Línea Directa Aseguradora, S.A., Compañía de Seguros y Reaseguros (LDA) Earnings Call Transcript & Summary

Good morning and welcome to Línea Directa's conference to discuss March 2022 results. I'm Beatriz Izard, Head of Investor Relations. As usual, we will first walk you through the slides and then we will be happy to take any calls you may have. Now let me turn the call over to our CFO, Carlos Rodriguez.

Thank you very much, Beatriz, and welcome from my side as well. We'll start with the highlights for the period in Slide #5. Policyholders grew by 4% and premiums by 3.5%, displaying very solid growth across all segments, especially in home insurance, which grew a double digit and is progressively gaining weight. Combined ratio remains strong at 89% in a context of increasing frequency and inflation. Net result stood at EUR 24.2 million and return on equity at 29.2%. The solvency ratio as of March 2022 was 195.1%. This number is already taking into account the EUR 21.8 million first interim dividend to be paid on June 8 with a payout of 90%. Moving on Slide #7 provides an update on the Spanish Motor market, which is still displaying a very complex environment. New car sales continue to be impacted by the serious supply crisis that the car industry is enduring, which in turn affects the turnover of insurance business. Sector premiums are up 1% in the first quarter and average premiums saw very limited signs of stabilization following the sharp decrease experienced since 2019. They increased by 1.1% year-on-year. Turning to Slide #8. Home continues with a positive development. House sales continue to climb up almost 33% year-on-year and Home insurance sees further growth with revenues up 4%. Atmospheric events were quite relevant for the industry in 2021 and combined ratios climbed to almost 97% last year. The first quarter, no major events took place. For its part, sanitary assistance to grow in premiums and policyholders. The market is growing at 7.2%. Health cost and hospital tariffs are also on the rise. However, the market seems to be passing the increase. Now I'll take you through the main figures for the year. In the context I just described, the Company continues to grow together with robust profitability metrics. Premiums were up 3.5%, reflecting an increase of 4% in policyholders and premium growth across all lines of businesses. Technical margin decrease explained by higher frequency and price pressure in the Motor segment. Financial results reflect lower investment yields on the maturity of our fixed income portfolio. So all things considered led to a remarkable combined ratio of 89% and a profit after taxes of EUR 24.2 million, down 18% as compared to last year. Please note that the mobility of last year, first quarter, was still limited due to the COVID as opposed to this quarter. Please turn to next slide, Page 12, where you see the breakdown of policyholder and Gross Written premiums by line of businesses. The portfolio increased by 4%, supported by an excellent retention ratios. Policyholders will reach EUR 3.39 million with solid growth across all segments. Company premiums grew 3.5% despite the still competitive environment, Motor managed to grow 1.7%. Home grew at 11%, which is triggering a steady increase in the overall weight. More specifically, if we turn to the next page, the Motor segment grew 0.7 percentage points above the market. Again, the portfolio recorded a solid growth in a still very competitive environment. On the technical front, combined ratio stood at a noteworthy 88.3%. Expense ratio was excellent and stable excluding one-off restructuring costs. And the performance of claim -- the performance of claims was driven by an increase in frequency and insured risks. Severity was not relevant in the quarter as opposed to the previous one. Moving to next slide. Home had an excellent performance during the first 3 months of the year. Premiums grew at double digit, up 11%, a growth rate that beats the market by almost 3x. Combined ratio stood at 92.4%, 5.9 percentage points below that 2021 with remarkable performance in both expense and loss ratio. In the latter, atmospheric events were mild in the quarter. Moving now to next slide. Health continues its path. Premiums grew by more than 14%. We continue with a prudent subscription policy and a careful risk selection. The expense ratio has been adjusted to take into account lower first quarter expenses deferral. Unadjusted ratios fall to minus 3.2% and 2.1% in Q1 2021 and Q1 2022 and 2021, respectively. Please let's move now to Slide #16, where we'll break down management ratios by line of businesses. Loss ratio had a notable mark across all line of businesses. Motor loss ratio stood at 7.2%, explained by frequency on the rise, a strong inflation and a still very competitive environment. Average premiums in this segment to remain under pressure. Home reflects mild atmospheric events this quarter. Expense ratio was 19.8%, showing the street ongoing control of expenses. As I mentioned earlier, Health reflects expense deferral in the first quarter, which will normalize over the rest of the year. All things considered resulted in a solid combined ratio of 89%. If we move to the next slide. Consolidated claims ratio up 3.3 percentage points, was driven by the Motor line of business as I just explained. On the next slide, we elaborate on the expense ratio. Acquisition expenses reflect more efficiency in the acquisition of policies. Expense ratio stood at an excellent 19.8%. The item other technical expenses include one-off exceptional restructuring costs. Let's please now move to Slide #19. Rates are on the rise, yet reinvestment yields on the maturities don't exceed the yield on the fixed income -- in the fixed income portfolio. Hence, the 2.8% increase. Income from equities and investment property was up 8.3% and 0.6%, respectively. Please turn to Slide #20. The asset allocation has remained pretty much stable. We reported good returns from equities, properties and corporate bonds. The overall return of the total portfolio, rolling 12 stands at 4.2%, 3.37% excluding net realized gains. Moving on to our solvency position. The company's solvency margin stands at 195%. The Board approved yesterday an interim dividend for an amount of EUR 21.8 million, which we paid on June 8, which is already considered in this ratio. Eligible own funds reflects EUR 21 million of less unrealized gains on the available for sale portfolio because of the rising interest rates and high volatility of equities following the Russian invasion of Ukraine. Other adjustments include a positive variation in the Best Estimate for Premiums. This provision has a seasonal effect in the first quarter and will be increased in the second quarter. For its part, capital requirements decreased by EUR 14 million in the quarter. This is explained by lower exposure to equities and the symmetric adjustment dropping to 1.4%. It was 6.88% of as on December 2021. A decrease in underwriting risk is mainly driven by the final adjustment of the specific parameter, which now stands at 3.86 compared to 4.95 in December. No further changes are expected. I would like to close the presentation by very briefly going through the organizational changes recently undertaken by the company. Let's move to section #4. We are welcoming Patricia Ayuela as the new CEO of the company since February 17. Patricia has been part of Linea Directa since 2003 and office management team since 2008. She is already providing great impulse and direction to the company. One of the main organizational changes is now implementing in customer-centric strategy as opposed to our policy focus. Two distinct divisions are created to serve this purpose: the Commercial Department responsible for client acquisition in the Motor and Home line of business taken together; and the Client Department responsible for the management of clients in a broader sense. We are certain this will provide further growth opportunities and increasing customer satisfaction. Patricia will be having a relationship with the market and I'm sure you will meet her in the near future. Thank you very much. I will now hand the call over to Beatriz to begin the Q&A session.

