Sabre Insurance Group plc (SBRE) Earnings Call Transcript & Summary

Hi. Good morning, everyone. Welcome to another of our series of virtual presentations. Slightly slow [ grimly ]. We've done 8 results calls since the IPO at the end of '17, and exactly 50% of them have been during lockdown, which is one we haven't really realized. A fairly common format, as you've seen it before. Here are the presenters, one new face. Matt Wright, as you know, has been promoted to Chief Actuary. Hanro will continue in his role as coordinator. [Operator Instructions] We are, as usual, [indiscernible] IT so they will have to figure any technical switches. On the agenda, very similar approach to normal. We'll look backwards at the result and then give you our best insurance view of where we think the market's at today and where we think it might be going. So financial highlights. It goes without saying it's been a pretty strange half year. Clearly, a lot worse for other industries than us, but COVID has had a material impact on us. Volume has been relatively painful, mainly driven by wider U.K. factors, which we'll discuss later, like driving Tesla car sales, that type of thing. The climates have benefited from lower traffic. Overall, we're pretty pleased with the half year performance. As we sit here today, we can see a continued, reasonably bumpy for the short term as we hopefully emerge out of the soft market cycle and the COVID impacts, but we're increasingly optimistic throughout the medium term. And we'll talk more about our development efforts and how we think the market will turn later. To pick up on a few of the highlights. We've maintained our leading underwriting performance, we believe, strong profitability and returns. COVID has impacted the slow return to car sales, and the young driver impact has impacted volume. We continue to increase rates ahead of the market. We're continuing to price within our normal pricing corridor. Low claim frequency in H1, lower than anticipated in our pricing changes, which is why we're seeing strong loss ratio performance. Reserving position continues to be sensibly cautious to reflect the greater uncertainty in claims outcome. PI claim settlements are still slow because of relatively slow court processes. Interim dividend, exactly in line with our corporate policy, and continued strong capital generation. On the operational highlights, our key focus will remain on high-quality pricing, underwriting and claims management. As the COVID challenges start to fade slightly though, we are able to sort of raise our sites and look for development, and we're probably talking more about future product developments in this session than we have in any other presentation that we've done. Some of the highlights here are that we continue to test new data and rating factors. We continue to find ways that we've exploited in building our own IP within our rating. The van product is being updated. The Saga relationship has gone live as planned. And importantly, we've now got in place a new front-end IT cloud-based system that allows speed and cost-effective launch of new product variants, and we'll talk more about that as we go through this presentation. We continue to support employees and customers through COVID-19. As a reminder, we haven't taken any government support nor have we furloughed any staff. Having said that, the excess headcount in claims has given us some short-term pain to expense ratio. We believe maintaining staff is the right thing to do both for colleagues and for the business. This positions us well to be able to accommodate growth in future periods, which we do strongly anticipate coming through. We're very well positioned for the forthcoming regulatory changes. We have no concerns about anything that's coming up, and we've largely completed all the work that's required for the host of things that are coming through. We've got an enhanced focus on ESG, and Adam will touch more on that in his section. And the MOJ whiplash reforms have caused a bit of disruption, if not chaos, I would say. Trevor is going to present 3 or 4 slides on this later. So I won't steal your thunder now, Trevor. I'll let you talk about what's happened there. So if we look backwards, while COVID has clearly not had the same impact on us as [indiscernible], it has had a major influence on our business at the same time as some other fundamental industry changes have been occurring. Pick up on a few of them. The COVID-19 restrictions materially shrank ours and others addressable market. We know there's been fewer new drivers into the market. There is an enormous backlog of driving tests. I know my daughter is trying to get driving test. Can't get one until next January in [indiscernible]. I'm not even sure where [indiscernible] is quite frankly. So it's a desperate time for youngsters trying to get driving tests sorted out. Those lower -- those drivers of those lower volumes haven't yet unwound so we're still seeing the pain of some of those things as we sit here today. We believe some competitors have almost certainly chased that reduced volume within, our view, incorrect prices. We have maintained our pricing discipline through this. I think the true underlying impact could be partially disguised for the next 6 to 9 months by strong current year loss ratio performance across the industry. We have chosen, say, to maintain our pricing discipline on this [indiscernible] between maintaining volume and maintaining our strong focus on profitability. This is a graph that shows quotes from all the price comparison websites. And if you look coming into the early part of this year with new basis on 2019, 2020 is still all over the place to draw comparative numbers. Still significantly down as we came through, say, the first quarter and start into the second quarter here, and only modest growth coming through now in the most recent weeks. A little upbeat note. If we look forward, we are confident that organic growth will come through. And our investment in our front-end systems capability over the last year or so will allow us to push much harder on, I guess, self-help developments. So the pricing discipline has left us very strongly positioned to capitalize on natural growth. Well, we are going to have to earn through a lower earned premium position for a period. We've got -- probably for the first time, we're discussing new product launches in half -- well, the second half of this year. We're going to be launching our new flexible insurance product under the Drive Smart brand. That allows you to buy insurance by the hour, day or week or up to a month. This is definitely a growing niche. People will want to insure. Younger people potentially on payments cars for temporary periods. We think -- we're not sure how -- and I think it's going to move down massively in premium for the first period. But it's definitely a niche we want to understand, investigate and be able to play in as we move forward. We've got focused machine learning program underway. We're reinvesting and invested more heavily in machine learning and looking at how we can deploy those new routes into our various distribution modes. So we're pretty optimistic that the combination of market strengthening and our development efforts will leave us well placed to grow into the medium term. Looking even further forwards, electronic vehicles, electric vehicles. We already insure electric vehicles, and we also insure other propulsion methods like hydrogen and fuel cell vehicles, which perhaps get spoken about less. Importantly, our repair network is keeping track of that, and 93% of our network have started to a qualified in repairing electric vehicles. So we're confident we can write them profitably and repair them properly at the same time. This is the volume position. So we have seen good recovery since the end of Q1. We've grown by just under 3% since Q1, growing consistently and bit modestly on a weekly basis. I guess, importantly, we also track our competitiveness on the broker panels where we play. So that is how often are we the cheapest price of growth we can find and how often are we the policy that eventually gets sold. In recent weeks, we've seen our competitive position that was health and we're cheapest, increased from about 5% to 8%. But our sales share has more than doubled. So we've gone about 3% to 6% share of the sales that some of our larger brokers are making. So good signs within that market that we think there's a rate coming through to improve our competitive position. On the premium -- or the impacts of COVID on the premium side, I think an important point here is that expected claim savings have been passed back to customers certainly by ourselves and I suspect by most of the market. Currently, traffic is back to effectively 100% of the old normal. We're seeing some slight differences there and slightly higher. Car is still slightly lower. Premium remains down low due to the lack of car sales/young drivers, as we've mentioned. And the bounce back in volumes has been slower than we might have expected, but we are seeing some signs of recovery. On the claims side, the short -- there have been short-term benefits. The claims frequency has been much lower than we expected. Theft hasn't been down by the same proportion. Balancing this larger PI claim settlements are still slow. The courts are still slow to get through some of these cases. And I guess the last point here is really important, which is the net impact of what will increased work from home look like, different traffic density, potentially higher severity because of higher speed traffic. What is that going to look like? And that's going to take some time to normalize. So we are deliberately trading quite a cautious path through this to ensure we don't lose control of the portfolio. We don't want to boom and bust. There's no point growing rapidly and then taking the pain for that in very unattractive losses in future years. This is a really important slide, which has been in our last couple of presentations. We've been very open in the softer market peers. We've been writing towards the top end of our pricing corridor. So we would expect, all things being equal, our combined ratio to sort of start to move slightly to the right. As we go to 2022, we'll be taking decisions, we hope, on whether we should take more margin or more volume or what the optimum position is between those 2 positions. But at that point, I think I could probably shut up for a minute or 2. And Adam, I think you're going to grab control of the screen and talk through the financial results.

