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Edited Transcript of DLG.L earnings conference call or presentation 7-Mar-17 9:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Direct Line Insurance Group PLC Earnings Call

Bromley Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Direct Line Insurance Group PLC earnings conference call or presentation Tuesday, March 7, 2017 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paul Geddes

Direct Line Insurance Group PLC - CEO

* John Reizenstein

Direct Line Insurance Group PLC - CFO

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Conference Call Participants

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* Arjan van Veen

UBS - Analyst

* Thomas Seidl

Sanford Bernstein - Analyst

* Andreas Van Embden

Peel Hunt - Analyst

* Oliver Steel

Deutsche Bank - Analyst

* Cameron Hussein

RBC - Analyst

* Andrew Crean

Autonomous Research - Analyst

* Dhruv Gahlaut

HSBC - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Direct Line Group 2016 preliminary results presentation and conference call. I will now hand you over to Paul Geddes, CEO of Direct Line Group, to take you through the results. Thank you.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [2]

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Thank you, and good morning everyone. Welcome to our full-year results, a week later than originally planned thanks to waiting for the Lord Chancellor's announcement, which I think, given events, was a good delay.

So here you can see on the chart our 2016 highlights. Another successful year that demonstrated the benefits of our multi-year transformation program towards our mission to make insurance much easier and better value for customers.

As a great retailer, we increased our competitiveness across distribution channels, increasing our own-brand policy count by over 200,000 policies, having written the highest volume of new business since the IPO in a high shopping market.

Motor premiums were up almost 9.4% in 2016 following a very strong year for our market-leading Direct Line brand, which I'm going to share in a lot more detail later.

As a smart and efficient manufacturer, in 2016 we expanded our own repair network, we extended our home and private insurance partnership with RBS for a further three years, and we extended the nationwide travel partnership.

We were also disciplined on costs, and through our efficiency improvements offset additional levies, investment in the business, and funded new business growth.

Finally, to lead and disrupt the market, we continued to grow our share of the direct commercial market, and we demonstrated our determination to stay at the forefront of new car technology with a series of new relationships. And I'll say more about these also later.

All this enabled us to improve our underlying COR to 91.8%, which after adjusting for weather, was 93.5%, towards the bottom of the 93% to 95% range we set at the start of 2016.

Post-Ogden, the combined ratio was still comfortably below 100%. Return on tangible equity was 20.2% before adjusting for Ogden, and 14.2% after.

As a result of our strong balance sheet and prudent reserves, we delivered 5.4% [sic, see presentation page 4 "5.8%"] growth in the final regular dividend. We did pay a special, to remind you, at the half year, and our capital position is strong at 165%, which is above the middle of our range.

So we're taken in our stride, we think, the challenges from IPT rises, the Ogden rate decision, Flood Re, sterling devaluation to name a few, and we're now confident we can take any opportunities that result in the market in our stride.

Over to John for some numbers.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [3]

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Thanks Paul, and good morning everybody. We decided to present you with both our reported figures and the underlying results pre the Ogden change as we felt this would be more useful.

In our statement last week, we outlined the one-off impact of moving to the new rate, which we believe doesn't affect our underlying position going forward. I'm going to cover the headline results first, and then I'll explain the specific Ogden impact, and then I'll talk to business segments excluding Ogden as I think that's more instructive as to our future prospects, and move back to capital, which clearly will reflect Ogden.

And in the appendix, we've included the usual segmental P&Ls again, both pre and post the Ogden adjustment. Hopefully, it's all transparent.

Starting with the financial summary here, as Paul said, we think it's a strong set of results. We grew premiums by almost 4% in 2016, helped by particularly strong growth in Motor. Pre-Ogden, operating profit was GBP578.6 million, 11% ahead of 2015.

There are, of course, a number of moving parts which I'll come onto later. But in summary, the biggest movement was a GBP70 million increase in underwriting profit, which reflects lower weather-related claims costs, and a higher prior year releases. This was offset by higher costs and commissions.

Secondly, instalment and other income increased to GBP168 million due to higher written volumes, while investment return was GBP27 million lower than prior year on lower assets under management, and fewer unrealized property gains.

Ongoing COR of 91.8% was a couple of points better than 2015. Adjusted for weather, that would have been 93.5%, in line with our guidance.

Total costs were GBP924 million in 2016. That's GBP39 million higher than prior year. It includes an additional GBP24 million Flood Re levy, and GBP39 million of non-cash impairment. We believe the underlying position is reasonably good, particularly in the context of our strong new business growth.

At a segmental level, better weather in 2016 led to a significant increase in Home and Commercial profit, and that was partially offset by Motor and Rescue, and other personal lines

Here we come to Ogden, and I want to take a moment to explain the impact to our business from the reduction to the discount rate announced last week.

In summary, we've booked a one-off hit of GBP217 million in 2016, but we expect very small impact to our earnings going forward. This takes account of the change to the rate, which for us is from 1.5% to minus 0.75%, along with the estimated impact on PPO propensity.

Our reinsurance was renewed at 1 January, and we maintained cover at GBP1 million, so our costs and coverage are protected during 2017. And we continue to hold a significant margin above the ABE, having maintained our reserving strength post the Ogden change.

I'll go through the P&L, balance sheet and solvency in that order for both 2016, and our expectations for 2017.

2016 is pretty straightforward. We took a charge of GBP217.3 million, of which GBP12.1 [sic - see presentation page 7 "GBP12.2] million relates to the 2016 accident year.

As for 2017, there are a few effects, but they're all small.

The first one is we expect a small earn-through effect from business already written, but the impact should be smaller than the GBP12.2 million impact you see there for 2016. So the 2017 impact smaller than the GBP12.2 million you can see for 2016 from the earn-through.

The second point, which deserves a bit of attention, is that in recent years we have been recognizing prior year releases as we provided for claims at 1.5%, but these were settled at 2.5%. We estimate that this would have given us a release of about GBP10 million in 2016, perhaps a little lower in 2017. We no longer expect to get that release going forward.

However, we do expect this will be offset somewhat by movement in the current accident year as we'll no longer be adding a 1% prudent provision to current year claims, i.e. we'll be booking at minus 0.75%, not at minus 1.75%.

The net impact of these two items -- of those two little bullets -- in 2017, we think will be very small.

Now clearly -- so all those three things together, we think, will be small in the context of a very large business with high profitability. But clearly, obviously, the underlying 2017 current year performance will depend on market conditions.

So, moving down to the balance sheet, this is quite simple. We have higher claims liabilities and lower retained earnings. We maintained our reserve strength overall. Despite Ogden, we see no material impact in 2017.

Then moving on to Solvency 2, in broad terms, the Ogden impact was a GBP180 million reduction in eligible own funds, which is pretty similar to the IFRS charge post-tax. And the SCR also increased by approximately GBP80 million, and that's due to higher claims liabilities as a result of Ogden, plus a reduction in tax benefits due to lower 2016 profits.

Importantly, it doesn't take into account any implications of uncertainty around possible changes we could still have to the discount rate because that's still up for grabs.

So, overall, our position is we've absorbed the hit, remained focused on trading. That's what's important to us in 2017. We're going to have very little carry-through from what's happened in 2017, and we believe we're well positioned to trade.

Let's go to more positive things, the policy count on slide 8. It's down a little over the year. However, this marks another year of growth across our own brand portfolio, and in particular the direct channel, which gained momentum during 2016.

