around it. So that's sort of an active management of looking at our portfolio optimization to ideally give us a good return with less volatility. It's very difficult to be precise on exactly how these things will settle, but we're building that more into the planning process. So that definitely came to the fore for the 3 divisions planning process in 2023 and expect to become more embedded in planning process as the years go by. Specific numbers on it, but they're sort of model numbers, and I'm not sure they would necessarily mean anything at this point. But we want to continue to talk about it. So we will give you examples of where -- what we've actually looked at has delivered action. And we talked about the program business in the U.S., where it's definitely driving too much volatility around the U.S. combined ratio. And then the small retro book that came to the fore under Hurricane Ian and of course, a reason amount of volatility in the QBE Re.

You did mention LMI or trade credit. I mean those trying to take out -- would be the ones that would caused the most concern?

Yes. The reason I don't mention LMI is it's become a relatively small part of our total. So we're talking about a couple of hundred million in $20 billion, and it tends to have different drivers of volatility compared with everything else. So even if it did become volatile, other classes of business, we should be able to absorb it within the overall Group's volatility. So although we're looking at volatility by individual product, roughly interested in how the group's volatility works. And that's the idea of the property cat. We should be able to manage a more challenging year in the property cat by the profitability of everything else. If we can't, we've got too much of it, and we need to look at that. So LMI doesn't drive that much volatility for the group.

Yes. And just on the, on LMI, I think, Sid, you've got to remember that we have been increasing quota shares, right? So we've gone from 0 to 20 to 25 to 30 to 50, right? And particularly in the more recent underwriting years, we've had decent levels of quota share on and plus the top line shrunk significantly, just given market dynamics. And so we remain focused on it, but it's just not the biggest driver anymore at a Group level of volatility.

Our next question comes from the line of Nigel Pittaway of Citi.

Just first of all, I wanted to explore sort of your reticence to grow too strongly in this hard property market. I mean I take what you say about cat exposure, and volatility. But you're sort of saying it's the strongest property market for a while. And yet sort of in casualty, you're not sort of -- you're surprised at how quickly capital has come back here and you're not convinced that you can actually say the rates are above inflation. So can you just sort of maybe expand a little bit as to why you're sort of so reticent to increase exposure in what does seem to be a pretty strong market?

So Nigel, I think it's the issue of balance. I mean, I would say that people said at the beginning of last year, there was a relatively strong property market and it didn't prove to be the case because sadly, the catastrophe levels just get with the rate increase. I completely agree with this year. It could be strong up because the reinsurers have responded to 3 or 4 years of tough markets for them. So I think what we're trying to do is be more thoughtful about how we deploy our property capacity rather than just have too much stand-alone both in QBE Re and in our property insurance business. So we may end up growing in certain areas. We may end up pulling back in some areas, which is what we're aiming for and overall, have relatively neutral exposure. So I think it's being more thoughtful about how we use the capacity and see if we can increase the quality of the property portfolio to deliver a better return, again, ideally with less volatility. So it's not as though we're just doing nothing and going to renew the 2022. We're going to be very thoughtful about how we deploy it. I think if it proves to be a great year to grow, there's going to be plenty of opportunity to grow property in 2024 and beyond because if anything, there is getting to a shortage of capacity with the fact that exposures have increased over the years on the planet in more challenging areas. So I don't think it's going to be an issue of missing the boat. We can do as well as we can this year, optimizing the portfolio to give the best returns possible. And if we want to grow more into property in 2024, we can use some of that extra capital that we've generated to grow in 2024.

Okay. That's clear. And then maybe just turning to Crop. I mean I think Inder said that expecting a little bit of GWP growth. But I was just wondering, can you sort of confirm what normalized level you're now assuming in terms of COR? And at what stage would you consider unwinding the quota share in that business?

So I mean, let's -- I mean, on 2023, Nigel, the way to think about the business is we probably ended up with around $1.3-ish billion of net earned premium because that's really the big driver. I mean, the gross obviously is helpful, but that drives the economics. And we think we'll see a bit of growth in that, maybe, call it, 1.5%, and we're assuming around 93% combined. So the way we think about that is $100 million or so underwriting profit in current settings.

Okay. And I guess would you unwind of the quota share be driven by sort of growth considerations or...

Volatility issue, Nigel. I mean, the -- I mean, just recap on 2022, if we hadn't had the quota share, the combined ratio would have been significantly higher, right? And so it's just about making sure that we can manage through slightly more challenging years and sort of balance the return versus the risk that we're taking on. And so we think the 2023 quota share on the same terms, makes sense. We'll obviously continue to look at that every year, depending on the economics and depending on where we think the outlook for the business is.

