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

Good morning, and thanks for joining us. 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, water and culture. I pay my respects to the elders past, present and future and I extend this respect to any First Nations people joining us today. For today's briefing, I'll follow the usual format, providing an update on our strategic priorities and key features of the result, while handing over to Inder to talk through the details of the financials. Before Q&A, I'll circle back to provide some more detail around our recent North American performance and conclude with some comments on the outlook. Let's move to Slide 4. I wanted to open with a handful of key messages on the result, our strategy and outlook. Growth remains a real highlight, continuing in double digits. further traction across target areas is driving greater confidence in our ambition for consistent and sustainable growth. Underwriting performance was impacted by catastrophe costs, both in the current and prior year, resulting in a combined operating ratio of 98.8% or 97.6% excluding the upfront cost of the reserve transaction we announced in February. Though we've been able to better absorb some of these setbacks and still maintain a double digit return on equity, I'm disappointed with the extent of the catastrophe volatility this half and our result in North America. Improving returns in North America remains our highest priority. While not clear in the headline, I do think we've made further progress. North American core returns are moving in the right direction following what's been a prolonged effort to stabilize, rebalance, de-risk and modernize. We completed a very significant reserve transaction. This de-risked around 15% of our long-tail reserves across lines which carried social inflation risk, has helped to improve capital efficiency. Momentum across our strategic priorities continues. In the short time I've been here, I think the enterprise is collaborating more effectively. There's more alignment across our business leaders and our people remain motivated and engaged. We have great people with great ideas and I'm really excited about the transformation I'm seeing in the business. Higher interest rates continue to support a more resilient and more diversified earnings base. We exited the half with a running yield of 4.9%. And we've maintained our full year outlook. In 2023, we expect GWP growth around 10% and a combined ratio around 94.5%. Alongside current investment settings, this equation continues to support a mid-teens return on equity for the business this year. So let's move to our strategic priorities in a bit more detail. As a reminder, we've organized the business around these 6 focus areas and we've had another productive 6 months. Under portfolio optimization, efforts to better manage volatility continue. Property catastrophe risk remains a major focus. I previously referenced the work we're doing around property cat appetite, mix and underwriting, and this continues to consume much of our attention. Secondly, I'm pleased with the momentum we're building on modernization. We're seeing more benefit from recent investment to rationalize our IT estate, digitize and better organize our data. This means we'll be better placed to leverage our unique datasets to support underwriting decisions and further automate process. Like many, we're excited about AI. As a business which spends many hours ingesting documents and data that come with broker submissions, claims filings and legal documents, we see many meaningful contributions to QBE. On people, we continue to see encouraging results across our people surveys, particularly around engagement, well-being and sense of belonging. I want to ensure QBE as an employer of choice with great career and development opportunities. Finally, I'm really pleased to announce the appointment of Peter Burton to the role of Group Chief Underwriting Officer. Peter has been with QBE for over 15 years, holding various senior underwriting roles in our international division. Peter currently heads up our international markets or Lloyd's segment, and has a long and distinguished career as an underwriter and leader with experience across multiple lines of business. The CUO role is a critical one for me to ensure the consistency of our underwriting and to drive our growth and performance agenda. Let's turn to sustainability on Slide 6. We received a number of great accolades in the past 6 months, including Green Insurer of the Year for the fourth year running, and we continue to be recognized as a top company globally for our gender diversity. There remains a material amount of work underway as we continue to build the data and capability to track insured emissions. Some of you may have seen our recent withdrawal from the Net Zero Insurance Alliance, or NZIA. As a reminder, this was the key insurance industry group working toward establishing a consistent framework to measure underwriting emissions. For various reasons the NZIA has now largely disbanded. While this is disappointing, we do take comfort from the fact that the NZIA achieved its goal of developing an insured emissions measurement and accounting framework, which we expect will remain the standard for the industry. We remain committed to our sustainability focus areas, and we'll keep you informed on our plans and developments in this space. So shifting back to the result on Slide 7. While I'm disappointed with the impacts from catastrophe cost this period, most other features of the result are all fairly encouraging. Growth remains a highlight. Gross written premium growth of 13% is consistent with the result we achieved for 2022, though much less reliant on crop. Premium rate increases of 10.2% was supported by reacceleration across property lines alongside generally stable trends elsewhere. We continue to see good opportunities for selective growth and expect rating will remain firm for the foreseeable future. We generated more investment income this half than we did over the course of 2022 with an annualized return of almost 5%. And market seemed positioned for interest rates to remain higher for longer. The strength of our balance sheet remains a consistent story. Our combined operating ratio was 98.8% or 97.6%, excluding the reserve transaction costs. This includes the impact of catastrophe costs above allowance and what was largely catastrophe-related prior strengthening. Collectively, these impacts accounted for around 4.5 points. Beneath this, I think the business is performing well. As Inder and I noted back at our first quarter update, we do see good momentum in the business, which is tracking a little better than our original plan. Rate is likely to be a little ahead of our original view as is growth, while inflation is trending broadly in line with our assumptions. Turning to Slide 8. I'll spend a moment on growth. I think this chart speaks to the breadth and diversification in our business, plus supportive markets we currently operate in. GWP growth is tracking slightly above our full year outlook for growth around 10%, and importantly, represents another year of compound rate increases for the group. Net insurance revenue growth was broadly in line with GWP growth on the same basis. Ex-rate growth of 7% includes strong new business growth and further inflation-related exposure growth, partially offset by changes in terms and reduced volume in property lines. At a divisional level, ex-rate growth has been driven by international and AusPac, partially offset by some contraction in the North American P&C business. This reflects the runoff of non-core lines and more challenging markets in financial lines, a mix of both fewer opportunities due to less capital markets activity and the impact of more competition. Growth in crop GWP of 10% reflects more stable commodity prices alongside consistent organic growth. Turning now to Slide 9. I wanted to spend some time on the evolution of our portfolio starting with our focus on property. We've spoken regularly about our focus on building a more resilient property portfolio and our limited desire to grow property despite what are currently very hard markets. Falling another challenging year, half year for catastrophes, this continues to feel like a sensible strategy. At around 25% to 30% of group premiums, property cat exposed lines are broadly in line with our group mix targets. Across our 3 sources of potential volatility, being current accident year, prior and investment returns, property lines continue to account for a material level of our historic and potential volatility. This period was again characterized by outsized impacts for a number of poorly modeled perils. Winter Storm Elliott in the U.S. impacted almost 40 states. The New Zealand events in February both ran at upwards of 30x the typical cost for a non-quake event in the region. And first half insured losses in North America ran well above long run averages due to a large number of convective storms. As such, we entered this year with a property strategy organized around 2 pillars: firstly, to drive further improvement in our property underwriting and terms; and secondly, leverage the turn in the market to improve rate and balance. So firstly, on underwriting and terms. We continue to focus on improving our tools, models and capability to ensure we're pricing at a level which reflects the changing nature of property cat risk. We're raising deductibles and attachment points meaningfully, plus including more exclusions. We're also ensuring we leverage our in demand cat capacity to gain access to ancillary lines. Moving to rate and balance. The chart here highlights the significant rate increases we've achieved across our property sales this half, which range between 20% to 30% in many segments. In contrast, our ex-rate growth is negative, which is a function of a few different items. In one direction, we continue to push for inflation-related exposure growth; in the other, the trend reflects some of the recent portfolio exits we've spoken about and the impact of terms and volume reduction elsewhere. Collectively, we think these actions should leave us with a more resilient property portfolio and in a position where we're less exposed to dynamics in the reinsurance marketplace. Moving now to growth. We're increasingly confident around a broad pipeline of multi-year growth opportunities, which underpin our sustainable growth strategic priority. We spent considerable time as an enterprise reviewing our position in and competitive advantage across various growth opportunities. As I said in the past, we have enough breath by geography and product to support a healthy outlook for ex-rate growth across cycle. Combined with some considered exploration and innovation in new lines and products, I'm sure we can build on recent momentum. We've organized these opportunities across 3 categories. The first being a focus on deepening our core franchises. We have incredibly strong SME and middle market franchises in Australia and the U.K., and are one of the leading corporate and specialty players in the Lloyd's market, plus have great crop and A&H franchises in North America. Across each, we're holding leading market shares in our focus markets and want to defend and build on these positions. Two opportunities I'll touch on here. In our U.K. regional business, we've invested in people, capability and broader relationships to raise our profile in lines beyond commercial motor and financial lines. Domestically here in Australia, we've commenced a modernization project aimed at improving our platforms, systems and process to support responsiveness and consistency. Across the second category, expand footprint in focus areas, we've spoken about the opportunity we see to grow our reinsurance business in a more complementary way. While in Europe, we have a track record of consistent organic growth as we've leveraged our U.K. and Lloyd's capability into targeted niche specialty opportunities. Finally, in terms of newer opportunities, we've hired a new Head of Cyber and see an opportunity to grow in this area. Demand for cyber insurance is increasing at a material rate. If we maintain our peripheral role, it will increasingly limit our ability to retain customers and grow. And finally, in the renewable space, the investment required over the next few decades to reach net-zero will be significant and give rise to numerous opportunities associated with financing and ensuring the transition. With that, I'll pass to Inder.

