Direct Line Insurance Group PLC

LSE:DLG

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the Direct Line Group Q1 Trading Update Call. My name is Felicia, and I'll be coordinating your call today. [Operator Instructions]I will now hand over to your host today Penny James to begin. Penny, please go ahead.

[Penelope Jane James, CEO & Executive Director]

Thanks, Felicia. Good morning, everyone. Thanks to all of you for joining us today from wherever you are in lockdown. I hope that you and your loved ones are all keeping safe and well.Our plan for this morning is just for Tim and I to spend around 15 minutes or so talking you through the trading results for the first quarter and what we've done as a business to navigate through these uncertain times for all of our stakeholders. And then we'll open up for questions, which Felicia, our call moderator, will juggle.So just a summary to start off with then. Q1 was really characterized by real momentum in the business, both in terms of trading performance and in terms of the delivery of the strategic transformation agenda. The last few weeks clearly have been different. They've been about prioritizing the physical and financial well-being of our people, supporting customers, both practically in terms of the effects of the crisis whether they were trapped abroad or need a different coverage in a lockdown, and financially, where customers are in financial distress. And has been about contributing to the national efforts, supporting some of the most vulnerable in society. It's also important to note through such a period, we have a strong balance sheet and good liquidity. But why don't we start with the Q1 performance and the effects of the recent events on trading. So Tim, over to you to take everyone through the numbers.

[Timothy Walter Harris, CFO & Executive Director]

Thanks, Penny, and good morning, everyone. In this update, we'll initially review the positive first quarter trading performance before moving on to our current view of the impact of COVID-19 on the group, as outlined in this morning's release.So starting with Q1, and we saw a continuation of the positive trading performance that we experienced in the second half of 2019 into the first quarter of this year.Headline gross written premium grew by 4.7% compared to Q1 2019 driven by strong own brand growth of 5.6%. Own brand policy counts also continued to grow, increasing 0.7% in the quarter. Motor written premium grew 6.2% and policy count was stable across the period, supported by strong retention. Motor claims inflation in the first quarter was within the group's 3% to 5% long-term expectation.In addition to the strong Motor and Home performance, Green Flag delivered premium growth of 11.3% despite a material reduction in new business activity during March following COVID-19 disruption.In Commercial, both NIG and Commercial direct grew premiums. DL4B growth was supported by progress on its transformation program with the launch of the new Van and Tradesperson products on the digital platform.As you will have read, we've given an update on the weather losses in Home and Commercial from Storms Ciara and Dennis, which are estimated at GBP 30 million down from GBP 35 million announced with the 2019 year-end results. This is around half of our full year expectation for weather losses of around GBP 64 million. So overall, an encouraging start to the year. Clearly, since the middle of March, COVID-19 has brought unprecedented levels of uncertainty to the global economy. While it's too early to know when we will be through this uncertainty, I will spend some time outlining our current view of the financial impacts on the group and why we believe we are well placed to navigate the volatility. Starting with Travel. Assuming the Foreign and Commonwealth Office travel restrictions remain in place until the end of September, we estimate the net impact on Travel will be approximately GBP 25 million in excess of the normal level of claims. This estimate assumes customers will continue to seek refunds from airlines, tour operators and credit card providers.Moving on to Motor trading. Following the U.K. lockdown, there has been fewer car transactions, leading to a reduction in new business quotes. Retention has remained strong.The lockdown has also led to a reduction in Motor claims notifications of around 70% in April. However, we expect the reduction in frequency will be partially offset by higher severity as repairs take longer, leading to higher credit hire costs. We're also mindful that recent data suggests that the number of cars on the road is on the rise. And we will continue to track these trends closely as we assess the overall impact on Motor profitability.In Rescue, we've seen a material reduction in direct new business sales and a reduction in claims of around 40% following the lockdown, although our latest data suggests some increases as people prepare their cars to go back on the road.In Home, we've seen an initial reduction in claims frequency, although it's not clear whether this reduction is genuine or due to delays in claims reporting.In Commercial, whilst we provide Business Interruption cover to our SME customers across NIG and Direct Line for Business under our standard policy wordings, which represents about 99.5% of our policies, cover is limited to a list of specific diseases and does not cover the COVID-19 pandemic. Penny will say more on this in a minute.Of a very small proportion of policies not on our standard policy wordings, we estimate claims costs of approximately GBP 10 million.Moving on to the balance sheet. Our investment portfolio remains high-quality and well diversified, leaving the group well positioned to deal with COVID-19-driven volatility. Our mark-to-market portfolio has been impacted by movement in credit spreads. And at the end of Q1, the available-for-sale reserve was minus GBP 138 million net of tax having moved in line with disclosed sensitivities. As of the close of business on the 1st of May, the balance on the available-for-sale reserve was approximately minus GBP 55 million net of tax.As of the end of Q1, the vast majority of our GBP 3.8 billion of debt securities were investment grade. Of the GBP 378 million of high-yield investments, less than 10% were held in sectors most impacted by COVID-19, such as energy and transport, which equates to less than 1% of the overall portfolio.Our liquidity remains strong, with around 19% of our investment portfolio held in cash and cash equivalents as at the end of March. At 2019 year-end, we said we expected a net investment income yield of approximately 2%. Due to falling interest rates, we now expect this to be around 1.8% for 2020. In terms of capital, as you know, we suspended our buyback. And on the 8th of April, we canceled our final year-end 2019 dividend. Our capital position is strong with coverage ratio estimated at 177% on the 1st of May, towards the top end of our 140% to 180% risk appetite range. On dividends, the Board reiterates that it will review this position alongside the half year results and on an ongoing basis, once it is possible to have a better understanding of the impact of COVID-19. Finally, the outlook. And today, our business remains strong, and we remain focused on our transformation and cost reduction plans are key drivers for our future commercial success. For 2020, we reiterate our target of a combined operating ratio of 93% to 95% normalized for weather and anticipate our restructuring costs of GBP 60 million over 2019 and 2020 will be incurred in full as we strive to maximize the opportunity for operational efficiencies. We remain focused on the targeted combined operating ratio of 93% to 95% normalized for weather in 2021 and in the medium-term and on improving the current year contribution to operating profits to at least 50% by 2021, but acknowledge that these will inevitably depend on the duration and uncertainties of the COVID-19 pandemic and the pace of economic recovery and consequential impact on customer behavior. We expect some impact on the timing of our cost-saving program due to the actions we are taking in the face of COVID-19, including limited delays in the delivery of certain programs. So we may not achieve the target of reducing operating expenses by GBP 50 million by 2021. Notwithstanding these challenges, we remain focused on the strategic and operational transformation of the business, including our targets of improving the operating expense ratio to 20% by 2023. We also reiterate our ongoing target of achieving at least 15% return on tangible equity per annum over the long term. We continue to closely monitor the impacts and uncertainties arising out of the COVID-19 pandemic, and we'll update you further with our 2020 half year results. I'll now hand back to Penny.

