Edited Transcript of SBRE.L earnings conference call or presentation 7-Apr-20 8:30am GMT

So moving on to the operational highlights. We’re seeking to be boringly consistent in our focus on the things that really matter. We’re looking to track and cover the long-run claims and cost inflation. We want to optimize our profit within our COR corridor, broadly in that 75% to 80%. We’ll talk about in a few slides time, how we do that. We’re looking to understand the possible changes during the whiplash reforms. And I think as everyone on the call knows, we are prudent and conservative in our outlook on how much benefit they may deliver. We’re continuing to roll out innovative new rating factors, and we’re continuing to do that despite the fact we’re all working from home at the moment. Increasingly, we’re integrating machine learning into the claims and the underwriting process. And clearly, at the moment, we are responding to the COVID-19 operational challenges, but we’ll return to many of these points later in this session.

A few of the more interesting things we’ve done. Insure2Drive, our direct van product, is now rolled out to almost all price comparison websites. We’ve agreed a new distribution agreement with Saga to launch mid-2020. Clearly, everyone working from home gives us some challenges around the time scales on that, but we intend to get that away as soon as we can. We’ve appointed Goldman Sachs to help us manage our investment but still within very conservative guidelines. Our views have not changed that our investments are there to fuel our underwriting profit, not to be a key driver of our profit. Fully high levels of staff retention. Over 90% of the colleagues recommend Sabre as a place to work, which is fantastic. Perhaps a thing we’ve not spoken about much in previous years is we do look to reward our colleagues for supporting our success. We have a range of share schemes, bonus schemes. And we also pay an annual bonus, actually net of tax this year that was GBP 1,250 for all staff. Importantly, we continue to try and expand our underwriting footprint so we can offer our prices to more and more customers. At the moment, we’re up to that 98.5% quotability.

So at that point, I’m going to pause, and hopefully, Adam is out there somewhere and can talk about the financial results.

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Adam Richard Westwood, Sabre Insurance Group Plc – CFO & Executive Director [3]

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I am. Thanks, Geoff. I do hope everyone can hear me and is well. Let’s move straight on to a summary of our 2019 results, which is on Slide 9 of the pack. Top line premium came in at GBP 197 million for the year, so below 2018, but as Geoff said, a little ahead of our expectation, given the level of price increases that we put through during 2019.

Net earned premiums down, of course, but it does benefit from the earned through premium written in 2018. Being a net earned premium also benefits from a small decrease in our reinsurance rates from the first of July 2019 renewal. The combined operating ratio remains pretty healthy at 73.4%, albeit adversely impacted relative to 2018, both by claims costs and slightly increased fixed cost base, set against a reduced premium. We’ll talk in a few slides about how we think about writing premium at different levels through the cycle. Our investment return continues to reflect the market value movement on our gilt-based portfolio, and the gains in 2019 reflect market-wide movements in gilt yields. And I’ll talk a little bit more about investments as well in a couple of slides’ time.

Profit after tax is, as you would expect, a function of all of these metrics, with earnings per share being proportionate to profit. We’re declaring, as Geoff said, a total dividend of 12.8p for the year, which is approximately 70% of our adjusted profit after tax, and as such, represents our ordinary dividend as per our dividend policy. As Geoff mentioned, we’re deferring payments of any special element of the dividend at this point. We’ve discussed the dividend with our regulator in the context of recent communications from EIOPA and the PRA. We consider the dividend to be prudent and full within our own risk appetite. The distribution of capital we are making demonstrates our confidence in the robustness of our business and the strength of our balance sheet, while recognizing the challenges and uncertainties presented by the unprecedented environment in which we’re currently operating. Our solvency position remains very strong at 214% prior to the announced dividend and 180% after the capital required to fund the dividend is subtracted.

So if we move on to the next slide, there’s a breakdown of our underwriting performance. That’s Slide 10. As ever, we should look at our expense and loss ratio separately. Our loss ratio has continued to benefit from strong prior year releases, with a financial year loss ratio of 51.5%. That’s net of a prior year benefit of 11.3%, which is a little higher than in 2018. During 2019, the group sought to optimize profit by writing business towards the top end of its preferred combined operating ratio corridor, which is between 70% to 80%. And that, along with the historically high levels of short-tail claims inflation, resulted in a higher current accident year loss ratio than in 2018. At first glance, our expense ratio appears to have improved year-on-year. However, we’re keen to point out that this did benefit from a one-off reduction in an accrual held against industry levies, which reduced our overall expenses by around GBP 3.3 million. Without the benefit of that, our expense ratio would have ticked up a little year-on-year to around 24%, which is driven by an increase in underlying levy costs, an increase in our staff costs, both of which were effectively fixed against the lower top line. Together, these contributed around 1.5% to the increase in combined ratio this year. The increase in staff costs is a result of the combination of inflationary increase in salaries, earn through of share scheme costs and our commitment to run an excess of resource in our claims team in anticipation of future growth. The increase in industry-wide levy costs is, as I say, industry-wide. And as ever, we’ve implemented rate increases to cover the costs going forward. This all remains well under control, and we continue to cover the increasing cost of claims and underlying claim expenses in our prices.

