Good day, and thank you for standing by. Welcome to the QBE FY 2023 results briefing. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. 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'll 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. 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 we're 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. Driving improved performance in North America remains a primary focus. Our core Commercial and Specialty segments are improving, and we have good governance in place to manage through the remaining non-core runoff. Turning to catastrophe costs, where we ended the year well within our allowance.
Following a prolonged effort to de-risk our portfolio and reset the catastrophe allowance, this is an encouraging outcome. On people and culture, I continue to see greater alignment across the enterprise, and our people are excited and engaged. Many of our key achievements this year required a degree of enterprise, collaboration, and maturity, which wasn't present when I joined the business two years ago. The $1.9 billion reserve transaction, the global approach we've taken to new growth opportunities, and the pace at which we repositioned our property portfolio are all proof points which demonstrate we are bringing the enterprise closer together. I'm also pleased with the general stability of the wider leadership. Where we've had turnover this year, the roles have been filled through internal succession. This ensures we have good continuity and consistency of our strategy and our QBE DNA.
Moving on to unpack the result in more detail. The premium rate environment has remained supportive, and we achieved an average rate increase for the year of 10%. Combined with extra rate growth of 4%, gross written premium growth of 10% represents our third consecutive year of double-digit premium growth. This is outstanding momentum and ultimately driving confidence in our ambition for consistent and sustainable growth. Our underwriting result of 94.6% continues to demonstrate greater stability and consistency. The result was supported by below-budget current-year catastrophe costs, however, included a drag of over one point from largely catastrophe-related reserve strengthening. While this is disappointing, I'm pleased with how we've learned from the challenges in the first half and subsequently built a more robust catastrophe reserving process. We produced a record investment result.
Total investment income was roughly $1.4 billion, resulting in a return of almost 5%. Our balance sheet is in great health. Capital remains at the top end of our range, and gearing is comfortably around the middle of our target range. In line with the exceptional profitability this year, we've generated strong growth in book value per share, which increased by around 10%. The full-year dividend of $0.62 is up meaningfully from $0.39 last year, representing a payout ratio of 45%. Given the breadth of growth opportunities in recent periods, flexibility has been key, and we've opted to manage the business toward a payout ratio in the lower half of the 40%-60% range. Entering 2024, markets remain attractive, with excellent rate adequacy across the majority of our business.
As such, we maintain a bias toward capital flexibility at present, though should the outlook for growth moderate, the strength of our balance sheet leaves us well placed to explore a higher payout in coming periods. Let's turn to slide six. We continue to build momentum on our strategic priorities. Under portfolio optimization, we've made good progress and see ongoing opportunity to better manage and reduce volatility. The focus on volatility is now deeply ingrained in the business, and our teams are generally excited about the transformation we're driving. Building a higher quality, more resilient property cat portfolio has been a primary focus in 2023, which I'll delve into shortly. Beyond that, we're in the fortunate position of not having many underperforming sales at present. Of those which remain, we're being more clinical about the path forward and enter the year with a clear plan.
Our sustainable growth initiatives are building traction. I think we're doing a better job at assessing where and why we can win in certain markets and don't in others. We've achieved good growth across our focus areas and added capability in selective Specialty adjacencies like healthcare in the U.S. Where we have high quality and experienced people, there's a great opportunity to add complementary products in many areas across QBE. Moving to modernization. We continue to invest this year across initiatives geared around better organizing our data and modernizing our technology... Combined with our focus on designing a smaller and simpler set of products and a more efficient operating model, we can improve both the quality of our underwriting, plus customer and partner experience. Ultimately, I believe that doing the basics well can be differentiating, and few have cracked this in Commercial insurance.
To ensure we have the right capabilities, we've commenced a review of our operating model to assess opportunities for simplification and operational efficiency. AI is going to be a great enabler for our modernization agenda. With insurance essentially ground zero for unstructured data, the AI opportunity is meaningful. Initially, we've focused our efforts on underwriting, are in the process of enabling the technology across cyber, property, and workers' comp. One example I'll share is in our North American cyber business. We've developed a generative AI copilot, which is now analyzing all new business submissions. In relatively short order, the underwriters get an assessment of document completeness, whether the risk is in appetite, and a number of additional risk insights.
