Linea Directa Aseguradora SA Compania de Seguros y Reaseguros

MAD:LDA

Earnings Call Transcript 2023-Q1

[Unknown Executive]

Good morning, everybody. Welcome to our conference call. I am trite, Head of Investor Relations. As usual, our CFO, Carlos Rodriguez, 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 Carlos.

[Carlos Rodriguez, executive]

Thank you very much, Valentin and welcome all. We start with the highlights for the period in Slide #5. In a nutshell, 2023 will be a challenging year where the focus will be on the technical margin. Premiums grew by 5.3% and policyholders by 2.4%. Motor is gaining momentum with premiums also growing at 5.3% in the first quarter. We acknowledge much remains to be done to adjust prices to the present level of cost of claims. Combined ratio rose to 107.3% because of cost inflation and high frequency as compared to the first quarter of 2022, which had less mobility due to the COVID-19 variant Omicron. Expense ratio stood at an excellent 21%. We are displaying, once again, resilient capitalization with a solvency ratio of 183%. Finally, return on equity fell to 9.2%.

Moving on, Slide #7 provides our regular update on the Spanish market sector. Inflation remains high despite a slight decrease in the last few months. Underlying CPI closed in March at 7.5% and industrial prices at 7.8%. As with regards to estimate average premiums, the market has a long way to go before converging with claim cost.

On Slide 8, the buying and selling activity in real estate show signs of a slowdown with high interest rate and a weaker economic projections. Nevertheless, the insurance home market grew notable at 5.8% as of March. As with regard to the Spanish health market, turnover for the industry continues to report significant growth at 7.5%, yet the inflow of new customers is slowing because of economic conditions.

Let's move on to the main figures of 2023. The first 3 months of the year were marked by rising premiums and a strong pressure on margins. Premiums continue to gain momentum, up 5.3%. The motor line of business also grew by 5.3% on the back of continuous tariff adjustments, yet much more remains to be done. Technical result is explained by historically high cost of claims and higher frequency in motor and home as compared to last year.

Additionally, bear in mind, when compared to last year quarter where mobility was reduced as a consequence of COVID-19 variation Omicron. I will provide additional details on the loss ratio further down.

Expense ratio was excellent despite marketing investments and financial results include realized gains in equity and fixed income. Excluding such effect, financial result will have grown by 12%. All things considered led to a combined ratio of 107% and a loss of EUR 5.3 million.

We are reporting no material difference this quarter under the new accounting regulation IFRS 17. On this matter, 3 key messages: net income was not significantly impacted as compared to the previous accounting norm.

Profitability could be slightly more volatile under IFRS 17 because of the effect of discounting. In a relative high interest rate environment, this can cause a higher insurance service result with offsetting effects in insurance, finance income and expenses. Also, the mark-to-market of investment plans will add some volatility to the P&L. The current business management indicators and the current layer of the income statement will be maintained in parallel.

In Slide 12, we provide the profit and loss account under IFRS 17. The profit and loss account change for income from insurance service is pretty much equivalent to premiums earned before reinsurance. Reinsurance result is presented separately. Net income from the insurance service will be the key line item to the technical result.

On the right side of the slide, we present the [indiscernible] IFRS [ 4 to 17 ]. The overall difference is explained by the home liability of incur claims, the equity realized gains accounted for in OCI under IFRS 17, the mark-to-market of mutual funds under 1 year and [indiscernible] of interest discount. Overall, results is pretty much the same. We additionally publish a general IFRS 17 presentation with the main impacts and criteria adopted by the group. Please refer to it for further details.

Let's move to Page 13, where you see the breakdown of policyholders and gross written premiums by line of businesses. All segments displayed solid growth. The portfolio increased by [ 2.4 ]% and policyholders reached 3.5 million. Company premiums grew 5.3% and [indiscernible] continued its trend upwards.

Moving to Page 14. The Motor segment grew 5.3%, outperforming the market by 0.6 percentage points. Average premiums are clearly on the rise, although we still have much ahead. We are prioritizing price adjustments and April already factor further increases. On the technical front, combined ratio stood at 107.9%, reflecting average costs at a record high levels, both in repair and personal injured claims. We admit much remains to be done to improve the loss ratio, yet we are moving in the right direction, adjusting tariffs on a non-stock basis. The first quarter was also marked marked by higher frequency as compared to last year, which recorded low mobility due to the COVID-19 situation, as I have referred previously.

The expense ratio reflects more marketing investment because of the new client focus and multiline product offering. Such expenses will be reduced in next quarter.

Moving to the next slide. Home premium growth continues a good performance at a rate of 6.7%. Loss ratio was affected by higher frequency as a consequence of increased coverages and services. Expense ratio reflects a higher deferral in the first quarter.

Moving to Slide 16. Premium growth in the Health segment stood at 4.2%. We keep our strategy of being very careful with the subscription and risk selection process. Our loss ratio continues to improve.

Please let's move now to Slide #17, where we break down management ratios by line of businesses. Motor loss ratio increased by 18 percentage points, reflecting a steep cost inflation. Frequency also was higher as compared to last year, both in Home and Motor, as I explained earlier. Health continues to improve. Expense ratio stood at our remarkable levels of 21%. Overall, combined ratios reflect the impact of sharp cost inflation and higher frequency.

