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

Good day, and thank you for standing by. Welcome to the QBE FY '23 Results Briefing. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Horton, Group Chief Executive Officer.

Good morning all, and thanks for joining us today. I'd like to start by acknowledging the traditional owners of the many lands on which we meet today and recognizing their continuing connection to land, waters and culture. I pay my respects to elders, past and present, and extend this respect to any First Nations people joining us today. I think we've had a good year, and these are strong results. I initially spend some time discussing the evolution of our business and strategy before handing over to Inder to talk through the detail of the financials. As per the usual format before Q&A, I'll circle back to conclude with some comments on the outlook. So, let's move to Slide 4. The key messages from today's session are well summarized here. Financial performance improved significantly, the 16% return on equity reporting today almost doubled compared with the prior period. We've had another strong year for growth continuing in the double digits. GWP growth of 10% was in line with guidance and highlights the strength and breadth of the franchise. We delivered a combined operating ratio for the year of 95.2% or 94.6%, excluding the upfront cost of the reserve transaction we announced in February. Our underwriting result continues to demonstrate more resilience and consistency, and we expect good improvement in the year ahead. On our strategic priorities, momentum continues, and we have a lot of progress to highlight throughout the presentation today. Collectively, the GWP drag from terminated property business amounted to roughly $400 million this year, with another $600 million expected to run off in the near term from decisions already actioned. This is around $1 billion of underperforming volatile property business, which collectively contributed a combined ratio of around 130% in 2023. These initiatives are driving a meaningful reduction in exposure to global perils, particularly in the U.S. and Australia. From the actions currently in train, we see a 15% to 20% reduction in our exposure to peak wind events, which reduces even further in Australia after taking account of the Cyclone pool. This means our potential property volatility is reducing and indeed, at the shorter return periods we've spoken to about, we're becoming much more comfortable with the level of catastrophe volatility in the business. Finally, I wanted to touch on the reposition, which occurred in our Reinsurance business, QBE Re. The reinsurance market was in mild this array in 2023, and this presented a great opportunity to leverage the investment we've made in QBE Re over recent years. We have an attractive proposition in the market with a broad global platform, which ultimately enjoys the benefit of our group credit rating. The team entered the year with a similar strategy in property. At about 1/3 of their business, the goal is to maintain property premium broadly steady, however, leverage our in-demand capacity to build new and deeper relationships whilst reducing volatility. The transformation has been significant. Despite around the 25% reduction in worldwide parallel exposure, property premium was stable on account of strong rate increases. The exposure reduction has come about through the decision to exit our small retro book this year, alongside materially higher attachment points across the book. The team has also been very deliberate to reduce correlation with our insurance exposures. This means where we might pay insurance claims in a 1 in 5 event want QB Re attaching much further out. We've had good proof points on this with no notable claims from New Zealand flood events or any of the North American events this year. Indeed, our reinsurance exposure in Australia and New Zealand is down around 90% and our exposure to 1 in 5 and 10 barrels in North America, it's down 40%. Moving to Slide 9. Our sustainability agenda remains focused around these three areas. In underwriting, we continue to improve our underwriting emission measurement capabilities and have set formal customer engagement targets. Leveraging the skill set of our European renewables franchise, we launched the cradle to grave insurance for Australian renewables projects, essentially providing cover over an asset's life cycle. We also continue to make progress on our Build Back Better initiative, which looks to build and repair properties more sustainably. I'm really pleased with the progress we've made on diversity, particularly surrounding women in leadership, which now stands at 40%. We've introduced new diversity targets this year, spanning the dimensions of gender, ethnicity, disability status and LGBTQ+ identification. With that, I'll now pass over to Inder.

