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Edited Transcript of DLG.L earnings conference call or presentation 3-Mar-20 9:00am GMT

Full Year 2019 Direct Line Insurance Group PLC Earnings Call

Bromley Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Direct Line Insurance Group PLC earnings conference call or presentation Tuesday, March 3, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Broadfield

Direct Line Insurance Group plc - Director of IR & Capital

* Penelope Jane James

Direct Line Insurance Group plc - CEO & Executive Director

* Timothy Walter Harris

Direct Line Insurance Group plc - CFO & Executive Director

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Conference Call Participants

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* Abid Hussain

Crédit Suisse AG, Research Division - Research 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

* Jonathan Denham

Morgan Stanley, Research Division - Equity Analyst

* Kamran Hossain

RBC Capital Markets, Research Division - Analyst

* Kevin Ryan

Bloomberg Intelligence - Analyst

* Ming Zhu

Panmure Gordon (UK) Limited, Research Division - Analyst

* Oliver George Nigel Steel

Deutsche Bank AG, Research Division - MD

* Paul Walsh;Field Gibson Media;Reporter

* Sami Taipalus

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [1]

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Well, good morning, everyone. And firstly, I'd just like to thank Allen & Overy -- can't see where David is, but Allen & Overy for lending us their fabulous facility this morning. So thank you for that. Thanks for joining us today.

Looking back at 2019, I've to say I'm really pleased with what we've achieved, both financially and operationally. And we've improved the quality of our earnings, we've delivered an operating profit of GBP 547 million and a return on tangible equity of 20.8%, which I think demonstrates the resilience of the business model. As a result, we're able to pay a final dividend of 14.4p and a total dividend for the year growing by 2.9%, and we're launching our GBP 150 million buyback.

From an operational perspective, the technology upgrades that we've been working towards are injecting real momentum into the transformation now. And we've traded effectively navigating pretty difficult market conditions. So I think 2019's achievements are a real testament to the quality and the focus of our people as well as to the strength, diversification of the business model.

Now one of this year's highlights to me was our Capital Markets Day in Doncaster, where we launched our new strategy, vision and purpose. And it has customers at its very heart. We want to create a world where insurance is personal, is inclusive and is a source for good, where we help people carry on with their lives, giving them peace of mind now and in the future.

Now later, I'll tell you a bit about what we've achieved since November and some of our plans for 2020, but let me hand over to Tim to give you a summary of the financial progress in 2019.

Tim, over to you.

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [2]

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Thank you, Penny, and good morning, everybody. 2019 was an important year for the group as it progressed along its journey of transformation, whilst also delivering a good set of results in a difficult motor market. I arrived in the business in early October, and in November, Penny and I set our strategy and new financial targets at the Capital Markets Day. I'm now 6 months in and I'm more convinced than ever of the opportunities for this business.

So before I go through the results in detail, I'll summarize the highlights. First, we continue to grow, albeit modestly, achieving 1.4% policy count growth across our Direct own brands.

Second, we held our focus on costs and delivered against our GBP 700 million cost target, with operating expenses of GBP 694 million.

Third, we delivered our combined operating ratio target adjusting for weather and the change in the Ogden discount rate, our ratio was 93.5%.

Fourth, we did what we said at the Capital Markets Day and grew the current year contribution to profit to 39%, making progress towards our 50% target, more than offsetting expected headwinds in 2019.

And finally, we continue to generate strong capital returns with a total return of GBP 447 million, reflecting growth in the regular dividend and a GBP 150 million share buyback. The solvency coverage ratio after these is a strong 165%.

Turning to the summary results on Slide 7, where we have the key group line items. Moving down the table on the left. Written premiums were broadly flat reflecting underwriting discipline and the run-off of some of our partnerships. Underwriting result was GBP 232 million, 11% lower than 2018, with the impact of benign weather in 2019 more than offset by lower reserve releases, which were in part related to the change in the Ogden discount rate.

In line with our expectations, installment and other income was about GBP 10 million lower than 2018 due to nonrepeat of the gain on the sale of our Bristol office. We also saw lower gains in our investment result, which brings us to an operating profit of GBP 547 million. In 2019, we incurred GBP 11 million of the GBP 60 million restructuring costs outlined at the Capital Markets Day. We expect to incur the remainder in 2020. All of this helped deliver a return on tangible equity of 20.8% well ahead of our 15% hurdle rate.

Let's look at the key trading ratios at a group level before we get into the divisional results. At the Capital Markets Day, I talked about our plan to improve the proportion of our earnings from the current year. Here, you can see the progress made in 2019. The group current year attritional loss ratio improved by 1 point, supported by reductions across all segments, demonstrating the benefits of our focus on underwriting discipline and claims management. Weather was very benign in 2019 with major weather events of just GBP 6 million compared with GBP 75 million in 2018. As expected, prior year releases were lower, but still significant and were concentrated towards more recent accident years. The expense ratio was flat as lower costs were offset by lower earned premiums. And the commission ratio increased a little due to profit share payments and higher price comparison website volumes. Overall, the combined operating ratio was strong at 92.2%.

On Slide 9, you can see we have continued to deliver modest growth in our Direct own brand policy count, up 1.4% in 2019. Motor and home own brands were both down a little in 2019, but there were some positive signs towards the end of the year with home policy count stabilizing and motor returning to growth. Green Flag grew its policy count by an impressive 14% and passed the 1 million milestone in Q3 as it continued to grow market share. Commercial own brands grew policies by 5%. Direct Line for Business continued to grow as it launched further propositions on its new digital platform. Outside of Direct, lower in-force policies were mainly driven by partner volumes continuing to reduce and our focus on maintaining margins in NIG.

2019 was a tough year for the U.K. motor market. And against this backdrop, we continue to focus on underwriting discipline, and I'm encouraged with the performance. Starting on the left side of the slide. We took pricing actions to achieve our target loss ratio, with risk-adjusted prices increasing 3.1%. This resulted in a slight reduction in policy count. But as you've seen, growth returned in H2 as market pressures eased a little. Risk mix reduced by 3.7% due to developments in pricing and underwriting, including enhancements to our capability to spot and prevent application fraud at the point of quotes.

Moving across to the right, our disciplined pricing actions meant we delivered a broadly stable current year loss ratio of 81.2%. Prior year releases were more than GBP 100 million lower than 2018 at GBP 181 million, but still significant and with around half of the swing driven by the Ogden rate changes in 2018 and 2019.

Our commission ratio was up, reflecting the higher price comparison website volumes and associated commission rates. Overall, Motor delivered GBP 303 million of operating profit and a sub 95% combined operating ratio, a strong result, particularly given the market backdrop.

Our 2020 Motor excess of loss reinsurance cover was maintained at GBP 1 million, and the team did a great job as all layers were 100% placed at a modest increase to last year. We believe the quality of our Motor business and our strong reinsurer relationships supported our competitive renewal.

Here on Slide 11, we have the ABI pricing data chart. The latest published data point shows some positive signs with prices up 0.5% in Q4 versus Q4 2018, the first increase for nearly 2 years.

