Direct Line Insurance Group plc (DLG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Direct Line 2020 H1 results. My name is Rachel, and I'll be coordinating today's call. [Operator Instructions] I'll now hand over to your host, Penny Wilson, to begin. Penny, please go ahead.

Good morning, everyone. Thank you for joining myself and Tim today for our half year results presentation. I'd like to start by saying how incredibly proud I am of everything that we've achieved so far this year. Being in this position, given the unprecedented environment we've been trading in, is testament to our strategy and our people. Starting with the highlights on Slide 3. We focused on being a force for good and have supported our customers, our people, key workers and local communities through the crisis. And we traded well. The momentum we saw at the end of 2019 and into Q1, has begun to return. We delivered 2% growth in our Direct own brand policy counts. Operating profit of GBP 265 million and improved the quality of our earnings even before COVID effects. Our financial resilience in the face of COVID-19 disruption has enabled us to reward our shareholders' patience by paying a 2020 interim dividend as well as a catch-up of our 2019 final dividend. And finally, our strategy helps us navigate testing first half whilst making great progress on our technology transformation. Now you may recall our vision, purpose and strategy on Slide 4. I'll talk more to our strategy later, but it was designed to give us competitive advantage to help us change and adapt and be more resilient, so that we can improve margins on the business we write and ultimately grow. Now there's no doubt that this has been a testing period, and our strategy hasn't just helped us through the crisis, it's enabled us to accelerate our plans in a way that we simply couldn't have entertained 18 months ago. And consistent with the vision that have customers, people and society at its heart, we've achieved the success by doing the right thing for each of our stakeholders. Throughout the pandemic, we focused on the physical and financial well-being of our people, supporting our customers and contributing to the national assets. And by doing so, we believe that we are protecting the business for the long term. Repair centers aside, we moved almost all of our people to home working, that's around 9,000 of them. And rather than access government support, we chose to protect everyone's salaries and rolls through to the autumn. For our customers in financial difficulty or with altered circumstances, we reviewed covers, waived cancellation fees, offered the option to defer direct debit payments and refunded customers who are driving fewer miles due to lockdown restrictions. And that's in addition to flying 800 customers stuck abroad back home. We played our part in the national efforts by helping key workers with free Green Flag recovery and free home emergency cover. But we've also helped around 100,000 of society's most vulnerable households through our GBP 3.5 million community fund, and we've contributed a similar amount to the ABI's COVID support fund. In all, we expect to invest around GBP 80 million to GBP 90 million across 2020 on these initiatives, and I believe it helps protect the business for the long term. Now we couldn't have done all this without our highly engaged people who've shown the commitment and flexibility to do what it takes for our customers, resulting in high levels of customer satisfaction. It's been a real 11,000 strong team achievement, and I'd like to thank all of them for their contribution. And with that, I'll hand over to Tim to talk you through the financials.

