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

Good morning, and thank you for joining us today. I'm here today with Inder Singh, our Group CFO. And this morning, we'll take you through what are another great set of results for QBE. We're well on track for a strong year, and I think the business is on an exciting trajectory. Before we begin, I'll start by acknowledging the traditional owners of the many lands on which we meet today. For me, this is the Gadigal lands of the Eora nation and recognize their continuing connection to land, waters and culture. I pay my respects to the elders past and present and extend this respect to any First Nations people joining us today. Moving to Slide 4 with a snapshot of our results. It's clear we've had a good start to the year, with strength across the board from growth to underwriting, investments to capital. Headline GWP growth picked up to 6%, which was driven by underlying ex-rate growth of 7%. Profitability is attractive across the majority of portfolios, and we remain motivated to grow the business. Our first half combined ratio of 92.8% is essentially in line with our full year outlook and represents another marker of more predictable, resilient performance. To this end, catastrophe costs will come [ re below allowance ] in a period pegged as the worst first half for the industry in over a decade. We had favorable prior year releases, which are encouraging, following our efforts to derisk and build resilience into the balance sheet. And finally, we've delivered steady performance in a backdrop which was quite complex with escalating conflicts, tariff disruptions, plus an active period for large claims. As expected, premium rate increases moderated through the period. This was most noticeable in certain commercial property and Lloyd's portfolios, while the remainder of the business was much more stable at around 4.5%. Our investment result was broadly steady on the prior period, with income of close to $800 million representing an annualized return of almost 5%. Collectively, return on equity of 19.2% was excellent, and we're on track to deliver another year of high-teen returns. Our capital position and balance sheet remain well positioned. And through the period, we welcomed credit rating upgrades from S&P and Fitch, who both moved to AA minus. Finally, we've announced an interim dividend of $0.31. Turning to Slide 5. I wanted to open with a recap on the key pillars underpinning our medium-term aspiration for QBE outlined here at the bottom of the slide. We shared these with you in February, which appear to have resonated well, giving you a sense of what QBE wants to be known for over the coming years. In effect, they are 5 simple ambitions which we think, if done consistently, can be differentiating and drive significant value for shareholders. This is exciting as a pivot in our focus and ambition is occurring at a point where industry fundamentals are quite attractive. To expand on that a little, we operate in an increasingly uncertain world, and the risk landscape is really quite complex. As you think through the prior half decade, the world has encountered a global pandemic, material economic and geopolitical uncertainty, significant impacts from extreme weather, high-profile cyber incidents, plus more active conflict than we've seen in many decades. Our customers have been impacted to varying degrees, and as a result, are more risk aware and ultimately more risk averse. Commercial P&C has an incredibly important role to play in this backdrop, and we're motivated to deliver great solutions for our customers. I think commercial P&C also has a critical role to play in supporting a number of major global growth thematics over the coming decade. From the renewables transition, the shift towards digital assets, infrastructure for growing populations and the evolution of mobility, all themes need innovative and dependable insurance partnership. Along this path, new risks will undoubtedly emerge as technology and economies evolve. We'll be well integrated into these structural shifts given our problem-solving culture, leading broker relations and strong presence in our key markets. As we look at the industry today, returns are attractive, and the market remains disciplined in aggregate. We think this speaks to the inherent complexity in the commercial P&C landscape currently and the need for more consistent industry returns. With improved pricing and claim sophistication over the past decade, those in the industry who truly understand risk plus our scaled, diversified operations will be best placed to navigate these trends and capitalize on emerging opportunities. So turning to Slide 6. So then how is our strategy evolving to capitalize on this backdrop and support our medium-term aspiration? You'll recall in February, we suggested 2024 was a period of transition for QBE. In the years prior, we've been incredibly focused on initiatives to derisk the business, achieve better balance, reduce volatility and sustainably improve performance. Where we stand today, we feel the health of our underwriting portfolio is excellent. We're on track to further reduce underperforming sales this year, and our strategy is becoming more future-focused. For portfolio optimization, that means evolving beyond the period focused on fix, repair and exit to one where we continually look to optimize the portfolio across dimensions of growth, ROE, combined ratio and volatility. As a result, we've had more time to concentrate on our growth strategies and align as an enterprise behind our most compelling structural opportunities. Our modernization strategy is evolving, too. With a number of important foundational system and data work streams behind us, we're well placed to lift our pace on transformation. We have a sound data and AI strategy and understand the foundations required for QBE to deploy AI at scale across the enterprise, which in some cases will involve functional transformation. We have a number of great partnerships in this space [ with one ] of the world's largest companies through startups which can experiment and build solutions at a much faster pace than us. Our progress execution and momentum are all underpinned by ongoing stability in senior leadership, which is important for consistency. On balance, there's a great deal of change occurring in QBE, and it's a real privilege to be leading the company through this transition. Putting this all together, what do we want to be known for medium term? Firstly, we're a uniquely positioned international carrier with strong presence and relationships across all key markets and platforms. This lends us a level of portfolio