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

Good morning, everyone, and welcome to our December 2024 results. I am Beatriz Izard, Head of Investor Relations here at Línea Directa. As usual, we will first walk you through the slides and then we'll be happy to take any questions you may have. Now let me turn over to our CFO, Carlos Rodriguez Ugarte.

Thanks a lot, Beatriz. Good morning and thank you for joining us. Before I kick off, there are a few things I would like to highlight. One is taking a more holistic view on how we are at Línea Directa. Almost 4 years have passed since the listing, and I would like to remember the context of what we have been through in these years. And I just wanted to take you through some of the macroeconomic headwinds we have experienced. One of them is the inflationary environment. In Spain, it was very benign and stable and then overnight, it skyrocketed. For any insurance operator, inflation is the worst enemy, especially when it comes suddenly and abrupt. This is something we have to tackle. In addition, we have seen geopolitical uncertainties, COVID and even a war in Ukraine. Besides, the value chain was impacted globally. All things together, there has been a lot of uncertainty around us. At Línea Directa, we had to manage all these contexts, but at the same time and most importantly, we have kept working on the projects and initiatives that will take us into the future. So here we are. First, a leading brand, which is the company's largest asset. Our strong franchise is a key company asset and is crucial in driving company growth. Línea Directa is the #1 insurance brand search in Google and leading in advertising awareness. We also come with a dynamic media strategy, ensuring an adequate ROE. We are committed to be the reference company in transparency, simplicity and delivering always good prices. Priority for the next period is to further accelerate the customer experience to earn customer loyalty and drive financial impact. Second, as you can see, Línea Directa is not just the brand. We are committed to bring the direct model to excellence and moreover, to bring digitalization whenever our clients prefer to interact with us in this way. 90% of our clients are already digital, and they demand best-in-class digital assets. Efficiency and digitalization are an intrinsic part of the culture of Línea Directa. All these translate into an extraordinary expense ratio we will continue to deliver. Two pillars sustain our ambition: Growth and transformation. Our ambition must generate growth and resilient development in our insurance markets, expanding our product offering with less dependence on Motor and notable, obtaining an outstanding returns on capital. We must deliver in productivity and reduction in administrative costs. We continue to make massive steps in digitalization. We have improved our pricing models alongside with continuous improvement in our risk selection. Our technological capabilities are constantly being optimized. We also intend to further leverage the data model to enable better decision makings in the company. I would like to stress our robust solvency and prudent investment portfolio. And finally, nothing of this will be possible without a strong corporate culture and people highly responsive to changing work environment as recently demonstrated. To close this section, sustainability and ESG are embedded in our day-to-day operations, as shown by the continuous improvement in our commitments, marks and ratios. Without further delay, I would like to move to Section 2 on results. In Page 12, you will find the usual snapshot. We are very happy to deliver an excellent set of results, which are very much in line with our guidance along the year. Business growth accelerate in the last quarter. Premiums grew by 4.8% and 8.6% for the 12th and fourth quarter, respectively. The portfolio of clients multiply by 1.5x as compared to the third quarter. Combined ratio was excellent and stood at 94.7% for the entire year and an excellent 92.6% in the quarter. Return on average equity rose to a more than remarkable 19.6%. And we are pleased to propose to the AGM a complementary dividend of EUR 50 million. Solvency ratio maintains its strength at 185% considering for that. Let's turn to Page #13. Here, I would like to highlight once again, the acceleration in the top line. We expect this trend to continue in 2025. We had an excellent combined ratio with