We believe this is a result of offering customers better propositions combined with our improved trading and sharper pricing. Our improved digital capabilities have been a key enabler to this growth as well, allowing customers to purchase our products quickly and easily via their chosen channel, be it direct through our website, call centers or through price comparison websites.

Starting with motor, which is predominantly own bands, motor grew volumes by 4.5% in total. Direct Line, Churchill and Privilege together grew by 5.3% over the year, and the majority of this growth was driven by the Direct Line brand.

In home, it's also been a good year for own brands which were up 2.3%. This was due to improved trading across both direct and PCW channels. In home partners, which account for around half of home policies, volumes were down 4.7% during the year.

But the direct growth story continued in Green Flag and commercial as well. Green Flag policies were up 7.4%, and in Commercial our Direct Line for Business brand reported a 6.4% increase in policies.

This growth in our own brands in a high shopping environment demonstrates that we're doing the right thing for customers.

Turning to premiums, which, just to remind you, all exclude IPT. Gross written premiums increased by 3.9%, largely driven by motor. Motor premiums are up 9.4% due to strong new business growth, particularly in Direct Line.

Home premiums were 3.7% lower in 2016, primarily due to partnership volumes. Written premiums for our own brands, Direct Line, Churchill and Privilege, were down a little in 2016 in home, although direct business -- although we did see some growth in own brands in Q4.

Overall, rescue and other premiums were up a little. Within that, rescue was broadly flat, but Green Flag direct business grew premiums by 11%.

Commercial premiums were up 3% on last year, mainly due to growth in Direct Line for Business.

Moving on to combined ratio. This improved by 2.2 points to 91.8%. Normalizing for weather, the COR would have been 93.5%, which is in line with our guidance, and pretty similar to the prior year.

Overall, we improved the loss ratio, but this was offset by higher expense and commission ratios.

Starting with the loss ratio on the top right, which improved 4.5 points to 55%. The current year attritional loss ratio improved yet again, continuing the trend since the IPO. In 2016, we delivered another 0.7 percentage point reduction as a result of improved underwriting.

The contribution from prior years was higher yet again, continuing the trend since the IPO. Sorry, the contribution was higher than we expected in 2016, and GBP51 million more than in 2015. This was mainly due to positive development from the storms at the end of 2015.

Finally, the majority of the loss ratio improvement, i.e. 2.5 points, was due to better weather in 2016.

Moving to expenses and commissions, the expense ratio was 25.3%, up 1.7 points, due to two items. First, the Flood Re levy of GBP24 million, which equates to roughly 0.8 of a percent. And secondly, the intangible asset impairment which we flagged at Q3, which came in at GBP39.3 million, or 1.3 points. Absent these items, the expense ratio would have improved by about 0.4 of a percent.

The commission ratio increased a bit to 11.5% as a result of sharing better weather and prior year development with our partners.

Stepping back, we believe that achieving a 93.5% normalized COR, improving the current year attritional loss ratio while supporting strong levels of new business growth, and investing in the business and absorbing higher levies represents a good result.

Let's move on to the ratio trends at a segmental level, starting with motor. A good set of results for motor. Strong top line growth and disciplined underwriting delivered an improved current year loss ratio. Overall, pre-Ogden, the motor combined ratio increased to 95.1%, mainly due to a higher expense ratio.

Moving from left to right, motor delivered a further 1.7 points of improvement in the current year attritional loss ratio to 85%, impressive in the context of the growth we've achieved.

The improvement in current year was offset by lower prior year releases, in line with our guidance. The 2-point increase in the expense ratio is all due to the intangible impairment, but as you can see from the waterfall, our run-rate expense improved.

Commissions were up a little due to a true-up on partnership business. And excluding the impairment charge, motor made good progress year on year, an impressive result when we consider we wrote the highest volume of own brand new business since the IPO.

Now for more color on motor pricing and claims. In 2016, motor took market share at attractive margins, having grown policy count and premiums while approving the CY attritional loss ratio.

Starting with pricing, we've changed our disclosures here a bit, replacing price and risk mix metrics with average premium movements, which we believe is an easier metric to understand.

Average written premiums increased by 6.3% in 2016 over the year, while the risk in our portfolio declined modestly. Our pricing reflected our claims experience and also enabled us to improve our current year performance, and support investments in customer propositions.

These investments in propositions, particularly in Direct Line, have resonated well with customers, enable us to benefit from the higher levels of shopping, and this has resulted in strong new business growth. And despite the high levels of shopping in the market, our strong retention rates remain stable.

Onto claims where trends were broadly in line with what we previously said. Taking bodily injury first, Ogden aside, it was another benign year for large bodily injuries claims, which performed better than our expectations.

Small bodily injuries seemed to perform well, and you can see that in the usual chart with RCA portal stats, which we've included in the appendix.

Damage claims, on the other hand, continue to develop adversely. The majority of the adverse performance was driven by increased severity. We expected some damage inflation from our investments in propositions such as seven-day repair and guaranteed hire car, but most comes from general inflation in the cost of parts, paint and labor, along with other factors.

Taking all this together, we believe claims inflation is running at the top end of the long term 3% to 5% average.

Now, we've made a change to our reserving chart here as we thought a net view is more useful than gross, given the changes to our reinsurance program over the years. You'll probably be getting your rulers out and comparing the two charts, but essentially, the overall trend is the same, as this is pre the change to the Ogden rate.

Prior accident years continue to develop favorably, which is a reflection of the conservative approach to reserving, and operational improvements in the way we handle claims.

The initial current year net loss ratio of 83.4% for 2016 is lower than prior year, consistent with our headline motor results. Looking ahead, our message remains unchanged. Assuming current claims trends continue, we expect the contribution from prior years will be significant in 2017, albeit we'd expect it to reduce over time, as it did a bit in 2016.

Moving to home performance on slide 14. Home's combined ratio improved significantly in 2016 to 85.0%, driven by lower weather losses and higher prior year releases. The current year loss ratio deteriorated by 2 points, but at 47.8% is still a good number.

The year-on-year increase is partly driven by claims inflation and partly due to changes in tenure and channel mix away from partners to PCWs, which I'll come onto.

Prior year releases were higher in 2016, as home recognized favorable development on the 2015 storms.

The expense ratio increased by 1.9 points due to the additional Flood Re levy in 2016, although we were able to partially offset the costs of that in other efficiency measures.

The higher commission ratio in 2016 reflects profit shares associated with favorable weather and prior year development.

Now, for more color on home pricing and claims. In home, we maintained competitiveness across our strong own brand portfolio growing policy counts by 2% to 3.3% over the year. In our home business, we seek to protect our valuable own brand portfolio, and ensure a strong position in all the main channels.

The home market remained very competitive in 2016. As shopping rates were high, price comparison sites continued to grow market share. We wrote higher volumes of new business through our own website and through PCWs, while the impact of deflation does flow through the back book.

The change in channel mix and tenure led to a 3.9% reduction in own brand average written premiums in 2016. We saw some underlying improvement in the market later in 2016. After many periods of deflation, you'll recall we highlighted some stabilization in prices in Q3, and this improvement continued in Q4 where we were able to increase new business prices a little, albeit not enough to keep pace with claims inflation.

And on claims, the claims experience in home has been pretty benign over the last few years, and at the half year we said overall inflation was below the long-term average. In the second half, we saw an increase in claims costs, which we believe reflects inflationary pressure in the building trade.