Okay. And maybe just finally, I mean, obviously, you've -- could add a number of programs this year. Normally, that does bring with it the risk of anti-selection. And you're pretty convinced that that's all clear, and that's not a risk? Or how should we think about that?

So the risk of anti-selection terminating program.

No, I think it's fine. So on the programs we terminated, you mean the ones that are actually shutting down. No, I think we're going to be fine. Most of them got extra capacity, one hasn't. We still stay close to them as we withdraw, so I don't think an anti-selection. And on the programs we're keeping, I think they're keen on keeping us on, which is good. So we have the opportunity of having more input into what they are selecting. So I feel more confident we'll have more input into what they are selecting than we have done previously.

Okay. And actually, sorry, I do actually have one more, which is just, you're obviously saying you're assuming no sort of benefits from inflation moderate actually. If inflation were, however, to moderate, do you expect those benefits would be relatively immediate, particularly on the short tail business? Or would there be a delay in terms of seeing that come through the P&L?

I guess there'll be a bit of a delay as it earns through, and we truly recognize it has. So I think that's the challenge. Then the property side, you should feel it relatively quickly. It'd be interesting to see whether rates track down with it. The casualty classes, it's a bit different, isn't it? Because to say it doesn't actually go in line with any sort of CPI and you don't see inflation necessarily moderating casualty classes, immediately. So yes, there will be a benefit, probably in the property classes, reasonably quickly. Other classes would take time.

Yes. Just to clarify what I said earlier, so we are expecting a small bit of moderation, Nigel. We're not assuming 0 moderation.

Our next question comes from the line of Andrei Stadnik, Morgan Stanley.

I wanted to ask two questions, please. Firstly, just around having a more service-wide proposition in North America. And you've given some industry commentary as well some interviews along those lines. How far progressed are you in terms of actually enhancing your service offerings in North America having less of a price-led proposition?

Service offering in North America.

So for what particular -- I wasn't sure what you were talking about, particularly.

Look, in some of the recent interviews in your broad commentary if it was said that you have to service your customers better in North America because it could be right now seems like a price take in that market. How are you progressing in that journey?

Okay. I mean I think -- I hope I'm going to try and answer the question. I think a bit about the U.S., which we tried to explain at the half year was it's now focused on a few business lines. We take Crop to one side, which is about half of what we do. We're then in financial lines, A&H, Aviation, this mid-market business, which is probably in casualty for mid-market customers and there's a large commercial casualty team. So our focus is on dealing with those lines of P&C insurance as well as possible. I think the quality of the teams we've got is very good. The focus on our appetite is very good. And our message out to our distribution partners has been incredibly positive. I was slightly concerned that because they've seen volatility in which classes we've been in or not been in over the past 10 years, they will be slightly skeptical, look we've actually steadied things down. But the response to our distribution partners, the big brokers in the world is really positive. I'm not sure I'm answering the question about service though. I think it's a focus on those lines. underwriting them as well as possible and backing it up with a good claims service. I'm maybe missing something in your question.

Yes. And I think the other thing I'd say is -- on, so there's consistency of appetite, consistency of product, targeting of certain broker cohorts. And the systems kind of upgrades coming in have enabled us to be a bit more responsive, right, able to get through quotes a little bit quicker, be a bit more responsive. So it's a series of things, Andrei rather than -- here is the one thing that we've done during the course of the year. And we continue to build on that into 2023.

Sorry, I was missing the point, the technology has definitely improved. So you're exactly right, in the fact we can get through more quotes than we could before, that is a positive for us and that was starting to go online in 2022 and really impact us in '23.

And my second question, just around the balance sheet. The debt-to-equity is just sort of 30%. But we do get pushback on some investments around the hybrid suggesting the debt-to-equity potentially more comparable metric with other companies closer to [ 45% ]. So how are you thinking about the balance sheet, if you may have the opportunity to further strengthen or simplify the balance sheet given some of the strong earnings and reinsurance transactions coming through.

Andrei, the capital position is probably the strongest it's ever been in a long time. The debt load for the company has been the lowest it's been for a long time. The debt-to-capital ratio is within targets. Now obviously, we can talk about the AT1, the level of Tier 2, et cetera, et cetera. And we'll continue to be sensible about running what we think are fairly prudent, conservative balance sheet settings. We don't get any of those concerns that you're talking about from any of our rating agencies, right, where we do get credit for some of those hybrid instruments. But look, we'll continue to look at it. It's, and obviously, the strong capital generation -- the capital being at the top end of the range, just gives us a bit of flexibility to look at different options as we go forward.

Our next question comes from the line of Julian Braganza of Goldman Sachs.