Yes. Thanks, Geoff. I think I've managed to wrestle control of the slides. There we go. So hi, everyone. Thanks for joining us remotely this morning. All right. Let's talk through the financial highlights for H1 2021. I'll talk to our results, focusing on premiums, claims experience, expenses and, of course, the dividend. So here we go. Headline premium, GBP 78.2 million, is down on 2020, which reflects the continued pressure on the top line during the first half. Geoff has already explained how market conditions have contributed to us giving up some income in order to maintain profitability as far as possible during a significant temporary reduction in the size of our addressable market. Our combined operating ratio was just under 75%, which reflects similar dynamics to 2020 full year, with a strong loss ratio being somewhat offset by a relatively high expense ratio, mainly driven by that pressure on the top line. Investment return at GBP 0.6 million continues to reflect the long-term yield across the portfolio. Profit before tax, of course, at GBP 22.2 million, remains primarily a function of our premium income and the combined ratio. With the decrease in earned premium and a slight uptick in combined ratio, it follows that our profit is down in '21 versus H1 2020, which consequently feeds through into our earnings per share, as you can see here. We remain in a very strong capital position and therefore declared an interim dividend of 3.7p per share, in line with our corporate policy. After the payment of the dividend, our year-end solvency coverage ratio remains at a very comfortable 168% -- 169%, sorry. So moving on to the next slide, which drills down into our combined ratio versus the full year 2020. We can see that a very strong loss ratio has been somewhat offset by a relatively high expense ratio for the same period. The headline figures. Our loss ratio is down to 44.9%, while our expense ratio is up to 29.5%. I'll talk you through the loss ratio first before digging into the expense ratio. We can split this into the costs recorded in respect of accidents in 2021, which is our current year loss ratio; and movements on our estimated or actual cost of settling claims recorded in previous years, which is our prior year loss ratio. On the current year loss ratio, this came in at 50.7% versus 55.4% for H1 2020 and 51.2% for the full year 2020. While the current year loss ratio can be volatile, particularly across a short period, this is indicative that claims experienced during the period has benefited from lower levels of traffic despite discounted policies earning through. There are 2 things happening here. One, while we discounted policies to reflect expected claims frequency over the life [ speech ] policy written, the length [indiscernible] of the third lockdown was greater than anticipated. And the current year loss ratio will show a lockdown frequency benefit in H1 but potentially a higher ratio in H2 to average out at our target loss ratio, both of which means that we will likely see an increase in the current year loss ratio in the second half of this year, notwithstanding the normal levels of volatility. Our reserve position continues to reflect our consistent long-term methodology and allows for increased volatility on the latest claims. We continue to see relatively slow assessment of personal injury claims, which, of course, is also reflected within our reserves. The prior year loss ratio benefit is in line with our expectation of long runoff of around 5.8%. This compares to a benefit of just 2.6% for the full year 2020. We've previously said that we might expect to return to normal prior year reserve benefit around 4% to 5% a year, which would largely reflect the run-off of risk margin on open claims. So this falls well in line with that. All right. On to our expense ratio, which increased year-on-year to 29.5%. So this next slide shows a bridge between the full year 2020 and the HY 2021 position. We've commented on previous years the pressure on expenses come from industry levies, increased audit costs and the cost of running our PLC to name but a few. While those costs remain high, they've not increased significantly since the full year 2020, so don't form a significant part of this bridge. In fact, we're continuing to reduce operating costs throughout the business. Although that's, of course, offset by normal inflation on recurring expenditure. Instead, the main increase in costs have come from inflationary wage increases. We've continued to maintain our operational capacity in the strong expectation that we'll recover our policy count in the near future. We remain forward-looking and careful to manage the risk of overwhelming operations should growth come quickly as it has done it. The main driver, as you can see here, of expense ratio has, therefore, come. We have a considerable variable element, or different premium will always have an adverse effect on our expense ratio as it as through -- as it has done in H1. This next slide shows our allocation of invested assets at the period end. During the year, we continued to step into a more diverse, still very low-risk portfolio of assets. The high-quality corporate earned at bonds performed well during the year with no significant outrates or losses. Our strategy centers are on capital preservation still while attempting to earn a reasonable yield on low-risk assets. Because we generally hold all our assets to maturity, the amount recognized in the profit is the effect of interest on those assets, which is reflective of the yield to maturity. Short-term market value fluctuations then come through below the line. On to capital and dividend. So our corporate policy, as we've said previously, is to pay a dividend at the interim stage calculated as 1/3 of the prior year ordinary dividend. So mechanical looking backwards based on last year. This time around, it's 3.7p per share, which we're very happy to pay given the level of capital. Post dividend is at a very comfortable 169%. Our overall approach continues to be to return excess capital to shareholders with that excess being defined in reference to our current circumstances while keeping the post year-end capital in the 140% to 160% range. This interim dividend does leave us with a very strong capital position post dividend. We will, as always, review the capital position at year-end and distribute any excess capital as appropriate at that time. This next slide is one you'll be familiar with, having shown a few times in the past, which shows our capital position over time. As you can see, we remain very strongly capitalized. As we generate excess capital very quickly, our capital position has tended to exceed our preferred range, mainly because of the time between calculating the capital available to fund the dividend and paying that dividend. We still continue to aim to hold post-dividend, period-end capital at the 140% to 160% range. On to climate. We recognize that climate rightly as a huge area of focus for companies and investors. While operationally, we're a very small business, we're still giving significant thought to our impact on the environment and the impact of the change in climate on us. Our corporate purpose is to provide fairly priced motor insurance to everyone. That means we'll never penalize those who can't afford electric vehicles by selling differential prices for cost depending on their environmental impact. But we will, however, continue to provide a fair cover for all cars, which utilize new and emerging technologies, as Geoff has already discussed as we've all done. We're stepping up our efforts this year, both in terms of our own impact and in terms of the disclosure that we put in our accounts. And with some external help, we intend to build our carbon-neutral road map, increase our level of disclosure before our year-end results. And with that, it's back to you, Geoff. Thank you.