This pressure on margins is reflected in a higher current year attritional loss ratio in 2016. Although do remember that 2015 was the best year on current year loss ratio we've had for some time.

Overall, we believe the home market is becoming tougher due to rising claims inflation, and it remains very competitive. Against this backdrop, we continue to balance between margin and volumes, aiming to deliver long-term value.

Now, back to segmental, with rescue and other personal lines. Total rescue and other personal lines' combined ratio increased to 93.3%. Profit was down by around GBP6 million. The main movement in this category was a 2.5-point increase in the current year loss ratio, which was mainly due to timing of pricing changes to partnership travel policies.

Taking rescue on its own, you can see from the table that rescue combined operating ratio increased a little to 83.4%. Rescue remains the biggest driver of profit in the segment, contributing GBP46 million to the segment as a whole in 2016, and please see the appendix for more details on that.

Last but certainly not least, commercial. It's a great set of results from commercial in 2016. The best results since the IPO. Headline combined ratio was 93.2%, and underwriting profit was GBP30.6 million, although there were some very favorable tailwinds, namely lower weather and large losses, and some favorable development on the 2015 accident year.

Normalizing for weather and large losses, commercial COR would have been 3 points better than 2015 due to higher prior year, but also some current year improvement.

So moving left to right, starting with the current year loss ratio, this improved by 9.5 points. As I said, some of this improvement was due to better weather and fewer large losses. But commercial did deliver over 1 point of underlying attritional current year improvement due to better pricing risk selection.

Commercial also benefitted from higher prior year releases, some of which related to favorable developments from the storms at the end of 2015.

The expense ratio was up a little in 2016 due to marketing activity, while commissions were flat. Commercial made GBP66.6 million of operating profit in 2016, more than 3 times more than 2015. And in the appendix we've got the usual segmental P&Ls, again pre- and post-Ogden.

Now let's come back to costs for the Group as a whole. 2016, our total cost base was GBP924 million, GBP39 million higher than 2015, which is all due to an impairment on intangible assets. The impairment charge of GBP39 million was a non-cash item, reflects the large volume of work we're doing on IT projects to enhance our digital offering, customer experience and operational efficiencies.

Excluding this non-cash item, we held our costs broadly flat, having fully absorbed an additional GBP24 million Flood Re levy in the first half, and achieved a 5% year-on-year reduction in the second half. The latter due mainly to lower claims handling expenses.

This is a pretty good result when you consider we've also absorbed inflation again, keeping staff costs flat year on year. Flat costs also means we've effectively managed costs associated with the highest new business growth we've had since the IPO.

Our marketing costs were down another 4% in 2016, the lowest spend since the IPO. Overall, we've made significant progress on costs over the past five years, whilst investing in our capabilities and propositions. It's this investment that's driving our strong brand performance, and these numbers demonstrate our discipline on cost.

In ratio terms, in 2016 our expense ratio was 25.3%, and 24% ex the impairment. Looking ahead, we see further opportunity to improve efficiency so we can continue investing in the business and improving our competitiveness. We therefore aim to reduce the expense ratio in 2017 along with the commission ratio normalized for weather. And we aim to reduce further both ratios over time.

In 2016, we delivered a robust investment result against a backdrop of increased financial market uncertainties, and further yield compression. Starting with the top left, headline assets under management stood at GBP6.6 billion at the end of December, 3.5% lower than the previous year.

On the top right, you can see the income yield increased a bit to 2.5% in 2016, helping to offset the impact of lower AUM to maintain -- enabling us to maintain investment income of GBP165 million.

The investment return yield held at 2.6% in 2016, as we recognized gains of just GBP3.5 million compared with GBP29 million in the previous year. And that's due to fewer unrealized property gains in 2016, per our guidance.

Looking at the asset allocation in more detail on the next page. As part of the ongoing review of our investment strategy, we decided to exit securitized credit during Q3 2016. We also sold two investment properties in 2016, realizing a small gain above unrealized fair values.

Investment in three new mandates commenced with the subordinated financial debt and global credit at their benchmarks.

The third is commercial real estate loans, which aim to be fully funded by the end of 2017.

Debt securities make up the majority of our portfolio with GBP4.7 billion of assets, of which 69.9% are rated A or above.

In terms of outlook, ongoing yield compression is reflected in our 2017 guidance of 2.4% income yield. That's based on the current yield curve and assumes interest rates remain unchanged.

This slide shows how we get from the headline ongoing operating profits of GBP578.6 million pre-Ogden to profit after tax of GBP452.6 million. The run-off segment of GBP69 million pre-Ogden was slightly lower than prior year, but again it more than offset restructuring costs. Looking ahead, we expect to incur further restructuring costs, and these will be substantially offset by run-off profit over the four-year period 2015 to 2018.

Diluted earnings per share from ongoing operations increased by 23% to GBP0.327 pre-Ogden, and was down versus prior year after adjusting for Ogden.

Now we'll turn to coverage -- to capital. You'll recall we transitioned to our internal model at the half year following PRA approval for our model in June. At the half year, our Solvency 2 ratio under the model was 184%, slightly above our 140% to 180% target range which we also set out at the time.

This was a strong starting position, and has meant we were able to comfortably absorb the Ogden charge, pay our ordinary dividend, and still remain above the midpoint of our target range at 165%.

Our solvency ratio fully recognizes the new Ogden discount rate of minus 0.75%. Although it doesn't take into account the implications from the uncertainty arising from the new government consultation.

The impact of the change to the Ogden discount rate cost us 24 points on our Solvency 2 ratio. As we showed earlier, this was approximately a GBP180 million reduction in own funds, and an GBP80 million increase in solvency capital requirements.

Overall, we think we have a strong solvency position, and this strength remains a key enabler to our strategy. And we'll submit our final solvency calculations in May, along with the rest of the industry.

Let's go through some of the moving parts.

Slide 25, we've broken out the moving parts. Sorry, it's slide 23 -- in our own funds calculation. This is the first time we've provided a slide and the numbers shouldn't be too surprising. At a high level, the Solvency 2 world looked quite similar to the IFRS world in 2016.

We don't expect the IFRS and Solvency 2 world to align every year, but we do expect the two to broadly reflect each other over time. During 2016, the Group's own funds decreased from GBP2.47 billion to GBP2.34 billion.

First, we had a one-off movement due to the change in treatment of the risk margin as we moved from standard formula to Solvency 2. We benefitted from mark to market movements in 2016 as interest rates fell and credit spreads narrowed.

We generated approximately GBP490 million of Solvency 2 capital in the year, which was reduced by the Ogden rate change of approximately GBP190 million.

Capital expenditure continued at around GBP100 million per annum, reflecting investments we continued to make into the business.

Finally, we continued to return significant dividends to our shareholders, totaling GBP340 million in 2016.

Moving to dividends on slide 24. As you've heard, we've announced today our final regular dividend of GBP0.097 per share. It takes the regular dividend to GBP0.146 for the year. That's 5.8% growth in the year, and it's in line with our ambition to grow the regular dividend annually. Including the special dividend we paid at the half year, but excluding the impact of international in 2016, year on year we've increased capital distributions by 8.8% from GBP0.226 to GBP0.246 per share.

In terms of earnings, although we don't target a payout ratio, we declared GBP338 million of dividends in 2016, which is over 100% of our net income for the year.

