Morning, and thank you for joining us today for QBE 2021 Full Year Res ults Presentation. Before we begin, I'd like to acknowledge the traditional owners of the many lands on which we meet today and recognize their continuing connection to land, waters, and culture. I pay my respects to the elders past, present, and emerging, and extend this respect to any First Nations people joining us today. I'd like to start by offering some initial reflections on the business since joining QBE last Dec ember. After which, I'll discuss the key features of the results before handing it to Inder to talk through the details of the financials. Before Q&A, I plan to circle back, and I'm excited to be able to introduce our new purpose, vision, and strategic priorities for QBE before finally commenting on the outlook. Let's start with some initial reflections.
The past five months have been incredibly exciting as I developed a better understanding of QBE. I got to know its people and customers, although that has been quite challenging in this virtual world we're currently living in. I collaborate with the group executive committee and teams at all levels across the organization on a new vision and strategy for the company. I feel confident that we can deliver on our new strategy, in large part due to the strong existing foundations. We have a great book value portfolio which is diversified in terms of breadth and product. Our brand resonates well in our target markets, and we have strong relationships with our customers and partners. On these foundations, I see room to improve returns and reduce volatility, which will be an ongoing focus of mine and represent a priority within our new strategy.
With the benefit of supportive market conditions, we also see opportunities for targeted growth. Together with recent refinements to our pricing, underwriting, and capital allocation capabilities, we hope to provide greater consistency across the organization and be able to seek out selected growth throughout the cycle. Key to executing on these priorities are our people and culture, which are absolutely of paramount importance to me. I've been impressed with the quality and depth of talent in the business, though recognize that to be consistently successful, we need to do a better job investing in our people, including succession planning, building sustainability into our culture, and driving a more collaborative and enterprise mindset across the organization. On to slide four. It's been exciting getting around the business in recent months. Despite travel challenges, I've been lucky enough to spend time in each of our three divisions.
Some parts of the portfolio are new to me. For example, I've enjoyed learning about crop insurance in the U.S., including a visit to Ramsey, Minnesota, and LMI, Lenders Mortgage Insurance here in Australia, while more generally building a deeper understanding of the Australian insurance market. Other parts of the portfolio, of course, are more familiar to me. For the last two decades, I competed alongside QBE in a number of the key Northern Hemisphere markets, and as such, have a keen appreciation of the strength and quality across many of these businesses. As I noted earlier, the portfolio is well diversified and we have a strong core. While we certainly have work ahead of us, you'll be pleased to hear that I see no need for another phase of material remedial activity.
Our strategy is centered around building on the strong foundations we have in each of our three divisions. I do want to ensure that we approach growth and capital allocation with an enterprise mindset and better leverage our skill set, knowledge, and product capabilities across the group. Onto the results and its key highlights. I'd like to start by noting how pleased I am with the improvement, which is clearly evident in 2021, particularly as this is my first QBE results briefing. We've made encouraging progress and have momentum building across the business, including impressive top line growth of 31%, underpinned by rate increases, improved retention, and growth outside the rate increases. Profitability rebounded strongly over the year.
Our combined ratio of 93.7% is over 10% better than the prior year, which was heavily impacted by COVID-19 and a very significant amount of adverse prior year developments. The improved underwriting results supported a particularly noteworthy group adjusted cash return on equity of 10.3% for the year. The strongest result the business has generated in over a decade. Now Inder will talk in more detail regarding the impact of COVID on the results. At the beginning of the year, we flagged the likelihood of a further $130 million of COVID-19 related costs in 2021. Encouragingly, the impact of COVID to date has been much less onerous than expected, particularly in lines like LMI and trade credit.
Accordingly, the result includes $140 million net benefit from COVID, largely due to release of COVID related risk margin, which we booked last year. Now coming back to the underwriting result. The whole portfolio saw an average rate increase of 9.7%, which should be covering current claims inflation. Heightened natural catastrophe activity continued through 2021, likely to be one of the costliest years on record. Not surprisingly, given this backdrop, catastrophe costs of $905 million materially exceeded our planned allowance for the year and the $688 million of costs incurred in 2020. The adverse prior accident year claims development we reported today is disappointing. It largely reflects strengthening patterns of our legacy U.S. E&S portfolio and Australian liability lines.
Significant strength in these areas was partly offset by favorable COVID-19 related developments in LMI, trade credit, and business interruption. Overall, PYD broadly offset the $140 million of COVID risk margin release I noted earlier. On claims inflation more broadly, economic or CPI inflation has been making headlines across many of our key markets. While there are some components within these measures that have an impact on our business, it's important to note we have a diverse portfolio of businesses, all of which have sensitivity to a range of unique inflationary attributes, for instance, social, wage, medical, raw materials, to name a few. Nonetheless, the operating environment will undoubtedly be challenging in the year ahead with respect to claims inflation. I'll be continually challenging my teams to be vigilant and proactive.
It is imperative that we pick up trends in claim inflation as soon as we can to feed into our underwriting. Inder will cover both our investment portfolio and balance sheet in more detail shortly. Though I did want to stress that I'm pleased with the shape and state of our balance sheet, and encouraged that we've been able to present strong metrics in light of the significant growth achieved over the year. Turning now to rate momentum in a little more detail. Rate momentum remained strong through the second half and exceeded our expectations, culminating in the group achieving an average renewal rate increase of 9.7% for the year, which was consistent across both halves and broadly steady on the prior year. Encouragingly, pricing remained strong across all three divisions and importantly continued to compound on rate increases achieved in prior periods.
Retention was also up across the board and generally improved steadily over the course of the year, reaching levels not seen in over a decade. This not only speaks to the extent of rate momentum across the industry, but also the growing impact from our Customer CD i nitiative. Some noteworthy callouts across each division. In North America, we saw rates improve during the second half of the year. Notable increases over the year were led by financial lines, with rates up 26%, aviation up 13%, property programs up 17%, and Accident & Health up 10%. In International, some tapering of rate increases more evident into year-end, though we'd previously flagged a high likelihood of this occurring given the division's bias to a number of lines which drove the inflation in industry pricing, many of which are now into their third or fourth year of substantial increases.
Increases were led by our international markets business up 13%, while our composite rate increases up 11%. Our outlook for the division remains positive following the January 1 renewal season, with European insurance, U.K. property, and QBE Re experiencing better than anticipated renewal outcome. In Australian Pacific, rate increases improved over the year, with the second half particularly strong as pricing recovered following customer COVID support initiatives in place last year. In commercial lines, rates was up 8.5%, with double digits increases in commercial property, strata, and public liability. The obvious and difficult question at this juncture is where do we expect rates to trend over the coming year? As always, this is not an easy question to answer with any certainty. Rate tapering will likely continue into those lines, which may now be entering their fourth or fifth year of increases.
However, we do expect rate increases will remain above inflation following another year of elevated natural catastrophe claims costs, and reflect ongoing uncertainty around climate change, rising inflation signals, particularly in short tail lines, and continued low interest rates. As mentioned earlier, it's imperative that we monitor these closely. Now we can turn to GWP growth. As already noted, we saw very strong growth during the year, with GWP up 26% to $8.5 billion or up 21% on a constant currency basis. As was well taken at the half year, our U.S. crop business had a standout year with growth of 51%, and even excluding crop, organic GWP growth of 17% was the strongest QBE has achieved in over a decade, and restored premium levels not seen since the early part of the last decade.
Premium growth has again been supported by the strong rate increases I noted earlier, though ex-rate growth has been a good feature over the year, growing at 10% ex crop, up from 4% in the prior year. This has been a function of solid new business growth, exposure growth in many regions as the global economy rebounded, and also improved customer retention. While 50% growth result may have exceeded expectations, I want to ensure that where we have grown, we approach all opportunities with the same return conscious mindset, which has become more refined in recent years due to the CEL review framework, which I think is excellent, alongside the investment we've made in improving underwriting and pricing tools and in how we allocate capital across the business. Our new strategic priorities will embed a more consistent growth discipline into our DNA.
