Good morning, everyone, and thank you for joining us today for QBE's 2022 half year results 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. For today's briefing, I'll commence with an update on our strategic priorities. After which, I'll discuss the key features of the result before handing over to Inder to talk through the detail of our financials. Before Q&A, I plan to circle back and provide a strategy update on our North American division. After which, I'll conclude with some updated comments on our full year 2022 outlook. I wanted to open with a quick refresh on our strategy.
Since launching the new purpose, vision, and strategic priorities at the beginning of the year, I've been excited to see such a positive response across the organization, which has been echoed across our external stakeholders. I'd lost count of the number of functional areas, cells, and teams which have launched their own version of this page, repurposing the principles to align with their particular focus. As a quick reminder, our purpose is centered around enabling a more resilient future, while our new vision for the organization is to be the most consistent and innovative risk partner. Each of the six strategic priorities on this page have been developed to help us achieve our new purpose and vision, and I wanted to share some of our early progress. Turning to slide 4.
I want to keep you regularly updated on how our new strategy is coming to life, but importantly, driving better and more consistent outcomes for QBE and its customers. We have two GEC members responsible for delivery on each of the six strategic priorities and have a number of work streams established across the group to build these priorities into our culture and DNA. We've been busy over the half, and this slide highlights some of our early progress. Three personal highlights for me have been establishing new leadership cohorts across the top 350 of people at QBE. These groups will work alongside the group executive committee to drive progress on the strategic priorities and will also be used to support internal succession. Secondly, we've sharpened our measurement and appetite for volatility by class of business.
This new framework is being embedded into our cell review process and driving more informed capital allocation, pricing, and reinsurance decisions. Finally, we've made great progress in bringing the enterprise together. I'm seeing greater collaboration across the group, and we're approaching growth and capital allocation decisions at an enterprise level. We've realigned divisional remuneration to have a greater group performance weighting, while Inder and I have been recently appointed to our three divisional boards. Over the coming half, I want to maintain this early momentum and look forward to sharing more as we catch up with many of you in the coming weeks. Some comments on sustainability. As a reminder, I want sustainability to be consistently integrated throughout our strategic priorities and business. We're currently evolving our approach to sustainability, and this slide provides some color around the three focus areas which will underpin the new strategy.
We'll provide a more fulsome update at the full year result. We're making good progress supporting our commitment to the Net-Zero Insurance Alliance with a number of pilot studies currently on track. As a reminder, the NZIA is playing a key role in establishing a consistent framework to measure underwriting emissions across the insurance industry. This work is helping our business assess the gaps and build capability to strengthen our engagement with customers in higher emitting sectors. I see a great opportunity for QBE to support our customers as they transition to net zero. We move on to the actual result. As you're probably all aware, geopolitical instability, inflation, and a remarkable recalibration in global interest rates have led to a challenging operating environment in the first half of 2022.
While these factors have clearly had an impact on our business, I think we've delivered a good result. Positive momentum and improved resilience in the business have clearly continued into this year. Premium growth remains an excellent story for us. Group-wide renewal rate increases averaged 8.1% in the half, with supportive rate increases achieved in each of our three divisions. Combined with ex-rate growth of 13%, group constant currency GWP growth was 18% in the half. Despite a number of unforeseen headwinds, our underwriting profitability remained solid in the half. Our adjusted combined ratio of 92.9% improved by 40 basis points on the prior period. While our adjusted cash ROE of 4.3% was impacted by investment marks and OSPAT remediation, the current exit investment returns suggest a strong improvement into the second half.
Unpacking some of the key drivers around our underwriting result, our estimate on the ultimate net impact from the Russia-Ukraine conflict remains $75 million. Given lower catastrophe costs in the second quarter, it's pleasing to announce that our first half catastrophe costs were only mildly above allowance, including the Russia-Ukraine impact. Adverse prior year development was $68 million, reflecting some small pockets of adverse experience and higher inflation assumptions. Brief comment on inflation more broadly. We've seen inflation continue to emerge over the half. To date, this has predominantly been in short tail classes where rate is responding. Across our liability classes, while claim settlements are not suggesting any major concern, we've been cautious around realizing the full benefit of recent rate increases given uncertainty around the emergence of inflation and the persistency of inflation.
This has had an impact on the ex cat claims ratio trend this half. The other side to this theme has been the substantial uplift in fixed income running yield. From an exit running yield last December of just under 0.7%, we've seen an almost four-fold increase to an exit running yield of 2.5%. This is the highest we've achieved since closing the balance sheet mismatch, and will drive a materially higher investment result going forward. Our balance sheet is in great shape, with capital at the top end of our target range and gearing comfortably around the middle of our range. Finally, I wanted to address the customer remediation charge we announced in July. I was disappointed with the findings of the review, taking an active role to ensure impacted customers receive appropriate refunds as quickly as possible.
With the benefit of an additional few weeks since our announcement, our ongoing testing and review continues to support what we book this half. Turning to our premiums. As mentioned earlier, GWP growth remains a great story for us. Constant currency GWP growth of 18% represents a continuation of momentum experienced throughout 2021. As in 2021, our North American crop business has seen significant growth, up 40%. However, even after excluding crop, group GWP growth of 13% remains strong, and collectively is setting us on course around $20 billion in GWP this year, a position the business has not seen for over a decade. The 18% growth rate does compare favorably to our original expectation for GWP growth in the high single digits, and today we've announced a small uplift in our group GWP growth guidance to around 10%.
Before I unpack some of the drivers of the result, I wanted to note the strong growth in NEP this half. This chart highlights that the gap between GWP and NEP growth has broadly closed this period. Turning now to premium growth in a little more detail. Group-wide premium rate increases remain strong through the half at 8.1%. Encouragingly, pricing remains solid across all three divisions and continues to compound on rate increases achieved in prior periods. While rate increases have decreased slightly this half, the moderation has generally occurred across a number of liability classes, which in general have experienced a material improvement in rate adequacy. Importantly, we continue to achieve rate increases in those classes which are most noticeably being impacted by higher inflation, and we expect the risk of a more prolonged inflationary backdrop should maintain pricing discipline across the market.
