Henry Engelhardt – CEO
Geraint Jones – CFO
David Stevens – COO
Lorna Connelly – Head of UK Claims
Kevin Chidwick – CEO, Elephant Auto
Andrew Rose – CEO, comparenow.com
Greig Paterson – KBW
Andy Hughes – Exane BNP Paribas
Andrew Crean – Autonomous Research
Marcus Rivaldi – Morgan Stanley
Dhruv Gahlaut – HSBC
Marcus Barnard – Oriel Securities
Ravi Tanna – Goldman Sachs
Admiral Group plc (OTCPK:AMIGF) Q2 2014 Earnings Conference Call August 12, 2014 4:00 AM ET
Good morning and thank you for joining us for Admiral Group’s results announcement for the first half 2014. I’m Henry Engelhardt, Chief Executive of Admiral Group and I’m joined today for the presentation by our newly promoted CFO, Geraint Jones. Some of you might be wondering, what’s his name, the old CFO, well he is here too, Kevin Chidwick stepped into the role of CEO of our U.S. Insurance business, Elephant Auto a couple of years ago and while simultaneously doing the CFO job with the growth of potential development he took the decision that it was time to relinquish the CFO position and concentrate solely on Elephant. I’m very pleased to say that Geraint who has been with us since 2002 has cleared all the internal and external hurdles and as of today is the Group CFO.
In addition to Geraint and Kevin, you will also hear from David Stevens, our COO and CEO of the UK Insurance business. He will be joined by Lorna Connelly, who runs UK Claims and then I will go into some detail on the vagaries of the UK Car Insurance market and what state it is in today. Following David and Lorna, Kevin will talk about Elephant and will be joined by the CEO of Comparenow.com, Andrew Rose.
Let me just start by summarizing our results. There are a lot of positives to take from our H1, 2014 results but equally no shortage of challenges ahead. The positives are the results themselves a record half first half of the year profit and dividend in particular and continued progress on the non-UK businesses and UK Household. The big challenge is the UK car insurance market. In the UK Car Insurance business it's very simple, we have more customers and less income now compared to last year and so unless there is a noticeable change in claims and/or severity. There will be pressure on margins
So now let’s look at some of the specifics. It was a good half year for profits, in fact the best first half of the year in Admiral’s history.
The results for the first half for earnings per share which increased by 5% to £2.7, a higher rate of increase there due to a lower rate of corporation tax in the UK. The dividend will be 49.4p per share slightly higher than H1, 2013 and higher than any other first half dividend we have ever paid.
And there was good solid growth in customer numbers up 9% to 4 million. A 130,000 additional vehicles in the UK, year-on-year, decent growth in international and good growth in UK Household and Gladiator.
Turnover is down which is due to falling rate levels in the UK business.
And finally on the slide the goods return on equity which is still running in the mid-50s, a very good results and we think pretty much unmatched elsewhere.
There is a point of look at the turnover in customers number, it is a bit hard to see but there has been growth in Gladiator and UK Household and compared to H1 last year non-UK insurance.
This slide shows that the proportion that each of our business segments contributes to the total customer numbers and shows a similar pattern to Henry’s slide on turnover. You see continued growth in the total and the mix continues to change. Today 14% of the 4 million or so customers come from our International insurance operations. A 6% come from Gladiator and Household.
This is a slide that’s very familiar to you showing a profitability of the group and as you can see it continues to be led by UK Car Insurance. The reason for the reduction in profit from price comparison is partly confused and partly the investment we’re making in comparenow.com which Andrew will talk more to you in just a few minutes.
This slide is important because it reconciles our statutory result with reality. In this case reality is represented by the fact we don't own a 100% of the entities in the Group, but we are obliged to report 100% of their profits and losses executive. In particular the reality is that we only own 68% of comparenow.com even though our statutory results will show 100% of any profit or loss.
Now there is not a big difference between the two results in H1, 2014, but the plan is to move Comparenow as marketing standup by some £15 million to £20 million in H2, 2014 and possibly spend in excess of £60 million next year. Previous experience says that if the market is very receptive to price comparison, we might be in profit in 2016 but more likely will be 2017 and this means we will be carrying losses for several years.
The Comparenow losses into 2014 are likely to be around £10 million for our share and somewhere between £10 million and £30 million in 2015.
We think the U.S. is right for price comparison and all our consumer research supports this and so we do this investment. So we were so bullish you might ask, why did we sell off 32%? That we have sold 32% of this venture is the testimony to the risk averse nature of the Group. We believe that Comparenow has great upside potential as it's an internet disrupter in a very large market.
But we know it will sustain losses in its early years and we’re happy to sacrifice some of the upside potential this business has for risk mitigation today.
Okay I’m going to talk a bit about the bond, a bit about capital and then I’m going to finish up talking about the interim dividend. Firstly to recap the bond issue, as you know at the end of July we issued £200 million of ten year, subordinated notes which qualifies lower tier two under the current capital regime and we expect to qualify as tier two on the Solvency II capital regime.
Why do we do it? Well you see the key rationale on the left hand side of the slides here and there are a number of reasons. It was in our view a good time to strengthen and diversify the capital base, we believe that holding a much larger buffer above capital requirements as we had in the Solvency II is a prudent and appropriate thing to do and more on capital requirements coming up in just a second and importantly additional capital now sets us up well for growth we expect in the future from across our operations around the group. And it isn't on the slide but just to reiterate we haven't raised the debt to do M&A and we haven't raised the debt because we see an immediate or fundamental change in our reinsurance business models.
Just how favorable the conditions were in the markets you can of course judge for yourselves. But as you see on the right hand side of this slide the net annual cost of £200 million is about £400 million a year or about 2%. Moving on just take a look at the capital position at the end of June. These charts here show the coverage against our current capital requirements on the left excluding and on the right including the debt and you see very strong coverage against the Solvency I requirement, 440% after deducted interim 2014 dividend. And there are a couple of important points to note here. June 2015, the Group’s capital requirement will be based on a Group individual or capital assessment with Individual Capital Guidance applied by the PRA. If that requirement is reinforced today then after deducting the 2014 interim dividend we will show a surplus above that requirement in excess of £300 million.
And of course to Solvency II, as you know the capital regime in Europe fundamentally changes in 1st January, 2016. Our regulatory capital requirement from that date will be set by the standard formula, though the actual capital requirement will be higher and will be derived by our Own Risk Solvency Assessment or ORSA process.
Based on what we know now we expect to hold a substantial surplus above the standard formula capital requirement and significant surplus above the actual ORSA capital requirement and significant surplus above the actual ORSA capital requirement. But to caveat the capital requirement numbers are to be agreed and so there is uncertainty. Hence one of the key reasons we’re issuing a debt to make sure the Group is well placed to deal with that uncertainty.
On to the dividend, here you see the usual slide that sets out the calculation of it. Before we get into the numbers here just to reiterate our philosophy here is regards dividend is unchanged. We believe in distributing to shareholders surplus cap so we don’t need to keep in the company for solvency capital plus any appropriate margin we feel it's appropriate to withhold. We gave normal dividend 45% post-tax profits and then a special dividend which is based on any remaining surplus at the measurement point.
On to the numbers, calculation starts as usual with the capital in the company, which is timing to use the bond that’s £674 million. We did that with solvency capital requirement which is based on our current capital requirements from around the Group that’s £287 million and then now determining the level of buffer to withhold and usually here of course due to a small margin, £30 million as being recently.
This kind of margin is materially bigger, a £250 million much of which of course is made up of the new capital in the Group and gets a dividend about £737 million or 49.4 pence per share. Now the specifics of this calculation will of course change as the Group ICA requirements come into effect in 2015 but we would expect to continue holding a significant margin above those requirements somewhere in the order of what it is today as we make the prudent transition to Solvency II that we have talked about.
