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

Good morning to all of you, and thank you for joining the call today. Welcome to Línea Directa's Third Quarter Results Conference Call. My name is Beatriz Izard, and I'm Head of Investor Relations. Presenting today is Carlos Rodriguez Ugarte, our CFO. And as usual, after the presentation, we'll open up the call to Q&A. And with these words, over to you, Carlos.

Thanks a lot, Beatriz, and good morning to all of you. I will start, as always, on the first slide by commenting on the financial highlights for the quarter. We are reporting premiums of EUR 844 million, which is an exceptional growth of 11.4%. By line of business, Motor grew by 11.8%; Home, 7.3%; and Health, 13.9%. The portfolio of customers recorded an outstanding growth of 8.1%, reaching 3.65 million clients as of September 2025. Despite a few high severity claims experienced in the quarter, combined ratio was a solid 93.4%. Our highly efficient capital model translated into return of equity of 22.3%, and solvency stood at 189%, which is supportive, of course, of future capital distributions. Moving to Page 6. Here, the message I would like to convey is consistent with what we said in previous quarter, further acceleration in the top line and sound retention levels by increasing the loyalty of our customers and attracting new ones to our brand. We accelerated commercial digital initiatives, aiming at improving top line development and efficiency in the coming years. It is always important to remember that growth can easily be achieved in our industry, but disciplined growth is a different story, and we only seek the latter. We posted a worse underwriting result in the third quarter from a few high severity claims and still, combined ratio was a sound 93.4% for the first 9 months of the year. Expense ratio posted a further improvement. Financial result was up 18.9% with higher income from the bond and equity portfolio and the revaluation of investment funds. And all of this led us to a profit after tax of EUR 60 million, up 46% over the 9 months of 2024. As with regard to business volumes and clients, all line of businesses reported significant growth, particularly in the Motor line of business with more than 53,000 new clients in the quarter. We are very pleased with this progress. In Health, we resumed growth, even considering the extraordinary dental campaigns of 2024. Excluding this effect, clients will have grown by 9.8%. Moving to Page 8. The evolution on the combined ratio was solid despite a seasonable adverse quarter with a handful of high severity claims. We continue to invest in data and tech capabilities that will improve efficiency and customer experience. We consider the expense ratio to be a key competitive advantage and remain very focused on this. Now I would like to move to a more detailed explanation by line of business. In Motor, we further accelerate growth with premiums up 11.8% year-on-year and 13.3% in the quarter stand-alone. We were able to see the market growth by more than 3 percentage points. The combined ratio stood at a solid 93.4% for the 9 months. For the quarter stand-alone, a handful of high severity claims in the summer months added 2.3 percentage points. Excluding this effect, the underlying combined ratio stands at 94%. For its part, the Home line of business posted significant growth with premiums up 7.3%. Profitability for the year continues to be remarkable with combined ratios below 90s. The quarter stand-alone stood at 87%. Moving to Page 11. Health posted growth of 13.9%. The figures are benefiting from more comprehensive products, specialists and complete products now account for more than 65% of the portfolio. Very importantly, we will also resume customer growth. On the technical side, combined ratio posted a further improvement. Moving to the financial results. We posted higher income on bonds and equity instruments. The mark-to-market of investment funds was very positive in the year, particularly in the first half and less in the third quarter. The investment property result declined due to the temporary loss of rental income from a building under renovation at the city center. Completion is expected by the end of 2026, after which, an updated rental income will resume. As with regard to the investment portfolio, its composition remained pretty much stable in the third quarter with the portfolio, excluding cash, increasing by EUR 1.2 billion on the back of business growth. The underlying return stood at 313 basis points. Average reinvestment yield for the fixed income portfolio was 249 basis points. Its duration is currently 4 years. On our solvency position, solvency margin stood at 189%. As we anticipated last quarter, a more consistent calculation has been performed in parallel with the development of our internal model for premium risk. Given the quarterly volatility, while we calibrate the tool, it is more appropriate to look at it on a yearly basis. Moving to the next page. SCR is mainly driven by underwriting risk, increasing as a result of business growth, and market risk on the back of interest and spread risk and a significant increase in the year of the symmetric adjustment. The second dividend, if the Board decides to do so, is expected to be announced before year-end. To conclude, September results posted exceptional growth. Underwriting remains very prudent. Combined ratio was also solid in the quarter despite headwinds from a few severe accidents. We continue developing the necessary basis for our future ambitions and remain very focused on efficiency. I will now hand the call over to Beatriz to begin the Q&A questions.

Thank you, Carlos. We'll begin with the questions received from the conference call.

[Operator Instructions] The first question comes from David Barma from Bank of America.

Firstly, on the Motor profitability in the quarter, the 94% underlying you flagged is still deteriorating a bit compared to the last several quarters. Can you talk about that level and what you're seeing in terms of underlying frequency and severity? And then secondly, on the reserve adjustments and solvency that you talked about. Can you please come back on what you did there? And whether that's mostly a model change one-off, taking back part of what you had done in the previous quarter? And then lastly, on average premium growth. It seems like it's starting to slow a little bit in Q3, both in Motor and in Property. So if you could give us an update on pricing trends.