Thank you, Andrew, and good morning all. I'll start with our results overview on Slide 11. This is our second result under the new accounting standard, and hopefully, you're becoming familiar with some of the changes in our reporting. As we've said previously, we want to ensure that the market is comfortable with the quality and comparability of our updated disclosures, and we'll continue to work with you on this front. In terms of the 2023 result, I think there are four main themes to highlight. We've delivered strong high-quality growth. We've meaningfully reduced exposure to volatile segments of our business to support greater resilience in our underwriting profitability. We've delivered an exceptional return on equity. And finally, the strength of our balance sheet has continued to build. I'll now walk through our key financial metrics for 2023. GWP of $21.7 billion was up 10% over the prior period and in line with our guidance. The combined ratio improved to 95.2%, which includes the upfront cost of the $1.9 billion reserve transaction we announced in February. Excluding this, the combined ratio was 94.6%, which was in line with our outlook. As we alluded to in our Q3 trading update, whilst we're pleased with the second half performance, this did benefit from lower catastrophe costs, offset by some discrete short-tail inflation challenges and a weaker crop results. Moving to investment income. We've had a great year with our investment income more than doubling versus the prior year with total income of around $1.4 billion. This reflected strong returns across both core fixed income and risk asset portfolios in what was a highly volatile year. Our tax rate was marginally higher than expected, largely due to the mix of earnings and particularly the challenging profitability in North America. The result also included a $25 million impairment of our North American office premises, which reflects the well-publicized valuation pressure in this segment. Adjusted cash profit of almost $1.4 billion was substantially higher than the prior period, translating to a group cash return on equity of 16%. In terms of the balance sheet, the PCA multiple has increased from 1.79x to 1.82x and at year-end is marginally above the top end of our 1.6x to 1.8x target range. The Board has declared a final dividend of AUD 0.40 per share. This equates to a full year payout of 45% of cash earnings. On a pro forma basis, after allowing for the payment of the final dividend, our PCA multiple reduces to 1.74x. Turning now to Slide 12. Growth in written premium of 10% is a great outcome considering the drag from exited lines during the period. This represents further compound rate increases of roughly 10% and ex-rate growth of around 4%. We were particularly pleased with the growth momentum in international as well as the more targeted expansion in key franchises in North America and Australia Pacific. As you can see in the table on the slide, the overall growth rate in North America and Australia Pacific was impacted by portfolio exits. And excluding these, the ex-rate growth in these divisions was around 4% and around 2%, respectively. We spoke about our sustainable growth agenda in August and have continued to execute well against a diversified set of opportunities. We've made good progress in deepening our core franchises in Australian and U.K. commercial lines, Crop and Accident Health in North America. We've expanded our presence in reinsurance and on the European continent. We've innovated well to build out our QBE portfolio services business, including becoming the reference carrier for a global specialty lines facility with one of the major global brokers. Turning now to Slide 13. I'll start here on premium rate increases. We've achieved rate increases of around 10% for the year. Within the quarterly analysis on this slide, I do want to caution that the seasonality can be quite pronounced in our Northern Hemisphere businesses. Much of the property and reinsurance business renews through the first half for international and for North America, and quarter-over-quarter trends are heavily influenced by mix. Rate increases achieved through 2023 reflected broad strength in property classes, general stability across casualty lines, partly offset by ongoing pressure in financial lines. As we look ahead, the outlook for premium rates remains favorable. This is an attractive market with good rate adequacy across the vast majority of our business segments. Moving now to the combined operating ratio on the right-hand side of the slide. Current year catastrophe costs of around $1.1 billion, tracked within our allowance for the year of $1.175 billion. 2023 was a record year for secondary payroll activity, ultimately contributing around 2/3 of global insured losses for the year, which are likely to settle around $120 billion. Given the significant increase in reinsurance attachment points across the industry, the bulk of these losses have been retained by the primary insurers. In this context and given our focus on reducing CAT volatility and building a more resilient CAT allowance, we are pleased that we came in below our allowance for the year. Our ex-CAT claims ratio improved by roughly 1.5 points or just under one point if you exclude the current year strain from risk adjustment. This represents the benefit of rate increases relative to inflation, though the extent of improvement was limited by some of the inflation challenges we referenced in November, principally in consumer lines here in Australia, alongside noncore lines and A&H in North America. Adverse prior year development, as measured from the central estimate totaled around $220 million. This was predominantly weighted to the first half, where PYD of around $180 million largely represented development on late 2022 catastrophe events and in addition, we experienced a $30 million deterioration in our Crop reserves. The incremental development on the second half was driven by short-tail inflation challenges, I just referenced, which we flagged at our November trading update. It's worth noting that the noncore lines in North America accounted for roughly $85 million of the group's prior year development. As Andrew referenced, long-tail reserves are broadly stable for the year, though we're highly attuned to the social inflation risks in many of these lines. While the extent of short-tail development is unacceptable, rates are now better covering inflation in these lines, and we've acted on the learnings from the cat events of late 2022. Moving on to expenses. Our expense ratio was fairly stable at 11.8%. As we referenced through the year, we took some tactical expense actions in response to the underwriting profit challenges which emerged through the first half. With this in mind, the exit run rate on the expense ratio is probably closer to the low 12% range and we expect to remain in the low to mid-12 through 2024. Our investment in modernization initiatives will help unlock efficiency and revenue opportunities for QBE. And as our execution matures, we will update you on any relevant implications for our medium-term outlook. Turning now to Slide 14 to add some divisional context. Underwriting performance across our three divisions was mixed for the year. The result in North America of 104 is frustrating, and we need to do better. I'll come back to some of the more detail around this on the next slide. International delivered an exceptional result. The combined ratio of 89.5% improved by around five points on account of favorable ex-CAT trends, CAT costs being below allowance and a reduction in adverse prior year development. The combined ratio in Australia Pacific increased slightly over the period, which reflected short-tail inflation challenges and elevated catastrophe costs in the first half. The higher expense ratio predominantly reflected increased investment in modernization initiatives. In crop, the combined ratio of 98.4% was impacted by prior year reserve strengthening, which added around two points. The current year result of 96.6% was at the upper end of the target range we referenced in November. This