[Penelope Jane James, CEO & Executive Director]

Thanks, Tim. So I'm going to focus on how we think about handling the COVID-19 issue. Well, through this period, we're using the following principles to assess all our decisions. One, protecting our people financially and physically; two, supporting our customers; three, protecting the business for the long term; and four, contributing to the national efforts. Now to this end, we're implementing over 14 measures across the business, expected to cost in the region of GBP 70 million. I'll now give you a flavor of some of those measures to show you how we're prioritizing those most in need while giving customers the individual support and empathy that they rightly deserve from us. Our immediate priority coming into the lockdown was to keep our people safe and ensure that they could continue to serve our customers. By the end of the first week of lockdown, we moved to home working for almost all our people, and they continue to work from home. We're not accessing the government furlough or any other support schemes and all our people will receive their usual pay regardless of how their specific working practices may change during home working with all roles protected through to the autumn. Despite the mass movement to home working and the disruption that it inevitably causes, we've had some great feedback from customers and have seen an improvement. In fact, our highest ever My Customer scores, the survey that we use to test customer satisfaction with how our people are serving them. Given the circumstances we're in, this is extraordinary and is a testament to the way our people put customers at the heart of everything they do. And when it comes to supporting customers, I'm pleased that we've also been proactive on this front by providing our customers with additional value to help them through these testing times. We've done this in a way that is personal for them and true to our brand. For those customers experiencing immediate financial difficulty, we've waived cancellation fees and mid-term amendments for those who've lost their jobs or have seen reduced hours. Some of the -- and this is so that they can tailor their insurance needs and limit any buildup of debt. In some cases, we're giving discounts, and we are also offering payment deferrals for those with financial difficulties. But we also know that the lockdown is changing our customers' behavior, Motor being the most prominent area, but also in Travel.In Motor, we've been refunding premiums and waiving admin fees for customers who wish to cancel motor cover abroad as well as refunding premiums to motor customers who wish to reduce their annual mileage, recognizing the impact of the lockdown. In Travel, we repatriated 175 British citizens by the end of April. A further 56 are being supported overseas with accommodation and medical support, while they wait to be fit enough to travel. And we're temporarily refunding Travel customers with multi-trip policies on a pro rata basis for anyone who hasn't made a claim this year and has no trip planned for the rest of the year. But we also recognize that it's important that we play our part to support the country during this time. We've been working closely with our supply chain to ensure that they can continue to serve our customers. For example, Green Flag is supporting our independent network of 200 local rescue businesses by offering a number of them support payments, which has contributed to the protection of over 4,000 key workers. We also wanted to reward the commitment of our NHS workers by offering free breakdown services, priority repairs in our owned repair centers for key workers' vehicles as well as offering free home personal protection cover and home emergency cover. And we've committed GBP 7.1 million to charity. The first stage was the DLG community fund to distribute GBP 3.5 million to charities, helping vulnerable people in the communities we serve. Since launching the fund a month ago, we've been working with local councils and charities to identify where best to target the funds to benefit quickly the most vulnerable, thus far, distributing GBP 2 million to 12 charities across the U.K. helping tens of thousands of people. Before I summarize, I'd like to turn to 2 issues, though, which I know will be very much at the front of your mind, the dividends and the impact of Business Interruption claims. Firstly, we know that canceling the dividend was a disappointment, but we took this decision to protect our strong solvency during this period of intense uncertainty. And we're committed to reviewing this at half year and on an ongoing basis once it's possible to have a better understanding of the impact of COVID-19. And secondly, on business interruption. As you would expect, we have reviewed our business interruption policy terms closely. 99.5% of our policies have standard wordings. Our standard wording was altered in 2006 to make sure it did not trigger in a pandemic to protect the organization and our long-term ability to stand behind claims across all our product lines. As a result, our standard BI policies do not pay out as a result of COVID-19 and our nonstandard policies are estimated to cost GBP 10 million. So when I step back and reflect, how do I feel about the first 4 months of the year? Well, it might feel like a lifetime ago, but it was actually less than 6 months ago that many of you joined us in Doncaster for our Capital Markets Day. We came into this quarter a strong business with a clear strategy combined with operational momentum. And notwithstanding the events of the last 6 weeks, we are still that same business. As you've heard today, we've traded well through the first quarter, growing written premiums supported by another strong period for Motor and double-digit growth in Green Flag and Commercial. And amongst the necessary and immediate work we've done around COVID 19, we've continued to focus on our strategic objectives and the operational momentum that we successfully garnered over the last 12 months. In 2020, we have launched Van and Tradesperson on our new DL4B digital platform. We've launched Darwin on another price comparison website. We've continued to deliver new releases on our new Motor platform. We've delivered greater counter-fraud capability. We have a new end-to-end Green Flag claims system built and in pilot on start policies, and we've launched a new brand identify for Direct Line.Now we've talked a lot about the benefits of our model and the importance of our customers. As you've heard from the range of actions we've taken, we are focused on looking after those most in need because after all, treating customers as individuals with great care and empathy is what we are all about. I'm proud of our strengths as a group, our people, our passion for serving customers, our brands, our technical expertise. We have a clear strategy and good momentum, and all this is underpinned by a strong balance sheet and liquidity position. I remain confident that we'll continue to navigate the business through this uncertainty.And with that, I'll hand back to Paul. Thank you.