While we're unlikely to maintain growth at this pace, or the pace seen in this result, we certainly feel we're now better equipped to drive selected organic growth across the cycle, both in businesses where we already have scale and strong market share, but also in some select lines where we're currently underrepresented. Part of our success in this area will be dependent on having the right operating model and structure in place. I want to approach growth and capital allocation more holistically as an enterprise, ensuring we're making the best decisions for the group, which will involve better leveraging skill set and capability across the organization to target new and or underdeveloped regions and lines.
It's difficult to set any medium-term targets on growth, as I believe it can lead to undesirable outcomes, though we have already commenced efforts to strike a more appropriate balance in remuneration models to motivate underwriting teams to consistently seek out growth opportunities while at the same time maintaining an unrelenting focus on profitability. I will now hand over to Inder, who will take us through the financials.
Thank you, Andrew, and good morning, all. Overall, I'm pleased with our financial results for 2021. It underscores our strong recovery in earnings and shows encouraging improvement across many of the value drivers in our business, including good premium growth, better underwriting margin, and a high running yield on our fixed income portfolio. I'll start on slide nine and make some remarks on the overall group P&L. Gross written premium for the year was $18.5 billion, a considerable 21% increase over the prior period. This reflects the benefit of compound premium rate increases, improved customer retention, and strong new business growth. Net earned premium was up 12% year-on-year, reflecting stronger growth in more heavily reinsured lines such as crop, lenders mortgage insurance, and financial lines, as well as the natural lag in earning through of higher written premium growth in more recent quarters.
Our statutory combined ratio for the year was 93.7. To make it easier for you to compare year-on-year performance, we have adjusted this combined ratio for two items you can see referenced at the bottom right-hand side of the page. Firstly, our result includes a net $160 million benefit from a release of COVID provisions, which equates to around a 1-point benefit to our combined ratio. Secondly, the reinsurance of our Australian CTP portfolio has benefited our combined ratio by around 20 basis points. We have adjusted this out as it distorts the presentation of some of our key ratios. On a like-for-like basis, our combined ratio has improved by 3.6 points to 95.0 versus 98.6 in the prior period.
This equates to an underwriting profit of $695 million, excluding a roughly $300 million benefit from the move up in risk-free rates over the period. Just some context on the COVID movements. The overall operating environment has clearly been more benign relative to our outlook around a year ago when we established significant provisions for potential COVID related claims. This is particularly the case in lines such as Lenders Mortgage Insurance, trade credit, and our potential exposures to business interruption claims, both here in Australia and in the U.K. Across these portfolios, the probabilities attached to some of the more adverse risk scenarios in our modeling have now reduced. Moving on, our investment portfolio delivered an annualized return of 40 basis points or $122 million.
Higher risk-free rates adversely impacted the portfolio by $260 million on a mark-to-market basis, and excluding this, the overall return would have been closer to $380 million or a yield of 1.3%. As you're aware, to manage interest rate risk, we look to strategically match the duration of our fixed income portfolio with our outstanding claims liabilities. During the year, we had a modest, practically short asset duration, resulting in a $40 million benefit to the P&L, which in essence is the difference between the two numbers I referenced earlier, the $300 million benefit to claims and the $260 million impact, mark-to-market impact on assets.
Adjusted tax profit for the year was $805 million, a meaningful turnaround from the $863 million loss we reported in the prior period. This supported a strong double-digit return on equity of 10.3%. The board has declared a final dividend of AUD 0.19 per share, and this takes the full-year payout to AUD 0.30 per share, which equates to $443 million or around 40% of adjusted cash flow after tax. I'll now take you through some of the key movements in our combined ratio on slide 10. As you can see on the right-hand side of the chart, the group combined ratio was 95.0, excluding COVID and the CTP reinsurance transaction I referenced earlier.
This is a 3.6-point improvement from the 98.6% recorded in the prior period. Walking through some of the movements from the left, the first block represents the year-on-year change in the ex-cat claims ratio. Now, this is not a measure we have spoken to in the past, but it effectively represents our net loss ratio, excluding catastrophe claims, prior year reserve movements, and risk margin adjustments. For ease of reference, we have included a table in the appendix showing a breakdown of this ratio. Going forward, we will simplify our claims ratio disclosures and adopt an approach that is more consistent with our global peers. As you can see on the chart, the ex-cat claims ratio improved by 1.4 points.
This was primarily driven by the benefit of composite rate increases and lower claims settlement costs, partly offset by higher IBNR assumptions, including the current year claims. Our expense ratio improved by 1.3 points, reflecting further cost savings as well as operating leverage through strong premium growth. We're making good progress on our efficiency initiatives, including the rationalization and modernization of our technology estate and the migration of existing applications to the cloud. It is worth noting that our reported expense ratio includes the benefit of some non-recurring items this year, and our exit run rate is around 50 basis points higher. Having said that, we are well on track to achieve our target 15% expense ratio by 2023. The next block shows the commission ratio improved by just under 1 point.
As I referenced earlier, we had strong growth in portfolios such as crop, where commissions are reimbursed by the U.S. government, as well as classes that generate ceding commission from quota share reinsurance structures such as Lenders Mortgage Insurance and Financial Lines. Moving to the last three bricks in the chart, catastrophe losses were again elevated at $905 million or 6.6% of NEP, compared with an allowance of $685 million or 5.7% of NEP. Adverse prior year development was around $192 million or 1.4% of NEP, compared to $366 million or 3.1% of NEP in 2020. Importantly, the numbers I just quoted all exclude the impact of movement in COVID provisions.
The last block on the chart captures the year-on-year movement in risk margin, which had a 70 basis point negative impact on the group's combined ratio in the period, compared to a 40 basis point drag in the prior year. This essentially reflects new business strain associated with the stronger premium growth we've achieved in 2021. Turning to slide 11. Inflation is clearly an important topic for us, and we're very focused on the risk of this remaining at elevated levels over the near to medium term. As Andrew's highlighted, we have a broadly diversified portfolio of businesses across the world, many of which have their own unique, diverse, drivers of claims inflation. While CPI inflation numbers are now printing meaningfully above pre-pandemic levels in many of our key markets, the translation to our business and claims cost is actually quite varied.
We felt the most immediate impact of inflation in our short tail property lines, particularly in North America. This is largely driven by input costs, notably lumber and other construction materials, such as plywood and copper, combined with demand surge and tighter labor. Another example is our Accident & Health business that is exposed to medical cost inflation, which has been elevated. In this case, we are continuing to achieve premium rate increases to broadly offset the inflation in claims costs. As we sit here today, it is harder to be as definitive on the ultimate impact of inflation on our longer tail lines of business. The weighted average term to settlement of our outstanding claims is around three and a half years, with our longer tail liability lines being sensitive to social, medical, and wage inflation.
Our actuarial teams are very conscious of inflation risk when striking the estimated loss picks for each class of business. This ultimately determines the profile of profit emergence across the business over time. Another somewhat related topic on claims cost is the heightened catastrophe activity, which continues to be a feature across the industry. As many of you are aware, four of the last five years have been the most expensive years for the industry on record. Noting the recent cat experience, but also our focus on reducing volatility and improving the consistency of our results, in 2022 we have increased our catastrophe allowance to $960 million. While there's a degree of inherent volatility within our cat exposed lines, this increased allowance better reflects more recent experience and allows us to manage downside volatility in our financial performance going forward.
The as if analysis presented on the chart shows that the revised allowance alongside our 2022 reinsurance program would have been sufficient in seven out of the last 10 years. I'll now turn to divisional performance, and I'll start with North America on slide 12. Gross written premium was $6.3 billion, up 32% on the prior period, with strong growth across crop, our retail mid-market commercial business, financial lines, and accident health. Crop premium grew 51% year-on-year, supported by higher commodity prices as well as successful organic growth initiatives. Year-on-year growth excluding crop was around 30%. As you can see on the chart, the North America region reported a combined ratio of 102.9.