Based on our initial observations, this is speeding up our time to quote by roughly 65%, allowing us to quote more submissions and helping us make sharper risk selection decisions. This is one brief example. There will be numerous near-term applications helping us to improve our underwriting and operations. Turning to slide 7. I thought this slide was a nice way to highlight the impact our strategy is having across the business. Now, at QBE, a little over 2 years, by now you're hopefully well aware our primary goal has been to become a more resilient and consistent business. To get this right, we've really had to execute well on these 3 themes. Firstly, on claims inflation. Successfully managing through a challenging inflation environment has been critical. I'm pleased that we've been able to consistently improve Ex-CAT claims through this period without any material missteps.
Secondly, on catastrophes. Much of our volatility in recent periods relates to CAT, which has been a moving target for the industry. In what is another difficult period to navigate, I'm pleased that we've come in below allowance this year. On account of our property de-risking initiatives and a significant reset in our CAT allowance, we're now feeling more comfortable in this space. Finally, we have to deliver greater stability in reserves. While the headline result this year is not acceptable, I expect we can avoid the extent of catastrophe and other short-tail top-ups going forward. Importantly, there's a notable trend here regarding the improved stability of our long-tail reserves. This is the culmination of more consistent, higher quality underwriting and reserving, alongside a number of reinsurance transactions to de-risk our balance sheet. Ultimately, I think our underlying business settings are now much more resilient.
If we can continue to execute around these three themes, I'm confident we'll continue to deliver more consistent and higher quality results. So moving to slide 8. Building on the prior slide, de-risking and improving our property CAT portfolio has been a major focus, and I think we've made great progress. This time last year, we told you that despite the re-acceleration in property rates, we had no desire to grow in property. At around 25%-30% of our total premiums, property is about right for us. We did, however, want to make the most of the market dislocation and improve the quality of our portfolios. 12 months on, I think the slide highlights we've done a pretty good job. Firstly, on the standalone property sales. This is where we're not bundling property with other lines.
In a world which is short property capacity, we need to be highly disciplined about the returns we require here. While we achieved average rate increases of around 24%, standalone property premium was stable for the year, with FX rate growth down 9%, largely due to deliberate volume reduction. This is now a more resilient portfolio. The volume reduction included the impact from exited North American programs, plus two recent Australian consumer exits. 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%-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 you about, we're becoming much more comfortable with the level of catastrophe volatility in the business. Finally, I wanted to touch on the repositioning which occurred in our reinsurance business, QBE Re. The reinsurance market was in mild disarray 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 a third of their business, the goal was to maintain property premium broadly steady, however, leverage our in-demand capacity to build new and deeper relationships while reducing volatility. The transformation has been significant. Despite around a 25% reduction in worldwide perils 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 is also being very deliberate to reduce correlation with our insurance exposures.
This means where we might pay insurance claims in a 1 in 5 event, we want QBE Re attaching much further out. We've had good proof points on this, with no notable claims from the New Zealand flood events, nor 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 perils in North America is down 40%. Moving to slide 9. Our sustainability agenda remains focused around these 3 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 a 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 LGBTIQ+ identification. With that, I'll now pass over to Inder.
Thank you, Andrew, and good morning, all. I'll start with our result 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 4 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, while 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 result. 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-1.8x target range. The board has declared a final dividend of $ 0.48 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 X-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 X-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 peril 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 1 point if you exclude the current year's 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 non-core 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 of 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 non-core 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-12s 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 5 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 2 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 non-core run-off portfolio. As a reminder, the non-core portfolio now principally reflects recently terminated property programs and the Westwood homeowners portfolio. There remains around $600 million in net premiums in the non-core 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 non-core underwriting loss to more than halve 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 run-off 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 six 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 non-core 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 non-core 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 dollar 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 lying 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-lying 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 eight 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 five 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 surrounding 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 result for the half and the healthy growth in the business. Over the course of the first half, sorry, 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 1.79 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 1.2x . 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 7 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 6 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 A A 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 GWP growth of around the mid-single digits. Within that, we expect premium rates to remain supportive, though likely moderate slightly following significant property rate increases in 2023. Rate adequacy is excellent across most of the business, and we expect further X rate 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-90s on a current year basis. Into 2024, we expect an expense ratio in the low-to-mid 12s, and there'll 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 run off of non-core 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 plan 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'd hoped 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. Want to ensure that we do a better job of hitting our guidance, hopefully find a place where the bounds for 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 is 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 one in five downside year would have pushed our combined ratio beyond our 90%-95% target range. In 2024, we expect a one in five 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.
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Kieren Chidgey with Jarden. You may proceed.
