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Edited Transcript of ADM.L earnings conference call or presentation 5-Mar-20 11:00am GMT

Full Year 2019 Admiral Group PLC Earnings Call

London Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Admiral Group PLC earnings conference call or presentation Thursday, March 5, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair Hargreaves

Admiral Group plc - COO of UK

* Cristina Nestares

Admiral Group plc - CEO of UK Insurance

* David Stevens

Admiral Group plc - CEO & Director

* Geraint Jones

Admiral Group plc - CFO & Director

* Milena Mondini de Focatiis

Admiral Group plc - Head of UK & European Insurance and Executive Director

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Conference Call Participants

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* Andreas de Groot van Embden

Peel Hunt LLP, Research Division - Financials Analyst

* Andrew John Crean

Autonomous Research LLP - Managing Partner, Insurance

* Dominic Alexander O'Mahony

Exane BNP Paribas, Research Division - Research Analyst

* Edward Morris

JP Morgan Chase & Co, Research Division - Equity Analyst

* Freya Kong

BofA Merrill Lynch, Research Division - Research Analyst

* Greig N. Paterson

Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst

* Ivan Bokhmat

Barclays Bank PLC, Research Division - CEEMEA Banks Analyst

* James Austin Shuck

Citigroup Inc, Research Division - Director

* Jonathan Denham

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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David Stevens, Admiral Group plc - CEO & Director [1]

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Great. I think we're at 11:00, so we'll kick off. Good morning. Thank you for coming to Admiral's 2019 full year presentation. Sorry about the late change of timing. It was to accommodate the Aviva results presentation. And thank you to the ABI for hosting.

This morning, Admiral announced that I've given notice of my intention to step down as group CEO in 12 months time. Now is not the time for valedictory comments of any length, but I'll briefly touch on why now, and there are 2 reasons. One reason, that I learned from my predecessor that it's better to go when people are asking why now and why not sooner. And the other reason is beside me on the podium here, a senior management team that deserves the credit for much of the good things that have happened over the last few years at Admiral and is more than ready to step up into a bigger role, led by the very talented Milena Mondini, who will be a brilliant group CEO when she takes over until the 12 months time.

So that team is going to talk today. Geraint will pick up the key numbers. Cristina will talk you through the core U.K. business before Alistair does a deeper dive on the claims situation in the U.K. car insurance market. Milena will talk about our comparison businesses and our international insurance businesses before I return for a few words on the strategy.

Over to Geraint.

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Geraint Jones, Admiral Group plc - CFO & Director [2]

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Thanks, David. Good morning, everyone.

I'm going to talk about the significantly higher 2019 profit and give some detail on the very positive U.K. claims experience which was the key driver of the result. And I'll highlight our continued strong solvency position and finish up with the increased final dividend. Let's start with a look at some of the highlights from another strong set of results.

On the top line, firstly, more modest relative growth than in recent years, though at the very similar percentages to the ones that we showed at half year; strong increases in absolute terms; nearly 0.5 million customers added since the end of 2018; and turnover up to GBP 3.5 billion. Profit was up 10% to GBP 526 million, a very strong result boosted mainly by U.K. motor but also by U.K. household and comparison. EPS was up 8%. Return on equity, still a pretty positive result despite a small reduction year-on-year. And dividend, we propose a final payment of 77p per share, which takes the full year to GBP 1.40, which is 11% up on 2018. And post that final dividend, we maintain our usual and very strong capital position with a solvency ratio of 190%, which is in line with the position at the half year.

More details on all that as we go throughout the presentation. Moving on to a generally very positive picture of top line progression and starting with U.K. motor at the top. In line with the message at the half year, the core business is marginally bigger in terms of turnover and customer base, and that's because of our rates moving up throughout 2019 in response to the claims inflation that we will talk about shortly. Decent growth for U.K. household, moving through the 1 million active customer mark. Household now makes up 15% of the group's total customer base, turnover heading towards GBP 200 million.

Good numbers from our international insurers, although the underlying picture is a bit split between Europe and the U.S.

On customer numbers, for example, in Europe we grew by nearly 20%, whereas the U.S. was flat. 20% of the group's customers are now outside of the U.K. And not to forget a very nice performance from our comparison businesses with 14% revenue growth. On the loans business, balances were up 50% year-on-year, more gradual in H2. And revenue in Admiral Loans more than doubled.

Next up, let me explain what's led to the 10% increase in profit. And this table shows the year-on-year movements for each of the main parts of the business.

And starting with U.K. insurance, which delivered a profit of almost GBP 600 million, a touch over GBP 40 million ahead of last year. GBP 30 million of that increase came from the U.K. motor business. And it's worth remembering here that the changes in the Ogden discount rate over the past few years have impacted our results for both of these periods. And as a reminder, 2018 benefited by GBP 66 million and we assumed the Ogden rate will be 0. And then 2019 was hit by GBP 33 million, and we corrected for that slight optimism when the actual rate was confirmed mid last year at minus 0.25%. And so the underlying profit increase for U.K. motor is substantially more than GBP 30 million, although the changing Ogden rates make sensible comparison a little bit tricky. Thankfully, we'd expect stability, at least from the Ogden rate, in the coming years.

What's led to that material improvement is some really strong back year ultimate loss ratio development, and those moves have in turn led to some big reductions in the booked loss ratios.

A similar picture to the half year but even more positive in H2, and I'll talk more about loss ratios and releases shortly. Also within that U.K. insurance total, our household profit was GBP 8 million, around GBP 11 million of turnaround since 2018, which you'll probably remember was quite badly weather impacted.

Moving down. The international insurance result was flat year-on-year, just a tad under breakeven. And as at the half year, there are 2 parts to that, with the European insurers improving their overall result whilst growing strongly, although a deterioration in loss ratio in the U.S., the Elephant results, to be somewhat worse in 2019. Our comparison profit doubled to GBP 18 million, which was a very pleasing result. Confused.com led the way there with a more than 40% increase in profit. High profits in Europe and a lower loss in the U.S. also helped.

Admiral Loans met a loss of GBP 8 million, which is as guided. And the other costs, at the bottom, up GBP 8 million year-on-year. And GBP 6 million of that increase relates to a one-off cash bonus that we're paying to all our staff on the back of the very strong 2019 results.

Let's look in more detail now at the U.K. motor reserve position, and this chart shows a number of things. Firstly, the solid line is the usual current projection of the accident year loss ratios. And as you know, these numbers will tend to be prudent and especially so for the more recent years. The numbers in the brackets show the change in that projection over the last 6 months, and the points above the line show the first pick. That's the projection at month 12 for each accident year.

