Direct Line Group (DLG), a leading insurance provider, has reported a mix of challenges and growth in its recent earnings call. The company's Motor division faced financial setbacks with a £320 million loss and a negative net insurance margin of -8%. Despite this, DLG's Home, Rescue, and Commercial divisions delivered strong performance, with a combined net insurance margin of over 12% and an operating profit of £130 million.
Looking forward, DLG aims to increase its net insurance margin to 13% by 2026 and expects an improvement in Motor performance with a 12-point margin improvement anticipated for 2024. CEO Adam Winslow outlined a strategy focused on cost reduction, claims excellence, and pricing optimization, while CFO Neil Manser reported a 10% growth in written premiums in the Commercial segment. The company also announced a proposed dividend of 4p per share for 2023.
Key Takeaways
- DLG's Motor division reported a significant loss, but the company expects improvement in the coming year.
- Other divisions, such as Home, Rescue, and Commercial, performed well, with a combined net insurance margin over 12%.
- The company aims to raise its net insurance margin to 13% by 2026.
- DLG reported a 10% growth in written premiums in its Commercial segment.
- A dividend of 4p per share was proposed for 2023.
- The company is focusing on cost reduction, claims excellence, pricing optimization, and leveraging strong brands.
Company Outlook
- DLG is confident in the Motor division's future, expecting a 12-point margin improvement in 2024.
- The company plans to present a comprehensive strategy review in July.
- A net insurance margin target of 13% is set for 2026, with an emphasis on cost-saving and investment in technology.
Bearish Highlights
- The Motor division experienced a loss of £320 million with a net insurance margin of -8%.
- There was a reduction in policies in force (PIF) due to the repricing of the Motor book.
Bullish Highlights
- Home, Rescue, and Commercial divisions showed positive results with a net insurance margin of over 12%.
- Premium growth was reported across all segments in Q1 2024.
- DLG has a strong capital position and is committed to a dividend proposal.
Misses
- The Motor division's performance was disappointing, with financial results below expectations.
Q&A Highlights
- DLG expects a more normalized balance between volume/market share and margin/pricing in the second half of the year.
- The company has addressed past business practice failures and is aligned with regulators.
- DLG is confident in their ability to compete on price comparison websites and expects intermediated distribution in personal lines to decline further.
In conclusion, despite the setbacks in the Motor division, Direct Line Group is taking strategic steps to improve its overall performance and achieve ambitious net insurance margin targets by 2026. The company's focus on cost reduction, claims excellence, and pricing optimization, combined with a positive outlook for its other divisions, sets a course for future growth and profitability.
Full transcript - None (DIISF) Q4 2023:
Adam Winslow: Great. Good morning, everybody. It's a pleasure to be here today. I wanted to start by taking the opportunity to introduce myself to you all and say that I'm committed to the road ahead and have great belief in DLG's potential. I acknowledge that the past few years have been tough and that we haven't delivered good value for our shareholders. We need to significantly improve our performance. And I believe I'm the right person to lead DLG through this challenge. I know the winning playbook in personal lines, I've run transformations turning around legacy organizations and I've successfully built and led execution-focused teams before. We'll start with Neil, who'll take you through our full year 2023 results. Then I'll spend some time sharing my initial reflections on the business and my forward-looking plan before taking your questions. Neil, over to you.
Neil Manser: Thanks, Adam, and good morning, everyone. So if I stand back and look at the second half of 2023, I'm confident we've made the right decisions to stabilize the business for the future. Whilst the headline financial result in Motor is disappointing, it's important to say upfront that this is not reflective of the embedded earnings potential of the group. Now we set 3 clear priorities last March, and we've delivered against each of these. We've repriced the Motor book. And the last 6 months, we estimate we are writing business consistent with our net insurance margin ambition of at least 10%. Outside of Motor, we delivered a good result with a net insurance margin of 12%. And with the sale of the commercial broker business, we've refocused the group as a retail, personal and small commercial insurer whilst restoring the capital position. With a strong capital base and good underlying progress, we are proposing a 2023 dividend of 4p per share. Now let me go into some of the detail. Gross premiums increased by 27%, whilst total policy count remained flat. The operating result was a loss of £190 million, and that was driven by a £320 million loss in Motor, but offset by £130 million profit outside of Motor. And the net insurance margin was minus 8%. Within the result, there is a charge of £104 million relating to the customer remediation for the 2 past business reviews, and we now consider these to be final. Importantly, on a current year basis, the group was profitable in the second half of 2023 as pricing actions started to reduce the Motor claims ratio. Profit before tax was £277 million, benefiting from the gain on the sale of NIG and better investment markets. And these factors drove a significantly improved pre-dividend solvency ratio of 201%, above the top end of our risk appetite range. So standing back, good results in Home, Rescue and Commercial, offset by losses in Motor, but following our actions, we have seen an improved trajectory in the second half. So let me summarize the key parts of Motor. As I said upfront, this is clearly a disappointing financial result, but it is driven mainly by factors from previous periods. We believe the actions we took last year should support a significant improvement going forward. So let me summarize the key points. First, we took significant action on pricing, which delivered a material increase in our average premiums and led to a written net insurance margin of 10% in the second half. As a result of this, we lost some market share across own brands. However, the new partnership with Motability delivered growth in policy count overall. Claims inflation stabilized in the second half of 2023 and was in line with our expectations. In addition, we believe we've now concluded on the financial effect of the past business reviews and most of this can be seen in the prior year movements. Now we expect 2024 to be an improving picture for Motor performance and estimate that the increase in earned premium on business already written should mechanically improve our margin by 12 points versus the second half of 2023. So in summary, we believe the actions we've taken should support significantly improved performance going forward. So let me turn to the result. Own brand policies in Motor were 10% lower following the significant pricing actions over last year, while total in-force policies rose 9% as we welcomed over 700,000 Motability customers. The rating actions we took together with the introduction of Motability saw