Before I move to the outlook, let me just summarize some of the financial highlights. 2016 marks another year of progress. We grew premiums and improved the current year loss ratio again. Our underlying cost base was flat, having offset the Flood Re levy, and costs associated with new business growth through improving our underlying efficiency.

We grew our investment income yield to deliver a robust result against a backdrop of market volatility. We grew the regular dividend again in line with our policy of aiming to grow this in real terms.

And finally, our capital position post-dividend remains strong, despite the charges from Ogden.

Now let's look at the outlook for 2017.

We'll talk about this in segments as well as at Group level, starting with motor. The motor market is facing significant change following the Ogden rate decision and forthcoming IPT increases and other regulatory actions. The high levels of customer shopping in 2016 look set to continue in 2017, and we believe this represents an opportunity.

In terms of prior year reserve releases, we expect the contribution will be significant in 2017, albeit will reduce over time.

In home, after years of premium deflation, we saw some improvement in the new business market in Q4, albeit not enough to keep pace with claims inflation. We continued to aim to protect our valuable own brand portfolio, seeking to balance value and volume to deliver sustainable long-term value.

Our partnership with Nationwide was due to terminate in June 2017. Their plans are currently being reviewed, and this may result in the migration moving later into the second half of 2016.

While I'm on the subject of partners, let me just mention the Prudential. We had a long-term relationship. That deal came to an end this year. We have a new deal where we'll be paying them a brand license, but commissions we will not be paying anymore. So we'll keep that a net-net. That's favorable. One of the reasons why we see commission ratios going down in the future, as we said.

Finally, in home, the weather load for 2017 has reduced to around GBP65 million, reflecting lower volumes.

In rescue and other personal lines, we will continue to enhance the Green Flag customer experience, building on the growth we achieved in 2016.

In the rest of personal lines, we plan to rollout new initiatives in pet and travel to help drive profitable GWP growth there.

Prior year release in rescue and other personal lines are expected to be significantly lower in 2017 following one-off benefits and adjustments in recent years.

Finally, commercial. We're aiming to build on the excellent progress we've made in commercial direct market through the delivery of further improvements to our trading capabilities and Direct Line for Business, while in NIG we have a number of operational initiatives in train designed to deliver effortless trading to our brokers to differentiate us from the competition.

Turning to what this means for Group results. In 2017, we're targeting a combined ratio in the range 93% to 95% assuming normal annual weather and no further change in the Ogden discount rate.

Within that, as I said, we are aiming to reduce both the expense ratio and the commission ratio in 2017.

Moving across to investments, our 2017 guidance of a 2.4% income yield is based on the current yield curve and assumes interest rates remain unchanged. We continue to expect assets under management to decline modestly.

Finally, we continue with our ongoing target to deliver sustainable growth at a 15% or better return on tangible equity.

With that, I will hand over to Paul.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [4]

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Thank you, John. The success that John has just described means that we've taken the Ogden impact in our stride, and we believe we are well placed to succeed in the market results. But over the next 10 minutes or so I am not going to mention the O word, and instead deep dive into two things that I'm really proud of that bring our strategy to life, starting with great retailer, and sharing with you the story of our fantastic turnaround in our biggest, most profitable and important brand, Direct Line.

For us, being a great retailer is about building compelling brands, and we believe in owning powerful retail brands and owning our customers, which not only puts the fate of our business firmly in our own hands, but we also believe this is where most of the economic value lies in the insurance value chain.

We also believe that owning multiple brands means you can better meet the diverse needs and preferences of customers. We've done a lot to improve our brands over the last seven years. We started by retooling the basics supporting all our brands, regaining our excellence in pricing and claims, and improving our cost base.

With these basics in place, the next urgent task was to get competitive on PCWs through our Privilege and Churchill brands. And working with the PCWs themselves, and optimizing our marketing, products and pricing for the channel, we really turned this around, and it worked.

Privilege and Churchill turned around their competitiveness and started to grow, and today they successfully compete against the most competitive and efficient players in this channel.

Our next task was to turn around Direct Line, where a multi-functional team was charged with reinventing the brand for both personal and SME customers with a launch in August 2014. So I'm really proud to put up this slide showing the turnaround we've achieved in Direct Line, together with some of the many initiatives that delivered it.

This chart shows the sequential change in the number of Direct Line home and Motor policies, showing the improving trend in policies almost immediately after the relaunch in August 2014, and then a happy day in September 2015 where the brand finally went into growth.

The chart plots the many initiatives along the bottom, and just some of the financial and other benefits flagged above. Clearly, a lot of individual components to success, but let me start by telling you the strategy behind it.

Our start point, as you can see on the left-hand side here, was the recognition of the inherent value of the Direct Line customer. They liked the direct relationship. They valued service, experience and brand. They bought more products. They stayed longer, and, adjusting for everything else, they simply had a better claims performance.

We believe that by investing some of that additional value back into the business, we could make our existing customers even happier, and so further increase their retention and product holding. And we could also recruit new customers with similar characteristics and similarly higher value, and so it proved.

Through this reinvestment, we've pretty much made everything better. Here are just some of the improvements. We gave customers better insurance with unique features such as seven-day car repair promise, guaranteed hire car, and our emergency plumber proposition.

We gave them better value, such as by removing mid-term amendment fees and through competitive pricing. And we also gave them a better experience, such as introducing digital claims services, a motor claims tracking portal, as well as investing and completely retraining over 4,000 frontline staff with new skills to give customers more empathetic service, and our net promoter scores have climbed ever since.

All this communicated with drama and wit, with our award winning marketing using our Fixer campaign.

Now, this has been a huge amount of work across our 10,000 people, and I'd really like to emphasize how hard this is to replicate. Firstly, delivering these propositions isn't easy and it really helps to have both scale, and to be vertically integrated.

Let me take, for example, the seven-day car repair proposition. Delivering it is really helped by our early direct contact with our customers and our ability to get them to share photos and videos from their phones so we can be ordering parts immediately.

It's also really helped by owning body shops. We own 19 now and growing, making us the second largest body shop owner in the UK, and the largest insurer owned repairer in the UK. This means we can have state of the art centers, and we can fast track Direct Line repairs.

But having differentiated propositions would be hard to justify, unless you can tell new and existing customers about it. It's hard for PCW brands to justify this investment when their main means of explaining their product to customers is simply ticks on a PCW site. No wonder there is such homogeneity in the propositions of PCW brands.

But no such problem for Direct Line. Our leading brand and award-winning capabilities in social, digital and customer experience capabilities mean that we get to interact directly with millions of customers. We generate about 4.5 million direct quotes a year from our own website and our own call centers, meaning that we can directly explain our propositions to our customers.

All this hard work and investment has generated tangible benefits. We've achieved higher new business sales, up 31% across motor and home in 2016, and an 8.2% uplift in Direct Line for Business quotes.

We've also seen higher persistency, up between 4 percentage points and 5 percentage points and all done at a lower marketing spend with greater efficiency.

The traditional value creates and completes the vicious -- the virtuous, I should say, circle. I'll say that again. The traditional value completes the virtuous circle. More value for customers generating more customers and more valuable customers, and so the flywheel starts to turn.

We've already recognized the increased value with further investments in proposition and in price. This has in turn improved our marketing efficiency to such a degree that we can now acquire a new motor policy direct for a lower cost than we can via a PCW, a great asset going forward.

Let me end this section by showing you the two latest ads that are about to go on air for two brand new propositions, which of course come on top of all the propositions we've given our customers already. These two for SME and for motor. We also have a very, very secret one on home that's too secret to share with you today.