What do we conclude? Well, a few things. Firstly, you can see from the numbers in the brackets that we saw another very positive 6 months in terms of how these projections have moved. Most years saw similar moves in the first half of the year as well, and so for the year in aggregate, that's much more positive development than we would normally expect to see. More from Alistair later on some of the underlying causes. You'll also see that 2014 has stabilized, and we wouldn't expect that to move too much from 70%. 2018, which 12 months ago looked like a pretty challenging year when first projected, is now more positive and has scope still for further improvement. And 2019, to finish reasonably similar to 2018 in some ways, started quite high, as we suggested at the half year and in our trading update a couple of weeks back.

And this bottom chart reconciles 2018, where it stands now, to 2019 accident year at its first projection; shows the drivers of the increase. And as you can see, there are 2 notable impacts: firstly, damage; and secondly, large injury claims. Alistair will cover these in more detail shortly, so I'll just say at this point it's worth remembering that we tend to project injury claims and especially the big ones cautiously early on, but it's also important to note that damage claims make up a higher percentage of 2019's claims costs than they did a few years back. And of course, our projections of damage claims will develop less over time than our projections of injury claims.

Moving on now to look at how those big improvements in back years have impacted the 2019 results, while they clearly led to large reductions in booked loss ratios and, as you can see firstly on this chart on the left, a very big reserve release, 27% of premiums, which is the biggest we've seen in percentage and pounds terms. And the booked loss ratio moves also meant that profit commission was significantly higher. And this chart shows the contribution to profit from reserve releases and profit commission, and you can see 2019 stands out. Don't forget, of course, the 2018 figures were boosted by the Ogden change that I referred to earlier.

If the reserve releases were more in line with the recent average, which is around 20%, 21% over the past 5 years, group profit would have been more in the order of GBP 430 million to GBP 450 million, that's net of the Ogden drags of GBP 460 million to GBP 480 million compared to the actual group result of GBP 526 million. And finally, just to note that the level of conservatism in our booked reserves is unchanged year-on-year.

Turning now to look at our strong solvency position and a very consistent message here with recent periods. The ratio was 190%, which was exactly in line with the mid-year position. And as you can see, both the level of capital and the capital requirement moved up slightly in the second half. We also show the movement from the half year 190% to the full year 190% in this chart. And the main contributors to the movements are in line with what we'd expect, significant capital generation, with a larger element from prior years than would be normal; and then the big reduction for the proposed final dividend. Other changes includes increase in capital requirement, mainly as a result of growth and the yield curve movements. That position is still quite at higher than we would expect to operate at in the medium to long term, and again, that's because we will wait until we have internal model position certainty before we change it materially.

And speaking of the internal model. Our work there continues, though as we hinted 6 months ago, realistically we are expecting our formal application for model approval to be in next year, not this year. None of the work that we've done has moved the overall capital position materially. And I would still say that in our view, the surplus that you see here is a reasonable guide for what we'd expect to see if the model were approved and in use today, though note appropriate caveats that, that is not fully in our gift to decide upon. We will keep you updated.

The last topic for me is the proposed final dividend, another record payout. The number, as I mentioned earlier, is 77p per share, which is 17% up on the equivalent from last year. And as you can see, that the 2018 figure included an 11% boost due to the assumed improvement in the Ogden discount rate in the second half of '18. And so again, the underlying change is pretty substantial. The payout ratio is 90% of the second half earnings. And even after that payout, which is just over GBP 220 million in total, the solvency position remains strong at 190%, as I've just talked about. And as usual, no change to our policy or the philosophy. And you've got the relevant dates there on the slide.

That's all from me, so let me try and give you a few key messages to this today: good growth in a number of areas, European insurance, household, loans, comparison, though more muted in our core motor business and in the U.S. Profit was up strongly and especially when looking through some of the Ogden discount rate changes. And we propose a big increase in our final dividend and maintained our very strong solvency position.

I'll hand you over to Alistair and, first, to Cristina to give more detail on U.K. insurance. Thank you.

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [3]

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Thanks, Geraint. And good morning, everybody.

It's a pleasure for me to stand today to talk about the very strong results of the U.K. business. I'm going to cover the main highlights, except loss ratio and claims which will be covered by Alistair.

So let me start with the picture that you can see here. It was a big moment in the year when we passed 1 million customer in our household books. You have here a picture of the team celebrating. It's been a good year for household growth of 17% in customers and turnover. And given that the weather in 2019 went back to normal levels -- well, sorry, normal according to the U.K. standards, we went back to profitability. So that was a good year for household. Also, in terms of U.K. motor, given where we are in the cycle, we have seen very modest growth around 1%. And this -- an underlying trend behind these numbers is increase in the retention due to lots of operational improvements. So what we have in the book now is a bigger proportion of renewals which tend to have a lower average premium.

Now let's move to pricing, which -- with a lot of things happening in the past few months. We normally put feature slides, so hopefully, you're very familiar with the information here. First is the market indexes that we use. The ABI, in blue, takes into account new business and renewals, so it tends to have softer changes; the new business Confused index, in red, where you can see sooner the trends in the market. So what we can see is that in the past few periods prices have gone up in the market, at least for new business. The data shows 5% increase year-on-year and 4% quarter-on-quarter. That's for the market. For Admiral, you have a graph that shows Admiral times top, the percentage of cases that we return the first or best price in price comparison, and indicates how our price is versus the average of the market that trades in price comparison.

It's indexed to 2017.

Now I want to highlight a couple of things. The first one is that, as you can see, since 20 months, we have been putting prices up versus the rest of the market; secondly, that we continued doing so in the second half of 2019. So as you can see, the trend in the second half, we have continued putting prices up. Even though the market has done it, our increases have been overall higher. In the past couple of months, you see a small uptick. We have continued putting prices up, but we believe that the market has put prices up slightly more. Now the question is what is going to happen during the rest of 2020, and it's a very difficult question, so I have put a slide to try to summarize every effect that could happen in the market.

So let's start with whiplash reforms. So it's just been announced, a delay on these reforms. We expect now that they will happen in August. That has given us a bit more certainty about when they will happen. However, there's a lot of uncertainty about why it's going to be the actual reform. This is still being discussed. But also, what is the impact going to be? So in terms of prices, we don't think there is going to be a big impact, at least in the first half of the year. And in Admiral we're not planning to take any change at the moment in our prices because this reform. We're going to be cautious about it. Second thing to take into account is the outcome of the FCA market pricing study. Very difficult to predict when it's going to happen, but I think overall we can -- or something that could happen is that, after the results are announced around June, there could be pressure to increase prices at new business and maybe reduce at renewals. And companies that have large renewals book with high tenure might be more affected. In the case of Admiral and in the case of our motor book, 80% of our customers shop and they call us every year, so we have quite an active book of shoppers. Therefore, we hope that the impact is going to be less on us. However, this is a regulatory reform. Until we see exactly what it's going to be, we're going to be very cautious about it.