gross premiums grow by 43%. Clearly, the result has been impacted by business written at lower margins in 2022 and early 2023 together with some prior year strengthening. However, as you can see from the chart on the bottom, in the second half, the current year claims ratio improved by 6 points as we are starting to see the impact of higher average premium earning through. And this also benefited from the initial contribution from Motability. Prior year strengthening was £138 million, including £78 million from the remediation for Motor total loss. Following a third-party review, we have now finalized the scope, and we consider the provision to be final. The remaining £60 million primarily consisted of adverse development in damage claims, particularly from the last quarter of 2022, most of which we reported in the first half. So let's turn to claims trends. The Motor market continued to experience significant claims inflation in 2023, although some of the key indicators began to stabilize in the second half of the year. The main driver of claims inflation was repair costs, largely driven by a tight labor market and parts inflation with both features being market-wide. And this caused industry-wide backlogs in the first half of 2023, and we've been tackling this by increasing technicians in our 23 repair centers. As a result, we've reduced cycle times by 10% in our garages, which has not only increased the advantage over the wider network, but also means fewer total losses and reduced higher car fees. Used car prices were broadly stable through the first half and began to deflate in the second half, although this was not universal across the car park. In all, our view of 2023 inflation is unchanged since the half year. And based on these trends, our outlook for 2024 is high single digits. Now whilst there's still inflation in the system, the key indicators have started to stabilize. Now the following 2 charts, I'm going to update the charts I showed you at the half year. On the first one on the left, you can see the strong pricing action we took, particularly around Q3, and this resulted in a 37% increase in our own brand average premiums in Q4 2023. On the right, you can see how the 37% increase in average premiums has driven a 26% improvement in our predicted written claims ratio. And you can see, we have been delivering written margins in line with our 10% net insurance margin ambition for the majority of the second half. As I said earlier, we've already seen some of the benefits start to come through in the second half of 2023. And on the following slide, I will show you how this should continue into 2024. So my final Motor slide, I've updated the view of forecast earned premium based on the business we have already written. The red line shows the pickup in average written premium in the second half and the gray lines show how that has increased the average earned premium estimated into the future. The darker gray line shows the current expectation of average earned premium, and you can see it's been increasing throughout 2023. In Q4 '23, average earned premiums were 24% higher than the previous year and are predicted to be a further 20% higher by Q4 2024. Now this would mechanically deliver around a 12-point margin improvement and move the current year net insurance margin into positive territory. So as you can see, there is a meaningful margin uplift embedded in the business we've already written. And we believe there's further upside in 2025 as earned premium fully catches up with written premium. And this is before the impact of further pricing initiatives, which Adam will come on to later. So to conclude on Motor. We've taken the right pricing actions, inflation looks so stabilized, and we have a strong earn-through to come from the business we've already written. As I said upfront, outside of Motor, our other businesses performed well. Together, they serviced over 5 million policies, giving them scale in their markets, delivered a combined net insurance margin of over 12% and reported a meaningful operating profit of £130 million. In Home, the result rebounded with premium growth of 6% and a net insurance margin of 10%. And this is a testament to the positive trading approach over the last 2 years. In 2023, we delivered over 40% increase in new business sales, grew new business share in PCW and maintained strong retention at over 85%. Now underlying claims inflation or claims trends remained in line with our expectations of mid-single digits, and we benefited from lower-than-expected weather-related claims. And this resulted in an operating profit of £52 million. Now on this slide, you can see how well the Home team have priced over the last 2 years, which leaves us with a positive trajectory as we exit from 2023. On the left, you can see that we've priced ahead of the market since the beginning of 2022, including the impact of the pricing practice reforms. You will see that the gap narrowed in the second half of 2023 as market price increases caught up. On the right, you can see that this focus on margin led to some policy loss in early 2023. However, as rates increase across the whole market, our competitiveness improved, and in Q4, we returned to modest policy count growth. Now we're not expecting significant policy count growth this year, but we are well positioned as we enter 2024. In Rescue, we delivered a strong net insurance margin of 29% and exited the year on a better premium trajectory as pricing actions through the year took effect. In a big change for Green Flag, we're rolling out our own fleet of patrol vehicles. Historically, we've utilized a fully outsourced model. However, we decided to move towards a more mixed model, akin to what we have in Motor repair. We now have 20 Green Flag patrol vehicles attending to customers and selling parts at the roadside. The results have been highly positive and customer NPS has been excellent. Looking forward, looking ahead, we plan to expand this further with an ambition to get to 130 vehicles. Rescue overall delivered operating profit of £48 million. And finally, Commercial. In September, we announced the sale of the brokered element of our Commercial business, which operated under the NIG brand. This part of our business is now reported outside of our ongoing results. We retained the Commercial Direct business, which provides cover to landlords, van owners and small businesses. It shares the same customer base as personal lines by selling direct and through PCWs under our 2 most famous brands, Direct Line and Churchill. It has pricing synergies with the rest of the business and a strong track record of growth. Through a combination of policy count growth and rating action, Commercial delivered a 10% growth in written premiums and has achieved a 13% compound annual premium growth over the last 3 years. In 2023, the net insurance margin was 13.1%, and the operating profit was £30 million. So let me turn to costs. Total ongoing operating expenses increased by 4% to £524 million, less than inflation despite the additional costs from the Motability partnership. Controllable costs shown here in pink were also up 4%. And within that, staff costs increased by 3%, as salary inflation was partially offset by a reduction in headcount. And finally, noncontrollable costs were up mainly due to higher amortization. And this resulted in an expense ratio of 19.7%, a small tick up on last year. In 2024, we expect a broadly stable expense ratio. We'll