Welcome, everybody. Good to see you here in the room. We also have people on the webcast, and I think we're good to go now. We're live on the webcast as well. Excellent. Good to be here in person. Thank you all very much for coming. Same faces, I'm pleased to say. Slightly concerned Trevor's eating the tree in his photo. I'm not quite sure what he's done with it, but I think that's the only thing wrong with that one.
Yeah. It's a very poor photo, ain't it? I was about to say, "Welcome to our informal results call." We're off on a good start. As ever, Adam and I will run through the slides and then let Trevor and Matt deal with all the difficult questions at the end. So feel free to bombard them when we get there. Usual-looking agenda. We'll spend some time on our results, obviously, but then equally as much time on our view on the current market and how we see the market panning out for 2024. We will, of course, leave plenty of time for questions at the end as well. So highlights. And perhaps for the first time since IPO, this does feel like a highlight slide, actually. 2017, 2017 seems a long time ago. We'll talk about where the market's been since there as we go through.
We have stolen some of our own thunder, clearly by pre-announcing, but hopefully we've got some new things to talk about in here as well, especially around the market. So as I said, we've had to grit our teeth for a long time since we IPO'd in 2017. We've had to cope with COVID. We've had to cope with high inflation. And we've had to cope with what we would see as some pretty bonkers market pricing along the way as well. I think these results today, for the first time, perhaps really show the power of our strategy. The first thing is a strict adherence to profitability. We haven't come off our strategy. We still see profit as the target and volume as an output. The most important thing for us is we've enhanced our loss ratio.
We're now very well; we are in line with our long-term target loss ratios. Almost incidentally, we've delivered our best-ever GWP. That's not just since IPO. That's our best-ever GWP. Pleasantly, very strong growth in January and February as well. So we haven't seen that tail off. We're also looking pretty good in March as well. So we haven't really seen any volume tail off since the year-end. The rates we put through last year were broadly in line with the ABI. The ABI quoted about 35%. You can assume we're somewhere around that level for the year-on-year as well. We've got motorcycle at a good loss ratio. We've effectively halved the loss ratio in a year. Taxi’s still got a bit of work to do, but we're seeing pretty encouraging trends coming through on the taxi loss ratio as well. Claims inflation is still very high.
We called inflation high. I think we were the first to call the issues back in 2022. We are sticking with a claims inflation number of around 10%. We'll spend quite a bit of this presentation outlining why that is. Finally, our direct system, new direct system, went live. Amazingly, on time and on budget, very little external consultancy support. Huge thanks to all my Sabre colleagues who worked incredibly hard to get that platform live. Financial highlights. Strong results. We still think a staging post to what should be our near back-to-normal results next year. The highlights, margins. Well, start with growth. Very strong growth. 31% overall, 47%, which is way above our expectations in car. Overall, 31% impacted by motorcycle shrinking as planned. One of our distributors stopped trading last year. We expected motorcycle to come down during the year. Very strong motor loss ratio.
You can see 50% for the year. That's comfortably around our long-term target. Pretty importantly, core motor vehicle is 89% of our overall GWP. So while motorcycle's still on improving, taxi's still not quite where we want it, relatively small bits of the portfolio. The vast majority of our result is driven by the core motor results still. Stronger profit than we expected at the start of the year. Clearly, we pre-announced that that profit was going to be better. So still a staging post to where we think next year should take us. Full-year dividend, we think, is pretty attractive. GBP 0.09 for the full year. Probably slightly above people's expectations. And that still left us with a very strong capital position. We don't intend to hang on to that capital. We don't think we need it to support growth in a meaningful way.
That capital is still available to be redistributed in future periods. A very strong balance sheet really gives us flexibility in how we do that. Our first portfolio call will always be dividend, but there are other options we may consider in the future as well. Adam, at that point, I think I'm going to hand to you.
All right.
Okay. Thanks, Geoff. Hi, everyone. Let's take a look at 2023's financial performance in a bit more detail. I've set out the headline figures in a way that's hopefully familiar to those who have followed our results for a while, albeit now on an IFRS 17 basis. You'll be happy to hear I'm not going to give a lecture on the new accounting standard, but I'm happy to take any questions later on and show you how it impacted our results. I'm pleased that I can start with very strong growth in the top line. Having stuck to our guns during softer market conditions, we brought our total premium back to beyond its previous peak whilst maintaining our pricing discipline. Insurance revenue, which is effectively premium and installment income on an earned basis, has grown by less than the written premium in 2023.