diversification, which now in better balance, will drive more predictable underwriting performance. We want to keep growing and effectively build on this better base. We're building a business which can deliver sustainable mid-single-digit volume growth. Beyond growth, we're building a more efficient and effective business. And over time, this will unlock significant value. And finally, we want to be known for being highly disciplined in how we allocate and manage capital. And we shared our capital allocation framework with you in February. Collectively, continued delivery around these ambitions will generate high-quality performance which we expect will be rewarded by markets. Turning to Slide 7. This slide unpacks one of the points I just made, giving you some color on the balance in our portfolio and how it drives predictable performance. We've shared a handful of different views of our business on the left. No matter how you cut it, QBE is one of the most uniquely differentiated and diversified carriers in the world. Unlike many international insurers, we aren't over indexed to our home market, have true balance across our key regions of operation. We have broad expertise both in product-led and more service-led segments and have talent and capability across all key classes of business. This broad presence is underscored by leading relevant franchises which gives us representation across all key insurance and reinsurance hubs and markets. Ultimately, insurance is all about diversification, and QBE is a fantastically diverse business. With our portfolio now in better balance, we have confidence in sustaining more consistent performance. To illustrate this point, we've included the chart on the right. What this shows is a view of our 13 underwriting pools, which are an aggregation of our multiple cells, into broad domains of commercial, specialty and reinsurance, which we use for internal performance measurement. [ Prince ] North America Commercial as a pool, QBE Re as a pool, our U.K. commercial business as a pool and so on. It gives you some sense of the distribution of our growth and rate this year, but also the distribution of our combined ratio across the business, shown here relative to this year's outlook of 92.5%. At any point in time, there is a wide spread of profitability across our portfolios with varying price, claims, combined ratio and ROE dynamics. While a lot of attention gets placed on where premium rate increases are relative to inflation in forums like today is, in reality, this is only one of many drivers feeding into the outlook for underwriting margins. Mix, portfolio management and portfolio optimization initiatives are incredibly important in this regard. As our terms, risk selection, retention, our source of efficiency and the volume growth in this chart supports margin as the business scales. You can see some pools have a combined ratio which is accretive to our 92.5% outlook, which we are generally growing. Others are dilutive, which are shrinking in the most notable instances. In some cases, however, we're growing pools which have a combined ratio above 92.5%. In many instances, these pools have a slightly higher combined ratio though need less capital and give us a highly accretive ROE. For example, at 1/1 this year, we grew our U.S. A&H business substantially, which [ plans ] around 96%. That has low volatility, it's capital-light, and we'd love it to be even bigger. In other instances, we may be growing a combined ratio dilutive pool for strategic reasons. For example, we're standing up adjacencies in North America. These are multiyear investments which take time to grow and scale. Pool C will draw some focus, which is experiencing premium rate reduction. This is international markets, which is effectively our Lloyd's business. Rate is negative, though it has an accretive combined ratio, and most Lloyd's underwriters will tell you some of the most attractively priced business in many years, which we're trying to add more of. When you double-click into this chart, behind it is 50-plus cells, all with different profitability dimensions. While we guide to a combined ratio, we manage and view profitability across multiple dimensions and often make trade-offs between combined ratio versus ROE, which is ultimately what drives shareholder returns. So to close here, we create a lot of value through active portfolio management, and particularly as markets become more nuanced, our diversification gives us many levers to optimize performance. Moving on to customer and growth on Slide 8. We outlined our ambition for sustainable mid-single-digit volume growth at our briefing in February. With a presence which spends most products and regions, all with their own unique profitability cycles, there will always be something we can grow. [ X-ray ] growth in the first half was 5% or closer to 7%, excluding exits and crop, and we're well on track to extend our track record of sustainable growth in 2025. I want to spend some time on our customers' strategic priority to date. Our work and ambition in this space will be another important enabler of our growth strategy. In February, I flagged that Julie Minor has joined us as Group Head of Distribution and will lead our customer strategic priority. The two key pillars underpinning this work will be firstly, to better serve our customers; and secondly, to build deeper relationships with our distribution partners, taking each in turn. We've never had an enterprise customer strategy, and this is an exciting direction for us. We serve customers right across the spectrum, from consumers and small businesses through Fortune 500 multinationals. We think there's a significant opportunity to better serve the unique needs of our customers across these segments. We commenced building the data and capability to tailor our products and services, leveraging an enterprise-wide CRM system to improve customer data and analytics. We've also started mapping key customers across the enterprise to senior relationship leads to improve engagement. And this year included a customer component within the nonfinancial metrics underpinning our long-term incentive program. Turning to distribution. Our historic approach to distribution has been somewhat fragmented, and since joining QBE, I've been motivated to build an enterprise strategy. We have a lot to gain by better leveraging our global scale and becoming more targeted in our distribution strategy. We can also gain from improving engagement at all levels of the organization. This year, we've commenced mapping GEC sponsors to each of our largest trading partners to support and grow key relationships. With that, I'll now pass to Inder.