Group ex-rate growth was 13% in the half and around 66% if the growth in crop is excluded. While this did moderate from the outcome we reported for the first quarter, at the time we flagged that Q1 written premium does have a heavy bias to our QBE Re and Continental European portfolios, both of which are a growth focus for us, and both of which are weighted to a 1-1 renewal. Within this exhibit, you can see that in North America, ex-rate growth was 3%. We've achieved further targeted growth in our specialty and commercial portfolios that began actively reducing program exposure in the half, which has weighed on growth. In Australia, ex-rate growth was more challenged.
LMI new business applications have reduced meaningfully from record activity in the prior period, while we also had a deliberate strategy to contract in public liability and closed our workers' comp XOL portfolio. The final message I want to leave you with here is the distinction that our ex-rate growth encompasses more than just new business. We've seen quite a material tailwind from exposure growth in recent periods. This is the interplay between a number of different things, such as terms and conditions, deductibles, inflation in some insurers, and buying patterns. More recently, inflation has been driving this trend, which importantly acts as a mitigant against claims inflation in addition to premium rate increases. I'll now pass to Inder to talk through the result in more detail.
Thank you, Andrew. Good morning, all. As Andrew said, the operating environment this year has been quite challenging. We've had a combination of record flood and storm activity here in Australia, geopolitical instability, and a remarkable spike up in inflation, as well as a significant reset in interest rate settings. Despite this, our underlying business performance remains strong, and our underwriting margin is demonstrating much better resilience than in prior years. We're also pleased with the positive momentum in the business, which you can see coming through in our strong top-line growth. Moving into the second half, we will benefit from a much higher running yield on our fixed income portfolio. I'll first turn to slide 10 and make some remarks on the overall group P&L. Gross written premium for the half was $11.6 billion, a substantial 18% increase over the prior period.
Net earned premium was up 15%, and excluding crop, NEP growth was higher than GWP growth. Our combined ratio for the half was 94.1. The chart on the bottom left-hand side shows the two key adjustments we have made to our statutory result. Firstly, as we announced in July, we have booked a charge in relation to the Australian pricing review, and this will be reported as a remediation cost below the underwriting income line. On this basis, the 93.2 shown on the chart is the right reference point for our guidance around the full year combined ratio. Separately, as flagged in May, we executed a loss portfolio transfer for our U.S. excess and surplus lines book. This effectively de-risked what has been a very problematic portfolio for us.
The accounting mechanics of this transaction reduced our net earned premium by around $400 million, and this distorts the presentation of all of our key underwriting metrics and ratios. Consistent with our treatment in prior years, we have adjusted out the impacts of this transaction to give you the best basis for year-on-year analysis of the key trends in our business. The combined ratio of 92.9% equates to an underwriting profit of $512 million. This excludes the significant $804 million benefit from the step up in risk-free rates during the period. The investment result for the period was an unrealized loss of $840 million. This included an adverse impact of $854 million from the move up in risk-free rates.
If you exclude this movement in risk-free rates, the investment return was around $15 million for the first half. A brief comment on our asset and liability management framework. While we attempt to maintain a tightly duration matched balance sheet, there is inherent basis risk in the process as among other things, our liabilities include insurance classes that have a multi-decade term to settlement. In this context, the first half result included a $50 million adverse mismatch impact, which in essence is the difference between the two numbers I just referenced, i.e. the $804 million positive impact to claims, offset by the $854 million negative mark to market on assets. Adjusted cash profit for the half was $169 million, down quite materially on the prior period, although impacted by the one-off items I've just referenced.
We completed the sale of the non-core Westwood Insurance Agency business in North America, and this generated around $300 million of capital for the group. The gain on sale was $6 million, net of a restructuring provision of $30 million. Following the transaction, the remaining goodwill in North America is now just $30 million. Overall, our capital position has strengthened over the half with the PCA multiple moving up from 1.75x to 1.77x, and this is now towards the upper end of our target range of 1.6x-1.8x. The board has declared an interim dividend of AUD 0.09 per share, which equates to a payout of around 40% excluding the charge for the expected Australian customer remediation costs.
This reflects the board's confidence around the strength of the balance sheet, the positive momentum in the business, and the improving earnings visibility. I'll now step you through some of the key drivers for the group result on slide 11. The chart on the bottom right-hand side shows the key movements in the group's combined ratio versus the prior period. Walking through the movements from the left, our ex cat claims ratio deteriorated by 30 basis points versus the prior period. A few points to call out here. Premium rate increases were broadly at or above observed levels of inflation. However, the current half included a higher loss ratio pick for crop to reflect heightened risk of preventive planting claims. In some classes, we saw a reversion to higher claims frequency as economic activity returned to more normal levels after lockdowns last year.
Finally, there was a higher instance of non-cat weather-related claims here in Australia, while in North America, we observed a higher frequency of larger property claims. Moving on to catastrophe claims, the net cost of cat for the period was $450 million or 6.3% of NEP. This is around $10 million higher than our first half allowance of $440 million, but it does include the $75 million we have reserved for the impacts of the Russia-Ukraine conflict. Adverse prior year development was around $68 million or 1% of NEP, compared to a broadly equivalent release in the first half last year. The reserve strengthening in the current half was net of a few moving parts. Given the strong domestic economy, we saw releases from LMI and trade credit, including the residual $30 million related to COVID.
However, against this, we strengthened European business interruption reserves by $42 million following an adverse court ruling. Beyond these two items, we had some strengthening in older accident years for financial lines, U.S. casualty programs, and to reflect broader uptick in inflation assumptions linked to wage, medical, and CPI factors. On operating efficiency, our underwriting expense ratio improved by 1.4 points, reflecting good cost discipline and ongoing positive operating leverage. While we're pleased with the progress we're making on efficiency, I would caution around extrapolating the first half expense ratio, which has benefited from the growth in crop, delays in hiring and project spend, and doesn't reflect the impact of the out of cycle pay increase we recently implemented to address cost of living pressures.
