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

Welcome to Línea Directa's conference call to discuss June 2022 results. I am 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 questions you may have. Now let me turn the call over to our CFO, Carlos Rodriguez-Ugarte.

Thank you, Beatriz, and welcome from my side as well. We will start, as usual, with the highlights for the period in Slide #5. In a context that we can describe as extraordinary and as certain with a sharp [ uptick ] in inflation, we are happy to present a strong performance in the first 6 months of the year. Policyholders grew 3.8% and premiums by 4%. By line of businesses, we are displaying very solid development across all segments. Motor grew at 2.5%, with an acceleration in the second quarter. Combined ratio stood at 90% and return on equity at 28.3%. Additionally, it is noteworthy to mention the excellent performance of the expense ratio, which stood at 19.8% and solvency ratio as of June was 206.7%. Moving on. Slide #7 provides our regular update on the Spanish Motor market, which is still presenting a complex environment. With the main developed countries all making progress in their vaccination rates and with COVID-19 becoming somewhat less severe, economies are now focusing their attention on the conflict unfolding in Ukraine. The war has had major impact on the economy at a time when the recovery from the health crisis was not yet completed, leading to a sharp increase in prices. CPI rose to 10.2% in June with underlying inflation rising to 5.5%. Correspondingly, the cost of claims in the sector is on the rise. Sector premiums are up 2.3% in the first quarter and average premiums show small signs of stabilization following the sharp decreases experienced over the last few years. Turning to Slide #8. Home continues with a positive development. Property purchases have continued at a good pace despite higher borrowing costs. House sales are up 24%, sorry. Revenues for the sector increased by 5.1% as of June and average premiums remained stable. As with regard the Spanish Health market, the growth in policyholders has slowed down while turnover continues to report significant growth, with premiums adjusting for higher healthcare costs and hospital tariffs. Now I'll take you through the main figures for the year. In the context I just described, the company continues to grow with robust profitability metrics. Premiums were up 4% customer increased by 3.8%, together with excellent retention rates. Our technical result as of March was fully explained by higher frequency. Please note that the mobility of 2021 first quarter was still limited due to COVID. The second quarter is also marked by additional frequency and higher personnel injury compensation and repair costs as compared to last year. Financial result includes EUR 4.5 million of realized gains, mainly in mutual funds with the aim of reducing P&L volatility prior to the entry into face of IFRS 9 in 2023. We also took advantage of the window of opportunity to realize a notable gains. Excluding such effects, financial result will have grown by 9.1%, driven by higher dividends on the equity portfolio. So all things considered led to a solid combined ratio of 90% and a profit asset after taxes of EUR 49 million, down 15.9%. Please turn to next slide, Page #12, where you see the breakdown of policyholders and gross written premiums by line of businesses. The portfolio increased by 3.8%, supported by excellent retention rates. Policyholders reached EUR 3.4 million with solid growth across all segments. Company premiums grew by 4%. Motor display positive momentum with premiums up 2.5%. Home and Health continue their very positive trend. More specifically, if we turn next page, the motor segment grew 2.5% or 0.2 percent of 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 89.3%. Expense ratio was superb. And the performance of the loss ratio was driven by a gradual increase of the frequency in the first and second quarter and higher cost of claims as compared to last year. net premium earned, however, increased at a lower rate with the rise of the unearned premium reserve combined ratio is well below the sector, almost 7 percent of points. Please bear in mind, we are comparing with the sector latest available data as of March, and we expect the market to deteriorate its margin in the first half. Moving to next slide. Home had an excellent performance during the first 6 months of the year. Premiums maintained its very positive trend at 10.6%, a growth twice that of the market. Combined ratio stood at 90%, 1.2 percentage points below that of 2021 with remarkable performance in both expense and loss ratio. Moving now to next slide. Health continues its path. Premiums grew more than 13%. The message here is that we continue with a prudent subscription policy on a careful risk selection. As we did last quarter, the spend ratio has been adjusted to take into account lower expenses deferral and adjusted ratios fall to 32.2% and 42.1% in June 2022 and 2021, respectively. Please let's move now to Slide #16, where we break down management ratio by line of businesses. Motor loss ratio had an outstanding performance, up 3.5% in this quarter, in a context of high frequency and higher bodily enduring compensation and repair costs. Home had an excellent semester and Health improved by 6.3 percent of points. Expense ratio dropped to 19.8%. Noteworthy to mention the expense ratio achieved in the Motor line of business of 17.3%, which I think is remarkable. Overall, we display strong operational resilience in a very inflationary situation or context. If we move to the next slide, consolidated loss ratio was driven by the Motor line of business, as I just explained. The first quarter was marked by higher frequency and the second quarter begins to take into account higher average cost of claims. On the next slide, we elaborate on the expense ratio, which again was remarkable. We remain firmly committed to efficiency and technology, together with a strong control of our heads. Acquisition expenses are contained, thanks to higher retention ratios. Let's please now move to Slide #19. As I mentioned before, we took advantage of a window of opportunity to realized gains. Equities and mutual funds were sold at 56% and 17% average return, respectively. And we also unwound an interest rate swap and the underlying bond generation capital gain of EUR 1 million. Excluding those gains, investment results will have grown by 9.1% on the back of higher dividend income. On Slide 20, you can see equity mutual funds have fallen from 8% to 7% of the total asset allocation. As with regard to investment returns, the overall return of the total portfolio Rolling 12 stands at 3.9%, 2.7% excluding realized gains. Moving on to our solvency position. The company's solvency margin stands at 207%. The main impact on eligible own funds was a drop in the mark-to-market of the AFS portfolio, particularly the fixed income portfolio as a result of rising rates. Set aside the profit for the quarter, other adjustments include a positive variation in the best estimate for premiums. For its part, SCR decreased by EUR 10 million in the quarter. This is largely explained by lower exposures to equities and the symmetric adjustment dropping to minus 5.3 -- 5.34% compared to a positive 1.4% as of March. I would like to conclude by saying that we expect the Board to have or to keep the same dividend schedule as last year's. Thank you all. I will now hand the call over to Beatriz to begin the Q&A session.