And the other impacts that we're going to see are excess of loss. At the beginning of this year, the excess of loss costs have gone up. They have caught up with the changes in Ogden. Some external parties are saying that the increases have been around 5% to 10%. In the minimum cases, up to 35%. It's important to note that in Admiral, versus a lot of competitors, our excess of loss cover tends to be smaller than the rest. And therefore, the impact of this increase overall is smaller. And finally, claims inflation. Alistair is going to talk a lot about it, but in general we will continue having claims inflation, and that will put pressure on prices. So with all this uncertainty and information, we believe we are going to continue to see prices going up in the market, at least in the first half of the year. What is going to happen in the second half will be also very much influenced by the FCA market study and the whiplash reform.

We're moving on to expenses. We have seen in 2019 a small uptick, 2 main reasons behind. The first one, as you can see in the waterfall graph, it's an increase in levies. The second one is continuation of spend that we're doing to strengthen our business around areas like analytics, technology, cyber; and also the implementation of a lot of regulatory change and strengthening in governance. Now all these spend in making our systems stronger and our online capabilities also could have an impact on what customers can do. So today, Admiral Elephant customers can do most of changes online. They can take a policy. And what we're seeing very clear is that customers like that channel. So every time we put new functionalities online, there is a very -- increase intake -- in the takeup. I have put here a graph of Elephant customers just to show that, in 1 year, the number of online interactions have doubled. And this definitely will have an impact on our expenses going forward.

So overall in terms of expenses, we haven't changed our culture. We are very focused on having a lean operation. Our staff, our shareholders -- and they also understand even better the value of every investment and how it impacts. So I believe that our expenses going forward won't necessarily keep increasing. However, we will remain open and flexible, and we will value the investments that can come and see the value that it can have for the business.

So moving on. In terms of household, I was talking about the good growth. Behind this is growth of Admiral in the price comparison channel, but also is the growth of our MultiCover proposition.

We offer to the customers a convenient policy. You can buy several products in the same policy. You get discounts. And it takes much shorter. We're very proud that anybody who wants to buy a household insurance with us can get a price in 4 questions. In terms of claims in household, we have seen a continuation of inflation, especially around escape of water, although the rate of inflation has been lower than in previous years for both the market and for Admiral.

Now I want to talk about the recent Storms Ciara, Dennis, Jorge. Even though they are not impacting these result, I think it's interesting to see the impact. So far, what we know is that the incurred that we have seen so far has been 14 million gross. So when you take into account the [flooding] effect, we are around 5 million.

So let me just summarize the key message: strong U.K. motor profit; market prices up, and we expect this trend to continue in the first half of the year; uncertainties in the second half; expense ratio increase due to levies, but also due to investment for the long term; and finally, a continued growth in household.

Now before I pass you to Alistair, I just want to talk about an award that we got a few weeks ago. We have been given a lifetime award for being the only company that has been part of the Best Companies to Work For according to The Sunday Times since the beginning 20 years ago. And I -- for me, I think it's a very clear reflection of the strong culture that we have, but also of how continuous and how consistent that culture has been for the past 20 years. I think it puts us in a very good place for the future and it's a great testament of the work that we do.

So that's it for me. And now to find much more about claims and loss ratio, I leave you with Alistair.

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Alistair Hargreaves, Admiral Group plc - COO of UK [4]

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Thank you, Cristina.

Cristina just touched on our strong culture. Here is a picture of our employee consultation group. It's a group of staff representatives who ensure strong 2-way communication between the Admiral Group Board and U.K. employees. I've been there to present. They ask great questions.

Now before I go into the details of U.K. motor claims, let me just give you the headlines. We've seen larger-than-normal reserve releases on '15, '16, '17 and '18. We've seen an increase in our 2019 loss ratio driven by 2 factors: first, more large BI claims. It's a first view, so it will take time to see how these develop. And secondly, market-wide damage inflation. Finally, the whiplash reforms will have a positive impact on claims costs, but it will take time to see exactly how much.

So let me first explain the higher reserve releases. As you know, we take a conservative approach to reserving. Our largest claims typically take 3 or more years to settle. When claims settle, that's when we know their costs for sure, and it results in positive developments on our loss ratio and reserve releases. We proactively manage large losses to settle them quickly, but in recent years this has been hampered by changes to the Ogden rate. This graph shows large BI claims settled as a proportion of open large BI claims, and it demonstrates the change in settlement patterns for large BI, is indexed to 100 in H2 2016 pre announcement of Ogden rate changes. Through 2017 and '18, there were less BI settlements due to uncertainty around the Ogden rate. The higher bar in '19 reflects more large BI claims being settled again due to the Ogden rate being confirmed. In addition, we saw some unusually positive claims cost developments on a few large claims. This faster settlement and the positive claims developments combined to result in the larger-than-normal reserve releases.

Now let's move on to the 2019 loss ratio, where the drivers are large BI and market-wide damage inflation. There are 2 points to note here. First, in both '16 and '19, bodily injury costs are over half of our claims costs. For the market, bodily injury costs are around 40%. So large bodily injury cost is more significant for us. And we also saw an increase in the number of these claims in '19 versus '18. This, of course, is the first pick for '19, and we'll wait and see how these claims will develop. Secondly, you can see that despite this adverse large BI experience, the proportion of damage costs has increased from '16 to '19. There's been market-wide damage inflation. This is being driven by sharp increases in severity that have more than offset the moderate declines in frequency.

So what's driving this? First, when I say damage, I'm referring to all types of vehicle claims costs, including repair, vehicle total losses and theft, across both policyholder vehicles and third-party vehicles. 2019 damage costs had a starting point driven by the high inflation we saw through preceding years.

This high rate of inflation slowed through 2019. To illustrate this, we can take a closer look at one element of damage, repair cost inflation. Between '16 and '18, it was a lot higher than normal. A key driver was higher parts costs due to weaker sterling; and more technology in vehicles, things like LED headlights, parking sensors which are at the front of the vehicle and more likely to be in an incident, even minor ones.

The graph also demonstrates that we've started to see this faster-than-normal repair inflation slow in '19. This is positive, but risks remain, notably the potential impact on -- of Brexit on exchange rates. We've been taking action to address higher damage costs. We've used our buying power to purchase parts direct on behalf of our network. We've increased network capacity and used technology to identify total losses. Both enable faster settlement, reducing the extra costs such as higher vehicles'. We have a market-leading third-party damage costs through basically looking after those third-party claimants directly. On the right-hand side, you can see market theft costs per vehicle year. The theft is less than 5% of total claims costs. However, you can see it's increased very quickly. Driven in part by the theft of high-end vehicles using high-tech methods, there's also been an increase in theft on vehicles such as the increased theft of catalytic converters, which contain precious metals that have increased a lot in price. Overall, in 2019, we've seen a positive slowing of damage inflation through the year, but as mentioned, risks remain.

Next, the final contributor to overall claims costs, small bodily injury or whiplash claims. On the left are small BI claims notifications, a good proxy for market claims frequency.