If we move on to the next slide on investments and our conservative approach to risk. Our investment portfolio during 2019 will be familiar, being almost entirely invested in gilts and in cash. In January 2020, we appointed Goldman Sachs to assist with our asset management, with a mandate to maintain low capital, low-risk portfolio, still predominantly gilt-backed and to markedly increase our yield over the long term. We’ve chosen to step carefully into a revised portfolio and currently have invested 5% of our assets into highly rated corporate bonds. We’ve got no direct exposure to the equity markets and are well placed to ride out the current market turbulence. I should add that we’ve also chosen to increase our cash reserves since year-end in order to make sure we maintain sufficient liquidity and can easily meet the cash requirement of our dividend.

So if we move on to the next slide on capital generation. We have continued to generate significant capital during 2019, and we’ve carefully considered the level of dividend we’ll pay against the current market conditions. We are confident in our business model and continue to consider the best use of our excess capital to be — to return it to shareholders in a prudent and orderly manner. Our dividend policy remains to pay out 70% of our profit after tax and to consider an additional special dividend to distribute any capital we consider to be surplus to our requirements. We’re announcing a total dividend of 12.8p in respect to 2019, which means a year-end ordinary dividend of 8.1p due to be paid in May. We’ll keep our level of surplus capital under review as events develop and hope to return to our preferred SCR range as soon as it makes sense to do so. The solvency capital ratio, having subtracted the cash required to fund the dividend, remains a very healthy 180%. I would add that we’ve seen no significant adverse impacts on our solvency as a result of the current economic and market conditions.

Moving on to my last slide, approach to capital management, Slide 13. It’s really a reminder of the — our overall approach to capital management, and it will be familiar to people that have been in these presentations before. As I said, in normal circumstances, we prefer to operate within a capital range of 140% to 160% and generally manage this through the distribution of surplus capital via dividends. As by convention, this is measured as being the period end position less the cash required to fund any year-end dividend payment. And as the dividend is not paid until sometime after the period end, the actual level of capital held over the last 2 years has actually been considerably higher, as is demonstrated by the chart at the bottom of the slide.

And on that note, I will hand back to Geoff, who’s hopefully still there to talk through the market context.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [4]

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Thank you, Adam. Funny you say that, my own phone dropped out. I hope you didn’t say anything silly for the last 2 minutes. Okay. So we are, as usual, now going to go into some detail on our view of the current market position, and we’ll try and maintain our position as given the most [geeky] for the annual results presentation.

If we move on to the claims inflation side. Importantly, we don’t see claims inflation holding off. Our view is virtually the same as we had last year. And if anything, we think the long-term trend may be slightly upward. The fact is we’ve got here are very similar, and overall inflation, 7.5% to 8.5%. The bent metal costs go up 10%, theft to over 25%. And while PI frequency is flat, the severity is still inflating.

I guess, importantly, the mix of business underwritten may be a factor in different insurers having different views on the claims inflation number. Our best guess is that if you stop writing any high-theft risk policies, that might be worth 1% to 1.5% on claims inflation. So we can see how people may be at a level of around 6.5% compared to our quote. Importantly, over the medium term, we really don’t consider claims inflation a problem, providing it’s identified quickly and we can increase prices appropriately.

We’re going to the next slide, on Slide 16, to break out the bent metal claims in a bit more detail. This isn’t just about the parts and the cost of repairs, it’s also about the migration to credit repair models, which as I’m sure most people on the call know, are significantly more expensive than fixing the car ourselves through our own network. We’re looking to capture our own and third-party vehicles to mitigate these industry-driven increases. I thought it might be interesting just to break out, on the next few slides, some of the drivers of the bent metal cost inflation. I think as most people know, we outsourced our First Notification of Loss and management repairs to the Innovation Group. The Innovation Group facilitate repairs across a whole range of other insurers and partners. Our best guess is this gives us the same buying power as an insurer with about 4 million motor policies, which takes away any concerns we may have that our smaller scale leaves us exposed to a disproportionate claims inflation. This analysis is across all the other players, not just the Sabre portfolio.

So if you look on to the first one, which is the Ford Fiesta. The key information here is the manufacturer’s list price increases over the last 6 years. So if you take an example here, the front bumper on a Ford Fiesta has increased by 7% between 2018 and ’19. Probably slightly simplistically, front damage could be fault claims and rear-end damage, nonfault claims.