Thank you. Let me get control of the screen. Just one second. There we go. Right. As we'll be now putting some market context and particularly focus on 2 features. This is a slide you've seen many times before. It's how we grow and shrink through the insurance cycle. I would say that COVID has extended the model cycle by around 12 to 18 months. We would have predicted this turn in as we came into 2020. And indeed, we think there was strong evidence that did happen. We were seeing rate go on as we discussed last time in Q1 2020. That reversed when the first lockdown kicked in. Since then, there have been, I guess, fits and starts attempts to increase rates as lockdown has started and stopped. There is a risk that claims frequency benefits from COVID do blind some competitors to the underlying position or allow rates to be held at low levels slightly longer. We firmly believe that for many competitors, rates need to adjust very sharply upwards in the foreseeable future. One of the large consultancies in their annual results review is predicting a 2020 position of around 110% combined. That's pretty much wrapped. It was in 2010, and that's a pretty ugly picture for the industry overall. We don't intend to let that happen to us. I guess our current view is these differentiated strategies amongst competitors. Some are still on a bit of a landgrab ahead of the FCA reforms, and some are trying hard to push prices now. We know again from some of the feedback we get from our approaches. Some insurers have now decided enough's enough, and I guess putting an uprate on to protect themselves in future years. Others sort of know they're driving towards a brickwall. You put the price up, the volume goes down instantly. So I think some competitors are still stating the usual trickle, but knowing what you need to do, but you can't afford to do it because the volume impact is too severe. So there's clear signs of pain being felt in underwriters and brokers building pressure from the significant rate increases. It feels like the Coke can still being shaken but it's not popped just yet. There's been some industry headlines around this. I don't think anyone is going to be surprised that prices need to move up. These are our usual weighing scales that we now put in on whether prices should be going up or down in the market. The inflation factors are exactly the same as the ones we outlined at the full year. On the deflation factors, we think at best at a modest whiplash reform benefits, certainly less than GBP 30. And an element here of what will happen to work from home and traffic density as COVID impacts unwind. Our view of claims inflation is still consistent. A new relevant that's coming through is wage inflation. We are seeing that start to have a future. That does impact large claims costs and potentially reinsurance recovery position. Might be a blip. We know that perhaps some lower-earning people are not currently in the employment market. So we'll see whether this is a blip or whether that becomes a long-term trend. This is the sort of context you put it into the full year, and we've traffic lighted what we think has happened and what hasn't happened so far. So we think the market probably has reflected the appropriate level of whiplash discount. We think we have. We've unwound the residual amount of COVID benefits, and that's assuming there's no future lockdowns to come. Probably not everyone has fully unwound those yet. What hasn't happened is the quote volumes increase that we saw in 2020. There's a significant bounce back after lockdown. We haven't yet seen the market pricing direction, and I suspect we still haven't seen the full impact of the FCO pricing review. So some things are happening. Some things have happened slowly. Some things, I think, are still likely to happen towards the end of this year or possibly even into 2022. We can now give you some detail on 2 of the more fundamental changes. The first one is the FCA pricing review, which I suspect most people are pretty close with. This was our read of the sort of final rules, broadly in line with industry expectations. Noncash equivalents can't be used to disguise price walking. That really means vouchers. Hopefully, that takes away the risk with customers being showered with shopping vouchers that disguise the underlying price. Stricter rules on back book or transferring books. So clearly, anti-avoidance is going to be a key focus for the FCA. APR being included. Generally, we think these are sensible rules. None of these cause us any concern. As you know, we don't do promote price anyway, and we are very comfortable we can accommodate the reporting and the various rules that are required. At this point, I'm going to hand over to Trevor, who's going to come up to you and is going to talk about the whiplash reforms.