While this is 10, close to 10-point improvement on the prior period, it is still a disappointing outcome, and we're very focused on delivering an underwriting profit in this business in the near term. The ex-cat claims ratio improved by 2.6 points, reflecting the benefit of rate increases, partially offset by higher inflation assumptions on casualty lines, as well as the wage and material inflation on the property exposed business that I referenced earlier. Catastrophe claims were still elevated and above planned allowances in the region. The U.S. experienced its third most costly year on record for natural cats, and cat claims increased to 7.7% of net earned premium from 7.1% in 2020. Andrew will touch on some of the actions we are taking to reduce cat exposure, particularly in our property programs book.
Adverse prior year development was $148 million, down from the $305 million adverse result last year. The vast majority of this reflected strengthening in two portfolios, our excess and surplus lines business and ProHealth. We stopped writing new business in these portfolios around 18 months ago, and they are both now in runoff. We are pleased with the continued reduction in the total acquisition cost ratio, which improved by roughly 4 points with strong cost control and operating leverage resulting from significant premium growth. The combined ratio for crop was 93, which was an improvement on the 95 we recorded at half year, and this translated to an underwriting profit contribution of around $87 million, compared with $14 million in the prior period. I'll now turn to our international division on slide 13.
Gross written premium was $7 billion, up 15% on the prior period, supported by broad base rate increases, higher retention, which improved from 83%-86%, and strong new business growth of 10%. As you can see on the chart, the combined ratio for the year improved by 70 basis points to 90.6, and this was despite the elevated catastrophe activity experienced during the year. The ex-cat claims ratio increased modestly with the benefit of ongoing rate increases offset by higher IBNR held in longer tail casualty lines to reflect inflationary risks. The total expense ratio improved by a little over one point, reflecting operating leverage and cost control, plus the benefit of cost commission from reinsurers.
The international result included positive prior accident year claims development of $66 million or 1.2% of NEP, compared with 1.7% of adverse development in the prior period. This was primarily due to better than expected development in QBE Re casualty, U.K. motor, European liability, and Asia. This more than offset the further strengthening we took in the financial lines portfolio. Pleasingly, our business in Asia reported a combined ratio of 96.7%, representing the first underwriting profit generated in the region for a number of years. Moving to our home market of Australia Pacific on slide 14. Gross written premium of $5.2 billion was up 17% on the prior period, with strong growth in our core commercial lines, including commercial packs, workers' comp and engineering, as well as in our Lenders' Mortgage Insurance business.
The combined ratio improved by 1.4 points to 91.4. Within this, the loss ratio improved by 2.4 points, despite elevated non-cat weather claims. Total acquisition costs ratio also improved by almost 3 points. The La Niña weather pattern continues to drive a higher level of storm and cyclone activity across Australia, and as a result, our catastrophe claims experience remains elevated through 2021 at 5.7% of the earned premium. Adverse prior accident year claims development of $111 million was driven by further strengthening in liability lines, including general liability and workers' comp. However, unlike in prior periods, releases in other parts of the business were not sufficient to offset the strengthening in these liability classes. I'll now make some remarks on our Lenders' Mortgage Insurance business.
2021 has clearly played out quite differently to how we and many market commentators envisioned back in 2020. Significant nationwide house price growth and a strong snapback in economic activity supported strong combined growth, as well as a much improved profile for the business reflected through favorable claims experience on both current and prior accident years. As a result, LMI recorded a combined ratio of 95.0% for the year or 135.0%, excluding COVID-related reserve releases. With interest rate normalization on the horizon and noting the significant house price growth over the last 18 months, we continue to adopt a cautious outlook and have maintained 50% quota share reinsurance over this business in 2022. Turning now to slide 15,
We're pleased with our investment performance for the year and in particular with the strong returns generated by our unlisted property and infrastructure holdings. The running yield on our fixed income book continued to improve through Q4 last year, and we exited the year with a running yield of around 68 basis points, up from roughly 40 basis points at the end of 2020. Cash investment income was $122 million or $382 million when adding back the impact of mark-to-market losses on the fixed income portfolio as risk-free rates shifted up. Returns on the management group were around 8%, and as you can see on the chart on the left-hand side, we largely maintained a relatively modest exposure to risk assets through the period with closing asset mix of 94% fixed income and 6% in risk assets.
In the early part of 2022, we have started deploying towards our long-term strategic asset allocation of 85% fixed income and 15% in risk assets. We expect to reach our target investment mix at some point over the next 12-18 months. The chart on the right-hand side of the page provides some useful context on our investment portfolio repositioning. You can see with our 2021 exit, total portfolio yield of around 1% would adjust higher by around 50 basis points at our target asset allocation. Just a couple more points on our target asset allocation. We expect the enhanced fixed income sleeve to account for around 5% of total assets or about a third of our allocation to risk assets. This will include our allocations to high yield debt, emerging market debt, and private credit.
The remaining 10% or two-thirds of risk assets will comprise growth assets, including unlisted property, infrastructure, and developed and emerging market equities. Finally, before moving to the balance sheet, I wanted to make a brief comment about rising interest rates. I think ten-year risk-free rates may continue to rise over the course of 2022, and this would indeed support a higher running yield on our fixed income portfolio. However, it'll take some time for the impact of higher yields to translate into higher absolute dollars of investment income given the 2.1-year duration of our fixed income portfolio. Moving now to our financial position on slide 16. QBE's capital position strengthened during the year and notwithstanding the very significant organic growth in our premium base.
Our PCA multiple improved by 2 points to 1.75x and remains in the upper band of our target range of 1.6x-1.8x. The board has reassessed the group's dividend policy and now expects to pay out 40%-60% of adjusted tax profit annually. This revised approach provides greater flexibility to balance our desire to reward shareholders with our capital generation profile, the outlook for organic growth, and the broader dynamics of the global insurance cycle. In this context, our full year payout ratio of around 40% was struck with reference to both the near-term organic growth outlook and the ongoing deployment towards the target asset allocation within our investment portfolio.
Our borrowings reduced further during the year, with our debt-to-equity ratio improving to 21.8%, pro forma for the pre-funded redemption of the tier two subordinated debt. In 2021, we also reviewed and revised our debt covenants, which are now anchored around a threshold debt-to-total capital ratio. To align our covenants, our internal risk appetite, and our external gearing level, we will now shift our preferred gearing measure to a debt-to-total capital basis with a target range of 15%-30%. With that, I'll hand back to Andrew to talk through our outlook
Thanks for that, Inder. I now want to spend some time walking you through our new purpose and vision and the six strategic priorities which will guide us for the medium to long term and apply across the whole group.
Let me start with our purpose, which you can see here, "QBE enabling a more resilient future." This resonates well with our people, particularly after the past few years and the world we're in now. I've also landed on a new vision for the organization, which is to be the most consistent and innovative risk partner. I believe that insurance is a long-term game, and consistency is key to success. It's a simple notion, though many fail to execute on this, and I think if we can do it will set us apart from our competitors. We've had a great response to our purpose and vision internally, having launched it just recently. It does take some time to transition and embed the new vision into our DNA.
I'm certain it's going to resonate well across all of our people, and in turn, will translate into improved outcomes for our people, customers, partners, and shareholders. I'll now take you through the six strategic priorities which underpin our purpose and vision. Firstly, on the left-hand side of the slide, portfolio optimization. This is all about more actively managing the future direction of our business by making deliberate choices about the mix of products we offer, the business lines and geographies we operate in, and the types of customers we support. This will be informed by a better understanding of the mix of risks we're assuming, a desire to better contain volatility across the business, and through better portfolio balance, drive more consistency. We'll be developing a globally consistent framework applied across the company to monitor and manage this.