But we'll see that growth once the GWP from 2023 starts to earn through in 2024. Sticking to that pricing discipline and responding quickly to inflation has allowed us to bring our net loss ratio down to 56.3%, an improvement of nearly 10 points since 2022. That's much closer to our long-run average. Our expense ratio, while up on last year, has improved since half-year 2023 as the increase in premium starts to earn through to cover off operational expense inflation and some smaller one-off expenses that occurred during the year, all of which leads to an increase in profit for tax up 68% on 2022 when restated on an IFRS 17 basis. Pleasingly, our increase in both income and profitability have allowed us to double the return of capital to our shareholders this year whilst leaving us with a useful excess of regulatory capital as we move through 2024.
On this slide, I've broken out our prior year and current year loss ratio on a discounted and undiscounted basis to give you the full picture. Given the headline figures, hopefully, it'll be no surprise to see improvements in both. The current year loss ratio reflects improved performance across core motor vehicle and motorcycle, whilst the prior year loss ratio has returned to reflecting the runoff of the risk adjustment as we would expect. This slide gives a little bit more detail on the performance by product. The big news here is the significant increase in premium in core motor, along with the improvement in core motor vehicle loss ratio. That means we've been able to address the balance of income towards our more profitable core product, whilst motorcycle and taxi remain a small part of the overall picture.
We've seen policy volumes grow in core motor vehicle as our rate increases have been supported by market strengthening, whilst the motorcycle book has shrunk following the closure of one of our distributors. The taxi market remains challenging, so it's grown only little during 2023, whilst underwriting quality and pricing has been improved, which we expect to show in 2024. My final two slides, which cover the capital position of the group. At the end of 2023, we've grown our pre-dividend capital excess to 205%, well ahead of our preferred operating range of 140%-160%. That gave us plenty of options when it comes to the deployment of that excess capital.
We proposed a total year-end special plus ordinary dividend of 8.1p, which we consider to reflect a sensible balance between passing all the excess capital back to our shareholders immediately and keeping the uncovered element of the dividend to a reasonable level. Note that while the proposed dividend is in excessive profit, it's not in excess of the level of capital generated during the year. So our post-dividend Solvency Capital Ratio remains above our target range at 171%. This next slide is a reminder of our capital allocation and distribution priorities. Fundamentally, we aim to trade profitably, generate excess capital, and return that capital to our shareholders. A key element of that capital return will take the form of an ordinary dividend, which is currently set at 70% profit after tax.
We then have the flexibility to deliver further returns of capital should our excess regulatory capital move above our target range, which in 2023 has taken the form of the special dividend. And with that, back to Geoff.
I've successfully not fallen over twice now. That's good. Okay. Thank you, Adam. So now we're going to spend some time talking about the motor insurance market. We give sort of free rein to our insurance nerd tendencies here. What's the key thing? Extraordinarily high levels of claims inflation in 2023. I think we're about the first to call them back in 2022. Many moving parts in claims inflation. At this point, we're not changing our claims inflation call. We think 10% is still the right base number to have in there. Lots of moving parts both ways, which we're going to unpack in here as we go through.
Absolutely extraordinary levels of price increase in the market last year. I've seen nothing like it in 30 years, way more than we expected in the one-year correction. For us, that's been good news because we've been able to return our margins quicker than we expected through this. We think there was some irrational pricing from competitors for quite a long time. Our general view is that has now corrected and that people should be pretty much at the right start point. We've seen competitor exits from the core motor market. And we've seen a lack of MGA capacity. Even last night, there was news in the insurance press of two or three MGAs struggling to renew capacity for this year. That's in line with our thoughts that MGAs are going to struggle to keep their existing capacity.
If they do, maybe on different terms, which hopefully means higher pricing. Market prices going forward. If our view of claims inflation is correct at about 10%, we would think that market needs to put through pricing of maybe 13%-14% to cover that claims inflation. Back to a more sustainable 1, 1.5, 2 points a month compared to the extraordinary level of price inflation we saw last year. Taxi market, a bit more difficult. We still think there's some insurtech-type businesses that are fundamentally underpriced in that market. We're very happy with the distributor we're working with. They're sensible. Neither of us are pushing for volume in this market. We'll keep our foot in to see if that market improves through 2024. We do expect taxi to deliver a contribution to profit this year.