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

[Operator Instructions] Our first question is from Maks Mishyn from JB Capital.

I have two. First one is on Motor. I was wondering how do you see premium dynamics in the sector going forward? It seems that your peers have already reverted discounts and some are hiking premiums, but it should take some quarters until we see the impact on the combined ratios. And I was wondering in terms of lag between hikes to premiums and the impact on technical results, do you think you have an advantage over your peers because of the direct sales model? And can we see the improvements faster? And then the second question was on frequencies. I was wondering if you could please update us on how you see frequencies in water evolving over last week or last month? Are there signals suggesting that high gasoline prices can reduce mobility?

Well, thank you very much, Maks. In terms of our premium dynamics, I've been always saying that my expectation was that in 2022, we will see a change in the cycle. I think we are experiencing that. It's still slow. I think in traditional companies, it's kind of difficult to turn around the pricing strategy. But the perception is clearly that the market is turning around and start to increase our prices. In our case, we have posted a 2.5% increase in premiums. But if you take the last quarter isolated, you will see that our increase was 3.5%. Indeed, the growth on the second quarter onto the first quarter was above 10%. So my perception is that. Of course, premium growth translated to the P&L. It takes quite a time because at the end, you basically put on the P&L, the earned premium and not the gross premium. So it will take a while until it impacts the technical result. On the other hand, the claims side of the business, any impact is immediately translated into the P&L. So it will take a time by my perception that the market clearly is starting to turn around in the pricing study. Having said that, keep in mind that the market, as of June grew gross premium by 2.3% and Línea Directa was able to outperform the market growing by 2.5%. On the second question, frequencies. Well, I still don't see that impact that you were posting in your question. I mean, in terms of gas and all that. It is true that frequency is very much in line with 2019. I think in our case, frequencies in the neighborhood of 17% more or less. I think we will see a change in the frequency evolution after summer. My expectation is that frequency will drop in the last -- in the second part of the year. But still today, we don't see that the frequency is very much in line with first quarter. So we still need to see some evolution of the impact of inflation or the impact of the gas prices and all that, still today, I don't see that impact.

Our next question is from Thomas Bateman from Berenberg.