[Paul Smith, Investor Relations Director]

Thanks, Penny. So now we'll move on to Q&A. [Operator Instructions]So I'll hand over to Felicia to coordinate the incoming questions.

[Operator]

The first question comes from Kamran Hossain from RBC.

[Kamran Hossain, Analyst]

I just wanted to ask the -- I guess, the dividend decision is more of a kind of doing the right thing decision rather than some reality of having to cut. Can you talk maybe about what's the plan here for normalizing? There's clearly huge uncertainty through the half year. Would it catch up to be unreasonable? Or how should we think about getting back to normal there?And the second question, I guess, topic digital business interruption. How comfortable are you with the GBP 10 million number that you've given? How [cap is ] this? Is there potential for this number to kind of grow exponentially?

[Penelope Jane James, CEO & Executive Director]

Thanks, Kam. Look, dividends. The decision was made after conversations with the Board, conversations with the PRA and really in the context of the level of uncertainty that is around at the moment. I think as we move through the year, we hope to see some of that uncertainty lift in a number of areas. And as it does so, and the first point we'll consider is the half year, we will do so. So it remains our aim. We recognize how important dividends are to our income investors in particular. And we remain very focused on getting back into a pattern of paying dividends, but we'll only do it at the point that we're confident enough on the uncertainty. So that's dividend. I think business interruption. But if we stand back for a minute, I mean, firstly, we recognize the pain that businesses are suffering at the moment, many businesses are suffering. And we continue to work with the ABI on different initiatives to try and help across the board. But when it comes to actually the insurance coverage on business interruption, you have to stand back and say, actually, what is insurance all about, it's about paying for the few. The many payings relatively small premiums to pay for the few. So it breaks down in a circumstance where effectively everybody wants to claim. And that's why when you look back at 2006, our wordings were adjusted explicitly to address the risk from potential pandemics. And what does that mean? It means that for those of you -- I don't know if some of you have studied a lot of wordings for these sort of -- we've got a specified list of diseases that don't include respiratory diseases in previous pandemics because it's explicitly what we were trying to deal with.So what does that mean? It means that we think we've got a tight position on our wordings that reflects the intent of what we were trying to do. Clearly, there is a lot of focus clearly, a lot of wordings are going to be tested legally, whether it's through the FCA process or elsewhere. So no one can say that going through that there's no risk. But we do believe our wordings are at the tight end of the industry and are robust. And that's why we've been as clear as we have in what we've said. In terms of the nonstandard wordings, yes, it's a very limited number that we believe have the right kind of criteria to potentially pay out and we have had to make estimates on those in getting to the GBP 10 million, but we believe that estimate is quite reasonable. So we're reasonably comfortable around that number as well. I think the final point I'd make on BI is actually, we welcome what the FCA is trying to do. I think it's important that for this much more broadly for financial services in the U.K. that we look to the law wherever there is uncertainty and that we're based in contract law. And actually, what they're trying to do, although we're still getting -- still seeking to understand the detail of the process in terms of accelerating that through the court process to actually give the industry and the market greater clarity. I think it's really important. So we're supportive of that approach.

[Operator]

The next question comes from James Shuck from Citi.

[James Austin Shuck, Director & Head of the EMEA Insurance Sector]

So 2 for me, please. Firstly, the new systems that you showcased and you're going live with, I mean, the hope would have been that you look to grow in U.K. Motor. There's a lot of uncertainty around at the moment, obviously in the current environment, the whiplash reforms and the FCA reviews being delayed. Can you just give some kind of guidance to your confidence in being able to grow in this kind of backdrop with the uncertainty around claims and customer behavior? And then secondly, on the -- how are you going about with your 2020 loss picks, obviously, there's a bunch of uncertainty. To what extent can you build in additional conservatism into those loss picks based on existing claims trends?

[Penelope Jane James, CEO & Executive Director]

Thanks, James. Okay. Let me take the systems one. And then Tim [indiscernible] your question. So on systems, and I think the first point I would make is that the strategy that we have remains -- is kind of unaffected by this in terms of the steps that we need to take -- the future quality of the earnings will still be dependent on us delivering a transformation plan that improves our operational cost base and gives us sort of the underwriting and pricing benefits that we laid out back in Doncaster. So we're really focused on kind of keeping that on track. And there'll be some movement in time line till there which we flagged, which is, I think, inevitable given the amount of upheaval. But fundamentally, it's the right thing.Now there clearly is a lot of uncertainty coming into 2021 and beyond. We expect the core product to hold up well, so not to be fundamentally different. But we may find people operate different driving behaviors over time or we may find different attitudes in different areas. So really, we have to wait and see. But I don't think any of it changes our fundamental approach that we believe that we can be better and more effective than we are in the way we price and the way we're operationally efficient, and that will make us stronger players, more competitive players in our core products. Probably that's the greatest clarity I can give you at the moment, James.

[James Austin Shuck, Director & Head of the EMEA Insurance Sector]

I guess if I can just quickly circle back. So the -- I mean, it's not just the current environment, no. I mean it's also whiplash reform delay, the FCA review, all of these things. I mean, is 2020 the year to be looking for kind of accelerate growth a little bit? Or do you really need to a little bit more certainty about the market backdrop?