Thanks, Penny, and good morning, everyone. This has been a very challenging first half, and I believe the business can be justifiably proud of how we've traded through the period. I would like to start with the key messages before we explore the detail. I'm starting our presentation on Slide 7. We came into the year with strong trading momentum and despite COVID-19 uncertainty in quarter 2, we delivered a 2% growth in own brand policies in the first half. Today, we're reporting operating profit of GBP 265 million, when we adjust for the storms experienced in Q1 and the change in the Ogden discount rate to minus 0.25% in 2019, our operating profit is GBP 5 million higher than last year. Importantly, we continue to improve the quality of our earnings with current year operating profit estimated to represent 52% of total operating profit in the first 6 months of this year, excluding the impacts of COVID-19. Our expense ratio increased in the first half to 25.2%, reflecting the additional costs we incurred to support customers, people and the national effort through the crisis. However, we continue to target an expense ratio of 20% by 2023. These savings will be delivered through the benefits of our technological transformation, and we took the first steps towards this with the office closures and redundancies we announced in February. Our combined operating ratio was 90.3%, below our 93% to 95% medium-term range, reflecting the claims frequency benefits coming through our Motor book due to COVID-19. We recognize the importance of dividends to our shareholders and having taken steps to strengthen our capital liquidity and observed a marked improvement in credit markets as well as a great confidence around travel and business interruption claims. We believe it's appropriate to catch up on the 2019 final dividend of 14.4p. And even after the dividend capture and an interim dividend of 7.4p, while solvency is a very strong 192%. Turning to the results summary. The shape of a result reflects the consequences of COVID-19, including the significant reduction in Motor claims frequency, the impacts of adverse market movements on our investment returns and the additional costs that we incur supporting our customers, our people and society. Strong Q1 trading across our own brands offset the headwinds in Q2 and delivered modest premium growth of 0.4% in the first half. Although we delivered strong growth in Q1, the reduction in Q2 will have an impact on earned premiums in future periods. Underwriting profit was GBP 144 million, well ahead of H1 last year, largely due to the Motor frequency benefits we saw at the start of Q2 due to the COVID-19 lockdown. Installments and other income was lower in H1, which is largely due to lower written volumes in Q2 and lower claims-related income. Investment return reduced to GBP 41 million in the first half due to a combination of lower income and higher realized losses, mainly on our commercial property portfolio. That brings us down to operating profit of GBP 265 million, marginally lower than prior year as the stronger underwriting results was more than offset by lower investment return under Q1 weather events. Turning to Slide 9. And here, we have split out the management estimates of the impact of COVID-19 on the group's operating profit, which you can see was broadly neutral. This takes into account changes in the claims environment, costs associated with supporting customers, people and wider society and movements in our investment portfolio. As I have said, our headline operating profit was GBP 265 million in the first half compared with GBP 274 million in 2019. Last year, we had very benign weather and the results included a hit from Ogden. Adjusting for these, there was a modest growth in profits of GBP 5 million. We estimate the net impact of COVID-19 on the group to be around GBP 7 million benefit, which you can see broken down in the table on the left-hand side. We haven't seen much impact in Home at the moment, but that may change claims developed in the second half of the year. That leaves us with a broadly flat underlying profit year-on-year, but there has been a real increase in quality with a GBP 63 million growth in current year profits, offset by the continued reduction in prior year reserve releases. This is a good result and demonstrates the progress being made in increasing the sustainability of our earnings, and we're well on track to deliver 50% of our operating profits from current year by 2021. On Slide 10 is a summary of a breakdown of the 90.3% combined ratio. The group current year attritional loss ratio, which is for current year loss ratio, excluding weather, improved by 8 points. We estimate the impact of COVID-19 is around 4 points, which were less due to underlying improvements, some of which will come back in the second half. However, estimates from Q1 are unchanged at GBP 30 million, which is around 2 points of loss ratio. The prior year loss ratio was 3 percentage points lower, as Motor prior year continued to reduce in line with our expectations alongside the timing of reserve reviews in Home. That gives us a group loss ratio of 59%, which is around 3 points lower than H1 last year. Next, the expense ratio is higher due to actions taken on COVID-19, and the commission ratio was flat. Finally, the annualized return on tangible equity was a strong 19.9%, ahead of our 15% long-term target. On Slide 11, we've split out the operating expense movement half-on-half, which increased by GBP 9 million. The expense ratio tends to be higher in the first half of the year and the increase against H1 2019 was driven by higher levy costs alongside the actions taken to support our customers, people and wider society during the COVID-19 uncertainty, which Penny will share more on later. Other costs have reduced GBP 3 million with lower staff costs and amortization and depreciation, partly offset by higher overall operating expenses. In terms of outlook for operating expenses, we estimate we will incur a further GBP 20 million to GBP 25 million of COVID-19-related costs in H2. The additional costs we've incurred to support our customers, protect our people and society do mean we have delayed the downwards trajectory of our cost base. We remain committed to becoming a more efficient organization and reiterate our targets, as outlined on the Capital Markets Day in November last year to move to a 20% expense ratio by 2023. As I mentioned earlier, the key actions