So we'll be out of the loss-making stage in this year, all being well. As you clearly know, there's a lot of regulatory focus on some of the product value measures we'll talk about later. So what might happen? We're going to quickly run through these and then unpack some of them in the next section. What I would say at the start is we have covered all the things we see here as risks that are part of our claims inflation and therefore our pricing and reserving assumptions. So we view these as market risks, not things that will adversely impact Sabre. So what might go well? Market price discipline hopefully will be maintained. Reduction in used car prices, that's certainly helpful. Continued improvement in parts supply, although I might put a question mark against that since I wrote these slides a couple of weeks ago.
Improvement in credit hire cost if we do get those parts and we keep repairs moving. Improvements in reinsurance pricing. We know in January, overall, there were reinsurance price reductions to people who we need on 1/1. That's mainly driven by the increase in the underlying premium. So the reinsurance cost of a vehicle on the road was still up year-on-year, but the actual reinsurance price came down. Ogden Discount Rate, hopefully, will move and increase in used car sales. On the risk side, there's clearly a risk that some competitors lose price discipline. We haven't seen that so far this year, I'm pleased to say. Cost review. Judicial College Guidelines, I've come with a prop this year, which I'll be waving about in a minute and explaining. Inflation, this is quite nerdy but quite important. That inflation could move small claims outside of the GBP 5,000 cap.
That will move claims back into a cost environment for lawyers, which could increase personal injury frequency and could increase the cost. There's definitely a lack of resources in body shops and the care industry, which we'll talk about in a minute. The impact of global conflicts is now starting to impact. Even since, again, we wrote these slides a week or two ago, we're starting to see evidence. Because the living challenges can increase claims frequency. There's ongoing uncertainty around claims costs by the Supreme Court decision. The uncertainty bits in here, Supreme Court, which way might that go? FCA installment income focus and Consumer Duty, generally. So to unpack some of the more interesting bits here. The first few slides here were broadly on the cost of fixing bent metal, fixing cars. Used car prices, a very different experience among car types.
It's probably a mistake to think of these overall. Smaller and city cars holding value really well. EVs, less so, I would say. In fact, not well. That's awful would be another description. As used prices soften, total loss becomes more prevalent. That means you do need a very robust way of handling total loss claims, which we believe we have. This slide, you may not be able to see it on here very clearly, shows the cost of increase in parts. So what we have here is some headlights, some bonnets, and some bumpers. It's a pretty aggressive-looking ski slope on most of these. The message is that these part cost increases are not stopping. These are continuing to go up, and Trevor can probably unpack, if helpful, some more detail around that in a minute. Labour rate pressures in the body shop repair wouldn't be surprising.
10%-15% Labour rate increases coming through in some of those areas. I don't think it matters whether you employ people or whether you contract that out. You're still seeing the same pressure for the labour. There's lots of vacancies in the care industry, 150,000 vacancies in the last numbers we saw. That will put further inflationary pressures into the fixing people side of this. This is a really interesting one. This is the amount of freight coming through the Red Sea. So a lot of parts come in through the Red Sea route. I won't try and explain this slide in detail, but effectively, you can see the amount of freight coming through has come off a cliff in the last few months. We reckon that it's adding about 8.5-9 days to each trip, which adds around GBP 1 million to the costs.
Interestingly, on Friday afternoon, we got notification that Tesla and Volvo are having to pull back production in Europe because of a lack of car parts. I think for Volvo particularly, it was gearboxes they can't get a hold of. If they're pulling back production on new cars, that must mean there's going to become a shortage of parts. No one is confident this freight capacity goes back up anytime soon. So this is a thing to keep an eye on. It's not a typical thing to look at in insurance claims inflation, but we think it will have quite a substantial impact. Inflationary factors. Something else that happened last week. It's unusual to get two things like this. This very slim guideline is the guideline to Judicial College with the assessment of general damages, not in the top slots on the Amazon bestsellers, but it's probably worth a read.
I think it's GBP 21 a copy, just to warn you. This is the guidelines that effectively guide how much courts give for a personal injury. So if you look through here, you'll see everything from hearing loss to wrist damage to bad backs to serious brain injury. The key message is everything has gone up by 22%. So all small claims starting point, I would say, is now 22% inflated. This is not a surprise to us. This is what we thought would happen. I think Trevor almost did the number what we had in our pricing assumption for the year. We think this is worth around 2-2.5 points as a sort of part of driver of claims inflation covered by our own reserving and pricing, whether it is for the rest of the market, I clearly don't know.