[Penelope Jane James, CEO & Executive Director]

So we will do what we always do, which is set our pricing in the market at the level that we think is appropriate for the returns that we need and drive growth off the back of that. So the growth that we've got driven is not because we are undermining our own loss ratio positions, if you like, to grab market share. The growth that we've had today is because some of the initiatives and drives that we've been talking about are starting to come through and have an effect. And so we will continue that philosophy as we move through the market as we always do. So it wouldn't be great. We're not going to go for growth at all cost, we'll do a disciplined growth approach that we've always tried to do, and we'll see how the market develops. In terms of the reforms, yes, I mean, they're on a slightly slower time line. I think -- I'm not sure that it makes a lot of difference in terms of the way we think about how we trade and market through that period. We will continue to make the sort of the advances and the steps that Kate laid out in Doncaster as we -- on the pricing side. We'll continue to weave our path until we've got clarity from the FCA in terms of exactly what they expect. And whiplash, we and the market will deal with it at the points that we're ready to. But I don't see it necessarily being a particular driver in one direction or another. Tim, do you want to do dividends?

[Timothy Walter Harris, CFO & Executive Director]

Yes. So let me pick up the question about loss picks -- the 2020 loss picks. Thanks for that, James. I -- look, what we will try to do is what we always do, which is to reserve with the appropriate level of prudence and conservatism and consistency actually period-on-period. So we haven't did anything radically different in terms of the approach that we take. I think the only thing I'd add to that is the key here is going to be data. And we're very, very early on in the development of this pandemic and understanding the impact it's going to have on behavior across all of our lines of business, but particularly Motor. And so what we're working very hard on is gathering the data and trying to understand the data as well as we can. And that's what we're doing. And we'll update you on how we think that's turning out at the half year and obviously, the full year as well. But the -- what we're not used to is such a dramatic change in reporting patterns, and we challenge ourselves to deal with that in an appropriate way.

[James Austin Shuck, Director & Head of the EMEA Insurance Sector]

And [ what about ] one of your comments earlier on that you'd still expect the full year combined ratio to be in the region of 93%, 95%?

[Timothy Walter Harris, CFO & Executive Director]

Yes. And that's -- I should make it clear. That's a group level figure. So there are -- they are one of the notes out this morning first thing. And I think the comment had been made that there's quite a lot of moving parts, and of course, there are. So that will be a consequence of factors like an improvement in the claims experience on Motor. But these are the things going in the opposite direction. When we talked about travel this morning, we've also talked about the money that we're spending to make sure that we're serving our customers well, looking after our people and making our broader contribution. So you got to take all those things into account. And I think, when you do that, we thought that if you triangulate back on the guidance we've given on the call, I think it helps you understand where we expect the overall profitability of the business to be.

[Operator]

Next question comes from Dom O'Mahony from Exane BNP Paribas.

[Dominic Alexander O'Mahony, Research Analyst]

A couple of questions from me as well, if that's all right. So just firstly, on investment yield, you've been clear that you've had to be a bit lower this year than you had previously thought. Could you just help us understand the drivers because I'm really just trying to think about through to 2021 and beyond? Just in terms of interest rates, of course, those are down, but spreads are wider, you might have thought there would be at least an offset there. So are there other factors going on? Is this absolutely to do with the increased cash allocation? But also, could you tell us whether you've made any adjustments to your real estate portfolio? And then I guess what implication of that for the yield in 2021 when -- but generally you would expect a normalization of mix?And then second question, just on combined ratio guidance. You reiterated both for 2020, 2021 and beyond. There's a tiny note of caution, I suppose. So still aiming for it, but it's a bit more uncertain. I can see where there might be uncertainty on top line in this environment. But could you just help us understand where the uncertainty or the risk comes on the combined ratio? I mean, is it as simple as potential delays to the expense program? Or are there other factors that you have at the back of your mind as the potential risks around that?

[Timothy Walter Harris, CFO & Executive Director]

Thanks, Dom. I'll take those. On the investment yields, first of all, I think you've actually highlighted exactly what's going on. So we've got a portfolio, as I've described, which largely comprises investment-grade, fixed-income securities. And they're actually relatively short duration, as you'd expect, given the nature of our liabilities, and they generate cash quite quickly. So the rate of maturities in that book is pretty significant. And I think, sensibly, we've taken the choice over the course of the last several weeks just to hold back on reinvestment because a sensible thing to do, just as we take -- took actions to support the capital strength of the business, is to support the liquidity of the business as well. And as you've seen this morning, our liquidity is very strong. But that comes at a bit of a cost. And the consequences that you see, the guidance we're giving on investment yield drop slightly. So it is a related consequence of those reinvestment patterns.On real estate, we do have a real estate portfolio. It's supporting our longer tail liabilities, essentially bodily injury claims that come out of the Motor book. We're very careful about what we invest in the real estate. And actually, we're confident about the portfolio that we've got. And so far, of course, I've come back in its early days. I'd say that we're satisfied it's performing well.If I move on to the core guidance, I think you've read really what we're saying right that we are highlighting that when we look beyond this year into 2021, the impact on the business of all the things that arise from COVID-19 inevitably become less certain because none of us quite know exactly how this is going to work out. But we are committed, and it is our intention to be operating within that 93% to 95% range.In terms of the moving parts, again, sort of going back to the point I made in response to James' question, there are a number of moving parts, actually. Some of it is in relation to top line and trying to anticipate what might happen to customer behavior. And frankly, the ability of some customers, perhaps especially in the commercial lines to continue buying policies, some of it is relating to expenses. And we're anticipating, as we've said, a bit of a delay on the ability to deliver all the expense programs that we're working on, not significant, we think, in the greater scheme of things but potentially providing some pressure in 2021. So you can be assured that we are very focused on achieving what we've said, as we've said in the press release, but we felt it was appropriate to highlight that as we look further out, the risks are more uncertain.

[Operator]

Next question comes from Jon Denham from Morgan Stanley.

[Jonathan Denham, Equity Analyst]

Just coming back to Dom's question. What types of changes to behavior you're really expecting from policyholders? Is it just the top line side to Commercial you mentioned earlier? Or are there some changes that you're potentially worried about on the claims side? And then yes, you reiterated your long-term target for your return on tangible equity. Is that something you expect to achieve in 2020?