While this was encouraging, you can see that market price -- pricing remained behind our long-term claims inflation expectation of 3% to 5%. The question we're getting from investors is how the claims inflation that we are seeing compares to our peers. So I'd like to spend a few minutes walking through our 2019 claims experience in a bit more detail.

Our claims experience was consistent through 2019 with underlying severity inflation towards the top end of the 3% to 5% range driven by damage.

Claims frequency, however, was better than our expectations following the benign weather, alongside lower risk mix and actions taken on counter-fraud initiatives. You'll recall, Gus talked about the value of claims insights in his pricing presentation at the Capital Markets Day. There, he talked about our in-built strengths which have enabled us to deliver strong results over a number of years.

The scale of our data and our ability to see trends early, we believe, is a key differentiator. For example, we improved our counter fraud process and enhanced our risk models, which has led to a reduction in risk mix and helps us to reduce claims frequency. We have the second-largest owned vehicle repair network in the U.K., our vertically integrated model gives us greater control of our claims environment and indemnity costs. For example, around half of all accidental damage claims go through 1 of our 21 owned repair centers, which gives us greater control and visibility of repair costs. And we also monitor credit hires closely so we can identify any changes in claimant solicitor behavior. And we're not just good at repairing cars, we're good at managing bodily injury claims costs, too, with specialist skilled teams who manage cases proactively so as to prevent leakage and keep costs down.

We believe our business model enables us to better control claims costs, giving us sustainable advantage. We remain committed to developing and improving on the activities we believe make a difference.

Looking ahead, we continue to expect underlying claims inflation to be between 3% and 5% and are satisfied with the margins we wrote in 2019.

Moving to Home on Slide 13. The Home result was strong with operating profit of GBP 151 million and a combined operating ratio of 80%, reflecting benign weather and our actions on pricing and underwriting.

The market was rational in 2019 with pricing broadly tracking long-term claims inflation of 3% to 5%. Against this backdrop, we increased our prices on new business ahead of the market to strengthen margins, particularly on PCWs, which resulted in a modest reduction in new business volumes, while retention remained strong across the portfolio.

Home average premiums continued to reduce, a reflection of better risk mix, lower renewal prices and a continued shift towards a price comparison website channel, which typically has lower average premiums.

Moving to the right of the slide, the current year attritional loss ratio was 53.5%, 3.5 points better than 2018. This reflects our claims experience, which was better than our long-term view as we continued to see improvements on escape of water inflation following the actions we took a couple of years ago. It was also a good year for attritional weather, and we benefited from lower claims from event weather.

Home was the only division to see an increase in prior year releases in 2019, up GBP 8 million to GBP 41 million, reflecting favorable development on escape of water claims.

Looking ahead, we continue to expect underlying claims inflation to be between 3% and 5%. In respect of the recent storms, Ciara and Dennis, our early estimates of the claims cost across Home and Commercial is in the region of GBP 35 million. This represents a little over half of our 2020 weather load of GBP 64 million for Home and Commercial.

Rescue delivered a strong result in 2019, but this was offset by small losses across other personal line products. Overall, this segment delivered GBP 39 million of operating profit and held the combined ratio stable at 95%. Rescue, which is the largest part of the Rescue under the personal lines results, grew profit 12% to GBP 45 million and delivered a combined ratio of 81.5%, almost 4 points better than prior year. This improvement was a result of a continued focus on operational and customer service improvements alongside benign weather. The other personal lines loss of GBP 6 million was driven by falling prior year releases in UK Select, which is our mid- to high net worth business and Travel. We also saw additional headwinds in UK Select from higher large loss severity.

Looking ahead, we expect Rescue to continue to transform and grow, and we're working to improve the results for our other personal lines businesses.

Finally to Commercial on Slide 15. Commercial delivered GBP 55 million of operating profit and kept the combined operating ratio broadly flat at 96%, while improving its current year attritional loss ratio. The improvement in current year claims performance is a result of investments in pricing and strong rate carry in NIG. The team has been working on a range of pricing and underwriting initiatives and the benefits are beginning to come through. Direct Line for Business continued to grow across all product lines, while also ensuring strong rate carry.

Prior year releases were GBP 14 million lower than 2018, in part due to Ogden. This was partially offset by lower event weather of just GBP 3 million in 2019 compared with GBP 10 million the previous year.

Looking ahead, we expect Commercial to continue to focus on improving technical pricing to support profitability.

Now back to the group view, starting with operating expenses on Slide 16. In 2019, we reported operating expenses of GBP 694 million, outperforming the GBP 700 million target that we set out a year ago and a GBP 25 million improvement on prior year.

In November, I said we are targeting GBP 50 million of savings in operating expenses, excluding amortization and depreciation by 2021.

Here in the waterfall, you can see that excluding amortization and depreciation, operating expenses were GBP 615 million, GBP 11 million lower than prior year, whilst absorbing increase in levies of GBP 14 million, driven mainly by the Motor Insurers' Bureau and Financial Services Compensation Scheme.

Amortization and depreciation charges were a little lower in 2019. However, the outlook is for these to increase as we roll out new technology.

As I outlined earlier, we expect to incur restructuring charges of GBP 60 million over 2019 and 2020.

In 2019, we realized GBP 11 million of restructuring costs, and we expect to incur the remainder in 2020. Our business model is different to many of our peers, and therefore, so are the economics. However, we consider our expense ratio is too high so I reiterate our target to achieve an expense ratio of 20% by 2023.

We're making progress on addressing this. I've already run through the cost reductions delivered in 2019. We expect this trend to continue as we realize the benefits of our investments in systems and technology. We announced last week that we're looking to continue reducing headcount as we rationalize our site footprint over the next 2 years, and we launched a consultation in our head office functions as we aim to improve the speed of delivery at lower cost.

These actions are clear steps towards reducing our cost base so that we can be more nimble and efficient and improve our competitiveness.

In line with expectations, the group generated a total investment return of GBP 135 million, GBP 20 million below 2018. This was due to lower assets under management and the expected reduction in realized and unrealized gains. Realized and unrealized gains taken through the profit and loss account was GBP 16 million lower in 2019 following a reduction in investment property valuations.

At the end of the year, the available for sale reserve stood at GBP 48 million unrealized gain compared to an unrealized loss of GBP 37 million at the end of 2018. This was due to tighter credit spreads and lower interest rates.

Moving to yields. We achieved a net yield of 2.1%, slightly ahead of the 2% guidance. In 2020, we expect to achieve a yield of around 2% and minimal gains.

At the Capital Markets Day, I said, we're focused on improving the quality of our earnings and are targeting over 50% of profit to come from current year by the end of 2021.

Here on Slide 19, you can see the progress we made in 2019. And if you exclude restructuring costs and adjust for normal weather in Ogden, we increased the current year proportion from 36% in 2018 to 39%. This is good progress when you take into account the benefits in 2018 from investment gains and the gain on sale of our Bristol office.