recognize additional costs from a full year of Motability and increased amortization, which combined is around £50 million, and that's in addition to the impact of underlying wage inflation. Now we have more work to do here, and Adam will run through why we believe there's such a significant opportunity. Turning to capital. The key takeaway here is that we end the year with a strong capital position. The chart shows the key movements since the half year. The sale of the brokered commercial business contributed 46 points of capital and 2023 also benefited by 3 points from the reforms to the risk margin. Net capital generation of 12 points reflected mark-to-market movements, improvements in written earnings in Motor, alongside the good earnings performance across the rest of the group. Looking forward, we continue to look at ways to optimize our capital requirements. However, the resilience of the balance sheet has been restored. On the back of the strong capital position and good performance in Home, Rescue and Commercial, we are proposing a 4p dividend in respect of 2023. We're also confident in the turnaround in Motor, as we demonstrated in the earlier slides, but we recognize this has only been for a short period of time. Therefore, we will revisit the conditions for a dividend restart in July as part of Adam's strategy review. Before I hand over to Adam, let me give you a brief update on Q1 trading so far. In early 2024, we've delivered premium growth across all segments. In Motor, premiums grew by 21% with a small reduction in policy count. Market rates so far have been broadly stable. In Home, premiums were up 14% and own brand policy count continued to grow modestly month-on-month. We've seen further rate go through the market so far in Q1, which is supportive. A quick note on Q1 weather. We've used some of our event load in the early part of this year, and our current estimate of weather claims in Home is £22 million compared to our 2024 expectation of £54 million. And Commercial has continued to grow well. So to sum up, we expect to deliver improved performance in [2022] and trading so far has been positive. I'll hand back to Adam.
Adam Winslow: Great. Thank you, Neil. Since I started as CEO 21 days ago, I visited DLG's sites and met many of our colleagues. I'd like to share my initial reflections on DLG's starting point and the immense opportunity I see for this business. I'm going to provide you with as much detail as I can today, but there'll be much more I'd like to share with you in the summer. So there are 4 key messages I'd like you all to take away from today. First, I believe that DLG has strong foundations. We have some of the greatest brands in the market, over 9 million policies and a diverse portfolio of assets, including rescue and repair at scale that's unique to this market. Second, there's strong evidence to show that our Motor business has turned the corner and that in 2024, we'll see a significant performance improvement. Third, there are immediate actions we're taking in 2024 to create value, especially on our cost baseline. And fourth, there are larger moves that can drive a step change in value creation. I'm currently working with my team on a comprehensive strategy review that will answer the key questions on how we drive mid- to long-term value and return to growth. I'll come back to you in early July during our Capital Markets Day to share a refreshed strategy, proper planning and execution will be key to delivering the right outcomes. We have iconic brands that are consistently the most recognizable in the market and a passion for serving our many millions of customers. The variety within our brand portfolio should enable us to resonate with and reach many diverse target customer segments. We have one of the largest personal lines portfolios with strong positions in Motor, Home and Rescue and a truly broad product suite together with one of the most comprehensive Motor ecosystems. Our owned repair network and Green Flag enable us to feed unique data into our pricing models and provide better end-to-end services to our customers. Our mix of assets and products is distinct in the market with more than 60% of our policies being driven by Home, Rescue and Commercial lines. The management team has taken action over the last 12 months, and I thank [Jon] for overseeing these important efforts, providing me with a solid platform to build on. DLG has responded to motor claims inflation in 2023 by repricing the Motor book and improving written margins to above 10%. We managed to substantially grow our customer base by 700,000 customers through the partnership with Motability. And we've increased the focus and simplicity of DLG's business by selling the brokered commercial business. At the same time, we managed to significantly improve our capital position, and we're now at 197% solvency ratio after the dividend we announced today. We've continued innovating across products and services by providing our customers with a greater choice of products, including the launch of new affordable products responding to the cost of living crisis. For example, we launched Direct Line Essentials, an affordable offering that still has everything customers need to get on the road. We also acquired By Miles, an offering that allows customers to pay only for the miles they drive. In summary, this has always been a market where the best businesses can outperform materially over the cycle. As you've just heard, DLG is a business with significant strategic and operational advantages across brands, channels, scale and capability. We should be capable of outperformance, but we're not there yet today. While our Motor results are disappointing, I believe the latest figures show that we've turned a corner. Neil covered this earlier, but I believe it's important to reiterate and highlight the impact on our go-forward plan. We can see that based on our written premiums, our earned premiums forecast is expected to mechanically improve our current year net insurance margin in 2024 by about 12 points compared to the second half of last year. This momentum will drive improved performance in 2024. But more importantly, we're now able to do more. Previous investments in modernizing our underlying technology and platforms allows us to build machine learning-driven pricing models, new product development is also significantly faster and cheaper, delivery of increased digitization and self-service can also now be a key area of focus. If I think about the wider market, it is recovering from a period of significant inflation, and you've seen evidence of rate hardening across all of our competitors. We have established or reestablished our own pricing discipline, and this gives me confidence in our ability to price effectively going forward. With that reestablished discipline, we can achieve our existing net insurance margin ambition. While the picture has improved, we need to do more to drive performance, simplifying the business, stripping cost out of marketing, operations and technology whilst improving our digital capabilities are all critical. I believe these quick wins will start to drive improvement from the second half of this year. Starting with cost, I'm confident there are immediate actions I can take to address controllable costs and third-party spend as well as simplifying the organization. As we've announced today, at least £100 million of cost savings have been reported on to Takeover Code