If you flip to the second slide, you can see a very similar thing showing a Vauxhall Corsa. If we take the headlamp cost, increasing by 23% year-on-year. I still haven’t quite worked out why a left headlamp is more expensive than the right headlamp. No doubt, Trevor can explain to us later, if people are interested. And finally, Volkswagen Polo. A very similar message across all these cars. And the key message here for us is that parts are getting significantly more expensive, even for fairly normal much of super-tech or very advanced vehicles. So this looks to us very clear that it’s one of the drivers of ongoing claims inflation.

If you look on to Slide 21, look at the premium inflation position, and this is our view of what will happen on premium. We believe rates gently increased in late 2019. I mean there was a sharp acceleration as we came into Q1. But I’m a little bit cautious here to say it could be a premium increase or it could be people moving away from the types of risks that we tend to underwrite. It’s probably too early to say what impact COVID-19 will have on us in the medium term. Our belief is any impacts from COVID-19 should be fairly short term, and we’ll talk about this in much more detail in a minute. Importantly, any of the short-term impacts are not changing the fundamental driver of claims inflation.

If we go on to next slide, Slide 22. Last year, you may recall we presented a seesaw, which showed the market pretty finely balanced between the drivers for price increases and decreases. That’s not how we see it this year. We believe it’s very heavily weighted towards a need for price increases. You can see on the left-hand side, the premium inflation factors. So that’s the underlying claims inflation. That will inevitably lead to some competitor margin squeeze. The whiplash reforms, we’ll talk about in a second. The lawyer response — the lawyer legal reforms, we think, will be fairly assertive. The FCA pricing review will have an impact. As with the industry levies around MIB, which perhaps doesn’t get much exposure, and reinsurance. We’ll talk about all these a bit more detail in a minute. On the other side, the only deflation, long-term deflation factor we see are the whiplash reforms. It seems unlikely to me that will happen this year, given the current operational challenges. So that still feels a little way off. And at best, we view that as fairly modest.

To dive into a few of those in more detail. The FCA pricing review, it was back to June. I suspect now somewhat later before we see the remedies. I have no specific insight into where these will go. We do know the FCA has been listening to the industry. They are aware of the equal impact between new business and renewals. To reiterate, we don’t utilize inertia pricing or propensity modeling. All of our prices are calculated purely from risk factors. The market claims, premium inflation has increased. We’ve touched on, we don’t see claims inflation holding off, and we will continue to seek to fully cover claims and other cost inflation as we go through this year.

On Slide 24, the MIB levy is one that perhaps doesn’t get spoken about terribly much. This levy is almost certain to increase due to the Ogden cost impacting the MIB’s normal claims. In addition, some of the recent Supreme Court judgments have left the MIB responsible for accidents occurring on private land involving uninsured vehicles. Our best view is an increase this year, with about 17% to 20% on the previous levies and probably more to come later. In our case, we’ve spent about GBP 3.5 million here at the moment on the MIB. On the FSCS, there’s been quite a lot of insurance company failures in ’19, not by people regulated by the PRA, I don’t think, in any cases. We’re aware that non-U. K. regulators are having an increased focus on solvency levels. Whilst the failures of some of the insurers is reasonably good news for us in terms of opportunities, there is a risk of an increase in the FSCS levy to compensate customers.

If we move on to reinsurance costs. I think we have well flagged in previous competitors’ presentations, very significant market price increases at the end of the year from mid-single-digit to in excess of 30%, driven mainly by the Ogden impact. It’s fair to say that the size of the portfolio and your claims experience will drive the level of that increase. Our renewal is not till midyear. We certainly wouldn’t expect to be at the higher end of those increases, but we are increasing prices now to ensure there’s no risk in a funding gap if we get a reinsurance price increase.

The whiplash reforms, we put in 2 or 3 slides out, which we’re not going to talk through now. We’re very happy to take any questions towards the end of this session or afterwards. Our view hasn’t changed that the outcome from this could be mildly positive or mildly inflationary. And it’s going to be sometime before those impacts can be accurately assessed.

So if we move forward, if it’s okay, to Slide 28. Very briefly on Ogden, not a big impact on our results. We are concerned about Northern Ireland. They are indicating a different discount rate of minus 1.75%. That would require very significant price increases in that market, if that were to come through.

On Slide 29, I think we’re really keen to start to talk about cost inflation rather than just claims inflation. So these are just a sort of small summary of things we see coming through from the insurance cost increase in levies and the underlying claims inflation. Our view is that cost inflation will be in excess of 10% this year. Many of those industry factors are not specific to us.

Okay. Now to change focus slightly, a brief reminder of our strategy, although I’m sure it’s becoming quite well known. So on Slide 31, our strategy hasn’t really changed at all. We want to maintain a very wide underwriting footprint, which, as we’ve discussed, broadly in excess of 98%. And we want to continue to be very defensive on our nonstandard positioning as well. We want to maintain our market lead in underwriting performance. That really means writing in mid-70% to 80% ratio range. Strong cash returns and I mentioned earlier, our approach to capital hasn’t changed. We want to maintain a capital range of 140% to 160% and return excess capital to shareholders as and when we can. And we still believe we’re going to get attractive growth across the cycle. We’ll talk about our view entirely on that in a minute.