All right. So good morning, all. We thought it would be relevant just to sort of describe where we are on week 9 after the launch of the whiplash reforms because this was certainly called out in terms of premium being suppressed. So a quick recap. This is for accidents which occur on or after the 31st of May for the adult occupants of the vehicle, and that is also subject to a number of exclusions. Applies to claims with a value of up to GBP 10,000 in total, where the personal injury element is worth no more than GBP 5,000. The idea of this official injury claims service or OIC as we call it is that claimants can self-manage their claim through a portal and don't need to be represented by a solicitor. They can take representation, and the solicitor in the absence of any sort of legal expense product to cover them will take a cut of the compensation. So very similar to sort of the PPI model that most of us will be familiar with. Whiplash claims are for injuries to the neck, back and shoulder only with less than a 2-year prognosis and a very valued now in accordance with the tariff system, which is set down by law. Other injuries, so injuries in addition to whiplash, are valued by reference to the judicial college guidelines, which has been with us for quite some time. A claimant can say that their circumstances are exceptional, although injury is exceptional and argue for an uplift in relation to that tariff injury by up to 20%. Importantly, for claims within these financial limits, there are no legal costs recoverable. But in the event that the case needs to go to court for some sort, arbitration court fees are payable and recoverable is successful. So Geoff, if you don't mind -- thank you. So there is a significant technology build for this portal. Code was even dropped on the day before or within hours of go live. We believe that many of the law firms and potentially some of the insurers were unprepared, weren't ready, and we're still seeing ongoing development in terms of the technology build here. Claims that we've received since 31st of May are suppressed. What we don't know is how many claims haven't been capable of being presented because of the technology barriers. So I would say that only yesterday, we received our first claim from one of the big law firms that we know have had technology problems. So that's certainly an example of where claim volumes are suppressed, but we don't yet know what the new normal is going to look like. Whilst this has been built for unrepresented claimants, the vast majority of claims that we've received coming from law firms with really a de minimis proportion coming from unrepresented claims, and that may be because of the complexity. There's a guide to making a claim that runs in 64 pages, and the pre-action protocols that describe the processes run to another 102 pages. And if there's a claimant you want to go to court for various different reasons, there are 10 different processes, each attracting a fee. Whilst the signaling is for claimants in person, this is a process to adopt, it's not without problems. So what are we seeing? We're seeing an increase in a proportion of claims where there's a non-whiplash injury. And for some legal firms, 100% of their clients have an injury in addition to the whiplash. Again, for some firms, 100% of their claimants have got associated psychiatric injuries when these claims have been presented. And believe it or not, 75% of the claims deem to be exceptional in one way or another, which clearly is not exceptional. So all 3 of those will be strategies to increase the level of damages that are recoverable and an effort to get the claim over that GBP 5,000 to GBP 10,000 limit. We haven't yet seen any medical reports. So what we don't yet know is how layering of treatment and other costs are going to be progressed, but we anticipate that activity will take place. Certainly in the early days, we were seeing some strange behavior. So people using do not reply e-mail domains. It's necessary to sign off a submitted claim with a statement of truth, with segment of truth was being signed by the system rather by an individual. Claimants using the old portal where costs are recoverable. We don't know whether that was through poor education or just an expectation that we might miss it. And then perhaps most [indiscernible], our counter-fraud team are busy with these cases, which would suggest that the due diligence that some claimant firms are putting into their efforts of avoiding sort of Trojan horsing, so potentially fraudulent claims through may not be as vigorous as they were in the past. So it's something that we're actually putting a lot of effort into in terms of that upfront activity around additional counter-fraud checks on these claims. So I guess that's sort of an early side of what we're seeing. But at the moment, it's still very early. Will these savings come through? Again, still very early to predict. Thanks, Geoff.