standards. We also need to drive claims excellence and optimize pricing capabilities, whilst bringing our brands back to higher quotability levels in aggregated distribution. Execution of these quick wins is already underway. I intend to speed up delivery by strengthening the execution capabilities of my team and instilling strong performance management into the wider organization. A simpler, more efficient business with very explicit priorities can navigate the short term and should enjoy sustainable success over the medium to long-term. Let's start with our cost base. Before joining the business, I thought this would be an area of significant opportunity and everything I've seen since joining has confirmed that we can create more value in the short term. I'll be coming back in July with a broader strategy plan, but the cost opportunity is already clear to me, and we're acting for in-year delivery. Neil took you through our operational expenses. However, I intend to address our full cost base, which is much larger, representing £849 million and therefore, offers a higher controllable cost base to focus on. As many of you know and have pointed out, our expense ratio is 6 points above peer group average. We have a fragmented and costly technology stack. Our org structure is complex and not yet fit for future success, and we still underperform in digital. For example, it's evident how the lack of online self-service functionality, simple automation and demand management across our service operations are driving 60% more service calls compared to our best-in-class competitors. We already have initiatives in motion, a combination of stopping activities and rapidly building on existing digital platforms to reduce this demand and offer customers a better choice of channels to interact with us on. I know and have previously implemented the winning recipe to take cost out in our industry. We need digitized and automated processes, a simplified operating model with clear P&L accountability, increased self-serve and to extract greater value from the tech organization. I did this at both AIG (NYSE:AIG) and Aviva (LON:AV), where I systematically reduced complexity through operating model redesign and the significant streamlining and targeting of the product portfolio. This is a well-trodden path, and I'm exceptionally focused on delivering these outcomes. Moving on to claims. We have strong foundations, but we need to build on these. We used to be the market leaders in claims accuracy, but our position has deteriorated in recent years. Our average spend per claim is no longer best-in-class. We need to recapture the benefits from our structural advantages. For example, as Neil referred to, our own garage network can be further leveraged to fulfill a higher number of repairs at a lower cost but with superior customer service measured by NPS and key to keyx. A claims transformation program has already been launched, initially focusing on further optimizing our garage network, building on our counter fraud efforts and accelerating in-train initiatives, for example, fully applying the auto body professionals rate. I've run similar programs before. At Aviva, I led an end-to-end claims transformation, so I know what it takes to ensure these initiatives deliver and translate into tangible savings recognized by our actuaries. I'm confident that we can capture the value. Continuing with pricing. From an assessment conducted in Q3 last year, we know that we had a substantial opportunity to uplift our pricing capabilities. With this assessment concluded, we started the transformation effort last year, and we've made progress against -- across all areas since then. This includes improving data quality and availability, upgrading our pricing models and simplifying the pricing organization. This year, we're focusing on a step change in our technical pricing models, enrichment of our models with new data, further simplifying our pricing algorithms and increasing our speed to market. These are really important attributes, especially with PCW distribution in mind. And finally, moving to customer, brand, and value proposition. Market research consistently shows that Direct Line and Churchill are the most powerful brands in the market. However, we don't leverage the full strength of these brands because often we don't quote. I'm already evaluating whether we put Direct Line on price comparison websites, and I'll communicate to my decision to you in July. We need to create a clear strategy with target customer segmentation and differing value propositions across our brand portfolio, which will enable us to leverage our strong brands and updated pricing models and return to customer and policy growth quickly. My ambition is the controlled return of our price comparison website brands' quotability to their previous 70-plus percent levels by the end of this year, and I'm confident in our ability to get there. So far, we're focused on short-term actions to generate value this year. I'll come back to you in July with updates on our progress against these. And at the same time, I'll also share the results of the comprehensive strategy review that's currently underway. Many of the topics we're looking at are well understood, but the proper groundwork needs to be completed to ensure the right design choices are taken, proper planning is in place and delivery is derisked. As I mentioned, I'm focused on delivery and creating a results-orientated culture and leadership team that executes at pace. So bringing all this together, we believe that the set of quick wins laid out in combination with medium-term strategic moves should create significant upside against our current performance. We believe there's an opportunity to deliver an additional 4 points to 5 points of margin. As I mentioned, I joined DLG because I believe the value creation opportunity is huge. Our existing ambition is to write business above a 10% net insurance margin. The set of quick wins, coupled with a refreshed strategy, today provides us with the opportunity to increase our net insurance margin target to 13% in 2026. So to wrap up, I'd like to reiterate my starting messages. Direct Line Group has strong foundations to build on. Our Motor business has turned the corner and shows positive momentum into this year. We've identified immediate actions we can take to further improve 2024 performance, and I'll come back to you in July with more details on strategic moves and progress to date. So thank you for listening. I think the plan is that we're now going to open it up for questions. Usual rules apply. 2 questions each, please. And we are in an offer period. So obviously, I can't answer specific questions on this subject. Paul, I think we'll rove around.
A - Paul Smith: Thanks, Adam. I'll just check the mic. Thank you. Raise your hand if you like a question. James?
James Pearse: Yes. James Pearse from Jefferies. So you flagged reinvesting in the business in your bridge to that 13% NIM target on Slide 28. And obviously, DLG has just done a transformation project. So I guess, where do you think that latest project took you to kind of relative to peers? And how much more do you think needs to be done on technology and kind of being competitive in terms of your underwriting capabilities? And then just again on that bridge on Slide 28. So is it -- is it fair to assume that -- is that going to kind of be back-end loaded or is it going to be a steady improvement over time?