Thank you, Andrew, and good morning all. I'll start by reiterating some of Andrew's opening remarks. This has been a very challenging half for underwriting performance. The impact from catastrophes has been too large and the returns in North America are not acceptable. As you're aware, we've made several decisions over recent periods to reposition portfolios, reduce property exposure, increase our catastrophe allowances and sought to build resilience. But clearly, there is more to be done. We remain highly motivated to deliver on our revised combined ratio guidance for the full year and continue to push hard in our ambition to build a more resilient and consistent QBE. Importantly, there is strong underlying momentum in the business. And this result highlights the continuation of encouraging trends for growth, premium rate increases, ex-cat claims ratio, operating leverage and investment returns. Our balance sheet also remains in a very strong position. I'll move on to the financials and start with the P&L on Slide 11. This is, of course, the first half result under the new accounting standard AASB 17. As you can see here, we've tried to preserve as much consistency around key metrics as possible. Premium growth remains a highlight. GWP of AUD 12.8 billion was up 13% of the prior period and comfortably ahead of our guidance around 10% growth. The combined ratio for the half was 98.8%, which includes the upfront cost of the $1.9 billion reserve transaction we announced in February. Excluding this, the combined ratio was 97.6%. I'll now briefly provide some context around the full year combined ratio outlook, which we have reiterated around 94.5%. This outlook effectively implies a second half discrete combined ratio of around 92%. This is around 150 basis points better than our original plan. The 3 main drivers here are: rate and growth were higher in the first half than we had planned, and these will earn through in the second half; two, we've lowered our assumptions for employee incentives given expected miss versus the plan for the full year; and three, we've made some tactical expense decisions, including managing the pace of headcount growth in the second half. Moving on to investment income, the benefit from higher interest rates is now very present in our result. Total investment income of around AUD 660 million was a marked improvement on the prior period. As a reminder, we now report the impact from changes in risk free rates on insurance liabilities within the net insurance finance income line and for investment assets, within the fixed income losses line below this. The net impact from ALM activities in the period was a small loss of around AUD 30 million. Our tax rate was a little higher than usual this period largely due to challenging profitability in North America. Going forward, we continue to see the group tax rate trending in the mid 20% range. Adjusted cash profit of AUD 405 million was substantially higher than the prior period, resulting in a group return on equity of 10%. Based on our 2023 combined ratio outlook, plus current investment settings, we expect to achieve a mid-teen ROE for the full year. In the context of our performance through recent history, this would be a very pleasing outcome for the group. Our capital position has strengthened over the period with a PCA multiple moving up from 1.79x to 1.8x and remains around the upper end of our target range of 1.6x to 1.8x. The Board has declared an interim dividend of AUD 0.14 per share, which equates to a payout ratio of around 35%. As most of you are aware, we tend to run a slightly lower payout ratio in the first half and true this up as we move through the second half. I'll now turn to Slide 12 and make a few brief comments on AASB 17. This morning we published our new investor report, which is structured around the new management reporting framework that we outlined in May. Where possible, we have tried to simplify the presentation of our financial disclosures and provided some clear reconciliation to help you navigate your way through the changes associated with the new accounting standard. We received some good positive feedback around the presentational direction we've chosen, but we'll continue to work with you to sharpen our disclosures as the market adjusts to the new standard. This slide serves as a brief reminder of some of the key changes to our numbers. Two key points to reference here. Firstly, our ex-cat claims ratio increases on the new basis. This is due to the inclusion of the risk adjustment strain associated with new business and the impact of onerous contract charges. Secondly, our prior development now includes the unwind of risk adjustment. Our risk adjustment balance remains at around AUD 1.3 billion and our reserves have a term to settlement of around 3.5 years. Therefore, you should expect just under 1/3 of our risk adjustment balance to unwind per annum. For reference and given the ongoing focus on reserve adequacy, we'll continue to provide disclosure on the movement relative to the central estimate of held reserves at period end. Turning to slide 13. Our top line performance has been pleasing. We've continued to deliver double digit premium growth this period, evenly balanced between rate and ex-rate growth. As Andrew outlined, we've got a broad set of opportunities to grow our core franchises, and moving forward, we'll be talking to you more regularly and in more detail on how we are executing against our sustainable growth priority. Group wide premium rate increases reaccelerated over the period to 10.2%, roughly 2 points above what we achieved in 2022. This reacceleration was led by property and reinsurance classes, where the impact of elevated inflation and cat activity continues to pressure loss ratios. Aside from property, premium rate trends were a continuation of what we saw through 2022. Markets are competitive and a number of our peers are pushing for growth, albeit discipline generally remains intact given uncertainty regarding economic and social inflation, heightened weather-related losses and constrained reinsurance capacity. Some moderation of premium rates continues in classes which have reached strong technical rate adequacy in recent periods, and this is most pronounced in financial lines. U.S. management liability has been a focal point for the industry over the past year, where competition has become less rational. North America's management liability portfolio is relatively small with U.S. public D&O accounting for net insurance revenue of only around 50 million. Moving on to claims ratios. Catastrophe activity had a meaningful impact on both the current and prior year. The net cost of catastrophe claims for the period was around AUD 700 million, which exceeded our first half allowance of AUD 535 million. This was underscored by the 2 New Zealand events in February, elevated convective storm activity in North America and a series of storm and flood events domestically. As we flagged in July, we have incurred around AUD 180 million of adverse prior development relative to the central estimate reserves held at the end of 2022. Of this, AUD 140 million related to catastrophe events that occurred through the final few weeks of 2022. This central estimate strengthening was more than offset by around AUD 210 million of risk adjustment unwind, resulting in reported net PYD of positive AUD 30 million. Pleasingly, long-tail reserves are broadly stable through the period. The reserve transaction we announced in February is already proving favorable in this regard. Importantly, our ex-cat claims ratio improved by roughly 1 point during the first half. This included some mix headwinds as we rebalanced away from property classes, as well as the benefit of compound premium rate increases relative to claims inflation. As referenced earlier, the impact of any movements relating to onerous contracts resides in this line. Over the period, we have had very limited change in our onerous contract provision, which remains at around AUD 100 million. This provision continues to be driven by AusPac personal lines and the North American sales we spoke about in May. Moving to expenses. Our expense ratio remained flat at 11.7%. While operating leverage remains a significant tailwind, we have continued to invest in the businesses period and have seen some cost inflation. This was largely due to the out-of-cycle pay increases across the group in July last year, in addition to the normal increase which occurred at the beginning of this calendar year, and neither of these increases were reflected in the prior year comparative. Given some of the tactical expense initiatives I referenced earlier, in the context of our combined ratio guidance, we expect the expense ratio to be below 12% for the full year of 2023. Moving forward, and as we have previously flagged, we are planning to -- planning an elevated level of investment in our business through our strategic priority around modernization. These initiatives are primarily focused on improving connectivity and ease of doing business with our customers and partners, supporting the digitization and efficiency of our core underwriting and claims processes, better leveraging data across our organization and providing better tools for our employees to meet customer needs. Ultimately, these initiatives will be critical to unlocking efficiency and revenue opportunities for our business. In this context, we expect the expense ratio to track in the low 12% range over the medium term to support these investments. Turning now to Slide 12 to add some divisional context. Underwriting performance has been mixed, with the first half cat impacts most pronounced across North America and AusPac and the majority of prior year central estimate reserves strengthening also incurred within North America. The overall North American combined ratio of 107% is clearly unsatisfactory, and Andrew will spend some time on our strategy shortly. In international, the combined ratio of 93.2% was a meaningful improvement on the prior period, where supportive ex-cat trends helped mitigate pressure on total acquisition costs. The Australia Pacific result was also disappointing. The combined ratio of 98.9% included the impact of higher than planned catastrophe costs and deterioration in the ex-cat claims ratio. I'll just provide some broader color on claims inflation. You may recall that we incurred claims inflation of around 7% in 2022. And as we entered 2023, we were assuming a mild moderation from this level. At the halfway point and looking across the business as a whole, claims inflation is tracking broadly in line with this expectation. The exception here is in AusPac, where domestic short-tail inflation was higher and more persistent than we had expected. While rate increases have now caught up to the inflation we're observing, earned rate was lower than incurred inflation in the discrete first half, and this resulted in the deterioration shown here in the ex-cat claims ratio. Across our key regions, economic inflation appears to be peaking or has peaked and we are seeing some very early signs to suggest inflation may be moderating in certain short-tail classes. While this is encouraging, the risk of persistency remains a key focus. Across long-tail lines, there remains limited evidence of a broad increase in inflation, though we remain attuned to the risks of lags, persistency and social inflation. I'll now provide a bit more color on our crop and lenders mortgage insurance businesses. In crop, the combined ratio of 99% was impacted by around AUD 40 million of prior reserves strengthening. While crop development is generally a feature in the first half, this AUD 40 million number is too large and further reinforces our efforts to better manage variability of crop results. From a top line perspective, we've continued to grow in target states and cede more to the federal fund in an effort to improve the balance of this book. To give you some context, for 2023, we expect crop GWP of around AUD 4 billion, up from AUD 3.5 billion last year. However, we expect net insurance revenue of around AUD 1.6 billion, which is only a small increase from AUD 1.5 billion last year. Growth remains challenging for our lenders' mortgage insurance business, where GWP was down by a further 50% in the period given reduced housing activity and the impact of the government's first homebuyer support. The impact of high interest rates has had some impact on delinquencies, though, this is ultimately been limited and credit quality continues to track quite favorably relative to our assumptions. Turning to the investment result on Slide 15. We've had a strong first half with investment income of around AUD 660 million, representing an annualized return of around 4.8%. This is materially higher than the prior comparative period and indeed above the total investment result for the full year 2022. This result excludes the mark-to-market losses associated with higher risk free rates over the period. As I referenced earlier, these impacts are now shown separately in a stand-alone P&L line item. The very recent step up in interest rates has driven our fixed income running yield to around 4.9% at the end of the first half. For context, having come from a sub 1% running yield just 18 months ago, we take a lot of comfort from the fact that interest rates will likely be higher for longer, which should support our returns moving forward. Across our risk asset portfolio, returns were generally supportive, where equities, infrastructure and enhanced fixed income more than offset lower valuations in our unlisted property portfolio. Our funds under management declined slightly over the half to AUD 27.4 billion. This was predominantly driven by the AUD 1.9 billion reserve transaction, which was partially offset by underlying growth in the business. We saw opportunities to selectively reposition this portfolio in recent months to align it with our long-term strategic asset allocation of 85% fixed income and 15% in risk assets. At the end of the half, risk assets represented 13.3% of the portfolio on a deployed basis and 14.8% on a committed basis. Moving now to Slide 16. Our balance sheet remains in good shape. Our regulatory capital position improved from 1.79x to 1.8x and remains at the upper end of our target range. Within this, there were a few moving parts during the half, and I'll step you through these at a high level. The reserve transaction we announced in February generated around 6 points of capital, and we recently launched a domestic Tier 2 transaction, which added another 3 points. On the other hand, organic growth in the business absorbed around 2 points of capital net of the earnings generated during the half. And the impact of the 2022 final dividend was around 5 points. It's worth noting that the balance of net outstanding claims increased by around AUD 1.3 billion during the half, reflecting the strength of organic growth during the period. Debt to total capital increased by around 1 point, which was due to the $200 million Tier 2 note issuance I just referenced. I'll pause here and hand back to Andrew.