After seeing frequency decline following the 2013 last pay reforms, it's remained flat in '18 and '19. Severity inflation has also been modest. Key to the outlook for small BI are the whiplash reforms. These reforms remove third-party legal costs and set compensation tariffs for whiplash claims under GBP 5,000. The MIB is implementing a portal to facilitate the new process for claimants, ready for accidents from 1st of August. The reforms will have significant benefit. However, the size of the benefit remains uncertain. I think there are 2 questions that will only be answered with time. Firstly, how many injuries will fall outside of the whiplash definition? And secondly, will the reforms reduce frequency? Due to this uncertainty, we're estimating a wide range of GBP 10 to GBP 25 reduction in claims costs as a result of the reforms.

Finally, a reminder of the key elements of Admiral's claims costs advantage. We have a great claims team. They're experienced, passionate about customer outcomes and keen to continuously improve. Recent improvements have included analytics and automation. I'll give one example. We recently introduced a claims notification model to help route repairs and total losses correctly. This improved settlements within 7 days by over 20%. Customer experience is key. The point of claim is the moment of truth for our customers. Good customer outcomes and lower claims costs are not mutually exclusive. We settle claims faster than our peers, which is what our customers want. And faster settlement speeds also reduce claims costs. Here we show that we have lower claims complaints than our peers. i.e., we deliver great service for our customers.

So in summary, Admiral's market-leading claims capability continues to drive strong results. We saw larger reserve releases due to positive settlements on large BI. Our 2019 loss ratio was driven by large BI and market-wide damage inflation, but we saw positive signs that damage inflation slowed in 2019. Looking forward, the whiplash reforms will have a positive impact on claims costs.

That's all for me, and I'll pass over to Milena.

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Milena Mondini de Focatiis, Admiral Group plc - Head of UK & European Insurance and Executive Director [5]

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Thank you, Alistair. Good morning, everybody.

And first of all, let me share with you how honored and excited I am to succeed David as the next group CEO; and together with Cristina, Geraint and the rest of Admiral management team, continue to build on the foundation laid by David and Henry before, but there is still 1 year to go, so today I'm going to talk to you about comparison site and international insurance.

So overall, 2019 has been a positive year with continued growth, some progress in U.S. despite a more challenging market for our price comparison site and insurance and very strong performance of European insurance and comparison. Picture on cover is from Penguin Portal, new umbrella company that aim at increasing synergy and sharing expertise in our price comparison site in Europe.

So going now a bit more in detail, starting with comparison and then moving to insurance.

Another outstanding year for Confused that grew in turnover by 19%; and in profit by more than 40%, reaching GBP 20 million that is double what it was 2 years ago. So what are the reason of this success? Not a single silver bullet, but a mix of improvement on user experience, more focus on -- and contribution from other verticals as well as more effective marketing acquisition.

So we move now South overseas. Solid performance also in Europe for Rastreator and LeLynx with a 10% increase in turnover, an improvement in profitability mainly driven by LeLynx in France. Rastreator continued to focus on improving our customer experience mainly through price accuracy in car and now also in bikes. We also made progress on our product diversification strategy, for example, by internalizing fully the energy vertical in France. We decided to not proceed with the proposed joint venture with Oakley Capital and Acierto due to the challenge to complete this transaction in reasonable time frame.

So moving now across the Atlantic to Compare. I mentioned 6 months ago that we were downsizing the business to focus on marketing efficiency and agility. So we reduced expenses significantly, and this is starting to produce some benefit.

So we reduced our run rate from 2018 to 2019 and then from H1 to H2. And we continue this trend to -- we expect this trend to continue in 2020. We remain very focused on improving our proposition to customer both by enhancing our products, but also by enlarging the panel of issuers.

So staying in U.S. now but moving to insurance. In Elephant, we experienced some pressure on the loss ratio. This was only partially compensated by an improvement in expense ratio, leading to an increase in combined ratio by 2 to 3 points and $2 million of additional losses overall. We took actions by increasing pricing, reducing growth, with flat vehicle on cover and 4% increase in turnover. And we remain very focused on our fundamental of claims pricing and underwriting. You will see that we reduced carrying value of Elephant by further GBP 66 million. So as consequence of deterioration in loss ratio, we changed to using shorter-term projection in the calculation, and this resulted in a lower net present value. And just to clarify, this is not a reflection of our belief in Elephant's future prospects for success over time.

And indeed we have seen a lot of improvement on operational fronts in several areas. And just to give you a few example: slightly better mix of customer, increased persistency, increased number of vehicle per policy and also marketing acquisition effectiveness and also a lot of progress on our digital offering to the customer and namely a release of the new claims portal that allow our customer and our adjusters to track and manage claims entirely online.

So now back across the Atlantic to Europe, another very strong set of results for our European operation that are growing by 20% both in turnover and customers. And this is a contribution from all the 3 countries. It's really the results of a team effort, but a special mention to L'olivier that is today 4x bigger than it was in 2015.

So the growth in Europe was mainly driven by an increase in conversion. And increase in conversion is an effect -- is driven by level of competitiveness on price comparison site, improvement in the sales and the customer journey, but also an increase of the share of the direct sales that come directly to us, not by -- via price comparison site. And these are supported by increasing brand awareness in each single country in which we operate. So prior year -- improvement in the prior year loss ratio has been a very relevant driver of European insurance results, doubling profit compared to last year and putting us in a very good trajectory to deliver EUR 30 million to EUR 60 million gross profit by 2022.

So this set of results is a reflection that we are delivering on our strategy that remain unchanged and is mainly about building scale while leveraging on very strong underwriting competencies. So as you can see in this slide, from the different chart, we are indeed building economy of scale. You can see there is a decrease of 10 points of expense ratio across the last 4 years and steady improvement in all the efficiency metrics. We are also looking for further opportunity for product and channel diversification. So we just launched very, very recently a new fully fledged household insurance product in France under L'olivier brand. And we're also testing distribution through brokers both in Spain and in Italy.

So to conclude, highlight of 2019: improved results in comparison, with the outstanding performance of Confused.com; a more challenging year for Elephant, with the loss ratio deterioration only partially compensated by expense ratio improvement; and another set of strong results for our European business.

Thank you very much, and now back to David on group strategy.

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David Stevens, Admiral Group plc - CEO & Director [6]

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Thank you, Milena.

So as is appropriate for a strategy update, I'm taking the long view. I joined Admiral in 1991, and here's a picture of me involved in an early management team-building exercise.

First of all, a reminder of the strategy. There are 3 prongs to it: maintain our position as one of the best insurers in the U.K., prove that we can be a great insurer beyond the U.K., and prove that we can build businesses beyond insurance. And what I'm going to do is just focus on some examples of the progress we've made on those 3 pillars over the last year and the last few years. So firstly, I'm going to pick up beyond insurance. And I'm going to pick up the rapid growth of loans, but in a sense more importantly the reaching of a milestone in that growth, namely the delivery of a second-generation pricing structure in the loans operation.