[Timothy Walter Harris, CFO & Executive Director]

Thanks, Jon. Shall I try and answer those as well?

[Penelope Jane James, CEO & Executive Director]

Yes, yes. Go ahead.

[Timothy Walter Harris, CFO & Executive Director]

So on behavior, it can be a collection of things. It's quite interesting to have observed how buying behavior on the retail side, not commercial side, has developed during the course of the lockdown. And so actually we're seeing less demand for new business, and that's being offset to some extent by renewals. So it's clear that policyholders are behaving a bit differently. But that's not necessarily a problem. I mean one of the strengths, I think, of our brands is retention rate, and actually, that potentially could be a positive, but it's a bit early to tell, obviously, Jon, and we've just got to see that work through and see how it comes out as we see what the consequences are of the lockdown and of course, the rate of recovery post lockdown and what that means. So they are issues in relation to claims. Well, I think it's pretty well documented, but sometimes, you can see claims changes during times of recession. And I don't want to say we're worried about it, but we're thoughtful about it, and we will be looking carefully to see what happens. In terms of return on tangible equity targets, yes, that is we're reiterating our target for 2020.

[Operator]

Next question comes from Greig Paterson from KBW.

[Greig N. Paterson]

I'll ask 2 of my first questions. Just in May, you talked about new business being down, sort of in most business lines. I wonder if you could give us sort of a -- some kind of quant number in the May experience or after your quarter just came back on line in terms of year-on-year growth in your business? And just briefly something back of your mind you were planning through?And the second thing is, I mean, you've religiously for the last 5, 6 years, priced your business to achieve an economic return and certain economic hurdle rates. Given that interest rates have dropped quite materially and the costs are very complete -- one of the other comments that you have made on hurdle rates in the new business have come down materially. Does that mean that mechanistically, it will fall through July premiums or your current premiums?

[Penelope Jane James, CEO & Executive Director]

Thanks, Greig. Look, I think what's the shape of what's going to -- the reality is it's too early to tell. And why do I say that? So I think we, and not just us, I think a number of competitors turned off new business in the -- certainly on the phone lines so that we can get everybody out of the buildings and still service current customers and claims. And I know that we are not the only ones in the market who have done that. And we also turned off things like pay-per-click for a while to keep the volumes down. So some of those things take a little time to come back. So I think we're not probably at the point that we've got full integrity of the numbers in terms of a steady-state. But I think it's fair to say across insurance to reflect, I think, some other consumer lines as well, where people through the early parts of the lockdown certainly were not sort of shopping around as actively as they were. And there'll be some real reasons for that. So less young drivers on the road passing that test, less new cars being bought, but I think there are also some behavioral traits. It feels as though things are starting to pick up again. But I think until we've got a run rate for a few weeks, kind of -- it will be -- it's difficult to give kind of real clarity on that. What we can certainly see, which is another indicator is the retention levels are holding up. In fact, they're moving up. So that probably should give you a feel as to what has happened through that.In terms of how things have moved and so on and so forth. You're right. We've price to target loss ratios. We'll revisit those over time in the context of the overall economics. We wouldn't do that in kind of those effects in a short-term latest period, but we would do over time when things stabilize. Tim, I don't know if there's anything you want to add on that?

[Timothy Walter Harris, CFO & Executive Director]

No, no, that's right. I mean, you're absolutely right, Greig. We do have an eye on the economic return and interest rates have reduced. But other things have moved to offset that, as you know. And I think those effects will take longer to work through, and you're absolutely right.

[Operator]

Next question comes from Freya Kong from Bank of America.

[Freya Kong, Research Analyst]

Given a bit more clarity now than, I guess, a month ago, do you see any reason why you would hold capital above the top end of your target range?And just second question. If travel restrictions were to last until, say, the end of the year, could you quantify the additional impact on your Travel book? Could you put in any more reinsurance as well?

[Penelope Jane James, CEO & Executive Director]

Tim?

[Timothy Walter Harris, CFO & Executive Director]

Yes, certainly. Thank you. Thanks, Freya, for those questions. So let me talk about the capital range, first of all. I think the answer to that is we need to remember, we're in pretty extraordinary circumstances. And while I would go back to all the things we said on the Capital Markets Day in Doncaster last year about where we will be aiming to be in terms of our capital risk appetite, 140% to 180% and believing that it's perfectly satisfactory to be operating at the middle of that range in normal circumstances, and none of that has changed, and that's where we're wanting to get back to as soon as we can. We do need to acknowledge that we're in pretty exceptional circumstances at the moment. And that's why we took some of the capital actions that we did. I think very difficult decisions to make and disappointing, we acknowledge, as Penny said, but ultimately, we need to make those calls. And I think that I'd just say on the needing to hold capital above the set target range, yes, that's not currently where we're operating. I'm not sitting here believing that there is a need to do that. But ultimately, we've got to be conscious as these times are pretty exceptional, and we need to be open to just managing through this in the best way that we are able because that's what's really in the interests of our shareholders in the long term. And that's exactly what we're doing.On Travel, you're right to raise that question because actually, one -- the thing that -- the main thing that's moved the figure that we published this morning compared to previous figures we've given is that we have, if you like, taken a more pessimistic view about when the Foreign & Commonwealth Office guidance might be changed, and we've moved that out to the end of September. And we could, I guess, debate all day whether or not we think that is conservative or not. But it is taking us beyond the peaks from a holiday period, which is important.In terms of if it went out longer, would it make a difference? The answer is it could make a difference. But as time goes by, it becomes a much less material difference, because of course, we're only covering holidays that have been booked by the time it became clear that, that guidance was going into place, which was a week or so before the lockdown. And one of the things we look at is the behavior of people taking holidays, about when they book those holidays. And some people booked their holidays a long time in advance, but most people actually don't. And so when you start getting out beyond the summer holidays, the number of holidays that have already been booked actually drops off pretty quickly. And so we wouldn't expect that to be a particularly significant factor. Hopefully, that answers your questions, Freya.