(Video playing)

I hope you'll agree that both these ads tick all the boxes. Insightful, engaging, dramatizing a relevant insurance event, and memorably demonstrating why Direct Line outperforms other insurers in fixing customers' problems.

And now to lead and disrupt the market. In the interests of time, I'm going to keep this to a single slide on the topic of connected and autonomous cars. But this belies all the focus and energy we're putting into understanding and influencing the future of motoring.

We believe the time to act is now, even if the real-world impact will take a few years or even decades to fully develop. That's because decisions taken today, like the recently proposed changes to UK law for automated driving systems will profoundly influence the future.

It's also the reason we've spent time working closely with motor manufacturers on connected and autonomous cars. I'm delighted that we're able to extend our successful motor insurance partnership with Peugeot Citroen in the UK for a further four years. This partnership packages insurance, including telematics, with car finance.

We now have to build on the success and create propositions based on the technology already fitted into the car, and so avoiding the need to retrofit black boxes.

Similarly, through our relationship with The Floow, we're also looking to use data connected by Renault's R-Link multimedia platform.

Onto autonomy, we're working with Tesla to understand the specific characteristics of electric cars and the role advanced technology and driving aids can play in enhancing road safety, and therefore insurance. This year Tesla become introducer appointed representative able to refer customers to Direct Line so we can insure the customers of Tesla.

And in 2016 we kicked off a partnership called MOVE_UK with the UK Government, technology providers and car manufacturers to accelerate the development and market readiness and deployment of automated driving systems. With ADS systems observing and recording in the background whilst MOVE_UK vehicles are driven normally, we're learning how ADS technology would respond in real life situations, with over 200 different channels of data collected from each vehicle.

So I hope from this we've given you a deeper insight into two of our key strategies, helping you understand why we're so confident in our ability to win in the current market and to sustain it into the next. Our strategy is delivering results with benefits coming through multiple areas, yet we still remain excited by the significant opportunities we see to improve.

Here we give you the usual level of detail of our 2017 priorities, but in the interests of time I'll let you read these at your leisure, and of course you can come back to us with questions.

So some key messages from me before we go to questions. Against the backdrop of a shopping market, we are winning in the marketplace by giving our customers more of what they want at a competitive price. Our solvency is strong at 165%, and has comfortably absorbed the cost of lower Ogden discount rate, whilst we reserved our reserve strength, and we expect prior year releases to be largely unaffected by the Ogden decision and to remain a significant feature of our results, albeit they will reduce over time.

Looking forward, improving efficiency remains core to our strategy, and we aim to improve both our expense and our commission ratios in 2017. But we're also going to continue to invest in our future capability, as I've just taken you through.

With this in mind, we are aiming for a 2017 core in the range of 93% to 95%. This of course assumes normal annual major weather claim costs for home and commercial, and assumes no further change in the Ogden discount rate. Dramatic I know.

And our 15% RoTE target remains ongoing. You may have seen today that our long-term incentive plans have been increased for the next grant to 15% to 18% range, keeping us aligned with our shareholders, and keenly focusing on maintaining the Group's strong returns.

Finally, the multi-brand, multichannel strategy that brought us success in the shopping markets of 2016 means we're well placed to win in the disruptive markets of 2017.

Thank you ladies and gentlemen, and we'll now take your questions firstly in the room, then Rosie onto the phones.

Good. Right, shall we do -- we'll do a somewhat clockwise motion. Microphone please?

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Questions and Answers

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Arjan van Veen, UBS - Analyst [1]

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Thank you. Arjan van Veen from UBS. If I may ask a couple of questions around pricing post the Ogden change? Some of your competitors have already moved, so I think maybe a bit of color around what's happened so far.

Secondly, your confidence in being able to push through the price increases you need.

And thirdly, given your retentions are lower than -- quite a bit lower than some of your competitors, that obviously creates potentially an opportunity, should you wish to take a bit of market share. So maybe if you can comment a little bit on that as well, to the extent you can.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [2]

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So let me have a go, and I normally disappoint on future looking pricing statements because we don't like to talk about future pricing for all sorts of reasons, including we don't know what's going to happen in competitive markets.

But listen, we've taken some pricing action, as we said we would.

Remember of course, we're shielded, as you point out, by reinsurance, as are many of our competitors. The level of shielding, both in terms of deductible and date, is variable in the market, and we think we're in pretty good shape with a million and all of 2017 covered. So in a way we've got a lower level. We've got some shielding.

So obviously there is some -- as John pointed out, there is some inbound cost pressure already this year. But there'll be more, depending on the outcome of two things really; the reinsurance renegotiation for 2018, and of course we are not planning or betting on it, but there is an expedited consultation going on with indications that should that consultation recommend a change, that there could be some expedited law making. And of course that may -- that could theoretically come into effect within 2017.

So really I think the big impact -- there's a lot of unknowns and therefore what will happen on pricing I think is still to be seen.

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Thomas Seidl, Sanford Bernstein - Analyst [3]

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Thanks. Thomas Seidl from Bernstein. The first again on this Ogden price change. You say it has little impact for 2017 forward, so does that assume that you expect the market to all increase the price in line and hence there's little impact going forward? First question.

And second, on home, you lost a little bit of volume last year. To what extent is this driven by PCW and what is your outlook? How can you keep competitive given the dramatically rising penetration in this segment?

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Paul Geddes, Direct Line Insurance Group PLC - CEO [4]

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Okay. So listen, our comment on 2017 is -- a lot of it is about the reinsurance protection we have in 2017. So we're saying there is obviously a net -- there's a net cost as well, and as you know, I can't comment on future pricing but we do work back from the loss ratios we want to write at.

And that -- so what I'm saying is there's more uncertainty about what the 2018 outcome, as I've said, for lots of reasons, including, by the way, there is something going in our favor, which is the whiplash reform coming in in October is going back in the other direction.

So there's quite a lot of moving parts for 2018. There's the rate change again in -- theoretically in 2017. What happens on reinsurance, which obviously impacts people before us and we'll see the impact of that in the marketplace. Then as I say, in 2018 we've also got the -- in the other direction, the whiplash.

So there's just more uncertainty in 2018. But our stance in that uncertainty is we work back from the loss ratios we want to write at and then we take the volume that we can. 2017 there's less uncertainty.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [5]

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Just to add though, we haven't -- our forecast -- our guidance, sorry, for COR for the current year for 2017, 93% to 95%, there's very, very little impact of Ogden in there. It's pre-Ogden and if they change the rate, obviously that would change. So we don't -- we're not assuming any great benefit. We're not assuming any great hit. We told you a little bit about some of the small impacts we're getting.

We're going into this year almost as in every other year, but it's going to be a very exciting year because a lot of people are impacted in different ways and there's lots of things going on, and that kind of uncertainty continues into 2018. That's really the message. We're feeling pretty confident going into -- as we are already trading in 2017.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [6]

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So on home we are, just to be really clear, and this is also true in motor, we're competitive on all channels. What I'm saying is we've kind of -- we've done a great turnaround in our PCW competitiveness and now we've layered on top of that growth in Direct Line, which is a fantastic combination. And the same is true in home, and actually we are very successful in winning business on price comparison websites in home.

Some of the deterioration of the loss ratio you've seen is that -- so some of it is risk and some of it is mix, and that mix is channel mix. So the characteristics of the PCW channel is it's slightly worse loss ratios. It has other characteristics.