Thank you very much, David. In terms of the Motor business profitability, which is very much linked to the combined ratio, it is true that our combined ratio on the stand-alone quarter is in the neighborhood of 96.2%, I think. But I think we need to take the picture on the entire year, which is very close to 94%. What happened on the third quarter, which is something that happened usually historically, if you take a look at the history of our combined ratio, I think almost all the third quarters were 1 or 2, I mean, our combined ratio is worse than the second quarter. What happened on this third quarter, frequency was more or less in line with what we expected. Average cost was also very much in line, although average cost has been increased by a handful of severe claims, especially bodily injury claims, which I must say is sometimes they come, sometimes they go. What we did is we took a look at these claims, whether they are very much impacted by the new business or not. And we see that basically those severe claims, most of them are on the portfolio, so very comfortable in terms of how we are gathering clients in terms of risk profiling. But again, I mean, when you have a handful of severe claims in the neighborhood of EUR 5 million, it has an impact of 2 points on our combined ratio. Looking forward, our expectation is still that we are doing things on the track we wanted, gathering clients with good risk profile. Frequency is still very much in line with our expectations. And if the last quarter of the year performs well in terms of severity, we should be shooting for a combined ratio, which is more close to low mid-95s than above 95%. That's my expectations. In terms of solvency, it is true that we've been calibrating a new platform, which is not a change in the model. I mean, it's basically calibrating the model. I think it's a one-off. Of course, you also have to take a look to the premium provision, which has a lot of seasonability throughout the year. It's very positive on the second quarter, and then it's a little bit worse on the third quarter. Looking forward on the year-to-date picture, I mean, that premium provision is very positive for the capital, and it should be that the case for the end of the year. Again, I mean, we are talking about a company which still has 190% solvency ratio, which is very good. And third quarter solvency is a little bit of a seasonal effect. And I think we need to look at the solvency risk on a daily basis, more or less. And on the average premium, well, there is not a change on the strategy. I think the evolution of the company in terms of pricing is very much linked to the premium risk, and we focus on that. I mean so we adjust premiums on that. If we take a look at the year, our average premium for the new business and for the portfolio are very much in line in the core business in the bulk of our business, individuals is very much into the 2% to 2.2% increase and it's adjusted on an individual basis. So it's not a strategy that we will start to lower average premiums. Indeed, if you take a look at the CPI increase in Spain, it's picking up a little bit, now it's in the neighborhood of 3%, 2.3% on the underlying CPI. And we will adjust premiums on that ground looking forward next year, again, on an individual basis. But still, I think we need to keep on adjusting our premiums to CPI increases.

The next question comes from Francisco Riquel from Alantra.

My first one is a follow-up on this Motor combined ratio. So you printed 92% combined ratio in the first half of the year in Motor. So excluding the large loss claims that you mentioned and also the adverse seasonality in the Q3 due to the summer season, shall we expect a combined ratio in Motor back down to 92% in the fourth quarter? If not, how can you reassure us that the fast growth in Motor policies is not coming at the expense of underwriting risk? And my second question is, I wonder if you can also share the weight of digital in the Motor business, both in terms of the total revenues and in the new business. I understand you are not using the sector database for claims in the digital business. So I wonder if that is having an impact in the risk that you are taking through the digital channels and if you plan any change at all in the digital strategy?

Thank you very much, Paco. Since you follow our numbers on a quarterly basis, probably you can go back to my script on June, and I was saying that 92% on a quarterly basis was too good to be true. I mean we are a company, with that, we should be more in line to that 94% or something like that. My expectations looking forward for the year is that we should stand in that level. I mean it's kind of difficult to give you a number, but I always said that 92% was very good, and we are very happy to be on 92%, but I think the company should maneuver in the neighborhood of 94%, especially in an industry that, as you know, combined ratio is still on 99% as of June, 98.7%. So our positive gap is still there. And looking to the third quarter, Well, I tried to explain that. I think we have like 2 points, 2.3 points on the combined ratio on the third quarter that are basically due to severe claims that are very difficult to manage. Again, it's very important to say that we do look at the short frequency of the new business. We look at the 30-day, 60-day and 90 days frequency of the business, and that is performing quite well. Second of all, the main severe claims that we have on the third quarter are assigned to the portfolio and the 2 business. So the combination of those 2 things tell us that we are gathering clients with the risk profiling that we like. We will keep on monitoring that, but there's no concern on the company on those grounds. So looking forward, fourth quarter, things should perform quite well on the portfolio. Things should perform quite well on the new business. My aim is that we should be in the neighborhood of those mid-90s that I always said should be the target for this year for the company. The second question, I think, was on the digital side of the business. Well, the digital side, the pure digital side, and when I say pure digital side, I say the online real-time digital business, which is opening the interaction with the company and closing the deal without human interaction is still small. I mean we are talking about 10% of the gathering of new clients, I mean, in the neighborhood of 70,000 clients. So the impact of and not using SINCO, which is what you are saying, is not very important. I must say that, of course, we follow very much not using that database. And really -- and surprisingly, the risk profiling of the pure online clients is much better than the -- well, I wouldn't say much better. It's better than the risk profiling of the clients that they use our call center. So we are very happy on that. I don't think that is an area to be worried. I mean we will keep on fostering our digital proposition to clients. We have more than 3 million transactions on a monthly basis of our clients. Almost 100% of our clients are direct. And I think for us, that is key and it's nonnegotiable. I mean, of course, we do look at the risk profiling, and we are very happy on the profile of those 70,000 clients that we have got on the year through our digital proposition.