year was characterized by challenges from both lower commodity prices and drier conditions in certain states. Relative to the harvest window, commodity prices for many of our key crops have continued to decline. Should these prices hold through the remainder of February, we would expect crop GWP to be marginally lower year-on-year. We continue to strive for both improved balance in our Crop portfolio and a more optimal mix of external reinsurance and utilization of the government pool to increase the probability of achieving our target underwriting profit. Gross written premium for our lenders mortgage insurance business declined by a further 40% to roughly $100 million. Credit quality remains favorable with limited impact from the fixed to floating rate reset thematic that played out through 2023. Given the considerably reduced gross premiums for LMI, we opted to reduce our external quota share from 50% to 30% for the current underwriting year. Turning to Slide 15 to give you some additional color on North America. This is a continuation of the disclosure we shared at the half, which separates the performance of our three core business segments from the noncore runoff portfolio. As a reminder, the noncore portfolio now principally reflects recently terminated property programs and the Westwood homeowners' portfolio. There remains around $600 million in net premiums in the noncore segment, which are expected to broadly halve this year as the property programs roll off. Our capacity commitment for the homeowners' portfolio will effectively end in early 2025, and this premium will subsequently earn out over the course of that year. In aggregate, these lines contributed an underwriting loss of around $245 million, which included more than half of North America's catastrophe costs and roughly half of the division's prior year development. As we flagged in August, we expect the noncore underwriting loss to more than half into 2024 and then improve further and broadly conclude in 2025. In the interim, we have good alignment with our distribution partners around managing the profitability of this business through the runoff period as they are ultimately incentivized to find replacement capacity. Turning to core segment performance. Across our Specialty and Commercial segments, you can see good progress. Both segments include some prior year development but also benefited from a slight beat versus the CAT allowance. Performance in Specialty is a mix of a solid result in financial lines bundled together with a tougher year in accident health due to the inflation pressures we highlighted in November. A&H is largely a short-tail business that renews on 1 January. Based on the renewal outcomes we achieved about 6 weeks ago on premium pricing, terms and conditions, we're confident of improved performance in 2024. In commercial, we had a good year in workers' comp and property lines, though performance in the middle market was challenging, largely due to the significant impact of first half convective storm activity and adverse prior year development on storm Elliott. We definitely have work ahead of us, but hopefully, this disclosure gives you some sense of the near-term pathway to improve performance in North America. A final word, as you think about the combined ratio implications for 2024, be conscious that the noncore result was heavily impacted by both prior year and CAT. You will need to be mindful of any double counting as you analyze the combined ratio trends into the year ahead. As I referenced earlier, the noncore PYD was around $85 million, resulting in a current year drag of closer to $160 million. Turning to Slide 16 on our reinsurance renewal. Relative to 12 months ago, this year's renewal was more orderly, and we're pleased with the outcome. Our reinsurance partners recognized our ongoing efforts to improve the quality of our property book. Our 2024 program remains broadly unchanged, and the cost of our program will be broadly neutral to the combined ratio for the year ahead. The $400 million attachment point of our main cat program is consistent. We purchased slightly less at the top of the program, mainly reflecting the new cyclone pool in Australia and recent portfolio exits. Markets for volatility and lower line covers remain fairly uneconomic, and we expect this will remain the case for the foreseeable future. Noting the strength of our capital position and the fact that rate online on these low line covers is nearing dollar swapping levels, we've continued to place only a small order on our CAT aggregate treaty. In all our CAT retention is broadly stable year-on-year, and we feel good about the resilience we've built into our CAT allowance. You can see this in the "as-if" analysis we've included on the slide here. The 2024 CAT allowance would have been sufficient in 8 out of the last 10 years, an improvement from last year and importantly remains comfortably set relative to the elevated cat losses experienced over the last 5 years. Moving to Slide 17. We've updated you on our investment performance through Q3 and closed out Q4 in strong fashion to deliver an excellent result for the year. Total investment income of $1.4 billion represented a return of 4.7% and was supported by favorable returns from both our core fixed income and risk asset portfolios. The exit running yield improved over the year to 4.6% where it has broadly consolidated through the early weeks of 2024. I suspect healthy debates around in the direction of our running yield will continue in coming months. For now, the futures market currently suggests the 2024 exit running yield of 4.1%, i.e., this is what the current interest rate curves are projecting as our running yield at the end of 2024. This is only a point-in-time view, which will undoubtedly change, but hopefully, it provides you some useful additional context. Across our risk asset portfolio, we were happy with the returns of almost 6%, given the valuation pressure in unlisted property. Our funds under management increased by roughly $3 billion over the half to $30 billion. This was predominantly driven by the strong investment results for the half and the healthy growth in the business. Over the course of the half, risk assets reduced as a proportion of the portfolio to 12%. This was largely due to the strong Q4 returns in core fixed income relative to the negative returns experienced in property. On a committed basis, where funds have been committed, though not yet drawn, risk assets currently represent around 14% of the portfolio, broadly in line with our long-term strategic asset allocation of 85% fixed income and 15% in risk assets. Moving now to Slide 18. The strength of our balance sheet remains a consistent story. Our regulatory capital position improved from 1.79x to 1.82x and remains at the upper end of our target range. Importantly, the quality of our capital has also improved. Our core equity Tier 1 ratio increased from 1.16x to 1.23x. I'll just give you some color on the key movements in our capital position through the year. On the one hand, we generated strong profits, which increased our PCA by around 25 points. And on the other hand, risk charges associated with the strong organic growth in the business absorbed around 17 points of capital. Finally, dividend payments during the year consumed around seven points. It is worth noting that excluding FX and the reserve transaction, the balance of net outstanding claims increased by $2.5 billion during the year. The reserve transaction released around six points of capital from the legacy back book, and we redeployed this capital to support new business growth in an attractive market, and this effectively has enhanced our risk-adjusted returns. Debt to total capital continued to reduce to 22%, which is at the midpoint of our target gearing range. Finally, our S&P capital position improved over the year, and we retain a meaningful surplus to the AA requirement. Importantly, we are well positioned under the new S&P criteria as the model generally favors large diversified insurance groups like QBE. I'll pause here and hand back to Andrew.