Now, there's another thing going on in home which is more of a cyclical, so there's a secular thing. There's a mix shift towards PCWs, which we're competitive in and we're happy with. There's a cyclical thing going on in home which is building costs, as John talked about, did go up, and we in the -- towards the end of the year priced for that to seek to recover that. So that's our normal business which is we look at -- we target loss ratios.

Yes, Andreas?

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Andreas Van Embden, Peel Hunt - Analyst [7]

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Andreas Van Embden, Peel Hunt. Ogden again. Would it be possible to do a walk-through from gross to net on your Ogden reserve addition of GBP205 million, including how much reinsurance absorption there was, any use of the risk margin, and the assumptions you made on PPO propensity? It seems from your sensitivities that not much has changed on the PPO sensitivity. I was just wondering how much you used there.

Second question. Could you run your thoughts on why you skipped the final special, and tie that to your solvency range of 140% to 180%?

And then finally on the comments you made about having lower acquisition costs within Direct Line versus PCWs, how much lower are they? Thank you.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [8]

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We're not going to disclose the last one. But even -- we've often said if you take PCW versus direct, we love the direct channel for all sorts of reasons, persistency in cross-product holdings and everything like that. But the problem is they're expensive to acquire. We've often said that. I'm now no longer saying that. So that is -- to even get to the same level is really impressive progress, and I think strategically gives us a real edge in a shopping market.

And as I say, whatever happens on Ogden, there's a lot hitting the customer this year, and we think it will be a shopping market again. There's another IPT going through. There's going to be Ogden changes going through. It's going to look like a shopping market. 2016 was a shopping market driven by IPT and other factors. Renewal price disclosure in April as well. So there's a lot of shopping. We did really well on the shopping market in 2016, which is why we're optimistic we're going to do well on the shopping market in 2017.

And the Ogden hit, as John will say, is in the past, and our relative size of our Ogden hit is, as John says, it wasn't about 2016, it's kind of a historical size thing, and that's behind us. So we really are on terms with anybody else. In fact, with our reinsurance position, I think we're feeling pretty strong in the market. John?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [9]

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Shall I do some of those other ones? I'll do my best. So in terms of gross to net, probably the single number to give you is ceded reserves have gone up by GBP320 million year on year -- no, as a result of Ogden, GBP320 million.

On the risk margin, the risk margin improves a bit because the PPOs are particularly costly to the risk margin. So that pure change makes the risk margin better, but the increase in reserves is a partly offsetting factor, and then obviously year on year you've got the thing I mentioned earlier, which is that we moved from the low risk margin standard model to the high risk margin, higher risk margin internal model in June. So you've got a few movements, but the pure Ogden one is favorable because of the net impact of that PPO point.

On the PPO sensitivity -- propensity, we do assume that as the Ogden rate goes down there will be fewer and fewer PPOs. Obviously below zero there's a point at which, from a reserving -- from a profit perspective, a PPO is better, if you like, for our profits than -- at zero, because we discount them at real zero -- than a negative discount rate. But from a capital perspective it's worse, and that's an interesting thing. Obviously, we don't get a choice normally. The claimant may have a choice and we'll see what happens when the government comes out with the consultation.

But certainly as you come down you get fewer PPOs, and we've had in particular a release from our PPO margin because we had a propensity margin. We were worried it might go the other way previously and we've had a relief from that. We no longer need to carry that.

So hopefully I've answered some of those questions. On the special, we showed you that the impact of Ogden was 24 points on the ratio. So if we hadn't had Ogden, I would have thought -- we will never know for certain ---

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Paul Geddes, Direct Line Insurance Group PLC - CEO [10]

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We'd have recommended it to the Board.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [11]

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-- because you can -- we could have a hypothetical Board meeting. But as management we'd have probably recommended to the Board there should be a special at the year end. That was 189% post-regular, so that would be quite likely. And I don't think anyone will be that surprised that at 165% there wouldn't be. And I think people would like to know much more about the future of special dividends. I'd love to be able to say, but obviously our Board will decide each year based on the current -- the then current -- the conditions that are obtained then.

And we've said normally it's going to be once a year, around this time, when we do the final results and we look at our business plan and look at opportunities and so on. That's what we'd expect.

Now, as you think about our profitability, and we've said that over time our IFRS profits and our Solvency II capital generation should be broadly aligned, not every year but broadly aligned over time, clearly our IFRS profits do exceed our regular dividend by some considerable margin. We're growing -- we aim to grow our regular dividend, but even so there's a margin there and therefore, all other things being equal, you'd expect over time there'd be some years when we generate a special dividend certainly.

But as Neil always said when we started off post-IPO, a special is a special, and a regular is a regular.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [12]

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Yes, Oliver?

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Oliver Steel, Deutsche Bank - Analyst [13]

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Oliver Steel at Deutsche Bank. You'll be relieved I'm not going to ask you about Ogden, though I might mention the O word. So first question is I don't know how far we can push you on this solvency range. Somebody said to me this morning, which I thought was intellectually quite a rigorous comment, how can you pay a special if you're actually not above the top end of your target range. So again, can we sort of see if we can push you a bit on how comfortable you feel with 165%? Would you expect that 165% to need to move up over the next few years? If so, how long do you think that could take and so on?

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Paul Geddes, Direct Line Insurance Group PLC - CEO [14]

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Do you have more any parts to your question, Oliver, or was that it?

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Oliver Steel, Deutsche Bank - Analyst [15]

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Shall I -- well do you want --

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Paul Geddes, Direct Line Insurance Group PLC - CEO [16]

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Well do all your questions.

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Oliver Steel, Deutsche Bank - Analyst [17]

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So the other two questions are much easier. First of all, the commission ratio seemed to be a bit higher than expected. You mentioned some of that in home being profit commissions being paid out. You also talked about a true up on the motor partnership numbers or something. So how exceptional was that commission rate increase?

And then finally, your cash percentage of the investment 16% against your target of 9%, so perhaps you can just talk about what you're doing on that.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [18]

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All for you John.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [19]

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Yes. So I think the dividend -- I don't think -- I'm not going to add too much. I'd love to but I'm not sure, but I'll try. So would we pay a special below 180? And actually if you go back, there were times when we paid a special below top end of the range. We didn't -- we kept at the top of the range while we were waiting for Solvency II to land. We made that clear and then Solvency landed and we did.

So I think it's quite possible for us to pay a special below 180, but that will be decided each year by the Board against the points I made. Could it be paid at 166? I can't answer that one. It will have to depend on the circumstances at the time. But, as I said to Andreas, the dynamics of it are -- because you asked about that as well. If you grow -- you can model this -- you've got a model for our profit and if you grow our regular dividend, it's been growing at around 5%, 6%.

So if you grow that, you'll see that we build surplus. And therefore -- we've given you an indication of the CapEx and those kind of things. You can make an assumption about mark to markets and those sorts of things. And I think your model would show that 165% growing. And that's encouraging clearly from a dividend perspective. That's probably all we can do.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [20]

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I think that's enough.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [21]

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I'm sure your model will be incredibly accurate.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [22]

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Commission ratio?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [23]

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Commission ratio, yes and most things are very small. The big things in there are weather. So in terms of the home business, we profit share obviously the good and bad weather with the partners, and in this case they had, or we shared, good weather in the current year. 2016, hardly any weather cost at all, and in 2015, where we shared the hit as we reserved on December 31 for the storms of around that time, we've had a relief from that. So you can see our own home prior year is up a lot, and we've shared -- that's after sharing quite a lot of that with them. So it's very weather related in this case. So I think you can probably extract that and say that's not normal.