that deliver this reduction are linked to our investments in technology and changes to the way customers interact with us, with a shift towards digital channels. This will also enable us to review our proxy footprint, and you will remember that in February, we announced the planned closure of 2 of our offices. Our new systems will help us to reduce costs further over the next year or 2 as they become embedded in our operations. And we will now look for additional savings that may arise from the changes in customer and workforce behavior following the pandemic. Let's turn now to Slide 12, which shows performance across policy counts and premiums during the first half. From a trading perspective, the first half has really been a tale of 2 quarters. Starting with policies on the left-hand side, which are split between own brands and partners. In the dark blue bar, you can see the 2% own brand growth versus June last year. If you look at the individual data points, the own brands policy count grew quarter-on-quarter with a very strong Q1 and a slowdown in Q2. On the right-hand side, our premiums, which at a group level, were broadly stable. In the darker blue sections, you can see growth across own brands was strong at 5.6% in Q1 but fell 2.9% in Q2 due to reduced Motor new business premium following lower new car sales and new drivers to the market. We now get into the segmental results, starting with Motor on Slide 13. Operating profit in Motor of GBP 221 million was well ahead of prior year, largely driven by the impact of COVID-19 lockdown restrictions on claims frequency, partially offset by higher average repair costs, lower installments and other income and lower investment return. On the ratios, you can see a really strong H1 current year performance. Of the 18 point reduction year-on-year, we believe approximately 10 points is COVID-19-related, which leaves around 8 points of underlying improvement. This was delivered by underwriting and counter fraud initiatives introduced throughout 2019. We started recognizing the benefits from these initiatives in the second half of 2019, meaning the 2020 full year improvement in the underlying current year loss ratio will be lower than in the first half of this year. But we still aim to demonstrate year-on-year progress against the full year 2019 current year loss ratio of 81.2%. On the next slide is more color on Motor trading. I'm not going to go through all of the moving parts as we commented on the slide. A few points I would like to mention are the strong policy growth was largely driven by Churchill and Darwin, which have both performed extremely well on price comparison websites. This demonstrates good progress on our PCW strategy, which Penny will talk about later. As I mentioned before, the pricing environment in Motor has been somewhat distorted due to actions taken to help customers and the impact of lockdown, driving a reduction in new car sales and young drivers entering the market. This has led to a 3.4% reduction in risk mix. We continue to price for our view of underlying claims inflation on new business, with some caps placed on renewal pricing increases in Q2 as the group focused on delivering strong retention. In addition, many of our customers have also taken the opportunity we provided to reduce their premium, reflecting their lower car use. Overall, risk-adjusted prices increased by 1.8%. On the claims side, frequency has been increasing since the initial 70% reduction in claims notifications we called out in April, while the impact on claims severity is too early to assess as very few claims have been settled during this period. As a result, we continue to expect underlying claims inflation of 3% to 5%. In terms of the outlook for Motor, we expect some headwinds as the top line impacts begin to earn through. Now turning to Home on Slide 15. Home profit was GBP 35 million in H1, GBP 36 million lower than H1 2019, and but a strong result considering the weather events in Q1 and the exceptional performance in 2019. In terms of ratios, Home's current year attritional ratio, which excludes the impact of weather, continue to improve following actions taken on escape of water claims in 2019. The combined ratio normalized for weather was around 5 points higher than prior year due to a reduction in prior year releases, although there are some timing differences here, so some of this should come back by the end of the year. On Super Home trading slide, you can see the Q1 Q2 shape on the policy volumes and premiums. I'd just make a couple of observations. But overall, we are pleased that we grew own brands policy count since the end of December, and this was due to a strong performance by Churchill in the price comparison website channel and strong retention over the period. Gross written premium was broadly level, which reflects the continued shift towards price comparison websites. While PCW business attracts lower risk and lower average premiums, our team are making great progress on trading profitably through this channel. Moving onto Rescue and other personal lines on Slide 17. Let's start with the overall results for the segment, which was a GBP 16 million loss. There were 2 main moving parts in this, namely Travel and Rescue. Starting with Travel, where we estimate the net impacts of COVID on the book to be approximately GBP 25 million. This assumption is based on the same criteria we set out in Q1, namely that the Foreign and Commonwealth office restrictions on international travel remain in place until the end of September. As we now know, this is quite a conservative assumption. The main miss to this figure is around the financial failure of airlines for travel companies. In Rescue, the H1 operating profit result was a very strong GBP 24 million, GBP 3 million higher than H1 2019, which helped partially offset losses in other personal lines. The growth was mainly due to lower claims frequency following the COVID-19 disruption, which has since returned to normal levels. In terms of Rescue trading, you can see that Green Flag had a very strong Q1, as it continues to deliver double-digit premium growth before COVID-19 drove a material reduction in new business sales in Q2. Finally, the Commercial results on Slide 18. Commercial profit was GBP 25 million in the first half, which is a strong result when you consider the GBP 13 million of weather event costs. The net impact of COVID-19 in Commercial was slightly positive at GBP 4 million