Great. Thanks, Inder. I'll now talk through the plan for 2024 and then conclude with a few points on why I'm really positive about the year ahead. Firstly, on growth. At this stage, we expect constant currency [indiscernible] growth of around the mid-single digits. Then that, we expect premium rates to remain supportive that will likely moderate slightly following significant property rate increases in 2023. Rate adequacy is excellent across most of the business, and we expect further excrete growth in our focus areas. This will be partially tempered by the headwind I referenced from terminated property at around $300 million. We expect net insurance revenue growth to be slightly above GWP growth. For our combined ratio, we're planning for around 93.5% in 2024. To give you some context on the year-over-year trend, we finished 2023 at 94.6% or around the mid-93 on a current year basis. Into 2024, we expect an expense ratio in the low to mid-12 and there will be a headwind from the higher catastrophe allowance. In the other direction, we expect further ex-CAT improvement, a better Crop result and a benefit from the ongoing runoff of noncore lines in North America. And finally, on investment returns, our exit running yield was 4.6% and Inder gave you a useful data point on what markets currently expect for fixed income yields from here. Combined with our planned combined ratio, these current investment settings will continue to support a very strong ROE outlook for the year ahead. We'll circle back to discuss how the first half is tracking at our AGM on May 10. Hopefully, through today's session, you've gained a good sense of the transformation taking place across the business. Whilst I hope to have made a little more progress at this juncture, I feel we're on the right path. In 2023, we didn't achieve our planned combined ratio, which is incredibly frustrating, and I want to start the year on more resilient settings. I want to ensure that we do a better job of hitting our guidance, hopefully, find a place where the balance of updates is more positive. To this end, you can see the extent to which we're trying to address CAT volatility, further raising the sufficiency of our CAT allowance means we're trying to reduce the scope for any downside here. On inflation, while some moderation is likely this year, we do want to maintain a sensible allowance for the potential that inflation remains persistent in short-tail lines or slow to manifest in long tail lines. This feels prudent at this point, and as I noted earlier, our underlying business settings are becoming much more resilient. This should ultimately mean we have a higher probability of achieving our plans, but importantly, any downside is much better contained. To give you some context from our 2023 plan, a 1 in 5 downside year would have pushed our combined ratio beyond our 90% to 95% target range. In 2024, we expect a 1 in 5 downside year is going to be broadly contained within that range. I'll close on the outlook here. 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 Kieren Chidgey with Jarden.