The next question comes from Carlos Peixoto from CaixaBank.

A follow-up actually from my side. So you mentioned an expectation of combined ratio around 94% for 2025, if I understood correctly. I was just wondering if you could clarify whether this is for the Motor business standalone for the company? And then on the second part of the question, looking into 2026 and beyond, do you see the 94% as a combined ratio as, let's say, a normalized level for Línea Directa? Or how do you -- where do you see it over the coming years basically?

On the combined ratio by the end of the year, again, I mean our expectation is to be in those mid-90s, below mid-90s. Of course, I don't have a crystal ball. I mean it depends on a lot of many things. I mean what we have to do is to manage our risk profile as we do, and that should put the company in those rounds. In terms of company, overall company combined ratio, well, it's very much driven still by the motor business. I mean, indeed, I mean, our combined ratio year-to-date is very similar, 93.4% in both Motor and overall company should -- I mean, overall company is very still -- is driven by the motor business. Of course, if we take a look at the other 2 main business that we have. Home insurance performed superb throughout the year with a combined ratio below 90%. Of course, we are very happy about that, and we look forward to maintain those levels by the end of the year. We will see what happened with the atmospheric events. I mean the year has been kind of mild throughout the year, and we'll see what happened, but very happy with that business, growing almost 8% in the gross written premium, and we have a very good combined ratio. Health business, also the combined ratios keep on improving. Again, we still are a loss-making business, but we are very happy with the growth on the upper lines, growing above the market quarter-on-quarter. So very happy on that. But combined ratio should be very much in line with the motor industry if we take a look at the company. And looking forward on 2026, I don't have a target on the combined ratio. Currently involved in my budget for next year, so I don't have still numbers for that. I think the company is always -- has always said that we should be a company with the best combined ratio in the sector and one of the best on a pan-European picture. And that should mean that we have to be on those grounds, on 94s, 95s. It depends very much also on the evolution of our expense ratio. Expense ratio has improved, again, almost 100 basis points, which is a very good number for the quarter, should keep on improving with our digital proposition. And that in the medium term should keep on putting pressure downwards on the combined ratio for the company.

The next question comes from Maksym Mishyn from JB Capital.

I have two. It's on the new production, given the strong numbers you are posting in Motor, I was wondering, what's your ambition for the market share in the segment in the long term? And then the second question is, if you could share a bit of more color on what kind of customers you are adding? Are there mainly first-time buyers that come from other companies? And what type of coverage do you sell the most? That would be super helpful.

Thank you very much. Going on the last, our portfolio mix is very much similar to what we have. I mean, we are a company more focused on third parties than in fully comprehensive. And that is more or less the trend with the new gathering of clients. What type of clients are we gathering? Well, we are very strong on the new business, on new buyers of cars and secondhand cars. I mean we have always been very, very powerful on those grounds. I mean our market share there is well above our natural market share, which is in the neighborhood of 7%. I think our share of new business, new cars is in the neighborhood of 10%. So we are there, and we are gathering clients from there. But then we are gathering clients from the competition. I mean if you take a look at competition, and I know you do, I mean, they are losing portfolio and some of those portfolios is coming to the company. The second you were asking -- the first question you were asking is, well, in terms of gathering of clients, my ambition, no targets on that. I think our ambition is being able to grow more than the market, and it's something that we are doing in terms of gross written premium. Our gross written premium is well above 11%. Market is in the neighborhood of 8.98%, and that is a trend. I mean what we want is to be a company that we are able to grow more than the market, and that growth will realize in gathering a good number of clients. We have been gathering 50,000 clients more or less on a quarterly basis, and it's something that you should expect by the end of the year.

The next question comes from Juan Pablo Lopez Cobo from Santander.

My questions were already answered.

There are no further questions at this time. I will now hand back to Beatriz Izard, Head of Investor Relations. Beatriz, now your line is open.

Thank you. Thank you, Carlos, and thank you all for joining us today and for your questions. And as always, Investor Relations team is here to help you should you have any further needs.

Thank you very much and have a nice day. Thank you.