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

All right. Good morning, everyone. I think we are good to go. Fantastic to see so many of you here in the room. I know there's people on the phone as well. So welcome to you as well. First face-to-face presentation in 3 years, what could possibly go wrong? Count the mistakes as we go, I think, is the game here today. You'll see we spent some money on photos this year rather than Adam's Apple phone shots last year. Same faces pretty much. Same start to the presentation. Me and Adam will run through the slides and then attempt to give all the difficult questions to Matt and Trevor. Matt is the Chief Actuary and Trevor, I think you know, is the Claims Director. Standard agenda really, we will run through the highlights, look at the financial results, some stuff on sustainability. Then this year, we've got a bit more to talk about in terms of new developments and development initiatives. So we'll spend some time talking about the market and then some time talking about what we've been doing as well. And it's good today to have some positive things to say after what's been a pretty gruesome couple of years generally. So strategic highlights. Very disciplined approach to pricing. We'll talk more about our pricing approach as we go through this presentation. Very strong top line momentum coming into the year, which has allowed us to put through significant price increases on our core motor book whilst continuing to grow the portfolio. Year-end policy count up quite nicely. New market entries in the motorcycle and taxi, which we're very excited about and also announcing today a new partnership with Bennetts, our second motorcycle distributor, gives us a good spread across the market, and we'll talk more about this as we go through. Basically, I think we feel in a good place. This year, we feel like we turned the corner, and we're feeling pretty confident about 2022. The financial highlights. Profit before tax, pretty much in line with our expectations. GWP slightly ahead, partly because of good momentum on car and partly because we had the first policies coming on board from Bike. COR in our range, squeaked into our range, if I'm being honest, but still within our target range. We think an attractive dividend, paid of GBP 0.13 and very strong organic generation -- organic capital generation with the year-end solvency capital, somewhat higher than we expected, and Adam will talk more about that in a second. So at that point, Adam, I'm going to hand to you to go about the numbers in more detail.

Thanks, Geoff. Good morning, everyone. Let's take a look back over last year's financial result then. Starting with premium, pressure on the top line remained throughout 2021, with several factors contributing to soft market conditions, including slow unwind of COVID-related discounts and in our view, low pricing implemented by competitors during H2 in the run-up to the FCA pricing reforms. We also saw periods during which very few new drivers entered the market, car sales remain low through 2021, both of which significantly held back the size of our addressable market during the year. Against this backdrop, we remain focused on finding the right margin to target and maintained pricing discipline throughout, increasing our prices ahead of the market. Despite all this, the year-on-year drop in premium was relatively modest at just over 2%. We saw a return to growth during H2 2021 with H2 2021 GWP exceeding both H1 2021 and H2 2020. The dip in our net earned premium, therefore, reflects the lower written premium in 2020 and H1 2021 earning through. The combined ratio remained within our target range at 79.4%, with claims costs and expenses falling within our expectation. In H2, we reversed the trend in rising expense ratio, which peaks during H1 2021. With other income remaining broadly proportionate to premium and investment income remaining reflective of the medium-term yield on our portfolio, profit before tax continues to be primarily a function of net earned premium and combined ratio and the year-on-year dip in profit before tax to GBP 37.2 million as a result of this. We declared a total dividend for the year of 13p, consisting of a 3.7p interim dividend already paid, plus an ordinary dividend of 4.7p and a special dividend of 4.6p. We've generated surplus capital this year and have benefited from a reduction in our capital requirement, which has allowed us to distribute just over 107% of profit after tax. We've also retained significant excess capital going into 2022, giving us a solvency capital ratio post dividend of 164%, which should give us ample headroom to grow the business in 2022 and beyond while maintaining an attractive dividend. I've included this next slide to provide some additional color on our rate changes during the year, where conditions continue to present a complex raising challenge. We've addressed increases in the overall cost of claims, while allowing for periods of lower claims frequency and some savings from Whiplash reforms. We've increased our core motor prices by over 28% since January 2020, 11% since January 2021 and around 15% since August 2021. All of these pricing decisions fell into our underwriting performance, as shown in the next few slides. As you can see, we've achieved a loss ratio of 51.1%, consisting of a current year incurred loss ratio of 56% and prior year reserve movement of 4.9%. This is a return closer to historic norms, following the unusually strong current year performance in 2020, which resulted from the unexpected lockdowns during that year. Much of the reduction in claims frequency during 2021 was expected and so priced into the premium charge for policies, so the benefit was far smaller. The prior year reserve movement is towards the upper end of what we would expect as a normal business as usual runoff, which is driven by the unwinding of risk margins and positive developments on settled claims. The expense ratio reached 29.5% in H1 2021, largely driven by the reduction in net earned premium, which put pressure on the fixed cost base. In H2 2021, the expense ratio reduced due to some reduction in fixed costs, although the relatively low earned premiums still remain a factor, full year expense ratio was therefore 28.3%. The next slide shows the extent to which the change in year-on-year expense ratio has been impacted by a reduction in premium and changes to underlying expenses. As we can see from this graphic, expenses remain well under control, and the change in expense ratio is almost entirely down to the reduction in premium. I'll take this opportunity to note that our expense remains all in, including every penny of our expenditure, with no offset for non-risk income. It's an area which remains inconsistently reported across the market, so like-for-like comparison is tricky. A few comments on our investment portfolio. We've kept the mix pretty consistent with our reports at the half year. The yield has remained at about 0.6%, and we've retained a strong overall credit rating across the portfolio. The objective of the portfolio remains to hold a diverse set of low risk and capital light assets, which support the core underwriting activity. Our year-end solvency position is strong, even after paying the total dividend of 13p. We're above the top of our preferred operating range and have sufficient capital to support our expected growth over the next few years, while allowing us to continue to pay a significant proportion of future earnings as dividend, should use to do so. We benefited from a reduction in our capital requirement during the year, which has supplemented the organic capital generation, and supported the payment of a dividend slightly above earnings. A reminder of our approach to capital. We've committed through our dividend policy to pay a dividend of 70% of profit after tax under most circumstances. We would usually expect to pay a special dividend to the extent by which we feel we have excess capital. As you can see this year, we've maintained a level of capital slightly above our preferred operating range, which will provide useful cover for anticipated growth in 2020. Over the past year, we've significantly advanced our thinking about climate change, both in the risk it presents to us and the ways in which we can do our bit to slow down the increase in greater temperatures. We've engaged a specialist sustainability team from Mazars to assist with this from understanding our carbon footprint to mapping out the key milestones on our journey to net zero. Today, we've published our road to net zero road map, in which we set our ambition to reach operational carbon neutrality by the end of 2030 and full net zero by the end of 2050. We'd love to accelerate these deadlines and note that some elements of the plan, particularly when it comes to indirect emissions, remain outside of our sphere of influence or are contingent on advances in technology or societal evolution. I'm leading Sabre on this journey and have the full support of our Board and leadership team in doing so. Of course, despite ours and others' best efforts to reduce our impact on the environment, it remains likely that changes in global climate, which we've already seen, will continue. We've carried out a quantitative assessment of the risks we perceived to be associated with such change, be they physical, operational, transitional or related to our insurance liabilities. There's more detail on this within our annual report, but the headline is that we're generally well insulated from such risks for the short and medium term. And we must address the strategic challenges and opportunities presented by changing consumer behavior and potentially regulation over the long term. Thanks, and back to Geoff.