For us, this is a proof point of why you can't be too bold on claims inflation at this point. The other thing we spoke about on here is that if costs inflate, it may drop out of the cheaper under 5K claims track, which will have an inflationary factor of its own. What I'd also say is this impacts all outstanding claims. This is not just new claims. This is any unsettled claim will be subject to these price pressures. NHS cost review. I mean, this is just a fairly standard. They're normally reviewed once a year how much we have to contribute for the NHS costs. Reviewed twice last year, which I think is another proof point of the care industry cost that we're facing. That's going to continue inflating going forward. Supreme Court decision is a really interesting one.
So this is around the whiplash reform, which broadly says how much do you pay if you've suffered a whiplash and something else that's covered in this book. Trevor, you were there for the court. I listened into it on the webcast. Didn't feel wildly encouraging, I would say, for the insurance industry. The notes that come out from solicitors didn't feel there was a strong position put forward. We think it could lead to some really strange behaviors. So if a decision comes out that that does stick, well, just don't bother claiming for whiplash. So if whiplash restrains what else you can claim for, don't bother claiming for whiplash in the first place. Just claim for everything else you can find in this book that you could make a claim for. So heard on the 20th of February.
It looks like it normally takes three months to make a decision. They did promise at the end of that case to try and do it quickly, but that still feels like a little way off. Ogden discount rate. Economically, it looks like that should be positive for the industry. It's not just an economic decision. It's a political decision as well and takes into account other factors such as the cost of advice. Due at the end of the year and probably January next year, which is likely to make our reserving processes next year quite entertaining around the end of the year. We are not receiving any positive news from these Ogden discounts. Nothing here is outside our current thoughts. FCA focus on installment income. It doesn't feel likely to me that there'll be a cap imposed.
I think what will probably happen here is a much tighter view on Fair Value. Are you happy that your products generally are providing Fair Value, of which premium finance is one? We are happy that our APR in the mid-20s does provide Fair Value. Consumer Duty. We've always taken a pretty customer-focused approach. Some of the examples are the total loss issues. We've always taken a retail approach to total loss rather than a trade valuation on that. So we are not feeling like we have any particular exposures here to Consumer Duty or the Fair Value rules coming through. All of that feels a bit gloomy, which is not the intention at all.
I think we're just saying these are proof points of why we think people or we are being fairly cautious on claims inflation and why we don't think there's really scope to come with pricing discipline as we go into and through this year. So outlook and summary. Very strong performance in 2023. As I said, it is a staging post we would hope to an even better performance in 2024. Overall cost pressures are going to remain from fixing vehicles and fixing people. We're very vigilant. We were quick to spot the claims inflation pressure going one way. We're equally as attentive to finding any further poor moves or if we see positive moves reflecting that in our pricing. Our base case is to grow by more than claims inflation. So that clearly means growth of more than 10%. Improvement in combined ratio.
We've given the guidance of 75%-80%. Overall, we feel in a very good place. I think good profit, strong growth, attractive dividend, more to come. We are feeling pretty bullish as we go into this year. We're pleased with last year and excited about the year to come. At that point, we're now going to brace ourselves for what I thought would be I'm going to invite my colleagues to not fall over the step and join me up here. So just because you're at the front a bit.
Morning, and thanks for taking my question. I've got three questions if I can.
Normally, my voice is quite loud enough. So three questions if I can, Abid Hussain from Panmure Gordon. Just firstly, on the current trading conditions, how has pricing, premium growth, and margins trended year to date? I think you touched upon it, but just any more color on that would be helpful, please. And then secondly, on growth versus capital, you've handed back a substantial dividend today from the excess capital. Just wondering why you didn't keep hold of that excess capital and potentially deploy it this year into a very attractive margin market and potentially grow harder this year. So why not keep hold of the capital? And then the third one is on Consumer Duty. What is the hit to your earnings if the FCA was to set some sort of maximum on the APR, so the premium finance?
Just your view on premium finance, the APR, if they will set a maximum, and if so, what would be the hit to your earnings?
Okay. I'll take the first one, Adam. Maybe you can take the second ones with Matt? Premium growth is still very strong. We haven't really seen any tailing off in the pounds premium coming through in January and February. So we've carried on with the same sort of run rate that we saw at the end of last year. So no decrease at all. Policy count continues to grow up between 500 and 1,000 a week on core motor. So we're continuing exactly the same trend we saw at the end of last year. On growth, to start that off, I mean, we are basically self-funding on growth. We don't need to hold back capital for growth. Adam, do you want to pick up from there?