Then -- and we have talked about the commission ratio trend, so I'll just maybe say a couple of points about that. So obviously when Nationwide goes, them being a big partner, you'd expect our commission ratio to go down. So that's not due to our skill really. We'd love them to stay but they're not -- they might stay a little bit longer but they aren't going to stay long term.

But there are other things that we feel more positive about in terms of our commission ratio move that we see over time. So the Churchill -- the deal Churchill has done with Pru is favorable to our commission ratio and favorable net-net. It's a positive. The growth of Direct Line for Business is obviously favorable to our commission ratio and just the growth of own brands is also favorable. So there are lots of things we're doing that are positive that if you looked at our five-year plan you'd see our commission ratio coming down over the years, including 2017.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [24]

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Good. And then cash John.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [25]

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Cash. Yes, it's interest rates. We'd love to find lots of great places to put cash to work. Within risk appetite and so on, it's actually a struggle to find them. Meanwhile, we're all sort of thinking that one day interest rates might start to rise and then it's better to be in cash than to be in something that will be more long term.

We -- if people got interesting ideas -- but we think we've kind of done all the things within our risk appetite pretty much to be diversified, not to take too many risks, and to get decent returns. I think we've done a reasonable job. But we've sort of eked out as best we can. I think now we really do need those interest rates to rise.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [26]

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Sorry Jan, we'll come to you next.

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Cameron Hussein, RBC - Analyst [27]

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It's Cameron Hussein from RBC. Two questions. First of all, coming back to Ogden again, so apologies to everyone in the room for that. But there was a meeting last week with the Chancellor and the CEOs of a number of insurance companies. Could you give us a flavor of what the feeling was in the room?

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Paul Geddes, Direct Line Insurance Group PLC - CEO [28]

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No.

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Cameron Hussein, RBC - Analyst [29]

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And do you believe this is something that the Government might want to correct, or does it feel that the minus 0.75 is the right answer? That's the first question.

And the second question, just on the expense ratio, desire to improve that in 2017. What's the right base for us to look at that expense ratio? Is it 24 or 25?

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Paul Geddes, Direct Line Insurance Group PLC - CEO [30]

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So it was a Chapterhouse meeting but there was a -- so I'm going to rely on what I say on the two statements, the joint Chancellor-ABI statement and then obviously the original MoJ statement on Monday morning, which we all gathered around the screens for. I'm sure you were as well.

I read into the first -- sorry sequentially the first, the MoJ statement a sense that they thought it was the right law, minus 0.75, but they weren't fulsome in terms of saying it was the right outcome at minus 0.75, and therefore I think even they were saying they felt bound by the law. We disagree, by the way, on them being bound by the law. But in their interpretation, I think that was their proclamation.

And then obviously the Chancellor was quite careful in what he said. Urgent consultation, bringing forward necessary legislation at an early stage, which I'm encouraged by. So obviously there needs to be a process. There needs to be a consultation. Many of our arguments are well prepared. We need to update them. And they rest a lot on what do people actually invest these lump sums in, which is not ILGS we think, which is -- and it's not we think assets with a negative return. So that's the basis. We obviously need to hear that out and the other side need to have their stuff heard out.

Our desire would be to attach this to some legislation as soon as possible, if the outcome of the consultation is that there should be a change, and of course there are -- this is like catching trains. You can do -- there are some bills going through at the moment. The Prison and Courts Bill is an attractive one from our point of view that's going through at the moment, and that would be one.

If the consultation comes through at the right stage with the right outcome from our point of view, that would be a candidate I think. So we are encouraged by that, but I think it's really important to say the Government have got to run a fair process now. We'd expect nothing less if we were on the other side of it. And it's got to be evidence based.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [31]

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And on the expense ratio, it's the lower number, it's the 24 number, ex-impairment, yes, that's the base.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [32]

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Thanks. Sorry, we're going to go --

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Unidentified Audience Member [33]

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Yes, just a couple on reserves. So I'm wondering if you could give us an update on how you're reserving now? Because I understand that last year you decided -- correct me if I'm wrong, but you decided not to put a margin over best estimate. I'm wondering whether you're still doing that going forwards, and so should we then expect the buffer in reserves to decline over time and subsequently the reserve releases?

And then secondly, I noted that your reserve releases, excluding the impact of Ogden, were higher than last year. So I note 14 percentage points, so I'm just wondering where the majority of that is coming from.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [34]

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Thanks. I'll deal with the second one first. So we have said that -- so in 2016 we had, if you like, unexpected reserve releases from weather impacts from the storms of December 2015, which helped both home and commercial, and should be regarded as kind of one-off weather events.

And that's what really boosted the prior year for 2016, because in motor, which is the source of most of our prior year, and certainly on an ongoing basis, it was slightly lower, as we'd predicted. So let's talk about that, because the main -- when you talk about reserve strength, the main reserve -- we do have reserve strength in many places but the biggest part of it is motor.

So you're right, we did stop in 2015 adding more margin to the current year because we felt that we'd reached an adequate point of conservatism on our reserving as a whole. And that's continued, and I expect that to continue.

Over -- if you compare end 2016 to end 2015, we're saying that our total reserving strength is overall pretty much maintained, so still very strong. There is -- there are some movements, however, within that, between what's happened on the actuarial best estimate and what's happened in the margin.

So our actuarial best estimate, which is clearly by far and away the largest part of our reserves, is still very strong, and we look at a variety of measures and we have third party reviews and so on, and it's clearly very strong in my opinion. And that's pre-Ogden and post-Ogden.

Our margin, as a result, we have reduced somewhat, and there are really two impacts in that. One is -- and the first impact has nothing to do with Ogden. So we looked at our total bodily injury reserves over the whole portfolio and we decided there was adequate conservatism in the actuarial best estimate not to have to hold much more margin as well.

So we've released some margin from that. And then post-Ogden we released this one-off special I call them binary provision we had for PPO propensity because we have a pretty conservative PPO propensity assumption in our ABE, and we had, because we were worried about potential volatility, an extra margin in the margins. And that's gone. We don't need that.

So if we take those two elements into account, our pure margin has gone down. And if you trace -- I'm not going to go through all the numbers, but if you trace some of the numbers on capital generation and so on, there's an influence of that in there.

However, the total reserving strength remains very strong, as checked out by third party, and in particular when we look at our -- all the stats and data we get on motor and particularly large bodily injury and small bodily injury, it looks very favorable, which is why we've made those -- the statement we've made.

I think one of the -- just to reflect on -- because people may be -- to reflect on why this has changed a bit in terms of how we're thinking about it, is obviously when we IPOd, the problem we'd had in 2008, 2009, 2010 was relatively recently in one's memory, and it conditioned our view about the actuarial best estimate. So we wanted to have a very big margin and that grew. We just need to worry about it. And we kept them -- and obviously they stay very separate in accounting terms and how we manage them. But we looked at them in two bunches and said well we can't assume there's conservatism in the actuarial best estimate. So any conservatism we want must be in the margin.

Well I think we've -- having had many more years of experience, pretty favorable actually. We've now come to the view that there is conservatism in the actuarial best estimate on an IFRS basis, and therefore we can look at it as a whole rather than just look at the margin.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [35]

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And as a whole -- just end with a positive.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [36]

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End with a positive. As a whole it is maintained, and that's the key message.