or 0.1 points of loss ratio as the estimated impact on business interruption claims was more than offset by a reduction in claims frequency during lockdown. As outlined with our Q1 results, our standard business interruption policy wordings on which over 99.5% of policies are written provide cover only for certain specified diseases and do not provide cover for losses due to the COVID-19 pandemic. For those policies not on our standard wordings, we continue to estimate claims costs of approximately GBP 10 million. As you can see from the ratios, Commercial improved its current year attritional loss ratio, which is a result of the investments in NIG pricing and underwriting initiatives beginning to come through, with rate increases above 5%. This delivered a combined operating ratio normalized for weather, but has improved around 5 points year-on-year. Turning to Commercial trading on Slide 19. Here, you can see that Commercial group premiums and policy volumes in both Q1 and Q2 to end the first half 5.3% ahead of prior year. Moving on from trading performance. Let's now turn to investment return on Slide 20. The total return of GBP 41.3 million in the first half was GBP 34 million lower than prior year due to lower net investment income, some losses on our Commercial property portfolio and the non-repeat of gains recognized in the first half of last year. We recognized GBP 14 million of realized losses in the period, of which the majority was due to revaluations of our Commercial property portfolio. In the middle graph, you can see that our Commercial property investments accounts for just 4.6% of the portfolio. The majority of our portfolio is held in either investment grade, credit debt securities or cash. Our cash holdings have increased over a period as we took the prudent decision not to reinvest as debt securities came to maturity, although we have now begun reinvesting. We have seen no material deterioration in the quality of our credit securities during H1. From a yield perspective, you can see that the realized losses reduced our investment return yield to 1.4%, while net investment income yield reduced to 1.8%. At Q1, we updated the net investment income yield expectations for the year to 1.8%, which we reiterate today. Here on Slide 21, we have presented the capital ratio in a walk, so you can see how our solvency ratio has progressed across the half. On the far left, you can see the results of the prudent decision we took in order to maintain a strong solvency position. After those actions, our solvency ratio was above the top of our risk appetite range at 189%. Onto the bars in the middle of the waterfall, first, in order to help secure the long-term finance of the group, we issued GBP 260 million of Tier 2 debt at a 4% coupon. I was pleased to see a strong appetite for the transaction, which was 16x oversubscribed. Our existing Tier 2 tax instrument issued in 2012 has a call date during the first half 2022. But at least until then, this provides a useful capital and liquidity buffer. Importantly, the debt issue represents the first step in our work to secure the long-term capitalization of the business that I discussed at the Capital Markets Day last year. You can see capital generation is a strong 25 points of solvency or GBP 350 million due to the progress made on current year profitability alongside a reduction in claims frequency seen in Motor. Market movement is predominantly impacted by increasing credit spreads, which delivered a 6% headwind in the first half, though narrowed significantly across Q2. Capital expenditure was around GBP 70 million in the first half, and we reiterate our GBP 150 million expectation for 2020. So overall, our solvency ratio at H1 before any dividend was 213%. This strong solvency ratio means we are able to declare a 2020 interim dividend of 7.4p and alongside a full catch-up of the 2019 final dividend of 14.4p. While significant market uncertainty remains from COVID-19 and other issues like Brexit, we recognize the importance of our dividends to our shareholders and believe it is now appropriate to catch up on the 2019 final dividend. Specifically, we have seen a marked improvement in the credit market since we canceled the dividend in April as well as a greater sense of certainty around how claims will be impacted by COVID-19 in particular, in relation to travel and business interruption. Going forward, we will continue to be prudent in our management of the capital and liquidity resources of the group. In normal circumstances, operating around the middle of our 140% to 180% risk appetite range remains appropriate. We do, however, need to acknowledge the unusual situation within which we are all operating, including the direct impact of COVID-19 and the consequences of the pandemic on the wider economy, including our customers. Accordingly, you can expect us to continue to be prudent in our management of our capital and liquidity. As usual, the Board will consider our overall position again with our full year results. Before I hand back to Penny, I'd like to remind you of our targets. We are reiterating our medium-term expense ratio target of 20% in 2023. As outlined earlier, our trajectory to get there has been modestly delayed, and so we may not be able to achieve the GBP 50 million saving by 2021 we talked about in November last year. We are focused on improving our cost profile by delivering on the actions we had identified before the pandemic and some of the new opportunities that will revise as a consequence of changes in behavior as a result of the pandemic. For 2020, we reiterate our target of a combined operating ratio of 93% to 95% normalized for weather, and we anticipate our restructuring costs of GBP 60 million over 2019 and 2020 will be incurred in full as we strive to maximize the opportunity for operational efficiencies. We remain focused on a targeted combined operating ratio of 93% to 95% normalized for weather in 2021 and over the medium term, and on improving the current year contribution to operating profit to at least 50% by 2021. But acknowledge, these will inevitably depend on the duration and uncertainties of the COVID-19 pandemic and the pace of economic recovery and consequential impact on customer behavior. We expect a net investment yield of 1.8% in 2020, and we'll continue to invest in-force for good activities. We reiterate our long-term 15% return on tangible equity targets. Thank you. I'll now hand back to Penny.