Well, thank you, Andrew, and good morning, all. As Andrew has referenced, we've had a strong start to the year, and this is an excellent set of results. Our performance across both underwriting and investments is tracking in line with or better than our 2025 plans, and our annualized return on equity at 19.2% is particularly pleasing. Our ambition is to continue to shape the business to deliver sustainable, industry-leading performance over the medium term. I'll start with an overview of our results on Slide 10. Gross written premium of $13.8 billion was up 6% over the prior period, or around 8%, excluding Crop and business exits. Our combined ratio improved by around 1 point and positions us well to deliver our full year outlook. The improvement was driven by the reduced strain from noncore lines, some favorability from CAT, a modest release from prior year reserves and consistent current year underwriting performance. Our high-quality investment portfolio delivered an annualized return of almost 5%, which was broadly stable versus the prior period despite what has been quite a volatile 6 months for financial markets. This was driven by a fairly steady core fixed income yield of around 4% and a strong performance in risk assets. The net impact of changes in risk-free rates was again broadly neutral this period, a pleasing outcome given the elevated volatility and macro uncertainty. We had a tax rate of 23%. This was a little better than expected, driven by the mix of our earnings tilting towards our North American tax group. We continue to see our effective tax rate trending at around 25% now that we've fully exhausted our U.S. deferred tax assets. I do want to call out two items which are more one-off in nature. Firstly, we had an FX gain of around $35 million, which gets accounted for in our investment result. Secondly, as we work through the final phase of our U.S. noncore runoff, we booked a gain on sale of around $18 million associated with the wind down of our homeowners portfolio. Adjusted net profit for the half was a record $1 billion, up almost 30% versus the prior period. Group return on equity was excellent at 19.2%, increasing by around 2 points. Our capital position remains very strong, with the PCA multiple at 1.85x. The Board has declared an interim dividend of AUD 0.31 per share, which equates to a first half payout ratio of around 30%. Consistent with prior years, our distribution is a little lower in the first half, and we will true this up with a final dividend at the end of the year. We have slightly increased our dividend [ franking ] rate to 25% from 20% previously, and we expect to maintain this over the medium term. Turning to growth on Slide 11. We've had a good start to the year for growth and are on track for our full year outlook. Group GWP growth of 6% was substantially higher than the 2% we delivered in the prior period. The drag from exited lines is now moderating, and the headline growth rate more clearly illustrates the strong momentum we've built in the business. Excluding the impact of Crop, GWP growth was 6%, and on further excluding the impact of portfolio exits, growth was closer to 8%. This was driven by average rate increases of around 2% and x rate growth on the same basis of 7%. Andrew spoke about market conditions in his remarks. To add some additional color, premium rate increases for the half were broadly in line with expectations for North America and for international, though were a touch softer than anticipated in [ AusPac ]. We are seeing modest rate reduction in commercial property lines and most Lloyd's portfolios. Rate in some of these segments has increased by well north of 50% in recent years. Profitability is excellent, and giving up some modest rate will have limited near-term consequence for the overall group margin. If we adjust for these two segments, group premium rate increases for the half were around 4.5%, down modestly from the prior year. Volume growth in the period was a function of organic growth in a number of Northern Hemisphere segments, including accident health, U.S. specialty, crop, cyber, portfolio solutions and reinsurance. We have highlighted many of these segments as key growth focus areas through recent briefings. Our modernization and customer strategic priorities are well aligned to this ambition, and we're investing to build capabilities to support growth. Our premium retention rate was stable over the period and pleasingly continues to improve for the core North American business. For the full year, we continue to expect a drag from exited portfolios of around $250 million, with roughly $200 million of that having occurred this half. Turning to Slide 12 for some comments on our underwriting performance. Our underwriting result was excellent and one of the strongest in many years. The combined ratio improved by around 1 point to 92.8%, essentially in line with our full year outlook. The year-over-year trend can be broadly attributed to three main drivers. Firstly, the drag from noncore lines is significantly lower, which benefited from a modest release from prior year reserves. Secondly, we had some favorability from cat, alongside a modest prior year release in the core business predominantly from short-tail lines. And finally, we continue to benefit from favorable market dynamics with the combination of moderating inflation, compounding rate increases and operating leverage, tempered by slightly elevated large loss experience. Catastrophe costs of around $480 million were comfortably within our allowance of $550 million. This is particularly pleasing given industry estimates for insured losses show the first half as being the costliest start of the year for insurers in over a decade. We feel good about the resilience of our cat risk settings given the portfolio and profile of our book and the construct of our reinsurance program, where we continue to retain all upside in benign periods. Pleasingly, on reserves, we saw favorable development around the central estimate of $90 million compared to $20 million adverse in the prior period. We saw releases in a number of North American and Australian short-tail classes alongside a continuation of releases in Crop, in CTP and in LMI. The ex-cat claims ratio was relatively steady versus the prior period. The benefit from supportive market conditions was offset by a change in business mix and the slightly elevated large claims experience I referenced earlier. In the middle of the slide, we've included a view of our premium rate increases by business segment indexed back to 2020. This chart highlights the extent of rate increases in recent years and provides some insight into the strong levels of profitability embedded in our portfolio. It is worth noting that these rate increases have been accompanied with significant improvements in broader policy terms and conditions, such as lower limit deployments in many classes of business. Moving to expenses. Our expense ratio was steady at around 12%. We continue to benefit from positive operating leverage and will maintain a healthy level of reinvestment to support the higher change spend associated with our transformation agenda. As we referenced in February, we expect the expense ratio to remain in the 12% to 12.5% range again this year. As Andrew noted earlier, we see a significant opportunity to become a more efficient and effective organization. And this, together with