Adam Winslow: I'll take the first one, James, if that's all right, and Neil will take the second. You're right. The -- we're showing you a bridge sort of 4 points to 5 points more than the 13% target. How do I think about where we might use that buffer? I think there were 3 obvious areas for us to think about. One is the tech point you absolutely rightly made. I think every business has to continually invest in tech and digitization, just to keep pace candidly with what's going on in the wider market. And I think that will always be a part of our ongoing investments. I think the second area is potentially accessing profitable growth opportunities as they present themselves. And the third is to give us an appropriate buffer acknowledging that the pricing environment is likely to change. And so we want to be cautious and sensible about the plans and targets we put forward to acknowledge that. Just to build a little bit on the tech platform question. I actually think the work has provided -- has given us some really solid foundations to build from. And so this isn't about doing that fundamental building block work. It's about what we can do on top of that. So things like apps, things like eDoc enablement, things like taking some of the failure and demand away and creating those digitized channels and end-to-end journeys, the platform absolutely provides us with the opportunity to do that. Our competitors, I think, have done that very well, and we are now catching up. And that's what gives me the confidence that we can achieve it. Neil, the phase...
Neil Manser: Let me take the second one. So I think first thing to say is the actions aren't back-end loaded. The actions are front-end loaded. So we obviously get -- we'll start the actions immediately or have already started many of the actions already. In terms of the phasing through, I think there's 2 phasings here. Obviously, you've got the Motor earn through phasing as well as the action phasing. So the Motor will earn through over the course of '24 into '25. So that's one phasing part. Clearly, we are aiming for £100 million cost savings by the end of 2025. So some of that will definitely come through in 2025. I think where you've got pricing claims initiatives, clearly, we have to recognize that, and some of that takes a bit longer to earn through. But I think messages, actions today, and you will see it flow through over the course of that period.
Will Hardcastle: Will Hardcastle, UBS. Just really leaning on the cost save and trying to establish, I guess, want of another word, credibility around it. I think you've touched on the benchmarking, the external reviews. I guess where are you trying to land on those benchmarking exercises and the number -- the targets that are coming out, where is that landing you? And what's the scope for further upside, which feels punchy obviously, given today's upgrades potentially? And then second, I guess, on the mechanical 12 points of margin improvement. That's the earn through. I guess, can we get any update, and this is market-dependent clearly on what you're thinking for '24 because that 12 points -- are we still pricing in excess of inflation today? We saw policy count reduced a bit year-to-date, but that could be competition-driven. So I'm just trying to understand a bit of what you're thinking for '24 direction of travel there.
Adam Winslow: Why don't I take the first question, and Neil, you take the second, please. Significant work by expert third parties that was commissioned by the Board has gone into looking at cost, claims and pricing since last year. I think that cost benchmarking point relative to peers is well known and well understood, and we now understand it at a level of granularity and detail that we maybe didn't in the past. I think roughly 50% of the £100 million, think about that as sort of technology and digitization in one part and sort of simplification of the organization in another. You're right to ask you -- where does that get us from a benchmarking perspective. It doesn't get us back to the peer group average. So what we're announcing today is at least £100 million of cost saves. Clearly, we need to reestablish credibility by delivering that £100 million, but is there further potential upside after that point, then the benchmarking absolutely suggests that there is. And having achieved those outcomes, I'd like to talk to you at that point about where we go and what that looks like. Neil?
Neil Manser: Let me try the second one. So there is further mechanical improvements in 2025 as well because at the end of '24, your average earned hasn't caught up with your written at that point. You're still earning through the first half of this year, some of the business written in the first half of last year, which was at below target margins. So there's more mechanical earn through coming through in 2025, which supports the margin going forward. On the pricing point, yes, we are pricing claims inflation. It's a simple answer. In terms of policy count, I think there is a -- there will be a first half, second half split, I suspect, because in the first half, we're still pushing through quite significant year-on-year price rises into the customer base as we -- as pricing catches up, and you've seen the pricing chart that we put up. So it was very much Q3 loaded. So some of that will come through in lower retention in the first half of the year, but then you should stabilize as we get through 2024.
Adam Winslow: And it's fair to say, our underlying philosophy will always be balancing on the one side, volume and market share, and on the other side, price and margin. And we'll always look to effectively try and balance those 2 levers.
Anthony Yang: It's Anthony from Goldman Sachs. The first question is actually on Slide 12 on the NIM margin for the other segments. Can we think those are normal level going forward or are there any one-off? And then second question, I guess it's still just coming back actually to the policy count. Can we just maybe more clarification at what stage will Direct Line say, okay, I'm happy about the price increase or adequacy, then I can reverse the policy count to growth, especially in Motor?
Adam Winslow: Why don't you take the first? I'll take the second.
Neil Manser: I'll take the first question. So there is some modest weather benefit in the Home numbers in 2023 that will -- so there's a small modest benefit in there. On the flip side, though, there are some remediation provisions in Home that we wouldn't expect to continue. So look, I think the portfolio of those 3 products, we're confident that at least 10% NIM is the right way to think about.
Adam Winslow: And I'm just going to reiterate some of what Neil already talked about from a sort of policy count perspective. We have repriced the Motor book. You've seen evidence of that from the midyear last year. That has led to some PIF reduction as we focused on restoring profitability. We are now happy from midyear last year that we are writing at the required target NIM margin. So in that sense, we're not looking to catch up. To Neil's point, as that earns through and as that stabilizes, we would expect to see, I think, the second half of the year that more normal balance I just referred to between volume and market share on one side and margin and pricing on the other. So that's how I think about the sort of shape of the year in that respect.