Thanks, Adam. So let's have a look at our strategy. Something that I think many of you have seen before. I guess the key thing here is our strategy is completely unchanged. We're going to continue to maintain a very wide underwriting footprint. We're going to continue. We hope to have market-leading underwriting performance. We're going to continue to focus on strong cash returns and dividends and controlled growth across the market. The sharp-eyed amongst you might note a few new words coming into that box, which is from our core products and new product developments. So probably a bit of a change as we've done our first new footprint expansion into new products for quite some time. We'll talk about how we've addressed those boxes as we go through. Underwriting profitable business, we still maintain, we think, an advantage over the market. And I guess the key box to me on this one is our mindset has not changed at all. Profitability is our target and volume remains an output. We have no change in our approach or attitude towards that. So also the competitive advantage. Again, many of you have seen this before, high-quality underwriting, strong data like, very strong data enrichment techniques. We believe our pricing is at the forefront of the market, including all the new insurtechs and all the new AI machine learning techniques you may hear about. Distribution, we're going to maintain our split between brokers and direct. We remain agnostic whether we sell direct or through brokers. We make the same return either way. Around 940 brokers, so we maintain a very wide network of brokers. The final one is cost advantage. I think claims handling often gets overlooked, and it's important to the insurance result and especially the link between claims, actuarial reserving and pricing, we intend to maintain and invest in our claims function still. I guess the final one on the bottom there, profitability over volume mindset is a really key one for us, and we'll talk over the next few slides about what we've done in market pricing compared to where we believe a lot of the wider market might be. We have done some material growth initiatives this year. So we've entered the motorcycle market at scale, but in quite a controlled way by partnering with some expert distributors. We've also significantly enhanced our footprint into the taxi market. As part of this, we've been able to confirm our criteria for these relationships going forward. Broadly, they need to be large enough to us to justify our committing time and resource to. All of these initiatives are managed by the senior team. We don't have a sort of junior team who are looking at these initiatives and building it up. We must have ultimate control over pricing. We must handle technical claims by which you really mean personal injury, which is where we think you gain or lose on profit in this market, and a partner with deep expertise in specific market sectors. And I'm pleased to say the deals we've done this year have fulfilled all those criteria. The first one was MCE that we went live with in November last year. Motorcycle is a really interesting market, we think. About 1 million, 1.3 million bikes in the U.K., relatively few underwriters and relatively few scale distributors. And I would say, unsophisticated pricing compared to car. It feels like it's 10 years behind car price and techniques. So we are pretty confident as we unleash our pricing expertise on this, we can make a real difference in the market. The distribution deal with MCE allowed us to enter with a very expert partner with fantastic claims handling capabilities. The new panel arrangement with Bennetts we're announcing today expands our footprint from MCE being broadly higher premium to Bennetts being broadly lower premium. We're going to have a good footprint across the motorcycle market. We've been looking at motorcycle for quite some time. You probably heard us talk in these presentations before that's the market we're looking at. We were frankly wondering how to get into it without the data, which is a question people have asked us in the past. Both of these deals have given us multiyear claims data, so we've been able to price confidently as we enter the market. We've also executed extremely quickly, the MCE deal went, for example, from serious negotiations to live selling policies inside 2 weeks. So I think we've also demonstrated our ability to execute these deals very quickly where we identify the right partner. Freeway is our partner in taxi. Taxi is another book where we've been underwriting taxi for a while, but knew we lack some of the underwriting knowledge. I would say the conversation we've had with Freeway will be able to last month or so have given us a colossal insight into how the taxi market works, beyond the obvious things you see in the data. So Freeway is absolutely hitting our criteria of a partner with deep market knowledge, where we can apply our price and sophistication, they can apply underwriting knowledge and frankly, fantastic systems and controls around that market. What this doesn't mean is we're taking any focus off our core book. Private motor and brand remains core to our business. We've maintained discipline in pricing. We consider that the market is still substantially underpriced for reasons that we'll come to in a second. As we go through this year, we'll look to balance maintaining our loss ratio, we take an opportunity of growth opportunities that are there. And that's probably a good chance to about what's happened in the market. So what's happening right now? Broadly, traffic volumes have bounced back as our belief to just about where they were pre-pandemic. And driving tests are recovering. As you know, we lost some young drivers, who just couldn't pass the driving test through last year. We believe they are now coming back towards us. The FCA, as you know, banned price walking from the first of January. Our view is that the market has approached that rationally, increased prices by about 5% to 7% on new business, which has given us the opportunity to grow quite strongly as we came through the year-end. We expect to increase our competitiveness further as we go through this year. Our view is some evidence of market rate increases in that 5% to 7% range for the FCA; very, very little evidence. If anything that's technically what we consider to be almost rampant claims inflation. And what's going to happen? You might have seen these slides before or this particular way in scale before. We couldn't actually make it any more tilted towards price increases and still fit it on the page, if I'm very honest. What are the deflationary factors, reduced personal injury claims, yes, but severity of that and the value of that is still going to be confirmed. And the claims that are being taken out of the market are at the very lowest end, they're the most insignificant claims that have been taken out by the new portal. I'm sure Trevor will have to talk a bit more about that later. Potential for permanent change in customer behavior? Possibly. We don't see much evidence so far. Potential for petrol cost to reduce miles driven, possibly. But if households are financially stressed, that may give increase in theft, in fraud, the other types of claims that might come through. The inflationary factors are all the things we've discussed before, continued claims inflation, that will lead to margin squeeze, FCA pricing review. FSCS levies, we think, will increase. There are companies who stop trading over the last year. And reinsurance cost increase. Reinsurance costs is a very interesting one, driven by 2 things: One is possible concerns about [indiscernible] discount rate change