Thanks, Inder. It's now 1 year since we outlined our strategy for North America and gave you some insight into its particular segments. Unfortunately, it's hard to see much progress in North American combined ratio this half as it ultimately remained to expose to property. Beneath these impacts, however, I do think we're making progress. To give some sense of business performance, we've provided some additional color here on the performance between core and non-core lines. These non-core lines used to constitute around a 1/3 of the division and will continue to reduce over the next 2 years. The remaining non-core net revenue around AUD 600 million is largely related to recently terminated U.S. programs, which were predominantly property programs, and the Westwood personal lines homeowners' portfolio. As a reminder, we sold the Westwood agency last year. That was part of the transaction agreed to continue providing capacity through to May 2025. Excluding these non-core lines, the revenue mix for our go-forward business is now in better balance. We're targeting broadly a third crop, a third specialty, and a third commercial. The table on the right-hand side highlights the recent combined operating ratios for these go-forward segments. Unfortunately, the new accounting standard makes trend analysis a little difficult, so we've given you a few data points. Firstly, on crop. This should be a low 90s business for QBE. We're the #2 player in the industry, have deep relationships, a track record of strong returns relative to the industry and consistent organic growth. We continue to focus on diversification and resilience. We've grown in traditionally underweight states and continue to optimize how we use the federal scheme and external reinsurance to deliver more consistency. Turning to specialty, which should also be a low 90s business for QBE. We have a leading accident and health franchise which has delivered consistent low 90s combined ratios for a number of years. In financial lines, with a team change in 2020, we changed our strategy and look to build profile. Some years on as the portfolio has grown and matured, returns have continued to improve and are currently quite attractive. As I referenced earlier, rate increases and growth opportunities in financial lines have become more challenging, that we have a 50% [ quake ] share across the portfolio and continue to debate whether this remains necessary. Turning finally to commercial. Many of our peers are able to achieve a low to mid-90s combined ratio in this space. This segment includes those remaining property programs we write, workers' comp, our middle market business and our small commercial -- our large commercial casualty business. Our workers' comp book continues to perform very well, with a consistent track record. We expect to maintain some property programs, which will be largely wind and quake related and complement our middle market property footprint. Finally, we've spoken a lot about in the last 12 months about our middle market strategy. Our performance here has been more challenging. As we've grown, our mix has shifted a little more toward property than targeted, and we haven't achieved enough industry balance. In response, we've stopped writing new monoline property, made some personnel changes and are working with our partners to get the balance we want. While we've achieved better scale, we expect growth in middle market will slow somewhat, and we're confident that the portfolio mix is closer to target. So we'll move now to Slide 19. You can see here the extent to which non-core lines have weighed on North America's results, particularly in the current period. The first half combined ratio for the non-core segment was around 140%, which leaves our go-forward business at around 100. As it stands, the non-core segment is heavily skewed to property and accounted for a significant portion of North America's current year catastrophe costs. In particular, the homeowners' book was quite impacted by the recent convective storms. So where do we go to from here? Non-core net revenues are expected to broadly half in 2024 and half again in 2025. Assuming second half catastrophe is at budget, the underwriting loss for non-core lines this year will be in the low $200 million range. This should more than half in 2024 and then improve further and conclude in 2025. We think reserve volatility from the segment should be well contained given the majority of gross reserves have been reinsured through various loss portfolio transfers. Roughly half of the remaining net reserves relate to short-tail lines. So looking out what worries me most is a residual catastrophe, and I think we have good governance in place to manage the operational impacts of the runoff. As we near the end of the runoff, we expect our Southeast wind exposure will have reduced by around 45%, with all peril exposure down around 30%. So I'll conclude on the U.S. here. So I said from the start I want to be transparent and open about our journey in North America. We wouldn't be persisting in the region if we couldn't see a pathway to a combined operating ratio that can sustainably trend in our group 90% to 95% target range. The successful runoff of the non-core segment should help us bridge much of this gap. Whilst we've had some setbacks this period, they have been concentrated in the parts of the business we're exiting, and hopefully, these slides help shed some light on our performance. So let's move to outlook. We're reiterating our full year outlook today. We expect group constant currency GDP growth of around 10% and net insurance revenue growth to track at a similar pace. We continue to expect a group combined operating ratio of around 94.5%, which excludes the upfront cost of the reserve transaction and includes a revised catastrophe budget of around $1.3 billion. Finally on investment returns. Whilst we can't predict where financial markets will end the year, we've again provided you with a view of our exit running yield. Collectively, our combined ratio guidance alongside current investment settings should support a mid-teen return on equity this year. We'll circle back to discuss how the second half is tracking on November the 27th for our third quarter update. So I'll close on the outlook here. This has been a disappointing half for me in many regards, but I do think we're making progress on our key initiatives and have good momentum in the business. A mid-teens return on equity here would be great following the setbacks we've encountered this half and we're all working hard to make that a reality. With that, I wanted to thank you for joining us. And I'll pass back to the operator for Q&A.