In addition, as we flagged in February, we will be making further investments into our business to modernize our systems and processes, enhance our data and analytics capability, and to support growth. Finally, the improvement in the commission ratio of around 80 basis points was supported by higher quota share income from both crop and LMI. Turning now to slide 12 and a very topical discussion around claims inflation. Since we last spoke to you in February, we have seen a significant increase in global inflation, in turn prompting aggressive central bank action across our key regions. Over the last 10 months, we have committed additional resources to our inflation working groups to both enhance monitoring and ensure we're agile in responding to emerging claims trends through pricing, as well as continually challenging our reserving assumptions given the risk of higher and more persistent inflation.
On short tail lines, the combination of labor shortages, supply constraints, higher commodity prices, and wage inflation is impacting the cost of claims both across property and motor classes. Our liability and longer tail classes are most sensitive to social inflation, which is always harder to quantify, and they're also leveraged to wage and medical inflation. Broadly speaking, claim settlements on long tail classes are not indicating any major shift in severity at this stage, albeit there is an inherent lag in the emergence of claims experience in these lines. In terms of financial impacts, and again speaking broadly across our portfolio, premium rate increases are holding up at or above observed inflation trends. In relation to claims costs, we are embedding higher inflation assumptions across our portfolios to reflect both the mix of experience and the uncertainty around the inflation outlook.
In addition, as Andrew alluded to earlier, we are also seeing inflation related exposure growth across our portfolios, and this provides another line of defense against higher inflation going forward. Finally, we've also strengthened prior year reserves where appropriate, to allow for higher CPI and wage inflation, as well as higher observed severity in some of our casualty classes. I'll now turn to divisional performance, starting with North America on slide 13. Gross written premium was up 24% to $4.7 billion, supported by rate increases of around 10%. Crop premium grew by a remarkable 40% to $2.7 billion, with higher commodity prices accounting for around two-thirds of this growth. Overall premium growth excluding crop was around 8%.
Importantly, North America delivered an underwriting profit in the first half, reporting a combined ratio of 95.6, which was over 5 points better than the prior period. While the result is encouraging, we remain very focused on driving further improvement to ensure North America trends sustainably into the group's combined ratio target range. The ex-cat claims ratio deteriorated by around 90 basis points, which reflects a higher loss peak in crop, an increase in larger commercial property claims in our mid-market segment, and more broadly, the impacts of higher claims inflation. The result included a lower level of catastrophe claims, which reduced meaningfully to $60 million or 3% of NEP compared to almost 9% in the prior period, which was clearly impacted by Winter Storm Uri.
Adverse prior year claims development was $32 million or 1.6% of NEP compared to a small release last year. This reflected strengthening in older accident years of financial lines and casualty programs, primarily around public entity portfolios. Pleasingly, we have made some important strides in improving the efficiency of our business in North America with investments in policy admin and data architecture, supported by a leaner and more fit for purpose operating model. The reported expense ratio of 11.9% is meaningfully lower than the levels of around 15% reported around two years ago. A couple of remarks on our crop business. We reported a combined ratio of 93, which is a slight improvement on the 94 we reported at the same time last year.
A combination of drought conditions in certain parts of the country and excess moisture in others led to quite late planting this season, and we are assuming a slightly higher level of preventive planting claims. Commodity prices have also been volatile, with both corn and soya falling from their peaks after reaching 5-year highs in mid-May. There are clearly some risks as we head into the harvest season, given the extreme temperatures we're seeing in parts of North America, albeit the higher initial loss peak in the first half does provide a bit more resilience than we've had in prior years. I'll now turn to our international division on slide 14. Gross written premium of $4.4 billion was up an impressive 19% on the prior period. This was supported by rate increases of around 7% and ex rate growth of around 12%.
Each of our key insurance segments, including the UK, international markets, and Europe, delivered premium growth in the mid- to high-teens%, supported by strong retention and new business wins, particularly in UK property, international liability, and European specialty lines. Our inwards reinsurance business, QBE Re, reported premium growth of 27%, supported by a material improvement in market conditions. We secured good new business opportunities through what was quite a disrupted January re-renewal season and actively deployed capital into property reinsurance for the first time in many years. The overall international business reported a combined ratio of 91.0, a modest deterioration from the 89.1 reported in the prior period. The ex-cat claims ratio was flat year-on-year as strong earned rate was offset by higher claims inflation and a reversion to normal claims frequency as economic activity recovered post-lockdowns.
Catastrophe claims of $175 million or 5.9% of NEP were higher than the 4.8% we reported in the prior period. This included our allowance for the ongoing Russia-Ukraine conflict, where we have exposure through political risk, political violence, and aviation classes. Prior year reserves deteriorated by $75 million or 2.6% of NEP. This compared to a reserve release of 1.5% of NEP in the first half of last year. This reserve strengthening included the impact of an adverse judgment in the Corbin and King COVID business interruption case and higher inflation assumptions across pockets of the business. The expense ratio improved by almost 2 points, reflecting operating leverage and cost control.
Finally, our Asian business delivered another improved result with a combined ratio of 96.5 following the 97 we recorded last year. Moving on to our home market of Australia Pacific on slide 15. Gross written premium increased by 6% to $2.5 billion, supported by strong premium rate increases of around 9% and stable retention. Overall, ex-rate growth was broadly flat year-on-year. Within this, we achieved good growth in targeted segments such as commercial packages, farm, and engineering, but this was largely offset by lower premium income in LMI and general liability classes. The combined ratio improved by roughly 1 point to 90.0, with strong contributions from New Zealand and LMI offsetting elevated non-cat weather claims.