in 2024. Perhaps more interestingly is that reinsurers obviously charge a percentage of the premium charged by the underlying insurer. If you've decreased your prices across the markets, reinsurers have under-earned on the premium they're expected to gain, we have put our prices up as we'll demonstrate in a second. Claims inflation. Previously quoted 7.5% to 8.5%. Our belief is our best central view now is 10%, and that has potential to step higher in the short to medium term. An important point here is claims cost inflation is not necessarily a bad thing, providing your matching that premium inflation at the same time. We've been prudent, we think, on this over the last few years. And that prudent means we're now very strongly funded compared to many competitors who we believe may not have fully focused into the extent of claims inflation. This is our view of some of the drivers of claims inflation. Parts inflation 14%, paint inflation 8%, labor costs up substantially, mobility costs, that's the cost of keeping some on mobile after a claim up 30% and used car values up 30%. These are market-wide, not Sabre impact. I think that's an important factor to make here. So we think inflation running very, very hot, probably near historic highs, and that is what we are looking and have covered in our pricing. A bit more detail. On the bent metal side, that's fixed in the cars, part shortage. There are some numbers in the market suggesting there's 100,000 cars still waiting to be booked in for repairs. The key-to-key repair time, which is a key industry measure of how long from the time you take your car to repair to the time you get it back, extending possibly by a week to 10 days. That's another week to 10 days you're in a hired car. That's bad enough, but it's quite hard to find a hired car to give to someone as part of the courtesy fleet. So you get these mobility costs spiral in. Body shop staff shortages pretty significant wage inflation and some of the lower skilled people in body shops leaving for alternate jobs. So quite an employee's market. And clearly, overheads going up as well. We're seeing an example of surge pricing. This is almost an Uber-like type approach where if you want your car booked in, there's a GBP 250 fee before you start. That's happened across the industry, not just to us and inability in certain parts of the country to just physically book a car in. We're not suffering from that, but we believe some of our competitors might be. Injury, yes, as we said, lower frequency of low-value claims, increased frequency of other injuries. So actually wristlash replacing whiplash. Other things that are equally as hard to prove. Layering the claims costs, which we've described in previous sessions. We thought we'd see more claims elements added to a claim, absolute proof of that. Non-tariff claim value is not yet established by the courts. Credit hire is out of the reform process. So credit hire costs could still inflate highly, and we discussed before significant wage inflation in the care sector. You may recognize this graph from our last couple of presentations. This is what we thought would happen. We've color coded this to mark our own homework slightly on this stuff. So in here, we believe whiplash discounts have been reflected across the market as have we from the slide Adam showed earlier. Unwinding the COVID discounts, we think, has already happened across the market. Quote volumes have not yet improved, I'll talk about that in a second, and we don't think we've seen a significant market price inflation yet. So what's going on here? And I spent some time over the last couple of weeks phoning around some of my peers in other insurance companies, some brokers to get a feel for what's going on. One of the first things is quotes are down in the market by about 15%. So if you look at comparative periods, there's less quotes in the market. Some of that could be because of the FCA price in new forms. I think a bigger driver is lack of new car sales and new car sales drive people to the market to look at price. So people are competing in the market where there's less quotes there to start with. Underwriting directors and other companies are talking the market up. In broker conferences they are holding, there's a lot of talk about the need to put forward very significant price increases this year, but people aren't moving. And why aren't they moving because you end up with an invidious choice of do you choose to lose the top line or the bottom line. So you know if you took your price that the market doesn't follow, significant top line drop. If you don't do that, loss ratios are going to be running very hot. If you look at some of the nonlisted peers, COR simply very near 100% in a lot of other companies. So that market pressure is building and building and building. But we still haven't seen that big market change yet to cover claims inflation. So in our view, very confident of more price to come this year. Our approach, and I guess this is the Sabre difference in a nutshell, we are fully priced with our view of claims inflation, we have done and we continue to do so. We'll keep our core in our target range. As we move forward, we think we've had a very clear-eyed view on claims inflation. So we think we're very fully funded, as I mentioned, that will allow us to become more competitive as the market increases -- increases price this year. We'll continue to price what we think is a realistic case claims inflation. If it comes in, that we've been too prudent, we're going to deliver a fantastic combined operating ratio result. If we're right, and we think we are. We're fully funded and others may not be. Putting the final point is our new product lines was an advantage this year, but we're going to enjoy very significant growth, driven partly by our new bike and taxi partnerships and partly by growth in our core book. So to move to the summary. These are our 4 boxes. What have we done? We've maintained our wide underwriting footprint. We've continued to deploy new rating factors as we've gone through the year, we significantly enhanced our position in taxi. The dividend for the year, I think, hopefully, is in line with people's expectations and we've maintained a very strong capital position to allow us to give confidence in the dividend moving forward as we grow. Combined ratio inside our target range. And the controlled growth across the market, we believe we are going to see growth coming through. We have seen growth. We continue to see growth, and we'll see growth on our private car portfolio as well as significant growth from taxi and motorcycle. So as a summary, in our core portfolio, evidence of market price increase driven by FCA, not yet reflecting claims inflation in our view. A need for a lot more rate to go on this year across the market. We think inflation pressures are high and will intensify as we go through this year. We have fully reflected those in our price -- pricing changes. We're genuinely excited by the prospects for bike and taxi, new areas, great partners, great opportunity to develop profitable premium income. It's been a while since I've been had to say this actually. So we anticipate significant year-on-year premium growth while maintaining the position in our combined operating range. So after a few years of controlled declines, we gritted our teeth to come through the difficult years. We now think we've turned the corner and are off into a much more exciting future. At that note, I will invite my colleagues to come and look like the 3 wise monkeys who are sitting at the front here. So very happy to take any questions about anything at all that we've said. [Operator Instructions]