So the business is bigger, 50% up in balances. It's grown its revenue over 100%, its costs by about 50%. And the profits -- the losses, sorry, have shrunk by about 25%. That's all interesting, but what to me is more interesting is the bottom half of the exhibit. When we talked about the loans business in more depth, I was talking about the analogies for the car insurance business, where we sought to take a difficult and commoditized market and create differentiation and superior performance, but that takes time and it takes learnings. And one of the learnings that's required is claims data to do excellent pricing. And the analogy to the loans market is you need some credit event data to give you the basis of doing differentiated pricing.

On the left-hand side, you could see the growth of our credit event data. Don't interpret this as meaning that we're finding we're having lots and lots more defaults as a proportion of loans out there. It actually has been the opposite. The rate of default as a proportion of loans out there has been falling, but it does show you the cumulative experience. And versus 18 months ago, we've got 10x more credit risk experience on which to base our rating. And in January of this year, we introduced a rate structure, which was in a sense our first somewhat differentiated rate structure. When we started the business, we brought in some great loan professionals who had obviously their own knowledge of the loan business. And that was built into the rate structure, but we've gone on now to a structure which is beginning to provide some differentiation. I'm expecting a third-generation rate structure to arrive sometime in quarter 3. And we are confident that, that rate structure will give us the option of improved margin and/or volume.

What about international insurance? Well, it's fairly obvious what I'm going to talk about. I'm going to talk about the European businesses. Obviously, the U.S. is still work in progress, but the point I'd make on the European businesses is they've established themselves as healthy, stable, far-throwing profitable businesses. And if you take the long view, you'll see that, versus 5 years ago, we're more than twice as big. We've gone from what was already a relatively trivial loss at the gross level of EUR 6 million in 2015, and we're up to just over EUR 20 million at the gross level now. That business is, in a sense, a virtuous circle. Milena talked about things like brand awareness and investing in that, talked about scale feeding through into expenses. I'm very confident that these businesses will prove to be very valuable for the long term.

And lastly and by no means least, in fact the opposite and the reason why I'm finishing on it, is the centrality of maintaining our performance as one of the best insurers in the U.K. And on this context, I'm going to particularly focus on the single most important performance measure when you're looking at car insurance in the U.K., and that is the loss ratio. There's been a fair amount of noise over the last few years. There's been the emergence of apparently Admiral-like competitors. Has that eroded our competitive advantage? There's been the noise from Ogden. There's always the complication that our early-year picks tend to be very conservative. And that can visually create the impression that maybe things are going downhill, but if you actually take the longer view and look at how our loss ratio has evolved, I think, particularly on the basis of 2019, you see a lot of reassurance that we are one of the best in the market on this key measure.

So just to explain the exhibit. This is the evolution of the accident year loss ratio, the projected ultimate. And if you look at the blue line, the longest line with the squares, that's 2014. And it's plotting its evolution from 83% at the end of year 1, 2014, to just under 70% at the end of the year 6, 2019. And in contrast, in the far left you have the first reading for 2019 itself with the, I think, green square. Also -- sorry.

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Unidentified Company Representative, [7]

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Orange.

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David Stevens, Admiral Group plc - CEO & Director [8]

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Orange, the orange square. Color has not been my speciality. It was either insurance or graphic design. And what I think you see in this exhibit is a reminder that ultimately our loss ratios finish in a very satisfactory place, '14, '15, '16 and '17 all below 70%, some of them significantly below 70%; '18 already knocking on the door of 70%. And that's where so much of the value of this business resides and so much of the achievements over the last few years has been.

So I think that's a good note on which to finish and open up for Q&A.

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Questions and Answers

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [1]

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Greig Paterson, KBW. 3 questions. One is you do have -- you've grown, you've recently grown your travel book. I just want to make some comments on COVID-19 in that regard and if you had any reinsurance protection. Second thing is, if I remember correctly, you had a spike in large BI in 2017. You've had -- in terms of frequency. And you've had a lot of spike in 2019 as well. Both of those have bucked the market trend. I'm wondering if there's been some issue with your underwriting machine or whatever. So if we had to think about it, this resulted in you getting this -- that sort of business -- or that poor experience. And the third thing is, I mean, just looking at the U.S. The PCW and the underwriting operations have been there for a while. They're still loss making. If anything, the situation appears to be deteriorating. And the original plan, if I remember, was to build scale, et cetera; and take losses, et cetera. I mean, why don't you just exit these businesses? And there's a question.

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David Stevens, Admiral Group plc - CEO & Director [2]

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Travel, from Cristina? I might pick up the big claims, as an indulgence. And America?

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [3]

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Okay. In terms of travel, your question was whether we have reinsurance in place, which we do. Let me also say that we have a relatively small travel book, less than 1% of the market. And we have also limit our exposure going forward, so we believe the overall impact will be limited.

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David Stevens, Admiral Group plc - CEO & Director [4]

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On the spike in BI claims, what I would say is we may well have talked about a spike in '17. We talked about a spike in '19. I think we talked about a spike in '14 as well. Today's spike is tomorrow releases in many respects, and I would point you towards where the loss ratios now stand. Would you add anything, Alistair, on that?

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Alistair Hargreaves, Admiral Group plc - COO of UK [5]

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No, I was going to say the same thing.

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David Stevens, Admiral Group plc - CEO & Director [6]

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Yes. And there is a lot of randomness. I don't mean we see -- we don't like to create artificial spikes. It's just that big bodily injuries they come in with a degree of randomness.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [7]

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I mean, I appreciate that. Is that the nature of your book? Because I just haven't picked it up (inaudible).

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David Stevens, Admiral Group plc - CEO & Director [8]

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Well, it's mainly the nature of our level of excess-of-loss cover because, where most of our competitors are at 1 million, and that sort of volatility gets hidden from investors and from the numbers, we're substantially higher than that. And that means we -- if you have 2 or 3 big claims, it shows. America?

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Milena Mondini de Focatiis, Admiral Group plc - Head of UK & European Insurance and Executive Director [9]

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Yes. So we always took a long-term approach to our international expansions and with the idea of building, growing sustainable business and ultimately profitable, growing sustainable business over time. And creating and developing price comparison site in America is a big task. It's challenging this day and time. We've been disappointed by loss ratio this year in America, as well in Elephant. Having said that, we took action on price comparison site. We are running now with very small losses, and we're seeing a lot of operational improvement. And in Elephant, as I mentioned, there are a lot of signs that we're building more value in the book and we are building a lot of valuable operation there. And we do see progress on several metrics despite the deterioration of loss ratio over the years. We think we are addressing loss ratio deterioration, but we will continue to monitor progress over time and will assess option as they come. For now we stay committed to make both of them a success.

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David Stevens, Admiral Group plc - CEO & Director [10]

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Thank you. This side.