Catastrophe costs were above allowance as an extended La Niña weather pattern continued to drive a high level of property losses across Australia, underscored by the record-breaking floods that hit Southeast Queensland and Northern New South Wales earlier this year. A favorable reserve release around AUD 40 million was supported by positive development in LMI, including the AUD 30 million residual COVID provision, offset by strengthening in short tail property and workers' compensation. On LMI, credit quality remains strong, with 90-day arrears at 62 basis points, down from the 68 basis points last year, and 30 basis points below pre-COVID levels. Looking forward, house prices are now correcting as the Reserve Bank commences a return to more normal levels of interest rate settings. While the direction of house prices is important for the business, claims activity is much more sensitive to unemployment, which continues to trend at multi-decade lows.
Turning to the investment result on slide 16. As you will all appreciate, we've had a very volatile six months in financial markets, underscored by a record recalibration in global interest rate settings. This has led to a substantial increase in our fixed income running yield to 2.5%, and this will provide a meaningful earnings tailwind for the group going forward. However, in the current half, the sharp increase in risk-free rates has resulted in a mark-to-market loss of $854 million. When looking through this impact, the investment result for the half was around $15 million. In core fixed income, the running yield from the book was almost fully offset by adverse credit spread marks, and within risk assets, the returns from infrastructure and unlisted property were largely offset by unrealized losses on equities and enhanced fixed income.
Our funds under management declined by around 8% or 3% on a constant currency basis. This was driven by negative investment marks, the redemption of a Tier Two security which we had pre-funded for, and the E&S loss portfolio transfer. Over the period, we've steadily deployed towards our long-term strategic asset allocation of 85% fixed income and 15% in risk assets. Risk assets currently account for around 11% of the portfolio, and we expect to reach our target investment mix over the next 12 months. On the outlook for investment returns, it is worth noting that the first half 2022 exit running yield of 2.5%, alongside our expected long run risk asset return around 5.5%, would equate to a forward annualized total return of around 2.8%.
I'll now move to the balance sheet and capital slide 17. Our regulatory capital position, as measured by the PCA multiple, improved from 1.75 times to 1.77 times, and is now towards the upper end of our target range of 1.6-1.8 times. This is pleasing given we've deployed additional capital during the half to support both premium growth as well as the gradual re-risking of our investment portfolio. Couple of brief comments on reinsurance. We are progressing with the review of our program ahead of the 2023 renewal, with the primary goal of ensuring the medium-term sustainability of key elements of the program, and where possible, we are looking to simplify our structure. Reinsurance pricing has seen improved momentum this year, a function of higher primary demand and tightening capacity.
This theme was quite evident through the recent July renewals in Australia. It is worth noting that QBE benefits from a diversified worldwide risk profile that helps mitigate pricing pressure in any one specific market. In addition, half of our core cat and risk program is placed on a rolling two-year basis, which helps manage the risk at any single renewal period. As things stand today, we are expecting an orderly renewal of our program towards the end of the year, and separately, as I referenced earlier, our inwards reinsurance business will benefit from firmer market conditions. With that, I'll hand back to Andrew.
Great. Thanks, Inder. Before we turn to outlook, I want to spend some time on our North American business. Understandably, I've had a lot of interest in my plans and aspirations for the business since I joined. As some of you may know, I've had a long history of doing business in North America, and there are plenty of opportunities to do well in it. While it's the largest insurance market in the world, it's fragmented, no individual carrier dominates it, and brokers and insurers are keen on consistency from carriers. I'm a strong believer that it's absolutely possible to develop a profitable business in the region through having a simple and consistent approach grounded in a targeted, well-defined risk appetite, working with a limited number of preferred distribution partners. To this end, the current profile of our North American business is moving in the right direction.
We have a vastly simplified business which is in good balance, and I'm confident we have the right strategy and team in place to drive a sustained improvement in performance. We've simplified the overall structure into three segments: crop, specialty, and commercial. Within this, our strategy is centered around six key products where we have specialized capability and a strong customer value proposition. We've a targeted approach to distribution, and while we have market relevance within our market, product niches, this will improve and broaden if we demonstrate greater consistency than we have in the past. In recent years, the team has achieved significant operating efficiencies through addressing legacy and duplication. Alongside recent growth, our economies of scale are improving. We have achieved a 6.5% reduction in our P&C expense ratio over the past 5 years, and are targeting a sub 30 expense ratio medium term.
I want to reduce the volatility we've seen in our financial results for the division. We've been focused on optimizing the portfolio around a defined tolerance for volatility, and as I mentioned earlier, ensure the portfolio has better balance. This is visible here where across our three segments, crop, specialty, and commercial, you can appreciate the significant transformation which has occurred in recent years, but importantly, the improved balance. This has been a conscious effort which has come about through a number of actions. Firstly, we've exited a number of subscale and non-core portfolios, including trade credit, E&S, and healthcare. Secondly, personal lines represented 14% of the business in 2019, and it's just 7% currently, which will continue to reduce following a decision to sell Westwood this year.
Next, we reduced our cat exposure across the division, with wind and convective storm exposed business representing around 20% of our total business in 2019 to now well under 10%. Finally, we materially reduced our program partnerships by roughly half to around 20 currently. While the MGA channel remains an important point of distribution, we'll no longer run a dedicated alternative market segment, folding these remaining programs into specialty and commercial. Very simply, we now have control of the underwriting for much more of our business. All in all, I think we have a good footprint, strategy, and team, and I believe that if we stick to our strategy and show greater consistency, the financial output should be higher quality, less volatile earnings, with the division steadily trending into our group 90%-95% combined ratio target range.
Let me move to slide 20 and step through our segments in a little more detail. Starting with crop. I'm a huge fan of our crop business. While it's new to me, I essentially see it as a perfect insurance business. We've got deep relationships with our customers, and partners, scale that comes with the second largest market share, industry-leading technology and service, and a long track record of consistent delivery. Over the last decade, our operating margin has been best in class, while we've achieved consistent organic growth in a market where you can't compete on price and terms, and customer service is the key differentiator. Higher commodity prices have also driven significant growth in the last 2 years.