Thank you, Trevor. So the final slide, a summary. So I guess the key thing is that we are remaining resolutely focused on our long-term and well-established strategy. We are going to continue to prioritize underwriting discipline and profitability and volume. And we are centered on a long-term mid-70 COR, and we wouldn't be surprised to see that move slightly up to this year. We have seen some evidence of growth emerging as we go into Q2. I think we may be getting the benefit of the first early pops or some tailwinds in the market. We do anticipate much more significant tailwinds as we go into later 2021 and into 2022. We discussed the COR. There is -- I think we should stress increased uncertainty on claims cost in H2. We don't know exactly how traffic volumes are going to move. We don't know how it would impact. We don't know if less traffic involves higher speed, involves high severity claims. And we haven't yet seen where the MOJ whiplash reform impacts. So there are definitely more uncertainty than normal. Our crystal ball is slightly murkier than normal perhaps in terms of looking out towards the end of the year and this year and next year. What we are confident on is that our pricing discipline has avoided any risk of boom and bust, showing growth now in plain, undue pain later. And we're on a very strong foundation. We do expect we're going to take advantage of anticipated market price turn-driven organic growth opportunities. We've got a lot more focus on self-help and new product development, and we now have the capability to roll that out pretty quickly. And we are very committed to using our capital range to support an attractive dividend while we earn through the softer parts of the market. So I guess, in lots of ways, similar messages to previous presentations, probably now with a slightly stronger focus on our ability to grow through nonmarket turn-driven elements. Now at that point, I think we're going to pause. I'm going to hand back to Hanro, who is going to look for any raised hands for questions. He will then announce you and promote you to a panelist effectively. So there might just be a few seconds gap between him calling you and us to hear you. Hanro, back to you if that's okay.

Thanks, Geoff. Currently, we don't have any written questions, but our first question is from Thomas Bateman.

Can you hear me?

We can, loud and clear.

Geoff, Adam, thanks for the presentation. It's always really interesting here from you guys and the insight into the market. The question is on the guidance, so the 70% to 80% combined ratio guidance. I appreciate you meet this year, albeit towards the sort of top end. However, in my mind, the guidance is looking like a real stretch for 2022, given the trend in the expense ratio and reserve releases, and I think consensus forecasting 75% combined ratio next year seems quite unlikely. If you were to normalize this year for COVID, it should probably above 80%. So could you just give me sort of what are your expectations for next year? And what do you think about that current guidance?

Yes, sure. Adam, do you want to take that one? You need to come unmute for you to...

Yes. Sure. I mean, obviously, I can talk a little bit more clearly about H2 this year. And then as we move into '22, it becomes a little bit harder to forecast. I suppose I would think about it like this. Before we went into the first lockdown back in last year in 2020, we were writing towards the top end of our combined operating ratio range. We're quite open that in a softer part of the market, as Geoff has already said, that's where we would generally move to. And therefore, it stands to reason that at some point, had there not been any lockdowns, we would have been reporting combined ratios in that area. So not withstanding any prior releases, that might have come through, and obscure that. As lockdowns fall away, we effectively returned to that position, which means that potentially H2 this year should -- would show a higher combined ratio, the top end of that range, which then obviously would feedthrough into the full year results. 2022 is a slightly more difficult one to call because market dynamics could mean that we can put prices through, which would bring that combined ratio on our written business down, or it might mean that eventually it just supports our inflationary increases, and we would want to be careful not to see our volume down too far. Obviously, there's an impact on expense ratio there. So I guess base case thinking is that next year's combined ratio will be higher than this year's combined ratio. Stands to reason, if we don't have any lockdowns that, that would be the case, but there are opportunities to bring that back down as well. Nonetheless, I think I would guide cautiously to potentially being higher than this year next year.

That's really helpful. And sorry, just one other quick question, just on pricing. I guess I'm a little bit confused. You gave some quite good guidance that you've grown the book and your competitiveness has increased. That's quite positive for me in terms of rating price in the market. And then I've got a damning description or something sort of walking into a brick wall because they don't want to give up volume. I don't know. What's your best guess of what's happened to pricing over the last few months and maybe what we could expect for the rest of the year?

I think overall, it's been pretty flat in most parts of the market. I suspect we are in a slightly different part of the market to the core mass market insurers, and maybe we're seeing the early signs of that come through, and our part of the marketed might be quicker. It could be some people who start writing some of that notes and the business. It's hard to say. All we can really say with company is what we've done, and the output from that is we've definitely seen our competitiveness improve slightly. I think it's always a little dangerous to think about the market as being the listed players, and we're not really in the same game as [indiscernible]. I think now between those guys, they're probably less than 1/3 of the market. So you've got a lot of the market is like the iceberg, below the way. They're not going to have the same capabilities in some instances. They're not going to be strongly capitalized. They weren't with the same reserve releases in previous years. So I do think it's important to think about the 2/3 of the market that doesn't get the same visibility, and the payment might be suffered there.

Our question is from Ming Zhu.

Can you hear me?

We can.