[Operator Instructions] The first questions comes from the line of Kieren Chidgey from Jarden.

A couple of questions, maybe just starting on the U.S. and some of the non-core portfolio there. Andrew, I think you mentioned sort of the Westwood contract having a maturity date of May '25. I was just wondering what is your ability under that relationship to significantly re-price to reduce some of these very elevated losses ahead of that contract rolling off in a couple of years?

So it's a good question. So it gave us some limited ability to actually look at the portfolio and re-price. But we have the straightforward view that in 2025 this business needs to attract another carrier. So they need to ensure that when they hand it over to another carrier in '25, it is profitable. It also generates a reason out of the commission revenue for Westwood, which was the business we sold. So there is an alignment of interest to ensure this portfolio is working. Otherwise in 2025 if no carrier wants to support it, it's going to be a very challenged business on both the underwriting part and Westwood. So there's an alignment of interest and that's what we went into the contract with. But we worked together with them over what rates and terms and how the portfolio balance actually works.

Kieren, maybe if I could just add to that. This business is actually written in the admitted markets and there's clearly some constraints within those admitted markets with the regulators as to what we can push and price in terms as well. And you've seen some of that, you know, both through some of our peers and the back and forth with regulators in trying to make sure we get the pricing, the conditions, et cetera, reflecting the risk.