And on dividends for the near term we would expect payout ratios to be pretty similar to the current levels maybe slightly above, maybe slightly below but somewhere in the current ballpark. And just to finish on dividends this slide shows the payout ratios a little better in the history and you can see the current period payout ratio it hasn’t changed too radically in recent years, just for a little bit of context, the 2014 interim dividend isn't too far away from being twice as big as it was five years ago. And the normal special slide you see on the top right hand side, 23.7 pence is 45% of post-tax profits that’s the normal element and special is 25.7 pence and we have got some shares you will get paid on the 10th of October. Henry back to you.
Sounds good Geraint. Thank you. The next couple of slides go into some detail on the non-UK operations. We continue to invest in and grow our operations outside the UK. There is a slightly bigger loss in H1, 2014 than before which is due to a few items that we don’t expect to be repeated in the second half of the year, these are primarily in advertising campaign in Spain for our Qualitas Auto, where the expenditure has been weighed into the first six months of the year and the implications of some reinsurance caps where we’re taking a conservative view and there will be more clarity at the end of the full year. What isn't in these numbers is that we’re seeing good loss ratio numbers from the Italian business but caution investors that this is like the UK, a long tail marked and there is still a large amount of uncertainty in the back years.
The U.S. operation continues to grow and Kevin will talk more about this. Meanwhile in France we’re busy in-sourcing operations to our new office in lieu [ph] as well as developing a computer system from which to run the business. We don’t expect any growth in this market until sometime in 2015. However we’re keenly waiting for the enactment of a new law in France which will take changing car insurer from a complicated process to a simple free process. The law which has already been passed is expected to go into effect later this year.
The price comparison business’s results in some are pretty good, however, Confused is finding it very tough going and profits are slightly down year-on-year. It's just the opposite story for Rastreator in Spain and LeLynx in France where profits are rising. And now over to David and Lorna for a closer look at the UK.
Thank you Henry and Geraint. So Lorna and I are going to talk about the UK market and we will start with obviously a key number, the profitability up 8% in the first half of the previous year essentially driven by increased reserve releases offsetting the negative impact of reduced current year profitability. The size of the business in terms of cars insured is risen slightly. New business volumes actually are being flat in the first half of ’14 versus ’13 but we have seen very positive evolution on the retention ratios and in some cancellation ratio. So the system’s level has increased and that’s essentially what’s driven the 4% increase in cars on cover.
Turnover down 9% as obviously the average written premium has fallen substantially, a little bit of that is because our new business mix has taken us a bit away from the youngest drivers, a little bit of that is because there is more renewal in the mix that in the business than it was in the first half of ‘13 but most of it is price reductions in the nine months from quarter 1, ’13 and in the first three months of 2014. We started increasing rates in May and the increases that we have put through in the second quarter equal the reductions that went through in the first quarter such that our rates at the end of the first half were in-line with our rates at the end of the full year and we have subsequently put in some further price increases. Our view is that there will be price increases in the market in the second half, we’re going up -- couple other major players have announced that they are going up, it's unclear, how substantial those increases will be but we would expect the prices in December to be higher than the prices at the end of June.
Let’s look at the key performance measures for the UK car insurance business starting with the expense ratio. The earned expense ratio here is shown and it has gone up from 15 to 16 point through for a reflection of the falling average premiums. Now I will note here the reported number is actually slightly down and that’s a one off impact of a change in accountancy convection on levies and fees which work about 4.5 million to the profits in the first half, 6.5 million in the whole year and won't be repeated in subsequent years.
Another important measure obviously other revenue per vehicle flat in the first half at 67 versus the whole of 2013 slightly up when you net out expenses that are attributable to other revenue at 58 versus 57 but there is continuing pressure on these revenue sources and obviously we’re responding to that the most obvious pressure that might result in a material impact on the 2015 line is the work that the Competition and Market Authority is doing on credit hire which may lead to the end of credit hire referral fees, at least referral fee income or at least a significant reduction. It may not, this is still being consulted on but it's important to be aware and there is five pounds of vehicle at risk in 2015.
The claims ratio down from 68 to 66 that’s function of a three percentage point deterioration in the claims ratio on a current year basis and a five percentage point increase in reserve release. So let’s look at those reserve releases, in the first half of 2013 we released 14%, this first half we’re releasing 19% that is a partly the result of some positive evolution, some surprising new positive evolution on the 2012 year which demonstrating an increase in profitability and that has allowed to increase our reserve releases in this manner without actually increasing and eating into our buffer over expected ultimate claims. Obviously in that situation unless claims -- there have been some unexpected manner we would anticipate further material releases going forward.
However if current year margins continue to deteriorate the scope for compensating for deteriorating margins is not infinite and at some point we have to see some improvements in current year margins if we’re going to maintain our profitability. Current year margins are a function of claims inflation and premium inflation, Lorna will talk about claims environment.
Thanks David. Good morning everybody. I’m delighted to be here today to talk to you in a little detail about what I think are the trends in UK that you would be interested in learning about. And before I start because it's my first time presenting the results, I will just give you a little bit of the background of myself. My whole career has just been in the claims environment so I clearly, clearly enjoy the claims environment and previously worked at Aviva and I -- before joining Admiral some 20 years ago now. The roles I held at Admiral have included Head of Diamond Claims, and Diamond brand, definitely had UK Claims for the last 18 months Head of UK Claims with the UK.
So today I’m going to talk to you about claims frequency and some body injury cost as well which I may prefer to at times as BI costs and you may recall in March we gave you what we outlined at the time to be mildly optimistic and mildly pessimistic for the use of how claims we can see could develop and so what’s happened since then first off the small BI, we will take a look at the graph on the left and what that shows you is volume of the small BI claims, notified by the Ministry of Justice Portal. Now the Ministry of Justice Portal, you may remember is the method that a lot use to submit a small bodily injury claim to an insurer and what you can see here on the red line is that post last fall the market did experience some drop in volume but that’s the benefit now has started to erode and in fact in June the volume of claims received through the portal was the highest June no record since the portal launch in 2010, so some caution here on small bodily injury claims.
Then we move on to the second graph on the right what it shows you the average damages the claims settle for the portal and you can see here there are some inflationary pressures. What’s driving that? Well the portal in that was moved from 10,000 to 25,000 in July last year but I do think it's still of having a significant effect. The main drivers are the similar case which affected they added on 10% to damages post-loss and also increases to recognize that we use in the industry to file injury claims and then the JCG [ph] that you just saw in guidelines.
Then of course these increase costs are on the backdrop portfolio and always cause some small bodily injury. So before moving into small bodily injury -- may have been short lived and there are some pressures on costs here but it's important to remember that small bodily injury is only part of the picture although it seems to hog the headlines, if you take a look next at the mix between BI and non-BI claims you can see that over the last seven years it's been increasing all the time and the department like ours had to adapt quickly and effectively to be able to handle this well. I think BI reported a 60% increase in whiplash claims between 2006 and 2012. But again I will draw your attention to the red graph, it's not all about body injury, you can see from this chart which compares overall claims frequency in the market reported by the ABI, and reduction which we and the market enjoyed in previous hours has reversed through now since 2013. In addition although very small in number compared to the small bodily injury claims you can see from the final chart on this slide that there is a large BI claims that account for the lion share of total costs and as these costs there we have continue to be increasing.
Now many of you visit us, I’m frequently asked why the drivers have large body injury inflation? So I thought today would be an ideal opportunity but just to dwell into that in a little more detail.
So during that what we have done is created few illustration albeit quite a stark one but an illustration and of the increased cost in large BI claims. So we have taken the claim that settled in 2007 for a young person with a severe head injury and given our experience since, we have tried to take a view on what parts of that schedule could look like if you can settle that claim today.
I want to address some of that, I think it's a good time to point out that at the end of the day this is what we hear for and this is I want to make sure that claimants we see at the right level of compensation. The figures here are quite striking so let me dwell into some of them in a little more detail. So the drivers, there are many by the first today I will put them into three main categories, so the first one is in the obvious one inflation. Inflation on the cost of care and that has a significant impact here. So we have moved from world where there are one or two carriers, three are needed to cut all the hours [ph] and then increasingly those three need to be medical specialists as well.