Alex Evans, Credit Suisse. Just firstly, on claims inflation. So that 10% for 2022. How does that compare to claims inflation that you saw in the second half of '21? Is that still the same step-up? Or is it slightly elevated then? And then maybe just on the whiplash reforms. We've been hearing some peers say around GBP 15 to GBP 25 benefit that they see coming through potentially, is that consistent with how you view it?

As to the claims inflation, I'll take first then, Matt, Trevor you will take. So claims inflation, I think we've seen claims gradually moving up as we come through the quarter from sort of 8% up towards the 10%, maybe slightly higher. Matt, anything you want to add to that?

Nothing to add, that covers it quite well.

And Trevor what are your views about whiplash?

Yes. I guess we put through our anticipated savings back in March, April '21 in terms of the whiplash reforms. What we have seen is a reduction in terms of claims made. Remembering that there are 3 years in which to bring those claims. So that reduction may not yet be fully booked. In terms of severity, very few claims have settled so far. The way that the whiplash reforms work is that there is a tariff for whiplash injury. And then any injuries in addition to that whiplash injury are dealt with as nontariff. And as an industry, we do not yet know how the courts are going to determine the valuation of those claims. They are some way away from yet being established. So there is a large question mark over what severity looks like going forward. So until we've got more claims settled and the determination from the what will be the court of appeal, the measure of the absolute saving is not possible to determine.

Thomas Bateman from Berenberg. Could you just talk a little bit around your expectation for the current year loss ratio, particularly for 2022 in context of the new business that you've written for MCE and Freeway? And on those new deals as well, are there any more new products that you can expect to come through 2022? And can you give a little bit more color on the Bennetts deal as well, please, in terms of premium loss ratio expectations? And finally, just on the payout, the dividend. Obviously, I think it was about 108% payout ratio. Was that driven by the change in the SCR? Or is this driven more by your confidence in the business? And maybe an expectation to grow that dividend next year?

Sure. I'll take the first one. Adam the dividend one and then Adam or Matt will take the loss ratio one. So I guess on the new deals, it's a bit like a London bus, I guess. We waited a long time, and 3 came along all at the same time. I have promised Matt and Trevor, I won't wait and do anything else in the short term. We've launched them very quickly. We launched them very well, but there's still some tidying up to do in terms of system stuff in the background there. So we have been inundated with requests to write new deals since we've announced those ones. We are setting out those hurdles. I mentioned in the slide earlier. They do need to be big enough to justify our time. We need to have an expert part. We don't want to compete with ourselves. There's no point in competing with ourselves and multiple distributors in the same sort of markets. So I'm very confident we can do more deals. We probably won't do any for a couple of months, we need to embed in what we've got. The most important thing for us is to be profitable on those substantial newer business that we've already done. We don't want to overstretch ourselves and have a lot of unprofitable business. But I'm very, very confident there's more deals to be done when we're ready for it. Adam, do you want to talk about payout ratio?

Yes. Well, on loss ratio first. We tried to keep the guidance pretty simple for 2022. And at a really basic level, we see expense ratio coming down and loss ratio going up for 2022. And through that, we will attempt to control it so that the combined ratio is effectively probably more or less where it is this year, at the higher end of our range. The moving parts there are slightly more complex than they've been in the past. So the motorcycle and taxi business is being written at a slightly higher loss ratio. We know that we've been writing our core book at the top end of our range in the past few years. And there will be growth train coming through. So -- we're putting a lot of new business on, we hope -- that will carry claims. Those claims will be open at the end of the year and the most part, and therefore, they will carry a risk margin, et cetera. So that will just bring some strain through. It's obviously quite normal for a growing insurance company to record that. So the loss ratio will be higher in 2022 than 2021. '21 also benefited a bit from the lower claims frequency as well. So that's another factor which is driving that loss ratio up into next year. So in the round, we think the combined ratio will be at the top end of our range. There is slightly more uncertainty in this new business. We're getting to know the market. We think we've got partners that can really help us control the loss ratio through that. Nonetheless, there might be a bit of volatility coming through. And obviously, as we start to learn that through the year we will update the market as to where that loss ratio is going. On your following question on capital, and why we've chosen to distribute what we have. We did get a reduction on our capital requirement during the year that gave us a bit more capital to decide what to do with. What we've done is we paid down to an amount which is above the top of our preferred operating range, which is not something we've done in the past. And that actually is a signal of the confidence in the growth this year. So we can see a lot of growth coming through on the new products and particularly potentially in the core motor, but we want to be ready for market pricing increases should that happen. We don't want to be constrained by capital. So we've left a little bit in the tank to fund that. Obviously, entering new products, the loss ratio could be higher, could be lower than we're expecting. So having a bit of extra capital in the bank to support that as well, it just means that there's a lot more stability in the underlying ratio and hopefully, a lot more to support a sustainable dividend going into the next few years as well.