Okay. And the commercial business I think you said excluding that non-core book is 100 combined ratio in the half. What would it have been on a more normalized cat basis this half? Just wondering sort of where that is actually sitting relative to...

Yes. It's a good question. I haven't got the number, mate. Obviously, lower than 100. But I haven't got the number at my fingertips. I think the key with the commercial at 100 is getting the mid-market to a better combined ratio, because within that 100, programs are below it and the mid-market is above it. So our main focus is bringing the mid-market down. And the mid-market has had a reasonable amount of catastrophe impact to it, which is above average, as you point out. Not surprising, the programs have had very limited cat activity because they're mainly earthquake, of which there have been none, and the North Atlantic hurricane season expose. So they are potentially going to be impacted in the second half, if there are impacts for that. So the main focus is getting that number down. I haven't actually got a number. Obviously, sub 100. I don't think it will be good enough though. It still needs to be lower than what it would be even if we did a normalized cat activity.

And what is the timeframe you're expecting to get the overall U.S. combined ratio down to -- in the group of sub 95 even?

So I think it's a great question and one we debate internally. I think we should be looking at 2025 as a time for doing that, because we should be able to do most of the underwriting actions between now and then.

Okay. And then I just had a second question on reinsurance. Inder, I think at the start of the year you signaled ex-crop, that the dollar spent on reinsurance should be fairly flat year-on-year with rate online up obviously, but sort of less coverage purchased. Can you just give us an update for how we should be thinking about your reinsurance expense moving through to full year?

Yes, Kieren. So that trend should continue, you know, for the year of 2023. Obviously, we'll have a built-in step up into 2024 given -- we've got this 2-year phasing, part of the program. So some of the increases we saw will flow through into 2024. And obviously, as we get to the end of the year, we'll be providing you an update as to how things are progressing on the renewal for next year. But no changes kind of first half, second half in terms of what we've flagged for 2023.

Okay. So the only growth will be the crop reinsurance expense going up?

Yes, largely.

Next from the line we have the questions from Nigel Pittaway from Citi.

Just, first of all, on the comment that you're expecting second half to be 92%, which is 150 basis points better than planned. You mentioned that was a combination of sort of rates and growth higher than planned and also tactical expense decisions. I'm wondering if you could sort of give us an idea of sort of the relative contribution of those 2 components. Is it more tactical expenses? Or is the underlying result the biggest contributor? Can you maybe just give us a flavor for how you're thinking about that?

Yes. Look, Nigel, it's -- we're getting into finer point of precision here. I think the takedown of incentives and some of the tactical expense decisions is probably somewhere between 0.5 to 2/3. And then we are assuming some improvement given the rate and growth in the first half running through the second half. We are cautious on how much we're taking that into account, right? So as we touched on inflation, assumptions are tracking broadly in line at a group level, but there are some overs and unders and there is some volatility in that. So we're a bit cautious in terms of what we're sort of assuming in the second half around that.

So you're not envisaging at this stage that come sort of full year, you'll be able to say, "Well, some of our inflation assumptions were conservative. We can unwind them." We're sort of expecting that you'll be holding those still pretty firm come year-end?

I think it's a mixture of how you think about the short-tail business versus long-tail business. I think in short-tail, we sort of end up booking the claims that we're seeing. So we tend to experience it. So if it goes up, we have to book that; if it comes down, we have to book that. I think on long tail, it's just harder to see. So therefore, it's unlikely we'll be looking to sort of meaningfully shift our long-tail assumptions. But on the short tail, to the extent inflation does moderate in some classes, you should actually see that come through.

Okay. Secondly, it was just on the sort of -- I mean, I know there's a number of moving parts in this. But I mean, obviously, you -- sort of at the full year, you said you were happy with your cat allowance for '23. Obviously, you have had to now lift it. But at the same time, you have been rationalizing the property exposure. So sort of how are you feeling about sort of where that cat allowance just in broad terms might need to be in '24?

I think -- Nigel, I think that's one for us to think about as we get towards the end of the year when we look at what we've actually done to the gross property portfolio. So the focus -- and we were trying to convey that earlier on, is I'm really keen to look at our gross property portfolio. Of course, once we've determined how we want to move that into 2024, that will determine what our reinsurance program -- whether it needs to change at all in 2024 and what our cat allowance should be. So I think it's hard to say at this point in time because we're still in the analysis and determination through our 2024 plan of how much we're going to move property next year.

And then you mentioned in terms of sort of the U.S. business that peers were sort of able to do the 90 to 95 combined. I mean one of the striking things is that your distribution does seem to be quite different to a number of those other players, and particularly sort of your lack of use of the agency distribution channel. How much do you think that's sort of playing a part in your ability to deliver combined ratios that are similar to that...

I don't think it's making a massive difference. I agree with you, the ones were sort of travelers and others where they have offices in many places across the U.S. They can sort of go for much more local, smaller operations. There is so much of this mid-market business in the large brokers, the second-tier brokers, and even the smaller brokers. So there's just so much of it in total, Nigel, that I don't think it's making a dramatic difference to us. I'm sure traveler and others do benefit from decades of relationships with some small agents. But I'm in terms of quantum of total premium in the mid-market in the U.S., I'm not sure that's a massive number.

And then maybe just finally, I mean, you did mention that you said that you don't want to keep cyber as a peripheral role. Just how significant do you think cyber could become for QBE, obviously, with us realizing that at your previous job it was pretty significant?

Yes. Again, that's a good question. We haven't had a particular target because I don't want us to go out and try and write as much of it as possible. I prefer slightly a hard word, I think, we're writing probably $150 million of it successfully over a year or 2 or 3, mainly in North America and out of our international business. I just think there was an opportunity to be consistent -- more consistent and build on what we've actually got, and it would run into several hundred million. It's very hard Nigel at this point in time to determine actual number. But the market itself is forecast to grow into the tens of billions of dollars over the next few years. It's been growing incredibly quickly. And if you don't have it as one of your products in your portfolio, then you have the possibility of being competed against by others who will offer it. And therefore, we'll get the other lines of business on the back of it. So I'm just a fundamental believer, we're a fundamental believer. You need cyber as an offering. I need to ensure it's a consistent offering, get the pricing, aggregation and claims right because it does involve risks like many insurance lines and it involves the risk of aggregation relatively quickly. So you need to ensure you're managing that aggregation well.

Next up we have the line from Andrew Buncombe from Macquarie.

Just the first one is in relation to the dividend. It's half. I understand that higher tax drove the lower dividend. But if that is supposed to be a one-off and the capital position is strong, while it wasn't the payout ratio higher this half because it does imply a pretty significant second half number even to go to the midpoint of the full year guidance? Just what am I missing there?