[Operator]

Next question comes from Edward Morris from JPMorgan.

[Edward Morris, Equity Analyst]

You've kind of touched a little bit on this question. But just coming back to the topic of dividends. Obviously, there's been a little bit of difference across Europe in the way that companies have talked about either canceling or postponing dividends. And I just wonder if you could talk a little bit more about how you think this might play out as we go through the half year and then full year stage. Do you view the final dividend that was canceled as day 1 that is one that, ideally, you would like to return to shareholders as cash? Obviously, you changed your preference to switch to buybacks last year. So just anything around how you're thinking about that dividend that was canceled and how it would shift into a dividend policy going forward would be helpful?And then the second question, I wonder if you could just talk a little bit about whether there's been any notable change in the competitive behavior in the market in the last month. Are you seeing anyone yet lowering prices? How long do you think it takes before that starts to happen, please?

[Penelope Jane James, CEO & Executive Director]

I mean I think on dividend, Tim's given most of the color. I mean the very nature of the exercise is that you have to cancel the '19 dividend. So anything that comes in would be a dividend form. Our priority is always the ordinary dividend, the normal dividend. So that's the first thing that we'd be looking at. And we would love to be in a position that we could kind of make good as it were for that '19 dividend and that is our -- that is our aim over the course of '20. But we will only do that when we think it is appropriate to do so. So I think that's dividend.In terms of what we're seeing on pricing, I think the reality is it's just too early. You're not seeing high dramatic moves, I think, in the market at the moment. But most of the pricing activity is inevitably around new business. And as we said, new business sort of volumes have been depressed. Some players have been in and out at various points for operational reasons. So we're only just getting back to really the point where that's going to function. So I'm not sure that you'd read a huge amount from anything that's going on in that space right now. Probably another month or so, and you'll start to see kind of the real layers around us, I would think.

[Operator]

Next question comes from Ivan Bokhmat from Barclays.

[Ivan Bokhmat, CEEMEA Banks Analyst]

I've got 2 questions. And the first one, it's, please, on this GBP 70 million of relief that you've announced. Could you just help us understand whether it goes through the P&L in full this year? And also maybe just more conceptually, should we think of this as a one-off? Or assuming the lockdown stays in place, at least partially over summer, there's more to come?And the second question, I just wanted to understand, when you think about your claims management capability, there's obviously your suppliers, the garage network, the car part delays that we may have experienced in the first quarter. How do you expect this to operate once the lockdowns are lifted? And what impact may that have on your claims inflation?

[Penelope Jane James, CEO & Executive Director]

Okay. Tim, do you want to start, and I'd like to do some of conceptual stuff, Tim?

[Timothy Walter Harris, CFO & Executive Director]

Yes, sure. So the GBP 70 million that we've talked about, yes, that is money that we anticipate incurring this year. Just to give you a bit more color on that. About half of it will go through the trading lines on the P&L. So that's sort of premiums and claims. About half of it goes through the expenses, just depending on the nature of the underlying initiatives; about 2/3 of it is related to money that we're spending to improve the outcomes for our customers; about 1/3 relates to the measures we put in place to look after our people; and the -- I should say, that first 2/3 also includes the work that we're doing with charities. So you should think about it coming through.In terms of what -- will that continue? I -- we've given our estimates of that cost today. Of course, the answer to that must be that it depends on exactly what happens. And I don't know what's going to happen, unfortunately. But the only thing to say is, and we come back to a point that we made earlier, that there are a number of moving parts and to a large extent, you can see moving parts which are contributing positively to our results, being offset by items like the GBP 70 million, which clearly are costs that are very important for, obviously, very positive reasons, but they are costs. But we're getting some offset happening in there, which I think talks to the broader resilience of the business model.On claims management, I think that it's fantastic, actually. The asset that we've got, in particular, thinking about things like our repair centers on the Motor side, but it, of course, is not limited to that. I think that's a real strength. And actually, the ability that gives us to be a significant participant in the supply chain, we think can be a strategic advantage coming out of this. So those repair centers will remain open to make sure that we're keeping key workers and we're keeping all the people who need to travel at the moment on the road, they're reducing -- they're operating reduced capacity. Of course, the extent to which that capacity can ramp-up will depend on the measures that come into force post lockdown. But we're very proud of the job that everybody is doing in those repair centers, and we think it's going to be an aspect going forward.

[Operator]

Next question comes from Andrew Crean from Autonomous.

[Andrew John Crean, Managing Partner, Insurance]

Two questions. I just wanted to clarify, the GBP 70 million, is that a gross cost, net of which will become the benefit of lower motor claims frequency, for example. So is the actual cost of the business going to be less than GBP 70 million? And what is generally your approach in terms of lower frequency in Motor? Is it to pass it back to customers or to hold on to it?And then secondly, a question about -- the greatest uncertainty, I think, on this, or for others has certainly been quantifying the business interruption losses, which you've quantified as GBP 10 million. When you took the dividend decision, did you have the same level of certainty on business interruption losses as you have now? Or could we conclude that, that certainty has improved since you took the dividend decision and therefore, may carry your decisions on dividends going forward?