While I'm clearly a fan of crop, its return profile does contain a high degree of variability period to period, and with our focus on portfolio balance and volatility, this year we used additional quota share reinsurance to manage the group's net retention. This, alongside improved economies of scale, have helped increase confidence around our planned crop return for the year. Moving now to specialty. Specialty has been key to our diversification strategy, and across our three key products, we are relevant and profitable. Our two largest product lines are financial lines and accident and health. In financial lines, we made significant investment in capability to capitalize on growth opportunities from a hardening market and withdrawal of capacity. This has lifted our relevance in the market and helped to build scale.
While rate is decelerating, we still see some opportunities for growth, though expect a material reduction in the rate of growth for 2022 as we prioritize margin. In accident health, we have a fantastic business which has experienced good growth over the past 5 years and a consistent combined ratio. The business has low capital intensity and a low correlation with our broader P&C portfolio. We're a top ten player in our key Medical Stop-Loss product and see opportunities to deepen the core while exploring adjacencies. Finally, onto commercial. Our commercial segment is a key pillar for our North American business, representing commercial property, our small workers' comp portfolio, and our middle market business. As you can see, segment results have been challenged, and importantly, course correction within commercial represents the largest and most immediate source of opportunity for North America.
Stepping through each of the subsegments, beginning with property. The majority of North America's standalone commercial property exposure has been placed through well-recognized monoline property MGAs or programs. Profitability of this segment has been challenged in large part due to several significant catastrophe years in close succession. Putting catastrophe aside, however, relative to industry, the division has been over-indexed to property cat from a mix sense, and I also believe there is room for improvement in underwriting quality. As a result, we entered the year with plans to reduce program exposure, which accounted for around $400 million of premium in the full year 2021. This strategy was centered around property programs and other underperforming P&C programs. As our exposure progressively rolls off into 2023, we expect that wind and convective storm exposure for the division should reduce by around 30%.
Importantly, the property portfolio has achieved a year-to-date average rate increase of around 20%, while we've also been actively driving further improvement in underwriting. As we continue to broaden our North American platform, we'll be more channel agnostic around deploying our property cat capacity. Moving now to middle market, which we previously referred to as retail. First, a brief description, as the retail designation often leads to some confusion. This is not retail in a personal line sense, but rather in North America, standard and less complex general insurance, commercial insurance is placed through a retail broker in the retail or admitted market. The admitted market is highly regulated and uses standard form policies.
For business which can't be placed in the retail market, it then moves to the excess and surplus lines market. In effect, this segment represents largely packaged commercial insurance products for small and mid-market accounts, which the business profile looks very similar to the leading positions we hold in the equivalent market segments in Australia and the UK. Our profitability metrics here need improvement, albeit can largely be explained by a lack of scale. Over recent years, we've made significant investment to consolidate our IT infrastructure under Majesco and also support improved underwriting quality and partner connectivity. While this will support improved future outcomes, the segment is currently operating on infrastructure designed for a business slightly larger than our current size. Essentially, we're very comfortable with our loss ratio for the segment, though need additional operating leverage to sustainably reach our target return.
The natural conclusion here is that middle market will remain a growth focus of the division, and importantly, with a very large addressable market, there is plenty of scope for insurers to specialize by industry, segment, and geography. We have a good existing track record for measured and profitable growth. This has been grounded in a consistent underwriting philosophy, a narrow and well-defined appetite across 11 target industries, working with a limited set of around 30 preferred distribution partners. Currently, around 95% of our business is coming from our preferred partners, with around 93% of our in-force business within our target appetite. Earlier this year, we recruited a well-regarded commercial casualty team, which will further enhance our middle market proposition. It's important to me that QBE is and remains an attractive destination for leading talent across the industry.
All said, I don't want to place any unnecessary growth strain on the business. I want to ensure we attract the right growth. This could mean it takes a number of years to reach scale, though on our current trajectory, we're expecting a gradual shift to underwriting profits for middle market over the next 18 to 24 months. I'm going to conclude on North America here. While I'm not planning to leave you with any divisional guidance today, I do believe the division is capable of sustainably delivering results within our group combined ratio target range. Near term, subject to CAT and crop plan, we expect to return to underwriting profitability in 2022 and see steady improvement thereafter. Moving now to outlook. Our outlook for the remainder of the year has had some small adjustments.
Where we started the year expecting group constant currency GWP growth in the high single digits, based on the strong first half results, we now expect constant currency GWP growth of around 10%. Secondly, on our combined ratio, our expectations remain consistent with what we shared in February. Our strategy centered around resilience and consistency and should result in the business being capable of delivering a consistent low- to mid-90s combined ratio. For the full year 2022, we expect further improvement relative to our full year 2021 exit combined ratio of around 94%. Finally, on investment returns, while we can't predict where financial markets will end the year, we've again provided with a view of our exit investment return at around 2.8%. All in all, we feel good about the momentum in the business.
We've delivered further growth and underwriting margin improvement this half, and I'm confident that our strategy will support our ambition for improved and more consistent returns. With that, I wanted to thank you for joining us, and we're now happy to go to Q&A.
Thank you. For participants, to register a question, please press star one on your phone. The first question today comes from Kieren Chidgey with Jarden. Please go ahead.
Morning, Andrew and Inder. Couple of questions, if I can, maybe starting on the GWP growth outlook of around 10% constant currency. Just wondering if you can sort of unpack some of the potential headwinds or how you think about second half, given you've delivered obviously much higher growth of around, I think it was 18% in the first half of the year. Noting crop obviously will not be sort of the same contributor through the second half, but things like the program business that you've identified, the AUD 400 million reduction there, how much of that is coming in the second half? Because it does seem to suggest that you're not expecting much volume growth at all, or exposure growth outside rates through the second half of the year.