Faizan Lakhani: Faizan Lakhani from HSBC. My first question is on the capital bridge where you show the net capital generation was 12 points. If you could split out how much of that was from written margin versus sort of market movements? And I guess, an extension of that question, is it fair to say that net income would not be a good proxy for capital generation next year given the fact that you sort of front-loaded some of that written margin? My second question is coming back to the expense work that you're doing. The 2 areas that you pointed out was sort of marketing expenditure being too high. But when I look at it, it's sort of 40% lower 3 years ago. Can you actually reduce marketing expenditure without coming at the cost of sort of competitiveness?
Adam Winslow: Why don't you take the first one? I'll take the second one, please. Yes.
Neil Manser: I'll take first one. So market moves in that 12 points is about 5 points of that 12 points. In terms of is net income a good proxy for [S2 CapGen], you're obviously right. In normal years, yes, but in a year where you are seeing a better written premium than earned premium, you would expect all other things being equal to CapGen to be slightly ahead of the IFRS earnings. So for Motor, probably slightly better than IFRS earnings, for the other products, broadly in line.
Faizan Lakhani: For '24?
Neil Manser: For '24. Yes.
Adam Winslow: And so on the marketing question, look, we're only going to stop things that don't damage the future of the business. And so expect me to implement a fairly robust gauging progress around business cases and returns. To the extent any investment could be marketing or could be anything else meets those return hurdles, and it's good for the business, our customers, the customer experience we're seeking to drive, we'll look to support it. If it's not, expect us to stop it. And I think that's not all of the spend today, I think, conforms nicely to those and those sort of 2 levers. Where -- just trying to sort of think about where are we really short and where do we see a lot of those savings, I would point you back towards those digital quick wins. And today, customers out there, they are asking for an omnichannel experience. They want to transact with us digitally. They'd like better straight-through processing, and we don't give them the things they want or need and that our competitors do provide them with. And so -- but from my perspective, ignoring the desires of our customers isn't a very sensible thing to do for any business. We should embrace what our customers are telling us and what other people provide and look to solve that gap quickly. And thanks to, I think, the foundational investments we made in technology, I think we're in a very good position to do that. I'll give you a good example. Things like the Caha app has actually given us the app infrastructure that we need to be able to build a Direct Line and Churchill app far more quickly than if we were starting from scratch. That answer the question? Okay. Thank you.
Youdish Chicooree: Youdish Chicooree, Autonomous Research. My first question is really on your NIM target of 13%. What kind of sensitivity analysis have you done around it? I mean, for example, if installment income are to drop 25%, 30%, would you still be able to meet that?
Adam Winslow: Neil?
Neil Manser: So one of the biggest moving parts that you can see from there are costs, which is within our control. Claims transformation, where I think Adam talked about eloquently, he's done this before, got the track record, and he starts on a good base and then some pricing initiatives where we know there's much more we can do from the slide you can see in the pack. So much of the improvements we're looking at are completely within our control. Of course, there are always things that happen in the marketplace. And if something does happen in the marketplace, we would have to react in the same way our competitors would have to react, and it would be a market-wide thing. So we are confident that there's a sufficient amount in the hopper to get there. And I think as you said, as you can show in the chart, we think we've got 4 points to 5 points of margin improvement, and then there are some reinvestment opportunities. So that should give you the ability for some of that to be eroded or to be reinvested and still reach that target.
Alex Evans: Alex Evans, Citi. Just on the past business practices, you were saying sort of confident that the £150 million is final, but it also suggests that your sort of view is going to complete mid-2024. So I just want to get an understanding of how confident you are that some of the past business practices not related to total losses and the FCA price practices will stand up to further scrutiny from the FCA? And what do you make of the culture of the business since you've joined? And then secondly as well, just on sort of Motor reserving expos, this reserve strengthening in the second half, how comfortable are you on the reserving piece across Motor? And is it possible to give us a bit of a trajectory of how we think that should develop in '24 and '25?
Adam Winslow: Well, I'll do the first one, you do the second one. I think as Neil said, the previous reviews, I think, now have been completed. They've been completed by an expert third-party, and that's what gives us confident in the provisions we've made. A full customer redress will effectively occur over the coming months. So whilst we've completely provisioned for it, the monies haven't always yet been paid. So I think that's the timing delta you're referring to there. I think on the culture point, I'll come back to my starting position. I think DLG has always had a very customer-orientated and customer service-orientated culture. I think we've got some very talented colleagues who absolutely, notwithstanding the 2 issues you mentioned, put customers front and center in everything they do every single day. And that's the culture candidly I want to build on rather than change in any way, shape or form. I would say just to offer maybe some more personal flavor, I don't think today, our operating model always allows for quick decision-making or getting the best out of the talent we have in the business. And so some of the changes you heard me allude to is trying to simplify should we say our own internal ways of working so that actually our great people can do even more quickly rather than wade through any treacle.
Alex Evans: Sorry, just to follow up on that. So you're confident of the sort of future historical practices that DLG have run as a business?
Adam Winslow: I am confident that we have addressed the specific failures that we have learned the lessons and we have thought more widely and broadly about what we're doing in the business. I've actually met the regulators already and had a specific conversation with them on exactly this issue, and we're very aligned in our thinking.
Neil Manser: Shall I do the second question? So second question was Motor prior year. So I think, as you can see, there's a very modest movement in prior year in the second half once you take out the remediation provisions. If I look forward, we've had our standard third-party review of the reserves, which support our position. When we look at reserving, we look at the -- we always look at the potential things coming through the -- coming down the road. So obviously, we've had the traditional guidelines being updated fairly recently. We pre-saw that and reserved ahead of that. You've got some portal changes which we take into account. And the big thing is probably the Ogden rate review, where that should be, depending where that goes, but most market commentators would say that's a net positive going forward. Having said all that, I would go for the outlook for reserve releases, I'd be reasonably cautious on them, comfortable in where we are, but reasonably cautious on material reserve releases.