I think it might useful this year to provide a bit more context to our pricing approach, which is on Slide 32. At any point in the cycle, we’re looking to optimize our long-term pound profit by balancing volume and margin within this target corridor. If such a thing as stable market conditions exist, we view 75% as our bullseye, but that might be optimal point between volume and margin. In weak market conditions, which is where we were for much of 2019, we’re very comfortable to be right at the 80% to the right-hand side of this graph. As market conditions improve, we’ll seek to take enhanced margin ahead of premium growth. So we’ll be looking beneath that from the right-hand side towards the bullseye. In our view, that is always the most profitable approach to take, not to chase volume first. We only agreed to expect to end up on the left-hand side of this graph in the low 70s in periods where we’ve had to increase rate as volume has outstripped our operational capacity to take it all where we’ve seen exceptional reserve releases coming through from some prior periods. So stable conditions, 75%; soft market conditions, very comfortable and towards the right-hand side of this graph.

We, as a company, tend to be pretty prudent, I think, in our approach to life. We tend to say we are very quick to react to possible bad news and cautious responding to what could be positive news. Our view as a risk-taking business prudent is being prudent is key. Our view is exactly the same as the last year. If it turns out we’re being too prudent on any assumptions, data will demonstrate that over time and allow us to reduce our rates. If we’re right, they’re still paying to come to the market. We’ve already taken our pricing action, and that will allow us to grow at that point. If we try and sum it up, if we are too prudent, we may give up some volume, but we deliver an asset expansion combined ratio result at some point. And we can then also reduce our prices and grow. If we’re overly optimistic and long, you can significantly undermine the combined ratio, and it can take years to recover from that position.

Okay. Perhaps on to one of the more fast-moving bits of the presentation, which is the summary and outlook. And this is all considerably more confusing than it was just a few weeks ago. If I summarize what we think we are today and where we were pre the COVID impacts. Very focused on our long-term strategy, prioritizing underwriting profitability and remaining centered on the mid-70s combined target. Signs of market price increases coming through the end of this year and into this year to cover off claims inflation, but not to close the jaws, in our view, between the gap that we’ll have opened up for many competitors between claims and premium inflation. We’re very comfortable with the pricing we achieved on new and renewal business in ’19. If market conditions had persisted, we’d have been seeking to move lower in our combined corridor, back to the bullseye I just described ahead of the more material volume growth as the market pricing continued.

Going to Slide 36 and haven’t really mentioned COVID-19 impacts, and I think we do now need to talk about our views on that. First of all, I do want to reemphasize, we fully appreciate it’s a difficult time for many individuals and companies. So just to give us a context to our approach here. We intend to continue to employ all of our colleagues on their full salaries. We do not believe we’re going to need to take any advantage of the government support currently available. We’re looking to proactively support our smaller suppliers and local stakeholders in the [Dawkin] area through this period, and that includes offering colleagues paid leave each week to support NHS or other volunteer activities. We’re trying to maintain flexibility in our approach to customer issues as we know customer circumstances could be changing fairly rapidly through reasons outside their control. But generally, trying do the right thing without undermining the ongoing foundations of the business.

So how might COVID impact our results? In the short term, there’s going to be a significant reduction in claims frequency, at the moment, around 60% down for these initial weeks. However, we do think there’s a potential subsequent significant increase in claims cost that could come through if parts being hard to source. A lot of parts are made in China, with about a 2-month lead time to get parts into the U.K. Body shops may have a limited capacity immediately post the lockdown period. And the risk of new claim types trends emerging. So we are concerned here that we may see increases in theft, in vandalism, potentially joyriding. And the risk of wider economic influence is also having an impact here. So for example, customers becoming financially stressed and leading to cancel their policies. We also view, as we go forward, a risk of a significant increase in personal injury claims, again, financially stretched customers. The whiplash reform is not happening in the immediate future, and claims management companies will look in to potentially take advantage of that situation could lead to an increase in exaggerated or unfortunately forging of claims.

On the next slide, we’ve repurposed our scales here, but just to show our view on how this might impact. So on the cost reduction side, the clear reduction in claims frequency on the right-hand side, probably worth about 0.5% on our combined ratio for each week this goes on. Balancing that is the parts availability, body shop capacity, potentially a significant increase in miles driven post the social distancing, increase in theft, financial stress, increased loss of earning claims and sadly, potentially poor management from claims management firms. Our view is these are short-term impacts, they don’t impact the underlying claims inflation drivers.

We’ll talk a bit more about the outlook in a second in terms of premium. Pick up from other direct influences on our business. I’d like to really pause and thank all our staff for this huge effort, a very successful effort they’ve put in to be working from home. They’re working highly efficiently. We haven’t missed a beat. We have no backlog building up. We have no phone delays coming through. Our IT team has put in a fantastic effort to put in place a radically different BCP plan, and we do now have all of our staff working from home completely effectively.