Greig, you've been trying to -- Greig, wait for them to get the mic around, if that's okay? Up the front here if that's okay. I know Greig doesn't need the mic generally, but we'll give it a chance.

Sorry, I was going to -- you didn't answer the question on Bennetts in terms of net written premium and profit that is why I was just -- I was -- I'd wrote down, and I didn't see an answer that is why I was asking. All right. So that was the one question I had. The second one is the prior year development, I see it was higher than the normal range. Have you got any expectation for this year? You must have started looking at your BI doing it at this point. And the second point, excess of loss, you renew in June. What's your expectation for the renewal? Are you going to change the nature of those contracts? And then also, it was interesting, last year, you rolled out some new software in machine learning. I was wondering what the experience has been on that, how quickly it's been rolled out? And you see any expectation for an improvement either in top line or loss ratio from it?

Let me start on that Bennetts because I didn't mean to skip across that. That was a mistake, not a tactical thing. The Bennetts one is a bit different with MCE, but we're the sole underwriter. Bennetts is on the panel. I think there's 6 people on the panel, Matt? Something like that. So we will see what share of that panel we pick up. What we're pricing for is profit, not panel share. So I think we'll update you at the half year on how much volume we see coming through that panel. So it's just very early -- we have only been live for 3 weeks. The thing is we don't want to sort of try and extrapolate out from 3 weeks' worth of trading. On the XOL, our starting point will be -- obviously, we expect a huge discount from our reinsurance partners if they're listening. We know insurance is only getting more expensive. We have put our rates up. We have presented to our reinsurance recently to make sure they're aware that we, perhaps uniquely in the market, have been putting rates up over the last year or so heavily. I guess, Trevor, you lead a lot of that insurance stuff.

I guess one of the important messages is that [ 1/1 ] was quite bloody for those going through that renewal. There was some capacity in the market that was looking to either pull away or put rate up significantly. From our perspective, our original rates have gone through. We've managed to push that rate through. So that's a positive. On the other side, though, reinsurers will be looking forward to 2024, change in discount rate, sort of change of the discount rate in Northern Ireland yesterday, which was perhaps less optimistic than some had expected. And then as we've put in our deck, we're seeing inflationary pressure around care costs as well. So it's a difficult one to call at the moment in terms of where we are. We've got some fine balancing points between what we've done with our original rates but market inflation.

Is it going to be significant [indiscernible].

We would not expect so. I think your other question was around structure of the XOL. So we will start off looking at it on the basis of renewing on expiring terms but we'll look at other options.

Matt, there was a question about machine learning. Do you want to talk about what we've done or how we use that?

Yes. So the last year, we've brought in a new piece of software to help us in machine learning. It's something we've been working on for a little while, where we see the benefits actually helping to enrich our existing rating structure. So we continue to deploy learnings from our machine learning into our existing rating structure to help deliver the target loss ratio as you are. So rather than it given the overall benefit of reducing loss ratio it is actually to more blend with the existing rates to help continue to deliver our results whilst growing volume.

Yes. So what we don't need to do is move to a black Box where we have no idea what's going in within the black box. It's asking specific questions and in importing those bad analysis into our current rating structure.

The question is that is the benefit [indiscernible] fully in the system? Or do we expect some [indiscernible].

Yes. The question is also is also within the system or we've got extra IP. We think it adds to our IP. We take the existing data. We have the existing price in proprietary skills we have, and then we have machine learning on top of that as an extra layer of expertise.

And It's fully in the system?

You mean in the...

Yes, is it fully implemented?

Oh, we've been deploying bits of it. Yes, we'll carry on to deploy it. We haven't -- we're not going to deploy it in one big bang. We're deploying bits of it as we go. So we put the first couple of bits in this year. Matt and his team are working on more bits, which we'll deploy as we go forward. So we won't suddenly come out and say we've moved from our existing well-trusted rates to this new black box, where we have no idea what the difference is. It's going to be an incremental series of improvements. Nick and Andre here. Nick you're going first? Andre, you are next.

It's Nick Johnson from Numis. Two questions, please. Firstly, the expense ratio, which you say you expect to come down. Obviously, that's going to be helped by premium income growth. Just wondering what sort of cost growth we should expect from inflation and also presumably a bit of resource investment to manage the growth in the business. I think it will just help give us a feel for what sort of quantum of expense ratio decrease might be sort of possible? And the second question is on claims inflation. So the 10% number, I'm just wondering, does that include possible increase in fraud and theft over the next 12 months? What are the assumptions you're making around that? And perhaps you could say a bit about how you manage fraud as the business grows into new lines of business and overall?

Yes, sure. So perhaps if I start on resources, and then you can pick up the number part of expense ratio. So the benefits of the deals we've done is they bring very little additional resource requirement to us. We are going to recruit 1 or 2 people into Matt's team. So we don't want to lose focus on the core car book. We don't want to overstretch ourselves. So any sort of good actuaries out there looking for an exciting company to join, send your applications to Matt at the moment. And then the other area really is in Trevor's team where there's a variable demand, a demand that's driven by increase in policy count, so Trevor you're currently in the market for a few new claims handlers.

Yes, we are recruiting. I'd say, though, that we were overcapacity in claims department. We held on to the resource that we had sort of during 2020 and 2021, which has given us some headroom and the nature of the new deals with Bennetts, with MCE and with Freeway is that they've got some of that claims handling activity outside of the personal injury and complex technical claims. So it's not a straight line resource demand on it.

Adam in terms of how that [indiscernible]?

I think in summary, probably 3-ish points off the expense ratio. There are clearly inflationary factors coming through, and it's anyone's guess what that means in terms of overall base inflation. But we're in an inflationary market anyway when it comes to claims costs, et cetera, so prices will increase accordingly. So yes, best guess around that level around that level, around sort of 3-ish percent.