Oh, and sorry, looking forward, because you asked that as well, we're saying for motor, we're saying will still be significant because the actuarial best estimate is still conservative, even though we don't have margin, but we do expect it to reduce over time. And why is that? Well, partly because we're still getting releases from very old years, and that will stop at some point. It's outperformed our expectations and it's not all due to luck and over-reserving. Some of it's due to actual activity by Steve and his team, but it will eventually stop.

Secondly, obviously we've reduced our reinsurance deductible consistently, so the new years will give less.

And thirdly, we've had run-off. So those are the reasons why it was reduced. But we've struck it very carefully and we can predict it I think better than we could before, if I could put it like that. Which is why for the first time, I actually did produce a lower PY on motor, albeit only a little, as I had guided. For which I will not take any credit.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [37]

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Good. Right, Andrew.

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Andrew Crean, Autonomous Research - Analyst [38]

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Morning. It's Andrew Crean at Autonomous. Three questions. Could you give us some guidance on the unrealized and realized gains which dropped off a lot this year?

Could you also give us on an accident year basis the impact of Ogden on the different accident years please, so you can see behind that?

And then thirdly, I suppose it's a request. You're making a big thing, and I can see why, that the power in the engine is really -- a lot of it is in the Direct Line brand, which it does differentiate you from other players in the industry. Could we get some sense of the scale of that business by premium and how much of the profitability is coming from there?

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Paul Geddes, Direct Line Insurance Group PLC - CEO [39]

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Okay, so I'll give John time to think about the first two. So it's about half our policies, more than half our premiums, and I'm not going to disclose the profitability. I don't want to go down that particular rabbit hole. But it is -- as I've said, intrinsically it's more valuable and it has been more valuable, and even after investing some of it back, still more valuable. So a lot of our confidence and our mood music today is by having turned that around. That's a big deal for us. John?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [40]

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Yes, gains. Well I think we didn't really expect to get as big property gains as we've had. We were quite lucky with the timing. It wasn't just fantastic skill. We wanted to make property investments to back PPOs as a long-term thing. We happened to invest at a good time and we made lots of gains. And we were a bit worried with all the Brexit stuff they might reverse. They haven't reversed. Actually, we've been able to sell a couple of properties at even slightly above that. But do we expect that to continue forever? I don't think we can predict that that will happen.

And on the bonds, we'll get some gains as we try and optimize the portfolio, but we don't in general expect much in the way of gains.

On Ogden accident years, I do have some information.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [41]

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Did you warn me about this?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [42]

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The biggest (multiple speakers). The biggest Ogden hit by accident year was 2014 and the -- but they do -- but it's actually -- there's an impact on all years, right back to 2009 and prior. But the biggest of all is 2014. It's probably a --

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Paul Geddes, Direct Line Insurance Group PLC - CEO [43]

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Can we get the figures later?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [44]

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We'll try and -- we'll see if we can provide the figures. I can't see -- I can't think of a reason why not but we'll -- if we can find one [multiple speakers].

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Paul Geddes, Direct Line Insurance Group PLC - CEO [45]

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Great, I think we need to give some time for people on the phones, but just a couple more in the room I think.

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Dhruv Gahlaut, HSBC - Analyst [46]

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Dhruv Gahlaut, HSBC. Three questions. Firstly, could you say more in terms of the cost reduction from the admin side what areas you're looking at etc., and how should we think of it over the next two years or three years?

Secondly, going back to the question on the solvency ratio, from a standalone basis, if I look at your -- the target range, it's still higher than some of the other players. The 165% ratio still sits okay. Would that be a good level to operate the business from a management standpoint, as in a second?

Thirdly, on the Nationwide deal, as in what has led to the delay there? Thanks.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [47]

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I think the last one, I think you have to ask them and potentially their new provider and so yes we're there to help in any transitions.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [48]

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Do you want to deal with the dividend? It's your turn, the solvency.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [49]

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No, I think you're doing so well.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [50]

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We'll deal with the cost first while I try to get the answer to that one. So just to give you some things that happen in 2016 on costs. We closed a site, well we downsized a site actually, we moved from a big site in Bristol to a small site in Bristol. We offshored a large chunk of finance. We offshored more claims. We set up a second offshore center in South Africa, which is doing well in terms of sales and service.

So we're pretty active. We've got a new procurement function. So there's lots of things going on in -- but they're not dramatic things. They're just continuing progress. We look at our footprint, our sites. We look at our -- we've got quite high turnover of staff. Do we have to replace one for one? All those things you'd expect. Marketing has got more efficient and so we expect improvement in a number of those things.

Then on -- so how do we feel about the 165%? Well I think as management there's -- I don't think the regular dividend was ever in question, so I don't think it's a huge test of that. But -- so I don't want to overdo this, but it's of some encouragement to me that the Board are happy at 165% at this point. That doesn't mean that it'll be 165% or lower at the end of this year.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [51]

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Terms and conditions apply. Your home is at risk.

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John Reizenstein, Direct Line Insurance Group PLC - CFO [52]

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It might be -- and it's not out of our hands. It's for us to recommend, and we'll look at the risks then. If there's Ogden risk out then because the Chancellor hasn't finished, we will have to take it into account. If the Ogden rate thing stays as it is with the possible worsening, there's all sorts of things we have to take into account. I've said too much. I withdraw everything I've said.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [53]

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Right, I think we might to the solace of the phones actually. Can we go to the operator on the phones?

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Operator [54]

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(Operator Instructions). It looks like we have no questions coming through on the telephone lines so Paul, I'll hand the call back to you.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [55]

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Okay, last chance in the room. Yes Oliver, last one?

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Oliver Steel, Deutsche Bank - Analyst [56]

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Coming back to solvency and Ogden, so the -- I assume the sensitivity on your solvency is that a 10-point rate reduction would reduce your rate by -- would reduce your solvency rate by about 14 points. So sort of that makes me think that implicitly you have a price expectation in your mind in reaction to Ogden implicit in your solvency assumption. So I'm thinking if prices do go up over the next 12, 18 months, does that help your rate? Sorry, does that help your solvency ratio?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [57]

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Well yes, so every time we do a business plan we take into account what we think will happen and the action we're taking. And more profitable business, whether it be the same profit, more volume or more profit the same volume, it's beneficial to your Solvency 2 capital position. So yes, that would be a plus.

And you look at it on an 18-month basis on the Solvency 2, you then have to protect your balance sheet out to the end of that period and see what the risks you think will be there then. But yes, it would be positive pound for pound basically.

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Oliver Steel, Deutsche Bank - Analyst [58]

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But implicitly, that means that you have an assumption in there about how much you can offset the ongoing effect of Ogden?

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John Reizenstein, Direct Line Insurance Group PLC - CFO [59]

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Well we've had to -- yes, we've had to work with that, and we haven't had a lot of time to do it. So there is some assumption in there, and it's quite an important assumption. And yes, so there's upside and possibly downside from that. So a nice point.

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Paul Geddes, Direct Line Insurance Group PLC - CEO [60]

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But we work forward from our loss ratio. That's the -- that's our guiding principle. It always has been.

Very good. Listen, thank you very much indeed. We've got -- the people who actually delivered this result, my team here, and we'd love to join you over coffee. Well thank you very much for all of your questioning and we'll see you next time. Thank you very much.