Thanks, Tim. Now before I get into the detailed update, let me start by sharing with you how I feel about the last 6 months. Well, it's hard to believe that only 8 months ago, we established our vision and strategy to the group. Though uncertainty remains for us all, I'm really pleased with the substantial progress that we've made in the first half against the strategic objectives, whilst also implementing significant operational changes as we've navigated the COVID-19 disruption. We've shown we're a team that can make change happen even during a crisis. You can see some of the highlights in the slide, and I'll explore even more detail shortly. We haven't just survived during this period, we've thrived. Our people have delivered a great performance at every level of the business, all done with the creativity you come to expect from us. In the new Direct Line Superhero creative, to Churchill's Little Chapters of Chill podcast, designed to help kids in lockdown. But as you know, a large part of our strategy relies on the delivery of material technology. And what you can see from this slide as well is that, overall, our ability to deliver big change has not slowed during lockdown. Now there still remains a lot to do through the rest of 2020 and into next year, but we're in excellent shape, and we're becoming an agile and digital company, which has people and customers as well as the world around us at a part. Now moving on Slide 26. Our tech transformation has continued at pace. Moving from left to right. Following its launch last year, all privileged new business is now sold on the new platform. Our in-house startup Darwin has gone from strength to strength and is now live on 4 PCWs. The Green Flag team launched their new claims system. And in just 2 weeks, they made more enhancements on it than they had in the last 4 years on the old system. That is agility. Direct Line for Business rolled out another key product, Van, onto its new platform. And the NIG team continues to move products on to the pricing and underwriting system, which helped drive some of the growth Tim discussed earlier. And while all that was going on, our finance team delivered a new cloud-based Oracle accounting ledger and claims payment system during lockdown, and we rolled out a new telephony system across the estates. These changes are material in terms of both delivery and impact. Taken together, they involve training 7,500 colleagues and affects every customer conversation and every claim. As we're near the end of the tech transformation, we move firmly into the business transformation phase for the next couple of years, changing the way we operate to take advantage of the tools we are building and targeting margin improvement across the portfolio as w realized the full benefit of our tech investments. Now let me talk you through the progress against our 6 strategic objectives. They're designed to help us become a more competitive business with a lower cost base. Their aim to support the shift in quality of earnings, evidenced by the GBP 63 million improvement we've seen this half and grow our market share. Looking at the third tree on Slide 27, which are all about making sure that our products are easy to use and available everywhere. Let's start the best at direct, which is where our margins are the strongest. In the first half, we've launched a new Superhero creative for Direct Line, highlighting the brand's unique propositions. We've been working on some new fractional products, and you may have seen, we recently announced our acquisition of Brolly, a small fintech company that specializes in flexible, personalized insurance for the digital generation. So watch this space. Moving to winning on PCWs. Since I joined the group, I believe that we could grow our profitability in the PCW market. As the result of the improvements we've made, we're beginning to make real headway, a key part of our 5% premium growth in Q1, with Churchill's growth of 15%. Our Churchill brand has gone from strength-to-strength since the brand refresh. And Churchill Motor has recently passed the 1.5 million policy milestone, and we hope to continue this growth. Darwin has outperformed all our expectations writing more business in Q1 2020 than the whole of 2019. And in Q2, it's still on a steep growth trajectory. Moving to our third strategic objective, extending our reach. Our new customer platforms make it much easier for us to onboard new books of business. We're now in a place where we can scale up, and this opens the possibilities to explore growth opportunities through partnerships and acquisitions. Now moving to our 3-key enablers, starting with technical edge. Here, we aim to create a great experience for our customers and a sustainable competitive advantage. Throughout lockdown, digitization levels have transformed. In Green Flag, we saw the number of people accessing the app move from 12% to 35%. In Motor, digital customer interactions have grown around 40% and now represent 55% of transactions and has a similar picture in Home claims. And in Travel, which has had a particularly busy period, a new claims triage process means we can handle claims up to 5x faster. The technical improvements we've made over the past 12 months have enabled us to deliver around a 5 percentage point improvement in our attritional current year loss ratio in half year 2020. As said before, we are not yet as nimble nor cost-effective as we believe we can be. It's a reality in a market that's competitive as ours, but efficiency is critical. And that's why hitting 20% in 2023 is one of our key targets. We've made huge steps forward this year, some of which myself and Tim have already outlined. One of the few silver linings of COVID-19 is the fact that it opens the possibilities for us to reimagine the way we work. For the full year, we set out our agile transformation plan, and after only a slight delay, this transformation will go live in October. It will really help us to speed up getting changes and new products to market so that we can keep ahead of the competition. The world of home working means we can be less constrained by our physical office locations, which not only gives us access to a wider pool of talent, so we can be more diverse and inclusive, but it can also potentially support significant cost efficiencies. We're currently looking at how we use our buildings in the future to best support the cultural change and cost structure we're seeking. Finally, and most importantly, great people. As you've heard, the pace of delivery during the first half was all made possible by our highly engaged people to demonstrate their commitment to improving this business. Not only have they learned new skills and delivered exceptional results, but they've also refused to let distance stop them doing what matters to them, including the annual Sprintathon events involving 350 of our people which led to GBP 110,000 being donated to Stand Up To Cancer. They've also helped to support around 200 local charities with grants of up to GBP 5,000 each as part of our community fund. At our mental health first aiders, we have ensured that everyone has had the access to the support they need during these challenging times. This period is probably one of the most disruptive that we will see in our lifetime. Customers overnight have changed their behaviors dramatically. As you can see on the slide, there are a number of underlying trends you need to be in front of to drive in the post-COVID world. Of course, none of them are really new trends. And our strategy was built with them in mind, but many of them have been accelerated significantly as a result of COVID-19. This has just increased the importance of our strategy and shown us that to win in the future, you need to be agile, digital and flexible, both for your people and your customers. You need to have the ability to create new channels and products and get them out to market quickly. And that's what our strategy and agile transformation is helping us to achieve, making it easier for us to act quickly to serve our customers better. But we also want to do this in a way that's sustainable. The past months have reminded us of the importance of the community and the world around us. When we have, as I'm sure we will crack COVID-19, the climate crisis will still be there. And customers will rightly demand our organizations play their part in addressing it. Turning to Slide 30 then. Fundamentally, we believe that embracing sustainable practices leads to a better corporate culture, more reliable products and greater long-term sustainability. We have long been conscious of our impact on the planet. And as you can see, we've already met both of our 2020 targets, which we set in 2017. But we now want to go further to protect our business from the impact of climate change and to give back more to the planet than we take out. To help the business achieve this, we're committing to set science-based targets, which are consistent with holding the global temperature rise to at most 2 degrees above preindustrial levels. And we intend to do this across all categories of our emissions, including the supply chain. In the meantime, from this year, we will be 100% carbon neutral as the business by offsetting our emissions by investing in high-impact projects whilst working towards reducing our emissions over time. And finally, we aim to be TCFD compliant by the end of this year. So that is the report for the year so far. As we move to the latter stages of the tech transformation phase, we need to make sure that the business is ready to realize the full benefits of the investments we've made, and that is our priority for the remainder of 2020. We intend to get our cost base back on track as we continue to target a 20% expense ratio by 2023. COVID-19 has meant extra investment in the force for good initiatives I've mentioned and some delays to our programs. But notwithstanding this, our business and tech transformation are starting to drive material cost savings, helping us to improve the quality of our earnings. For me also, 1,000 of our people across Motor, Home, partnerships, marketing, digital and technology will operate in a fully agile way, making it easier for us to implement change and quicker to service changing customer needs. And we will move Direct Line and Churchill Motor onto the new platform, helping us to deliver more to our customers quickly. Taken together, these are designed to lay the foundation for the future growth of the business. Now this is the investment case that we presented to you at our Capital Markets Day. Whether its people and customers at the heart of our business, increasing our competitiveness or improving the quality of our earnings, each has stood the test of COVID and remain as relevant now as they were 8 months ago. So in conclusion, I believe today demonstrates that notwithstanding the environment, we are in excellent shape. We're focused on being a force for good and have supported our customers, people, key workers and local communities through the crisis. We've traded well and our financial resilience in the face of COVID-19 disruption has enabled us to reward our shareholders' patience by paying a 2020 interim dividend as well as a catch-up of our 2019 final dividend. And finally, our strategy has helped us navigate a testing first half while making great progress on our technology transformation. So that ends our half year presentation. Thank you very much for listening. And Tim and I will pass back to Rachel to coordinate the question-and-answer session.