Well, that's exactly right. I mean, we set our margins at a sufficient level so that we can effectively self-fund the increase in capital requirement through the profitability on the policies that we write. So capital has never really been a constraint for growth. Clearly, we will need some of that capital to support the increase in capital requirement. But yes, so our strategy has always been if we generate capital through trading, we can generally pass that back to our shareholders, except for that, which we need to cover the increase in capital requirement. But that's generally a very high proportion of that capital.
I think I better think I was answering the question. Oh, the FCA. Consumer Duty. Yeah. And do you want to talk about premium finance?
Yes. Yeah. Yeah. I mean, so I mean, installment income for us is a relatively small part of our overall income. We only generate it on our direct book and then only on those customers who choose to pay for a policy on installments, which is a relatively small amount. So that's as a percentage of our overall income, GBP 3 million-GBP 4 million out of the sort of over GBP 200 million of income that we earn as a group. So it's not massively significant. Obviously, we don't know exactly what an APR cap would be or what form it would take if it was introduced. But we don't see that as having a particularly material impact on our overall profitability.
Yeah. I would say we don't think a cap is likely. That is not our central point. That's only because I saw your next move. I'll come to that in a sec.
Hi. Darius Satkauskas, KBW. Two questions, please. The first one is on claims inflation. So as you said yourself, it feels a bit more gloomy than what was the feeling last quarter. Were you able to overshoot a bit in terms of price increases last year that puts you in a good position to reprice for it without losing competitiveness compared to the market?
And if not, are you comfortable that the market will reprice for this high inflation, 12%, 14%, when we've been hearing about some decreases in January in certain parts of the market? That's the first question. And the second question, you'll be well aware of the recent bid for one of your competitors. So I'm just curious about your outlook for consolidation in the UK motor market going forward. Is that a good thing for the likes of Sabre from your perspective?
Would you expect more to come? Any thoughts? Helpful. Thank you.
Okay. So on the claims inflation push, I want to be really clear. We're not gloomy about any of these things. These are all things we've thought of and we could see coming for the last nine months, Matt. I mean, these are things do you want to talk about how you sort of thought about some of these in pricing?
Yeah. So we've had the outlook that inflation will remain high for well over a year now. So in our pricing, we continue to expect that to come through. So when we're setting the prices and the reserves, we're ensuring we have enough to cover that off. So we think we're in a correct place at the moment to allow for this high inflation to continue to come through.
Yeah. Will people price for it? Well, I hope so. I mean, if you don't and our claims inflate I think we've seen what happens to the market. If you don't price for claims inflation properly, you end up with the extraordinary recovery curve that was needed last year. These things we're seeing are not unique to Sabre. These are market-wide factors. I struggle to see why anybody would be too bold in claims inflation and therefore pricing at the moment. On consolidation, I'm not going to make any comments on DLG and Ageas. I'm sure you know way more than I do about that. What I can see is that MGA is struggling for capacity. Will there be consolidation there? Will we have to find new capacity? Probably. Is it at the center of our radar? No, it's not.
We think we have plenty of organic growth to go at this point. We clearly keep our eyes open. I think if we do anything, we're more interested in partnership-type deals than we are in anything that involves writing big checks. Now, we've seen the bike one work well for us. Taxi is still more of a struggle, but we haven't actually paid anything for it. So we're happy that's a good way of developing new product areas. I guess from a personal point of view, it's nice to see listed motor insurers. Good to see research that covers the market. So I guess from a personal point of view, it's good to see not just two people left as listed specialists. Motor insurers would be my instinctive take on it. I'll come to you next, Tom.
Hey. It's Darragh Quinn from RBC. A few questions, please, if that's okay. First one, just on risk mix. So I presume some of the policy wins that you've had is coming from some of the standard markets. How does it impact your loss ratio, if at all? And in terms of the longer term, how does it change your competitiveness in the standard market?
Presumably, you're getting more data. You're getting more brand presence as well. Does that mean that over the longer term, there might be more of a gradual shift towards standard risk as well? Second one, it's on frequency. In terms of the experience in 2023, could you maybe split that out by BI and damage and also your frequency expectations for 2024? The third one, you mentioned that 22% uplift in JCG review.