Can I just quickly just ask about the -- just in terms of the guidance for FY '23 around GWP growth. Can you just unpack in terms of expectations around what you're sort of seeing in terms of rates and also in terms of ex rate growth and just volume growth over FY '23, just in terms of that mid- to high single digits.

Yes, do you want to have a go? You got the number? I mean it's a real mixture in there, isn't it? So -- and I was slightly concerned that we kept talking about 10% last year and then achieved 13% because we saw more inflation in 2022. I guess the ex rate growth is 2 or 3 points in that overall position. I'd be suggesting.

Yes. I mean I think we're just sort of expecting some level of moderation, right, around rate, a little bit of moderation, as I referenced around inflation so the relationship between those remains broadly consistent. And then we're thinking, the big delta here really is going to be where we end up on the Crop business. We're in the pricing season today and over the next few days, prices move around, so do volatility factors. We still think there'll still be a little bit of organic growth in that business but mid- to high feels like the right place in terms of where we're seeing it. We also ended up with 2022 being a little bit higher at the end, right, than we had anticipated. So it's the kind of, they're building off a higher base. And then we've got this uncertainty around the Crop business, but we see good growth opportunities in terms of ex rate across the business, but some of these lag effects on these terminated programs will continue to flow through as well. So there's few items to balance, and I think mid- to high feels at the right place.

A key point is the program. There's going to be a reason that our program runoff this year because we're terminating during 2022.

And in terms of your plan -- in terms of your combined ratio plan number, you've provided a high-level bridge in terms of how you're thinking about in terms of earned rate normalization of pulp, et cetera. But does it also include all these benefits that you're expecting on the North American business that you're driving strategically. Can you -- is there something in the mix with that specific number that you provided?

Yes. I mean, look, I think that's the real medium-term opportunity for us, right, is to get that business within 90% to 95%. I mean do we think we can get there in 2023, probably not, given the way we're trying to be thoughtful about growing in the right places and some of the impacts from these terminated programs flowing through. So yes, over the medium-term. And hopefully, we'll see an improvement from 98.9% that we've printed in 2022 into 2023, but I think that's very much the medium-term opportunity for the company.

I think it's definitely the case but U.S. business has got to get under 95%. It's not. I don't think it's going to achieve it in 2023 sadly. That's the aim, and that will bring the Group's combined ratio down.

Our next question comes from the line of Andrew Buncombe, Macquarie.

Just the first one, is a question about Australia. When are you planning on going into the cyclone reinsurance pool?

I think second half is around the half year. We're going to cyclone reinsurance pool.

Okay, sure. And then given that plan, how are you thinking about your net exposure in the Australian strata business?

Andrew, I think about it like everything else, we're trying to manage our net exposure in this Australian strata business because it comes in a number of ways for us. We have quite a lot of it, and we need to ensure we have the right amount of it. I mean that sounds such a bland comment, but that's how we think about it. We need to ensure we've not got too much of it. Of course, some will go with that. So it's just -- similar to my comment earlier on, we're trying to manage our overall property cat exposed portfolio across the QBE world, and that's just part of it.

Yes. And the main thing really, Andrew, for us has been to get that portfolio into right place. It still isn't there in terms of rate adequacy, right? So I mean, look, the cyclone pool, maybe at the margin a contributing factor here. But really, the big focus for us with our distribution partners on this business is to make sure we keep getting the rate, we keep looking at the terms and conditions in terms of deductibles, et cetera, that go into it so we can get the business to a sustainably sensible sort of return on equity profile, given it is capital consumptive right, it does carry a level of cat exposure within that business, which we're very conscious of. So it remains a work in progress.

Understood. The second one is just in relation to the expectations for the combined ratio for U.S. crop. You mentioned in response to an earlier question, you're expecting 93% for FY '23. My understanding is that in previous years, that was expected to be 94% to 95%. So is that 93% the new through-the-cycle number? Or is there something unusual coming in '23?

No, it's not a -- I mean, there's a couple of things we're trying to make sure we reflect property. One is the business is a bit bigger in terms of size, right? So we've got the natural operating leverage we've got through that business. We've also got this quota share, which gives us some decent economics into 2023. And we're just telling you like we see it that the plan for 2023 is 93%. And the reality, Andrew, this business will never print exactly what we planned for. It will either be a bit higher or hopefully, a bit lower. And so -- but that's, in essence, how we construct the plan for the business is taking into account the scale we've now got, the current reinsurance arrangements we've got and the current outlook and settings around price volatility factors, et cetera, which is the equation we're looking at.

Yes. And then just a final question from me, please. Given the increased attachment points across the reinsurance covers, do you feel like you've moved your catastrophe allowance by enough?