And the drivers of care cost rising are things like working time directive, handling regulations and compulsory claim for carriers, pension requirements all this types of things have ended up into the inflation that we’re experiencing. Next we have got what I would do -- sophistication. So again it's been a shift, a shift from claims we presented to us by varying layers I mean just the high street ones and to a handful of key specialist, experts and so it has become far more sophisticated. So transport cost, for wheelchairs and vehicles have moved on somewhat. New technology has become a big thing so voice activated, televisions, lights and curtains [ph] have advanced considerably.
The new technology is great news for claimants but of course it costs. And finally we have the lawyers cost and quite a different share as well because in the intervening period success fees have come into play. So in many cases a lawyer can earn a considerable markup on his fees sometimes a 100% so effectively doubling the fees at hearings.
These specialist lawyers because the sophistication I just mentioned because of they are divided to the best by their client while they become involved much early than before, they use more experts, they do more medical reports, they do more investigations, they seek more counselors opinion all this additional time adds up and they have quite a lot to -- significant figure like this. So what we’re left with is the claim that’s presented to us using far greater care, sophistication and expertise than before.
So we have talked to you what has happened with frequency and we have talked in a little bit about some of the pressures on the costs. I want to remind you some of Admiral’s key strengthens and claims handling. But I have talked to Louise and there's not much on the technical front that I will be able to disclose it today but I’m going to keep it quite general. For those of you who that are visitors and spent time with us I think you know. It's people that make the difference, our people -- it certainly before it remains to -- the people that we recruit and nurture and develop into these key specialist rules in our department that make the difference. And then, of course, it's the culture, the culture, they are deeply embedded into our organization and the productive approach to availing [ph] and claims handling, the empowerment and accountability that that culture and stock ownership of the business actually brings it on a day to day basis.
And you may be surprised at this one, that’s just not an expense ratio issue but I truly believe, having offices still, only 60 miles apart makes a big difference. So despite our size we have 10, 15 offices as many as our competitors, our staff get still get to regularly meet at different offices and to communicate them to discuss things and to update each other or the claim and I think it's factors like this that enable us to maintain that strong culture and strong communication and I guess this is the toughest one consistency across all that we do in the organization. I think that’s a strong advantage. I finally wanted to show you again my favorite chart which I think is at the heart of all of the claims underpins our strengths is what our customers think at the end of the day after their claims experience and of course it's my job to make sure that next year there is a tick up [ph] on second half for 2014. I will hand you back to David.
Thank you Lorna. So what we have been hearing them is we’re running towards the end of the windfall no frequency that came about through the recession and erosion of the value of the regulatory reform and continuing structural inflation on large BI and that all adds up in a sense to reversion to the situation which we will be familiar with for most of our 20 years of existence of claims inflation running a 3-4 points above the underlying level of inflation in the economy.
And it's something that we will probably be looking to live with over the next few years as well. So as I mentioned at the beginning of erosion of margins is about claims inflation and it's about premium, so let’s talk about that premiums. This is a sort of hybrid exhibit that shows in the reds the average earned premium in the market from PRA returns and in blue the average written premiums from the ABI index. And what you are seeing is written premium is down roughly 5% in the first half of 2014 and you will see interestingly the average premium in the market now is 360, below the average premium in 2009. So while the value of the price increases of 2010 and 2011 is been eroded.
The change in premiums doesn’t just effect the loss ratio of course it effects the expense ratio and what we have seen is increase in the expense ratio in the market in 2013. We’re showing here market to earned expense ratio, the blue line is the Admiral expense ratio on a written basis. Market earned a 29, some of you maybe more familiar with the 31 number from the returns, in the UKI returns tends to be very volatile on expenses and we have sort of taken them out. But what you’re seeing is the impact on the market expense ratio of falling premiums some impact on our own expense ratio, we’re happy to see a less and less of an impact and therefore our expense ratio advantage which has been a constant source of competitive advantage being slightly widened in 2013.
Now some people look at this exhibits and say it's a little bit unfair when choosing ratios because we’re a higher average premium company. So we have also shown the number in absolute on the right hand side there, £73 versus a £113, 35% lower. That doesn’t eat -- in term of full picture because actually higher premium business is more expensive to manage, they call more, they cancel more, their direct debits more, they claim more and to try and sort of quantify that impact what we’re showing here on the bottom is the two cohorts of business, a cohort of business 350 to 400 roughly market average premium, cohort of business 475 to 525 roughly our average premium and we have indexed the cancellation volumes and the claims volumes and you can see that the impact is roughly in the order of just under 20% in terms of the requirement to administer and handle and service the customer.
The last exhibits I’m going to do is on Telematics, this is an exhibit, this is an exhibit that’s reflection of the interest from analysts and investors who want to hear more from us on Telematics. We have been doing Telematics materially for the last two years, we actually did do a test in 2007 and 2008 that led us to believe that it was premature to invest further but from 2012 we have been testing all the technologies on our hard install, self-install and apps. On the left hand side of the bottom we have done a sort of schematic of the market. We think that Telematics sales represent roughly 2.5% of new business sales at the moment by volume but that’s near 6% or 7% by value because it's a product that is still essentially a high premium niche product at the moment. Very, very hard to get hard figures on market share so the colorful column is sort of indicative and what it is trying to indicate A, there are a lot of people doing Telematics almost all the significant car insurers have some sort of Telematics test in progress.
There is also a tail of smaller players and there is some dedicated Telematics brands like (indiscernible) and ingenie and Marmalade which are players in the market and one player which is dedicated Telematic brand is of course as shown in the box which is represented the green, I think it's green at the bottom and we believe they probably have somewhere in the order of a 125,000 vehicles on cover. There is then probably a universe of 3 or 4 players who have between 40,000 and 60,000 vehicles on cover with Telematics product and we’re towards the top end of that range and therefore think we’re probably -- that it's a management guesstimate probably second in the market.
Why haven't we made more of a fuss about Telematics historically? Well what we did say six months ago that it's a challenge in terms of relative profitability. Yes we make money on Telematics policies but we make more money on non-Telematics policies. And I wouldn’t say that’s changed in the last six months, it's still work in progress we’re making the investment that’s implied by that sort of size of policies in-force but we still need to get better on customer friendly options lot of customer resistance, lower technology costs, squeezing extra value from the data. It's not clear that risk solution alone will fund the costs, we got to find maximum number of users for the data to offset. The costs themselves and the discounting is required to persuade the customer and some of the commentary in this area can be somewhat simplistic and one of the ones that winds me up is well this is going to become a mass market product with apps because apps are free. Well apps aren’t free, put an app on an app store the world does not beat the path the your door, you have to tell the world about it, you have to market that app and there are a number of ways doing it but none of them particularly cheap, then you have an interesting funnel.
So what I have taken here is actually quite an ambitious cost of £5 per person persuaded to take your app. If they take your app you send them a link to the app store, some of those never actually activate that link, some of them don’t download your app therefore some of them that download your app they never register, some of them register never actually use it for single journey, some of them that use it for single journey only use it for a single journey and the number that use it for more than a single journey don’t use it for enough journeys for you to be able to score. Then at the end of that process you offer them a price and then a majority of them say no. And when you’ve done that if you’re clever enough and that is clever to do £5 you spend £235 to put a policy on cover that is not free.
So that’s where we’re on Telematics, I have to say that though I’m very excited about the technology, it's one of the most enjoyable things that we’re doing and one day it will come good. On summary then competitive market of course encouraging I think that premium rates seem to have stopped falling and that we think they will potentially rise in the second half although the violence or softness of that rise is very hard to assess. Our margin expectations for the business we’re currently writing are lower than our experience on the business we’re wrote one or two years ago due to rising claims cost and fall in premium.
The nature the way we book profits, the profits you’re seeing today is a lot about the business we wrote in 2011, 2012, the pressure on margins therefore that we see currently potentially reflects on our profits in the future. Offsetting that we are in a very conservative situation on reserve releases on reserves and we do see, reserve release has been a continuing material part of our profits but as I’ve said before if current year margins continue to erode you cannot defend profitability at infinite item [ph] using reserve releases.
Thank you. I will now hand over to Kevin and Andrew to talk about States [ph].