outstanding improvements in the claims ratio and very contained expenses. The evolution of the financial result was also remarkable, up 16% with higher income from the bond portfolio. All this led us to a profit after taxes of EUR 64.2 million, which compares to the loss of EUR 4.4 million over the same period of last year, a turnaround of more than EUR 68 million. As with regard to business volumes and clients, all lines of businesses reported significant growth, both in premiums and policyholders. Growth split up in the fourth quarter. Moving to Page #15. The progression of the combined ratio was remarkable from 104.1% in 2023 to 94.7% for the 12 months of the year, down 9.4 percentage points. Loss ratio was the main driver of this important improvement as the actions carried out have been earned in the income statement. The ongoing effort on administrative expenses, also paid off with a progressive improvement. And we also achieved greater efficiency in customer acquisition. Now I would like to move to a more detailed explanation of my line of businesses. In Motor, we further accelerate growth in the fourth quarter on the back of improved sales and retention. Premiums grew by 8.2% in the fourth quarter. The combined ratio stood at an excellent 94.8% and 93% in the quarter stand-alone. Also, the Home business accelerate its growth in the fourth quarter. Clients multiply by 2.5x versus the third quarter and premiums rose by 8% year-on-year. Combined ratio was extraordinary for the year -- for the quarter and stood at 88.3% and 84.1%, respectively. Moving to Page #18, in the Health line of businesses. It has been a success to sell under Línea Directa brand and incorporate the Health operations under the same company umbrella. We were also able to cross-sell significantly to our portfolio. Health posted an outstanding growth of more than 17% in the fourth quarter, and the mix benefited from more comprehensive products. This growth was not at the expense of risk appetite. We have cemented our underwriting discipline and risk selection and frequencies were lower than those of last year. Moving to Page #19. Financial result was up 16.6% driven mainly by higher income from the fixed income portfolio. As usual, we show the credited interest in a separate item. Remember that this reflects the financial unwinding of the claims provision for the prior years. The increase is explained as 2023 was a year of higher interest rates. As with regard to the investment portfolio, no major changes, only to mention corporate bonds have gained some weight in the portfolio as we were seeking for higher yields. The return of the portfolio stands at 325 basis points and average reinvestment yield stood at 355 basis points for the year. Moving on to our solvency position. Solvency margin stood at 185.4%. This is taken into consideration the proposal of a complementary dividend for an amount of EUR 50 million. If this additional dividend is approved by the AGM, payout ratio will stand at 72% for the year. The breach of own funds basically show the positive contribution of earnings and the deduction of both, the EUR 50 million dividend paid on December 19 and the proposal of the complementary dividend for another EUR 50 million. Then SCR remains stable in the quarter. On the one hand, we recorded lower market risk on the back of reduced equity exposure and the decline of the symmetrical adjustment provided by the European regulator. On the other hand, non-life risk was steady with 2 opposite effects. As of year-end, we updated a specific parameter that USP improved due to lower volatility and improved combined ratios in the Motor line of business. The increase of SCR due to increased business volume was more than offset by improved of USP. To conclude, December results were strong. The company was able to accelerate further client and revenue growth while improving considerable its combined ratios. As I commented at the beginning of my presentation, we had to tackle in the past with inflation and plenty of uncertainties. But most important of all, we didn't overlook projects that will take us into the future. Our customer-centric strategy and the capabilities to further accelerate growth and transformation have been built. I think the company is better prepared for 2025 and the following years. We have now a better company to succeed in our growth ambitions. I will now hand the call over to Beatriz to begin the Q&A session. Thank you.