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James Austin Shuck, Citigroup Inc, Research Division - Director [11]

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It's James Shuck from Citi. I'd just like to return to the walk from the ultimate year, the 73% loss pick to the 83% loss pick. I think it's on Slide 6. You're showing the damage in the large bodily injury. The other is also a negative contribution of 2 points. I think the comments through the year have been that you've been pricing ahead of claims inflation. I appreciate small bodily injuries are included within that. I'm just surprised to see that there isn't a more positive pricing impact reflected in that 2019 loss pick. And then kind of connected with that: If I look in the actual report and accounts, the accounting loss year. So on an attritional basis, the loss ratio actually improved by 1.1 points, so I'm just struggling to see -- I think there's a comment that you've relaxed the front-end conservatism on that. Can you just clarify that for me? And the final question is just around, I mean, up to now, Admiral has been very much focused as a retail car insurer. I guess, over the next few years, we're going to see much more growth in partnerships. I know you're doing some things with the OEMs. I'm just interested about your comment around the expense ratio remaining flat and what you need to do in order to be able to onboard people more effectively and how your systems can cope with that.

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David Stevens, Admiral Group plc - CEO & Director [12]

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Do you want to do the first 2, Geraint?

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Geraint Jones, Admiral Group plc - CFO & Director [13]

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Yes, I do. So the relaxation of the conservatism in the early year is true. That's effectively what we've done. So the attritional loss ratio booked in this year is 1 point or so better than '18, this year being '19, better than '18. And that's really about the margin which remains flat overall being more distributed over a number of years rather than concentrated in the most recent year, no particular reason for that. We think there's an appropriate approach to have margin over a number of years rather than almost all of it in the current year. There's nothing particularly substantial to talk about there. The other bit in the waterfall on Slide 6 is, as you say, it's made up of small injury claims and small movements in premiums. And they are both very small contributors, both going the wrong way slightly. And what was the question on that bit?

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David Stevens, Admiral Group plc - CEO & Director [14]

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I think it may have been about…

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James Austin Shuck, Citigroup Inc, Research Division - Director [15]

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The extend of pricing impact.

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Geraint Jones, Admiral Group plc - CFO & Director [16]

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The -- in terms of pricing. The -- what we did with prices over the course of the year is mid-single-digit increase. The portfolio is more made up of renewals which have a lower average premium. And the contribution of renewables to the overall number meant that the premiums were largely flat. There's not much movement or contribution to loss ratio either way from premiums. So the base rate went up, but didn't necessarily translate into written business during the course of '19.

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David Stevens, Admiral Group plc - CEO & Director [17]

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And the third one was about partnerships.

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [18]

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Yes. I think it's worth talking slightly about distribution. So Admiral has traditionally used price comparison. And we also distribute towards -- or using multicar and MultiCover. And thirdly, we have looked at partnerships in the past. And we have signed a deal with Ford. It allow us to understand a bit more about OEMs, but in particular about potential uses of telematics going forward and also the -- what are the benefits of using an OEM in terms of repairing cars and using approved repairers. In terms of the future, we remain open. We will continue exploring opportunities. And whenever we think something comes up that is interesting, we will take it.

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David Stevens, Admiral Group plc - CEO & Director [19]

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Lady in the second row and...

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Freya Kong, BofA Merrill Lynch, Research Division - Research Analyst [20]

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Freya Kong from Bank of America. 3 questions for me, please. There was no mention of price comparison in the 3 pillars that you mentioned at the end, and you've packaged the businesses up into Penguin Portals. What is your long-term view for price comparison? Second question, can you walk us through the 8-point improvement in the ultimate loss ratio for 2018? And do you expect something similar to develop in 2019? And then last question, what is your outlook for the original share net reserve releases? Is it still 20%?

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David Stevens, Admiral Group plc - CEO & Director [21]

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Price comparison. We've gathered the price comparison operations in the Penguin Portals as a corporate identity, but that is really a reflection of the way we're running the business as a much more combined business trying to maximize the transfer of intellectual property and, to an extent, technology. And that's been in place actually for about 18 months or 2 years, and we feel it is already showing through in the improvements we're seeing across the price comparison businesses. So we're very encouraged it's the right way to go. In terms of like part of the 3 pillars, at the end of the day, it's sort of less than 5% of our profits. And there's a limit to how many pillars you can have. It's a valuable part of the business that is growing. It's probably, in a sense, less material and less strategic than it used to be in the sense that, in the early days of price comparison, in a number of markets we were using it to pioneer price comparison and open the door for our insurers. And in a number of those markets, price comparison has somewhat matured and that job has been done, but it still contributes and that's interesting for us.

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Alistair Hargreaves, Admiral Group plc - COO of UK [22]

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So the improvement on the 2018 loss ratio is 3 factors really. Typically we do see that our first picks improve. As I talked through on the large BI releases slide, we saw that being larger improvements than normal because of the faster settlement. And the settlement is the point of reserve releases. And then we also had some unusually positive developments.

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David Stevens, Admiral Group plc - CEO & Director [23]

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Was there at third one? Or that was that.

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Freya Kong, BofA Merrill Lynch, Research Division - Research Analyst [24]

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The percentage of household.

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David Stevens, Admiral Group plc - CEO & Director [25]

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Yes, the 20% to 21%, is that guidance for the future? Is that just a comment on the past?

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Geraint Jones, Admiral Group plc - CFO & Director [26]

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It's effectively serves 2 purposes. I think obviously mathematical average of the last 5 years is 20% to 21%. So even if you include or exclude the Ogden impact, it's being basically at that level for a number of years. We will always be a conservative reserver. You should expect to see substantial reserve releases in the future. The extent will obviously vary from time to time, depending on what's going on in the portfolio. I wouldn't be surprised if 2020 was a pretty big release. I would be very positively surprised if it was as big as 2019.

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David Stevens, Admiral Group plc - CEO & Director [27]

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At the back. Thank you.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [28]

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It's Andrew Crean, Autonomous. A couple of questions. Going on from that, I think, now that we have certainty of the Ogden rate, the number of your large BI claims which keep settling and settling more quickly -- and that's part of the reason for the growth in profits in the second half. Is that likely to continue? Can you give us some quantification for what it -- what that impact was in 2019? And will it continue into 2020? Then secondly, the EUR 30 million to EUR 60 million target, whole account target, for Europe by 2022, I think what I remember is on an ultimate developed basis, as opposed to what you're likely to report. Could you give us a sense of, for your own account, what you're likely or what EUR 30 million to EUR 60 million actually means in terms of what the shareholder sees?

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Alistair Hargreaves, Admiral Group plc - COO of UK [29]

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Should I take the first one? So Andrew, I think mathematically you're right. We've seen a faster increase. And we've had a couple of years where we've been settling less, so there is a chance that we'll see faster settlements going forward. And that could be positive for reserve releases, but it's probably worth mentioning 2 other points as well. The reserve releases that we saw this time were also because of positive developments. And so that can't be seen as a guide for the future. That was unusually positive developments. And then I also showed the exhibit where I show that damage is a larger proportion of costs than it was a few years ago, so that would actually have a negative pull on reserve releases.