the benefits from our modernization programs, should support a lower expense ratio over the medium term. Moving to divisional performance on Slide 13. Importantly, each of our divisions performed well through the first half, and this speaks to the broad strength and quality of our earnings base. In North America, the combined ratio continues to edge lower, and the noncore runoff is well on track. We achieved another period of strong growth in accident health and financial lines and some of our newer adjacencies and specialty lines such as construction and health care, our building momentum and market presence. We're now moving into the final months of the noncore runoff and are very pleased with the progress we've made. As you can see on the left-hand side of this slide, the noncore result for the half was an underwriting loss of just $20 million. This is an exceptional outcome given the cat activity in the period, and this outcome has significantly derisked our full year underwriting targets for this segment. The core segment result of 96% slightly missed our plan, though we continue to expect a full year result of around the mid-90s. The combined ratio of the core business was impacted by some large loss activity in our aviation book, plus some impacts from business mix given the recent growth in accident health, which runs at a higher combined ratio. The Crop result of 92% benefited from favorable prior year development, while the current year combined ratio was booked at 95%, consistent with the approach adopted in the prior period. Over the last few months, we have conducted a comprehensive review of our Crop strategy with the objective of constructing a better, balanced portfolio and improving performance of private products like hail and livestock. We've been able to enact a number of important changes for the 2025 season, including much higher usage of the federal reinsurance scheme, which is reflected in our net insurance revenue decreasing by 6% during the period despite our gross written premium increasing by 9%. For private products, we commenced pushing substantial rate increases and reducing exposure in certain areas. We've appointed a new CEO for the business alongside other senior leadership changes we've made last year. Moving to international. The combined ratio of 92.5% increased by around 3 points, which was a resilient result in light of industry loss activity in the period. This was driven by a 2-point increase in catastrophe costs, where the majority of QBE's L.A. wildfire exposure sat within international. Despite this, both insurance and reinsurance portfolios delivered excellent underwriting results. Importantly, growth momentum remained strong, and we achieved ex-rate growth across all of our segments, including Lloyd's, reinsurance, U.K., Europe and Asia. The level of premium rate increases has moderated, albeit this is most pronounced in our Lloyd's business, where established market participants are looking to grow at what continue to be healthy levels of profitability across most portfolios. Overall, premium rate increases in international ran at around 1% this half, though when you look below this headline, rate increases were roughly 4% across our reinsurance, U.K. and European segments. Moving to Australia Pacific. The combined ratio here was excellent, improving significantly versus the prior period, which was impacted by elevated catastrophe costs. Through first half 2025, catastrophe costs ran closer to budget despite a reasonably active period of storm and flood events. We saw strong favorable prior year development, supported by LMI, CTP and multiple short-tail portfolios, where inflation continues to gradually tick lower. The growth story has been a little bit more challenging closer to home. The market remains fairly competitive, albeit still rational in light of declining inflation and attractive profitability across most lines. Similar to the Northern Hemisphere, rate has moderated most in commercial property, while other commercial portfolios like farm, commercial [ packs ] and commercial motor continue to see rate in the mid- to high single digits. Turning now to our investment result on Slide 14. Despite a host of macroeconomic and geopolitical challenges, financial markets have remained supportive this year. Our portfolio delivered total investment income of almost $800 million, which represents an annualized return of nearly 5%. Through the height of the tariff-related volatility in April, the portfolio exhibited pleasing resilience and delivered predictable performance. The fixed income yield has trended around 4% range through most of the year and exited the half at approximately 3.8%. Total duration is now up to around 2.5 years. When we cast our mind towards year-end, futures markets currently imply the fixed income yield will exit 2025 at around 3.6%. This is obviously a point-in-time view as of today. Our investment farm increased quite meaningfully in the period, up 11% over the last 6 months. It's worth noting that FX movements accounted for roughly half of this increase. With constant currency [ FUM up ] around 5%, we suspect FX will remain a notable influence in the current environment, and some of these increases have likely reversed through July and early August. As previously flagged, we have built a portfolio of fixed income securities that will follow fair value accounting, with mark-to-market impacts being recorded within equity or other comprehensive income. This portfolio has now reached around $3.5 billion or 12% of our core fixed income portfolio, where it should remain broadly stable. Our risk asset portfolio performed well, led by strong returns in equities and enhanced fixed income. It's also been pleasing to see commercial property valuation stabilize, resulting in a modest positive return in our unlisted property sleeve. I referenced an FX gain of around $35 million earlier. This is reported within the Expenses and Other line shown in this table. Moving now to Slide 15. The strength and quality of our balance sheet remains a great story. During the period, we received two important credit rating upgrades. Both S&P and Fitch have moved their rating to AA minus from A plus. This is the first time ever that QBE has held a AA rating, and it represents strong external validation of the progress we've made to improve the quality and resilience of our business. Turning to our capital position. We ended the half at a PCA multiple of 1.85x, which was broadly in line with the prior period. This is predominantly supported by an increase in our core equity Tier 1 ratio to 1.34x as the quality of our capital continues to improve. Following the payment of the interim dividend, we will hold a pro forma PCA position of 1.81x. Debt to total capital increased by around 5 points to 25%, primarily due to the redemption of our two Tier 1 notes, which totaled around $900 million and were accounted for as equity. This funding has effectively been replaced by new Tier 2 issuance, which will result in a slight improvement in our overall cost of capital. We expect gearing will glide back towards the middle of our target range over the medium term. It's important to note that following these redemptions, we currently have no Tier 1 instruments in our capital stack, which leaves us significant flexibility should we need to engage these markets in the future. I'll pause here and hand back to Andrew.