Thomas Bateman: Thomas Bateman from Berenberg. Thanks for the presentation and the new targets. Hopefully, we get to July. What have you seen that makes DLG -- what makes you think you can catch up with peers? Because they're spending similar amounts to you on tech. Their pricing has probably been a little bit stronger this year and yet you're still losing policy count. So I just want to see -- understand when we might see the tangible benefits of all that investment and particularly that PIF growth. And secondly, on the 13% NIM guidance again. I guess the near term guidance is a little bit weaker. Long-term guidance, very strong. And I guess I'm a little bit surprised that you're only at a 10% NIM towards the end of last year. Arguably, pricing is at one of its strongest points in the cycle at the moment, and it feels like there's not much consideration that, that cycle could turn. So I just want to understand, with that 13%, where does the big improvement in claims and pricing come from the [indiscernible]?
Adam Winslow: Let me take the first one, Neil, perhaps you take the second one. Actually, the -- those technology foundations you heard me talk about earlier, I think have given us the strong basis to build from which we didn't have in the past. And I do think they're quick wins because driving down failure demand through virtual assistant and sort of WhatsApp style services, increasing digital adoption via claims online on Churchill, the insurance app that we've already built in the form of Caha, and increased focus on eDoc adoption, they're things that all of our competitors have already done. There is a well-trodden and well-understood path here. We're not breaking new ground. We have got the foundations in place. And actually, I think that what -- that's what gives me really good confidence that we can execute quickly. And crucially, we're not giving customers something they're not asking for. We're embracing effectively an existing customer need that's there today. And so the combination of delivering those outcomes, do I believe the customers will embrace them and use them, which is where then the efficiency from a unit cost perspective and the better customer experience will come through, absolutely, because I think that's what we see in all of our competitors and frankly, the broader industrial environment in which we operate. So I'm confident. I'll come back to the PIF question you asked as part of that, which is, I think the first half of this year, you can expect to see some similar dynamics to last year as the rating action we've taken earns through. I think in the second half of the year, we see that stabilization and see that more normal balance between volume and market share on one side and margin and pricing on the other. And we'll always look to try and thread the needle between those 2 levers. Neil?
Neil Manser: So on the second one, I think I'd always go back to the earlier question, which is that we think we've got a hopper of 4 points to 5 points improvement, which should give you some insulation against the market. In terms of -- if you look at that breakdown costs we've talked about at length, and it's at least £100 million. On the other options, the team have spent a lot of time putting in good foundations. And actually, if you look at what some of the charts, the pricing chart, for example, actually in 2024, we can move quite materially forward, particularly around subjects, around retail pricing, around portfolio management, and there's quite meaningful benefits to come from those, the actions that they're taking. So I think that gives us the confidence.
Ivan Bokhmat: It's Ivan Bokhmat from Barclays. I have a first question to Adam. I guess coming from Aviva, another vertically integrated insurer, I was just wondering if -- when you think about that setup at DLG or more broadly, is there anything that frustrates you about that? Do you think that there's value in every chain of that vertical integration conceptually? As in, when you mentioned some additional cost measures that you can think about, do you think that it makes sense? Do you get enough value of owning the garages and stuff like that or anything elsewhere through the chain? And then maybe the second question, actually to Neil. I think we were talking about changes to reinsurance for a while now. I was wondering after the 1/1 renewals, what changes have you done? What else do you think may be worthwhile in the current environment?
Adam Winslow: Let me take the first question. So I think the Motor ecosystem that you've referred to is one of our unique characteristics that should enable us to deliver better customer experience and outcomes, but also a better unit cost as we do it. And no one owns the combination of rescue and repair at scale. One other player that you've alluded to owns repair at scale, although I think the number of repairs we do is it represents a higher proportion of our book. That higher proportion should come through in a lower repair cost, because we control the levers, the parts supply, the labor, a lot of the input inflationary measures, we've got more control over in that model, and crucially, from a customer experience time, and we can measure this very accurately because roughly 55%, 60% of our repairs today go through our own accident repair network, garages, and so 40% go into partners. We know how our speed, satisfaction compares and contrasts to the rest of the market, and we see a legitimate and evidential and an evidenced advantage in both of those measures. So I absolutely do believe it's useful. As Neil said, we are investing in Green Flag, because I think everyone else doesn't have that capability. And I think it's something that our customers are telling us that if it was packaged in the right way and served to them in the right way, particularly with that app-based interface, when someone is broken down at the side of a road, being able to push a button on their phone and know that we'll be there, we'll be there quickly and we'll try and get them fixed, all within one insurance ecosystem, I think is very, very powerful. And I don't think anyone else has got all of those levers today. Have we put them together in that way yet? No. Do we at least have the pieces on the board to enable us to? Yes. And I think that's a crucial advantage we should seek to lean into. Neil?
Neil Manser: On reinsurance, so actually, 1st of January feels like quite a long time ago now, but we -- the actions we took, so we actually reduced our catastrophe retention. That's partly in response to the sale of the commercial broker business. So that's gone down from £130 million down to £100 million. We actually had a very good property cat renewal in January. Quite pleased actually with the results. On Motor, tougher market actually in Motor. So we've retained the existing structure. We'll continue to look at it, but that's quite -- the capacity in the market is reasonably tight in Motor, given, obviously, the last couple of years' performance for the Motor industry as a whole. Then the other couple of things I mentioned is, of course, we had the 10% quota share now hold account. That's a 3-year deal. So that's not up for renewal yet. Obviously, we will start to think about that as we go through this year into next year. And I think the last thing just is worth reminding is that we, obviously, have still got the back book of policies from the commercial broker business and we will probably look to investigate options for that. Obviously, we've got the option with RSA at some point, discuss with them, but we'll look at that at some point, I think, so that we can reduce the reserve risk on the book.