Thank you Lorna. Thank you David. Well I guess if you do these presentations long enough you eventually get to see David being excited that’s fantastic. I never thought I would see the day. Let me start there by adding my congratulations to Geraint. I’m really, really very pleased that we have been able to promote Geraint on to CFO, he is an excellent addition to the Board and in my opinion a big step up in quality from the last guy. But I’m going to talk about the U.S. market particularly I’m going to talk about Elephant and Andrew is going to talk about Comparenow.
A bit of reminder the U.S. markets are a big market, it's a $180 billion of premium, it's over 200 million vehicles. It's a market that shops a bit less than the UK, in the UK we have about 2/3rds of customers who will reshop every year and in the U.S. it's about half of that number, about a 1/3rd who reshop their car insurance and about a 1/3rd of those people will switch so that’s 10% also switching rate.
It is a market that is moving more direct, it's about a quarter direct right now but about 40% of all new business is currently being bought direct. So the direct players are growing their share. It's quite well known for being a high acquisition cost market. It is a high acquisition cost market, Geico’s reported spend of more than a $1 billion on marketing each year, it's probably well-known quite well advertised but perhaps less well-known is that other players also spend a huge amount as well. Last year all states have been $900 million of which about $200 million is on the Esurance brand. A State Farm has spent $800 million, Progressive spent $600 million, so there is some very big numbers being spent out there which is obviously a very big market chasing new customers. But if you look at the movers in the market you can see that there is only really with one or two exceptions it's only really the direct players that have grown their market share and that’s happening year-over-year and that really tells you the sort of the nature of the market. The U.S. market also has an unusual feature our unusual competitor what we see here in Europe which is segmented not by risk as you might think of things over here. So obviously over here we think about high risk, Young Drivers with very expensive claims versus low risk drivers.
In the U.S. the market is segmented more by retention class, so breaks into a standard of non-standards as they call it over there. Standard being customers who will continue to stick through renewals typically and pay their premiums regularly and non-standard who tend to be much more promiscuous shoppers often cancelling their policies and falling in and out of their payments overtime and that means the insurers over there typically ended up focusing on one of those segments of the market and for us that meant we focused our business very much on being a standard player. We do write the whole market but we look to build a standard book of business over time which means building a book of quality customers who will retain along the period much more like you would imagine a business over here and to that end that means that we need to be able to build a brand that customers will obviously remember but also importantly customers will trust.
As I’ve already said, the acquisition cost in the U.S. are high, very high compared to the European standards. This graph on the left hand side plots the average acquisition costs of some of the players, the players are the dots. The vertical axis shows the acquisition costs to range between about $500 and a $1000 per policy. The average being somewhere in the middle of that range. It also shows a different colors that blue colors are the direct players, those actually Geico, Progressive in U.S. and the green and the purple dots are the traditional players and incumbent players have been around for a lot time where they are captivated in independent agents and there is a clear difference between the two as you can see and also significant on the growth rates of the two companies which is pointed on the horizontal axis at the bottom.
So the direct players are acquiring business much more cheaply and they are also growing faster. And I’m pleased to say that’s true with Elephant, as you can see the Elephant logo there on the right hand side of that graph we’re already being able to achieve acquisition cost roughly in-line with our direct competitors and significantly lower than the incumbent players and obviously being grown from small base, we’re growing very fast. So that’s very pleasing. And although particularly well as we’re already at this stage only in a four states and so our brand is significantly smaller and less than the other, so we would already be at the same level I think it's very encouraging.
On the right hand side is the graph showing loss ratio against growth. The horizontal axis been the same there, the vertical axis being the loss ratio and here you can see Elephant compared less well. There is a similar correlation going on here with slightly high loss ratios correlating with higher which is perhaps fairly obvious and the direct players in the blue there obviously on average getting higher loss ratios than the traditional players.
There is couple of obvious reasons for that, there is a clear why Elephant would be out there little bit higher as well and all of these older players have got very large books of renewal customers and it's true in the U.S. just like it here is in the UK. Even though there is price regulation in the U.S. which controls your pricing between renewal and new business very much they can’t be different but even in the U.S. it's very similar here in the UK, the renewal book will run a loss ratio typically 10 or 15 points better than the new business book will. So if you’re very much new business buyers which of course we’re you are going to be running a lot high loss ratio.
But it is also true in the U.S. that the couple of, the businesses that focus on trying to build a quality standard book will end up running high loss ratios in the early years because those customers are more aggressively competed for and therefore by nature you will end up running a high loss ratio in the early years when you acquire them, somewhat perversely those non-standard risks the ones that are cancelled readily were actually run very good, very low loss ratio, so they just don’t stick around very long.
So let me show a little bit about Elephant’s progress so far. We launched in the beginning of 2010 on TV and that’s a story about growth since then. We’re now in four states as you can see from that picture, the bars represent our turnover, the line is our customer numbers and you can see from this graph that we’re growing pretty fast. We have gained 50% in the last year and we’re now four times the size we were when I joined the business in the beginning of 2012.
I have got the right speed to grow it, it's a tricky one, clearly we want to grow as fast as we can to build a big book of business and therefore getting business to the point where we have got enough scale to produce profits for our shareholders assuming of course that we can maintain good acquisition and economies as we go. But on the other hand we don’t want to grow too fast that we are not learning from our mistakes as we go along and we will make plenty of mistakes. And so we want to make sure we don’t write too much bad business particularly in new territories.
So the speed of growth is an important one to try and calibrate correctly and this is probably about as fast as I want to be grow in the business right now. Although of course we will take opportunities to grow in different pockets of the territory depending how things are progressing but it's unlikely to be much faster than this.
Having said that I’m actually delighted with what success we’re making so far, we have grown the business fast and we’re also seeing very good economic results particularly from that core motor book but we’re in addition to that adding additional products, we have added quite a number of additional ancillary products in the last couple of years and we’re now upon where we think we have good competitive range of products for our customers and that’s an important point in the U.S. context because even for direct writers the U.S. consumers expect their car insurance company to be able to provide them with other products alongside car insurance, much more so than here in the UK.
In terms of those results, what you can see here is an improving combined ratio on the back of an improving expense ratio, the loss ratio is as I described earlier much better on renewals but with a high growth we have been seeing recently, we have got a slightly higher loss ratio. The expense ratio is coming down primarily because of the increased scale of the book. Obviously the fixed cost are now spread over more premium. But the speed of this reduction is somewhat offset by the growth but we’re obviously spending more money on marketing to grow more quickly and that’s been particularly the case in Texas where we have seen our acquisition economics improve quite significantly over the last couple of years. We started in Texas about two years later than we started in Virginia but it's now pretty close to Virginia in terms of its acquisition economics. And that’s very pleasing, both in terms of the kind of improvement you would expect to see from any new area, you market into any new state where you start again from zero.
But particularly I’m pleased in context of Texas which itself is a very large state. It's the second largest state for car insurance in the U.S., it has got 19 million customers, still plenty of scope for our Elephant to grow its business.
We had a combined ratio of about a 150%, 152% last year and I would expect us to come in this year with a somewhat lower ratio than that and the result in terms of absolute pound terms is going to look quite similar I think. We will have better ratios but obviously on a bigger book.
So the strategy for Elephant is a very simple one, we will keep trying to offer our customers good prices and we will growing our business as long as our customers are attracted to our business and so far so good but we keep focus on building a good quality business which is as Admiral like as we can make it and by that I mean keeping our costs slow, running a good efficient business, focusing on good quality underwriting, focusing on good quality pricing and being prepared to keep testing and learning and changing the business as we grow.
In time we will expand to more states, we’re currently in the four but we’re as you could see from the graphic on the right hand side here still pretty smaller in the ones that we’re in. Our market share has now grown to the dizzy heights of 0.8% in Virginia but we’re still north 0.2% in Texas which as I said already is a huge state with about $14 billion of premium just in that one state. One factor that might influence our decision want to grow to move more quickly into other states would be our belief in the strong future of UK style price comparison in the U.S.