[Penelope Jane James, CEO & Executive Director]

Okay. I'll take this one. Let me just stand back slightly on the sort of GBP 70 million and how we're thinking about potential returns to customers and so on and so forth. So first, to start what I should make is it's not our intention to make excessive profits as a result of COVID-19. I think that would not be in anyone's best interest. And so from day 1, we've been really focused on what we can do for our customers, but we've prioritized those who are vulnerable. So -- and we're looking at 3 categories, those who are in urgent need of claims support, those who've got financial difficulty, and then more broadly, your Motor point will fall into that the way COVID-19 is affecting all of our customers.And so we've given you a sense of the nature of things we're doing on the claims side. The things we're doing on sort of financial difficulty, payment deferrals, premium waiver, discounts, mid-term amendment, cancellation fees, all of those things, we don't yet know what the impact of those will be. So the GBP 70 million is a total of the cost spend that's not netted down by anything, but it is an estimate, and we may find that the drawdown on some of those customer-facing things is either heavier or lighter than we've anticipated.When we get to a point where we can see more clearly what the overall outcome is, we will think about what the customer impact has been as a whole. Today, those customers can change their mileage expectation, and we've got some indication of that kind of in our numbers. But actually, we don't yet know whether if we'll come out of lockdown, there'll be a spike in frequency or whether people will drive still fewer miles than they did before. And we don't know if there'll be a spike in severity because although we're taking actions, the supply chain may be slow picking up. And of course, we pick up the claims of other people managing their supply chains as well. So we will -- what we will do is look back across the profitability of the business as a whole to make sure that we're comfortable with that. And then we will do what we always do and look at individual customer lens and to make sure that we're comfortable with that as a whole.And when we've given you the 93% to 95% for the year, what we are really indicating is how we view that position, taking everything into account to try and give you a steer as to how we'll think about it. But the GBP 70 million itself is a gross number of payments.In terms of -- I hope that's clear on that one. In terms of the BI, look, we've always believed that we are not -- that these claims are not appropriate to be paid. So we believe that a month ago, we believed that today, we're probably got a better handle on what a nonstandard sort of numbers may look like, but I'm not sure that makes a material difference. I think that it is one factor in the levels of uncertainty out there, certainly in the minds of the regulators, which is why they've taken some of the actions that they've taken. But in our mind, we've always felt that these are the claims that in the vast majority of cases are not appropriate.

[Operator]

Next question comes from Faizan Lakhani from HSBC.

[Faizan Ahmed Lakhani, Associate Director of Insurance Research]

I just had a couple of quick questions. Given that you're in a stronger solvency position right now, do you think this can accelerate any opportunities for inorganic growth?And question two, sort of going back to the GBP 70 million, do you feel there is greater pressure on the industry in -- to do sort of a one-off rebate like some of your peers have done rather than waiting, ending on a one-off basis?

[Penelope Jane James, CEO & Executive Director]

So let's do the second one first. So do we think there's a pressure? And I think if you -- where does the pressure come from? We should do what is right for our brands and our customers. We should do what is right in terms of the long-term protection and benefit to the business. And then we should do what we think is right from the regulatory perspective. And there's these all dynamics in it. I think the FCA has been very clear if we did them in a reverse order that whilst they're expecting firms to look at policies where you cannot fulfill the promise, the example they used is where someone's got a boiler repairperson that can't literally enter the house to do the servicing, you should look at refunds there. And that's effectively what we're doing on some of our travel policies. But they've been equally clear that it doesn't apply to mileage where you are still ensuring a vehicle and so on and so forth. So the pressure is not coming from the recent guidance from the regulators.I think regardless of any other noise and what others may have done, it's for us to look at our brands and our customers and to work out the right answer. And so we will do that when we can see that picture in the round. But we also think that our customers would be mindful that it's appropriate to support the most vulnerable first in that order. And that's the judgment call that we and some others have taken, I think, in this path. So we will assess it over time, but we aren't, I think, under pressure at this moment to do so.In terms of inorganic, we will see how the -- I mean, traditionally, these types of events have created movement in the markets, and we'll continue to monitor those. We're focused on our own business plan and our own business case. And we will, as I say, keep open-minded on the inorganic front and see what happens.

[Faizan Ahmed Lakhani, Associate Director of Insurance Research]

Sorry, just to come back quickly to the first one that you answered. I guess, does this lead to the industry to provide sort of a normal profit level this year? Or do you think some people will use the opportunity to either write new business at lower premium costs, given that there's uncertainty around what the potential benefit is? Or do you think that the industry will be rational and will just give money back to customers?

[Penelope Jane James, CEO & Executive Director]

So rational -- so returns of value to customers in these circumstances and pricing rationality, I think, are slightly different points, and I think everyone will make their own view. I remain of the view that over time, the markets for some years have operated in a pretty rational way. But I think, Tim alluded to earlier that data -- we've had several examples on the call already. Data and interpreting it at the moment is challenging because it's not doing what it normally does, and people aren't doing what they normally do. So my guess is as we come through lockdown, people will take different views on that, and you may see movement in the market. But I fundamentally believe that the evidence of the last few years is that people have behaved rationally in their pricing. So I have no reasons to believe they will continue to do so.Felicia, have we got any more questions?

[Operator]

We do, yes. The next question comes from Ming Zhu from Panmure Gordon.

[Ming Zhu, Analyst]

I just have 2 questions, please. First is your sort of dividend versus capital. I mean your current capital position is very strong, to the top end of your target range. And also the highest compared to some of the listed peers. And you've mentioned, and I think, Tim mentioned, novel circumstances you would just land in the middle of your target range. And could you just give some color in terms of -- in what sort of situation would you be willing to pay the dividend and land on the lower end of your target range? Because otherwise, it seems like the mid-end -- the mid of your range is your sort of minimum range? Or are you still holding capital for this whole Brexit still going on in the background?And second, could you just talk about your pricing experience in Q1. So I can work out in terms of your Motor growth, how much is that due to pricing? How much is that due to the organic?And also some of your competitors mentioned they've seen new business pricing down 20% in April. I mean, what's your -- what have you seen since -- in the Q1, please?

[Penelope Jane James, CEO & Executive Director]

So Tim?

[Timothy Walter Harris, CFO & Executive Director]

I'll try. Yes, certainly. Yes, Ming. So on dividend, I haven't really got anything to add to the things that we've said already and Penny's been through. We're not really saying anything different to what we put out with the announcement on the 8th of April today. I would be looking at that with the Board at the interim.On pricing. Well, what we saw -- actually, I should say, but you've got to remember, we went into this crisis on a really positive trend. And I think that's something we should take out of today's results. If we look in particular at Motor, we were maintaining our number of policies. We're seeing rate go through and that rate was in line with our longer-term expectations on inflation. So that's really positive. I've talked a bit about the changes in buying behavior that seems to be happening in lockdown, but again, it's too early really to say too much about pricing behavior in the new quarter. But actually, I would say that the overall performance in Motor -- I should also say, in household as well, from our perspective, was really strong going into the pandemic.