Abid Hussain: It's Abid Hussain from Panmure Gordon. Two questions, please, if I can. Just coming back to the cost question, I'm just wondering, do you think you have been previously over-serving customers and hence a bloated cost base? And then, if you are going to take the knife to that cost base, how can you ensure the retention levels and the service levels remain on par with your peers? And then just -- I may have missed this. Have you quantified the restructuring costs to get to the £100 million cost saves? And if you could just sort of add some detail on that, please? And then just finally, if you do hit your NIM target and the cost save target, how much do you think the business is worth?
Adam Winslow: Neil, do the last one and I'll do the first 2. So cost question, do I think we've been over-serving? My -- today, we don't give customers the benefit of a choice or very little choice. So today, most customer needs are fulfilled by telephony. And telephony is the highest cost-to-serve channel. It doesn't mean by the way, it's a poor experience or it's the wrong thing for customers. It may be going -- in the future, by the way, we'll always retain a telephony model. It just might be that different customers. The example I might give you here is, someone buying a digital essentials product through an aggregator. They're buying it online. They're buying it because their buying or purchase consideration is motivated by price rather than necessarily the totality of the features, benefits, and service support. Typically, most of our peer group would seek to serve that customer need in a more digital channel. We don't do that today. And actually aligning then the operating model to those product and channel choices, I don't believe at all means that there is a customer retention or potentially a potential sort of dissatisfaction far from it. I think actually, we're aligning the target customer segmentation to their needs and also what they're used to and what their experience would be consistently across other brands and business. So I think we have the brands, we have the products, we just haven't constructed us. Hence that brand value channel question I alluded to at the end of my -- sort of midway through my remark. Sorry. That's why I think that work is so critical to try and get that right, so that we deliver the right outcomes to customers in the right way with the right choices, but that is appropriately priced into the cost of the premium. I think from a restructuring perspective, I think we have given a number, I think it's £165 million. And that £165 million today, we've published the £100 million to Takeover Code standards. There is a bigger hopper of activity that got us to that £100 million, and that £165 million refers then to that bigger number rather than purely the £100 million. What I would say is that £165 million is the majority of that is accounted for in our existing '24 and '25 expense base. So you shouldn't think of that as new spend. Neil, do you want to add anything to that?
Neil Manser: No. Third question, we're confident in the standalone valuation of the business.
Adam Winslow: Thank you, Neil.
Andreas van Embden: Andreas van Embden from Peel Hunt. On reserving, the risk adjustment, the confidence interval sits at 75%. I know part of that is mechanical, but some of your peers sit higher. Some other peers sort of give a range. Is this something that's going to be part of your risk strategic review, just a more holistic view of reserves not only the best estimate, but also that confidence interval? Second question is on PCW distribution. What is your experience with PCW distribution? And thinking about the quotability of your Direct Line brand, what is it now? And if you go on -- if you bring the Direct Line brand onto PCW distribution, what is the risk reward of doing that? Obviously, it's a much more competitive distribution channel. Is it a risk that actually your pricing might come down again as you compete with other brands on PCW distribution?
Adam Winslow: Questions, Neil, why don't you take the first one?
Neil Manser: Shall I take the first one? So, 75% is not uncommon in the market. Actually, traditionally, we've always been at 75%, even pre IFRS 17. I think it's sensible. I think it's a sensible place to be, other people in different places. I'm not going to rule anything out. We'll come back to you in July if there is something different to that, but I'm pretty comfortable with where we are.
Adam Winslow: And I think in terms of the sort of PCW distribution question, I think we're actually in a very fortunate position today. We have 2 of the best known brands, one that has a very strong Direct orientation and one that has a very strong PCW orientation. And what we're thinking carefully about is the sort of multiple ways distribution could evolve in the future. It depends what you think in the post-chip landscape thing, how that moves and how that changes. If we think that effectively more distribution is going to become consolidated on PCWs, then it would be, I think, fairly logical for us to want to reorientate our brand strategy around that. What gives me confidence if we made that decision is actually we have a brand of business today or other brands, I should say, rather than one, but one incredibly well-known one on PCW. So we have the skill set, the understanding. We've hired quite a lot of additional expertise to bring us from our competitors, who are more PCW-orientated businesses, some of them. And I think a lot of that pricing, foundational work and future work will enable us to compete to win well on PCWs. So if we made that decision, we'd do it. Having examined sort of the future evolution of distribution, having thought about the relative pros and cons, some of which you rightly allude to, and only if we think that we are set up to succeed and we have the skills and capabilities to be able to execute. That's how I think about it. I don't think the preeminent distribution channels, I think, are going to remain PCW majority and Direct. I think the channel that's probably declined the most over the recent years and probably declines further in the post-chip and consumer duty landscape is intermediated distribution in personal lines. And that's why our focus will always remain on PCW and Direct. Any further questions?
Paul Smith: And there's no questions on the line. So Adam, I'll pass back to you to close.
Adam Winslow: Well, thank you very much for spending some time with us this morning. I think we've hopefully given you a fair amount of information to take in. We'll be delighted to take any follow-up questions in the normal way, but it's been great to see you all. Thank you for coming and look forward to your many questions here on in. So we'll see you soon. Thank you.
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