[Operator Instructions] Our first question comes from Kamran Hossain from RBC.

Two questions. One is on -- they're both on the current year attrition, actually. I guess, it's really pleasing to see the measures coming through, you talked about 8 points improvement coming from these measures in Motor. Are there any other measures or kind of projects you've got on track which should kind of improve that further? So that's the first question. And then the second question is, you've improved the current year attritional quite a bit. You talked about the potential for transformational reinsurance. Once you do this, are we getting a little bit closer to that? Or am I just getting way too elated?

Tim, do you want to take the attritional question?

Yes. Thanks, Kamran. So I think you're right on the point that we're pleased with the improvement on the Motor attritional 18% improvement, about 10% of that's COVID, which means about 8% isn't. So we do have lots of things coming down the line, actually, that we hope will maintain that advantage and potentially improve excellence. It is a bit further down the line. If you think about the changes we're making to our underlying systems, a lot of those drive changes through our pricing and underwriting practices, which is exactly how you expect us to be trying to maintain that competitive advantage. So that, I think, it is a very good news. I should say just for completeness that, that 8-point improvement will not look as good by the end of the year, just by the way things earned through. We had half year's of benefit last year in effect. So we do have a bit of a comparative thing going on. But last year, overall, we finished at about 81.2% overall, and we certainly hope to be on the line side about by the time we get to the end of the year. In terms of transformational reinsurance, rest assured, we think about that quite hard, although we've had quite a lot of things to think about quite hard in the first half of this year. And certainly, the improvements we've made kind of in this transition towards a higher quality of earnings in the current year would be an enabler to doing that on a really competitive basis. Haven't got anything to tell you about today, but you can see that we're starting to make progress on that, which is broadly part of our overall capital journey. And you saw a first step on that through the debt raise that we did in May. So that's all part of our broader plan to think carefully about how we provide for this capital of the business. And as we come up with more ideas, obviously, we'll let you know.

Our next question comes from Jon Denham from Morgan Stanley.

Just coming back to Kam's question on the attritional. When stripping out quoted, it looks like the Motor attritional was around 75%, and Penny, you mentioned headwinds as lower premiums earned through. I was just wondering what would cause this to increase to the 81.2% in 2H that you just mentioned? And kind of what are the additional headwinds there? And then maybe just a bit more on from Motor pricing. You said risk-adjusted prices increased by about 1.8% year-on-year in the half. And you said it was a tale of 2 quarters. So I was wondering if there's any more color you could give around what the changes in risk-adjusted prices look like during 2Q and maybe into July?