[Penelope Jane James, CEO & Executive Director]

Anymore questions on the line, Felicia?

[Operator]

Yes. We have 3 more questions. First -- the next one comes from Phil Ross from Mediobanca.

[Philip Ross, Analyst]

I just wanted to ask for a bit of color on the 2 numbers you gave for the COVID-19 impact. So firstly, on the GBP 25 million for Travel. I know you mentioned the claims drop-off post September. But can you talk about maybe the win rate since the last update of GBP 3.5 million in early April?And then on the GBP 10 million for Commercial. I think you touched on it to Andrew's question earlier. I don't know whether you can tell us how much of that GBP 10 million estimate is, say, deliberate cover that you expected to provide? Or whether that is based on some potential exposures where it -- there may be some ambiguities in whether coronavirus is covered for that 0.5% policies?

[Penelope Jane James, CEO & Executive Director]

Okay. I'll take the second one. I don't want to take the Travel one, Tim.

[Timothy Walter Harris, CFO & Executive Director]

So let me take the Travel one.

[Penelope Jane James, CEO & Executive Director]

So if I do Commercial, first. So I think the short answer is that we tightened our standard policy wordings in 2006, where there were a number of policy wordings on the particular schemes, I'd say a number, actually a very small number, but -- on the particular schemes that we've been running with many years that weren't amended. And they have -- it's not clear they necessarily provide cover, it depends on the facts and circumstances in a particular case. I don't -- I think it's fair to say there's nowhere where we intentionally decided that we would write pandemic insurance or to my knowledge anyway, but there are a number of old -- all, I would say, old standing policies where we've written something for many years where the wording is slightly different and depending on their circumstances then, that may be -- it may be appropriate to pay.

[Timothy Walter Harris, CFO & Executive Director]

So let me pick up on the Travel question, Phil. The -- I mean, I think one thing to say is that the level of claims activity on Travel has been intense and continues to be intense. And I think that's a function of as the expectation for when travel and holidays might recommence has been moved back. And you see that in the actions airlines and travel companies are taking in terms of when they're canceling holidays. And so we -- I should say something about the incredible effort from our colleagues in our Travel team to deal with that intensity of claims. I think they've done an amazing job in these circumstances.In terms of run rate, as I say, as you progress through the year and more and more of those holidays come into sort of the period where people would be making claims, but will come to a point where that starts dropping off because the holidays booked at the beginning of the changes in Foreign & Commonwealth Office guidance will be far enough away from people when people were practically actually booking holidays. But it remains to be the case today that the claims activity continues to be intense, and that's factored into our estimates.

[Operator]

Next question comes from Nick Johnson from Numis Securities.

[Nicholas Harcourt Johnson, Analyst]

Just a quick question, please, on COVID losses in Commercial. So I know your comments that pandemic is excluded from most of the policies. Can you just say whether you've had any complaints or disputes from customers to what extent that's been the case or whether customers are accepting its clear-cut?

[Penelope Jane James, CEO & Executive Director]

Yes. No, I mean, clearly, we've had some -- inevitably, you get some in these circumstances. They're not actually dramatically higher than we would -- sort of our normal level -- complaint levels we would expect to see. But we are obviously tracking them closely and dealing with relevant brokers and so on in those occasions. So I think the short answer is yes, some, but not dramatic.

[Operator]

One more question that is from Abid Hussain from CS.

[Abid Hussain, Research Analyst]

I have 2 questions. The first one on claims inflation on the Motor book. I appreciate the color that the frequency in April is down by 70% year-on-year. But you said that's partially offset by higher severity. I'm just wondering what is the net of the 2. Is it claims inflation? Is it down 50% year-on-year? Or is it more like 10%? Any sort of color on the net of 2, or let's say, any outlook there?And then second question, I think you've already touched upon. So it's really small for an observation. Seeing that those -- the 93% to 95% core that you reiterated for 2020, you're confident in achieving it, mainly because you view the various books, the various portfolios as fungible earnings, being fungible. So the higher earnings from Motor can be used to probably refund customers, provide cover for NHS key workers, partly cover the losses in Travel and BI and elsewhere. Is that the sort of the right way to think about the portfolio?

[Timothy Walter Harris, CFO & Executive Director]

So let me take those, Abid, if that's helpful. On claims inflation, I think you would have split very clearly between the experience pre-COVID and post-COVID. As I've said, pre-COVID, things were behaving pretty much as we expected. The severity was probably at the higher end of our expectations, frequency, probably not overall, very much in line of 3% to 5% guidance.In terms of post-COVID, well, we've told you what we have seen in terms of notifications. As we said, we expect there to be some increase in severity. I think the only thing I would add is that -- it would be, I think, a mistake to draw too many conclusions about long-term claims inflation from what's happening in this period of lockdown. That I don't think would be meaningful. And there's all sorts of scenarios that could play out towards the end of the year in terms of claims frequency, depending on how people's behavior changes. And we've got to be -- we've almost got to wait and see.On the 93% to 95%, I think what you said is pretty consistent with the explanation I was trying to give, in that we do have a diversified general insurance, retail and commercial business portfolio. And actually, that diversification should be seen, in my view, as a strength over time. It's good never to have all your bets in 1 place, unless you're looking enough of that bet to come off. And I suppose you should, therefore, expect that we're talking about our results, overall, and that's what we're trying to do.

[Penelope Jane James, CEO & Executive Director]

Felicia, I think that was the last question. Isn't it?

[Operator]

Indeed, there are no further questions on the line.

[Penelope Jane James, CEO & Executive Director]

Brilliant. In which case, I will say thank you to everybody for dialing in, taking your time to listen and ask lots of questions. Do keep safe and well, and we will look forward to seeing you some time the other side of lockdown.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.