I mean, you were flagging certain elements there. Definitely in the first half, we've had crop and QBE Re and the position in Europe, where there are Q1 renewals. A reasonable amount of the program business does come off in the second half because we only started implementing the reduction in the programs at the beginning of the year. A reasonable amount of that will be impacting the second half as we reduce our exposure to that. We are expecting rates to moderate a bit, the rate of rate increase may fall because we are starting to see some reductions in the D&O world, we're not expecting the financial lines to have as good a second half as they have in the first half. We'd rather protect margin than go for premium growth.
It is a number of elements. Of course, our aim is if we can beat the 10%, we will try and beat the 10%. If things end up being better in the second half than we plan at this point in time, but we think it's a reasonable estimate without putting too much strain on the company in the second half, where we do think things are moderating and we are trying to make reductions in areas that haven't performed as well.
Okay. Sort of related to that, you raised sort of this within your slides, Andrew, around exposure growth, obviously. The rate is called out specifically, but out of the circa 6%, non-premium rate growth in the period, how should we think about sort of the exposure growth across the business globally? How much CPI linkage has come through elsewhere in the premium line that also insulates you against inflation?
That is a tough one to answer. I don't know whether you have the data on that, Inder?
I think Kieren, it's a good question, but we're sort of getting into spurious levels of science to be able to dissect the 6% between underlying inflation-related exposure growth versus broader growth. Look, definitely I think it's not just us, but the industry overall is being very thoughtful about making sure that the sums insured appropriately reflect, particularly in property classes, motor classes, et cetera, a sensible price for the inflation we're seeing come through. It doesn't apply to every single class, but, it's definitely a big focus for us to make sure we get the sums insured right. It, it's spurious just trying to split that 6%.
Okay. Sort of on the inflation sort of topic, generally, I'm just wondering if we could get a bit of an update on how you're viewing trends, and I know sort of they're different across different classes and different regions, but maybe a bit of commentary around the three regions. And specifically I guess in the UK where you have made some adjustments to prior year reserves, citing inflation. As part of that.
If I start, Inder, do help me out on this one. I think one of the things that I'm impressed with is standing up the inflation groups across the three divisions and then trying to coordinate them across the group. We are trying to track, not surprisingly, rate change and how we planned inflation by line of business and what we're currently seeing. It's not an exact science. Obviously planning for it's hard to do, and then actually tracking it's very difficult to determine exactly within a claim how much was an extra inflation over what we thought it was going to be. We have seen inflation, our view of inflation being higher than we originally planned.
Of course, not surprisingly with that's actually maintained rates being higher than planned, as we flagged earlier on, particularly in the short tail lines, 'cause you pay those claims much more quickly. We have a very thoughtful process of actually trying to track this. It's very difficult to get it exactly right within the reserves, but I think we should be cautious about why we're getting extra rate in a higher inflationary environment. Therefore, we have taken a reasonable amount of that extra rate within the inflation numbers. To say it's very difficult to determine within a claim what is extra inflation and what would the underlying claim have been. It's the thoughtful approach and trying to get a consistent approach across the organization.
There is, in my view, very little difference between what we're doing in AusPac, the international business, and the US. They're all very thoughtful about it, and it's being well joined up. As I say, it's almost impossible to precisely put that into numbers. And inflation, what I'm worried about, and I think I said it in the full year, although we can say pricing number at this point in time is ahead of inflation at this point in time, for liability classes, it's the future inflation that's more important than the current inflation. It's even harder in liability classes to determine what claims inflation actually is. I don't know whether you've got more specifics in that, Inder.
I mean, just with the, Andrew's caution around how we interpret these numbers, just to give you a bit of a sense, right? Which I think is broadly in line with what our global peers are saying , We came into the year planning across the portfolios, Kieren, around 5-5.5% globally for inflation. What we're sort of booking is probably in the 6%-7% range. We're booking a bit higher than we'd come into the plan with. If you look at that delta plan versus actual, it's mirrored across the rate piece as well. We came into the year thinking rate would be around 6-6.5%, and we're probably seeing rate, around 8%.
It's again spurious to get into by region, by line of business, but just to give you some sense of broadly what we're seeing across the portfolio, just to give you some numbers to work with.
Okay. That's useful. Just the sort of final question on the U.K. reserve top-up. There's a mention of the, I think a COVID related BI judgment in the U.K. driving part of the strengthening. Just wondering if you could sort of call out how much out of the $75 million there that contributed, and why that wasn't sort of insulated given the reinsurance protections that you had in place previously for the business of the pandemic and given the risk margin on balance sheet are still around this issue.
Good question. T He number for the COVID provision is about AUD 40 million of that total, Kieran. When we look at, the claims provisions we'd set up at the outset, most claims are settling actually broadly within those parameters. What we've seen is this litigation outcome from the Corbin and King versus AXA case, which, specifically looked at this non-damage clauses, which are not prevalent through our policies, but it's just meant that some of this claims activity has come, from outside of the UK. Effectively what's happened is we get the protections through the aggregate cover, but we're sort of taking the individual retentions on a per event basis on that, which is contributing to this AUD 40 million.
The reinsurance is still working as we would've expected. T his is just the net retention amounts that are adding up on that, and it's a result of some litigation outcomes in the first half of last year, which is consistent with what our peers have seen.
All right. Thank you.
Thank you. The next question comes from Nigel Pittaway from Citi. Please go ahead.
Good morning, guys. First of all, can I ask about reinsurance? I mean, I think most of the sort of $850 million or a good part of the $850 million increase in reinsurance expense was anticipated, but it does seem to be a bit more than both what we had and consensus appears to have. Can you just maybe unpick the movements a bit more there? I mean, is that crop provision or what sort of driving that sort of-
Extent of reinsurance cost increase?