We’re going to look to prioritize essential workers claims if required. We’re taking a sympathetic view towards some risk detail changes. Some example being taxi drivers becoming food delivery couriers. We’re fully supportive of the ABI principles that were set out in mid-March about how we help customers during this period. Facing things as a whole, we’ve done some extensive scenario modeling. The example we put in the — in an asset, a 50% drop in premium is not designed to be a planning assumption, it was to show an extreme position and even in a very extreme position, we will still be capital generative and profitable going forward. As we sit here today, people are continuing to buy policies. We haven’t seen a massive step-up in cancellation of policies. What I do believe is we’re going to see lower volumes in the market for the next few weeks. Some research came out yesterday on car sales being down by 20% or 25% year-to-date, and I think 40-odd percent in March. We’re seeing the volume of quotes to aggregators being around 20% lower at this stage. What might that do? We may see some competitors start to over discount because of the short — relatively short-term benefits of the lower claims frequencing. And we may see potentially some competitors start to chase that lower volume through discounts. Our approach is we need to stick to our underwriting discipline and continue to write at the combined operating ratio, and if we need to, let the top line move around a little bit.

Our investment case in these market conditions is probably just worth touching on. We’ve got a very consistent and stress-tested strategy that’s delivered very consistent profitability in a fairly narrow band across all parts of the cycle. We have, I think most of you all know, have no debt. And right at an 80% combined ceiling lets us generate significant capital and leaves us confident we can continue to pay an attractive dividend. The vast majority of our earnings generated from underwriting profits, and we have very little dependence on investment income to drive profitability.

On Slide 41, we’ve restated our dividend decision, but I think Adam has given that a good explanation in his section. I won’t touch on that again now.

On the outlook slides, we’ve put in 2 slides. The outlook we would have given about a month ago, which would broadly have been a potential base case of margin enhancement this year before potentially modest top line growth. On track to deliver an earned combined ratio, very slightly ahead of our long-term 75% target before that reduced to below in our combined range during ’21. Very strong capital generation to fund growth to support dividends. And having covered and continue to cover claims inflation, being well positioned to take that margin and volume growth.

Clearly, the COVID-19 impacts on Slide 43 have thrown in a great degree of uncertainty, I would say. The premium outturn for the year must be uncertain. Reduced car sales and customer behavior may, in fact are, currently driving lower quotation volumes. As I mentioned, the risk of competitors chasing that volume through discounts. In my view, this may set the market — turn back, the markets have to turn back by up to 12 months. We will continue to price rationally and maintain our COR corridor. I think it’s far too early to talk about windfall profits or excess profits for the year. We can see it being a bit of a tale of 2 halves, excess profitability in the first half, unwinded in the second half of the year as some of those claims inflation factors and potentially heightened inflation factors coming to the floor.

So my best guess, as I sit here today, is a combined operation ratio slightly above our long-term average and a premium income, somehow we decided for that. And clearly, we’ll update as we get more clarity as the year develops. All right. To state the obvious, we don’t have a crystal ball on this. The impacts aren’t yet known. The key thing for us is staying focused on righting our combined operating range. I would say we expect to emerge from this period in a very strong and well-positioned state, ready to take growth as the market turns.

I think at that point, I’m now going to draw a breath, and hopefully, we have a way to take questions, some of which I’ll be handing on to Trevor and James. So I think perhaps, the operator can help us take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have comes from Ben Cohen from Investec.

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Benjamin Cohen, Investec Bank plc, Research Division – Analyst [2]

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I have 2 questions, please. Firstly, sort of backing out your average premium per policy after last year, it looks like there was a fall in the average premium. I was just wondering if you could give some color around that, presuming it relates to risk mix. And any outlook you could give for this year?

My second question was in terms of reserve releases, you had higher reserve releases last year. I just wondered the extent to which your sort of updated guidance for the loss ratio, for the combined ratio, reflects a view that you’re taking about the sustainability of reserve releases at similar levels. And maybe you could just put that into the context of the sort of benefits that you’re seeing at the moment from the social distancing and how that could come through in terms of reserve releases?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [3]

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Yes. Sure. James, perhaps you can take the third one the second about the reserve releases and social distancing. On average premium and risk mix now, average mix changes all the time. It depends partly which of our distributors are pushing hard on volume. Some of them tend to target slightly lower average premium than others. I would say, overall, as we’re coming through the end of last year, average premium grew pretty strongly. We were knocking on the door of GBP 700 as we came into this year. That does change all the time, Ben, depending on the mix of business we’re writing at the time. And Adam, on the reserve releases and how they impact our numbers, do you want to comment on that?