Morning, Andrew and Inder. A couple of questions, if I can. Maybe just starting on the GWP 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 that at least match that, sort of, if not more. Just wondering, therefore, what sort of the disconnect is between that pricing outlook and the total GWP growth? I do note, sort of, you called out the $300 million property book decline, but that sort of is a bit over 1%. So, you know, 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.
Should I start? So picking up on... Inder also 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, as we've 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 some of, 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 digits growth. If there's anything you want to add?
Yeah, 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, you know, 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, you know, we do still continue to see opportunities to grow, but it's probably gonna be a bit more targeted.
Okay. But, but 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's gonna be. It is gonna be tougher to grow as rates are topping out.
Yep. That's a good segue into my second question, just on the combined ratio of, for next, for this year, 93.5%. I know there's a lot of noise sort of in the 2023 numbers, but if we adjust out sort of Enstar, the reserve top-ups, UK cats and the worst Crop results, so a lot of, a lot of items. Yeah, we sort of have you sitting already around the 93.5% mark. So it doesn't seem to be much in the way of underlying improvement baked into the year ahead, despite obviously, some runoff from the non-core, where combined ratios are higher and obviously premium rate settings 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-over-year?
Okay, let me have a go at the macro, and I'm sure you can have a go at, at bridging it better than I do. So when I look at it, I look at, If we look at the three divisions, Kieren, I, we're not planning for International to do as well in 2024 as having 2023, 'cause it had a fantastic year, and we talked about how the rates, especially in the International market, are under a bit more pressure than, other areas. In the U.S., we're obviously expecting it to improve from its 104 down, partially because of the non-core 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.
So I see the com-- and we touched on expenses being a bit higher and our cat allowance being a bit higher. So I see the combination of those as being 93.5, being a good plan number for 2024. Did touch on what I just said just now. I'd like to, like to achieve the guidance. If we can beat the guidance, that would be great, 'cause we've been slightly missing it over the past three years. I don't really have further to add.
Yeah. Andrew, I think we are probably gonna get a few questions trying to bridge this. So maybe if we just walk you through a little bit of the math, just so at least that's-- 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 that's call it 1 and a bit points. From that, we're obviously strengthening the cat allowance, call it a bit over half a 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 half a point or so.
Clearly, we expect the benefit from the non-core 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 30-40 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 kinda how we construct it, but happy to continue the discussion around that.
All right. Thanks, Inder.
Thanks.
Thank you. Please limit yourself to two questions, and you may rejoin the queue for additional questions. One moment for questions. Our next question comes from Nigel Pittaway with Citi. You may proceed.
Good morning, guys. First question on Crop, if I may, please. Obviously you've achieved a 96.6% combined. If you add back the PYD for last year, you're sort of more at 98%-99%. You've got an external quota share, which is meant to lower your expense ratio. You've got scale, because you're number 2 in the market. 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 that class?
I would, I would say, Nigel, we're in line with market when we've looked at what the market participants are doing, although it's quite hard to tell like for like, because 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-nineties. 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 schemes, the 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-shot things, so you get everything set, and it's this month and next month. You decide what you're putting into the stakes, 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, the 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 it's 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, lot of premium, but with Crop prices very, very high, with the commodity prices being very high and the, the, sort of the retention was eaten into by the Crop, the commodity prices falling before we had some of the dry weather Inder 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 with smaller books don't have. Again, I don't think you've got details on that.
Yeah, I mean, I think we—I mean, Nigel, our view is, remains that, you know, we're a top three player. It's a relatively consolidated market. You know, the top seven or eight players control about 80%. It's relatively rational. We've got enough tools through the internal reinsurance, through 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 a 96, a mid-96, you know, this is covering its cost to capital, so but we need to do better, and, we're very focused on it.
Okay. How much do you expect the reduction in premium to be at current prices? You said modest, so...
It's really difficult to guess, 'cause 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, right? And organic growth. So look, we think we could be down $ 200 million, but don't hold us to that. We'll give you a proper update in May.
Okay, thanks. And then thank you for that. And then just focusing again back on the 93.5% guidance for next year. I mean, I do hear you just saying that it's meant to be more resilient and, 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%-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's, you know, strong, 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?