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David Stevens, Admiral Group plc - CEO & Director [30]

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Thank you....

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Geraint Jones, Admiral Group plc - CFO & Director [31]

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There's a final question....

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Milena Mondini de Focatiis, Admiral Group plc - Head of UK & European Insurance and Executive Director [32]

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There's a second one...

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David Stevens, Admiral Group plc - CEO & Director [33]

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Sorry. There's a what...

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Milena Mondini de Focatiis, Admiral Group plc - Head of UK & European Insurance and Executive Director [34]

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European. So the reason why we gave the guidelines on the gross base is because we believe it's a better reflection of the underlying value of the business and what they're delivering. To translate from the gross base to the Admiral base, there is reinsurance that have an impact. And there are a couple of elements. One is that some element of our insurance contracts are different by country. And there are some nonlinear elements linked to cap or other conditions that we don't disclose it in detail, but also those contract may change and are changed over time. So it's very difficult to make a very strong assumption about what this is going to be in a few years, but I would say that as a general trend you may expect over time a slight improvement in the condition of reinsurance contract and therefore, in the medium or long run, a slightly higher percentage of profit on Admiral base in comparison to the gross. Having said that, there are some nonlinear element, as I mentioned before, that have an impact.

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David Stevens, Admiral Group plc - CEO & Director [35]

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Lovely. Is there anyone on the -- coming on the phones at all? No. Gentleman here at the front, almost at the front.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [36]

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Dom O'Mahony, Exane BNP Paribas. Just 3 questions, if that's all right, one on -- just on the reserve releases. Is there any sense in which there's sort of the surge in settlements which then created some of the PYD in '19 but that might have been settlements that might have otherwise happened in 2020 and beyond? So is there any potential for that to essentially front load some of the reserve release? Or is it really just delay that's now settled? Second question, next 2 questions, on solvency. You quoted solvency ratio, I think, for right now. Could you tell us what the solvency ratio was at the full year? And then a slightly longer question about capital generation.

So Geraint, I think you very helpfully explained this time last year that current year profitability is a more important driver of capital generation. I totally understand that in 2019 so much of the PYD came from the ultimate, but actually the PYD would have been very capital generative. And you showed as much on the slide, but if current year profitability were to stabilize where we are and you were to go back to a more balance of ultimate and nonultimate reserve release as it were, what will that mean in terms of capital generation? So your conversion of earnings into capital. Will capital generation be lagging the IFRS profit?

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Alistair Hargreaves, Admiral Group plc - COO of UK [37]

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The first one, no. It's not -- I mean we haven't sort of front loaded the settlement. It's catch-up that we've seen in '19.

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Geraint Jones, Admiral Group plc - CFO & Director [38]

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The second question is quite a bit trickier, I think, and I'll probably take quite a long time to answer. I think you're quite right to say that the IFRS earnings differ in pattern than the Solvency II capital basis, which is where the 190% comes from. Over a time period, they end up at the same place. I think we'll always be a conservative reserver, so I think there'll be conservatism in the Solvency II numbers as well as the IFRS numbers. There's just dramatically more of a conservatism in the IFRS numbers. I don't want to give guidance on how that conversion might work over time. The solvency ratio as at the end of the year was probably something in the 170s, I think. I can't remember the exact number, I'll get back to you. There's a requisite. When the SFCR comes out, it will be in there.

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David Stevens, Admiral Group plc - CEO & Director [39]

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We've got a call from an external party, I believe, with a question.

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Operator [40]

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Your first telecom question today is from Ivan Bokhmat of Barclays.

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Ivan Bokhmat, Barclays Bank PLC, Research Division - CEEMEA Banks Analyst [41]

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I've got 2 questions on reinsurance, please. One of them would be on the excess of loss. Could you please update us, what's the effective level of retention you have right now? I think, last time, you suggested it was somewhere between GBP 8 million and GBP 9 million. Was there any change after the 1/1 renewals? And second question would be around the quota shares. I think your -- you mentioned in the statements that there are discussions ongoing in the first half of the year on the future of the longer-term coinsurance and quota share relationships. Could you elaborate perhaps a bit as to what changes you may be looking for and what could be the strategy going forward?

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [42]

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In terms of excess of loss, just a small change, but it continues between GBP 8 million and GBP 9 million.

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Geraint Jones, Admiral Group plc - CFO & Director [43]

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On the quota share, we've started the discussions with our usual partners and also 1 or 2 additional players. I'd largely expect those arrangements will continue to roll forward in largely similar fold. The renewals are slightly later than they would normally be, partly because of our work on the internal model and us trying to work out whether we should be buying slightly different types of reinsurance and/or slightly different mixes of coinsurance, quota share, reserve cover and then so on. But for the time being, I would expect us to continue with the sort of arrangements that we currently got in place at largely similar terms, I would expect.

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David Stevens, Admiral Group plc - CEO & Director [44]

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Thank you.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [45]

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Edward Morris, JPMorgan. 3 questions, please. First is on the internal model. Can you just remind us of the sort of main objective that you're aiming for with this? Because you're already extremely capital efficient. A lot of your sensitivities on the SCR seem to have reduced quite a lot now, so it's probably quite an expensive project. What are you actually aiming to achieve by completing it? The second question is around leverage. One of the outcomes of the growth in loans means that your IFRS leverage is increasing quite quickly. Is this something that you -- is relevant to you? Or do you really think of that growth as being separate from the traditional debt that you have? And third question, just on commutation, the decision to commute 2018, is that likely to be done in the first half? And do you think it will be a positive or negative?

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Geraint Jones, Admiral Group plc - CFO & Director [46]

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In order. The internal model and the expense of the project. I think we feel the same thing when the bills come in, everyone. There are 2 reasons I think why we proceed with it. Firstly, it's not fully in our gift to effectively can it because the rules say, if the standard format doesn't work for you as a firm, then you should develop a model to calculate your capital requirement. And I think, given our size and scale, the regulator fully expects us to have an internal model. There are benefits to having an internal model. It helps, clearly helps with risk management, understanding your risk profile. It will allow us, I think, to think more carefully about the types of reinsurance that we buy over time. And it will become even more important as our group becomes more diverse, with different risk drivers contributing more and more to the overall capital requirement.

So there are business benefits to it. It's not fully in our gift. I think our program is -- this is not a cheaper program, but it's, I would imagine, cheaper than a lot of internal model programs that have been delivered over time. We'll keep going.

Leverage. It's a good question. I think we do tend to separate our thoughts in terms of the long-term Tier 2 capital that supports the business and the funding that supports the loan business. We are conscious of leverage ratios. We're obviously an external rating, which has leverage constraints. We won't just continue to build it forever. So we are conscious that, that is changing the way the balance sheet looks over time. And I suspect that over time some of that will be -- so it won't continue to grow forever, and we'll update you on that in time

And the final point is commutation of '18. I'd expect us to carry on with that and we're probably in the middle of doing that right now for '18.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [47]

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(inaudible)...