Thank you very much for the presentation, Carlos. First, we will begin with the questions received from the conference call.

[Operator Instructions] And our first question comes from Maks Mishyn from JB Capital.

I have a couple on motor if I may. The first one is on the repair costs, what dynamics are you observing, comparing to fourth quarter '21? How much have repair costs accelerated growth in the first quarter and how do you compare yourself to the competitors in the sector? The second question is on the one-off that you had in the expense ratio of Motor insurance. Could you give a little bit more color? What are those costs? And how much savings do you expect to achieve? And the last one is on the frequency of claims. I was wondering what is your take on how high gasoline prices can impact mobility? Have you noticed any dependence there?

Well, thank you very much. On the repair cost, I mean we are, of course, some concern about inflation in this part, especially on the material part. It is true that on the first quarter, the impact has been mild, but I think for Linea Directa and for the sector, it will have an impact on inflation, the concern around and that will have an impact on the material cost for the entire sector. Having said that, I mean, keep in mind that the repair cost for Linea Directa as compared to competition, we are much more efficient. On average, our repair cost is EUR 300 below that of the market, so that is an advantage, and even more advantage when the inflation rises, but of course, I think it's going to have an impact on the entire year, although it is true that on the first quarter yet, we haven't seen that much of an impact. On the second question, which is the restructuring cost. This is normally when you do an organizational changes. As I explained over my presentation, we create different departments, client-oriented, which I think is going to be very good in the commercial side of the business and you have to do some investments there, to give you numbers are very difficult, but my perception is that we were not to have those expenses in the first quarter. Our expense ratio was very much in line with one posted on December 2021. And then the price of gas. Of course, if it remains and is maintained at the levels that we are seeing probably, we will have an impact on the frequency of positive impact. When the gas prices go up, you normally mobility by cars is lower and people use more public transportation, so you will have a positive impact on frequency. It’s very difficult to quantify that, but of course that will happen if gas prices keep on the same track.

Our next question comes from Francisco Riquel from Alantra.