Yeah. Okay, Nigel, it's a great question, obviously something we focus on, but the U.S. is the drag, isn'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 I- we're targeting for 2025 and beyond. So we're going to be somewhere between 104% and 95% in 2024. That drags us down compared with some of our competitors. The International business, what it's delivered this year being a bit higher, combined ratio in 2024, in 2023, in 2024 being a bit higher, is still going to be a great performance where the market is. And the AusPac business is doing pretty well, of course, impacted by some prior, some inflation, and current year caps 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 2024 still looks fine, so it doesn't look as though the market's deteriorating rapidly. We've discussed financial lines before, so some elements aren't great, but generally across the portfolio, rating adequacy looks good, so we can continue to improve, try and bring the combined ratio in, and the premiums we write in 2024 will earn out into 2025 and beyond. So this shouldn't be seen as a high watermark, and we're not trying to improve upon it, 'cause both the rating environment can help us and also the North American business improving and that final run off of the non-core. So I still think we can improve somewhat from here, based on the current market conditions.
Okay, thank you.
Thank you. One moment for questions. Our next question comes from Julian Braganza with Goldman Sachs. You may proceed.
Good morning, guys. Just, just to follow on the, on the discussion, just on the combined ratio trajectory. In terms of just that underlying ex-cat improvement, just wanted to understand just how you're thinking about that, because just based on the numbers, that you provided, it doesn't look, look like it's a lot that's been embedded there, just from an underlying ex-cat improvement. Can you just, provide a bit more color on how, how that is, how you came about with that?
Yeah. Look, thanks, Julian. Good, good question. I mean, you've got a combination of things. Obviously, we're looking at, you know, the rate versus inflation dynamic, which has been nuanced in some lines as we've gone through. If we look 2023 into 2024, we've obviously seen some level of, you know, strong performance in certain lines, you know, 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 2023. So, you know, 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.
... Oh, okay, great. That makes sense. And then in terms of just in the Australia division, so there, like, I mean, you have, like, the chart there that shows the rate increases and retention over time. You can see that the rate increase is very strong and continuing, but it's the retention numbers there are coming off a bit. Just wanted to understand exactly what's happening there with that dynamic.
Did you want to pick up on that?
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 2023. They're in line with where we thought they would be from a planning point of view, so we're pretty comfortable about them.
Yeah. 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, you know, 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 2024, and we're very comfortable with the retention levels.
Okay, great. Thanks. 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 2024. Is that right? Because I would've thought it'd be slightly a bit more higher, the through of that net revenue growth versus GWP.
That's what I said. I think I said net insurance revenue growth will be slightly higher than GWP growth. If it sounded the other way around, I made a mistake because it should have said slightly higher.
No, I think you said it-
I know.
I think you said it right. I think the question was, he's a bit surprised.
No, surprised.
... by that. But I think the point being obviously, you know, we've had very strong rate as we've gone through 2023, some of that will earn through in 2024, and it's sort of a natural, you know, reflection of where we are in the cycle if you look at relative GWP growth to 2023, 2024. That. So that makes sense. You've interpreted that right, and that is actually the dynamic we expect to play out.
Okay, great. Thanks so much for that.
Thank you. One moment for questions. Our next question comes from Simon Fitzgerald with Jefferies. He may proceed. Simon, your line is now open. One moment for questions. Our next question comes from Andrew Buncombe with Macquarie. You may proceed.
Hi, guys. Thanks for taking my questions. Just the first one is on tax. A number of your peers have been incurring deferred tax assets, this result for 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 2024? Thanks.
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, you know, play out between the IFRS 17 reporters versus the U.S. GAAP reporters.
In terms of the outlook for tax going forward, you know, 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've 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, you know, 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.
Excellent. And then the next one is in relation to Australia. So QBE has dropped coverage on a couple of underwriting agencies and partnerships in Australia in recent months. It'd just be interesting to get some color. Has your approach to underwriting agencies changed? Thanks.
No. No, it hasn't, hasn't changed. I think the couple we've dropped had 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 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.
... Just off 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? Thank you.
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 for 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. Yeah,
Well, yeah, we look at it in total. So yeah, we look at it in total. Does it actually make money? If we, if we do something internally, which I'm not sure we do, then that's fine. But yeah, we look at them in total. Do they make money for us in total after the reinsurance costs we allocate to them?
Yeah.
I think-
There's a bit of historical folklore here, Andrew. You know,
I don't know what that is 'cause we look at... I'm not sure. When I've looked at CHU since I've been here, Andrew, Equator Re's never been mentioned, so I don't think that has any relation to the profitability of it.
It kind of probably goes back a few years, Andrew, where-
Mm-hmm
... you know, we had Equator as a separate reporting entity. So everything we look at, you know, in terms of return on capital, profile, et cetera, is on what we call a post-pushback basis, so we report the results all in. The internal reinsurance doesn't really play into it.