My first question is around the competition. Could you just give some color in terms of have you seen any -- how's the competition change in the nonstandard market? And for example, [indiscernible] is entering the market soon. And second is your claims inflation. Is that still sort of the 7.5%, 8% range? Could you just give some update on that, please? And my third question is how much price increase do you need in terms of the market you write? Do you need for you to go back to that 75% or better combined ratio?

Okay. Sure. So I'll take the first. And maybe Adam might -- you can pick up the other ones. I think in terms of nonstandard, we're not really seeing any change. Clearly, there has been talk around the new entrant with [indiscernible]. I don't believe they are necessarily targeting the nonstandard business. It's important to realize that within their business, they already have complete [Indiscernible] who've been very active in the nonstandard market, probably the more nonstandard market than us, in fact, for quite some time. So I wouldn't overly focus only one competitor. I guess, Adam, do you want talk about the claims inflation question that was there?

Yes. So we're still seeing the claims inflation similar to what we're seeing at year-end. I think as Geoff mentioned earlier, we're also seeing the wage inflation compare as well. And time will tell if that remains high or not, and that cost us out impact injury claim costs.

Yes. And the third question, Adam, was really around what price increase we need to get back to 75%.

Yes. I guess without saying exactly where we're pricing now, it's hard to say exactly what we need to put on to get to 75%. But if we were at 80%, we would want to put it on -- not 5% doesn't work quite like that, but that's the sort of ballpark. I suppose the way to think about it is that we still think inflation is at the 7.5% to 8% range. So we want to put on 0.5% a month or a bit more than 1% a month to match claims inflation. We would want to put on more than that to get that combined operating ratio down if that's what we wanted to do, and it really is a case of whatever the market can support, taking into account the impact on top line for the quarter.

Yes. Ming, did that answer the question? [indiscernible]. Okay. And we have 2 questions that have come in on the chat function if I just maybe deal with those quickly. The first question is the majority of listed players, DLG, Hastings, [ GS and Atmel ]. So they stay disciplined and put through rates. Can you provide any perspective on which players are putting downward pressures on rate and any perspective on which players have started to put through rate increases? I think a lot of the listed companies will stay disciplined. I think there are different strategies ahead of the FCA pricing reforms, which may differ -- may drive different behaviors. I guess the perspective on who's put through rate increases, we don't get that detail from our conversations with the brokers. They tell us about the overall theme of what's going on with rates, and they won't name names. If I was to guess, I would say, typically, if I look back at previous cycles, it tends to be companies that are not 100% dependent on motor to move first because they can earn profits in other part of the business. And logically, why would you burn profit in motor if you can make money elsewhere? So that's been my thought over the last couple of years, and I would be surprised if that doesn't come true. The other question is one for you, Trevor. Can you help quantify what the impact of the slowdown in PI claims settle are? And can we expect bigger reserve releases over the next couple of years?

Yes. Thanks, Geoff. From a case reserve perspective, yes, absolutely, we would expect case reserves to come off as these claims settle. And just to give you some sort of context or color around what we're saying is, some claims need to be approved by the court as a settlement, so those are taking time to settle. It is on the -- both on the large claims side and on the smaller claims side where there are disputes over either liability or quantum. So yes, absolutely, as that certainty comes through from the court determination, then case reserves will come off. In terms of how that then gets suggested through the IBNR, Matt might want to add to this, but clearly, where we've got less settlement certainty than we would have had in the past, Matt will need to be reflecting that in terms of the IBNR calculations that he undertakes.

Yes, that's great. I don't expect much bigger -- it's -- yes, we are some -- we have to take into account what we think we if that way becomes successful.

That's right. And perhaps the way to think about it is that we obviously adjust our open case reserves for what we expect the ultimate settlement to be when it comes to the actuarial calculation at period end. I suppose that actual settlement is somewhat obscured the more open claims that you have. Or if the settlement has some changes, it's harder to predict where those are going to. So it might be that you hold a little bit more in that reserve to reflect that. I certainly wouldn't go as far as to say we're expecting sort of bumper reserve release as a result of these things starting to settle. We might hope that, that clarity might yield something, but I certainly wouldn't make that in a serious 2020 models at the moment.

Thank you, Adam. Hanro, anything else?

Okay. we have a couple of raised hands. So the next person I will allow to speak is [ Greg Patterson ].

Gentlemen, can you hear me?

Loud and clear, Greg, as ever.

Just three quick questions. Numbers one, just in terms of year-on-year rate increases. What did you achieve on average in the second quarter? And how does that compare with July? That's my first question. The second question is on underlying claims inflation of 7.5% to 8%. What would the year-on-year inflation be if you added back the frequency benefits in the second half of last year? I'm obviously trying to work towards a loss ratio waterfall. So basically how -- what were the percentage points frequency benefits in 2H '21? And the third thing is in the 7.5% to 8% inflation underlying for the second half of the year, are you -- does that include the IBNR for the delay in whiplash claims due to IT issues on the portal? In other words, is there -- do we expect a few extra points year-on-year in the second half as IT issues get resolved?

Sure. Thank you, Greg. So on the first one, on the year-on-year rate increase, I think this is a really difficult number to pin over the last 12 months. Because we've had various periods where rates have gone up and down to reflect various lockdowns, I think it's pretty difficult to give a straightforward answer on that one. What I think we can say is that at all times, we have made sure we stayed within our 75% to 80% rating corridor, looking forward from each month. reflecting the likely claims costs from COVID underlying claims inflation whilst allowing for the potential reduction in traffic through that particular lockdown. Matt, we'll hear what you want to say on that one.