Thanks, Inder. So no changes to note on our outlook. We're on track to achieve constant currency gross written premium growth around the mid-single digits. The drag from exited lines remains pegged at around $250 million this year, which should be negligible in 2026. We maintained our group combined ratio outlook at around 92.5%. And finally, on investment returns, our exit yield was 3.8%. Taken together, return on equity in 2025 should be excellent, continuing somewhere in the high teens. We'll hold our usual third quarter update on November 27 and look forward to discussing second half performance then. I'll pause here, and before wrapping up, I do want to thank our 13,000 people for their contribution. This is an excellent result and ultimately represents the collective output of our steady, measured execution and effort over recent years. With that, I want to thank you for joining us, and I'll pass back to the operator for Q&A.

[Operator Instructions] First question comes from Kieren Chidgey from UBS.

A couple of questions, maybe just starting on some of the commentary around business conditions. Slide 7, the portfolio management sort of data you unpacked. Can you just talk to, I guess, collectively, what the GWP growth was in the segments where you're achieving better than 92.5% group core relative to segments that aren't? And also sort of off the back of that, just touch on or expand on the commentary on the outlook slide where you're sort of in the combined ratio commentary, talking about underlying business settings continuing to improve, which just seems a little bit at odds with seeing the softening in premium rates down to 2% relative to your low to mid-single-digit inflation outlook?

Okay. So picking up on those. I haven't got the breakdown between the ones above 92.5% and below 92.5%. And I was also trying to flag that, obviously, some of the things like A&H, which we grew by more than 10%, it was going to be above 92.5%, but still contributes to the ROE. What we're trying to show within that slide, that there is a great opportunity within our pools to also alter business mix if rating pressure becomes too great in some areas. And I was also -- we were also trying to align that to where technical pricing is at this point in time and technical pricing across a number of our portfolio still looks pretty good. So that was -- that's picking up. The second point you made, that while technical pricing is good despite rates coming off, we still want to grow those areas. And a great case in point, and this gets more focused than almost anything else is everybody is focusing on property, generally, insurance and reinsurance. And within that, to some extent, property cat, which is having the most negative rate decrease at this point in time probably. Having had the most rate increase over the past 4 or 5 years, it is still priced relatively well. So we can still write that, and it can still be a contributor to our ROE and our combined ratio. So that's what we're trying to do. Your point is a really good one, of where it actually is inflation going because the most important element for the success of all insurance companies, including us, is trying to get that claims inflation number right. Although rating is important, obviously, where prices are going, it is important. If claims inflation is double that or half that, then that makes a material difference to your potential profitability at some point in the future. And I think we're still holding reasonably good position on the claims inflation. We don't want to lower our expectation yet of it, mainly because it's feeding into our pricing. So I want to try and hold pricing in the market up as much as possible as we can. We'll have to see where inflation goes over the next few years. So where the gaps between claims inflation and rate is obviously in international markets because there's no way inflation is going backwards at this point in time. And you see international markets has got a rate reduction. But in a number of lines of business, rate is still holding above what our expected claims inflation are. There are some exceptions, and property is one, and the international markets more broadly is another.

Okay. And second question, just flying off the back of that, I guess, sort of the difference in this result, and I guess, prospectively, maybe moving forward between underlying and reported combined ratio, this period you've seen really good support, well, flight support, I guess, from below budget cat outcomes despite being the worst first half globally in over a decade. And we're seeing very good sort of balance sheet sort of prior year reserve release. It start to come through, but you potentially have a lot of capacity there. Two questions around that. The cat budget, where it is at the moment in the context of what was a really tough half globally? Is it too conservative now? Are you getting proper credit for that? And are you sort of including that [ cat budget ] within your pricing and sort of maybe missing some growth opportunities because of having an overly conservative view there?

It's a really great question, isn't it, because if we look back over the years, we got our cat budget wrong and went over it and were sort of criticized for that. And now we have this -- there's much more positive challenge of are we being too conservative in the cat budget. I think I've said a number of times, I really like having the cat budget at a relatively conservative level. And we're obviously doing it roughly the 80th percentile. So 4 out of 5 years, theoretically, if we got it right, we should be under the cat budget. So that's good. I like having that within the businesses, though, because they do have to hold discipline on pricing. You pointed a valid one. We need to look at whether that just makes us completely uncompetitive, but I like the idea that it's fed down into each of the 3 divisions to ensure that pricing covers the cat budget we've got. So don't really want to reduce it below the 80th percentile, which will be a way to do that because I think we'll just exacerbate the market dynamics, which is putting property under pressure anyway. But yes, we've also got to continue to look at it. And we do look at it, but I think it's the right thing to do. It's hold a relatively conservative position in the cat budget, ensure the pricing is conservative, and we're trying to keep discipline in the market with our own underwriters.

And just a final point to check the large loss commentary you called out this period. Can you just give us some sense of how significant that was and what drove it? I know this time last year, first half '24, we had Baltimore, which I think from memory was about a $70 million impact. Relative to that, was it sort of bigger impact this period?

I might hand that to Inder in a second. I mean, what we've talked about is some aviation losses and a couple of large oil refinery related losses. That's what we're flagging in the first half of the year, which were exceptionally large. But I don't know whether you have a number?

Yes. I mean, it's slightly, I would say, Kieren, slightly higher. And obviously, within that, we -- when we look at the year-on-year comparison, we've also got some mix changes playing into -- when you're looking at the current accident year, stripping out the cat. So -- and just to the overall point that Andrew is trying to make around cat and prior year, et cetera, we are looking to preserve the risk settings that we've established over the last few years as we go forward. And so we very much feel that planning for cat at the [ 80th ] makes sense. And obviously, in reserving, we've got to make sure that the inflation assumptions remain sensible as we go forward. So at least if we start to see some changes in rate adequacy, we know where some of those emerging issues are sort of coming up, and we can be quick to react.

And just building on that. We definitely are more consistent with our medium and long-tail reserving now where we are holding reserves for up to 3 years before we start releasing them. So we are trying to put more resilience in the balance sheet. It doesn't necessarily mean it's more conservative. But it's definitely more consistent and holding on for a bit longer before we truly know where the claims are settling.