If we see that model taking off strongly in states that we’re not yet in then we may want to be tempted to get there more sooner rather than later. So let me hand you over now to Andrew Rose, Chief Executive of comparenow.com, he can give you much better feel for how that business is getting on.
Thank you Kevin. Good morning everyone. Pleasure to be here. As Kevin stated my name is Andrew Rose and I have been with Admiral for six very wonderful years, first as CEO of Elephant Insurance and now as CEO of comparenow.com. Prior to Admiral I was running country-wide our insurance business and got my start in the insurance business with Progressive, one of big four carriers in the U.S. So why am I here? I’m here to talk about the U.S. I’m here to talk about the U.S. mix, I’m excited about it, $50 billion to $60 million of premium is shopped each year. But before we talk about the U.S. market and comparenow.com it probably makes sense to talk a bit about Admiral’s other comparison businesses, all three profit making enterprises. It all started more than a decade ago with Confused.com and as I think we would all agree that business has been quite successful, transforming the UK shopping experience.
Now between 2/3rds and three quarters of all new business in the UK is shopped on a comparison website. As great as that sounds the UK may not be the best proxy for U.S. styled or U.S. price comparison, Spain and France with their stronger tied agent and lower shopping intensity markets are probably better proxies. Well you can see that each has grown nicely in their early years and that is a great proxy we think for the potential of comparison in the U.S. and hopefully at comparenow.com.
One, the U.S. consumer is already conditioned to shop online in comparison shop for many products and services. Now our job is to give them the same thing for auto insurance. Consumers are only half the equation however. We need the insurers to embrace this change as well. Luckily many insurers are looking for a new way to compete, a new way in the face of the $6 billion of auto insurance advertising that is spent each year predominately by this top four carriers that Kevin mentioned earlier. For carriers 5 through 200 plus not being on TV often means out of sight, out of mind. They just don’t get considered that’s where comparenow.com can come and hopefully transform the market giving them the opportunity to compete.
Let’s go a bit deeper on the customer side, the U.S. didn’t evolve like the other markets for a variety of reasons, as a result consumers were left with less efficient, less satisfying models with limited choice. Consumers could quote each insurer one by one reentering their information over and over again hoping that they are getting an apples and apples to comparison on the way. Most consumers are tired of that process after 2 or 3 quotes barely scratching the surface of the available carriers.
Lead generators developed a sort of a proxy, they often look like European styled comparison in the surface but those consumers that were duped into entering their information into those platforms typically find 50 plus of calls and emails greeting them in the coming days and weeks. Rarely the process they were looking for. Comparenow.com is different, it follows the model that you’re most familiar with here in Europe, enter your information once, get lots of quotes back and no one requested to contact from the carriers. The customers are in control. Why do we think this just might work? Well the consumer is ultimately undefeated in their pursuit of simplicity and transparency and we bring both with our site.
Let’s talk more about the carriers, as mentioned earlier insurers face a mark of significant spend. This spend along with the commission structure for agents results in a very high acquisition cost for insurers. The first thing that comparenow.com can do is offer them lower acquisition costs. How do we do it? By achieving higher response rates to our ads, a simpler process for consumers and delivering a higher overall conversion on our site. Allow me to explain, as I said Comparenow should have high response rates to our ads, think about it, for an average consumer which sounds like a better value proposition? An ad from British Airways on TV or from one of those travel sites? The travel site offers single entry and many airlines including British Airways. So more people choose that.
Same logic should apply to auto insurance, the benefit should not stop there however, again as time goes by the conversion on the comparison site becomes somewhat of an aggregate of the individual insurers convergence resulting in the higher overall conversion. Higher response rates plus higher conversion yields a lower acquisition cost, something that we can share the benefit of with the carriers. Beyond just having lower cost we bring some other benefits, certainty of acquisition cost they pay when they make a sale. They only have to quote the risk segments they want. They get to compete on a fair level playing field, winning on their merits, a combination of price, value proposition and brand.
Lastly Comparenow gives access to competitive intelligence in the market that they can get almost nowhere else. They get real data in real time they can react to with react to with rate changes or footprint expansions or contractions.
So with that as a background you might be asking so how is it going? Well we just start off with a giant caveat, it's still very early. We have only been advertising for seven months but we have been pleased quite pleased by the consumer and carrier response, we are able to offer our service in 49 of the 51 U.S. markets by sticking true to our Admiral routes we’re starting small and testing and learning, using the data that we have at disposal to make good decisions along the way. First we have a full integrated marketing campaign, TV, internet, et cetera. We began the year by advertising in six smaller California cities, as those looked good we expanded in two larger California cities eventually into Virginia and Illinois and in July we added four large cities in Texas to our portfolio.
We focus our advertising efforts where we have the largest panel where we can offer the most compelling value proposition to consumers. In some states we can only offer a couple of carriers and hold off advertising in those states until the brand proposition can match our expectations. Naturally carriers have responded, six of the top 20 now work with Comparenow and even more on discussions. With an offering like ours we need carriers that cover the entire risk spectrum from the standard all the way down to the non-standard.
As you can see from the graphic we have been able to attract many of both, names many consumers know in the U.S. Will there be competition? Sure. But we feel like we have some advantages entering this market. First, we got knowledge partners that have the required capital to make this investment. Second, we have got experience building these businesses with the technology and processes that already have and can continue to be leveraged and last but not least we have got a group of people that have deep insurance knowledge and connections with the carriers something key to the overall success of the enterprise.
Like I said, it's off to a good start but it's still quite early. I look forward to telling you more about the business as it continues to grow and expand and hopefully match the results of our more mature UK siblings.
Now back to Henry to complete today’s presentation.
Thank you Andrew. Thank you Kevin. In conclusion, we are bullish on our long term outlook largely because we continue to have a fundamental economic advantage over the competition in the UK market. The growth and development of our non-UK businesses are proceeding nicely and the growth of price comparison and correspondingly the internet confirms our belief that we’re in the infancy of a dramatic change in distribution of car insurance globally for with Admiral Group is well-positioned. However, there are no shortage of challenges particularly on margins in the UK market for the near term. Thank you very much for your attention here this morning and I will now be doing be joined by David and obviously any of the other members of the panel for questions.
Greig Paterson – KBW
Can I just make a situation, you have a lot of tidbits of guidance all the way through your presentation and you present quite clearly -- could you may be on the slides on the future actually on the right hand side we are giving guidance actually put it down so we can concentrate what you’re actually saying as opposed to I think I did that get statement right or wrong. In that regard could you just reiterate what you said about the timing and size of the advertising cost in the U.S. also the profit guidance and that was question one. Second one is you boasted your Group combined ratio with the reinsurance cap story, the accrual reinsurance capital, could you just explain what’s going on there and then the third thing is a little bit of something that’s puzzling me, you have got about 280 million of required capital currency, my understanding from speaking to IR that’s it on the ICA strategy which is a fully comprehensive not far from Solvency II type regime in terms of internal models we eventually get yet you’re raising £200 million of capital. I mean it seems like using a big hammer to crack a nut and sort of raise a whole bunch of questions and thoughts among what are the true motivations from the debt. So you just want to talk about…
We will spend as it makes sense.
Very much Admiral, test and learn, we will continue to expand into markets as our value proposition warrants and as our acquisition costs demonstrate it makes sense for us to continue doing so. It's deliberate. We want to go about this process and make sure that it's a successful, profitable, sustainable business like Admiral’s other startups and so you will see us expand as it makes sense but specifically it's 10 million to 30 million in the second half of this year and potentially £60 million or more in next year. That’s the market expect and it will be 5 million to 10 million for Admiral’s bottom-line in the second half and 10 million to 30 million somewhere in that range for 2015.
I think relevant to specific guidance related to ancillaries where we were referring to the car hire referral income of £5 policy which we see at risk in 2015 and on top of that I would say generally the regulatory context in that, there may be pressure and other items of other revenue so there is a little bit of guidance there. And then there is guidance in the context of the UK market which cannot be more specific in just saying if current year margins continue to deteriorate due to proclaimed inflation on premium reductions, there isn't a turn in sense then there will be pressure on reported profitability which cannot be fully compensated by these reserve releases ad infinitum.