So I'll take that one. Well, Jon, thank you for those questions. If it's okay, I'm going to answer your second one first and perhaps just taking the opportunity to step back a bit and give you a bit more color about what was going on in terms of the pricing trends in the Motor book. So as you know, first quarter, really pleased, very positive rating period carried over the positive momentum we saw in the last part of last year, certainly much better than first half of 2019. Our price increases were sticking. We were seeing growth. We were certainly pricing in our longer-term claims inflation assumptions. So that was all very positive. And then, of course, we ended up with COVID-19 that introduced a huge amount of noise into the system. And obviously, working through that, there's been a number of factors. The first thing I'd point to, which is probably the most significant on premiums overall is the effects of risk mix, and it's important not to underestimate the effect of that huge reduction in new car sales and also a reduction in new drivers to the market as driving test was suspended. And that really meant that some of those higher-average premium policies weren't getting written, and so we saw a reduction in premiums as a result of a risk mix issues. But we also saw some effects on the risk-adjusted rate increases coming through, partly because of some deliberate actions we took. So we put through some targeted caps on renewal prices. When we first went into lockdown, our operational prioritization was to look after our existing customers. We actually closed down the telephone lines for new business sales on the direct channel for a couple of weeks. And that meant that, clearly, there was some action needed to make sure that we could improve retention. So I'd say, for a temporary period, we put some targeted caps on price increases on renewal. Then we were successful. We've seen renewal rates respond positively. But that did have an impact on the rate increase we were seeing, excluding the mix results. That is now working its way through, but certainly had an impact on the second quarter. Suffice to say that we're seeing some stuff going on in the market more generally. You can see this actually in the ABI data that came out from May, some price reductions coming through in some parts of the market. Certainly, that was a feature, end of April, May time. We think it stabilized more in June. And the sort of the real question, of course, is, well, what does that mean over the coming months? And the honest answer is, of course, we'll have to wait and see. But I'd just point to some of the factors, which I think are going to make a difference. First of all, we are seeing the miles driven come back to slowly the kind of levels we were seeing pre-COVID. I think it's important though to say that there's a change in driver behavior, and if you'd like, the nature of the miles that are being driven, and that does make the effect that we're seeing in claims and that will run on impact on pricing somewhat uncertain. State insurance is potentially a feature. But we won't really know until we see the schools go back in September and to see how much we see people going back to work on the back of that and how that will affect the performance of the market. So how pricing behaves, of course, will depend on how individual companies predict future claims patterns. We remain committed to our practice, which is to continue to price on the basis of what we think long-term claims inflation will be. Of course, that depends on knowing what that long-term claims inflation will be. We think it will be -- continues to be within that 3% to 5% range blended for frequency and severity. But this will -- we'll see how the companies respond to that. We do continue to believe though that the behavior in the market will be rational. And so we remain optimistic over the medium term that the pricing environment will be satisfactory for our purposes. Going back to your first question, which was about how would we get to 75%? And how would we get back to something more like the 81% or so that we saw last year? There's a bit of a just a denominator factor going on in terms of -- we've got -- that 81% figure was a full year where half the year didn't have really the benefits coming through the second half did, which this half year, you've only got the benefits, if you like. And so just as a sort of consequence of the lapse, we think that will pull us back towards the 81% figure, but I don't want to be too pessimistic about that. We are hoping that we will see some improvements on that 81% figure, but probably in real life, not as good as the 75% as you can see in the first half of the year.

And can I just check, did you say you thought you're currently pricing for your 3% to 5% claims inflation expectation?

Yes. That's what -- that's pretty much what we do in our -- in the way we approach our pricing.

Kind of how our models work, Jon, understand, we start with that.

Our next question comes from Edward Morris from JPMorgan.

First one is on reserving. I'm just wondering to the extent to which this period may have allowed some additional conservatism to go into the reserves. So can you talk a little bit about that? I wonder if there's been any change perhaps in the reserve margin or if not done on that basis? Can you talk about what you've assumed in terms of frequency benefits versus what was experienced in the first half? I know you said that frequency was starting to tick up again in June and just sort of understanding how you've approached that decision would be really helpful. And then the second question is around solvency and capital management. Obviously, thank you very much for the catch-up payment, I'm sure that's highly appreciated by shareholders. But just thinking about how you would approach this when we come to the full year. Obviously, you've mentioned this figure of 173% as a sort of ex debt figure for solvency. Is there any reason to think -- that you might think about capital management differently this year? Or should we just think the same preference for buyback versus specials and you'll approach it like any other year-end process?

Thanks, Edward. I'll pick up those, if that's okay. So let me talk about reserving. So I should stress there's been no change in our underlying reserving philosophy. But let me talk specifically about how we've dealt with frequency and severity. We've not had pandemic before, certainly not recently. And so the claims to reserve in this environment, clearly, a lot of the ways you can tend to do reserves isn't relevant because it doesn't really work off the back of historical patterns. So we do have to be cautious. In terms of frequency, we've obviously been tracking frequency very, very carefully. And as I described to Jon earlier, in sort of the major parts of the lockdown, the frequency was -- it was down about 70%. As miles driven has -- have increased, we've certainly seen that increasing in line. It's not yet back up to sort of pre-COVID levels. And as I said, that might be a bit deceptive anyway because the nature of the miles driven could well have changed significantly. But we followed the data on frequency. I think more difficult to read is severity. Anecdotally, there's some evidence that on bodily injury claims that they were a bit more severe during lockdown, possibly as a result of people driving faster and also the fact that a lot more people were walking and cycling. So you have some more accidents involved. People who are not in cars, sort of surrounding that -- evidence around that. But certainly, what we've seen operationally, of course, is that although the number of car repairs on the damage side has been much lower because we inform for your cars to repair, the capacity issues around repairing cars have been impacted by things like social distancing. We're very proud of our -- of most of the repair network. They continued to work throughout the pandemic, keeping key workers' cars on the roads. But necessarily, we do have some restrictions on capacity there, which we can manage through. But it will mean some potential impact on severity. How does that manifest itself? Potentially, some higher credit, higher costs, if it takes a bit longer to repair cars, and potentially also, if we see some supply chain issues coming through. So we thought about all of those things in reserving. And as you'd expect, we've been prudent in our approach, which is what you -- I think, you expect from us. But fundamentally, the underlying philosophy is the same. When you think about solvency and capital, moving on to your second question, I think that -- as we said at the time, we made the decision to cancel the final dividend with a very heavy heart. We know how important the dividend is for our shareholders and the people they represent, the pension schemes, the charities. So that was not a decision taken lightly, but it was appropriate over time. But we always wanted to get back to dividend-paying as quickly as we possibly could. This has been the first opportunity, and we've taken it. We've taken it because we've taken positive actions to strengthen our capital and liquidity, and that's meant that when we run special scenario testing, we can demonstrate that we can take the decision to resume dividend-paying, confident that we're still in resilient shape to meet our promises to policyholders. I think that in terms of what does that mean, in terms of overall capital levels? Well, I'm sure that in normal circumstances, what I said last year about the 140% to 180% range being somewhere towards the middle of that was appropriate, still stands. Unfortunately, I don't think we're in normal circumstances. The circumstances we are in are fairly extraordinary. And so you can expect us to continue to be quite prudent in the way we're thinking about capital and liquidity as we negotiate whatever, frankly, pandemic and a number of other issues like Brexit, for most of those, over the course of the next several months. We, like everybody, want to get back to normal as quickly as we can, but we'll be quite thoughtful about that. In terms of preference for buybacks versus special dividends, that kind of just depends certainly on the circumstances that exist at the time and whatever decisions we might make about returning surplus capital. And I'm going to save all of that for the end of the year.