Now finally to capital. Here on Slide 20, you can see the movement in capital surplus. Moving left to right on the waterfall, capital generation of GBP 610 million was slightly higher than IFRS profits, in part due to amortization and depreciation. Capital items are written off immediately for Solvency II purposes, as you can see on the right here, but depreciated in the IFRS result. This was helped with positive mark-to-market gains due to the narrowing of credit spreads.

The increase in the 2019 SCR results from the remaining restructuring costs we expect to take. We expect the solvency headwind to unwind in 2020. Capital expenditure was broadly in line with expectations at GBP 189 million as we reached the peak of our spend on new technology. And in 2020, our capital expenditure is expected to reduce to around GBP 150 million.

After capital distributions, which I'll come on to, our capital surplus is a healthy GBP 850 million.

Turning to the solvency ratio. Our good trading performance enabled us to grow the full year regular dividend by 2.9% to 21.6p. You'll recall at the Capital Markets Day, I reiterated our 140% to 180% solvency capital ratio range and that in normal circumstances, we do not believe it's necessary to consistently hold capital in excess of the midpoint, that is 160%. We also said that the Board's preference is to return capital through buybacks. And today, we announced our intention to repurchase up to GBP 150 million of shares by the end of July. This continues our strong track record of returning surplus capital to shareholders.

Our capital surplus equates to a solvency ratio of 165% after proposed dividends, and our share buyback program compared to 170% at the end of 2018.

To finish, let me reiterate the financial targets we outlined for you in November. I believe this business has strengths and untapped potential to become more effective and efficient. We are proud of these results, but there are many areas where we can do more. I reiterate our targets on cost, earnings quality, combined operating ratio and of course, our return on tangible equity target of at least 15%. And importantly, we start 2020 with a strong solvency ratio of 165%.

Thank you for listening. And with that, I'll hand back to Penny.

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [3]

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Thanks, Tim. So over the next few slides, I'm going to outline the key milestones that we've achieved last year on the IT transformation, the progress that we've made against each of our 6 strategic objectives and the actions that we're focused on as we go into 2020.

Now to be a sustainable business, we need to be delivering for all of our key stakeholders. So let me start by reviewing our overall performance through those various lenses. Now as you can see, we've had another successful year. We've maintained good levels of highly engaged people and consistently have top-quartile engagement scores, which is particularly important as we go through a period of such significant change. We've increased our Net Promoter Scores, demonstrating that engaged people go the extra mile for customers. And that's helped us to attract and retain more customers in 2019, growing our own brand policy counts to 7.3 million. And for our shareholders, we're returning GBP 447 million this year, taking it to a total of GBP 2.2 billion over the past 5 years.

And finally, alignment between all of our stakeholders is really important. And we couldn't do this without the hard work and energy of everyone in the business. And that's why we've announced that we're giving GBP 500 worth of free shares to each of our colleagues.

Now to sustain the success of our business, we need to combine great people, fantastic customer service and the right technology, and that's what we're working towards. We've delivered good results in 2019. But we need to keep moving on our journey to achieve our objective. It's a journey that begins by delivering the technology that gives us the right tools to drive the business transformation because that's how we create the speed, nimbleness and cost base that we need to thrive. And this powerful combination means that we can innovate and get products to market quickly, which helps us to be more competitive and grow.

And in 2019, we kept moving, investing in and delivering on the technology upgrade and bringing clarity to the strategic direction so that we can change with real purpose. 2020 is now about progressing that technology upgrade and changing the way that we work so that we can realize the potential of both our investments and our people.

As we've described before, we're upgrading our key technology blocks across the business to make it fit for the future. 2019 saw that technology transformation pickup place (sic) [pace] with launches such as our new Motor platform, which now has over 25,000 privilege policies, has supplied 15 million quotes and is live on all 4 price comparison sites as well as Direct. And our product Darwin proposition, which has grown to GBP 4 million worth of Motor premiums and 10,000 policies during 2019. And Direct Line for Business, which has added Tradesperson and just last week, van onto its new IT platform. And our Travel system, which was launched last year and now has over 1.6 million policies and much-streamlined processes for customers and consultants alike.

And behind the scenes, in the less visible but equally important IT infrastructure, we continue to improve efficiency, reliability and flexibility. For example, we've rolled out the new hosting platform with the migration of all the relevant servers onto it, essentially building our own private cloud. The implementation of our ambitious and complex IT upgrades continues carefully, but also with pace, and it supports our strategic objective.

So now let me talk you through the individual highlights helping to deliver those. Our 6 strategic objectives are designed to help us deliver our vision and realize the group's potential growth. Looking at the first 3, which are all about making sure our products are easy to use and available everywhere. Let's start with Best at Direct. Now we believe there is a place for brands that provide peace of mind and meet a broader set of customer needs. So backing that brand promise with delivery is really important. And in 2019, Direct Line achieved its best-ever customer Net Promoter Score, underlining that we put customers at the heart of everything that we do.

I'm also really excited to announce that our marketing team, who came up with the award-winning Fixer campaign will launch later this week, a new creative for our most famous brand. And those of you in the room at the end of the Q&A might just get a sneak preview if you're lucky.

Green Flag, our Direct Rescue brand has now passed the 1 million policies mark. And as I said earlier, Direct Line for Business has added key products to its IT platform.

Moving on to winning on PCWs, where we see real potential to grow profitably. As well as launching Darwin, we grew the Churchill brand at a good pace in 2019, even before the brand creative relaunch. We believe that brand strength has value on PCWs. And this, combined with the new PCW focus helped drive 25% new business growth in Churchill Motor in 2019.

Moving on to our third strategic objective, extending our reach. The delivery of the new Travel IT platform has helped us secure our 2 major travel partners, NatWest and Nationwide Building Society. Travel is a capital-efficient and fine-margin business, where scale and efficiency really matter as do the brilliant capability when it comes to dealing with really serious claims.

The platform is designed to allow us to scale efficiently and with ease. So let me pause here to talk a little about coronavirus in terms of our Travel business. The financial impact has been limited so far around GBP 1 million, and we have significant reinsurance, which reduces our net exposure to future claims.

Operationally, we're taking all the right precautions for our people and are preparing for any potential deterioration in the situation. And as I'll come to in a moment when I talk about floods, we're well versed in responding operationally to challenging conditions and events and supporting customers in difficult circumstances.

We continue to develop our Home partnership with NatWest by focusing on the end-to-end customer experience through both digital and branch networks. As you know, through this partnership, we've been offering 3-year fixed rate for Home policies since 2015. And this now represents 45% of the books' policies and has helped us grow the portfolio.

But partnering is also about innovating and building capability. So we're delighted to be working with partners such as Starling, Drover, YouMeCar, so that we can remain relevant and competitive into the future.

Moving on to our 3 key enablers now, starting with technical edge. Here, we're aiming to create a great experience for our customers and a sustainable competitive advantage. We expanded our repair network in 2019, opening in Weybridge, our 21st repair center. And as you heard from Tim, we believe our network of repair centers gives us real claims cost benefit. But the expertise we're building here is also starting to influence the future of car repairs.