I would like to focus also on costs in general, if you can please elaborate more and the claims costs are up 7%, excluding what you call atmospheric. Policy count is increasing by 4% and there is an increase in the frequency. So meaning that there is very limited cost inflation embedded in this first quarter, I understand. So if you can please elaborate a bit more on how much is the frequency, the severity, what type of cost inflation are you seeing, any mitigating measures? And what shall we expect for the full year? You mentioned before that you are expecting catch-up in the inflation costs in the P&L in the coming quarters. And then also -- so I may stop here, if you want.

Go ahead.

Okay. So also on the -- in terms of OpEx is down 2%. So if you can break down the evolution between the marketing expenses and other cost lines, it seems to me that you are spending less in marketing and acquisition costs. And I wonder if you feel that the growth in policies will be sustainable if you spend less. Also the one-off costs that you mentioned before in Motor. I wonder if whether it is a one-off or whether these are new investments, which will remain there in the cost base for the coming quarters as well. And just the last question, if you can please explain the difference between the growth in the gross and the net premiums? And how do you expect this gap to evolve during the year?

Okay. Thank you, Paco. Very nice talking to you. It is true that as I explained before I mean the impact of inflation on the loss ratio is still mild. It has increased -- it increase every year regardless of the inflation situation, but it is true that first quarter was not yet done, but I mean if you take a look at the loss ratio, basically it is -- the increase in the loss ratio was more linked to increasing frequency, more on increase in severity. Indeed, severity in the first quarter has been quite good as compared to the last quarter of 2021, where really the company had an impact on severity, so we are happy on getting normalised in the severity side of the loss ratio. The increase is because of the increase of frequency of exposure of cars and still inflation had a very few impact. You have to take into account also the contracts that we have with our repair suppliers, many times are not linked to inflation because they are long-term contracts, especially, for example, for the paint supplier, which is a very important cost on the repair -- on the repair side. Having said that, even though Linea Directa buys directly from suppliers as compared to our competitors that pay the repair shops and all that. Looking forward, if inflation remains at the levels that we are seeing that, of course, we don't expect inflation to be on those levels by the end of the year, it will have a negative impact on the loss ratio and will increase the cost. It's difficult to quantify that. Of course, I mean, mitigating tools and we are using this, we're negotiating with our suppliers. Again, many of our suppliers, they don't have a 1-year contract. They have more than a 1-year contract so that mitigates a little bit the impact. But again, it's going to be negative for the loss ratio. We keep on maintaining this inflation. Then the second question you were asking was...

Regarding expenses.

I don't have that feeling, Paco, that we are cutting on marketing expenses. I think more or less, we are on the same levels on marketing investment. Of course, for the year, our budget is very much in line with what we spent the other years. I think what we are doing is we are cutting costs in other areas. Our digital approach, the business is allowing us to reduce the number of calls in our customer service; not on the selling part of the business, because on the selling part and retention part of the business we like the phone and we still use the phone. But it is true that our cost on external call centers and they provide customer service to our clients. The number of calls are dropping and that means savings on the expenses. And then what we have the approach in the company is to analyze basically on a monthly basis, the evolution of expenses of the company and try to be very efficient. But again, if I were to say, we have an approach of being very, very involved in our marketing effort, is the way we create the brand awareness and we attract clients. So you shouldn't expect for the year a decrease on the marketing expenses. And the third one is the growth and the difference between gross and net. Well basically is timely on the entrance of the policy. We don't sign policies, all the policies of the company on January 1. We do that along the year. And of course, you have to be -- you have to decrease the gross premium by the provision of the premium not consumed, basically it's that. It's something that all the insurance companies, they do the same thing. You only can put on the P&L, the premium already gained.

I think that we are coming from a more flattish figure, particularly in Motor in the fourth quarter of last year. And now as the Gross Written premiums are growing, usually net premiums earned, they are lagging behind in terms of growth.

Yes. Sorry, if I may, yes, I understand the difference between gross and net premiums. Is the growth in both lines, the gap in the growth, why this year is different?

Because last year premiums were going down and you have the impact of the previous year. You have to take a look normally on the year basis, you have to take a look on the previous year as well and when the previous year, our gross premium was decreasing, makes a difference between the earned premium and the gross premium.

[Operator Instructions] Our next question comes from Thomas Bateman from Berenberg.

Congratulations on the results. There was much more solid this quarter. Can you just give us a little bit more color on the solvency position and in particular, the changes in reserving, there's a higher view of reserving buffer there. Also, can you just give a little bit of color on Motor pricing. It's obviously picked up a little bit. Has there been any changes in maybe competitive behavior that you had called out? And finally, just on the new strategic focuses. Patricia, where should we expect to see these kind of changes coming through in the numbers? Is it higher growth? Is it lower expenses? I don't know maybe you can just give a bit more color on those for strategic goals that would be really helpful.