You asked about then fraud and theft. Theft has been a heavy claims cost, I think, for the last couple of years. I think the views around less miles driven doesn't take away theft of the car, doesn't tend to be moving when it's stolen. And fraud, no, sadly as people do become more financially stressed, you can't afford to fix your car. Does it go missing? Does it catch fire? If you offered a chance for a personal injury claim, are you more inclined to take it, albeit that is a little bit that's less attractive than it was a few years ago. Trevor, anything you want to say on that?

Yes. I think our strategy has always been to apply counter fraud measures at point of quote or as early in the policy purchase process as possible, and really using the claims piece as the backstop. We have seen a reduction in personal injury claims on the back of the reduction in personal injury fraud. There are a number of areas in terms of some of the new products that are coming in, where Matt and his team are able to enhance some of our controls and defenses there as well, which we see as a further sort of positive leverage around sort of the position that we took in. Cyclical fraud is expected. That is not in those figures that we're talking about in terms of claims inflation.

Andreas, I think you had a question?

Yes. I just had one question. You mentioned towards the end that quote volumes were still 15% below sort of pre-pandemic levels. I'm just thinking about your addressable market. Could you maybe just give a view on how you expect your core motor book to recover? Because in your premium mix, there's been a big negative impact from the changes in your addressable market? How long will it take to bounce back on your core book?

Yes, sure. Yes. So quotes are down, we can compare because we quote for everything. We can compare the quotes we do across the market, across the big 4 or 5 price comparison websites, and we compare year-on-year to 2020 and 2019. '20 is slightly odd year. We think quotes are about 15% down, Matt, as of last week. So these are up-to-date numbers. Why is that? There will be an impact from the FCA switching? If someone gets a renewal notice and it's not gone up, you might be less inclined to shop around. I think the biggest factor for us, especially is people passing driving test, that's improving, but it's on the backlog to work through and new car sales, probably being the big one. There is a dearth of new cars available. So we think our addressable market will increase as new cars unlock. We insure some new cars, but actually what that unlocks is the secondhand market, where it sort of waterfalls down so that we then see more quotes coming through from new people buying a new car to them. So we think our addressable market is unlocking already, but there's more to go as car sales pick up through this year. Does that answer the question? I mean, so we're going to see young drivers come back. We are seeing young drivers come back, but there's been a big backlog through last year. Car sales, all the reasons you read about in other places, still slow delivery of new vehicles.

[Technical Difficulty].

Yes, the question is was there a lag in the mix? Yes, I think there probably is for the start of this year. But with the -- if I look at new car sales, they are increasing new car deliveries happening. So we think that will catch up.

I think, Geoff, what's worth adding on new car sales is the impact of manufacturer coming out of Ukraine as well. We've seen some reforecast for what new car volume to be delivered during 2022, which is currently looking to be below 2021 numbers.

And there's a question, I think, Barrie.

Barrie Cornes, Panmure Gordon. Three questions, if I may. First of all, I appreciate that you want to underwrite profitably, of course. But just trying to get a feel for the motorcycle market, what sort of percentage share that you might have of that once you're up and running? Secondly, you've shown us on the screen one of the slides, which talked about a number of items to put upward pressure on rates. What do you think will be the key driver to get rates moving ahead of claims cost inflation? And thirdly, again, I appreciate that you commented that you don't expect any more partnerships in the next couple of months. But for the rest of the year, what sort of partnerships are we looking? Is it sort of wheels and engines again? And would it be via MGAs or opening up a direct book yourself?

Sure. Yes. So I think I'm taking most of those, unfortunately. The first one is around the underwriting the size of the motorcycle market. I guess it's kind of interest in this, that in private car, where a small but a specialist fish in quite a large pond. Motorcycle is a bit different, we're quite a large fish in quite a specialist pond. So I think we probably have potential to get to a pretty meaningful market share, maybe in the 10% to 15% share of the market, that may be slightly higher, I think we could become quite substantial. Different area for us where when we move rigs it does move the market, when we move rigs in private car, people are interested, just not going to move the mass market. So I think we could become quite significant of the motorcycle underwriter. Matt, tell them your thoughts?

Yes, I think so. Again, I think our average premium might be slightly higher. So GWP is probably a sensible target for.

Yes. On the partnership side, I think we're still going to stay probably on engines and wheels. At this point, we see plenty of opportunity there still. One thing you may have noted we haven't mentioned so far is our flex product, which I assured you was going to be live by the end of last year, which is not. And why is it not because we put all our resources under getting bike and taxi live. So the flex product is still to go live pretty imminently. We have a range of Insurtech type partners who are lined up to work with us on that flex product. That's going to be a really interesting market to explore. That's the insurance by minute, hour, day, potentially by miles driven. We think that will be the next area we'll probably look to test some partnerships in. Then what's going to get rates moving? I mean there was articles in today's insurance press, quite a big article I think in a post magazine talking about the inflation and the need for rates to start moving. Everyone I am talking to in brokers that is being told to expect significant rate increase. I think the pressure is there. There's no more pressure needed. I don't think many people are arguing with our view of claims inflation that I've spoken to recently. But if rates aren't moving, you've got to take a crash on the top line or the bottom line, if you don't start moving soon. Take your pick already. Adam?

I was just thinking on my earlier answers while Geoff was talking. On the expense ratio, 3% may have been a bit punchy. I think I was thinking more from the peak in H1. So maybe think sort of 2% or 3% depending on where we are.

So you actually had to have the calculator out while I was talking. Okay. Excellent. Alan?

Alan Devlin from Goldman Sachs. A couple of questions. Just a follow-on from Barrie's on the motorbike market. Can you give us some more color on the kind of the structure of that market? If you did a 10% to 15% market share, where would that put you versus other players? And can you get that market share with your current distribution agreements? Or do you need more agreements to get to that 10% to 15%? And then just on the claims side, is there anything you can do with your relationships with the body shops and outsourcing, et cetera, to manage the claims process to make sure you're not waiting at the back of the line for new car approves or get extended car hiring, et cetera, how do you manage that part of the process?