You can also see the benefits of our technical edge in the underlying Home performance. Escape of water claims have been brought under control by reviewing excesses, making risk model updates and making operational improvements within claims, so we never forget that insurance at its very heart is about delivering on our promise to customers when they need us most. And nothing brings this home more than the floods that we've seen recently in Doncaster last year and Ciara and Dennis this year.

What matters is that we get customers the help that they need really fast. All our customers displaced by the floods in Doncaster were out of hotels and in private accommodation by Christmas. The day after storm Ciara's call volume surged to nearly 400% of normal levels. But due to our surge planning approach, we were able to return to our target service levels for both Motor and Home the following day. Having the ability to cope in these events takes skill and it takes experience. And it provides real value to customers who get their claims dealt with and back on their feet quickly. But it also means that it helps us control our costs.

But I said to you before, we are not yet as nimble or cost-effective as we want to be. Tim's already outlined the actions we're taking on cost, and these are critical if we want to achieve our ambitions. But we also need to work differently and get out to market with our products and pricing faster than we do today.

Now we've been experimenting with agile techniques with different success -- with success across different parts of the business. For example, in Direct Line for Business, in Darwin and our digital teams in Claims, and also in Rescue, which is where I'd just like to turn for a moment. 18 months ago, we restructured Rescue to a fully agile operating model. And today, every team is cross-functional and capable of delivering products from the beginning to end within that team. It's self-organizing and empowered to make decisions to build and get product to market. It's focused on building a product in small pieces, which they keep refining to get out to market quickly rather than trying to build everything at once. It's determined to test, learn and improve the product by getting real-time feedback from the customers and consistently making work visible so that everyone is aligned.

And the result. Well, a new claims system built in 12 months, multiple releases to improve quote-and-buy journeys, a 13% increase in Green Flag premiums, a 12% increase in Rescue profit this year and a plan that is full of ambition.

Now we want to replicate this success across the group. And last week, we shared proposals with our people to adopt this operating model across the areas of our business that drive change. It involves around 1,000 of our people moving to an agile operating model. And it's all about delivering more value to our customers by improving our productivity and accelerating our time to market dramatically. On the back of the success it's brought in our digital teams, in Green Flag, in DL4B, it's shaping up to be one of those moments that injects fresh energy into our business.

Finally, and most importantly, great people. We have a culture of openness and inclusivity. We celebrate difference, and we challenge the status quo. People know what we're aiming for and believe in delivering great outcomes for customers. I think those of you that came to Doncaster felt the special culture we've created. And there is no one defining factor that makes this so; it's a collection of people wanting to do the right thing, whether it's our employee representative body of around 100 people who actively support the communication flow between the executive and our people to make sure the dialogue remains fully open. And this has been particularly important over the last few weeks as we've entered into consultation on the shape of our business and how we support people through the resulting change.

These decisions are always really difficult. And we've given our colleagues as much time as we can to prepare, and we'll be offering a range of support to help them through that transition. But then there's also our 80 graduates rotating around the business, and the 220 apprentices studying and developing technical expertise across various functions following the path of the 200 before them who have already qualified. And I continue to be really proud of our well-being program, especially around mental health, which has made it acceptable to talk about personal and mental health issues.

Having a diverse, highly engaged and empowered people will always be the key to sustaining this business effectively. So that's the report of 2019. What then are we focused on as we move into 2020?

While we continue the development and rollout of our ambitious technology change and aim to move Direct Line and Churchill Motor onto our new platform, to launch Darwin on 2 more PCWs, to roll out Green Flag's new claim system, to upgrade our finance systems onto a new cloud-based Oracle ledger, to reengineer our technology platform to support those new systems and to enhance productivity.

And by moving to fully agile ways of working, we expect to lay the foundations for the future growth of the business. Landing technology change and meeting our cost targets are key activities for 2020. But we never lose sight of the importance of brand and customer with exciting plans for Green Flag, Churchill and Direct Line.

And finally, last week, we learned that the FCA market study proposals on pricing will be published in June. We gave you a really extensive update in November. And honestly, little has changed since. We continue to work well with the ABI from an industry perspective and are making progress in implementing our own measures. So 2020 will be an exciting and very busy year.

Now just before I move on to my closing messages, let me remind you of what we told you back in November. First, Direct Line Group has a number of incredible strength. From strong brands, to rich data, to leading claim skills. They are hard to replicate, and we believe provides real long-term value.

Second, this is proudly a people business, which means we really care and have a passion to serve our customers.

Third, we have a real ambition and a focus on transforming the business to deliver a step-change in our competitiveness.

Fourth, we've continued to improve the quality of earnings with a greater proportion coming from current year business, reflecting our improving competitiveness.

And finally, we maintain a strong balance sheet with further opportunities to improve its effectiveness. We have a huge amount to do both operationally and technically. But as you've just heard, we've continued to make progress against our clear and focused plan.

So in conclusion, I believe today demonstrates we're in good shape. We've delivered a good financial results in 2019, navigating difficult trading conditions. And I believe this should give our stakeholders confidence in our focus and discipline and in the resilience of our business model.

In 2019, we started to deliver the technology upgrades that we've been working towards for some years. And we have well-defined and focused plans for 2020 to deliver the business transformation in line with the clear strategy that we've laid out.

So with that, I suggest we go to questions. Thank you.

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Questions and Answers

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [1]

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Thank you, Penny. Thank you, Tim. I'll start with the questions in the room. And I'll start from this side and workaround, so apology if you get on at the end. If I could just ask you to keep it to 2 questions and then if we have time at the end, we'll come back for further questions.

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Ming Zhu, Panmure Gordon (UK) Limited, Research Division - Analyst [2]

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Ming Zhu from Panmure Gordon. My question, first one is on the dividend. I think at the Capital Market Day, you said that at the time of -- the valuation at that time, you considered share buyback over special, and your shares have rallied, it's in a different territory, except last week, of course. And I just want to understand a little bit more in terms of your valuation rationale or why you choose a buyback instead of special? Do you look at a NAV or PE or dividend yields just to help us sort of think going forward?

And also second, like, going forward on the dividend, are you just scrapping out special completely? Is it going to be just buyback?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [3]

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Yes. So I think the first thing to say is to answer the second question first, we've been very clear in our discussions, certainly at Board level, that we want to keep both of those options open in the future. And there will be a time where we prefer buybacks, there may well be a time where we decide to use special dividends. Economically, of course, there is no -- economically, we're returning money to shareholders, and there is not a huge amount of difference, but we entered into the buyback program having consulted with shareholders over quite an extended period of time. As I explained in November, the thinking was influenced by the dividend yield on the stock. You're absolutely right that we've seen some improvement in the share price since. I think it's fair to say, but we still think in the current climate that buybacks is the right approach and that's why we've announced one today.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [4]

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Oliver?

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division - MD [5]

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Oliver Steel, Deutsche Bank. So the first question is, you've clearly gained from improved claims frequency during 2019. How much of that is continuable as the new IT rolls out? And does the sort of management actions you've taken continue to evolve? And how much should we perhaps see as one-off during 2019 or at least ceasing as of end 2019?