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Adam Richard Westwood, Sabre Insurance Group Plc – CFO & Executive Director [4]

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Yes, just briefly. So our reserve releases or prior year reserve movements benefits our combined ratio to the tune of 11.3% for 2019. I have stood here a number of times and said that those reserve releases are going to move from exceptional to BAU levels in reserve release. It can be difficult to quantify and particularly difficult to guide on the timing of that. Clearly, we’ve been fortunate that those exceptional releases haven’t dried up in 2019, but I am putting strong guidance towards the fact that they will reduce during 2020. They are clearly, by nature, exceptional. So I do expect those to come down, absent any other factors during 2020, which should be part of the reason we’re guiding towards a COR for ’20, which is above that for 2019. So yes, I know — what I mean, what I’ve said previously is that when the reserve releases were at 10%, probably about half of that was the sort of the run off of just prudent free reserves and half of that was exceptional. That’s still not a terrible rule of thumb. And like I said, I do expect them to come down in 2020.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [5]

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Okay. James, the third question was around social distancing, and whether that has any impacts on our sort of reserves, I think.

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James Ockenden, Sabre Insurance Group Plc – Chief Actuary [6]

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So I’d just echo Adam’s comment on the reserve releases, but to talk about social distancing. I mean I think like every other insurer, we will be looking at our claim statistics, our previous reserving statistics and looking to see, are there any trends emerging? Clearly, social distancing started on the 23rd of March. So it’s quite early to say. So whilst we see some operational benefits, we kind of need to sift out the volatility potentially because it’s 13th of the first quarter. So this is something we’re going to keep a very close eye on. I mean our approach to how we treat claims within the claims department has remained the same, and the way in which we reserve has remained the same. So I think we just need to keep a very close eye on the diagnostics and see things as they emerge, as the data comes through. And I think as Geoff alluded to, there’s lots of potential inflationary trends that may arise as a result, both from a frequency and a severity point of view. So again, we’re just remaining mindful to this and looking for things in the data as it becomes available.

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Operator [7]

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The next question comes from Ming Zhu from Panmure Gordon.

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Ming Zhu, Panmure Gordon (UK) Limited, Research Division – Analyst [8]

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Just a question. The first question, you just mentioned that you’re guiding slightly higher combined ratio in 2020 than 2019 due to reserve release is not going to be as exceptional as before. So I get that bit. But what I can’t get my head around is you said you’ve increased your premium pricing around 10% last year, which is more than the claims inflation, 7.5% to 8.5%, you’re expecting. And should that sort of help your combined ratio for this year? And I mean, that’s the bit I’m sort of missing, maybe I don’t think I quite understand that bit. And second is the special dividend. Could you give a little bit more color in terms of the timing and amount? So are you going to pay for that special dividend and together with the interim dividend? Or is it going to come as a separate interim? And is that still going to be 5.2p or a bit more than that?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [9]

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Okay. Thanks, Ming. If I start, Adam, perhaps you can chip in if you want to add at the end. I think on the premium piece and claims, what we’re really saying is claims inflation is going to say — let’s say, around 7% to 8%. You then need to add on the reinsurance cost increases, potentially the MIB increases. So our view is that the total cost increase is going to be over 10%. So we believe we are broadly keeping track with the overall cost inflation picture. So we would have expected to be having this year to be a bit — move our way down the combined operating range a little bit. I’m not sure we’re going to be able to sustain putting through very significant price increases in the current market conditions. So I think we need to break out cost and claims inflation, think about cost inflation as we look at our price increases.

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James Ockenden, Sabre Insurance Group Plc – Chief Actuary [10]

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Geoff, it’s James here. Just — sorry, just going to see if I could just add to that. I think, yes, I’ll talk about — when we view claims inflation, we tend to do a — probably a low — we don’t just look at the past 12 months. We tend to take a — quite a medium-term view of claims inflation. And clearly, the direction of travel has been upwards. So if things continue, I think all else being equal, we’d expect claims inflation itself to increase.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [11]

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Yes, thanks, James. On the special dividend question. I think what we’ve said in here is, well, a couple of things really. One is our approach to excess capital hasn’t changed. We think excess capital is better off in the hands of our shareholders than it is us keeping it under the sort of mattress effectively on very low returns. I don’t know when the situation is going to become clearer. It could be 2 weeks. It could be 2 months. The Board wants to return excess capital at an appropriate time, but I think I’d be foolish at time put a timescale on that given we’re right in the midst of kind of the current uncertainty.

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Ming Zhu, Panmure Gordon (UK) Limited, Research Division – Analyst [12]

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How about the (inaudible)?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [13]

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Ming, I think we have been showing in the RNS where we were. We think the COVID-19 is going to generate an increased level of uncertainty for the rest of this year until we understand what the net impact will be first half benefits and the second half’s unwinding of those benefits simplistically. So I think we showed you where the Board was a few weeks ago. I think the Board will have to think about that special dividend as and when things qualify and as and when we get a better view on how the year looks. So I wouldn’t want to overspeculate at this point.