I don't have anything because I think covers off quite well that, yes, with lockdowns, it comes quite messy year-on-year. But yes, the aim is to cover long-term inflation.

So again, we're not going to be in a very easy number on this one. We can probably have a talk to you about after that usual in sort of more detail. I think difficult to give a headline number on that one year-on-year because it depends what period we're comparing to. The second one was around underlying claims inflation and what do we think the year-on-year inflation number is. I think that's the question I quote there. Matt, did you want to say anything on that one?

Again, I think it's made quite -- it was quite hard to see with the time of COVID lockdowns, change in frequency. The guide would be traffic volumes and cars experienced what's on the road.

Can you hear me?

We can, yes.

Yes. I'm just trying -- in the loss ratio in the second half of last year, what was the frequency benefit from COVID in terms of percentage points? That's really what I'm trying to get.

Matt, do you have that to hand? Or is that one, we'll need to come back on?

[indiscernible].

Okay. We'll come back on that one if that's okay after the call.

And then just -- is that 7% to 8% -- let's assume in addition to the 2 factors that I've just mentioned before, is that 7.5% to 8% inclusive of any pickup in whiplash claims as IT issues at the claims, the lawyers and the claim management companies get resolved?

I think we can say that we have tried to allow for that uncertainty. So we are publishing a number with an expectation it's going to get significantly worse. We've tried to now max what we think the right-sized number will be coming through that.

Next question is coming from Nick Johnson.

Two questions, please. The first is on the growth outlook. You're fairly optimistic again. Just wondering if you could perhaps sort of elaborate a bit on how much of the premium growth that you hope will come through -- will start to come through over the next 18 months. How much of that is contingent on a recovery in car transactions and new drivers? And how much of that growth depends on price rises in the market? I know it's difficult to say, but any thoughts that you can give around sort of relative importance of both those issues would be helpful. And the second question is on reinsurance costs. I just wondered what you're seeing on reinsurance rates and whether reinsurance rates are reflecting lower claims frequency in the market.

Okay. I'll start on the first one. It's hard to say exactly. I think my instinct is that the majority of this will come from price rises in the market. So I think the things are interrelated. So if there's no claims volumes available in the market, people are more inclined to keep rates lower for longer to write the share of that reduced market. So I think that has probably been what's held back some of the price increases over the last few months, and clearly, there will be a downward pressure on rates increasing if people are still needing to chase volume in a less rich market. So I think the majority will probably come from price rises. But car transactions, driving tests, other things coming back to life will be something that drives those price changes. On the reinsurance side, I think an interesting point I'll add about the numbers is that the olden discount rate is calling back out of the bulk. I think it's fair to say in terms of conversations around here and that we know that the next discount rate we do have, Trevor, I think is due in 2024.

Yes. So I guess if I pick this up, Geoff, the frequency issue, so the large loss frequency issue isn't necessarily linked to overall frequency. So higher speed traffic has led -- given rise to some more severe accidents. There is the discount rate. It's already gone up in Northern Ireland or gone down. So there's been some pressure coming through there. And there's some outlook that the discount rate, if it was set again today in England and Wales would be -- would deteriorate from where it is today. And then I think the third thing is, is because primary rates have been down across the market, reinsurers will need to secure the same income, need to be putting their rates up. Many reinsurers will look at this on a price per vehicle basis. So there's certainly pressure on the reinsurance side.

Yes. And to help everyone with their models, what that means for us is that our reinsurance renewal at 1st of July was a high single-digit relative increase on where it was last time around, which was, correct me if I'm wrong, Trevor, but pretty commensurate with sort of market rate increases on the reinsurance side.

We believe so. And potentially, there'll be sort of the forthcoming renewals sort of towards the end of this year could be pretty tough.

Yes. Did that answer your question?

Yes, that's very helpful.

Two hands remaining and then 2 in these written submissions. So we'll just go to Alexander Evans next.

Guys, can you hear me?

We can.

Perfect. Just a quick one, following up on the reserve releases point. You tend to have a little bit of a seasonality such that 1H is a little bit greater than 2H. So is it fair to assume that 2H is going to be a bit muted on that respect? And then maybe just in terms of that sort of 4.5% to 5%, how do you view the impact of the sort of delay in claims settling on 1H? Should we expect a little bit lower seasonality if there's a sort of increase in settling in the second half?

Sure. Adam, do you want to take one?

I'll take the sort of seasonality point, which is that typically, yes, the first half does somewhat flatter the prior year in favor over the current year. That's purely because there's more development related to the prior than the current year because it's only 6 months in the current year at that point. It's hard to extract exactly what the impact of that is. Looking back over time, obviously, the prior year reserve release has been very, very bumpy. Clearly, last year, we had a big sort of prior year reserve release in the first half and a very small one in the second half. But the scale of that difference wasn't really driven by seasonality, more stuff that happened in the second half of the year, which led us to watch through claims costs, which otherwise wouldn't have been there. So I wouldn't overstate the impact of the seasonality that there's something there. That's probably why we're at sort of 5% or 6% point rather than the 4% or 5% point for this first half, for example. But it's relatively hard to call, and that's probably the best answer I can give on that one.