And then second question, which I suppose is sort of linked to the first is, you talked about being satisfied with the underwriting margins, I think, were the words in Motor. And yet, Penny also talks about 2020 being a year of improving margins, so I'm just wondering if you can rationalize between those 2 comments?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [6]

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You might want to take, Tim? Yes.

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [7]

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Let me -- so on claims frequency, I think it's true to say that frequency improved relative to 2018, particularly on motor damaged claims. That's because there was a bit of a spike in 2018. I recall we had a good summer in 2018. That was contributed to that. So is it sustainable? I think the thing we think is sustainable and we intend to continue investing and developing is using the business model features, which we think are -- is not quite unique to us, what we believe are real strengths. So that is around the accident repair centers. It's around our use of data. It's around our deep claims technical expertise, including things like bodily injury, the work we do on application fraud and claims fraud. These things, we think, are sustainable and will deliver, we hope, sustainable benefits in the longer term.

In terms of the frequency, I think, overall, the trends in frequency are aligned with our long-term view. It's just so you saw a bit of a movement from '18 to '19 because of the experience in '18.

In terms of the underwriting margins, it's the nature of CEOs to always want to see improvements, as you know, Oliver. I think that we -- for the Motor book, specifically, we are encouraged by the result last year. I think you've got to take that result for the year as a whole and over, if you look at the H1, H2 trends, but you've got to remember that to some extent, some of the detailed modeling, for example, on prior year development happens in H2. So if you look at the year overall, I think we are encouraged by that. And we're hoping that we can continue to perform at those kind of levels.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [8]

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Dom O'Mahony, Exane BNP Paribas. I'll take 2 questions. So the first question is on the transformation plan, clearly very ambitious, very exciting to be moving to an agile model. The -- as I understand, it's a very large program. I think you've described it as one of the biggest technology programs, at least in Europe. What do you see as the potential risks around execution on that? And how are you mitigating that? How you're controlling those risks?

Second question is a very specific question. You described the motor repair network has been one of the features of your -- this is what it'll gives you competitive advantage. Do you actually see a real difference in the claims inflation that you experienced in your own network versus the roughly half of the repairs that's come through external repair centers?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [9]

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Let me take first one. So I don't remember using those words, but I may well have done. But it is a complex program. We're changing almost every piece of every system in the big parts of the business. So we don't underestimate that. And you're right, we're also making changes to the way we operate as well. So there's a lot going on. What I would say is, I think the nature of the risks in that program has shifted over time. So we're much further advanced than we were in some of those big blocks, some of them were in testing now, whereas, we were 1.5 years ago, we were in design. And so it feels different at different stages. What we are really focused on is that we will be landing different things into the business at different times across this year. And our priority is always to make sure that happens safely, which is why we're not sat here giving you a map of every single month on what's going on because we will maneuver those as we need to, to get them to land safely.

And how do we do that? Well, largely, that's the job of the people sat in the front row and the ExCo we talk, probably more about that than any other single component, to make sure that we understand the effects of what we're doing and that they land safely.

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [10]

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On the second question, which is around, do we see a similar inflation trends in the repairs that we put out for third-party treatment?

I think the answer is, the big advantage of having over half of our repairs done in-house is the insights that gives us to the overall supply chain, including the supply chain that's going into those third-party providers. So I think, there are different pressures but it puts us in a very, very strong position, having that in-house capability. So I'm going to avoid slightly answering the question directly. But I think the -- there are definitely benefits to us not just from servicing our own repairs, but the insight that gives us into the way other people service repairs.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [11]

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Sami?

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [12]

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Yes. Sami Taipalus from Goldman Sachs. First question is on reinsurance. Could you comment on the renewal of your reinsurance program, whether you made any changes and what you saw on the pricing of that?

And maybe also you talked at the Capital Markets Day about potential reinsurance actions in your future years. Is that something we should think about for 2020, maybe?

Then the second question is on capital generation. I think you talked already a little bit about the difference between net income and own funds generation, and I think D&A accounts were about half of that maybe, and what's the second half related to, own funds generation was quite a lot higher than net income?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [13]

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So let me deal with reinsurance question first. So we didn't change -- the biggest program we buy every year was motor excess of loss program. And we didn't change the structure of the program this year. We kept it the same. So that's buying protection in multiple layers above GBP 1 million. The -- I think it's fair to say that it was a tough renewal season generally in the market, but we're really pleased by the way our reinsurers responded. We have strong relationships with a number of reinsurers who have a very deep knowledge of our ongoing claims experience. And so the rates that we were able to get, while a moderate increase on last year were acceptable from our point of view. So that was encouraging. I'm going to avoid giving you a figure, but it was a satisfactory outcome.

The question about looking at reinsurance, I did talk a bit about that at Capital Markets Day. To manage expectations, of course, about the time we were doing at Capital Markets Day, we were beginning the process of the 1 Jan renewals. So the likelihood of too much of new thinking, new ideas feeding through to this renewal cycle, it would -- the important thing was, we executed that fantastically. I'm delighted of the team, in my view, did a brilliant job. The -- in terms of stuff we might do in the future, we are actively thinking about that. There will be a right time potentially, to make some changes relating to the other financial dynamics in the business. So I'm loath to promise anything in the short term, but be reassured that we are actively thinking and working on it.

The second one, I've got to say, Sami, I didn't catch what -- I didn't hear you said, would you mind...

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Sami Taipalus, Goldman Sachs Group Inc., Research Division - Research Analyst [14]

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Yes. Just if you look at -- if you start with the net income and add back the depreciation and amortization, you get to about GBP 500 million. But the operational capital generation was about GBP 600 million. So there's still GBP 100 million difference roughly there. So I'm just wondering, where that came from?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [15]

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So you've got some movement on the spreads, which made pretty big swing this year, I think. And beyond that, we'll need to just check and get back to you.

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Edward Morris, JP Morgan Chase & Co, Research Division - Equity Analyst [16]

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Edward Morris, JP Morgan. Two questions, please. First, can you talk a little bit more about Darwin? Do you think you have enough evidence yet to make an assessment on what the profitability of that book is relative to your other brands? And what are your expectations for the sort of trajectory of growth of Darwin for the next few years.

And second question, can you just talk a little bit more about the current trading experience? What you've seen in the year-to-date? And have you noticed any change in behavior of your competitors, as the pricing environment has started to turn over the last 6 months?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [17]

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Okay. So Darwin -- look, I think Darwin were in build for a lot of last year. And I think we've been really impressed on what they've done, operationally. It's a landing parts of the premium book, if you like, the kind of policies, we'd have expected it to. This is kind of doing what we thought it would. I think there's been a lot of learnings in particular, around fraud and how that's worked. So one of the reasons we're taking our time is to make sure we've got that right and flow through. We put through a number of changes on that. And importantly, the footprint overlap at the moment is still relatively small with the rest of the book. You'll only really know when you start to ramp it up.