Nigel, it's really just the statutory, crop numbers that are driving that. We've also done the loss portfolio transfer this year. We've had the CTP loss portfolio transfer last year. Some of that's just playing into the way the P&L shapes up, but there is no increase that we haven't called out before in terms of the core program when we look at the cat and the risk programs that we buy across the company. These are largely the statutory quota shares and the quota shares we've called out on LMI and on North America Financial Lines that are contributing to that movement.
Okay, fair enough. Thank you. Couple questions on crop. I mean, you did call out the fact that commodity prices have actually, sort of, fallen away from their peaks. I mean, it seems as if your caution in terms of booking crop at the half year was more related to preventive planting than any concerns over that. Is that fair to say? How are you thinking about that sort of movement at the moment?
I mean, that's exactly what we've done, Nigel, more of the preventive planting 'cause we did have a slow start in one or two states on the planting front. As , as I get to know more about crop, it's actually quite difficult to determine what to book at the half year because we're gonna find everything out in the second half. I think it was a sensible approach based on what we knew at that point in time.
Okay. At the moment.
Sorry.
I was just gonna say, Nigel, we're not particularly concerned about the pullback in prices. That's unlikely to play significantly, although it's something to watch, as we get into harvest season. Clearly, if we see a poor harvest , that could have an impact at the margin, but nothing at the levels we're seeing it today doesn't concern us too much.
Okay. I mean, just looking sort of more broadly at the crop business and what you sort of set out on slide 20 with the obviously combined ratio for the last few years at 94%. I mean, presumably, I mean, I know the capital load is not huge in this business, but I mean, presumably that's earning below the sort of target ROE that's set out by the U.S. government in terms of its sort of pricing. I mean, is that fair? I s there sort of any way in which that might alter moving forward?
I don't know. I would have thought it is delivering a good ROE. I mean, it could achieve below 94%, but the capital load is very light for it, mainly because it's an incredibly short tail class, and we know exactly what the risk is by the end of the year. Again, Andrew.
It's a very healthy ROE business, Nigel, always has been. I think the quota share we put on this year is very efficient, in the sense that we have a huge amount of demand for people wanting to participate in the multi-peril crop business, and therefore we get a nice ceding commission on that, which adds to the efficiency of it. Look, it's probably one of our higher ROE businesses when you look at it from a short tail perspective. That's mainly to Andrew's point. You sort of know the outcome, within a defined period of time as to what the result's gonna be, and you get the uncertainties that are topped and tailed by the federal fund.
Okay. It will be earning a return consistent with what's targeted in the broader scheme is basically the conclusion?
Yes.
Okay. Fair enough. Then, maybe just finally, I mean, just on obviously the pricing sort of environment, you obviously commented that there has been some sort of deceleration in certain classes. I s it fair to presume that the sort of quarterly pattern that you've had in sort of recent years in terms of those pricing increases will be, or , your expectation would be that it's broadly similar again this year, or is there anything else going on that might change that?
I think, Nigel, in my view, the pricing is driven by a number of things. We've obviously got inflation, which is quite an unusual thing 'cause that was not a major driver of pricing up until the past year or two. While core inflation remains high, I think it's going to maintain prices, particularly in the short tail lines. We have to see whether there is more social inflation on the liability lines, which could maintain pricing on that. You've got the counter of what is the profitability of the industry at this point in time, and is it bringing more capacity in? I'd say on the financial lines, D&O particularly, we're seeing more capacity coming in, which is having an impact on pricing.
It's going to be a match between how inflation impacts everybody versus the profitability everybody's seeing and whether it's drawing more capacity in to have an impact on that. I think that's why we've got to have a very wary and be aware time by line of business, by geography as things change over the next year or two. It's very difficult to determine exactly what the outlook is, 'cause it's gonna be dependent on those two major drivers of pricing.
Okay, great. Thank you.
Thank you. The next question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Good morning. My first question, I wanted to ask around the reinsurance. You mentioned you're seeking to simplify the program into the 2023 renewal. Do you see any benefits in terms of potential pricing or coverage from simplifying the program?
I think you can talk about the simplification. I think the reinsurance market is sort of waking up to the fact that it may have been underpricing some, not ours, but generally as a market, covers over the past few years. I think the view is pricing is gonna go up on cat-related programs into 2023. Then it's a question of how can we mitigate that, if at all, by simplification, and what impact it has on us. I think Inder raised a good point. We do have a pretty diversified portfolio. We also have deep relationships and long-standing relationships with many of the largest reinsurers in the world. I feel pretty confident we're going to end up with a good program in 2023.
I think it's worth looking at, can we simplify it, add some complexity to our program, and that's what the team looking at that has been looking at. Inder again.
Maybe just on the simplification point, Andrei, we're not trying to necessarily optimize costs. What we're trying to do is make sure we manage risk properly, right? Historically, we've had multipurposing of some of the limits. The top wrap and aggregate is just an example of that. C an we simplify it and reduce some of the interdependency between the different layers? A, it makes it easier for us to explain what it is the program is doing, but also, B, just de-risks it going forward. I think that's important. It's not an optimization play. We'll look at kind of risk-adjusted, weighted cost and kind of, give you that level of detail once we place the program, but that's really the purpose of the simplification comment.
I think the programs historically have worked pretty well for us, we don't want dramatic change to it. We just want, can we improve it?
Thank you. Look, my second question, I wanted to ask around the energy clients. We've seen elevated energy prices globally. How is this coming through in terms of the premium, collecting from your energy clients? Then going forward, how are you gonna work with them around transition renewable energy, and what are the implications, for your revenues?
A good question on the sustainability. Definitely want to work with our energy clients. We have a large energy portfolio. We're in the process of working with them, working out how to work with them, to ensure they transition in line with our commitments to the Net-Zero Insurance Alliance, which we will be publishing, talking about in about a year's time. Yes, working with those. Standing up a larger renewable energy team and helping both our energy clients transition and supporting other companies that are going into renewable energy is fundamental to what we do with our position in the energy market. The energy pricing is an interesting one. I don't think I've seen any major impact of the energy pricing other than it's feeding into inflation, and we're thinking through inflation.