A couple of questions, if I can. Maybe just starting on the GWP take growth outlook of mid-single digit. You've given a sort of a useful inflation outlook of around 5%. So, I presume you'll be looking to have rate increases at least match that, certainly, if not more. Just wondering, therefore, what sort of the disconnect is between the pricing outlook and the total GWP growth. I do note, so do you, called out the $300 million property book decline, but that sort of is a bit over 1%. So, it still looks like you're not actually allowing for much in the way of underlying volume growth across the business in the year ahead?

So, picking up on Inder made the comment, Kieren, about the Crop business being flattish based on the setting of where the commodity price is which is a reasonable chunk of our GWP growth. I think we are planning for rates to temper into 2024. Some lines we discussed before in the financial lines have been quite challenged and don't expect that to change much. We are continuing to focus on where the growth areas where we've done really well, which can be QBE Re portfolio solutions, some of the mid-market business here in Australia and on a smaller level, the A&H business in the U.S. So, I think it's not as easy to grow across the portfolio as we had done in 2023, and that's why we're guiding to the mid-single-digit growth. Inder is there's anything you want to add?

Yes. I think the two main headwinds you've called out, Andrew. One is Crop and the other is the ongoing runoff of the non-core component. And then, Kieren, the one thing we are doing is making sure absolutely that rate needs to cover our views on inflation. And I think we've got a better handle on that, particularly on the short-tail lines. But we do still continue to see opportunities to grow, but it's probably going to be a bit more targeted.

You are sort of definitely targeting rates at least at that 5% level?

We're definitely targeting margin Kieren, over growth. So, we want to try to maintain margin, and we do think it is going to be tougher to grow as rates are topping out.

It's a good segue into my second question just on the combined ratio for the next 3 or this year of 3.5. I know there's a lot of noise sort of in the '23 numbers that if we're adjust [indiscernible] start to reserve top-ups, your CAT rates and the worst Crop result on some of margins. Yes, we sort of have you sitting already around the 93.5 months. So, it doesn't seem to be much in the way of underlying improvement baked into year ahead despite obviously some runoff from the noncore where combined ratios are and obviously, premium rates earnings are above inflation. So, just wondering what the disconnect is there, particularly given we've seen a bunch of fourth quarter results from U.S. commercial peers showing very good underlying combined ratio improvements year-on-year?

Okay. Let me have a go to the macro, and I'm sure you can never go at bridging it better than I do. So when I look at it, if we look at the three divisions, Kieren, we're not planning for international to do as well in 2024, as having '23 as we had a fantastic year, and we talked about how the rates, especially in the international market, under a bit more pressure than other areas. In the U.S., we're obviously expecting it to improve from its 14% down partially because of the noncore and some of the underlying improvements. And in Australia, we're expecting to be slightly less than where it was slightly improved over where it was in 2023 and we touched on expenses being a bit higher and our capital lines being a bit higher. So, I see that the combination of those being 93.5 being a good plan number for 2024. Did touch on what I just said just now. I'd like to achieve the guidance. If we can beat the guidance that would be great because we've been slightly missing it over the past 3 years. Inder if you have further to add?

Yes. Andrew, I think we are probably going to get a few questions trying to bridge this. So maybe if we just walk you through a little bit of the math at least this is our view on how we've constructed it. So, we start with the 94.6 from that, we're taking obviously adjusting for the prior year, which we expect or don't plan to recur. So let's call it one and the midpoints from that. We're obviously strengthening the CAT allowance, call it a bit over 0.5 point. We're also calling out higher expenses, which we said in the context of investment going into the business and the headcount growth is roughly around 0.5 point or so. Clearly, we expect the benefit from the noncore business to flow through. But as I was saying in my remarks, we have to be careful not to double count some of the prior year in that. So, we think that's in the 30 to 40 basis points excluding that. And then we also expect the Crop business to normalize, so that should help. And then once you figure through all of that, there's a modest level of ex-CAT improvement to get back to the 93.5. So, that's kind of how we construct it, but happy to continue the discussion around that.

[Operator Instructions] Our next question comes from Nigel Pittaway with Citi.

First question on Crop, if I may, please. Obviously, you've achieved 96.6% combined. If you go back to PYD to last year, you're sort of more at 98, 99. You've got an external quota share, which is net to lower expense ratio. You've got scale because you're numbers are here. I appreciate it's been two difficult years. But why can't you do better than that? And do you think you're performing better than market in the costs?