[Operator Instructions] Next, we have Nigel Pittaway from Citi.

Just first of all, if I could, please. Just -- how far off do you think we are in terms of rate adequacy needing to deteriorate before that would really start to contain your growth? I mean, I hear you saying that there's always something you can grow. But with rate increases, I guess, down to 0.8% in the second quarter, taking on board that you're still saying that rate adequacy remains supportive, it's an attractive rate environment. How far off are we from rate adequacy deteriorating and curtailing the growth?

I mean, Nigel, it's such a broad question because you're doing it across the total portfolio. So there are certain lines in my view, and we talked about this before, D&O, which is not adequate at this point in time. So some things are already beneath that. There aren't many lines of business that are below the 100% rate or technical adequacy at this point. And there are going to be many lines of business that never go close to it. So there are certain lines, in my view -- obviously, Crop is one, the A&H business is generally one, which just are not particularly cyclical. They have to pick up the claims inflation based on what's actually happening. And in the case of A&H, it's medical inflation, but that's -- most of it is done on Jan 1. It generally picks up the inflation for the year, and the market bears it. So there are a number, which, in my view, will struggle to ever go below the 100, and that's the beauty about the balance in the portfolio. In the case of property, it's falling. It's still about 100. If it fell by, I don't know, 5%, 10%, 20% more, it would definitely go underwater. So we'll have to see what happens in the property world. But even within that, it varies on what part of the world your in. Our European property portfolio, we didn't see major falling in rate in the first half. So even within the world of property, there is variation depending on where you are. So it's a really tough question to answer. Some can take a reason out of rate before they go below the 100, some are already there, D&O, and others, only a small amount. But the beauty of what we're trying to flag is within the portfolio we've got, we've got quite a lot of elements, which in my view, are never going to even get close to 100. They're always going to be above 100. And we'll obviously focus on those if others fall below it.

Yes. And the vast majority of our business, with a couple of these exceptions we've called out around wholesale property and Lloyd's more broadly, everything else is still positive rate. And we feel pretty good about that. I think in terms of some of the middle market businesses and some of the SME businesses, they're obviously a different dynamic in terms of how the rating cycle may play through. But overall, profitability across many of the middle market books remains very strong. If you look at even the reinsurance business, that's been interesting because the market is quite rational at the moment. The QBE rebook has actually been positive rate even in property given that the reinsurers absorbed some of the losses from the L.A. wildfires. So we think as loss emergence is happening through the course of the first half, the market is being relatively rational.

That's great. I think that gives us a good feel despite the broadness of the question. Maybe just turning on to the U.S. division. And I just wanted to get an understanding of how you're feeling about your scale in the U.S. now. I mean, obviously, you're saying that the contribution from adjacent strategies continue to build your reference construction and health care. But how far off getting appropriate scale in the U.S. do you think you are? And how quickly can these adjacent strategies grow?

It's a really good question. I mean, I think, [indiscernible] during this call, setting targets from the U.S. underwriting teams in outside crop, almost everything has the possibility of growing. We are very relevant in our A&H business and financial lines. But they still have possibilities to grow because they haven't got massive market shares. They've got potential new distribution partners that they can open up and can get larger. The adjacency you're talking about with health care and construction, they are relatively nascent and therefore, they can be somewhat larger than they are in the tens of millions of dollars. The large commercial casualty business, which we've now been in 3 years, it's growing well to somewhere between 200 and 300, but there's a lot of large commercial casualty we could rise and it's growing at a reasonable rate. It's very focused on a specific part of the market in the wholesale and large retail markets. So there is an opportunity to broaden that out. Programs is an interesting one because you've got to find profitable programs to grow. So that's a hard one to grow because you might have to start from scratch. And then if someone is giving up on a program, you're just wondering why your carrier is giving up on it and where there are other reasons. So there is plenty of opportunity to grow. The key to me, Nigel, is relevance, and we have great relevance in the lines of business we're focusing on. We've got underwriters of high quality. We've got a great claims service backing it up. We've got good distribution support. So we're not in anything where we're never going to be relevant, nobody is interested in placing business with us. But it's not a scale play, per se. It doesn't really matter if it's twice as large or 3x as large. It's, are we relevant? And are we getting access to the business we want to write and can we write it at the margin we want to write it at? And in many of our lines, we've got underwriters who are very relevant in the market who do get access to the business to underwrite. And therefore, distributors supply that business to us, and we can write it at the right margin. So it can be a lot larger than it is. It's going to be -- and make sure it's time. Sorry, Inder, you're going to add something?

No, I was just going to say in terms of the -- even if you look at the total acquisition cost and the way it plays through, Nigel, so we're delivering a mid-90s combined ratio and a decent return on capital on that core business. And obviously, absorbing some of that cost that has historically been supporting the noncore business. So yes, we've rationalized that. But effectively, the business will be standing on its own two feet next year as we run off the noncore element totally. So I think from a total acquisition cost from a return on capital perspective, from a combined ratio perspective, the business is competitive. And middle market was a big issue for us because that required significant investments in technology. You have to get to a certain size to be able to really make that work. That doesn't apply to the specialty focused business that we have now.

Great. And maybe just one final question. I mean Obviously, you've talked about the work you've done on the net exposures within the Crop business. My understanding is you might still have a little bit more work to do on the gross exposures. But how are you feeling about the sort of 93 to 94 combined for full year of this year? Is that still guidance? And do you feel the work you've done on the net exposures will allow you to get there? Or how should we think about that?