So I think, we still have kind of high expectations for Darwin. We still -- we like what they've done. We like how effective the team have been and how they built it. We like where it's targeting as the pool of customers. The thing that we are taking our time on is the point at which we ramp up, if you like, because it takes time to get a claims trajectory. And it can take time to unravel what sort of short-term fraud features that you're working through and what's real claims effects. And that's the judgment that we'll be making as we move through this year, at what time we step forward, but we're still really positive about what they've done and the possibilities for it. And how is it feeling? Actually much of the same, I think, ended last year with kind of modestly positive is kind of the way we feel about -- and it kind of feels like that now, so that's carried on into this year. So we're feeling -- yes, not hyper excited, but mildly positive, how's that?

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Abid Hussain, Crédit Suisse AG, Research Division - Research Analyst [18]

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It's Abid Hussain from Crédit Suisse. Just 2 questions for me. Firstly, on the gap between new and renewal pricing. We've seen some industry-wide pricing data that suggest the gap between the 2 starting to narrow. Are you observing the same on your book? And then just thinking that through, logically, if the gap does start to narrow between renewal and new business pricing, do you think that will eventually lead to a lower shop around activity or a reduction in shop around? That's the first question.

And the second question is on margins. If you assume flat top line growth for next year, how much rate do you need to put through your book to maintain your current margins across your Motor book and your Home book, please?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [19]

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Okay. Let's do the -- what have we seen, and I think it's probably primarily a Home question, the first one, although, echoes across. I think, overall, we've seen -- we are seeing some movements. These -- they're certainly in ours where we're putting inflation through both new business and renewal book as a whole. But actually, you're seeing more price going through on new business relative to renewals. So there is some flattening going on. And I can't tell you what others are doing, but I'd be quite surprised, if you aren't seeing that in different parts of the market, to some degree, to moderate degree. So I think that's certainly a feature of it. Does that mean that you would have more or less shopping around us on? I think the reality is, in June, there's going to be an inflection point. And I know because I talk to the other CEOs of the ABI, everybody is trying to make progress on this point. And the ABI will issue in May sort of time to progress that has been made across the industry and so give some guidance on that. But the reality is what -- it's what the FCA say that will determine what the playing field looks like, when we get to June. I think in the long run, if you see a leveling of pricing, it's natural to assume that you'll see less people feeling the need to shop around.

Some of the FCA's proposals, I think, would lead to more shopping around, some to less. We just have to see what -- where they go. So that was the first question. Second one was?

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Abid Hussain, Crédit Suisse AG, Research Division - Research Analyst [20]

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The second was on margins. Basically, how much rate do you need to put through, if you've seen, for example, flat top line, what would you need to put through in rate to...

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [21]

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Look, we are -- whether it's Home or Motor, we are value first, volume second. So we will be putting through inflation or something around inflation across the book. I can't vouch for what others will do. What the volume is, that comes off the back of that will be determined by the others are doing the same or not.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [22]

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We'll go to Kamran

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Kamran Hossain, RBC Capital Markets, Research Division - Analyst [23]

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It's Kamran Hossain from RBC, not related to Abid. Two questions. First one is just on, I guess, the reduction in headcount. You talked about 800 people, can you just talk a little bit -- or give a little bit more color around which areas you're planning on taking kind of headcounts out of? And then what this might do for kind of morale and kind of what -- the company's experiencing how well things have gone over the last few years? And then the second question is on the -- it's going to sound like a little bit of a winge, I'm afraid. The capital ratio is 165...

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [24]

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Definitely for him if it's a winge, but yes, go on.

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Kamran Hossain, RBC Capital Markets, Research Division - Analyst [25]

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Do you think -- I mean it's never been right at the middle of the range. Do you think we will get there in future years?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [26]

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Why don't I take the first one. So what have we actually announced? We've announced 790 jobs, and they fall into, I guess, 4 categories. The bulk of them are in 2 sites: in Manchester and in Ipswich and then there are some other pieces. Those tend to be areas that -- there's a mixture of areas in there. From sales and service areas, some claims areas, but primarily, those are responding to the fact that over time, customers are dealing with us more and more online. And also, our expectation is that trend continues, which is reflected in some of the investments that we are making, that we showed you in Doncaster is to enable that. But the out working at that over time is that we will need less people in the front line. So that's kind of one pool. And we -- whenever we close a site, it's not something -- it's something we, as the team know, we worry long and hard about, but we give people a minimum of 12 months notice, so that -- and then we'll put in support arrangements back alongside of them, individually sit down and work through their transition plans with them. In the case of Ipswich, we've actually given them 2 years' notice because we wanted to be really clear that we had shared everything we have in sight. And also that we could give people the maximum amount of time to help navigate through that process.

So the other changes are, the numbers are smaller, so there's around 70 roles -- 70, 80 roles in the change areas, generically. So we've got about 1,000 people affected by the move to agile. We have done quite a lot of work in the run-up to that to limit the amount of roles that are affected by that. So through recruitment freezes and so on, we've been quite tight on the way, and we've been able to manage that down because those will be enacted over the course of 2020. So we have a shorter time line, if that makes sense.

So there's a lot happening. What does it do for morale? We care deeply what our colleagues are thinking. Clearly, as you go through any kind of change, you get a mixture of reactions as we move through. And we will continue to support them and work our way through it. I do believe that people across the board understand the direction that we're going in, and why. And that's a huge part of it. But it's also really important that we support people, whatever transition they're going through. And that is the plan. And people can see that.

So 165 or 160 or 170?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [27]

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Sorry to disappoint. I think you've got to remember a little bit about the context for the 170, it was said last year, which was we're 3 weeks away from potentially a unplanned hard Brexit. And clearly, that situation has changed. So when we started thinking about, where we would seek to manage as to in terms of the coverage ratio and obviously, the opportunity that gives us for returning capital to shareholders. We are thoughtful that the situation had moved on over the course of the last 12 months. So clearly, there are still a number of other issues out there, not least uncertainty around the future relationship with Europe. So I think, a move in the right direction was the right way to go. And that's why we ended up 165. I, obviously, can't tell you what will happen in the future, but I think you can see that it is a move in the right direction, and I remain committed to the things we said at Capital Markets Day about seeking to work towards 160 as our central point.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [28]

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Jon?

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Jonathan Denham, Morgan Stanley, Research Division - Equity Analyst [29]

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Jon Denham, Morgan Stanley. Just firstly, on the reserve releases. I guess they're a little bit lower than all of us in aggregate expected, how did that compare to your expectations? And the attritional in Home was really, really strong, how much of that is sustainable?

And I think you flagged some comments already and maybe, is there anything between first half and second half going on there?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [30]

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So let me deal with the reserve releases. I think, clearly, one of the components on the reserve releases is a movement in Ogden discount rate, which I don't think was entirely what we expected, but it's has an effect, especially a swing year-on-year. The -- if you take that away, though, the underlying progression is pretty much what we did expect, yes.