Is it fair to assume that would translate one-for-one to kind of tariff review as well? That should be up by 22%.
So it would apply to the?
The tariff, the small BI tariff.
Okay. Yep.
Last one, if that's okay. I guess when you rolled forward your claims inflation projection from last year to this year, what were the elements that surprised you in terms of the stuff that stayed a bit more persistent than you expected? In terms of looking forward into 2024 as well, given that I think your 10% mark is a bit higher than everyone else's, which elements of it do you think that the market is underestimating at the moment? Thank you.
Okay. Trevor, I'll take the first one to give you time to prepare for the last three, if that's okay.
Yeah.
So I think on the standard market, we look to get exactly the same margin, whichever policy we write. So we're happy to write a policy at GBP 300. We're happy to write one at GBP 30,000. We look for the same margin. So we don't target moving to the standard market. What we tend to see is as rates in the market go up, we become more competitive with that margin for things that feel and could be considered more light standard. So we don't really have a segmentation strategy around our pricing of trying to get into different bits. Matt, anything you want to add to that?
What I'll say on the risk mix is the mix will change over time as we continue to target the profitable sections. So if we see certain areas are improving performance, we'll target those. So our mix will change over time. So it won't be purely the rate change we put through reflecting in our change of premium.
Okay. Trevor, there was a question about frequency and the JCG on the tariff first.
Yeah. Let's take those two. So frequency, I would say that since May 2021, when the OIC reforms came in, BI frequency has reduced materially. Accident frequency has continued to fall year- on- year. And certainly, what we're seeing in Q1 this year is lower frequencies than normal. However, we've had very mild winter. But over time, we have seen that improvement in frequency, which is to a large extent being driven by the vehicle technologies. So frequency is definitely a good guy. I think just to explain, when we talk about inflation, we talk about burning cost inflation after the good guy from frequency improvements. The JCG uplift of 22% is actually an uplift that takes us back to March sorry, back to August 2023. So there's a little bit more to come on that. The OIC tariffs are due to be updated in May this year.
When they were originally set in May 2021, they assumed I think it was something like an 11% inflation over that three-year period. Clearly, inflation was greater than 11%. So one might say there's a delta of about 11% to come. And if it's also proposed on a going forward basis, we might actually end up with numbers that are very similar to that 22% uplift that we've seen in the JCG, but getting there through a different methodology.
Trevor, just want to add maybe a bit more detail on what happens if it gets over the GBP 5,000 limit and how that might happen.
Yeah. So at the moment, a two-year whiplash on the tariff, including a bit of psych, is GBP 4,300 or sorry, GBP 4,345. If we apply a 20% uplift to that, we're over GBP 5,000. A claim over GBP 5,000 attracts legal costs. So the consequences of that are that the lawyer bringing the claim, it will be more profitable to do so. So they'll get 25% potentially on the damages plus some costs of GBP 600 or so. And that, in turn, may well fuel an uptick in the number of personal injury claims that are being brought. So it's something that we're very mindful of if the Small Claims Track limit isn't increased in line with inflation.
Trevor, the last one I think was around, is there anything that surprised you in inflation last year? Anything that stayed high or went down lower?
No. I think that the JCG is absolutely not a surprise at all. We knew that that would be indexed to RPI. So that's not been an impact. I guess the things that are a bit more of a surprise are what we're seeing sort of out in the Red Sea. We didn't really expect that. So we were expecting more of a return to normal in terms of the supply chain. I think, and this almost goes back to the beginning of 2023, the material reduction in the value of EVs was a bit of a surprise. But that was probably right back in January 2023 rather than sort of throughout the rest of it. Otherwise, we've not really been sort of taken by surprise by anything that's happened.
I would say we are quite boring. We do spend a lot of time thinking about this stuff, which is I guess why we get so nerdy in this presentation. Tom? It's unfortunate. I'm making that joke. Go on, Tom. You carry on.
Hi. Good morning, all. Thomas Bateman from Berenberg. Just going back to the fair value issue, I guess from the outside, it's really difficult to understand how you go through that process of saying, "This is fair value. This isn't fair value," and where the line is between a competitive market and you generating profit and then the regulator coming in and interfering. Maybe if you could just give us a little bit of color on how that thought process goes for you. Secondly, could you just give us a bit more color on the direct system, your in-house insurer-hosted thing? Sorry. And just what that means in terms of pricing dynamics and your agility in the market.