It's obviously -- always famous last words is guessing on what crop is going to be at the end of the year. Because what I've learned, of course, it's nice to get to harvest time and then you find out what's really happening. But based on what we're doing, we still believe those are the sort of returns the crop business can achieve. And the work we put in at the beginning of the year, I thought was good on putting -- retaining a bit less, keeping more of the business that's historically been more profitable. So that should stand us in good stead. I think your point is a valid one. I think this is a 2-year exercise. We're going to be doing more into 2026 than we did in 2025, which will enhance it further. But I feel pretty comfortable about it at this point in time, subject to what we've done so far.

[Operator Instructions] Next, we have Freya Kong from Bank of America.

Could you help me talk -- run us through the moving parts of the ex-cat ratio? So that moved backwards by 0.2 points year-on-year. I just want the breakdown between rate increases net of claims inflation, change in business mix and any large loss volatility within this number, please?

Freya, thanks for your question. I think as we've referenced a couple of times on this call, we're really managing to the overall combined ratio and then we sort of give you the component parts within that. I think on the ex-cat, the two main issues that we're calling out relative to prior year is some elevated large losses. We've talked a bit about that in response to an earlier question. And we're also seeing some mix changes as the -- some of the books that we're growing like accident health have a slightly higher, call it, attritional loss ratio, so they contribute more on a relative basis to the ex-cat. Those have been really the two main drivers year-on-year, but we're really trying to manage the business to an overall combined ratio. That's the main metric we look at.

Okay. Great. And then how should we think about the changes in business mix that you're driving going into more attritional lines of business with low volatility? How will this affect the combined ratio?

I mean it comes back to that overall slide that Andrew was referencing, that ultimately, here, we're trying to make sure that we're delivering a return that is in excess of our cost of capital at a decent margin. So ROE is a big focus for us. Now within that portfolio, if we see opportunities to grow businesses that have a different mix of attritional large and cat or a slightly high combined ratio but carry a little bit less capital but still have strong returns on equity, we will do that. And the opportunity we've seen through the first half have been in some of those areas.

And obviously, return on equity is what we focus on, first and foremost. But when we set targets internally, we use the combined ratio because we can't have every underwriter having a go trying to manage the capital allocation. So we don't do that. So the combined ratio to return on equity is never going to be a direct comparative. As we said, some businesses need to run on a much lower combined ratio, deliver the return on capital and so can run on higher ones. We're not trying to move the combined ratio up or down. We're trying to deliver overall, a good mid-teens ROE.

Yes. Okay. Great. ROE focus. That sounds good. And then just a follow-up question on the reserve releases, which were quite high in the half. Some of it was driven by short tail inflation and derisking of the [indiscernible] portfolio. Do you see favorable or meaningful favorable PYD as an increasingly important part of your P&L going forward?

I think on the key drivers -- so as we said earlier, we are trying to make sure that we're booking our loss ratios with a level of prudence around inflation assumptions as it played out this half. Some of our loss picks for the short tail businesses that we wrote last year played out positively and therefore, we've released those reserves. In terms of the long tail business, clearly, that's a lot longer time frame we're looking at. And as Andrew referenced earlier in one of the answers to the questions that we will be holding those loss picks for at least 3 years against that long tail business to see how it develops. I don't think at this stage, we're going to be providing any guidance, forward-looking guidance on prior year reserve movements, only to say that the settings that we're running the company with have never been better.

Okay. That's helpful. And then just on your use of reinsurance, so that stepped up a little bit in the period, mostly because of Crop. But then I guess, looking through the cycle and as we're entering a soft cycle, how do you see, I guess, reinsurance coming into play in your business? Or how do you [ pace ] to use it during the cycle?

I don't expect the reinsurance spend as a portion of the total to change that much, really. I mean generally, reinsurance rates move up and down with insurance. So we're not expecting to do that. It's not as though we'll start thinking about reinsuring more or let out. We quite like where we are. The crop may vary a bit because, of course, that's got a big gross to net. So if we don't like certain things, we do have the option of increasing or decreasing that. And ideally, as we get the crop portfolio into a better place, we would retain more of it because it'll be in better balance.

Overall, I mean, our cost of reinsurance really ultimately is going to be driven by how well we manage the portfolio. And all the derisking work that we've done over the last few years obviously had a big positive impact in terms of our ability to get the retention levels down on reinsurance. And so it's really you've got to look at reinsurance holistically across both the rate that we're paying, but also the terms and conditions and where the attachment points are.

Okay. And sorry, just final question on the modernization drive. Should we expect this to come through the P&L through lower expense ratios? Or do you see opportunities for more growth and potentially underwriting improvements as well?

Yes. Look, over time, I mean the whole objective of the modernization programs is to continue to make the business more competitive. So make sure that we're investing in connectivity with brokers, make sure that we're being responsive in terms of the time it's taking us on both underwriting and claims. So a lot of the monetization work is very much focused around improving our customer propositions, making the business more competitive. So we do see over time, we should be able to drive better customer outcomes and support the growth agenda as well as making the organization more efficient, more effective. So it's a bit of both.

Next, we have Julian Braganza from Goldman Sachs.

Just an initial one for me. In terms of the large losses, just given the persistence of some of these large losses over the last half -- half of the Baltimore bridge and then also from the aviation losses this period, just holistically and strategically, how do you think about these losses? Whether it's a large loss allowance over the sort of separately cat budgets, but also your reinsurance program. And just managing the volatility in these large losses going forward. Yes, just on just any comments around that?