I think the last two questions for you.
Sure. So the first one is about the group combined ratio so I think it actually improved to 85% from 87% in the first half of last year. The question is about the caps on the international insurance businesses, it is right to say that some of our contracts internationally have caps, actually some of the UK contracts have caps to and in the first half of 2014 we took additional costs to the couple of million pounds compared to the first half of last year because the accounted combined ratio in those businesses is higher than those caps as you might expect. Now as those international operations move towards underwriting profits in combined ratio is where we expect them to get to ultimately obviously those cap issues go away. It's an issue in the first half of this year because of the thing Henry referred to big amount of ad spend in Spain, slightly bigger loss ratio in Spain as well. We don’t expect those two repeat in the second half of the year, it's also important to remember.
The third question was about, the impact would be lower in the second half for sure but it's expected gradually to dissipate over time, as you'd expect. And the final question I think was about capital requirements on the bond, so as you saw on the slide earlier on slide 8, the key rationale for the bond was it was a good time to do it, to build a prudent buffer as we move into Solvency II to deal with the uncertainty at the final level of capital requirements in the Solvency II. And the risk-based regime under ICAS and the risk-based regime in Solvency II are very similar in principle but there are valuation differences in capital and there are differences in the calculation of capital requirements, which is a very detailed calculation -- we are not saying the £200 million we are going to need all that to fulfill our capital requirements, we’re saying that's there to deal with any uncertainty that might arise in the final level of capital requirements. So we don’t expect the full use of that for our capital requirement we want to set there as a buffer.
It's all the investments in our early businesses Greg and for the future investments that we don’t even have yet planned out. It was an opportune time to raise money, we felt it was a good moment because these markets open and close and get expensive and get cheap and you never know, so you take advantage of what you can and we thought this was an appropriate amount in an appropriate time.
Andy Hughes – Exane BNP Paribas
First question following off on the reinsurance cap on the international, what was the gross of reinsurance losses on the international business because presumably the reinsurers are saying we don’t want to take any more of your international business, on the new business side just yet. And so you take that under the losses in some markets. So could you tell us which ones are capped and what the benefit has been historically and second question is on slide 50, which you don't talk about, which I think is the key thing in your results. I don't really care what your book loss ratio. I just care what best loss ratio isn't how the reserve buffer mode and surprise for me was really you’re showing unchanged reserve buffer despite releasing 73 million. So could you talk a bit about how those ultimate loss ratios have moved over the half year? Because it looks like a one off minus 1% overall historic years so they have reduced perhaps the PPO propensity or something? But I see that as being, on the slides being the key numbers in the whole presentation, can you perhaps breakout the 73 million and tell me how much of that is being added from H1 2014 underwriting and how much is from this movement in this chart we see here?
And the third question is you talked a lot about the UK motor market, how it's changed, all the bad things that have gone on but clearly large part of the injury claims is a large component of your business and obviously Young Drivers also a large component of your business. So since 2009 there has been a big drop in serious bodily injury claims involving younger drivers that has contributed to increasing competition presumably in your key segment and also a large amount of the profit commission we can see coming through now which in my mind is exceptional because you’ve benefited from this post 2009 drop off so could you talk a bit about that frequency as well, please? Thank you.
So caps, the ratios we represent in the international insurance commentary in the pack give the result of the underlying -- give the combined ratios of the underlying business, excluding the impact of the caps and then you can see in the notes underneath those KPIs what impacts the cap had assuming and get back to the total loss of those businesses in making. We’re obviously not going to say which contracts have caps and we’re not going to say at what levels they are at because they are confidential, the information. But I think we have given information in the segment note, the underlying performances of the business.
And I think exhibit on the top left, I think it's reasonably straightforward to work out what the earned premiums for each of the accident years and use the percentage changes that we are showing there to work out in a sense that value of the movement in the loss ratio, it's big picture, what we’re saying is that in the first half of 2014 and these changes relate to the first half of ’14, so versus the end of December ’13 where the market is December ’13 versus’12. But in the first half of ’14 we saw some releases across the years which is gratifying and particularly strong outcome on 2012 accident year which is a mixture of 2011 and 2012 underwriting year and because we have had that gratifying improvement in the projected best estimates that let us release more while maintaining a size of the buffer.
Andy Hughes – Exane BNP Paribas
What was the driver for the change in those charts?
Certainly the change, we have more positive development of claims than had been anticipated by our advisors when they last did the work, which is at the end of December.
Andy Hughes – Exane BNP Paribas
[Indiscernible – Microphone Inaccessible]
There has been a clear reduction in frequency overall, the number of crashes between 2009 and now has fell substantially during the recession. There is some reversal of that overall level of crashes, that doesn’t necessarily translate into a lower frequency across the market of big bodily injury claims for two reasons. One reason is, as Loran has pointed out, you get a structural level of high inflation on big bodily injury so claims that might have been smaller are beginning bigger and bigger and bigger all the time and then the other reason is there are fewer deaths of the road and that’s partly because medical interventions are more effective and more people survive and that is your very biggest bodily injury claim. So, I don’t think it's necessarily true to extrapolate from the overall frequency to say that the big body injury frequencies and particularly young driver frequencies are down materially.
Andy Hughes – Exane BNP Paribas
Sorry, I was referring to the younger driver KSI stats from the O&S, which shows a 40% drop in younger drivers killed and seriously injured and reported to police. And if you knock off -- obviously there is fewer younger drivers on the road which wasn’t in your 2009 to 2013 comparison premiums but if you knock that off then -- so you don’t think that’s necessarily reasonable comparison to make that there are the -- there has been a big windfall from less large bodily injury case frequencies since 2010 for Admiral?
No I wouldn’t, I would say -- I wouldn’t say there has been a large windfall from that. I would say that the prognosis is that bigger bodily injury claims and you saw in the exhibit that our share of costs from bodily injury claims has increased overtime, bigger bodily claims will increase materially going forward as they have over the past few years and as they have over the 20 years, it's a structural factor.
Andrew Crean – Autonomous Research
Three questions also, firstly could you say on your Spanish and Italian business if you have a sort of sense as to when they will breakeven? They've been going for some period of time. Secondly, the comment about ad infinitum, that you can’t carry on ad infinitum obviously begs the question of where infinitum is. During the last off cycle you did reduce the conservatism with which you set up current year reserves during the soft market which extended that period. Is that something that you will be considering doing this time around? And then thirdly the spend on the Comparenow business could hit the earnings, just agree that the earnings could fall and mechanically that would then be the dividend fall. Is that something which you’re prepared to countenance? Or could you use some of the capital you’ve already admitted that you raised excess over your Solvency II requirements to fund that, the dividend remains in normal circumstances will remain stable.
So let me take Spain and Italy, we have been consistent in saying that these operation should become profitable within 6 to 10 years, the Spanish operation hits 8 on Halloween and I fully expect it to be profitable within 10 years, the clock is ticking 2.5 years to go. The Italian operation is younger, it's what’s six years, so the clock is ticking but they have got a few years yet and I fully expect it to be profitable as well within the 10 year time frame that we setup.
Should I do infinitum? Yes I know it must be frustrating in the sense that I’m using a vague term as such as ad infinitum but there are a number of moving parts. One moving part is how these ultimates evolve. Another moving part is how claims trends and premium move in the next 12 months to 18 months, two years and another one that you’ve mentioned specifically is the size of the buffer versus ultimate and there is a number of factors that we take into account when we’re deciding what the appropriate buffer is versus ultimate and there may be at some point be potential for us, there may be an argument for at some point to consider that the buffer is excessively conservative but that would have to be because of some change in the environment and one of the things that’s specifically impacting our environment is actually this quite substantial moves in the ultimate which implying a degree of uncertainty. So we’re responding this to uncertainty because volatility is up and down it's not just up. This implies to the degree of uncertainty which we feel is appropriate to respond to with the big buffer as maybe as these settlement if they do that would create a context which is more stable than we might feel it to be appropriate in that context to reduce the size of the buffer.