And finally, just on peer behaviour, I guess with the introduction of pricing practices, there was some that thought long-term, this might lead to a more sensible market because you have to price everybody at the same level. Can you see any evidence of that thus far or a little bit too early?
Yeah. Sure. Matt, pass you. You take the IHP bit in a minute. On the fair value, I guess our starting point here is if we know the margin we make on our core product, if we're making about the same margin on ancillary products, that seems fair value to us. We're not trying to take super profits on other factors. I mean, if we look at one product that we actually withdrew last year or this year was personal accident. Product in the market. We looked at it. We weren't seeing what we thought was enough claims to justify that as a valued product for customers. So we took a decision. We'd actually tried quite hard to get claims.
Trevor's team was saying, "In any event where there was a claim that could have led to PA, are you sure that you're not injured?" So actually, we have taken steps to withdraw products that we don't think provide. We can't see providing fair value going forward. On the direct system, the main thing there is customer self-service. So how can we avoid the costs of manual intervention into the fairly simple processes sometimes? So the direct session is about really self-serve, a more modern approach to customer service. On the IHP bit, Matt?
Yeah. So IHP is something we're currently rolling out, so insurer-hosted pricing. That will allow us to have more ability to flexible rates in new ways and bring in more sophisticated pricing models. So whilst we do additional development, it just adds great flexibility in how we deploy that and therefore kind of opens up more avenues of opportunity going forward.
So that means all the stuff that Matt's been working on, we find better ways of deploying into the market. On peer behaviour, I would certainly hope that it brings a more sensible approach. I think it's been hard to tell because of just the wave of price increase that came across in the second half of last year. It's probably a little hard to tell what underlies that. But it should certainly stop some of the poorer practices that are in the market and hopefully people price new business sustainably going forward. So I think we'll have to wait and see, Tom, on that one. I think we need to see what happens when we're not in this hyperinflation period. Okay. Just because the mic will get to you quicker.
Good morning. Nick Johnson from Numis. Three questions. Firstly, on sort of competitiveness. So customers grew 8% in core motor last year, which obviously suggests Sabre is cheaper than the market. Just wondering if you sort of have a sort of sense for why that is. Is it that competitors have overshot? Is it that you've seen withdrawals in the sort of non-standard area of the market, or is it just more fundamental that Sabre is better at cost control and pricing? So just really sort of what you see the drivers are of the sort of 8% growth in customers last year. Secondly, on Ogden rate change, just wondering what you're assuming in reserves, if that's something you have to sort of have a look forward view on, keen to know what you've assumed.
Lastly, Labour Party have said that they will look to address the cost of insurance. Just wondering if you were consulting with the government, what would you sort of suggest they look at? What areas can they sort of potentially address? Thanks.
Okay. Wow, that's a big final question, isn't it? I'll take the first one. Matt, can you take the Ogden one in a sec? And then we'll all have a crack at how we'd consult with the Labour Party. On competitiveness, clearly, Nick, just because we're better. I think you summed it up in your final part of the question. I think we've seen a lot of withdrawals from our part of the market over the last year. We've seen people who were very competitive move away from that market. We haven't particularly priced behind the market. Now, we thought we would grow by undercutting market price increase. We haven't had to do that yet, actually. It's been more we've put through prices that are not dissimilar to the market, and we've still been able to grow. So it's been a perfect scenario for us on that front.
Anything you want to add to that?
I think the only thing to add is we also started increasing rates before the start of 2023 as well. We had that head start in the market as well from starting to increase rates before the rest of the market.
Yeah. On Ogden, Matt, in reserves?
Yeah. So the Ogden changes like to impact the excess of loss of the reinsurance layer more than the net layer. Therefore, the impact on Sabre's nets is going to be smaller. So in reserve, it's going to make less of an impact.
I think on your final question, I have quite a strong view, actually, that insurance gets blamed for increases in premium. The insurance industry doesn't cause those problems. The premium reflects the costs we have to cover in claims. So if you're looking to reduce premiums, you need to reduce the costs that are going into a premium. So I mean, the government can't impact judicial guidelines, but that is a factor we have to factor into. Labour rate shortages are another big factor. So I think if the government wants to reduce prices, they need to reduce the things that drive insurance claims costs, not to batter the industry for reflecting those costs back again in premiums. Anything to add to that?