To give you an early example of where we're already acting on this strategic pillar, the potential volatility with North American property programs is high due to their exposure to cats, plus returns have been challenging. While we consciously avoided adding exposure in this class in 2021, we will look to more actively reduce exposure in 2022, which will support our broader strategy to reduce volatility in the North American division. If we move on to sustainable growth, while we're thinking more broadly about our portfolio mix, we'll also develop a plan to achieve targeted, consistent, and sustainable growth in each region, customer subset, industry, and channel. Our goal is to harness the depth and breadth of product knowledge and expertise we have across the group and to focus our efforts where we have an advantage. We're also looking to innovate new products.
Innovate with new products, improve digital capabilities, and with risk solutions that solve customer needs and enable resilience. Thirdly, bringing the enterprise together. To achieve our vision and live our purpose, we need the right operating model and structure in place. It needs to bring the enterprise together and ultimately help us organize, manage, and leverage our capabilities across all markets. We also need to simplify what we do and remove complexity in how we do it by driving consistent processes and having clearer governance. Linked to this, modernizing our business. To ensure we're a future fit and modern insurer, we must complete the modernization of our foundational systems and processes. We also need to accelerate development and investment in our digital capabilities to make things easier for our customers, partners, and people. We will invest in differentiating capabilities that drive insight and support innovation. Fifthly, our people.
We're focused on becoming an employer of choice in our chosen markets and building and empowering a sustainable and diverse pipeline of leaders. Our strategy also depends on our ability to enhance the link between the performance, culture, and the way we reward our people, and so we'll be doing further work on this. We'll also be investing in more targeted workforce planning and succession practices to ensure we can harness the talent we already have and help to build the capabilities we'll need now and in the future. Finally, it's very important in culture, we'll focus on becoming a more purpose-led organization. We need to strengthen the alignment, trust, and collaboration that takes place across the enterprise. Those are our six strategic priorities in a nutshell, and we'll give you updates as these progress. Turning now to sustainability.
I want to briefly touch on our sustainability framework. Our aim is that sustainability will be integrated throughout our strategic priorities and business. I've been impressed with the number of initiatives underway at QBE and pleased that we can now confirm we've committed to a net zero emissions target by 2050 for both our underwriting activities and our investment portfolio, having recently become a member of the UN-convened Net-Zero Insurance Alliance. We've also committed to net zero across our operations. However, I recognize we want to be a leader in this space, which is my hope and intention. We need to do more. Building on our sustainability credentials, we're refreshing our approach in the coming months to set a consistent and well understood sustainability strategy across the whole business, which will extend to our employees, customers, partners, investments, as broader operations, and procurement.
As we continue to enhance our capabilities, we'll be personally focused on embedding our sustainability framework across our underwriting activities and want to drive greater momentum on this front over the coming year. We want to ensure we have a consistent approach across all industries and regions, which will include our role in supporting customers on their pathway to a net zero economy. I want to conclude this section by noting that each and every member of the group executive committee will be accountable for embedding our strategic priorities and sustainability framework into their respective functions, as will our broader leadership network. I also want to ensure you that we'll update you regularly on the progress we're making on our strategy, the changes generating across the group, and where possible, I want to ensure we attach some targets and milestones to our strategic priorities so you can gauge our progress.
Before we move to Q&A, I'd like to run through our 2022 outlook. This slide provides you with an exit view of our current accident year combined ratio of 94%. Through catastrophe allowances broadly in line with our 2021 cat experience, the exit view is a fairly straightforward one this year. On to the financial outlook. First, on the outlook for premium growth, as noted in my comments earlier, we expect the operating environment to remain conducive for further targeted growth this year. We'd not expect to repeat the growth achieved in 2021. At this stage, we can safely assume that constant currency premium growth should be in the high single digits, and we'll look to update you on how we progress on this through the year. Secondly, on our combined ratio.
In building on recent progress, our strategy centered around resilience and consistency should result in the business being capable of delivering a consistent low- to mid-90s combined ratio. In 2022, we'd expect further improvement relative to our 2021 exit combined ratio. Finally, on investment returns, while we can't predict how financial markets will end the year, we hope to have provided some useful context regarding the potential investment return uplift associated with the high year-end running yield on our fixed income portfolio and a gradual repositioning of our investment portfolio over coming years. I'll now draw to a close, and before opening up to Q&A, I'd like to reiterate how excited I am to be at QBE about the opportunities we have ahead of us.
Thank you. If you wish to ask a question, please press star one on your phone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're picking up the phone, please pick up the headset to ask a question. The first question comes from Nigel Pittaway with Citi. Please go ahead.
Good morning, guys. Just first question. I'd just like to understand, if possible, the sort of reconciliation i n broad terms between the sort of 92.9% current ex-cat combined and ex-cat's 94% exit rate . What are the principal factors that sort of adjust that for the extra 1.1%?
Yeah. Hi, Nigel. You know, the main factor there is, you know, the exit run rate in expenses, which as said, is meaningfully higher than what we've actually printed at 13.3%. You know, there's also some movements around the risk margin strain, which, you know, we have noted in our exit. In essence, I don't think we're starting exactly at 92.9%. We're sort of walking down from the 95% down to the 94% exit. Happy to take you through that.
Okay. All right, that would be good to understand. Then secondly, just on the P&C topics, I mean, you did $40 million last year. You have to do more this year. It does seem to be an ongoing and long process. When do you think we'll see the end of these reserve topics in the P&C closed portfolio in the U.S.?
Nigel, I mean, that is a great question, and I wish I could give you a definitive answer on it. We saw claims pick up in the second half of 2022. We thought we'd taken a good position on claims a year ago. We think we've taken a reasonable position. Of course, we have it reviewed by external actuaries. It is very hard to determine with the types of claims in that portfolio, where it is ultimately going to end up. We are also having a third party look at what we're doing from a claims management point of view and trying to get another view of where it could end up. They're even struggling to determine where it can be. We think we've taken a reasonable position this year.
There is a possibility that it could deteriorate again into 2023. Of course, it is becoming a smaller part of the total portfolio. I wish I could give you a definitive, "It has ended at this point in time and everything will be fine," but it's just impossible to do with the types of claims which are relatively long-term liability claims.
Okay. It is right to think you've still got that sort of roundabout $100 million social inflation provision in those U.S. reserves still. Is that correct?
Yeah, Nigel, we've used some of that, but I'd say, you know, if the $100 million we'd referenced, we've probably still got around that $60-odd million number. But, you know, that's across the portfolio, Nigel.
Okay, fine. Maybe just finally, in terms of you had in the past talked about sort of taking out more reinsurance over the crop portfolio. I wasn't clear whether or not you've actually done that or whether that's still sort of in the planning. Where have you changed your mind on that?
I think we've taken out a similar amount of it. I mean, I think it links to looking at the volatility of the book, Nigel. Crop can be relatively volatile, though its drivers are somewhat different from other parts of the book. We are reinsuring through quota share it relatively heavily in 2022, as we did in 2021. The overall net exposure may grow a bit, but it's not growing a lot. Is that fair?
Yeah. I think what you'll see, Nigel, in 2022 is a further uptick in GWP, given where current outlook for crop prices are set for season. We've exited 2021 with a net earned premium of around $1.2. What we're trying to do is effectively make sure that, you know, what may be a decent pickup in GWP is probably gonna be a smaller pickup in NEP because we'll take a quota share position, which we're actually still just working through as, you know, we're in the middle of pricing for the crop business now. We'll have a further update for you at the half year.
Okay. Thanks very much.
Thank you. Your next question comes from Kieren Chidgey with Jarden. Please go ahead.
Morning, guys. I've got a few questions, maybe just starting on claims inflation. I know it's very difficult to provide an average number across the business. Can you just talk to the broad level of inflation you're seeing across each region? Also, you know, you've flagged that you've tried to make some allowances for that in the IBNR strengthening in the current accident years. Just wondering how material that has been in terms of its impact on that underlying combined ratio for this year.
Again, it's a difficult one to answer, so I'll have a go and trust Inder can do a better job than I can on claims inflation. How I see claims inflation, the real key to claims inflation is what can happen over the next few years while claims settle on premiums we have just written. That is the most important thing. We can have a view of what we've seen in current claims and the claims inflation, which is fine, and it's ticking up a bit. But it's then what happens over the next year, two, three on premiums we've written, and that is the thing that could really impact us negatively if claims inflation continues to tick up. In current pricing, we're putting more into our pricing because we've seen inflation, claims inflation tick up.