I would say, Nigel, we're in line with market when we've looked at what the market participants are doing. And to its quite hard to tell, like-for-like it's not as though everybody puts the same into Crop. But when we've seen others, they have been taking out the PYD in the mid-90s. I think we've got to continue to look at whether we can get better balance in the book. I've talked about this before. This is a book I really like because you can decide what to keep and what not to keep, particularly with the state government scheme there. So, I think we've got to look at that even more. We did some in 2023, which may have helped a bit, but we need to look at it again for 2024. The challenge we have, of course, these are one-shop things. So you get everything set and it's this month and next month, you decide what you're putting into these states, you decide what you're buying from an external quota share point of view, and then you wait until October to November to decide whether those decisions are right and then you have another go at it. So, I still think we've got to look at the balance in the Crop book again in 2024. Good news is in a way that commodity prices are down a bit, which means there may not be too much froth in those, and therefore, they may not fall as much and they can't fall as far from a lower number, which is good news. And, of course, that's what we had the challenge of last year, a lot of premium with the commodity prices being very high. And that sort of the retention was eaten into by the Crop. The commodity prices falling before we had some of the dry weather inter touched on causing further claims. So, we need to get better balance into it. I think it's roughly in line with where everybody is. We have got a big book like others do, and that does give us, as you say, the breadth and balance that competitors smaller books don't have. Inder you've got...

Yes. I mean, Nigel, our view remains that we're a top 3 player. It's a relatively consolidated market. The top 7 or 8 players control about 80%. It's relatively rational. We've got enough tools through the internal reinsurance to the federal scheme and the external reinsurance to be able to manage better the results. But even just to give you some comfort around return on capital at even 96, the mid-96 this is covering its cost of capital, but we need to do better, and we are very focused on it.

And how much do you expect the reduction in premium to be at current prices? You said ones.

It's really difficult to guess because obviously, we can look at the screens and look at where the Crop prices are at. But the other slightly harder piece is the volatility factors and organic growth. So, look we think we could be down a couple of hundred million, but don't hold us to that. We'll give you a proper update in May.

And then just focusing again back on the 93.5% guidance for next year. I mean, I do hear you're saying that it's meant to be more resilient and that sort of thing. But it's still sort of in the top half of your sort of longer-term guidance range of 90 to 95 at a time when we have basically had the strongest insurance market for at least 20 years. I mean, from a broader perspective, do you think that a strong enough result in this environment? And at what stage do you think that strong environment will be more reflected in QBE's results?

Okay. Nigel, it's a great question. Obviously, something we focus on. But the U.S. is the drag, doesn't it, which you have written about as have others over the past year. So, having a U.S. currently at 104. We won't be moving immediately down to the 95 that we're targeting for 2025 and beyond. So, we're going to be somewhere between $104 million and $95 million in 2024. That ranks us down compared with some of our competitors, the international business, what it's delivered this year being a bit higher combined ratio in '23, in 2024 being a bit higher, there's still going to be a great performance where the market is. And the SPAC business is doing pretty well, of course, impacted by some prior year some inflation and current year accounts to some extent last year. So, I feel everything is pretty good. The North American business isn't as we've discussed on a number of occasions, and we've got to bring that in market outlook for '24 still looks fine. So, it doesn't look as though the market is deteriorating rapidly. We discussed the financial lines before. So, some elements are great. But generally, across the portfolio, rating audit looks good. So, we can continue to improve, trying bring the combined ratio in and the premiums we write in '24, will earn out into '25 and beyond. So, this shouldn't be seen as a high watermark, and we're not trying to improve upon it because both the rating environment can help us and also the North American business improving and that final runoff of the noncore. So, I still think we can improve somewhat from here based on the current market conditions.

Our next question comes from Julian Braganza with Goldman Sachs.

Just a follow-on on the discussion just on the combined ratio trajectory. In terms of just that underlying ex-CAT improvement, I just wanted to understand how you're thinking about that? Because this basin the numbers that you provided, it looks like it's a lot that's been embedded just underlying ex-CAT improvement. Can you just provide a bit more color on, how can you battle that?

Yes. Look, thanks, Julian. Good question. I mean, you've got a combination of things. Obviously, we're looking at the rate versus inflation dynamic, which has been nuanced in some lines as we've gone through. If we look '23 into '24, we've obviously seen some level of strong performance in certain lines where the ex-CAT claims ratio, particularly if you look at international, the overall result of 89.5, some of that's going to renormalize back as well in certain lines, which have had a very strong '23. So, we feel pretty confident that we are continuing to see rate holding either at or above inflation levels. We continue to see the margin being resilient, but you'll have some ons and offs in some businesses improving and some businesses normalizing as part of that. But the biggest play for us overall is to make sure we can get the improvement come through in North America, and that should be very helpful to that.

And then in terms of just in the Australia division, because, I mean, you have the chart there that shows the rate increases and retention over time. You see that the rate increase is very strong and continuing. But the retention numbers there are coming off. I just wanted to understand exactly what's happening that dynamic.

No, no. I mean, in some areas, as we've discussed in the property world, we have been coming off some business as we try to get a better balance of business going forward. So, that's not unexpected. Also, I believe when you have got a higher rating environment and rates going up, there is more marketing of business generally. So, you're likely to lose some and then win some back. So, that's what's driven the retention. We haven't been particularly worried about any particular area in terms of retention in '23. They're in line with where we thought they would be from a planning point of view. So, we're pretty comfortable about them.