Yes. On the motorbike side, it's -- there's not many insurers and there's probably about 6 significant insurers. I wouldn't be surprised if we are the third biggest already -- would be my sort of take on this. And we haven't done a market analysis yet. We'll see where we are at the of the year when we have underwritten the policies. But there's 1.1 million policies, and we're growing pretty quickly. We're going to work out fairly -- fairly soon how big we got in that market. Do we need new distributors? I don't think we do. I think between MCE and Bennetts, we have 2 expert partners we're very happy to work with who have got differentiated distribution. So I think we feel we've got a really good entry into that market. On the body shops, as you know, we outsource to Innovation Group, Trevor will hand to you in a second. And this is probably the exact reason why we're doing this. We would be far too small as a company to have any influence on body shops. Trevor, you can talk about how we work on this?

Yes. So the steps that we've taken is proactively we've reviewed how much we're paying. So labor rates, we have increased those, recognizing that body shops are under pressure. We haven't, in the way that some of our competitors have, tried to reduce the margin that they're making by grabbing more of savings on parts and materials. We've also positioned ourselves as a work provider that's easy to deal with. So we pay quickly. We have also reengineered some of the processes so that there are fewer delays in terms of getting that vehicle in, the repair completed and the vehicle back out the other side. So it's very much about being an easy partner that they would prefer to work with us than a partner is more challenging.

And in terms of sort of buying power, we will call it that, we think innovation group probably give us buying power somewhere about 3 million strong.

Yes. Yes. Yes, absolutely. So on our own, as you said, Geoff, we wouldn't be able to leverage that sort of market share.

Yes. So we don't feel we have a scale disadvantage because of the way we set up our claims. Ben?

I'm Ben Cohen, Investec. I just wanted to ask one question. In terms of, I guess, how your pricing versus inflation in your competitors at the moment. If market conditions remain unchanged, would it be difficult for you to be able to achieve margin improvement into next year? And if the market does change, could you just talk us through a bit more about your thought process of improving margin versus growth in that scenario?

Yes, absolutely. I mean I guess our view is it's often better to write at a higher margin than to write more policies. So Matt, we sort of -- do you say anything on this one at a moment?

Yes. So as the market turns, we'll optimize between the margin growth. So we'll grow our premiums to the correct position to deliver the highest margin possible -- sorry, the highest profit possible. Therefore, we're not going to target growth and say it's more about targeting our bottom line, which its natural consequence will be growth.

The most important thing to us is actually GWP, not policy count, and I would be very happy to underwrite GBP 100 million, GBP 200 million policy at a 52% loss ratio. So we don't get obsessed by the number of policies we underwrite, but concerned about the policy and the premium number, and the margin we're making on that premium. So I think that's a slightly waffly answer, Ben. We'll look at it on a monthly basis and decide whether we should be going for more margin or more policy count than any individual point in the market. It is clear the market is not moving, we're not going to make a lot of inroads if we want to maintain sort of the current level. But I'm very confident the market is going to have to move this year. . Are there any questions on the phone? So I think, Tracy, you might be -- I'm looking at it, looking at the sky. I think a disembodied voice might arrive amongst us.

[Operator Instructions] There appears to be no telephone questions at this time.

We then got some fancy iPad. So [indiscernible] some questions on it that have been e-mailed in. Like, can you talk about the benefits you are seeing from new rating factors we've introduced? What is the catalyst for competitors to introduce pricing? I think I might have answered the second part of that already in terms of the catalyst. The benefit from rating factors. Matt, I mean, I think we talked about one publicly, so we can talk about that as a new factor?

So during 2021, we purchased an [indiscernible] strategy, the LexisNexis vehicle build data. So this gives details on the ADAS features that a vehicle has, which allows us to better segment risk based on these safety devices the car has installed in it rather than the market standard. So that gives us an advantage of being able to progress rates where those additional safety features or so reduces the impact of accident or the likelihood of accident.

And you may recall, we said about 1.5 years, 2 years ago, that was one of the things we were trying very hard, how you could differentiate on what was actually fitted to the car, not what came as standard fit. So we're definitely seeing those sort of things embedded into rates. We don't like to talk about new rating factors while we're doing them because we think it gives us an advantage but that one we have spoken about publicly. There's another question here. In light -- Adam, I'm sending this your way. In the light of robust solvency performance during very uncertain times, what are your thoughts around lowering your preferred SCR cover range?

Well, I mean, it's a really good question. Our range is pretty high relative to the risk that we perceive in the business. It's right in the pack. So there's nothing unusual about it. We always look at the range. We think about the risks, what's going to be happening over the future and the market expectations and the amount of capital that we should hold. We're certainly not signaling a change in the range at this point. In fact, we've chosen to hold 4% above our range, just given the circumstances we're in. And being in a potentially growthy period, it doesn't hurt to have a bit of extra capital in the bank to support that. So always remains under review, I don't see we're going to change it in the immediate future.

Yes. And a final question, how I think, was when do we think we'll see the cycle turn. Well, there is the question, I guess, from our point of view, we've taken all the action and continue to take all the action we need to take. So I guess that's more a question for when more competitors respond appropriately to the claims inflation, which I can't answer. So we are happy we've done everything we need to do and continue to do. Greig?

Yes. I'm sorry, one was just..

Just one second Greig. I know I could hear you loud and clear, but...

Greig Paterson, KBW. I think -- I'm not sure you answered the question on the prior year development and the sustainability, that was question one. The second one, I know not to name the new enrichment factors, but I wonder if you could give us an idea of how many new material enrichment factors you're working on now? Is it one? Is it 2 dozen? Just to get us a feel for the tempo? And then third, and it's something that I've been thinking about for a while, a few years back you were talking a lot about automated and connected vehicles. And I think that's burning in the background and it's become more of a prevalent theme in the medium term. I was wondering what you guys are specifically doing around that to make sure you're on -- leading the IP curve there, I suppose, is the thought?