What we've now got to focus on is what actually happens from here on in and the potential impact that can have on us and feed that back into our underwriting as quickly as we can into further pricing. That's why I was trying to say earlier on, we think current pricing is current, covering current claims inflation. Our concern is where claims inflation goes into the future. We're building some uptick in it, but we may be right, and therefore, we're being cautious. Or we may be right and we're fine, or we may be wrong, and we could either be cautious or not cautious on it. It's a really hard one to answer because I'm concerned comparing current claims inflation with current pricing as though that's a perfect match when it's not.
I'm interested in future claims inflation, and it's hard to pull out against current pricing. I'm not sure we can give you exact numbers because it varies by line, by region, but that's how we should be seeing it. Inder, again, have you got?
No, I think that covers it. You know, it's difficult when you start applying broad brush numbers across divisions because you're really mixing and matching across a number of these lines of business. Mix changes will impact as well, but nothing specifically to add to what Andrew said.
Right. In terms of that, sort of, you know, you're trying to take that multi-year approach, and you're putting up your reserves for the current accident years that you've just gone through. I mean, how material have been those revised inflation assumptions into outer years, that feed into that current accident year combined ratio?
I'm not sure we can be precise in it. I think what we're building in higher inflation into our numbers and taking those into our reserves at this point in time and holding them until we see whether that claims inflation comes through or not. I'm not sure that's answering your question. I wish I could give you a precise number, but I'm not sure I can because it varies so much, based on line and division. We have built higher claims inflation into current reserving and pricing, and that's our estimate for it. As I say, I think it's a good thing to do until we know what's truly happening in it. If anything over the past year or two, people's view of inflation is it's going to be higher for longer, and we need to be aware of that.
Okay. Andrew, on your current sort of views then around inflation, broadly, as sort of you think about the premium rate environment, do you think on a written basis you'll be able to achieve premium rate rises through FY 2022 as it stands at the moment, that sort of cover off on the, on your inflation outlook? Should we still expect real positive premium rate rises?
Well, we'll find out. Obviously, we'll find out in a few years whether it was real or not. I think it's one of the drivers for rate rises in 2022. Why the market's going to stay in a pretty good place from a rate increase point of view, because not only the large cats we've all had in 2021, it's also the concern the industry has around inflation. You can see that with almost every announcement. Everybody's worried about inflation, and that, in my view, is going to maintain premium pricing.
You've seen a version of that. I was gonna say, you've seen a version of that when we updated you at the half year, right? We were kind of cautious about the outlook for premium rate increases in the second half. We've actually seen rates hold up well because we've had a lot of cat activity in the second half of last year. Secondly, this inflation thematic started to feel a lot more real, and I think the industry is starting to price in some into that. I think that's why we sat here today probably feeling a little bit better about 2022 than maybe what we had sort of said at the half year around the continuation of decent rates.
Yeah, just a question around sort of the interaction between the very significant capital surplus and reinsurance and NEP growth outlook besides it. The $962 million output, I see that you have significantly increased the attachment points for the aggregate from $625 million to $800 million. So I presume that's been a key factor within the very big uplift in the cat budget. Just wondering what sort of overall impacts there are on reinsurance costs as a result of some of those changes into next year, whether or not there are any savings or it's still sort of net increase on a like-to-like basis in reinsurance costs.
More broadly, how we should be thinking about NEP growth relative to the high single digit GWP growth, just given some of those factors and the sort of additional property share you talked about earlier.
I think there's a number of points in there, so I'll pick up one or two, and then to Inder. On the aggregate, not surprisingly, we've seen, and there's been a lot of commentary about aggregates have been difficult to place in the beginning of 2022, because they've not impacted so much, not only in 2021, but in previous years. We're pleased we've got good reinsurance support to have the aggregates in place. They wanted the retention to go up, not surprisingly, because based on the chart we're showing, the amount of catastrophes we've seen over the past five years were greater than the previous five years. Not surprisingly, we had to take an increased retention. The pricing on our reinsurance placement in total was within what we expected.
It's given all of our cedants across the board sort of low single digits increase in pricing across the board. The reinsurance program this year is very, very similar to the reinsurance program last year. I think it is something that we are going to look at, Sam Harrison and Inder and I in 2022, whether we can adjust the reinsurance program for the future. That'll be something we'll start in the second quarter. Again, we were quite happy with the reinsurance we got. It's just hard to get low attachment point aggregates in place because those reinsurers are becoming much better to retain. We're pleased still to have it. Of course, that does impact what our cat budget is because it's gonna kick in at a higher point.
Our aim is to manage the overall cat budget within having that retention in the aggregate. There were some other elements.
Yeah, maybe just on picking up some of the specific numbers, Kieren. You've got the aggregate attachment moving from $625 to $800, so that's $175. You've got the allowance moving from $685 to $960. Now, there's a bit of currency in some of that. In essence, you know, the allowance is moving up meaningfully more than just the aggregate attachment. As you know, the aggregate works, you know, excess $10 million as well. The I would say we've built in a bit more resilience into the cat allowance in addition to the uptick in the aggregate. That's why we're showing you the as if analysis. When you roll back, it probably reflects a better version of more recent experience.
Now, we're not saying it's gonna be good in every single year, but it should be good in most years, at least as we sit here today in terms of our understanding of exposure. The net increase in cost from our reinsurance program, what we call the core cover program, is around that $50 million mark, which is very similar to what we had last year if you look at year-over-year. And that, to Nigel's point earlier in the walk between, you know, exit, et cetera, that is another modest drag when we look at year-over-year exit as well. That's that $40 million-$50 million. You know, that's being managed. You've got to look at the reinsurance program both for the terms and the cost as well.
Obviously the attachment point moving up is a part of that. On your question around NEP, we would continue to see NEP probably lag a little bit for GWP point we've mentioned, just because of the things like the crop quota share, et cetera. LMI is gonna be running at a 50% quota share. We'll see some of that dynamic probably still continue to feature through the first half.
Thank you.
Thank you. The next question comes from Andrew Buncombe with Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. I just had three please. The first one's a pretty easy one, but just confirming my understanding. You've said high single digit GWP growth in FY 2022. Can I just confirm that definition includes U.S. crop? Thanks.
Yes, it does.
Perfect. The second one, Standard and Poor's are in the process of rolling out some capital changes at the moment. Can you give us some color on how that may impact QBE? Thanks.
Yes, Andrew. Early stages in terms of making sure we work through that with S&P. We're not seeing any material issues emerging from that. As you know, we continue to hold capital within a double-A level for S&P as relative to our rating of an A+. We feel pretty comfortable about that. Obviously, we'll work through the changes with S&P. There are obviously broader set of changes around cat models, et cetera, around cat risk. You know, this is a normal feature of our industry and what we're dealing with, but nothing to flag just yet, Andrew.
Got it. Just a final one from me, please. Over maybe the last six plus months, QBE has spoken about reducing the global catastrophe exposure. Can you give us an idea of what's happening to your P&Ls at the moment? Thanks.
I don't think we've changed the global exposure that much into 2022, so it's stayed relatively flat between 2021 and 2022.
Yeah.
We've looked at rebalancing. Sorry. We've looked at rebalancing from some pockets to others, but overall, at the extreme levels, it's very similar. Sorry, Inder. Come to you.
Oh, no. Sorry, Andrew. I thought you finished. I was just gonna point out, if you look at our PPA table, PPA isn't a perfect metric, but you can look at the ICRT, the concentration risk charge, and that's broadly flat, Andrew. Year- on- year, there's this very modest increase. We're talking about reducing exposure in pockets we're more concerned about, and as Andrew said, reallocating some of that.