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Operator [14]

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Your next question comes from Andreas van Embden from Peel Hunt.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division – Financials Analyst [15]

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I just have one question. Just interested in your stress test scenarios. I know you sort of gave an extremely worse case one with a 50% decline in premium. I just want to see within the range of stress tests you sort of run internally, to what range does your solvency ratio fall from that 180%, please?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [16]

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Yes. And I’ll just give Adam a chance to go his sort of right numbers in his head. I mean so the 50% we put in there is really saying, if we went back a few weeks, our big concern was a very significant amount of cancellations. If the lockdown had really hit to a point where we weren’t able to do the car, that doesn’t seem to have occurred. So we wanted to say how bad could it look if half our customers canceled and stayed canceled for the rest of the year. That was not a planning assumption. That was designed to be a very extreme scenario. Perhaps, Adam, you got to try to gather your thoughts on that right now.

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Adam Richard Westwood, Sabre Insurance Group Plc – CFO & Executive Director [17]

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Yes. I mean it’s been an interesting challenge for us to think through the impacts of the current environment. Most insurers or asset holders will probably look at the variations in the values of their underlying assets that could lead to solvency strain and sort of how their trading might be effective. If we take one and then the other, on the asset side, as I said, we are primarily invested in gilts. We’ve got considerably more cash on our balance sheet now than we had at the year-end to make sure that we’ve got enough liquidity. And we do have a small amount, so GBP 10 million, GBP 15 million worth of high-quality corporate bonds on the balance sheet. We’re not exposed to the equity markets. Clearly, gilt yields can move around as can the values of corporate bonds. We are asset liability matched to the extent we can be against the technical provisions. So movements in the low-risk assets are reflected in the movement in the discount rates, in the Solvency II balance sheet. And therefore, volatility on that side doesn’t really call a huge amount of capital strain. I am not going to put an exact number on it at this point. There’s some indication in the accounts. But generally, we’re well protected against movements in asset values. So the other thing is the more operational and trading. Things we’ve looked at has been, for example, the reduction, the extreme reduction in premium that we called out in the RNS. In that scenario, we were still generating capital. So we were still writing enough business to cover our cost base and a little bit more. So there was no real immediate or indeed long-term shock in that perspective. But clearly, that impacts our ability to distribute capital in the future because we wouldn’t be earning quite so much.

Where else do we look? I guess increases in loss ratio, unexpected increases in claims, which happened too quickly for us to be able to price. Again, we’ve got a considerable amount of headroom on our combined ratio at 70% to 80%. We — there’s 20% to 30% of headroom for loss ratio to deteriorate, and we don’t think that it is likely to deteriorate by that much. So again, we would continue to generate capital in that scenario, and therefore, there wouldn’t be any immediate, significant strain. We then look at things like counterparty risk and what might happen there. We don’t have a significant amount of counterparty exposure on our balance sheet. Our brokers generally pay us for the premium upfront, and therefore, the outstanding balance on them is pretty small. We do run finance policies on our direct book, which — our direct book is 30% of our overall book. So again, there’s not a huge amount of exposure there.

Where are our big counterparty exposures? I suppose the reinsurance market. That said, that’s a well-diversified reinsurance panel. They’re all highly rated. They’re all clearly under a significant amount of scrutiny at the moment. And we would need probably more than one of the reinsurers to fail to cause a significant movement in our capital base, which we consider to be unlikely. But even if they did, that wouldn’t take us below 100% of our capital requirement. So that’s the kind of thought process that we’ve really had on modeling the impact of COVID. It might seem sort of mildly simplistic, but when you think about the nature of the investments, I think it makes sense to think about it in that way. So yes, so Geoff, that’s my summarized feel on you could say our…

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [18]

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I think just a bit of a context. I think 180% going to 160%, there’s about GBP 12 million, Adam? Something like that?

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Adam Richard Westwood, Sabre Insurance Group Plc – CFO & Executive Director [19]

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Yes, that’s right.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [20]

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So down to 140% would be GBP 24 million. So we’ve got a lot of spare capital before we go anywhere near a danger. And as you go all the way down to 100%, we would be that sort of GBP 48 million, GBP 49 million. So we’ve got a lot of spare capital here before we get concerned about our capital range. Andreas, did that answer the question?

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division – Financials Analyst [21]

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Yes, yes, yes. Very clear.

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Operator [22]

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The next question we have comes from Nick Johnson from Numis Securities.

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division – Analyst [23]

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Just one or 2 questions, one follows on from Andreas, actually. So in terms of how insurers are responding to COVID-19, there’s an article on BBC today saying that U.S. insurers are handing back some premiums to customers to reflect lower claims during lockdown. I appreciate that U.S. is a very different market, but is there any sense that you could do something similar in the U.K? Any discussions that you’re aware of at the moment? Perhaps you can just talk around the issues on that, please?