Our next question comes from Freya Kong from Bank of America.

Two questions for me, please. So firstly, you're reiterating your 93% to 95% COR for the full year. But you did 90.4% normalized in H1. This is alive for a pretty tough second half. How much of this is conservatism? Or are you expecting a bit more frequency in H2 top operating conditions? Secondly, premium per policy continues to drop, even though on a risk-adjusted basis, you're pricing ahead of claims inflation. I understand risk mix was a bit lower in H1 because of COVID. Do you expect this to partly reverse in H2? And I guess, overall, do you have initiatives to try to get premium per policy up, not just Motor but also Home?

I think why don't I take the second one first. And on premium per policy, I think, on Motor, really it's a distortion because of the COVID events more than anything else, I think, rather than a particular pattern. We don't particularly target average premium in our pricing approach. That's not how we do it, but we will see how things develop. We've actually seen over the last years of pre-COVID, kind of more young drivers on the book and so on. So we'd actually seen that moving in the other direction. But let's see how COVID unfolds and how fast that unwinds. On Home, I think slightly different trend. On Home, we have seen LTP falling over time because what you've seen is a lot of the growth coming through price comparison. And there, there is definitely a differential on the average premium. And so there is a trend running, I think, in the Home book as we get stronger and stronger on the price comparison side. Targets, Tim, do you want to do targets?

Yes. So we are reiterating the 93% to 95% COR. As you said, we're coming off of a strong first half in that regard. We are expecting increases in frequency. As I said, we've seen that coming back as people return to the roads. In particular, also in household, actually, frequency is back to pre-COVID levels, albeit the mix of the claims that we're seeing is somewhat different. So yes, we'd expect a more normal, if you'd like, second half of the year. As I explained to Edward, it's somewhat difficult to predict exactly what's going to happen. But you would expect over the year for us to be in line with our guidance.

Our next question comes from Oliver Steel from Deutsche Bank.

I have 2 questions. First is, can I just come back on the reserving -- reserve release issue, because you've given us quite a lot of guidance on the attritional loss ratio. But actually, it was sort of quite equal and opposite rather than the release from prior year. And how should we be thinking about what a long-term reserve release should be in your numbers? That's question one. And then second question is, Tim, you talked about the risk to your Travel claims estimates coming from travel companies and airline companies going past. Because I mean those -- they are sort of insurance, I mean, like, you've got the sort of whatever it is, ABTA, at probably in a sort of insurance cover, which presumably covers that. So I'm just wondering how much of a risk that is actually to your book?

Yes. Thanks, Oliver. Let me take both of those. So our prior year reserve releases, especially on Motor, have been decreasing over time. And that's actually a result of some of the development that we see on the bigger bodily injury claims, some of which are on the book for a very, very long time. The releases of those are reducing because of the reinsurance changes we made a few years ago. And that tends to push down the prior year releases. As expected, frankly, the best guidance I can give in terms of how you should think about that is the sort of 50% of profits coming from the current year, which isn't just a result of improvements in the current year, but it is also a result of reductions in the prior year. And that's really what's going on. In terms of Travel, yes, I think it is important that we acknowledge there continue to be risks. And the risks to the financial outcomes on Travel are related to -- as far as COVID-19 is concerned, to the effect on airlines, travel companies. But you're absolutely right that it's not a straightforward kind of sequence of events that leads to us being online. There's a number of different kind of stopping points in terms of liability before it falls on our book. So you're right to say the first obligation sits with the holiday provider or the airline. We've then got in the extent of insolvency, schemes like ABTA and ATOL sitting behind them. And then potentially and depends very much on the facts and circumstances and the individual policyholders claim, but potentially, you've got the credit card providers behind that before we're liable. But there's no doubt that if we did see a major airline, for example, to fail, we obviously hope that doesn't happen, then it would be a consequence of those. The only thing I'd say is I don't think we're talking about a catastrophic consequence, but it would be negative compared to our GBP 25 million current estimate.

Our next question comes from Dom O'Mahony from Exane BNP Paribas.