Yes. I mean, obviously, we've talked about the Baltimore loss last year, we talked about a couple of large losses in the first half this year. There was a relatively benign large loss activity in the second half of last year, which obviously didn't get as much focus. So look, period-on-period, we're going to see some level of volatility. We have a very large, call it, allowance set aside for large losses. We look at that by each of the businesses. And we don't see any of this as being particularly concerning, right? Because when we look at each of these large losses and we look back at how we wrote the business, we do lots of peer reviews of what happened there. And when we look at each of these risks, we've talked about, we would have written that in the ordinary course. We don't see any issues with either the exposure that we wrote or the clients that we wrote that with. It's the sort of nature of the business, and we can, across a very broad book of business, manage some of that volatility.

Okay. And just to give us a little bit of color in terms of if we do see a normalized environment for large losses, what does that mean for your ex-cat claims ratio in terms of the benefit that we could sort of expect? Yes, I mean this period, obviously, it was offset by some of these aviation losses. And maybe we're going to see the bigger benefit just given the falls beat and also the reserve releases. So just in understanding what could potentially be a normalized [indiscernible] for ex-cat [indiscernible]?

Th is the issue, Julian. This is the issue, Julian. I think -- when you look at cat or prior year and large losses and you start to sort of take some out and don't take others out, it just gets a little spurious. I think what we're saying is that the combined ratio target for the year is 92.5%, at the half year, we're well on track. The fact that we've had some favorability from cat and prior year actually goes -- speaks more to the risk settings and the quality of the business than it does that -- it just so happens that these outcomes have resulted in the first half. And the large loss volatility is very much BAU part of the business. There's nothing we've seen in these large losses that causes us any concern in terms of business we've written and we remain pretty confident that we can deliver the full year outlook and manage some of that large loss volatility. To sort of start stripping some losses out and say, here's an underlying view of the ex-cat is just very difficult because you're going to see that from period to period.

No, we definitely don't want to do that. And if we do continue with an elevated level of large losses, we need to adjust our large loss loans going forward, of course, which we will do. The message here is to see where we are at the end of the year. They were large for the half. We'll see whether they are large for the whole year or not. And that depends on what happens in the second half. And last year, as you said, Inder, we had a relatively quite a large loss period in the second half. So see where we end up. We are trying to balance -- we are trying to manage the combined ratio rather than every element within it. And of course, every line of business is trying to achieve a certain return on capital. And the beauty about the diversification is that some aren't going to do it. And we still have some cells where we want to improve the profitability on them, and some are going to outperform. We're going to outperform on cat this half year. We underperformed ex-cat, but overall, it could reverse in the second half. There is no reason why they've got to continue to run where they are. And sadly, or exciting me in insurance, nothing ever does. So everything ends up changing. So I'm sure the second half would look somewhat different for the first half. I would love it to be the same and love to guarantee exactly the same numbers in 2026. Sadly, that won't happen.

Got it. Just a second question on Australia, Australia Pacific. Just given the growth pressures there, just interested in sort of strategy there to hit growth in what you sort of called out the competitive market. So just what are the -- what will it take from there to improve your position?

I mean, I think the Australian business is obviously a fantastic business and has delivered a great result at the half year. It is more competitive, both from local and international players here. The key strategy for us is build on the long-term relationships we've had with our broker and customers over many, many years. So that has been our focus, trying to renew as much as we can at the pricing we like and then also continue to build on those relationships, get people relationships with them and come up with initiatives we can work with them on that can enhance our premiums going forward because I still think there is good growth. The technical adequacy of our Australian business is pretty good. So it's purely the competitive market rather than the pricing that is an issue here. But there are a lot of people competing after the market premiums. So I think that's been our focus now. We've got one or two initiatives with various brokers that could come to fruition. We're also trying to be innovatively in this market about what other products we can add that are going to help our clients and help the ease of doing business. The modernization Inder talked about earlier on is really important. And it launched its first products in the first part of 2026, so making it easier to do business. And some of the fantastic brands we have here are going to be the things we're doing to protect and grow our business. We've been here a long time, been here since 1886. It's a fantastic business. We have these deep relationships here.

Got it. So we just start to see perhaps some improving trends into FY '22 is how you're getting it, some of these initiatives with [ brokerage ]?

Re I sort of missed that. Yes. I mean, I think sort of better trends in 2026. Look, there's a lot of work going on to improve our positioning, our service propositions and -- but also at the same time, we want to make sure that we're being disciplined in the way we execute in the market. We've got a strong business, and we want to build on it, but we also want to be cautious about market conditions staying rational as well.

Okay. Got it. And then just a final question for me in terms of just the seasonality in your volume growth, obviously, a strong first half despite the portfolio exits, which somewhat I understand will be meaningfully less in the second half, given your previous guidance. So just keeping it at sort of mid-single digits for the full year implies some sort of softening in the second half if I'm not mistaken. Just -- maybe just talk to the seasonality of the growth and what's driving that?

Yes. Look at the margin. I mean, if you look at some of the areas we're looking to grow, the reinsurance business probably has a bit of a skew first half, second half. The accident health business, which is growing strongly also has a bit of a skew first half, second half. So, yes, at the margin, it's more a mix issue rather than necessarily a run rate, the second half being lower than the first half. So it's just a sort of renewal cycle that we see through the course of the year.