I was hoping you could just give me a little bit more color on what your expectations for the market combined ratios are and hence, why would you -- why aren't we seeing a faster increase in premiums year-to-date and over the course of the rest of the year? And my second question is just on the yield on the investment portfolio. There's been a few moving parts recently. What do you think like a running yield is on your investment portfolio? And how would you expect that to pick up over the next couple of quarters? And finally, you just mentioned that claims frequency is only 70% for Línea Directa that seems quite low. I don't really know how to think about that number. Could you give me a little bit more color because if it's up to 100% that feels like that could be quite negative.

Thank you, Tom. Well, the combined ratio, I mean, first quarter of the year still was impacted a little bit by COVID, the second quarter frequency start to pick up a combined ratio for the companies as a whole is in the neighborhood of 90%, a little bit lower, much lower than the market, I would say. I don't have the numbers for the first half of the year for the market. But my expectation is that the market is going to be very close to 96%, 97%. In our case, looking forward for the entire year, I think we will be over 90%, in between 91% and 92%. The key here is to be able to maintain that positive gap that we have with the market, which I still think that is the case. And if you take a look at the first quarter results of the market, combined ratio was still -- was already close to 90% -- 95%. So we'll see what happens next week when we see the numbers of the market, but my expectation is that combined ratio will start to pick up, do -- not only for frequency, but also to the average courts of repair, which is very much impacted by inflation. On the investment portfolio, well, the running yield is in the neighborhood of 2.1%. This quarter, what we did, as I explained in my call, is some realized gains on the equity portfolio. because we don't want to put a lot of volatility next year on the P&L. So we realize some capital gains on the mutual fund business. The return on the capital gains are very good. It doesn't mean that the company is going to use the investment portfolio to compensate the P&L is basically we took an opportunity on the equity market. but still it's a very prudent portfolio with 75% of the portfolio of fixed income products. And whatever in there was an opportunity. We took it. We made a capital gain, but the running portfolio is in the neighborhood of 2.1%. And then on frequency, well, frequency 70% for me is high. I don't know your perception. I mean, my expectation is that it's going to keep in that path during summer. And probably, you will see a drop on frequency on the second half of the year. I mean 70% is very similar to the frequency that we have in 2019. I mean 2021 was lower, was in the 60s and the 50s and now it's in the 70s. Looking forward for the entire year, I think it's going to end it up below that 70% due to the lack of the use of car in the second half of the year to inflation and so on, but 70% is very much in line with a normalized year.

I think I misunderstood the frequency. 70% is a good number.

Our next question is from Francisco Riquel from Alantra.

Francisco from Alantra. I want to focus on pricing in motor insurance in particular. So in Slide 7, you mentioned that average premiums for the sector are up 0.9%, When I look at the -- at your average premium is lower than that. So I wonder if you can comment on this average premium, how much is due to price tariffs? And how much is due to the product mix, just to have a better sense of the underlying pricing trends? If you can also comment on how is the pricing for the new production versus pricing for the renewals of existing clients? You mentioned that you have an excellent retention rate. I don't -- I guess it might be coming at the expense of lower prices, whereas the new production might be coming with higher prices, but net-net is not yet a main positive. And then how do you see pricing in the market? Are you ahead of competition in terms of price hikes? Or are you typically slower because you can afford with a lower combined ratio?