Andrew, no, you're not missing anything. The balance sheet is strong. We feel good about it. The growth strain is meaningful when we look at year-on-year, the reserve balances are up significantly, which we're obviously pleased about given we're looking to grow in the targeted areas. So we're comfortable with that. The dividend is also up in cents per share quite meaningfully year-on-year over the last 2 comparative halves. So it's just about being thoughtful first half, second half. We've got peak periods for cat. Obviously, you got to land the crop result in the second half, but nothing more to it than just simple maths of trying to be cautious first half, second half.

I think those are the underwriting performance not being as good as we'd like, wait on our minds when setting the dividend for the first half.

And then maybe a couple of questions on Slide 18 for the non-core portfolios in North America, please. On the chart on the left-hand side, you've said 14% of NEP is non-core. Is that a fairly similar mix for GWP? Or how does that look on that metric?

Yes. I mean there's not a big difference, GWP, NEP. So it's really the programs business, most of which is short tail and then the homeowners book again, which is short tail. So there's no nuances in the earnings pattern of any of those businesses.

I guess some of the programs are running off. So in theory, the NEP should outperformed the GWP at some point, I guess -- but you're right. It's in the margin.

Yes. And then that dovetails with my final question, please. There's been questions on the Westwood part. But of the ex-Westwood part in that non-core pace, how long should we expect that to unwind?

So we're going to be writing it until May 2025 and then it will earn out after that. So we'll have another year's earnings after 2025. So that will -- it's going to keep going until May 2026 before the earnings have finished on the whole roughly.

Yes. Sorry, on the ex-Westwood par...

The ex-Westwood part...

Most of that should really...

Sorry, that was Westwood part.

Yes. Most of that ex-Westwood should really -- we should be done with by the end of next year, Andrew. So we are progressively coming off those programs during the course of this year. So there will be some earnings lag, as Andrew was referencing for some of that into next year, but really by the end of next year, we should be done.

And then the final one for me. Can you just give us some color on how often you mark your valuations on your unlisted property?

It's a good question. We marked them quarterly. These are based on submissions from each of the fund managers that are managing these valuations. We have been very cautious around the valuation of some of these unlisted properties. But we are largely following the data points we're getting from the fund managers. The clear area of a bit of strain here is in the office side of commercial real estate, as we all know. We're relatively underweight when we think about the mix of business we have. So and it's broadly diversified by region and by mix in terms of office, industrial, et cetera. So we're feeling pretty comfortable with where we've marked it. We're probably going to see some further marks come through in the second half, but nothing that's going to have a meaningful impact in the aggregate.

Next up, we have the line from Julian Braganza from Goldman Sachs.

Just the first question on the crop portfolio there. So I imagine that will be a reasonable chunk of the improvement in the North America combined ratio trajectory. And just a couple of comments there. So firstly, interested in understanding just the 93%, just the split there between claims and expenses. And then secondly, just in terms of experience versus industry, I think you flagged favorable trends versus industry historically, if it's be interested in understanding exactly just what you're seeing there?

On the claims ratio, the claims ratio is probably the biggest component. This is not a heavy expense ratio business. And also we get some favorable economics given the quota share we've got with the seed commission that comes through. So the 93% is really anchored around a medium-term view on performance of that business as we've seen it. Clearly, the last 2 or 3 years have been higher than that. We think the efforts to balance the book, manage the volatility through the greater use of the Federal fund, diversifying our book across different states and having the external quota share is all geared towards supporting less volatility around that 93%, but clearly, we've continued to experience that. So that's, in essence, how we anchor it, there is no differences in terms of what we're seeing in the claims ratio versus what the industry is seeing. We are a #2 player in the market. So our performance is broadly in line with the aggregate market as we look back over the last 2 or 3 years.

And then, I mean, if I look at the last 4 years, the average of 96%, a long-term target of 93%, 99%, once you're back quenching the 40 million deterioration into last year. Is it a function that the underlying pricing that the Federal results riding? Or is it just more a function of just timing and in terms of how long it takes to get there? Just understanding -- just to understand what can be done to get to the 90% target.

Yes. No, it's a good question. It's something we give some thought to as well. Clearly, I think what you're calling out, which is just factual, and that's why we've shown it on the slide, is that the last 2 or 3 years have run higher than what we see as the medium-term average for that business. Now if the next 2 or 3 years continue to run at the same level, we'll obviously have to rethink what we think the target for that business is. But you've got to remember that this is a relatively low capital business. So some level of underwriting margin actually translates to a decent return on capital. There are pricing lags in terms of -- obviously, if the risk is changing, it does take some time for the Federal scheme to re-price to reflect that. And so we are not able to re-price business. We've got to effectively write the business that comes in the door at the prices stipulated by the Federal government, albeit we have the flexibility to then see that business into the federal fund. So let's see how this year plays out. And but you're calling out the fact that the 96% is higher in the last 2 or 3 years, and that's the fact.

We've also sort of changed our view of what we're going to see to the Federal fund this year based on what we've seen over the past 3 or 4 years, the most impacted states and that seems to be okay so far based on what we've, what we've seen in terms of weather patterns in the U.S.

Okay. Great. And then in terms of specialty there, obviously, 94% relatively better performing there. But I think the clear message you're giving us there is that uncertainty there in terms of just the outlook around social inflation and pricing in that market, which is causing some caution around growth in that segment. Is that basically the fair [indiscernible] in that particular [indiscernible]?

Yes. I mean, that's definitely the case because in the financial lines, we've got D&O in there, where pricing started to turn I think beginning of last year and is falling quite a lot. And therefore, we've taken -- we're not writing as much but as we thought. And then we've got our transaction liability, which in insuring M&A transactions, and there haven't been that many M&A transactions this year. So the premium in that area has fallen away. So our aim is to focus on that combined ratio and profitability rather than maintaining our premiums. So yes, premium growth in that business is going to be quite tough for the next year or 2.

And then last question for me. Just on that 7% inflation number last year. And in line with inflation, slightly off. I mean in terms of your expectations and just getting into the rest of the financial year, I presume you would have some line of sight on where it is at a group level and where it's heading. I'll just be interested in any comments, whether it's a class or just at a group level. That would be appreciated.

Yes. I mean as I referenced, the actual at the half year is broadly in line at an aggregate level. There are some overs and unders. In Australia, it's run a little higher in parts of our international business it's run a little lower. Clearly, we are seeing slightly different patterns emerge in terms of economic -- broader economic inflation across our regions. We're not really assuming any material change in the first half, second half. We're obviously seeing some of that short tail uptick we've seen in Australia just moderate a little bit and rates start to catch up, but we're not necessarily projecting a significant deviation or improvement into the second half at this stage.

Next up, we have the line from Andrei Stadnik from Morgan Stanley.

Can I ask my first question around your de-risking in the property book. Like which regions are in focus? And how much de-risking do you have remaining in terms of time frames?