I mean, how about we go around actually testing enrichment, the enrichment factor and how many of you maybe looked at over the last year?

Yes. So we're always looking for new enrichment factors. It's hard to find new ones, the low-hanging fruit has been taken. When it comes to enrichment factors, we speak to a lot of third parties throughout the year. We've recently tested one, which we're not going anywhere. So we need to make sure that any enrichment first of all provides loss ratio benefit, but also value for money. So there's a couple of checks we do, which ensures that any new factor is actually predictive risk rather than just sounding impressive. So we're always looking for new factors, and there will be new factors coming on during 2022, I am sure.

Anything you're working on now?

There's a number we're working on, yes, but not yet to deliver.

I think based in 2 ways, Greig. There's stuff we've bought externally. And Matt's always getting me to sign off new invoices or new bits of data that were tested on retro exercises. So that happens with a fairly regular flow. And the second one is the machine learning stuff, which is this is going to be the new version of enrichment for us as well. It's stuff we can find by cut in, slice and dice in our data in slightly different ways and importing that back on top of our existing strong rating approach. So probably enrichment in 2 different ways going forward. Adam, I think there's a question about the prior year.

Yes. I mean, I and my peers always try and guide to prior year releases on the basis of what a normal year looks like. And I don't think anyone has ever had a normal year. So it's very hard to do. What I've said previously that our business as usual runoff probably develops about 4% or 5% on a sort of static business basis, we are be growing. So the net earned premium, hopefully in future years will be higher. If we've got a small amount of claims on the books going into those years, then that might bring the prior year development as a proportion of earned premium lower. So lower than it probably has been this year. This year was right at the top of that 4% to 5% range as I talked about. So I would expect a little bit of strain coming through on the prior year development as we go through the next few years, but that is normal for a sort of growth of your business.

On the connected cars piece, we already tie into companies like LexisNexis who are trying to lead the charge. I'm trying to get connected car data. Someone asked about the type of partnerships we might do going forward. And that's exactly the sort of thing where we're talking to people who do have connections with car industries or with car data. They're the sort of partnerships we may do going forward. So we are very aware of making sure we stay in front of that wave.

[indiscernible].

Yes. I mean exactly that. So I think there's a lot of insuretech. I must get a contact in a week, a lot of them are trying to do the same thing, frankly. You see very similar shade to the same color, I would say. But some of them will be successful. So we do spend a lot of time talking to insurtechs. Most of them, we frankly decide probably won't generate enough volume to make it worth our while. When we find one that does, then we take it quite seriously. And that could well be the sort of partnerships we may be talking about maybe next year as we go forward. The advantage we have is that we're seeing very good at prices and very good at claims handling, and that's the bit that insurtechs generally can't do. They're very good at distribution, which were we don't claim to be the world's best at. So we're looking to deploy our skills in line with people who've got distribution and customer experience skills. So mic heading your way.

Just a couple of follow-ups, probably both for Adam. First of all, on the solvency range, what -- when would you be comfortable actually operating within that range if you did have strong growth this year , and can it cause your capital after dividend to go within that range, is that the kind of [indiscernible] do you foresee to operate within the range? And then the second on the sustainability and the net carbon neutral by 2050. What are you doing in your own business to try to get there either on the -- anything on the underwriting side or anything on the claims management side to help there?

Yes. Okay. I'll take the sustainability question first. It's an interesting challenge for us. We are a company with a very small operational footprint. We're only 150, 160 people in a single site. The vehicles we insure are not necessarily the most environmentally friendly. But we still think it's the right thing to provide a wide footprint of insurance to everyone that needs it out of their price. So the intention at the moment is not to shift our footprint towards less polluting vehicles at this stage. We'll continue to price every vehicle fairly. We're looking more inwardly at the moment. So yes, we've got a low footprint, but we're going to have to make that zero at some point. So what do we do on that? Enhance communication in the firm, fit solar panels, all of that kind of stuff is ongoing at the moment. But the real challenge for insurance and asset holders is what's going on in their investment portfolio. And if you look at our carbon footprinting, that's where the real strain is and there's only so much we can do about it. Fortunately, we've got a very short maturity on our bonds, so we can flip that up over time. We can look at what's happening in the market. We're not going to dive headfirst into a whole suite of sort of green assets, but it's just something we've got a bit of time to work with. And as I said in my bit in the presentation, the world will move around us and we just need to make sure we move in the right way according to that. When it comes to the solvency range, it's a really good question. I think that the level of growth that we've talked about in his presentation means that we will move back within this range within a year -- after the dividend that we pay out, whatever that might be. But if we keep a sort of a reasonable flow of those coming, then we will naturally just move back within that range. And we'll be quite happy to be there. We'll get more comfortable with the kind of business we're writing, the kind of growth that we're putting on the books. And therefore, we won't be shy about moving to [ 155, 150, 145 ]. We're still within that range, we still think that range is more than sufficient to cover any real risks that face the business.

Yes. I think [ 141 ], we might look at ourselves. But anyway, over [ 145 ], I think we'd be comfortable. And don't forget, by the time we pay the dividend, we've generated a whole bunch of more capital anyway. So we're never ever actually at that theoretical capital level. Yes, so I think we're happy to go quite a way into the range if we need to, and it's the right thing to do.

[indiscernible] Taxi and the first motorbike deal. Could you just give me an idea what the average premiums would be of those 2 versus your core book?

Yes. If I give you some very sort of rounded numbers. I think of bike is around 300, private car around 700, and taxi around 1,000. They [indiscernible] as quite helpful, isn't it? That is every answer about your questions in a straightforward way, Greig. Okay. Anything else before we finish? Okay, in that case, thank you very much for your time. Really appreciate you being here. Any other questions, feel free to feed through to me and Adam. Happy to pick them up afterwards. Thanks so much.