The dividend question, the dividend is formulaic and, therefore, if earnings are impacted we don’t leave cash sloshing about in the Company and we follow the formula for the dividend and if there is less cash in the company then there is less dividend and if there is more cash in the company there is more cash in the company there is more dividend.
Marcus Rivaldi – Morgan Stanley
Couple of questions please, so you mentioned about the reserve release is driven by E&Y work, is that a timing issue so the sort of level we release we saw in 1H would that be something you could extrapolate through into the second half of the year? Just coming back to the point that Andrew made, would you use some of the capital you’ve raised, you have got more cash on balance sheet down on the ad, would you use some of that cash to support the dividend going forward rather than all and therefore countenance the payout ratio above a 100% on the business and then thirdly just maybe get some feel for what bang are you getting for your buck in the U.S. compared to now, can you give us sense of I’m trying to think of best KPIs -- the number of visits to the website, how that’s improving and maybe then the conversion rate through to actually booking policy. Thank you.
So I felt there may be a slight misapprehension we haven't done an extra special review of the reserves at the end of the half year, every half year for the last 20 years we have used actuarial advice to take a position on what the right ultimates are those of you who has followed us for a long while we will know that those numbers do move around and it's not in a sort of predictable and projectable way where we say, well that has happened in H1 so that’s going to happen in H2. Slight tendency for actuals to be conservative so if you do the history of our ultimate projects, there is more of a tendency for them to get better than get worse but you cannot extrapolate from historical trends to the future to say this is definitely what’s going to happen with the ultimate.
The dividend, it's not something we have really discussed at this point. Like I say, our dividend at this point is formulaic than it kind of pops out at the backend. So I would say we will have to see when we get there. Specifics to conversion rate, et cetera. We don’t want to share the details there yet but as you can imagine with the expansion into the states the growing carrier footprint et cetera we have experienced very rapid growth, seen visitors in some cases pass some of the number of visitors that our panel numbers see, the smaller ones but we’re still miles away from the Geico’s and the Progressive’s of the world but that’s the opportunity that sits out there, $50 billion of insurance is shopped every year. So the opportunity for us to have millions of visitors as time goes by, is certainly there.
Marcus Rivaldi – Morgan Stanley
[Indiscernible – Microphone Inaccessible]
Well that’s not how you're going to judge, it's how we're going to judge. But we’re going to judge it based on the metrics came through of cost to quote and sales per hit and then click throughs and so forth which we look at every day and we’re seeing very nice steady upward trends in that obviously when we go into the new area, immediately get pick up and the cost for quote slides down the sheet [ph]. Texas is moving rather quickly it's not surprising, when I went to California we had to set an ad campaigns, we did not know which one will do well and which wouldn’t. We go into Texas now it's what it's three other campaigns? And of course we have taken the better ones from California.
So it's all the matter of continuous learning and continuous refinement, meanwhile the campaigns in California are also coming down as we get more brand awareness and we’re out there more frequently our cost per quote comes down in California. The key for us now in the next 6 to 12 months is adding the insurers. We have got a lot more insurers signed up than are on-boarded. On-boarded is the process between our IT department and their IT department. And the smaller companies we deal with, a month, 2 months, 3 months we can do this. Some of the bigger ones I think our record is slightly over a year it took us to on-board and believe it's not us. We can do it very quickly. So the bigger carrier take a long time to get into their IT departments and get this on-boarding process and why is that important? Because the consumer, the real benefit to the consumer is as he goes in, he spends his 15 minutes or whatever it is, 10 minutes and he gets a bunch of quotes rather than 1 or 2. And we gone on from this 1 or 2 now up to kind of 3 or 4 and we need to get to 5 or 6 and 7 or 8, because when he does get eight quotes he is going to, wow, that was a valuable use of 10 minutes whereas when he gets to two quotes, that wasn’t so great.
And when he says that’s a valuable use of 10 minutes he is going to tell his friends about it because he is also probably going to save some money because the more quotes he get the more likely you’re going to save some money. So it all works forward in that way and we’re watching it on a day to day basis.
Marcus Rivaldi – Morgan Stanley
And on slide 36, is that on-boarded or signed up?
Those are live on the platform, they are more signed than that. Those are the live carriers.
Dhruv Gahlaut – HSBC
Could you quantify what the one-off was for the international operations in the PBT, you said out of the 15 million there were a few one-offs which will not get repeated. Secondly in terms of Confused.com, I think the revenues have been fairly flat and margins have come down. Do you expect much change in the second half of this year? And thirdly in terms of Comparenow, as in how has the response being of the bigger players which are still not there, some of the bigger names in the market, do you think those guys will be there in the next 12 months’ time?
I will give a little answer and then let Andrew go into details, he is the one talking to them. To me it doesn’t make sense for them to come on. But Andrew has more details. We have talked to everybody, I think we’re being watched very, very closely. If you’re willing to spend a $0.5 billion on more of your money to advertise you are not the first one to fall. If you look at how Confused.com started, Rastreator, LeLynx, et cetera., none of them got the largest players first but as the opportunity starts to grow, as you start seeing 10s of 1000s and then 100s of 1000s of quotes per month it becomes harder and harder to ignore and when one domino falls the opportunity for the next one to fall gets greater. We have got six of the Top 20 already on-board and there are more in the wings. We think that bodes well for the future.
Dhruv Gahlaut – HSBC
The next one was on Confused.com.
Confused.com it's tough going at the moment and it's very tough out there, there is a lot of money being spent and Confused is fighting perhaps the best UK ad campaign of the decade and it's not easy going.
The international insurance, the one-offs in the first half of this year. It's tough to be specific there is a lot of moving parts in that number but I think the first half loss was about 8% of pretax profits and it's usually about 5% to 6% so you can probably to that effect.
Marcus Barnard – Oriel Securities
I have got two questions relating to the quota share reinsurance treaties you've got in AIGL [ph]. And the first question is at the moment you get a 50% reduction in your capital having quota share reinsurance in AIGL [ph]. Do you anticipate this continuing on to Solvency II or something similar, from having quota share proportional reinsurance, particularly as the way you share the premiums, claims and profits doesn’t look particularly proportional or sharing to me. And secondly also on those treaties, your attritional loss ratio you’ve reported today excluding reserve releases were 85.3% and had expense ratio in about 15, it looks like your underlying profitability is running towards a 100%. Does it still make sense to use those treaties if you’re attritional rising to that sort of level and should we expect to see a lower level of quota share reinsurance going forward on year-on-year?
Couple of questions there, so going back to rationality of using quota shares there are couple of reasons we use it partly it's about capital relief, it's partly about our loss protection, it's partly the size of the reinsurance grows with the rate of the growth of the business. So there are a couple of good reasons why we used reinsurance in the past and I think we will continue to use it in the future.
In terms of our Solvency II treaties quota share reinsurance, we think we believe the Solvency II gives appropriate capital relief for quota share reinsurance and co-insurance where that reinsurance provides protection against loss in extreme events. We don’t think that changes from the current ICAS regime. In terms of the actual level of capital relief you get from individual contracts, also won't go into those numbers. I will refer you to the comment made in the presentation on the surplus we show now if the Group ICAS requirement was in effect today, have been in excess of £300 million and what was the final one?
Marcus Barnard – Oriel Securities
[Indiscernible – Microphone Inaccessible]
Yes so the attritional loss ratio as you quoted is 85% excluding releases but I don’t figure that includes the buffer above the projected ultimate’s, so it's quite to fair to say that the underlying level of profitability has hit a 100% because obviously we would expect to bring that down overtime. As to whether we will continue to use reinsurance into the future, we think as long as the reinsurance brings the benefits as it has brought in the past, capital relief, loss protection, flexibility. I don’t see any fundamental or immediate change in that business model.