So we're looking at property across the whole group. And what we're trying to see is whether we've got aggregations that we actually haven't actually seen before. We've obviously been impacted by some the infamous unmodeled perils in the first half of this year. And I want to see whether we can look at our property book and ensure we've got good balance in terms of exposure we've got in the right geographies. And if we have unusual events such as the amount of convective storms or flooding that we've seen or the winter storm all that we had last year that we're not surprised by the outcome of it. I think we have been surprised by the size of those, and I want to ensure that we actually look at our property portfolio and not be surprised going forward. So that's what we're trying to do is we're trying to look for aggregation that we probably haven't looked for before to see whether we have got too much property in certain areas on the planet that could be impacted by events that we haven't contemplated before. That's the main aim of it. Also, looking at how volatility is being driven. So the models keep changing on the modeled events. And are we picking up more volatility than we have. And if we are deploying, as I mentioned earlier on, this property cat capacity, which is in heavy demand at this point in time. We're also thinking of complementary lines, so we don't just grow property without thinking about what other lines of business we can sell to our customers through our broker network. So trying to think about property in a different way than we have done previously.

And how far along are you in this process, because I think you called out almost a year ago that you'd do like a $500 million GWP in the U.S. specifically. How far along this journey are you?

I think we're making good progress. So we've decided to change what we're doing in certain areas and stop underwriting certain programs, which is good. I just think there's more to be done. And this year has actually shown that. We've seen events that we haven't actually seen before. I want to actually look at those and see if we can actually learn more on it. We've got a group-wide initiative looking at it. So it's good. So we're learning from each of the 3 divisions who we think is doing better than others. Have we got better information in one division compared than others? And if we have, how do we elevate everybody to be the best. So it's a relatively straightforward program of work and see what we can learn from it. But overall, we can see the property cat and much more than property cat because it's in areas that we did not think were catastrophe exposed property generally has impacting the volatility of our earnings, and we won't try to decrease that. One of the aims is to actually reduce what we've got in property cat. And one of the aims is to actually increase the other lines of business. We're seeing whether it's going to be a combination of those 2 factors. And so far, it seems to be a combination of those 2 factors. We can't rely on the reinsurance program to take out volatility at the level we're feeling it. It will take out volatility at a much more extreme level than we're being impacted by.

Can I ask around pricing because pricing improved in the June half, but also even in the June quarter and improved. And that's despite slow in pricing and financial lines you called out. So what were the areas that actually saw better pricing and what's driving that?

Well, obviously, property have just been talking about on the stuff we're keeping, we're really pushing terms and conditions and pricing. So we have done quite a lot in the property lines. I guess we've also seen it to some extent in motor in parts of the book. Those will be the main areas. I mean casualty, we're trying to hold our position.

Yes. And obviously, you've got areas like QBE Re, which obviously have a first half skew in terms of what business we write. So it's predominantly property plus other short-tail lines where we are seeing inflation persisting, and we're responding to that. Broadly across casualty, it's sort of in the single digit, mid-single-digit sort of area occurred more broadly beyond some of the areas we talked about such as financial lines where we have seen some rate actually go negative.

And if I can ask a final question. Well, maybe slide hypothetical, but again, on crop. U.S. crop price and in 2 of the 3 largest crop areas are down substantially from February levels. So if those levels persist, is there any chance of delivering a low 90s combined ratio? Or is some sort of a higher combined ratio inevitable if this current price levels persist?

As things stand today, you have a series of overs and unders. So pricing on corn is probably down mid-teens from kind of the base level of pricing. And that -- if that holds Andrei for the rest of the year, that shouldn't be a problem. Obviously, if it starts to go further south from here, that may have an impact just depending on what happens on yields. Prevent planting this year has been a bit better than we had last year. Last year, we had some meaningful losses in the prevent planting. So crop has gone into the ground, growing conditions. There's clearly some drought conditions across different parts of the U.S., but we are also seeing some level of rain more recently. So we'll just have to see how all that plays out. But it's not just price, as you know. There's a series of other moving parts. But if pricing conditions hold up where they are today, that shouldn't be a factor, ultimately.

We have the question from Simon Fitzgerald from Jefferies.

My first question for yourself, Inder. I was just looking for some of the sort of drivers around the net insurance financing income of $149 million this time around. I was interested to know with the fixed income losses from changes in risk-free rates, I guess I was just looking for something more representative of the mismatch there, which you mentioned again was $30 million. Perhaps it's got a little bit to do with just my coming to terms with AASB 17. But maybe you can just give us some highlights there?

No, it's a very good question. So you've got a negative 200 million in the investment losses. So these are your risk-free rate impacts on the investment assets. And the $149 million is really the mainly the gain on liabilities from higher risk-free rates, the clearly 200 minus 150 million is 50 million, and we're talking to 30 million. The other 20 million is really to do with some of the accounting for the Enstar transaction in terms of deferral of some investment income around that. So that is your delta, the net ALM impact is 30% when you look through that.

Okay. And normally, we should see those 2 -- again, a representative of that mismatch that you speak to?

Yes.

Under normal circumstances?

Yes.

Okay. That's good. Second question for yourself, Andrew. At the first quarter '23, you mentioned some of the issues around the delays and sufficiently being able to assess those claims specifically related to Storm Elliott. You did mention that you'll need more people. I think you also talked a little bit about potentially lifting the excessive skill. But just wanted to know a little bit how you've gone with that? And obviously, what sort of confidence you have that you're not going to run into the same problems in the future?

So great question, isn't it? So I think the challenge we had, as you say, Storm Elliott was a very large storm happened towards the end of the year. And I think the process we're going through now as we assessed the convective storms in June is better. So we've got more people involved in it using more data. So I'm a great fan when you're assessing these, you get the actuaries, you get the claims managers and you get the underwriters all looking at together. You come to a number of views because they would never agree with each other. You look at those views and you come up with a reasonably conservative end of the position. And then you look at any market information that anybody else has announced and again, set your number on the back of that. So I think we've done a more thorough process with the convective storms in June than we did with the numbers back in December with winter Storm Elliott. So I'm pretty comfortable about it. There's always going to be a challenge, I'm not actually getting it right. So based on limited data, you're having these losses just before the end of the year, even a month in a few claims actually come in. It tends to be a month 2 and 3, so you start picking it up then. But everything we've seen so far, we feel pretty comfortable with the numbers we came up with in June. And we've also -- the Storm Elliott hasn't deteriorated from where we were earlier on, which is also good.

Just my final question that sort of still stems from that issue. You did mention a little bit about AI technology. Do you think there can be a technology link here to help speaking with assessors and your link to actuaries and so forth?