That makes sense. Maybe just a quick final one, please. On slide 15, you said risk asset return of 5.5%. Am I correct in interpreting that as a reduction of the previous 7.5% on growth assets, or are they not quite aligning? Thanks.
Yeah. Overall, you know, we've been fine-tuning the mix, and as we've said, of the 15%, you've got two buckets. You've got a 10% bucket of growth assets, and you've got 5% bucket, so call it enhanced fixed income. When you blend the two, Andrew, that's the 5.5 we're talking about across the 15%. There's been some fine-tuning around the mix between, and we're being more deliberate around the 10 and the 5 within that 15.
Excellent. Thank you.
Thank you. Your next question comes from Siddharth Parameswaran with J.P. Morgan. Please go ahead.
Hi. Good morning gentlemen. I have a couple of questions that [[audio distortion] just on COVID. I was wondering if you could just perhaps give a little bit of color on how COVID actually might affected [audio distortion] this year. Was there an impact? Did you see it? Does it impact your fiscal ratio at a group level? [audio distortion] I was wondering, is there reason to think that it wasn’t impact and which way does [audio distortion] I mean, [audio distortion] in particular? What was the impact of COVID and all the lockdown, etcetera. [audio distortion]
Yeah. It's, I must admit, it is becoming hard to split hairs on what impact COVID-19 lockdowns in many different parts of the world or not, and changing restrictions is actually having on current accident year loss ratios. We obviously have a very diversified book of business, so things like commercial motor or personal motor, for example, while they feature in our portfolio, are actually a smaller part. There probably is a modest level of benefits that we've took. It's very difficult for us to say, "Here's a precise number," because of the uncertainties in the calculation of that. Again, you know, we have thought about that as we've thought about framing our exit rate is to say, "Look, we probably has a slightly lower than run rate level of activity across the world.
Probably the same through a number of our books of business. We'll probably see a little bit of a normalization as we get into 2022 around claims activity. It's difficult to sort of pin down an exact number on it. We lost you.
Thank you. Your next question comes from Matt Dunger with Bank of America. Please go ahead.
Yes, thank you very much for taking my question, gentlemen. Just wondering if I could reconcile the steady improvements in the exit COR that you're looking for in FY 2022 versus the consistent low- to mid-90s combined operating ratio outlook. You know, are you able to talk to us about some of the components going into FY 2022 versus this what seems to be a medium-term outlook?
Again, if I look in sort of the total terms, the obvious thing that we need to improve is the North American combined ratio, as the other two are already in the low 90s. Within that North American combined ratio, it has a couple of elements that we're very focused on. One is the Alternative Markets and the cat exposure we talked about earlier, so trying to reduce the cat exposure in a North American number to improve its volatility with a lower downside. The second element really within there is the growth of the retail book. The retail book is still running at a combined ratio of 100%, not because of its claim, not because it has a claims problem, just has a scale problem. The expenses are too high at this point in time.
We need to put more volume getting into that retail book. We have good growth plans, and we think we've started the year in 2022 well on it. If we can get the combination of those two elements within the U.S. better and improving, then the overall U.S. portfolio will improve, and that will ultimately drive us into the low- to mid-90s combined ratio on an ongoing basis. That's the main focus. The other areas, of course, we're still interested in getting rate growth if we can in certain areas, and perhaps can do better. Generally it's the focus on the U.S. from my point of view. Again, Inder, you got-
Great. Thank you.
Sorry, go ahead.
Sorry, thank you very much for that. Andrew, I just had a follow-up question. I'm wondering if you could talk to how your priorities that you set out today will filter down through the organization and whether you've had any time to think about what potential performance metrics might be built into performance reviews and scorecards.
I mean, I think it's a great point, and we're working on that. The way we've structured it, we've got an executive responsible for each of the initiatives. We've made a lot of progress on them. The aim is to involve as many people in the organization as we need, because we need the younger organization to actually understand why we're trying to do this. Some of them lend themselves to easier metrics than others, so they are much more quantitative than qualitative. I think the portfolio optimization, of course, and the growth, it should be relatively obvious where we've actually made progress on those. The portfolio optimization, we need to understand the volatility in the various lines of our business as well as we can, and then try to mitigate that volatility.
That volatility is sort of a short term one as we underwrite, but also a potential five-year reserving one because some lines of business have longer tails than others. We're just very much focused on that. Sam Harrison, our Chief Underwriting Officer, is leading that. The second one that's possibly easy to measure is my colleague next to me, Inder, who's leading looking at where can we grow across the portfolio and are we pushing hard enough in certain areas. Because the rating environment is quite good. What I was teasing out in 2021 is the growth ex rate. If we've had three or four years of rate growth, now should be the time to put more exposure onto our balance sheet because we're getting so much more than we were getting three or four years ago.
That doesn't necessarily apply to all lines, because some lines haven't gone up as much as they should. The opportunity for putting excess exposure on the books is quite important in 2021, 2022, and really focusing on those areas which do have the best margin and we do have a competitive advantage. Those ones which it should be easier to show how we're getting on. The other ones are probably more challenging how we're doing on them, but the organization will key it. The latter more qualitative
In the feedback we get on have we improved governance, have we improved how we make decisions within the company and have we improved how we operate.
Thank you very much.
Thank you. Your next question comes from Siddharth Parameswaran with J.P. Morgan. Please go ahead.
Sorry, gents. I was on mute for the second part of my question, which was actually just around the changes in guidance. I mean, we've had allusions to this with kind of previous questions. Just maybe a question for you, Inder. I mean, you gave us an exit run rate of 95% at the end of last year. We had for the first half an exit run rate of 93% for the combined ratio, and now it's 94%. I mean, I do appreciate that they are moving parts, but the biggest driver should really be rates against claims inflation, and we've always been told that there was a gap of about 6% between those numbers.
I mean, I appreciate there's an increase of, you know, a couple percent for your cat allowances into next year, but it just seems like there seems to be a lack of consistency between those numbers. I was just wondering if you could just sort of break down what might have changed. Is it inflation? Is there something else that has changed in your thinking?
Yeah, I'm happy to pick that up. Sid, just to make sure we're on the same page. We said exit 95% last year. We're saying exit 94% this year. We never talked about an exit 93% at the half year. That's the number we actually reported. We've always been cautious. You know, we sort of commented in the past that, you know, observed inflation might be in the 4%-5% range, and we're getting rates higher than that. In every earnings call we've talked about, you cannot just take the 10 and take the five off and assume the combined ratio is gonna leg down. It's just not the way.
Sid, you've been covering the industry for years, and you know that as an actuary that you know the inflation, the risk that Andrew was talking about earlier is a multi-year view. The exits that we're constructing to give you a sense of where the business is at are constructed on a very consistent basis when you're looking at the 94% exit this year versus the 95% exit last year. Happy to take some of that you know offline as well, but that's just to give you some context because the inflation risk can't just be measured as the rate minus the observed CPI today.
Yeah. Okay. Okay. Maybe can we just touch on something else you mentioned just around the running yield. You mentioned that it takes time for increases in rates to flow through to the P&L, but my understanding is, I mean, your balance sheet is discounted. Your assets are mark to market. Shouldn't any changes in yields really flow through straight away? You know, I think you mentioned earlier that, you know, it'll take the duration of your assets for that to eventually flow through. It was 2.3 years or something. But I thought it would be pretty immediate. It's just-
We're just trying to. Yeah, no, it's a fair point. What we're trying to do is make sure people don't take, you know, the assets of $29 billion, and they see, you know, the tick up in the running yield and apply it to the same asset number. The problem is also as rates are rising and as risk-free rates go up, the mark to market value of those assets comes down, right? You might apply a higher yield, but you apply it to a lower asset base, right? What we're saying is, you get to that same dollar value of investment income. It just takes a little while for that to turn through.
We're just trying to make sure that when people are applying higher running yields, they're applying it in the correct way. You either ease them in over the duration, or you mark the assets down and you mark it against that lower asset starting point. That's all.
Yeah. Okay. Okay, great. Okay. I'll leave it there. Thanks very much.