Hello, Tom, very nice talking to you. On the first question regarding reserving. Well, last year, by the end of the year, the solvency ratio was kind of affected by the change of the statistical methodology for calculating provisions that we have by the end of the year, approved by the regulator. I think this year, this quarter we have seen a much less impact because things are -- they get to become stabilized, you know? So I think that is something as a one-off on the last quarter of the year, and we don't have a bad impact on this year. And then the solvency ratio, well, again, we had a negative impact this year because of the situation of the investment portfolio and the situation of the market. But basically, the reserving impact was on the last quarter of 2021 and this quarter and we have this quarter. Additionally, we have 2 impacts -- positive impacts this quarter, which was a symmetric adjustment that the EIOPA requires for this portfolio was more close to 2% up this quarter, whereas last quarter was in the neighbourhood of 7%. That is because what EIOPA tries to do is to protect volatility and when the market is in an upward trend, normally this symmetric adjustment is higher. So that had a positive impact on this quarter. And finally, the specific parameter that we use in other guarantees in the Motor line of business also benefited a little bit this quarter. The solvency ratio and that's going to be stable and looking forward on next quarter. So again, we always have said that we will be glad to have a solvency ratio above 180%. We are at 195% probably next quarter we will be more in the neighborhood of 190%, 192% and 195% but I think it's going to be stabilized. Then on motor pricing, we don't have -- we still don't have the last numbers of the sector as of March. We were thinking that maybe yesterday they were going to be published, but they didn't. My perception, looking at my retention rate looking at the evolution of the gross premium, is that still the sector is very competitive in terms of pricing, but I think that pressure on pricing is becoming more mild than in the past. And again, many times we have talked I expect, you know, a changing cycle looking forward this year. So I'm happy about the evolution of the gross premium. I see some of our competitors sending messages that they are going to rise pricing. In our case, as you know, we do this on an individual basis. We don't have a general strategy of rising prices, but my perception is that somewhat average premiums are becoming more stabilized than in the past. And then on the last question regarding our new CEO. Well, I think one of the good things having Patricia as CEO, she knows very well the company. She has been with the company many, many years. She's been in the management team for so many years. She has been in the back and in the front, managing the back and the front. So she knows the entire business all around. I think Patricia is very eager to keep or increase the growth of the company and that's something that she has communicated to the entire management team, so you should expect that the company is going to grow and it’s going to grow even faster than it has been growing in the past. And of course, the second main objective here is to keep on doing a company more and more digital and that means that the expense ratio should keep on improving. Again, Patricia thinks that this is a business very based on efficiency and that efficiency has to come through digitalization. So, the main objectives of our new CEO is growth, you know, increase the growth of the company as well as keeping the company as one of the most efficient companies in the sector.

That's really great, particularly on the growth and the expenses. And I just want to come back to the reserving one more time. I know you said there was a negative one-off in Q4. It seems like there's a kind of a EUR 12 million positive this quarter. I don't -- there's been some -- I guess, there's been some quite material moves over the last few quarters. So I'm just trying to understand where that positive EUR 12 million has come from?

I guess as you referred to the best estimate on premiums. That is a seasonable impact. I give you because of the evolution of the rolling of our premiums. If you take a look at the first -- I can tell you the first quarter of last year because probably you don't have that because we were not listed, but it's always a positive impact that happens in the first quarter of the year. It's an impact that will not be on the second quarter and become more stable, but it's an impact of the seasonal evolution of the premiums of the company. So those 12 years, that is a positive gap on the first quarter. We will have that on the second quarter. It doesn't mean that we have -- we'll have negative impact, but we will have the positive impact that always happened in the first quarter because the P&L of the company and the commercial activity of the company is much higher in the second half of the year than in the first half of the year.

Okay, understood. So, it should normalize throughout the year. Okay, thanks so much for your help. Really good results.

Our next question comes from the line of Phil Ross from Mediobanca.

So, first question on Motor. I think you mentioned severity is not relevant this quarter as opposed to other quarters. If you could just expand on the reasons why that is please? Or is it just a COVID normalization type thing? Second question, again on Motor. In the past you've highlighted the trend of customers choosing third party cover over comprehensive covers. Just wondering if that trend is still noticeable or is it leveling off a little bit now? And then the third question, I guess more generally, you saw customers interacting with you more or buying insurance more digitally and online during COVID, partly because they were forced to do so. Can you tell us whether these trends are continuing in Q1? Or is it too early to say at this stage? Thank you.