Yes. And I'd say if you look at the first half versus second half, I think we called out when we spoke at the first half that we probably were a little bit behind as an industry on the level of rate we needed because inflation had run a little higher. So, you can see that retention is probably getting to a better level as we look at the average across the year because the rate settings are now probably more reflective of where inflation has been heading. So, we're feeling better about margin into '24, and we're very comfortable with the retention levels.

And last question, just on the net. I think, Andrew, you mentioned, in your closing remarks, on the outlook that, I think you mentioned net revenue growth slightly above GWP growth for FY '24, is that right? Because like a bit more higher [indiscernible] revenue growth or GWP?

That's what I said, think I said net insurance revenue growth to be slightly higher than GWP growth. If it sounded the other way around, I made a mistake because it should have set slightly higher.

I think you said it right. I think the question was is a bit surprised that, but I think the point being, obviously, we've had very strong rate as we've gone through 2023. So, that will earn through in 2024, and it's sort of a natural reflection of where we are in the cycle, if you look at relative to GWP growth to '23, '24. So that makes sense. You've interpreted that right. And that is actually the dynamic we expect to play out.

Our next question comes from Andrew Buncombe with Macquarie.

Just the first one is on tax. A number of your peers have been incurring deferred tax assets. This result the changes in the Bermuda tax regime that are coming down the pipe. Just out of interest, how are you planning on treating that? And in conjunction with that, how should we be thinking about the tax rate for FY '24?

Good pick up, Andrew, and good question. So there are some differences between us and some of the peers that have been recognizing some of these deferred tax assets in Bermuda. It's really primarily the U.S. GAAP reporters and the delta between fair value accounting, which is now permitted for tax purposes in Bermuda versus the more the book value centric accounting under U.S. GAAP is the biggest driver of that. So, we obviously are under IFRS 17 on a mark-to-market basis. So, we don't have the same dynamic within our balance sheet. In terms of the tax rate outlook, so just on that, you'll see that quite consistently play out between the IFRS 17 reporters versus the U.S. GAAP reporters. In terms of the outlook for tax going forward, we feel that the natural tax rate of the firm, just given all the changes that have been going on across the world is probably in the mid-20 as we look into 2024. We still got some level of off-balance sheet attributes, which we haven't recognized as deferred tax assets. So, depending on the mix of earnings, which is obviously a big driver, whether the earnings in North America continue to improve, we should be able to recognize some of that tax loss onto the balance sheet through the course of 2024. So natural rate around probably mid-20. And with a small amount of recognition, assuming the earnings profile plays out, we should be a little lower than that in 2024.

And then the next one is in relation to Australia. So, 2 years dropped coverage on a couple of underwriting agencies and partnerships in Australia in recent months. It would just be interesting to get some color, has your approach to underwriting agencies changed?

No, it hasn't changed. I think the couple we've dropped have not been profitable for a number of years. And therefore, we decided at that point in time, it was worth changing them. I think underwriting agencies are great ways of getting access to the business that it's very difficult for us to access. So, no, it hasn't changed, but they do need to be profitable for us.

So, just on the back of that, when you assess profitability of some of these arrangements, are you looking at them through the Australian license or at a group level?

I'm not sure, is there a difference between from the Australian and the group level? So, can you explain what that difference is?

My understanding specifically the CHU was that a decent portion of the earnings were pushed up through Equator re-globally, which made it look different on the Australian license.

We look at it in total. So, yes, we look at it in total. Does it actually make money if we do something internally, I'm not sure we do, then that's fine. But yes, we look at them in total. Do they make money for us in total after the reinsurance costs we allocate to them?

Yes. It's a bit of historical folklore here.

I don't know what that is because we look at -- I'm not sure when I look at CHU since I've been here, Andrew, a quite reason never been mentioned. So, I don't think it has any relation to the profitability of it.

It kind of probably goes back a few years, Andrew, where we had Equator as a separate reporting entity. So, everything we look at in terms of return on capital profile, et cetera, is what we call a post pushback basis. So, we report the results all in. The internal reinsurance doesn't really play into it. So that's just the lens we look at it.

Our next question comes from Andrei Stadnik with Morgan Stanley.

Can I ask my first question just around the pricing transit you showed? The fourth quarter showed that a slowdown versus the third quarter. But at the same time, it was up on the fourth quarter of the prior year. Can you talk a little bit about -- I think about the pricing trends, how much of that slowdown in [indiscernible] seasonal?