Thank you, Paco. Well, on the mix of the portfolio of the motor insurance business, there has not been quite a change. I mean, you should expect that given the situation of the car industry, you should expect people taking more third parties more than fully comprehensive, but if we look at the weight of the fully comprehensive policies in the companies is still in the neighborhood of 40%. So it has not changed. So as a pickup on the gross premium has been driven by an increase in average premium and of course, increasing the portfolio. the number that you were posting 0.9%, I think it's a number of the first quarter, I think but my perception is that pricing is starting to go up. I mean if you take a look at the last numbers gross premium for the market was growing at 2.3%. If someone contaminated by the mutual impact of the dip of two months last year. But in the case of Línea Directa, I mean basically, the increase in gross premium is driven by increasing average in average premium. And regarding the mix between new business and the portfolio, well, it's -- we are not lowering the price on the portfolio. I think it's a matter of having a very competitive average premium in the portfolio, maintaining that average premium and providing quality to the clients. Of course, the gathering premium for new clients is probably a little bit lower than the portfolio, but we are not increasing or maintaining our retention supported by lower average premiums. I think as a whole, the average premium of the company in the motor insurance business is picking up on the market, it's also picking up. I always say the same thing. A change in pricing strategy for a direct company is faster than a change in change in pricing strategy for a traditional company. And I think that is the case. The third question, if we are -- if we are ahead. I don't know. I mean, I don't know. Probably we are a company faster in anything that we do because we are direct. Keep in mind that when we changed the strategy all our selling forces in the same building. We can do that very fast and it takes much shorter than the competition. But I think the move for the market is changing pricing and start to pick up on pricing. I'm not sure if I'm faster or not. What I'm sure is even with an increase in average premium, our premium is much more competitive than that of the market, but I would -- I couldn't comment on whether we are faster or not. I can say that we are very fast in any strategy change that we try to accomplish. I don't know about the market.

Our next question is from Carlos Peixoto from CaixaBank.

Most of my questions have already been asked and related to those and -- when I look at the gap between the growth the rates we see in the gross written premiums and net earnings -- net earnings of earnings premium. I was wondering if this is mainly related with the accrual -- with some sort of accrual effect or whether there's or whether is this a change in the reinsurance part on policy within the group, and if so, if you could elaborate a bit on that drove that change?

I have some difficulties hearing you, Carlos, but I'll try to -- I think I got you. Well, no changes on the [ reinsurance ] scheme of the company. I mean, we have an excess loss program, which is the same as we have last year, so no change on that. The difference between the gross written and the earned premium is the difference of the accounting. I mean, if we were -- I will try to explain if we were to sell all our policies January 1, there will be no changes, no difference between the gross written premium and the earned premium. But the thing is that you sell policies every day of the year. So you only can do an account the earned premium on the proportion of the premium use. Again, if we were to sell January 1, all the policies, gross premium -- gross written premium was very similar to the premium. No changes in accounting and no changes in their insurance program. I mean their insurance programs. we have a small insurance program with excess loss, both in the more in the home insurance as well as on the health insurance, but it's the same as in the past.

I think, Carlos, you will be seeing this acceleration of premiums at the top line, you will see it included in our P&L on an earned basis next year.

The thing, Carlos, I tried to explain that during the presentation is that any impact on the claims side of the business or on the spend side of the business, it's completely translating to the P&L at the first moment. the growth in gross written premium, it takes a while. So the thing here is being able to grow much more on gross written premium than on earned premium because that will have a very positive impact on the future.

Our next question is from Patrick Lee from Santander.

Patrick from Santander. Just looking at the motor segment, I think that claims went up by around 9% in the first half, even that you managed to lower the expenses by some 5%, which is obviously encouraging. But if we were to break down the claims increase into components hypothetically, can you give us a view of how much of this increase in claims is driven by higher frequency and how much of it by current inflationary environment. And I guess my underlying question is that how much of the inflation pressure we are seeing today in this set of numbers? Or is there going to be a further headwind in the second half of the year, affecting both claims and expenses.

Well. Thank you very much, Patrick. It's kind of difficult to do a split between frequency and inflation. I remember when I posted first quarter numbers, I'll say -- I was saying that inflation is still was kind of mild in the P&L. Second quarter has not been the case. I mean inflation impact has increased cost by 6%, 7%. My perception is like looking forward in the year if CPI is still on the double digit or close to double digit. That is going to be even worse before the end of the year. I mean inflation on the second quarter has been very much important. Indeed, frequency was a little bit better than we expected, but inflation really impacted the second quarter has done to the entire market, not only in the insurance business but in any kind of sector. If we maintain that 9%, 10% inflation, the second part of the year is going to have an impact for linear direct and it's going to have an impact for the market. Having said that, again, I mean, if you take a look at the combined ratio, our gap with the market is still there, 6%, 7% of points and my perception is that we will be able to maintain that. Again, inflation has an impact on the claims side of the business, but we did a real good effort on the expense ratio of the company and having an expense ratio of 17.3% in the motor insurance will help us very much to cope with that inflation pressure that will come in the second half of the year as well as it has been impacted in the second quarter of this year.