Does that answer most of your questions, Alex?

Yes. But maybe just on the claims settling perspective, that sort of impacted the first half on reserve releases. And if we sort of return to normal in the second half, maybe that's a slight positive.

I think potentially sort of referring back to our previous comment on claims settlement pattern, too. We've tried to take a best view as to how those will resolve themselves and report that in our current reserves. So it really depends on when these claims start to settle, it plays at all similarly to what we've seen in the past. Or if they settle higher, then obviously, that's a different conversation entirely. So I would go as far as to say we've got claims settling slower. Therefore, we're definitely going to have a big sort of prior reserve movement in the second half of the year. There could be something there. But I guess by nature, an unsettled claim is uncertain, and we don't necessarily know how that development market's going to look if it hasn't changed from previous years.

Yes. So before we move to our last live question for the day, if you maybe want to address the 2 written questions.

I would indeed. So the first one is, do you anticipate any changes in behaviors from the price comparison websites over the next 12 months as the FCA pricing regime comes in? And then any longer-term changes? Personal view here. I think the fact that we're very excited about the FCA pricing review doesn't mean the average customer knows that's happening. So I'm not sure in the short term, there'll be anything that stops customers going back to price comparison website to try and find a cheaper price. Clearly, after a year or 2 of trying that and finding that prices haven't changed much, maybe they will start to become slightly more to doing it. I think it's important to put us in the context of our belief that market rates need to increase substantially. So you may be sitting on a renewal from your existing insurer. We know that all insurers have different views on price. So it's entirely, you can see, well, you will still find a cheaper pace on the price comparison website as we go through this next 18 months or 2 years period. Longer-term changes, I guess, who knows, I'm sure they're thinking very much clarity about what they might do here. I'm sure they want to have a slightly stronger relationship with the customer or maybe looking at some of the ancillary products that are sold in there. So I'm sure we will see strategy develop, but I don't think this is going to happen instantly. And the second question is how meaningful do you think -- Trevor, this one's heading your way. How many whiplash reforms will ultimately be [indiscernible] something similar a little later a decade ago, however, ultimately had a little impact on industry claims costs.

Yes, [ Karl ], good question and good analogy really. So whilst we don't write business directly there, we are exposed to claims in the -- in Southern Ireland. So we've sort of got an insight into how that model worked, and I think it's a really good comparison. The way we see this is that we're going to rebase personal injury. It will take some cost out but then inflation will return in that sector. So ultimately, will it reduce expenses a bit, but we will see a return to inflation inevitably, particularly if we see ongoing pressure around wage.

And then our last question for today's presentation is from Ben Cohen.

I have 2 questions. Firstly, I just wonder if you could tell us how much you think your target market shrank in the sort of the depths of the COVID impact and how much you think it's recovered so far. And I don't know -- I realize you sort of answered this with regards to Nick's question, but I just wondered how much further you think it's got to sort of to normalize to get back to a normal environment for you. And the second question was actually just on the sort of below-the-line losses on the investment portfolio. Did that solely relate to sort of changes in the risk-free yield or were there any losses on the corporate bond holdings that you've built up?

Sure. I think it's fair to say that on a temporary basis, we saw a significant impact on our normal addressable market. So we know there are very few car sales coming through the lockdown period, and we know there were no driving test at all. And in fact, no driving lessons at all. So people potentially will not even move on as learner drivers in their parents' vehicles who were supposed to be giving your children driving lessons. So I think those 2 factors are pretty significant. That's probably also had an additional bit around, we think. I'll be interested to see the stats on this at some point. Less convictions for motoring, people out and driving less, best businesses. So for the average speed was down, I would suspect, for some people. So I think, Ben, quite a significant impact on our part of the market. I wouldn't want to put a percentage on it, but certainly meaningful. Adam, on the investment income, and that's clearly heading your way.

Yes. So it's the risk-free rate really as opposed to anything else. But if you look at the last year's fair value gains below the line, that was pretty substantial the other way, and I think this is just the way these things have moved over the last period. The corporate bonds have performed pretty well. I mean they're pretty highly rated bonds anyway, so they're not going to be massively volatile, but that's largely driven by rates rather than sort of anything unique to our bond portfolio.

Okay. Great. And sorry, Geoff, just on the first question. So you're just not speculating as to how much you've seen in terms of recovery. I mean it sounds like from what you were saying that actually while there's more to go in terms of young drivers coming back in, we're not a million miles away from where things might normalize. Would that be fair?

I think there's still more to go. I think the other bit to think about it, as we've always said, around the 1/4 of our business probably came from more the fringes in the mass market. Now we know the market has been as overly competitive as it has been for the last year. We're less likely to pick up that fringe of the mass market business with our margin requirements. So I think in anything, we note that has had a more material impact as a material impact as the target market. So that's the bit we would expect to grow back into fairly quickly as rates start to increase in a way that we don't need to because we've maintained our pricing foundations, I would say. Hanro, is there anything else? Or is that the lot?

Nothing else for this morning, Geoff.

Okay. Thank you. In that case, I look back. Thanks to you for joining us this morning. I really appreciate it. Hopefully, next time, we're up to see you face-to-face. If there's anything we've not covered, do feel free to follow-up with Adam and myself during the course of the next couple of days. Thanks very much, and speak to you then.