I mean, obviously, the answer is yes. So yes, I mean mostly models what we think the catastrophe allowance should be with the increased deductible $400 million. So yes, I mean, that's exactly what we've done. So we've modeled what it should be with the increased allowance also taking into the experience of 2022. So yes, we believe we have, I mean it's a great challenge, isn't it? Because catastrophe costs continue to rise, irrespective of what we've done. But we think, yes, we think we started from a good point. And the great -- we debated this last year, and I think the market thought we're being relatively cautious with our catastrophe allowance movement last year and explaining the great beauty about moving allowances that then the underwriters have to look for the rate to cover the allowance. So I think moving it by quite a large amount this year is a good thing to do. We've seen reinsurance costs go up. We've had to put more capital up to actually support the extra retention, so yes, I do think we've moved it to the right amount.

Andrew, we are trying to share some of the analysis that we look at, right? So for example, if you look at the "as-if" analysis, which we've transposed the current reinsurance structure, and we've given you the look back on how that would have held up in the last few years. And you can see that's going into our thinking in terms of the sufficiency, the allowance. Now what I must caution is that the last number of years are not adjusted for exposure changes, right? So we have made a series of exposure changes, which means when you look at the $1,253 million or $1,208 million for the last couple of years, those numbers would be lower, had we put back some of the changes we've made around QBE Re, retro, et cetera, et cetera. So I think in the round, looking at the model view, looking at the "as-if" view, looking at underlying exposure inflation changes, looking at the reinsurance attachments, we think that's right level. But clearly, this remains very topical for us and for the industry.

Our next question comes from the line of Matt Dunger of Bank of America.

Just wondering if I could follow up on that catastrophe budget question. Can you talk us through divisionally how the catastrophe budget is moving, noting the North American programs termination? Are we expecting to see a bit of movement around divisionally where you're allocating the cat allowance?

Just really getting into a level of detail. I mean, we could talk at length about how each of the divisional retentions have moved. We have put those on the page, so you can have a reference. And the reason we've done that is so you can -- when an event actually happens you can look at what the divisional retention is and then how that plays through the whole account quota share. So the 2 main pillars of our program, you've got the overall group retention at $400 million, and then you've got the divisional retentions that sit below that. And then you've got the whole account quota share. So we've given you some of the maths here to sort of figure out when there is an event, what the net impact on QBE might be, and we've given you peak and nonpeak events as examples of that. Getting into how each of the individual divisional allowances have moved versus prior year, I'm not sure it's a really constructive discussion nor is it going to give you really any more insight. I think the key thing is, which to the question earlier, is the allowance going to be sufficient. And we are very, very focused on that in terms of trying to plan for a sensible level. Last year, we planned what we thought was a sensible level at $962 million, and we ended up exceeding it. Now that was mainly because of the Russia-Ukraine conflict, but it was set at the 75th percentile on a model basis, right? So it's something we remain focused on. I think the Group allowance is the right number to focus on. The divisional allowance. I'm not sure really adds much to the debate.

I mean the Group actually is volatile, and therefore, the individual 3 would be too volatile. The -- I think it'd be sort of meaningless because it will be diversification between those 3 and the Group.

Okay. Fair enough. And if I could just ask on the fixed income running yield you're calling out the improving spreads contribution. Do you have any expectations around what spreads are going to contribute going forward? And just also on the asset allocation, if you could talk to where your -- where you're going to look to in the risk assets to allocate further in growth versus enhanced fixed income?

Yes. Look, I think the risk settings are very, very consistent with the long-term SAA, which we've talked about, so there is no change in terms of where we're looking to allocate assets. The growth assets for us really are anchored around unlisted property. And infrastructure, we have a very small proportion of holding in equity, whether it's developed market or emerging. And we continue to be probably cautious on equity and outlook for that. It has fixed income, we do probably see a bit more in terms of opportunity set. But there's no material change to the settings that we're looking at in terms of high-yield debt, emerging market debt and some component of private credit. But -- so the only thing I'd say is at the margin, maybe we favor a bit more enhanced fixed income versus equities, but that's at the margin, I'm talking plus or minus 1%. In terms of spreads, your guess is as good as ours, right? I mean it's been such an incredibly volatile year last year. We're not expecting a lot of that volatility to abate. We're giving you what we're seeing is the exit running yield, where we actually end up for the year will depend on kind of market volatility from here, it's really -- but we're not changing portfolio settings, responding to that. They remain very consistent. But obviously, the running yield gives us a very decent, healthy base of earnings when we look at the ROE outlook for the company going forward.

At this time, I would now like to turn it back to management for closing remarks.

Thank you very much. All I would like to say thank you for those questions, and thank you for joining us today.