Right.
So, you know, that's just the lens we look at it.
Okay. I'm missing the-
Great. That's it from me. Thank you.
Thank you. One moment for questions. Our next question comes from Andrei Stadnik with Morgan Stanley. You may proceed.
Good morning. Can I ask my first question just around the pricing trends that you showed? The fourth quarter showed a slowdown versus the third quarter, but at the same time, was up on the fourth quarter of the prior year. So can you talk a little bit about, you know, how to think about the pricing trends and how much of that slowdown in fourth quarter was seasonal? Yeah.
Yeah, I mean, I think and it probably showed up more in International than anywhere else, didn't it, Andrei, I think, up on the chart. So I think to some bit, to some extent it is seasonal, but to some extent we think it's more structural with a lower inflation, but 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 it had been previously.
Thank you. And my second question, just around slide number 8, and apologies, you kind of flew through that slide a lot of detail there. But in that slide, A, you show the windstorm peak, sorry, U.S., peak exposure down 15%, it's really down 18%. But in your comments, you said, yeah, a much larger number, something around U.S. being 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, you know, how conservative is your new, you know, clearly higher catastrophe budget for FY 2024?
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 the opportunity to rebalance our portfolios in a number of areas. And therefore, that's the difference between the size of those two numbers. Andre, what was the second part of the question?
around the resilience of the cat allowance.
Yeah, the-
The resilience of the cat allowance. Yeah. So, I mean, we show a chart, don't we, showing how the cat 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 were trying to reserve at a relatively prudent position last year, and it's probably a bit more prudent in 2024 than it was in 2023.
Of course, in 2023, 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.
Thank you.
If we put yeah, and of course, if we put the cat allowance in, the underwriters themselves have 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 I also quite like.
Thank you. One moment for questions. Our next question comes from Siddharth Parameswaran with J.P. Morgan. You may proceed.
Good morning, gentlemen. Just a couple of questions, if I can. Just, I want to just clarify your reading of the underlying combined ratio for FY 2023. I think you gave an answer to Kieren, which, and it gave some indication of some of the moving parts into next year. But I just wanted to, you know, just get your, you know, firmly your view of underlying for the starting point for FY 2023, because there are several moving parts. Maybe if we could just get that clarified.
Sid, I wasn't necessarily trying to form necessarily an underlying view of 2023. We're just trying to walk you, I guess, the construct between 2023 into 2024. The adjustments, you know, that are pretty consistent with actually what Kieren led with in terms of the question itself. You know, we, 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 2024, the two key things we've called that are gonna go up is the cat allowance and the expense ratio. So in the order of 50-70 basis points each, between them.
And then, you know, we also expect the benefit from the improvement in the non-core in the U.S., and we're saying that is in the 30-40 basis points. And, we're expecting Crop to run a little better and, the ex-cat to improve at the margin. I mean, those are the, those are the building blocks, you know, between 2023-2024, at least our view of it.
Yeah. Okay. Well, yeah, look, if I could just ask the second part then, which is, you know, we... The second half of the year, we're earning through rate into 2024, which should be around 9%. I take your point that you're saying that rates will slow, but you're still saying it'll be above inflation, and you're flagging inflation of 5% for next year. Seems like quite a gap between what you should earn through and where you're seeing inflation. I... First question just around that is, is there a different definition between the rate and, and, you know, what you're saying for inflation? So is, you know, is rate for policy ex-exposure, and is inflation something else?
So I, I'm just keen to get a perspective on, you know, why there's such a gap between these numbers and, you know, what doesn't seem to be, you know, any suggestion of improvements in combined ratios coming through.
Yeah. In terms of the, there is no necessarily differences in definitions, Sid. The main thing is, you're always gonna have a little bit of basis risk between, you know, the written premium rate, you know, then 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 the, you know, you would have seen through 2023 that the ex-CAT ratio did improve. We continue to see the ex-CAT ratio improving into '2024.
We are flagging, though, that some lines of business, when you look at the result in some pockets of International, for example, the ex-CAT performance has been extraordinarily good in the 89.5%, and some of those businesses, you know, will normalize in terms of their run rate, claims into 2024, 2025, 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.
Yep. Okay. Thank you.
Thank you. I would now like to turn the call back over to Andrew Horton for any closing remarks.
Well, I'd just like to thank everybody for joining us today, and thank you for those questions at the end of our presentation. I hope to see you all soon. Bye-bye.