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Geraint Jones, Admiral Group plc - CFO & Director [48]

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Say it again. Sorry...

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [49]

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Is it likely to be commuting that again? Or...

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Geraint Jones, Admiral Group plc - CFO & Director [50]

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'18 looks like a positive year. It depends on the sums. I think '17 was looking like a very good year. So the impact of commuting '17 in '19 was very small. I think '18 looks like it will be slightly worsened. And ['17] is maybe slightly higher but not materially so.

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David Stevens, Admiral Group plc - CEO & Director [51]

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Thank you. Should we go here and then behind, gentleman with the blue tie. Or is it orange?

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Unidentified Analyst, [52]

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(inaudible) from HSBC. Just to follow up on the commutation question. Clearly there's a positive accounting for the commutation last year. Is that just because 2017 is such a great year? Or is it a case that you're not going to see quite the same level of reserve releases going forward in that year specifically? Secondly, I know that you said that the overall conservative -- conservatism in the reserves are about the same but less front-end loaded. Does that mean the mix between commuted reserves and sort of net reserves will change over time? And thirdly, on the expense ratio, I know it's gone up because of the IT expenses by about 0.3%. How much of that will come out as you've made investments now? Or will this be a continuous sort of drag on the expense ratio going forward?

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Geraint Jones, Admiral Group plc - CFO & Director [53]

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The first question is about the commutation and the impact in the current year versus the previous year, the change in that in '19. That's really a reflection of, I think, how positive 2017 looks rather than anything else. So '17 looks like, as you can see from the charts, a very profitable year compared to '16 and '18 at the side of it, which are also very profitable to a lesser percent. The second question was about the pattern and the mix of reserve releases between commuted and next year. We don't have to think of it that way. Our releases are released to me and it comes into the P&L, and it doesn't really matter which line it goes into. And I wouldn't expect them to change that substantially, anyway. And I think your...

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [54]

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Yes, in terms of expense ratio, we don't expect it to continue increasing, but we don't have a specific target in the sense that, if we find there are investments that are worth doing, we will choose to do so.

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Unidentified Analyst, [55]

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And sorry, just to follow up on that. The -- in terms of that 0.3%, how much of that was IT specific and/or cyber and governance? I mean, how much can we sort of split between that 0.3%?

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Cristina Nestares, Admiral Group plc - CEO of UK Insurance [56]

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So the increase in our expense ratio was 1% in '19, but we have also increased our expense ratio in the past few years. So there has been spend that has been going on for a number of years, not just this year. We don't give so much specific details, but in general it's been IT, but also things impacting like data and digital and cyber. It's been a big impact.

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David Stevens, Admiral Group plc - CEO & Director [57]

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Thank you. Gentleman just behind.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [58]

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Jon Denham, Morgan Stanley. Your sensitivity to a 0.5 percentage point increase. And your long-term assumption for inflation in hours earned fell from about 10 percentage points to 3. Is that largely a consequence of your large BI settlements, or is that a change in propensity to PPO or a bit of both? Secondly, I think in the EU insurance section, you mentioned that the comparison market shrunk in France and Spain. Is that something which is structural? I noticed that your U.S. retention change -- well, your quote share changed. Was that your choice, or the reinsurers'?

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Geraint Jones, Admiral Group plc - CFO & Director [59]

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So brilliant observation on the first one, honestly. It's almost entirely down to propensity changes following the rate changes over the past couple of years. Second one, can you get the second one?

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Milena Mondini de Focatiis, Admiral Group plc - Head of UK & European Insurance and Executive Director [60]

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Yes. On the price comparison market, I would say in Spain we have seen a trend of not growing direct share of the market and not growing for a few years. Last year, it was readily challenging but not major change compared to the year before. France was a bit different. I thought -- I think 2019 was a bit tougher than in the past, but we've seen already some sign of recovery. So yes, already -- by the end of the year, beginning of 2020 is already going a bit better. I don't think we have reason to expect that price comparison site and quotes will increase massively in the next few years, but we do expect anyhow a steadily increase in the medium, long term as generation of customer become younger and more digital savvy. So -- but gradual toward that.

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David Stevens, Admiral Group plc - CEO & Director [61]

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Reinsurance contracts in the U.S...

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Geraint Jones, Admiral Group plc - CFO & Director [62]

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What was the question? I'm sorry, I missed out.

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [63]

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Your quote share proportion fell. Was that your choice, or was that the reinsurers'?

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Geraint Jones, Admiral Group plc - CFO & Director [64]

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It's a combination of both, I think. Yes, a combination of both. We've just moved the -- we moved part of that to our Gibraltar insurer. So we've effectively retained the risk, but we just moved it out of the U.S. in to Gibraltar. So partly ours, partly theirs.

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David Stevens, Admiral Group plc - CEO & Director [65]

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We may have come to an end -- or one more or -- one more. All right. There's -- I'm sorry. The hand -- well, you've had a go, James. Sorry. You had one. Go ahead. Sorry, James. Happy to do it afterwards.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division - Financials Analyst [66]

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Andreas van Embden, Peel Hunt. I just want to compare the accident year 2014 to 2019. 2014, you opened at 83%. And if I recall correctly, there was a soft market with declining claims inflation post LASPO. Now you're opening at 83%, your initial loss pick, in a market that is soft but with rising claims inflation. Would it be fair to think that -- that 83%, that it will continue to tick up a bit in the current environment? Or do you think that 83% has now peaked in line with 2014 and it will be sort of flattening out from here?

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Alistair Hargreaves, Admiral Group plc - COO of UK [67]

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I think it's difficult to tell. What that, I think, the trends tell us is typically, over time, we see releases on the first pick at 12 months. And I don't see anything material that would tell us that, that won't be the case for '19.

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Andreas de Groot van Embden, Peel Hunt LLP, Research Division - Financials Analyst [68]

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You opened at the same level in 2020 as in 2019.

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Geraint Jones, Admiral Group plc - CFO & Director [69]

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I think we'll be disappointed if 2020's loss ratio is worse than 2019's loss ratio, but given that we're sort of 2 months into the year, it's a little early to comment.

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Alistair Hargreaves, Admiral Group plc - COO of UK [70]

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I think what we're doing in 2020 is we -- so far, in 2020, we put through price increases to match the level of claims inflation that we've been seeing. And we put through price increases through '19, but it's -- you can't tell this early what the claims inflation is on large BI, but for the other claims inflation that we're seeing, we are saying our price increases match that.

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David Stevens, Admiral Group plc - CEO & Director [71]

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Thank you. I hope -- some of us might be able to stay around longer for some follow-up questions, but I think we better draw it to a close for people who need to be moving on. See you in August, if not before.