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [31]

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And Home. I mean the Home is a fantastic result. And I think is largely the outworking of a huge amount of work done on the manufacturing side to bring together claims understanding, underwriting understanding and make operational changes to make it more effective. So when you look at the result, there are several things going on. One is, obviously, you've got a normalize for weather. Two is, last year was so clean on weather that actually there is some attritional weather benefit in there as well. So we shouldn't expect that to run forever. And the third is that the -- both the current year results and the prior year results are benefiting from kind of the revised view of the cost of claim from all of that escape of water work. So in that sense, it's genuine stuff, you should expect to see a lot of that continuing to flow through because effectively, what you've done is rebase your costs for moving forward. So -- which is, change your shape, if you like the pricing in the second half of the year because you're inflating of a different cost number. But to the extent it's flowing through prior year number. There's a catch-up, if you like, to reflect that those cost of claims are lower.

So when you're looking at run rate, you need to be thinking about this year stripping out weather, stripping out attritional and recognizing that some of that prior year stuff releases is a catch-up from all those benefits.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [32]

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On to Ivan next, please.

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Ivan Bokhmat, Barclays Bank PLC, Research Division - CEEMEA Banks Analyst [33]

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It's Ivan Bokhmat from Barclays. Two questions, please. One, just a follow-up on reserves. I've looked at your triangles, and it looks like your initial loss picks have trimmed slightly down from 2019, I'm just wondering if you could give a little bit of color on that, how much of that is weather moves? And what's your general thinking about the management buffer around reserves? And the second one is, perhaps, on whiplash reform that was delayed. I'm just wondering, if you could give us an update on how much you think that would...

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [34]

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Okay. While I take whiplash, and then you can do reserves. So I think, yes, so whiplash reform has gone back to August. I think given where we are, it's a good thing that it's gone back. It's the first thing. So there are a large number of players in this industry who are involved in dealing with small bodily injury claims and to try and get all of those educated and what it means, in a handful of weeks, by sort of pushing a legislation through quickly, I think, would have resulted in poor customer outcomes. So I think the right decision is to slow it down, give everyone time to train properly their people, what it all means and implement it properly. So from that perspective, good. The industry remains solidly behind it, will flow through the benefits to policyholders.

I think what it means in terms of pricing, we don't know. I mean we just -- the initial government estimates were about GBP 35. We've always been skeptical that, that number will flow through because you don't know how claimants and solicitors and some will react behind it. So we will see.

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [35]

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So on reserves, there's no underlying change in the reserving approach or methodology. First thing to say. And no significant change at all in the loss picks, other than from time to time, of course, issues work through the numbers and you become more certain about the long-term trends. And that can sometimes make it look like, there's a movement, but fundamentally, the philosophy is the same. So that's what we're doing.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [36]

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Looking forward to Freya.

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Freya Kong, BofA Merrill Lynch, Research Division - Research Analyst [37]

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Freya Kong from Bank of America. Two questions, please. Premium per policy has continued to decline in Motor and Home, how much of this is a conscious change in risk mix? And where you want to be?

Second question on Home. Own brand policies is also going backwards, could you talk us through the dynamics you're facing in this market and where you want to be as well?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [38]

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Yes, we've seen average premium come off a little bit. Slightly different reasons, perhaps. In Motor, some of that is because we put some -- change some of our counter fraud models earlier in the year. So I think we flagged at half year that we were expecting to see average premium come down or had come down, and we were flagging that we also expected to see claims frequency come down, but we're waiting for the trends to come through. In a way, what you've seen here is the sort of the completion of that circle. It's not something that we actively seek to do, move average premiums down or, frankly, up. It's more a matter of where we see the risks and how the risk models are taking us.

Home, probably slightly stronger effect because you've got a channel switch moving on -- moving here. So there's quite a lot of growth in the price comparison side channels where average premiums tends to be -- tend to be lower. With Home, I can't write -- I didn't write the second one down.

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [39]

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The second thing is about own brand...

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Freya Kong, BofA Merrill Lynch, Research Division - Research Analyst [40]

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Own brand growth in Home?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [41]

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Own brand growth in Home. Yes, I mean, again, we still are very keen to grow own brand and so on and so forth. Across the year, we've been reasonably flat overall. And our brands, we're keen to grow over time, and we'll do what the market dictates we can at the right price.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [42]

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Greig?

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [43]

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Greig Paterson, KBW. I'll keep it to 2 questions. One is, 2, 3 years ago, you did a site visit to one of your repair shops, and there was a big hoo-hah about moving into repairing of electric vehicles and that was going to be your sort of competitive advantage in the future. And there's a heavy CapEx involved in tooling up shops for that. I'm wondering, have you given up on that, given the cost-saving program? And where we are with that sort of plan now theme?

And the second thing is, last year in the first half, you gave up by -- in my estimation, 4 points in the Motor attritional because you've stated that your -- you hinted heavily that you're targeted loss ratio was 83 to 84, it's now at 81. Also, Penny, you've made statements recently about, if the new tech comes along, you'd rather use it to grow the top line as opposed to the attritional loss ratio. So am I -- can we expect another -- first half 2018 event where we -- you go strongly for share and give up say, 3 points of rate?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [44]

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Okay. Electric vehicles. Actually, we still -- we do see a potential advantage in that space. Certainly, our number in Stechford that, does kind of a lot of our -- looking at future car technology and so on, one of the repair sites. And they do a lot of work on both around calibration of cars and what the effect of that is on car repair and looking at electric vehicles and what the cost of repair is there and what the opportunities are. We haven't specified what we invest in the repair centers, but we continue to invest in them as we think appropriate. And we see it as an area of competitive advantage, understanding how these things will work and potentially, being able to develop repair approaches that will be harder for others to do. So it's a real -- it is a focus area for us, and we're committed to them.

I think on the -- you may want to talk as well on the points. I mean, we were coming -- as we gave up 4 points this year, as you beautifully described it. I mean we were coming off the back of the pricing strength in the previous period. So we were in a leveling out period. And I think Tim's already pointed out that the kind of levels that we look at are probably represented by the whole of last year. There's some movement between the first and second half, which is really just about when you recognize trends that are coming through. So I wouldn't overread that.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [45]

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(inaudible)

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [46]

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I'm not giving you a specific number. But I think, if you look across that year as a whole, it's a better representation of where we are. Whether that leads us to grow, whether that doesn't will -- remains to be seen.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [47]

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(inaudible)

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [48]

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Will the...

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [49]

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Can we just repeat the question into the mic, so people over the phone can...

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [50]

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Sorry, given that we've got all these storms, I keep getting an inbound question on whether the Flood re-levy for the industry will increase, when it's paid in the first half of this year?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [51]

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I don't know the answer to that. I don't think, certainly, for this year and have no forward projection beyond that.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [52]

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Okay. Do we have any more questions in the room? If not, I'll -- if I can go to the phone lines, have we got any questions on the phone line?

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Operator [53]

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We do. And the first question comes from Kevin Ryan from Bloomberg Intelligence.