I don't think it's really impacted what we're doing with our energy clients or the pricing of premiums within the energy portfolio per se. That's much more driven by loss costs than other things.
Thank you.
Thank you. The next question comes from Matt Dunger from BofA. Please go ahead.
Yes. Thank you very much. You've highlighted the pleasingly closing the gap between gross written premium and net earned premium growth. What net earned premium growth does the GWP guidance translate to?
Look, I think we're not gonna get into the sort of grain of that, but we would expect, the growth rates to track closer to each other as we look forward. We had some anomalies as we went through last year. Obviously, when you're relatively early in the cycle, you'll see the written rate be a bit higher. As the cycle sort of moderates, you would expect things to start to get to more of a par. It really depends on the shape of the GWP growth, where it comes from. We don't see anything, Matt, that would suggest that, that shouldn't stay broadly, at or about par.
Thanks very much, Inder. Just to follow up, if I could, on the international division and some of the strong growth that's coming out of continental Europe you've called out. While pricing's moderating, can you just talk to, what you're looking at, why you're looking at growth in these areas? I think you called out specialty lines, Inder. Where is the growth coming from, and why are you confident growing when pricing's moderating?
I think our European platform has the opportunity of growing 'cause we're not that large in it. I think what we're trying to do is focus on the products where we can make a difference in our presence in a number of countries, and also add to the number of countries. We are thinking of moving into Netherlands, where we have had a presence. I think we start from a base where we've been there quite a long time. We have reasonably deep relationships, and if we focus on our specialties, we're not hitting head to head with the major competitors in those countries, we have opportunities for growth.
The rating environment over the past few years has been relatively good, sort of compound rate increase over a number of years. You're right. Now we are seeing rates moderate, but you would expect that having seen a number of years of growth. We're also trying to be much more joined up. Can we coordinate what we do on marine and construction across continental Europe rather than do it by country by country? I think that gives us an extra fillip to the premiums there.
Just maybe one thing to add. I think when you think about where we're growing, and particularly when you look at the next 6, 12, 18 months , it won't just be in lines where we're getting higher rates, right? I mean, the key question for us is gonna be, is the rate adequate? Having seen the upswing in the cycle over the last couple of years, there are a number of these lines that are, rate adequate. R ate might be coming off a little bit, but it still remains adequate.
Thank you very much.
Thank you. The next question comes from Andrew Buncombe from Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Just a couple of quick fire ones from me, please. The first one is on the 10% GWP growth guidance, just confirming that that excludes crop. Thanks.
No, that's the total GWP growth guidance, Andrew, rather than excluding crop.
Okay. The second item may be to ask Kieren's question a different way, just in relation to the $400 million program business exit in North America. To ask that a different way. Should we be assuming that any more of that is existing in 2023 or is it going to be completely done in 2022? Thanks.
It's a good question. I think I would be planning for most of it happening in 2022. Obviously, it's gonna run through or the negative impact of it will then run through in 2023. I don't see why it will roll into 2023. I mean, some might, but I would have thought it's a small part of it.
Perfect. Just the final quick one, please. Again, maybe I'm being a bit too pedantic, but have you commented anywhere on what your CapEx budget is for 2022 and has that changed from the previous commentary? Thanks.
It is in there somewhere, isn't it?
$962 million, and it's unchanged.
Okay, that's it from me. Thank you.
Thank you once again. To ask a question, please press star 1 on your phone. The next question comes from Doron Kur from Credit Suisse. Please go ahead.
Hi. Thanks for taking my question. Just, maybe starting the expense ratio. Inder, you did mention that we shouldn't read too much into this period because there's a number of expenses which could come back. On a more sustainable basis, given there's higher top line and more leverage there, would you still? Does this result still suggest that there has been some ongoing improvements in that ratio?
Look, I think if I think about the exit run rate, if you want a bit of a steer on that, normalizing for some of the things I was calling out, we're probably running at around 13%, maybe a shade under. What we are calling out a little bit is we're looking at some interesting reinvestment opportunities into the business as we shape into the plans for next year, particularly around some of the systems pieces, and also around capability and to support some of the growth initiatives. Why don't we give you a further update on that next year, or as we complete our plans around the reinvestment piece.
It's probably safe to assume that the business is sort of running at around that 13% mark.
Great. Thanks. Also notice the commission expense is quite a bit lower. Is that? That's one that probably just moves up and down. That's the significant mix change in the half.
A little bit of mix, but also we are getting the benefit of having some of these quota shares where we're getting quite decent ceding commissions, right? If you look at North America Financial Lines, on the crop business itself and also on lender's mortgage insurance, where the quota share has gone up from 40% to 50%. We are getting very healthy ceding commissions, and that's helping offset and improve that commission ratio. Clearly, what we don't wanna do is to say, "Look, that's where we're gonna lock it in," 'cause that'll change based on mix going forward. Also, we will assess whether we wanna preserve the same level of quota shares around these lines of business as we go forward as well.
Great. Thank you. Then maybe just one on the investment yield. Clearly a great tailwind, the increase in to year-end. Wondering if you have a more up-to-date number following the decrease in yields and credit spreads since thirtieth of June.
Look, obviously it's moving around a lot. We're seeing a lot of volatility as we've gone , through July and August. It had ticked up a little bit, probably overnight. It's pared back a little bit. It depends on what day you ask us. I think at the moment it's safe to say that 2.5% feels a reasonable assumption. It's there or thereabout still, Doron.
Fair enough. Thank you. That's all from me.
Thank you. At this time, we're showing no further questions. I'll hand the conference back to Andrew for closing remarks.
Again, thank you once again for joining us today. Thank you for those questions. I'm sure we'll see you all soon.