So I think -- I'm really excited about AI because of the amount of information both underwriters and claims managers have to review to come to a conclusion. So there's definitely going to be something in it. Underwriters have to go through pages and pages of relatively unstructured data to try to assess the risk, and AI might be able to help that. And then picking up your point, similarly on the claims front, you're looking at a lot of instructive data coming in to make your assessment of the claim. And AI, I think, will be able to help in both of those areas. So we're quite excited about it. Want to ensure it's well controlled. But I do believe it could be a major change for the insurance industry.

The first one comes from Siddharth Parameswaran from JPMorgan.

Just a few questions, if I can. Just firstly, on rates and your premium rates and what you're seeing on retention rates. It seems like -- I mean, you obviously had a very good premium rate growth and rate outcomes this half, but it looks like your retention rates are starting to drop. And just wondering if you could comment how much you would tolerate some of these numbers to continue to remain at these levels, particularly in Australia, I think, where retention seems to have dropped? And could you just give some comments on longevity of the current trends?

Actually, Sid on that point, we're pretty pleased with the way our retention is holding up. If we look at AusPac, second quarter retention of 88, so I mean that's a very healthy retention given the level of rate and term changes we are seeing. So we think what we're trying to do is broadly aligned with where the market is at in terms of pricing for inflation, cat costs, reinsurance costs, et cetera. So the only area where we've got retention relatively low at 66% across North America is partly because we're not renewing significant amounts of business as we've just referenced, we're trying to come off business, which obviously prints that number lower.

Yes. So you're comfortable that -- I mean, you're not worried about North America, obviously, because that's still going through remediation, but all the other portfolios you're very comfortable with...

Yes. Look, I think in mid-80s, I think, is a very good healthy level for the industry. So we're feeling that the market is absorbing the changes in price and terms, and we're not out of line.

I mean I think, if anything, we've had a marginal concern. Retention has been a bit high rather than too low. Because if we are trying to put rate through to improve some portfolios and we're retaining too much of it, it means we're probably not moving enough.

Inder, if I could just ask a question on inflation. So particularly around -- I mean, I think you mentioned that on short tail, you're seeing signs in certain areas, perhaps it might start to moderate from the 7% to 8% that you saw at the end of last year. Just on long tail, I was hoping you could give us some comments on what you've seen so far, whether you have -- and what you've done with your inflation assumptions? Are we getting the same, any reason to worry about long tail inflation?

No material changes in views really, Sid, we are holding to the assumptions we've held, which is in the low to mid-single digits across casualty more broadly. Clearly, in the second half of last year, we did increase some of our inflation assumptions as we saw some of that inflation spike. We've also -- where it makes sense and where we've got specific drivers like average weekly earnings in areas like CTP and others, we have picked those higher. But nothing we're seeing in terms of emerging trends. The issue really is on a 2, 3, 4-year look forward basis, the risks around social inflation, and we're seeing some of these verdicts as courts reopen in the U.S. come through. We've talked about how we've been de-risking our portfolio against some of those trends. But that's what we really worry about on a 3, 4-year look forward basis rather than anything in year that we can react to on the long-tail business.

The changing of the times. But those court awards are going higher?

We haven't seen anything like that...

Yes. We haven't seen -- we've seen 1 or 2 instances in our book. But broadly, as you've seen from the commentary in the U.S., we are probably seeing activity around commercial auto, around general liability umbrella classes where there have been instances of verdicts coming through. But the business we're writing today is much more focused in terms of the smaller limit sizes, et cetera. So we're very conscious of that risk and some of the recent trends are probably going back to where we were pre-COVID.

And just one final question for me. Just IFRS 17, I'm just trying to unpack your views on underlying performance in first half '23. First, were there any impacts from things like onerous contract charges that might have been higher or lower this half versus the past? And maybe just my simple view on underlying might be just to start with that 97.6% and just attract PYD and also just the adverse cat trends which are worth about 4.4%. That would just about 93.2% for the first half. It does suggest significant improvement in need in the second half to hit your guidance. And usually, you've seen some adverse seasonality in the second half, that is what we guide to, particularly on cash. I was just wondering, it seems like you need significant improvement in the second half. Is there anything from IFRS 17 that is basically distorting the trends in the way I'm looking at those numbers?

No, obviously, IFRS 17 plays through a number of line items, right? So whether it's onerous contracts or the movements around risk adjustment or the movements around discounting. I think it's really difficult to sort of put a line through all of that and say it's maturely over or under. I think the second half improvement is really anchored around the things we've talked about. So we're not assuming that there is a material leg down in current ex and year ex-cat. On the allowance, it's very simple. We've taken the actual for the first half was 700 million, and we just added the allowance for the second half. So there is no more maths than that. And we're just cautioned that trying to get to an underlying excluding the cat overrun. You've got to be cautious around that because clearly, we are seeing -- as we think about '23 into '24, there will be an increase in the planned allowance that we had at the start of this year versus what we're going to have in the plan for next year.

We have the last question coming from the line of Anthony Hoo of CLSA.

Just 2 questions. Firstly, just on Slide 18 on the left-hand side, you showed us the non-core portion of the North America business that you look to run off over the next 3 years. I just want to check, are there any costs or capital impact arising from that runoff?

Yes. I mean we did talk about managing the expense. When you say cost, you mean extra cost of running them off. No, there's no extra cost in running them off. They'll just be our underlying expenses, and we need to manage our expenses as they run off and redeploy the people who are managing that runoff into other parts of the business, which should be easily achievable. There's no exceptional cost or extra costs in running off those lines.

On capital, again, the same. I mean, as Andrew referenced, there's about 2 billion of reserves associated with that book, but that's heavily reinsured. So the net reserves closer to 800 million. A chunk of that is short tail. So no real material capital changes either.

Second question was just around your ROE. You mentioned before that if you keep your full year guidance, which is much stronger second half than you achieve a mid-teens ROE. If you succeed in your initiatives around rebalancing the North America business, what do you think is achievable in the ROE once that takes shape over the next couple of years?

That's a good one to commit to. I think based on interest rates at this level, I'd like to continue to achieve something like a mid-teens. You're right, it's a balance. It's really hard to say because interest rates are or investment returns are so high at this point in time. Are they going to stay at 5% over the next few years, I think it's unlikely. So you're coming down to 2% or 3% again and then you're adding the underwriting profit of mid-90s, whatever that works out from an ROE point of view. I guess it's hitting mid-teens when you drop the investment return to 2 to 3, and you had a better combined ratio.

Yes. I mean just to give you, Anthony, a sense of how we think about this on a through-the-cycle basis. We're effectively targeting in our pricing, a return framework that sort of is 10% plus risk free. So you've got to take a view of what the blended risk free is going to be based on our duration and mix of currencies, and that's, in essence, our target return hurdle.

I would now like to hand the call back to Andrew for closing remarks.

I'd just like to end for thanking everybody. Thank you for the questions, and thank everybody for joining us today.