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Kevin Ryan, Bloomberg Intelligence - Analyst [54]

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I just wanted to get a little more background, if I could, on one issue that's sort of nagging at me. I mean, we've got claims inflation, you tell us running at 3% to 5%, you're struggling to grow premiums at the headline level and you're being disciplined, which is not helping. You've got a major restructuring program going through, which may or may not overrun cost-wise, and you've done GBP 150 million share buyback or you're proposing to, that seems very ambitious to do all that, with so many balls in the air. Can you give us some background as to why you've made so many, I think, really quite bold decisions all at once?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [55]

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I'm not sure they're all at once. It sounds like we've dreamt it up since December. And I think that will be a long way from the truth. Look, we are on a path, as many people in this room kind of know, to improve the quality of the earnings, to improve the profitability of our current year business and reduce our reliance on prior year business. And part of doing that is investing heavily in technology and the business to enable us to be much more efficient, both in cost terms and the delivery of cost of claims and then loss ratio and speed to market. So all of those are critical.

Now we have taken the view as the benefits that come out, that we will always return money to our shareholders and we will keep the amount of money that we need to fund those investments, and to do what we need to do. So the form and the nature of that, I think, is secondary to the fact that we're standing by our long-term commitments to return funds to our shareholders.

You're right, there is an ambitious plan of activity here. We absolutely recognize that. But I don't think there's anything new and startling in that, and we continue to make good progress.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [56]

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Do you have any other question on the line?

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Operator [57]

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The next question is from Paul Walsh from Field Gibson Media.

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Paul Walsh;Field Gibson Media;Reporter, [58]

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I have just a couple of questions, please. Firstly, I'd be curious to know how much you're budgeting for your IFRS 17 operations? And lastly, I know we've touched upon the coronavirus outbreak in the presentation, but I was wondering, if you could give me some more details about your operational contingency plans for coronavirus? And sort of how and when will you decide to trigger this?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [59]

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If you can do...

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [60]

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I'll do IFRS 17, you can handle the medical side. I -- so look, on IFRS 17, we've not disclosed the figure for the program. It is part of the finance transformation work that we're undertaking at the moment. Penny mentioned another part of it, which is the implementation of a new Oracle system and general ledger, which also, most of the things actually pays all of our claims. So important investment alongside all of the other important investments we're making.

On IFRS 17, I know from my broader work that it's a significant challenge for the industry. I think in the context of Direct Line Group, it's important to remember that, at the end of the day, we have a personal lines general insurance business substantially, and that a lot of the accommodations in the new standard, in particular, the premium allocation approach are available for the vast majority of our lines of business, which, although I'm not complacent or for 1 minute, saying there's not a lot of work to do, relative to others, it will be more manageable. And we're waiting, of course, to see this month on the final decisions on timetable for IFRS 17 implementation, and we'll adjust our plans accordingly.

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [61]

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On coronavirus, I mean, the first thing to say is our primary concern is for our people and our customers. So we'll plan accordingly. In terms of the impact on the business where can they come through, there's sort of 4 potential areas: one is the Travel business; one is the, investments on the balance sheet; one is the, physical operations, so 11,000 people; and one is, supply chain, what could it do to the supply chain. I think we've been pretty clear on Travel that, costs so far around GBP 1 million, and we have extensive reinsurance above that. So we feel that is contained.

In terms of the assets and the balance sheet, we're heavily diversified. We don't hold any equities. So really it's what credit spreads do and even then any one issuer is pretty small. Operationally, we have multiple sites. So if there are issues in one site, and we need to take a -- take action, then we have other sites that we can transfer to. But we are in the process of operationally planning through. And we are used from extreme weather events to having to adjust to different scenarios as well. And the supply chain is largely either local U.K. or European and some -- in some instances and so far, we've seen no impact at all. So I think that's the [sweep I see], but we do keep monitoring, obviously. We have contingency planning, as you would expect.

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Operator [62]

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The next question is from Andrew Crean from Autonomous.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [63]

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Two questions. You talked about volumes in your Motor owned brands increasing or growing in the fourth quarter, could you tell us how that's been going since then?

And secondly, you talked about improving the quality of profits, but I'm just looking at the quantity of profits for this year. I mean you've got quite a lot of headwinds. You've got lower investment income, lower both event and attritional weather, you should get lower costs, you won't get the Ogden discount in, but you could be starting sort of with clean slate, by 10% behind what you just reported in 2019. I'm just wondering, whether your management plans see you actually growing the quantum of profits this year?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [64]

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So let me, first of all, deal with your first question, Andrew, around Motor owned brand and the positive trends that we talked about. Actually, I think we talked about starting when we met over Capital Markets Day, and they continued throughout Q4, and I think it's consistent with what we're seeing in the first part of 2020. So still encouraging. In terms of -- I'm not going to tell you what the profit is going to do next year; I've only just got around to telling you what we did this year.

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [65]

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What are your plans?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [66]

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But we look forward to updating you on that as the year progresses.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [67]

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Okay. Do you have any more questions on the line?

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Operator [68]

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No other questions at the moment.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [69]

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Okay. So we have one more question, I think, in the room. And one from the web as well. So we just take one in the room and then I'll finish the one on the web.

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Dominic Alexander O'Mahony, Exane BNP Paribas, Research Division - Research Analyst [70]

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Dom O'Mahony, Exane BNP Paribas. Two specifics, if that's all right? So you talked about a 3% to 5% inflation as a normalized inflation rate in both Motor and Home, is that severity? Or is that net inflation, including frequency or are they the same? Because you assumed flat frequency. And then Jon asked a pertinent question about normalizing for the attritional weather in Home, but also actually Commercial. Can you do anything to help us understand how much a normal attritional might've been in 2019? Is there anything you might be able to gesture towards that?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [71]

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So let me deal first one because I've got an answer to that one. The 3% to 5% is overall, is net. And it's not true to say that they're one and the same because, actually, you do see some changes in severity experience. The other thing to say is that's a medium to longer-term trend. So you will see some fluctuations in any particular year. As for example, we did on frequency in 2018 in the Motor book. So it's very much a net and overall figure for all lines of business. I haven't got a figure for the attritional loss. We've disclosed our event loss for weather, GBP 64 million overall, but we don't have a figure to share with you for the attritional losses, sorry.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [72]

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Thank you, and just one question from the web, which is just asking, whether we've guided to a depreciation and amortization in 2020 after slight fall in 2019? And have you got any guidance for 2020 on depreciation and amortization?

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Timothy Walter Harris, Direct Line Insurance Group plc - CFO & Executive Director [73]

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I haven't got a figure, but what I can say is, as -- the way it works is, as we're investing in the new systems. The investment we're making is capitalized, it's tested for impairment. But it's only when we actually switch it on, and start using it, that it starts amortizing, depreciating. And we very much hope that we will therefore, see a modest tick up in the depreciation and amortization charge in 2020 as our systems are turned on.

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [74]

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Thank you very much. Penny, do you want to -- last couple of words?

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Penelope Jane James, Direct Line Insurance Group plc - CEO & Executive Director [75]

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Just to say thank you. I think we'll kill the phone lines at that point. So thank you for everybody who's dialed in. I think -- yes...

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Andrew Broadfield, Direct Line Insurance Group plc - Director of IR & Capital [76]

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Thank you so much. That would conclude the...