Thank you. The next question comes from Andrei Stadnik with MS. Please go ahead.
Good morning. I wanted to ask two questions, if I could. Firstly, just around the reserve and top ups, which you've been conservative versus some of the global peers that have called out claims inflation but haven't made explicit top ups. Can you walk us through? You mentioned that for the 2020 to 2021 years, you've taken larger IBNR. Can you give me the figures and numbers, dollar numbers around just how, you know, conservative or what kind of mix or allowance you've made in those two years for IBNR?
Just a general comment. I think it's quite hard as I see it to be conservative in the way we actually do our reserving. We're relatively consistent, and I quite like it, and I think when I spoke to everybody in November, December, that it's consistency which is quite important. We are trying to reserve consistently. There is an element maybe of prudence in claims inflation number, and therefore we want to ensure we don't get caught out by claims inflation. We are trying to reserve consistently year in, year out. Of course, within an organization like ours, we get a number of external parties checking are we consistent or not, as well as our own actuarial function. That's what we're trying to do.
Of course, we can never get it right because the numbers are massively large, and it's impossible to say the claims were exactly right. That's definitely what we've tried to do and how I feel we've done it as we've gone through the year end. Now, Inder, I don't know if there's any more precision you can give than I've just outlined.
I was just gonna say, I guess we're talking about two separate points. One is. We have taken reserve top ups in areas where we've seen actual claims experience emerge that we're reflecting, right. The E&S book, part of the discussion earlier, has continued to deteriorate beyond our original expectations. The reserve top ups are not a general buffer for inflation. That's actually reserved claims experience. Same with the ProHealth book in the U.S. Again, a book in runoff that we've kept higher, and similarly with the Aus long tail liability book. You know, we're continuing to see some deterioration in pockets of the book around accident year 2016 , 2017 in particular.
We've sort of said, "Okay, look, maybe some of that is gonna continue right through to 2018, 2019." That's not a QBE thing. It's an industry thing, right? Because there is emergence of some additional claims in worker-to-worker liability, et cetera, and particularly with the prevalence of use of contract labor. There are some issues that are very specific that link to the reserve strengthening we've done. Then there's a separate discussion about, you know, the claims inflation. What we're saying is our exit IBNRs, both last year and this year, you know, we're probably carrying a higher level of IBNR in the current accident year, both last year and this year, than we have ordinarily done. That reflects the greater uncertainty around inflation going forward.
Thank you. My second question, in terms of that high single-digit GWP growth guidance, especially on the crop side, what are the lines of business you expect to see the growth come from? Are there any lines of business you think could be a potential in the way that you'd like to see more growth?
That's a great question. I mean, we're hoping in 2022, the plans are that all three divisions have growth opportunities in them. We're targeting growth across all of them. I've got a flag in the U.S. I mean, the retail book is starting from a relatively low level, so that definitely has an opportunity to grow. We think reinsurance rates have improved over the past few years, and therefore we've seen that QBE Re can grow its footprint across the organization. There are a number of those. I'm just highlighting one or two. I'm sure there are others that we've got. Those were relatively major, more chunky growth opportunities going forward.
I would like to see if there are products we have in any of the divisions that we could share with others, and that's why we talk about the enterprise-wide view. If we're doing something great here in Australia, is there a product we should launch in the U.S. or in the U.K. or vice versa in that? I would like to see if we can look at complementary products to what we have. There are certain things that may be complementary to what we're doing in each of the divisions. I think I see those as being relatively safe growth areas. I don't want to give Inder complete objectives because he's running the initiative himself, so I'd probably lifted out the things he would be looking at anyway.
We're bringing the organization together to look at where the best growth opportunities are. The plan looks in good shape for 2022 with 20. I think there are probably others we could also look at. It's quite hard to be definitive at this point. Things that are complementary, things we do elsewhere that we could do across the platform or across the business would be good.
Thank you.
Thank you.
GS, please go ahead.
Morning all, it's Scott Russell here. Can you hear me okay?
Yeah. Hi, Scott. You're just a bit faint. Yeah.
The first question that I had is just about catastrophes and the higher attachment point obviously implies more cat hold in the future. I was happy just to drill into last year's cat losses at $900 million, a little bit more. It appears the second half was actually lower than the first half, despite the fact that most of the events you're calling out actually occurred in the second half of the year. I was wondering if maybe you could case study Hurricane Ida in isolation, perhaps to quantify what the gross and net costs were there.
Sure. Happy to do some of that kind of offline. When we set our cat budget, we obviously have a first half, second half profile to that. As we get further into the year, obviously we start, you know, in the instance of 2021, we've attached into the aggregate, right? As the gross losses, you know, continue to write up, your net losses, you start to then hit a cap, right? Effectively because you're then into the aggregate. Looking at it first half, second half, the gross losses in the second half with Ida and with the storms in Europe and with some of the activity in Australia were very significant. We had an unusually high first half this year because of the Texas event or in 2021, because of the Texas event.
I would still say on the gross basis, the second half was higher. On a net basis you might see some of that moving around a bit because we've attached meaningfully into the aggregate protection.
Okay. Copy, Jeff. If we were then to drill into frequency versus severity, I can see clearly that severity of these events is clearly rising over time, particularly in more recent times. Perhaps around the frequency that you're seeing, below the big headline events, how's that been trending?
Sorry, you mean the frequency? Sorry, just clarify as you're wrapping up. Sorry . The frequency?
The frequency of these large events, yeah. I mean, obviously we can see, if I use Australia as an example, we can see a very long list of smaller events that still qualify as catastrophes. I guess I'm referring to the rest of the world. Is that similar with what you're seeing? Is that also driving up the cat budget?
I'll give you a view which is more of a feeling rather than on numbers, because I'm sure many of the larger insurers have probably listed out every single thing that's called a catastrophe in 2021 and 2020, and we can probably give you that analysis at a later point. I don't feel there are obviously different events that happened over the past few years from my time within insurance, and I don't feel there are necessarily more of them. They just cost more. I would say the severity is the one that's been driving up from my view and coming back over a 10-year period where a North Atlantic hurricane only cost a few billion dollars. Now it's almost impossible to have a few billion-dollar North American hurricane.
You just have a sort of a light breeze in one of the major cities, and it costs you several billion. Everything's changed to some extent, but these events just cost a lot more than they used to. I think that's the major issue. There has been more severity, I feel, in the events than frequency. There may be stats we can show you whether that's true or not.
Agree, you referenced wanting to reduce exposure to North American hurricane season. I think that's been a goal of QBE's in the past. How long would you envisage that takes place? Is it a step down during this year, or should we expect that over a few years?
It happens this year, and it starts earning through. Some of it will start earning through this year, but more of it earns through in 2023. I mean, you've hit a key point. You change your net exposure. Unfortunately, you can't do it overnight, and therefore it takes time to do that. The exposure will be coming off during this year, and the earnings will be more in 2023 than 2022. That's why it's quite important to have a similar reinsurance program this year to last year, 'cause in effect, we will have similar exposure this year to last year.
Okay, I got it. While I've got you, can I ask you a sort of bigger picture question about the group and its geographic mix? Over the past decade, QBE's simplified and shrunk from over 50 countries to, I think it's 27 now. It's still a very complex and sprawling organization. You're planning to optimize the portfolio. As you go through this, when you're thinking about countries and geographies, can this be simplified further? What's the right geographic mix for QBE?
I think it's a good question. I mean, I would like to see if we can focus on what we've got. I'd also like it so that people don't call QBE complex and sprawling at some point. We're not that. I think there are one or two places, you know, if you look at our European footprint, there are one or two countries with reasonable sized insurance markets where we can try to replicate what we've been doing in some of the other European countries. I wouldn't mind being open to opening up in one or two places, but I think the footprint looks quite good to this point. I think Inder made a comment that it's great to have Asia. It's just four countries now, isn't it? It's really cut back over the years.