I guess sort of two personal points. One is we currently have unlimited liability in motor. So if there were to be a cap on liability, that would potentially bring the cost of capital down in relation to reinsurance. Quite a complex change to make. And I think the other is the whole sort of credit hire model, whether the government through the CMA might want to get involved in engaging with that. I think the challenges there, again, would be quite difficult for government to intervene on.
That's some thoughts anyway. Andreas.
Thank you. Andreas van Embden, Peel Hunt, on your retention rates, could you maybe mention how that developed in 2023 versus 2022 as sort of the market recovered? And what would be an optimal retention rate for Sabre to sort of generate some organic policy growth into sort of 2024, 2025, and perhaps 2026? And the second question is, as you move your margins towards that sort of 80% sort of undiscounted combined ratio in your core motor book, I just wonder, what level of margin would you be comfortable enough in seeing across your portfolio to start just pushing for growth organically rather than being reliant on what the rest of the market does? Thank you.
Okay. I mean, on retention rates, Matt, I think they stayed stable through last year sort of mid-40s.
Yeah. I think they increased a bit during the year.
So slightly up, but not dramatically. Not dramatically, so. We don't target a retention rate. We target a margin. And we'll take whatever retention rate comes out of that price. So we don't target a notional retention rate in there. On the margin overall, I mean, we're not here to profiteer. We've been fairly clear on what our margin requirements are. Once we hit those margin requirements, we'll ease off the price increase and take growth at that point. So I think as we naturally hit that target ratios, we can then start to accept the growth that comes out at the end. What we won't do is undermine our margin approach to try and push for growth first. Anything else to add? Nope. Thanks, Andreas. Any other questions in the room? Were there any on the phone? Not quite sure how I get to hear if there is, actually.
Nope. I've got something on the iPad here. Do you think the market has changed in any way which makes returning to a 75 combined ratio challenging? I don't think the market's changed. I think probably the cost of running insurance companies has changed. Regulation is more expensive to cover. Being a PLC is a reasonably expensive hobby . So there are other costs in there that weren't there when we were a private company 7, 8 years ago. Adam, anything else you'd like to add?
No, I think that's fair. I mean, in the first few years of our life as a PLC, we did benefit from a few exceptional releases through our reserves, which we always said would not continue. And they haven't. So the prior year benefit is now reflective of the run-off of risk adjustments rather than anything exceptional, which obviously gives us a slightly higher combined ratio anyway. But absolutely, structurally, the expense base is a little bit higher now. We have seen a lot of overall economic inflation at a time when our earned premium has been shrinking or not growing as rapidly. And we expect that earned premium to catch up over time, which, again, is going to put pressure on the expense ratio.
In terms of a loss ratio basis, there's no reason notwithstanding what I've said about reserve releases, we can't get to a similar place that we've always been to. Really, the question is, can we get that expense ratio back down to similar levels that it was when we were five years ago ?
Yeah. There's a question about acquisitions, which I think I answered in terms of it's certainly not center of our radar. Are we going to envisage returning excess capital to shareholders? Yes, absolutely. That's exactly the plan. We see no reason to hang on to excess capital at all. The five-year plan for the business, I think, is to almost get back to where we were pre-IPO, which is to show how we can sustainably grow on a sensible level every year while generating the margins we've historically done. So I think our immediate plans are to go back to the future almost just to demonstrate now we've got this period behind us. We can evidence the sort of company we think we are. Anything else?
Just one question. Are you able to disclose what expense ratio you are aiming to write at?
Adam, do you want to take that?
Yes, I can. I guess we really target a loss ratio that our expense ratio will hopefully consequently fall as a result of the increasing premium that we're writing. We do have to estimate what we think our expense ratio is going to be over the next period. And we build in where we've been in the previous year versus sort of what operational expense increases versus the leverage that we're going to get through increased premium. And certainly, we hit, I think, 32% in the first half of the year. For the full year, it's 30%. So clearly, there has been a reduction. My view is that we'll stay around the sort of high 20s for at least the sort of short to medium term as that earned premium starts to catch up.
I'll just check. There's nothing on the phone? Nope. Okay.
Well, look, Iain, thank you for your time. Very much appreciated. Despite the fact we spent half an hour talking about gloomy claims inflation things, we're actually on very chirpy form, I would say, as a business. And we're very optimistic about how this year and the next few periods develop. So thank you to everyone who's been with us for a while. And look forward to updating more at the half-year. Thanks very much.