Thank you for the presentation, Carlos. First, we'll begin with the questions received from the conference call.

[Operator Instructions] Our first question comes from the line of Maks Mishyn from JB Capital.

I have 3. The first one is regarding outlook for Motor. Congratulations on the improvement in the results, but I was wondering what should we expect for 2025? If you could guide us for your expectations on growth in the number of clients, average premiums and combined ratio, that would be very helpful. The second is on Home portfolio. What kind of normalized combined ratio should we expect going forward after the strong first quarter? And then the last question is on financial income. It picked up quarter-on-quarter to EUR 30 million, excluding expenses. And I was wondering if this is a result of increase in the investment portfolio, and should we assume it is the run rate for the next quarters?

Thank you very much, Maks. Well, on the first question, the outlook for Motor. Well, I think the evolution of Motor throughout the year has been very much in line with what we said at the beginning of the year, I mean, from less to more. And I think you should expect that evolution looking forward on 2025. In terms of volumes of clients, I mean, we have increased the gathering of clients in the third quarter. We have increased the gathering of clients in the fourth quarter. And you should expect that 2025 to be a year of even more gathering in terms of clients. So the outlook there, I think, is going to be quite good. We'll see what happens with the market. I mean we need to see what's going to do the market in terms of pricing and so on. My expectation is that markets will keep on rising average premiums. In our case, average premiums again, in an individual case by case, I mean, we will adjust average premiums accordingly to the risk premiums of the clients. So you should expect somewhere increases close to CPI increases. And then in terms of combined ratio, again, I mean, I always say the same thing. I mean, our intention is to keep on improving our combined ratio. I think the combined ratio in 2024 has been more than positive. I think it has been extraordinary, the comeback on the combined ratio. And we'll see what happens on 2025, but I expect improvement on that. Home insurance. Great year in Home insurance, I mean, combined ratio in the neighborhood of 88%, which I think is very, very positive. I think the market as a whole is going to post a good combined ratio on the Home business. But again, I mean, as we get scale on the Home business, and the growth for the last quarter has been very, very strong in terms of 8% growth in gross written premium, that will help us on the combined ratio. So combined ratio should be in the neighborhood of low 90s. And in terms of the portfolio, I mean, the reason of the portfolio and the evolution of the portfolio is because we have taken advantage of the deals, especially on the corporate side of the fixed income portfolio. We also have a lot of liquidity to invest because the growth in volumes allow us to have much more volumes to invest. But we didn't change very much the mix of the investment portfolio, very oriented to fixed income instrument, more than equity. Equity, more or less on the same grounds as last year. The venture capital and so on, very much in line with last year. I mean, the increase in the investment income is due more to more capacity to invest than to change in the business mix.

The next question comes from Francisco Riquel from Alantra.

First one is on the digital strategy that you mentioned in the presentation. If you can elaborate a bit more on the shift towards digital, how much of the sales are fully originated through digital channels? Where do you want to reach and when? Or if the digital strategy is more towards improving efficiency or new business? If you can please elaborate more on this in your strategy. And second question is on the combined ratio evolution. You mentioned that you plan to increase tariffs closer to inflation. So the question is how do you plan to improve the combined ratio from the fourth quarter levels? You are -- the loss ratio to -- you expect to improve the risk underwriting further? And how can you reassure on this? Or in the expense ratio, any efficiency measures that you can share with us?

Thank you very much, Paco. Well, I think the second question is very much related as well with the first question. I mean the improvement of the combined ratio; I suppose you are talking more on the Motor business than general speaking on the company. I think the combined ratio should be improve by improving our expense ratio more than increasing our risk profile. I mean, the company is very comfortable in terms of the risk profile that we have on the book, and I think it's not going to be something that we will change. On the other hand, I think expense ratio should keep on improving. I think we have improved basically 100 basis points, the expense ratio throughout the last quarter. And I think we should keep on doing that. How? By being more efficient, by being more digital and, therefore, lowering our expense ratio. Our digital proposition is -- not only the goal is to reduce our expenses. It's also to provide a much better customer experience. We're really in the company are our believers that digital propositions, alternative channels provide to our clients. They provide much better customer service to our clients, and they provide more opportunities of selling. I mean, as of today, 60% or more than 60% of the selling inquiries by clients are throughout digital, even though still today, most of them are closed over the phone and the idea is to close the loop. The idea is that clients begin their interaction with the company throughout our digital channels, and they close the loop through our digital channels. I mean, in terms of goals, we'll have goals in terms of number or volumes. What we have goal is in terms of focusing the company into that digital proposition, which I think is an opportunity since the market is lagging on those grounds. I mean Línea Directa been almost -- always a digital company, we should go into those levels. I mean, what we have done is create a specific teams with employees from different areas that they can focus on maneuver the company through our digital proposition and that should pay off in 2025 and ongoing. And one of the last things Beatriz was telling me. Of course, on the combined ratio Motor and in the combined ratio of the Home insurance, we have to keep an eye on frequency. Frequency has been quite good throughout the year. Severity has also been quite good throughout the year. My expectation is that next year, nothing should change on those grounds. We see what happened with severity that sometimes it's a matter of lack in some grounds, but frequency should be more or less stable, and that will help us also to improve -- keep on improving our combined ratio.

The next question comes from Carlos Peixoto from CaixaBank.