Great. Thank you. We have no further questions. So I'll hand back to Beatriz for any other closing remarks.

All right. Thank you. And now we continue with the questions received through the webcast? The first question comes from Jaime Pallarés from GVC Gaesco. He's asking with the share price at these levels, are you considering a share buyback plan?

Thank you. Well, the share buybacks are not on the road map. Our intention here is we have been working since April 29 last year to increase liquidity on the share. That is the effort that all the Investor Relations team and myself are trying to do, and there is no share buybacks program looking forward in the medium term.

Thank you. Also, Jaime Pallarés is asking on the combined ratio. And what could we expect in the coming quarters?

Well, I think I already answered to this question on combined ratio is at 90%, and we should expect a little increase looking forward by the end of the year. It's difficult to say a number, but of course, we will be over 90% between 91% and 92%. Again, we'll see what happens with the market. But the market is going to be very close to 97%, 98%. That's the way I see it.

Thank you. The next question comes from Phil Rose from Mediobanca. For Motor, you mentioned lower net earned premium due to higher unearned premium reserve. The gap to gross written premium looks large than last year. Are there any changes here?

No changes. Again, I tried to explain that before. I mean the accounting of the company is very similar. Yes, I mean, it depends very much on the selling calendar of premiums. It depends very much on when you sell the policies. Unearned premium basically is discounting from the gross written premium, the proportion of the premium that it doesn't enter into place. So no changes is a seasonable impact more than anything else. Again, what is important is that the gross written premium is above the earned premium, and that will have a very positive input looking forward in the coming months and in the next year.

Thank you. He's asking as well about the motor line of business and our expected combined ratio. What kind of forecast are we making for year-end?

Well, I think we already talked about that. Again, you should expect an increase on the combined ratio, mild compared to the market, but an increase on the ratio not that much frequency because, again, I expect frequency to drop a little bit on the second half of the year. But I think inflation pressure is going to be in there. We'll see what happens with the latest interest rate increase whether it will be -- have a positive impact on inflation, but if inflation is on the neighborhood of 8%, 10%. Of course, the claim cost of the business is going to be impacted by that.

Thank you. Then the last question comes from [ Mario Santos-Saenz ] from Soros Fund Management. He's asking whether you can expand on the comment made in the press release. regarding a target to reach EUR 1,000 million of turnover. I see no year attached to that. So we understand this is a 2023 target?

Well, that's an ambition of the company to reach that EUR 1 billion of gross written premium. I mean its difficult to put a date there because when you -- when we have COVID, then we have the Ukraine war. So it's very difficult because we are not in a stable situation regarding the economy. So it will depend very much on the economy on how it works. Of course, we are close to that, very close to that, and it's going to be on the short term, really short term, but I couldn't put a date on that whether its gonna be 2023 or not. I mean if you take a look at the number and the growth rate of the gross within premium, you can figure out when it's going to happen, but it depends very much on how the economy evolves, how things evolve, but we are very close. It's a target of the company, but we don't put a date on that because, I mean, -- but we decided to put that target that came over the COVID and the Ukrainian war. Now the inflation, so it's difficult, but we are very close to that.

Thank you. We have a final question just came in from Richard Lake. He's asking whether the inflation in claims cost in Motor is very broad-based? Or are there key areas driving this, for example, glass, paint?

Well, it's a spread around all the repair costs, but it is true that there are some areas, for example, the painting has increased quite a bit. I mean the pending is basically ruled by a couple of companies in Spain. So there's a lot of personal pricing there and also in the labor cost, but it's very much spread around all the material costs. It is true that in our case, I mean, we try to manage this with our own repair shops, with our network. But if you break down the increase in cost of materials is very much a spread around. If I were to pinpoint something, I will pinpoint the in the print materials, which has increased quite a bit since January.

Thank you. Okay. Thank you. Carlos, it seems there are no further questions. And this concludes our meeting, and thank you very much for your time. Bye.

Thank you very much. I'd be careful with the car in summer.