And second question was on rollout of new rating factors. I was wondering if you could elaborate a bit on where you are on those. Were there significant factor in the 2019 numbers? Or is there really more to come in 2020? So where can we see the likely benefits of those new factors?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [24]

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Okay. Yes. Thanks, Nick. Yes, I mean, obviously, I think all states and some of the people in the states have started giving sort of 2 months’ worth of — or a discount for 2 months. I think in the U.K., that would be a very, very brave thing to do, given we don’t know what the full year impact is. So we can see some impact for the last few weeks. So as we’ve mentioned in our presentation, we can see those benefits in the short term being unwound in the second half, and we don’t know what the net position of those 2 competing factors will be. So I don’t think we’re in any position to say we’re making surplus profits at this point. I think the U.K. market is also a bit different. We mentioned that I can see in the market, price discounting going through. So I think there’s already market movements for some insurers, discounts in the price in — on the assumption there may be lower discounts coming through. So Nick, I think to answer that first question, I think it would be — I don’t think we have any data that proves we could possibly discount premiums at this point. On the rating factor side, James, do you want to say anything on that? I know you’re not going to give any details of what you’ve actually done, but any more general comments?

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James Ockenden, Sabre Insurance Group Plc – Chief Actuary [25]

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So we did introduce a small — I mean, I think, Nick, the — it’s pretty much more of the same. So we — obviously, we’re continuously tweaking the rating across the portfolio responding to changes in risk. We did introduce a new factor which looked at relationships between individuals and the policy rates any more than that. So it’s quite a small factor, but we believe it was predictive of — additionally predictive of risk on top of our current modeling. We are continuing to look at new data sources. It is becoming more tricky to find new bids, but then we have something in the pipeline. We’ve had it in the pipeline for a little while, but it’s — the devil is in the detail of deployment and how we deploy it. So hopefully, we will be looking to get that done this year and take the rating forward even further.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [26]

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Thanks, James. Did that answer your question, Nick?

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Nicholas Harcourt Johnson, Numis Securities Limited, Research Division – Analyst [27]

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Yes, I’m happy with that. That’s great.

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Operator [28]

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Next, we have Trevor Moss from Agency Partners.

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Trevor Moss;Agency Partners;Analyst, [29]

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A very comprehensive presentation, Geoff. A couple of things, if I may, credit repair. Can you talk a little bit about that, how prevalent it is becoming? As a trend, how you might tackle it? And how much more expense sort of add to claims? It looks slightly worrying to me, not that it’s necessarily a particular issue, but it’s an interesting one. The second thing is, just could you talk a little bit about Saga, what you’re intending to achieve there? What sort of policies you think you might pick up through Saga?

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [30]

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Yes, sure. Perhaps — so if I take the Saga question first and then Trevor, you can take up credit repair. So with Saga, I think, quite interesting. Obviously, it’s old people over there. Slightly less smart [audience — the target audience, they’re very saggy.] I think what we see is the full year — the actual full year policy is a differentiated offering, which I think is going to be quite attractive to certain customer demographics. Saga, as I understand it, and I don’t want to talk too much about their business, generate more business on a direct basis than through aggregators. So that’s quite an interest in sort of new customer pull but perhaps we don’t currently get to get to sort of fishing. So I think we can add value by — to Saga by either providing insurance to some of the more largely cars, some of the more nonstandard customer risks. And I think what Saga brings to us is a slightly different pull for the customers.

Trevor, do you want to talk about credit repair?

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Trevor Webb, Sabre Insurance Group Plc – Claims Director [31]

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Yes. Okay. So when we talk about credit repair, we talk about the cost of repairs, we also talk about some of those additional costs, for example, vehicle recovery and towing and storage charges. So we’re seeing 2 things going on, really. And if I look back over the last 5 years, we’re seeing a greater penetration of credit repair. So a great proportion of the claims are being subrogated or pursued against us on a credit repair-basis. And that’s gone up year-on-year. I’m looking at some data since 2014. So that’s gone up year-on-year over that period of time. And in addition, the cost of the repair through that model is significantly higher than the cost of the repair that’s being recovered if it goes through a traditional insurance model. So the inflation levels on repair are exceeding the inflation of straightforward bent metal. How can we deal with it? The way in which we look to deal with it is that we look to capture that innocent third party and manage that individual’s repair through our own processes and contain costs that way. The extent to which we’re successful is — does vary, but it’s something that we’re highly focused on addressing so that we can look to control that claims inflation.

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Operator [32]

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There are no further questions on the line.

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Geoffrey Richard Carter, Sabre Insurance Group Plc – CEO & Executive Director [33]

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Okay. Well, in that case, thank you all very much for dialing in. We finished just inside the hour, I think. Hopefully, that works okay for you doing it by phone. Any other questions we’ve not been able to pick up now or if it wasn’t clear, me and Adam are available all day, so please feel free to get in touch. Thank you very much for your time, and hopefully, be able to see you in person next time. Thanks a lot. Bye now.

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Operator [34]

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Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect your lines.