It's delivered a profit, and we seem to be able to grow there, which is great. I think the footprint seems to be, sensible and something we can build on. I haven't got a view of putting lots more flags down in the world and start building out a geographic footprint. I'm a great believer, let's look at what we've got at this point in time and see if we can add to what we've got. Add more product in some of the countries we've got where we have expertise and see if we can build our positions into them. If we can't, then you have to assess why are you in that country. If you can't become relevant or get to any size or get to the right returns, you do have to question whether you're relevant.
The counter to that is looking at other countries with reasonable sized insurance markets. If we have something that would be useful in that country, why wouldn't we enter it? I know that sounds so broad brush, but it seems to be a sensible building approach as opposed to having, "I've got a view of this country we should be in or that country we shouldn't be in.
Yeah. I like that. I mean, it's an industry that rewards diversification. Thank you. Thanks, guys.
Thank you. Next question comes from [audio distortion] Kerr with Credit Suisse. Please go ahead.
Hi, thank you for taking my questions. Sorry to go back to the core again. I know we've had a lot of questions there. Just if we look at the number recorded at first half of 93.3% and the other year, 93.7%. Is the main delta between that and the prior year reserve strengthening that you mentioned on the call, or the other significant factors in there?
Yes. I mean, this is one of the major reasons, isn't it, for the move?
Yeah. I mean, you know, we're happy to walk through the actual exit chart, which we've you know thought was quite clear from the 95% going down to the 94%. That obviously takes the full year and walks it down for the prior year, the risk margin movements, the expenses and the additional cat and reinsurance costs.
Yes, you're right with the prior year developments in the second half. Certainly had cat in second half, didn't we, the deterioration.
Okay. Thank you for that. On the expense ratio, it's the flag that's been kicking up a bit this year. Obviously you'd spoken to restructuring expenses of another $121 million expected in 2022, I think it was last half or the next 18 months. Apologies if I misquote anywhere. Is that still the view now that some of those high expenses will be other things removed?
Yeah. We said, on the restructuring charge, we'd take $150 million over two years. We're taking the $70 million-$80 million, 2021, and we'll take a similar amount. That's really driving a lot of the IT rationalization that we've talked about. We're seeing some good benefits come through on that. Like, if you look at the, you know, earned premium of the company, it's gone up by $1.5 billion. The expenses on a constant currency basis have gone up by $7 million, right? We're getting a significant amount of expense leverage play through. What we're saying is some of that, you know, is probably not a run rate that you can take. We'll still see some of that normalize back a little bit into 2022.
We remain confident that once we're through this program of work, we can hit our 13% expense ratio target in the next year.
Okay. Thank you. Maybe just one on the geographic mix question again. Clearly, a lot of the work being done in the U.S. and recognize a lot of the challenges there are related to prior accident years. The timeframe that you think about in your mind is how long, you know, how much time you try to fix the U.S. before, you know, considering other, you know, more significant measures in that geography.
Okay. Just briefly, how I see the U.S., it's in ex-cats. We've got the crop business, which is a very good business. Probably the second largest crop business to Chubb, who's the number one crop business. Has great relationships and can perform well, and we should be able to manage the volatility of the crop business on our overall balance sheet through quota share. There's no shortage of reinsurers who want to take some of the crop exposure off our books. We have the alternative markets. That's a mixture of third party catastrophe and non-catastrophe, and we just need to look at the balance in that and whether it's too catastrophically exposed when we talk about reducing the volatility in it. We've got the new financial lines team. That seems to be doing well, growing well. It's a good team.
They've added to the team during 2021. Need to be cautious about financial lines where the rates come off. Far it's had good rate momentum, as it should have done, because there's been some challenges in the financial lines markets in the mid-terms with claims. The A&H book, Accident & Health, has performed well over a number of years, and we have a very good team there. Aviation, we're sort of rebuilding. We've recruited a new leader in that, which is great. Then we have this retail book, which is subscale, and we're very focused on defining what appetite we have in that retail book, working with a number of partners, and ensuring we stick to our appetite and don't expand the appetite.
It'd be easy to grow by giving up on what we like and what we don't like. We're not doing that, and there's plenty of business coming our way on the back of it. I see the U.S. as being six nice parts at this point in time, and we can focus on those, and then we can add something which is complementary to some of those. The financial lines can be broadened out and maybe some other products that you could add that still fall under the financial lines book, and they have the expertise to do it. I don't see why there should be a reason why that portfolio, which has balance in it and potential diversification, can't work if we can get the mix of it right and the quality of the business coming in to the same high standard.
I think we should be able to do that, focus on that, and make it a successful business. We need to be very disciplined on sticking with those business lines and stick to our appetite as we've laid it out and ensure the brokers give the business we want. That takes a bit of time to ensure that all of those work, but there is no reason why that cannot be a successful strategy. My final comment is let's stick with that strategy over a number of years rather than changing our view after a couple of years and trying to grow quite quickly in different lines. I think aggressive growth is quite hard in any line of insurance. Our aim is not to grow aggressively in those six lines. It is to grow sensibly over the medium term.
That's what I hope will happen. That's the focus we have at this point in time. Looking at them, there's no reason why that should not be successful. The market is very large. There's plenty of space for us in the market to grow.
Great. Thank you for that. Maybe just the last one, if I can, on reinsurance. GWP looks a lot stronger in the half than I think the market expected, but NEP a bit lower. Was that perhaps people just maybe underestimating how much reinsurance is coming through in the crop? Or is there anything related to strange conditions that we should be aware of?
No, it's main crop, isn't it? Sorry.
Yeah. Yeah, look, it's crop. It's LMI. It's also financial lines, you know, where we've been growing. We've had a 50% quota share on that business. It's important to note with these quota shares that we've got on some of these lines of business that we do get significant overrides. It's actually very possible for us to be writing the premium, maybe keeping some of that to manage the level of net exposure we wanna retain. It's just about how we manage the portfolio. Also there's a bit of a lag in the written premium sort of earnings through as well, because some of that growth has come in the second half, and that'll take some time to earn through. Those would be the main drivers.
Great. Thank you.
Thank you. Your next question is a follow-up from Kieren Chidgey with Jarden. Please go ahead.
Hi there. I've just got two quick follow-ups around some financials. I might have missed a comment on this before, but the investment yield range you talked of 1%-1.5%. Just to be clear, that's based on actual yields sort of at 31st of December. Do you have a feeling for where that would sit today?
Yeah. The illustrative analysis we've shown you on the exit is at that 68 basis points on the fixed income book. Stock today is probably on that closer to 100 basis points. Now, clearly, we've seen an uptick in the short term yields in the last few weeks. Again, Kieren, I do caution that you can't take the delta and apply it to the asset base, right? That's effectively the blended running yield on our book on a spot basis today.
Right. Thanks. The second question, just on the tax rate. I'm just wondering if you can give some views as to how we should be thinking about that on a going forward basis?
Yeah. I think, consistent with how we've guided, you know, the natural tax rate of the company, is in that low- to mid-20s% range. Obviously there's a lot of tax reform underway, you guys might be aware. I mean, everyone's talking about both changing tax rates around the world and also, you know, kind of some restrictions around, you know, some of the movements of revenue and profits around the world. I think we're feeling okay in terms of what we see coming up. Doesn't necessarily change our view in terms of what we think the long term natural tax rate of the company is. It's probably still in that low- to mid-20s%. We continue to have this benefit of off-balance sheet tax losses that we continue to earn through.
The reported tax rate is closer to 17%. You know, we would expect for the next couple of years, depending on the shape of profits that come through, particularly if North America earnings start to come through, that the tax rate will be a bit lower as we earn through those off-balance sheet tax losses over the next two, three years.
Got it. Thank you.
Thank you. There are no further questions at this time. Now I hand back to Andrew Horton for closing remarks.
Okay. Thank you very much indeed for those questions. Thank you for joining us today. I'd just like to reiterate how excited I am to be here at QBE and the opportunities we have ahead of ourselves. I look forward to seeing you live at some point in the not too distant future. Thanks once again for joining us. Thank you.