Yes. I mean, I think it probably showed up more in international than anywhere else on under think on the chart. So I think to some extent, it is seasonal, but to some extent, we think it's more structural with a lower inflation that prices are coming down and to some extent, the margins are relatively good in the industry and not surprising with margins good, more competition comes back in to compete price away. So, I think it's a combination of things. I think we saw the same thing in Q4 last year where the rating environment in the fourth quarter of international was a bit lower than have previously.

And my second question, just around Slide #8 and apologies if you kind of flow through that side a lot of effort. But in the Slide 8, you show the windstorm, U.S. big exposure down 15%. It's really down 18%. But in your comments, you said a much larger number, something around U.S. has been down 40%. So, can you just repeat those comments and just reconcile the two different figures? And then in the context of clearly lower property exposure, can you then explain just how conservative is your new in a clearly high catastrophe budget for FY '24?

Okay. So, I think the difference between the two numbers is the larger numbers I was talking about QBE Re itself, and this is total for the group. So, I was pointing out that QBE Re had taken more action because they had the opportunity to with the reinsurance market, giving you the opportunity to rebalance our portfolio as a number of areas. And therefore, that's the difference between the sizes of those two numbers. Andrei, what was the second part of the question?

Around the resilience of the CAT allowance.

Around the resilience of the CAT allowance. The. So, I mean, we show a chart then we're showing how the cash allowance looks over a number of years. I mean, one of the things we have done this year is we spent a bit less on reinsurance than we thought, especially on the CAT programs, and we thought we would recycle that saving into the CAT allowance. And that's a couple of elements. One is on the aggregate cover, which we don't think is great value and one is on some of the specific buy-downs that we're no longer buying which, in our view, are very expensive. So, I feel that the CAT allowance now is pretty resilient. We're trying to reserve at a relatively prudent position last year, and it's probably a bit more prudent in '24 than it was in '23. And of course, in '23, Andrei, you saw us talk at the half year, thinking we were going to go through our CAT allowance. And then by the time we got to the end of the year, we came under the CAT allowance. So I feel more comfortable having a CAT allowance. We've got less chance of going through. And, of course, if we put the CAT allowance in the underwriters themselves after to cover the cost of that. So, it impacts everybody's P&L. And therefore, we need to maintain rate and pricing to cover the cost of that CAT cost, which also quite light.

Our next question comes from Siddharth Parameswaran with JPMorgan.

A couple of questions, if I can. I wanted to just clarify in the -- your reading of the underlying combined ratio for FY '23. I think you gave an answer to Kieren, which gave some indication of some of the moving parts into next year. But I just wanted to just get your firmly your view of underlying for the starting point for FY '23 because there are several moving parts. Maybe if you could just get that clarified.

Sid, I wasn't necessarily trying to form necessarily underlying view of '23. We're just trying to walk you, I guess, the construct between '23 and to '24. The adjustments that are pretty consistent with actually what Kieren led with in terms of the question itself, we are not planning for the prior year to recur. So, if you start from the 94.6, you can adjust for that. The second thing is, as we look into '24, the two key things we've called that are going to go up is the CAT allowance and the expense ratio. So, in the order of 50 to 70 basis points each between them. And then, we obviously expect the benefit from the improvement in the noncore in the U.S., and we're seeing that is in the 30 to 40 basis points. And we're expecting Crop around a little better and the ex-CAT to improve at the margin. I mean, those are the building blocks between '23 to '24 at least our view of it.

Well, if I could just ask the second part then, which is the second half of the year, we're earning through rate into '24, which should be around 9%. So, I think a point that good thing that rates will slow, but you're still saying it will be above inflation. And you're flagging inflation of 5% for next year. It seems like quite a gap between what you earn through and where you're seeing inflation. First question just around that is, is there a different definition between the rate and what you're seeing for inflation? So, is rate per policy exposure and as inflation something else. So I'm just keen to get a perspective on why there's such a gap between these numbers and what doesn't seem to be any suggestion of improvements in combined ratios coming through.

Yes. In terms of the -- there is no necessarily differences in definitions. The main thing is, you're always going to have a little bit of basis risk between the written premium rate than how it flows through to the earned rate and then how the inflation kind of breaks out between short tail, long tail, et cetera, et cetera. So, you would have seen through 2023 that the ex-CAT ratio did improve. We continue to see the ex-CAT ratio improving into '24. We are flagging though that some lines of business when you look at the result in some profits of international, for example, the ex-CAT performance has been extraordinarily good in the 89.5 and some of those businesses will normalize in terms of their run rate claims into '24 '25, et cetera. So, it's just a combination of, yes, the rate is converting the rate is in excess or broadly equal to inflation, ex-CAT is improving, but you have some ons and offs within that.

Thank you. I would now like to turn the call back over to Andrew Horton for any closing remarks.

I'd just like to thank everybody for joining us today, and thank you for those questions at the end of our presentation. And I hope to see you all soon.