Ravi Tanna – Goldman Sachs
Three questions please, so the first one is on the UK claims environment and just curious to know what the impacts from the Ministry of Justice is whiplash report cost to cap is likely to be on claims costs and in particular whether that might spell a recurrence of what we saw last year in the market following the legal remarks and if that has any bearing of if it's sufficiently material to impact the UK pricing and the scenario that you’ve laid out there. The second one was on administration fees and there has been some discussion in the press around the level of feels being charged by most insurers. Just wondering kind of what your level is and whether that has changed material over the time? And the third one was the question on the investment allocation and the changes that you’ve made there, perhaps you could give us a little bit more color as to the likely materiality of the impact on earnings from that and whether that’s you make a comment in there about invest risk not being materially greater and is that something that’s within your appetite going forward to increase investment risk further?
So in terms of the materiality changes on the likely yield I would say not very at all and what we have done is effectively move some out of the money market funds and into fixed income. And that doesn’t really result in any material change in the level of market risk capital allocated to investment and so you got to move out to AAA into single A. So in theory there is more risk in a portfolio but not much. And so you don’t generate that much additional yield, as to whether we will keep go further we will keep on looking at and if there are opportunities to additional yield without fundamentally the risk, the volatility and so on that we’re looking at them. So I don’t see it's been very materially at that risk spectrum.
I'll do admin charges and Lorna can do medical costs, on admin charges, I think some of the coverage on it may have shown on them is actually which has showed us very middle of the road certainly not an outlier; actually lower on some of the charges than some of our major competitors and we have always very careful to be able to set our charges in a way that’s justifiable by reference to the costs that underlie the process. So we don’t feel that that’s the source of competitive disadvantage at the moment that we’re particularly vulnerable in that front.
On the fees, I think fixing fees is good news, but on its own it's not material. I think what really needs to happen is they are reporting this after change going forward. So having reports that have got more evidential value and it can be questioned in case this value, I think there is low volatility that kind of thing, I think that really needs to change.
Andy Hughes – Exane BNP Paribas
Couple of additional questions if I could, the first one what is the H1, E&Y loss ratio compared to 85% and the second one is I guess on high level question on the debt raising, and the dividend, so we don’t retain any unnecessary cash in the business but you’ve raised more than 200 million you needed -- more the capital more than you needed, so without the 200 million would you still have had to pay the dividend? It sounds like you probably raised a 100 million more than you actually thought you needed. Is that fair comment? And the press comment yesterday that you might be interested in buying in Telematics for about a £150 million, given your commentary about how much excess capital you’ve presumable if you were to do that and although it sounds unlikely from your comments presumably you would have to raise more capital somewhere else. Thank you.
Your favorite exhibit on page 50, those have been debated as to whether we give access to key disclosure and on balance, the investors and analyst like it but we have decided not and we have -- this is true in 2013 not to give disclosure, best estimates at the half year level because it is so early in the evolution of the year that it can be just very misleading. We have comprised on our disclosure to give full year ultimate. So we will be adding that to the projection to the exhibit at the full year result.
Andy Hughes – Exane BNP Paribas
I just work it out from the comment for the reserve buffer's the same, take off the earned movement here and then the rest must be the current year, because you said the reserve buffer is the same so how can that work out?
Well then that’s something you can go into it if you feel that’s possible.
So question on debt, so I'd go back to the comment earlier, appropriate amount at the appropriate time, I think. It's there to deal with uncertainties that come in Solvency II. When Solvency II is in effect and we’re live in that environment we have got certainty over the level of capital requirement, we have got certainty over the level of surplus.
We don’t want to starve our businesses, as you can see we have got a lot of businesses that are getting up to speed, Kevin’s business is growing very quickly, money needed for Andrew’s business. We haven't talked much about Spain, Italy or France but they are all moving forward. So there is a lot of places to soak up capital other than the ones that you’ve mentioned.
Andy Hughes – Exane BNP Paribas
So clarification question on the guidance about the reserve margin that came out at the time of the kind of trading updates. So does it mean, you just really say that perhaps only increase in prices or any surprise positive development (indiscernible) loss ratios then also will the earnings will be coming down next year as a result of you wanted to keep this buffer the same because the natural evolution of this buffer should be that it reduces as and as you hit the impact weighing through of these large reserve releases unless we have further positive development in E&Y number as we have had in this period and so are you guiding that we shouldn’t expect more E&Y positive developments you had this half year and the earnings are going to be lower in future results? Thank you.
No we’re not taking a position on how the ultimate loss ratios will evolve because we don’t. And nor are we saying that we haven't a desired level of buffer and that that’s fixed over time the level of buffer is the reflection of the level of volatility that we’re facing and the uncertainties that we’re facing and it can vary upwards or downwards, but we’re not sitting here today saying there is a long term aspiration in terms of that buffer that we fix.
All we’re saying in a sense of and almost obvious point that if in the sense claims inflation has reemerged and premiums don’t start to rise, at some stage well progressively the current loss ratio will get worse and at some stage it will be impossible to compensate for that through reserve releases. That’s almost mathematically obvious but I think it's important that people should be aware of the claims pressures that are out there and the carry through impact as written premium reduction on earned results and bear that in mind when they think about the future. You’ve to take a position on what you think claims inflation and premium patterns are going to be over the next the next 18 months or two years. We’re just making a potentially obvious point but if we see more of what we have seen in the last 18 months in terms of margins then there is an issue in the medium term. What we have also said is typically our profits, what we deliver on our profits tend to lag sort of two years, it's roughly the actual experience. So that’s the big area of uncertainty is around is two years at rather than necessarily the second half of this year or early 2015.
Greig Paterson – KBW
Three questions, one quickly, is when you talk about the buffer, assume you’re talking 2014, are you talking relative to earned or return? Because one of them you jump around and one -- have all struggled sometimes? Sometimes one jumps around, sometimes the other, I think it's earned? If I’m not mistake I think you have set stable relative to earned?
We’re accessing the size of the buffer we want to hold on the space on the amount of premium that the business has earned at that point in time.
Greig Paterson – KBW
In first half of last year, you’ve 13 and now it's 10 or 13? Are you talking relative to end of last year or relative to the (multiple speakers) when you say it's stable is it year-on-year comparison or over the half year?
So the stability comparison is against the end of last year, and we are valuing the buffer on the size of the business that's been cumulatively earned to the end of June ’14.
Greig Paterson – KBW
It's a sterling amount that you keep in stable?
Greig Paterson – KBW
Sterling relative to?
The margin as a percentage of the best estimate.
Greig Paterson – KBW
Is it across the whole book? Or are you talking about --?
Across the whole book.
Greig Paterson – KBW
So whole book on an earned basis. All right, cool. Second question is just on this advertising campaign, are you talking about relative to Direct Line or relative to one of the price comparison websites, that's Confused.com? You said Confused.com is facing serious --
The meerkat is the reference.
Greig Paterson – KBW
All right. And then the third thing is you talk about -- I don't understand why it doesn't come into thinking, but we've got an election coming up next year. The Tories have invested a lot of time and money in getting premium rates down. They've still got some levers to pull on the portal and various other areas that they've put on hold for the time being. Isn't it fair to say that if we saw premium rates starting to rise, and they're still pretty unaffordable for young drivers, we're going to see the politicians starting to pull the levers again and then we'll see the whole cycle that we saw in the last 12 months?
I think what has already happened will result in most of the electorate receiving lower renewal rates than they did 12 months ago because the impact of these changes takes on average six months for the customers who experience them because the average policy length is 12 months. So I’m not sure necessarily it will get the physical agenda quite as fast as that. I think also time is very tight now to pull a lever and impact claims experience between and March 15, it's May 15. Sorry.
Greig Paterson – KBW
But they're going to make headlines. They can stand up and make a huge headline about it.
They can, indeed, but often when politicians make headlines it's not necessarily material to the actual outcome at the coal face. Having said that what the government has done you know in the reforms that took (indiscernible) were valuable reforms and it needs to be applauded.
Greig Paterson – KBW
What is the -- if you remember what happened last time, the Government was speaking -- made some announcements and there were six months before they were even coming in to play and hadn't even been clarified and we saw rates starting to drop.
I think it's unless they make some very dramatic announcements that are not currently on their agenda as far as we’re aware. There is no likelihood of people dropping rates in anticipation of reform.
No questions. Thank you very much for your attendance today and we will see you again in March. Thank you.
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