Well, the loss ratio is very similar to a normalized year. I think mobility after Christmas came back to normal. Frequency is picking up and that's going to be normalized for the entire year, I think. And now the people are going back to the offices, people are using the car, of course, maybe the gas cost, it will have a positive impact. But again, in Spain, everything is back to normal and frequency should the -- they are already in the first quarter being very normalized. So you should expect that unless something happens we are back on track as a normalized year and frequencies already in line with a normalized year, and I should expect a positive impact on that. Looking forward, I think frequency will be very normalized. The second question was on the type of insurance that people are taking. It is true that crisis on the car industry had an impact on the new car sales. Of course, people when they buy new cars, they tend to buy fully comprehensive insurance as compared to second used cars where people buy third parties. The situation is still very similar. The breakdown is very similar to last year because the situation in the car industry is very similar so again, the evolution is that people are buying more third parties than fully comprehensive, not different on the fourth quarter or even on the third quarter of 2021. But the situation is the same if you compare the car sales, the new car sales as compared to last year or even as compared to 2020, which is still lower end of that. You will -- you can imagine that the situation is very similar. And the third question was on digital trends. Well, one of the things that we have done during COVID and taking into account that many people, they were jumping for the first time digital market is, we worked very much on customer experience because we knew that people jumping for the first time into the digital. If they were happy with their experience, they will remain on the experience. So I think we are very happy on that because we have a lot of clients that try for the first time the digital approach and they remain on that. And the situation is still on the same ground. We work on customer experience and the evolution of the digital market in Spain or the direct market in Spanish, which means that people are using more and more digital product for us more than the person. So happy on that, I don't know what we try to do is that the customer experience for the first time for a client is good because if a client is happy the first time, it will remain digital.

We currently have no further questions on the phone lines. I'll hand over back for the webcast questions.

Okay. Thank you. So now we continue with the questions received from the webcast. First question comes from Carlos Peixoto from Caixa Bank. He's asking whether you could elaborate on your expectation on the technical, the combined ratio evolution in Motor business, during the year.

Well, the combined ratio, I think, as compared to last year, in the Motor business grew by 3%, 3.5%. I think, again, frequencies are starting to keeping up, severity for us was very good in the first quarter. My expectation is that a combined ratio for the Motor industry will increase during the year and that is going to happen for Linea Directa, and my perception is that it is going to happen for the entire market. Again, at the end, our gap compared to the market is quite good and we will remain with that positive gap. But you should expect the combined ratio on the motor insurance is slightly increased during the year.

Next question comes from Patrick Lee from Santander. You commented a few times on the extraordinary expenses seen in Q1. I believe that could be around EUR 1 million. Can you comment on the nature of this? Is this related to the regulatory changes? Could there be further changes in the remainder of the year?

Patrick, well, the good thing is that it is a one-off. When you have expenses, when you talk about expenses, the good thing is that you do not have additional expenses. It is good that there will be a one-off. No regulatory relation. We don't have any additional regulatory requirements in terms of expenses. There are more expenses of reorganizing the company. As I explained in my previous presentation, we have decided to change a little of the organizational structure of the company and trying to focus more on customer-centric than on policies. Keep in mind that we are a company that we were back in 1995 by selling only one type of insurance. So even though we do a very good job on cross-selling, both in the Home and the Health Insurance business, we were very much focused on policies. And I think our new CEO has decided and I think is very positive. It should change a little bit the structure of the company towards customer centric. Those expenses, extraordinary expenses are linked to that. So you should not expect more expenses or more extraordinary expenses on those grounds looking forward during the year. Again, no regulatory requirements there.

Next question comes from Close Brothers, Asset Management from Alejandro Velez. You mentioned retention rate a couple of times. Could you give us an indication of whether retention is improving above levels disclosed in the IPO?

It's not that much that retention levels are increasing. I mean, our retention levels on the Motor insurance, especially is very, very close to 90%. To explain is that the cost of retention is lower than we have seen in previous years and I think that is a positive impact on the company. It's very difficult to keep on increasing the retention of clients when your retention is well above that of the market and very close to 90%. But what it is very, very good is that we are seeing that the expense of retaining clients is decreasing. Probably that means that also average premiums on the market are more stable than before.

Thank you. So thank you, Carlos. It seems like there are no further questions. And this concludes our meeting. Thank you very much for your time. Bye.

Bye. Thank you very much.