If we move to Slide 18, consolidated loss ratio was driven by heavy cost inflation, while premiums are lagging behind. It is our firm commitment to keep firmly on price adjustments throughout the coming quarters. Additionally, frequency was 1.3 percentage points above that of last year. We have returned to the levels of 2019. Average cost in the Home segment behaved well as compared to last year, whereas frequency had an impact due to increased coverage to catch up in its offering. As with regards to the expense ratio, we maintain a strict control of expenses.

Acquisition costs reflects the new multiproduct campaigns, investments that will be significantly reduced in the coming quarters and the termination of the reinsurance commission in the health line of business.

Now we move to the next slide. The investment result is explained by realized gains in both the equity instruments and fixed income. Also fixed income reinvestment rates, remuneration on deposits and income from these [indiscernible] properties are on the rise.

On Slide 21, you can see the overall yield of the portfolio stands that -- the overall yield of the portfolio stands at 2.68%, excluding net realized gains. We estimate to reinvest in 2023 at around 2.8%.

Moving on to our solvency position, the company capitalization remains strong at 183%. Eligible own funds remained stable as the loss for the quarter was more than offset by the change in the market value of the available for sale portfolio. For [indiscernible], SCR increased by EUR 5.5 million in the quarter, mainly explained by the reduction in the symmetric adjustment and increased exposure to equities. To conclude, first quarter numbers display a very difficult scenario on the auto insurance segment, mainly driven by inflation.

Looking forward, 2022 should we consider numbers wise as a transition year with positive improvement as the year evolves and price increases are further implemented. Thank you. I will now hand the call over to [indiscernible] to begin the Q&A session.

[Unknown Executive]

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

[Operator]

[Operator Instructions]

Our first question comes from the line of Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 3, if I may. The first one is on motor premiums. I was wondering what kind of price hikes you will be implementing in April and to what portfolio are being applied and whether you see this impacting your churn rate?

And then the second one is on costs. Now that inflation is easing. Do you see that there are chances that repair costs can go down in the future?

And the last one is on home insurance. I was wondering if you could explain why frequencies have increased so much in a little bit more detail on what we should expect for 2023.

[Carlos Rodriguez, executive]

I mean in terms of keeping an increasing average premiums, I think it's something that we have started last year. I mean, if you take a look at the increase in our expenses, you will see that compared to first quarter of last year, the increase on the new business was in the neighborhood of 7% and the increase on the portfolio has been in the neighborhood of 5%. It is true that if you take isolated first quarter and you compare that to the fourth quarter, we are lagging, especially on the portfolio. I mean, the increase on the portfolio has been 1.5%. But keep in mind that I mean we were new the entire portfolio during the year. In the first quarter, we were in new prices on around 20% of the portfolio. Still, we have to renew prices on 80% of the portfolio. And the idea of the company is keep on doing increase on the portfolio throughout the year. Is that going to affect the churn rate of the company? Yes. If you take a look at the numbers on the first quarter, our retention rate has deteriorated by almost 200 basis points. That means that clients are still finding prices elsewhere, which are not increasing that for -- in our opinion, I mean, that is kind of -- yes, I mean, given the situation on the cost inflation. But looking forward, we will keep on increasing average premiums. We have done another increase on April and well, we will keep on doing that as long as our risk premium continues to rose.

Regarding the cost inflation, repair cost was not very good on the first 2 months of the year. We have seen increases in repair costs in the neighborhood of 7%, 8%. What we have seen on the last month of the quarter that, that increases or starting to slow down numbers on March were fine or were better than in the previous 2 months. And we expect that, that trend will come on the coming months.

On the home insurance, well, what we did this quarter, I mean, we -- some of the services that we have externalized on the management of claims, not only repair of it, but on the management of the claim, we internalize that in order to increase our quality of service, and that really didn't work that well. I mean it really increased our frequency. So we have [indiscernible] from that. And on April, we decided to go back to the previous situation where we have externalized as services, and that should help to improve the loss ratio on the home insurance the coming months. I mean -- and that's basically what we did. I mean we did a test, and it didn't really work.

[Operator]

The next question comes from the line of Francisco Riquel from Alantra.

[Unknown Analyst]

The first question is, if you can please explain the price quarter-on-quarter in the combined ratio in motor insurance. How much of the increase is explained by the variable? What cost inflation is still left here. So that's the first question, and this is in absolute terms. And then also in relative terms, I wonder how do you explain that you are reporting a higher combined ratio than the sector average, if you think that the cost inflation or the frequency is higher for you or the tariffs or so the change in absolute and relative terms?

And the second question is about your guidance. You previously were guiding for combined ratio in the year, '23 similar to '22 on average. Could you just still think that this guidance is achievable, given the start to the year in the first quarter.

[Carlos Rodriguez, executive]

Well, if we look at the frequency -- sorry, the loss ratio and the combination of frequency and cost. What we are seeing is that frequency accounts for 30% of more or less or 35% more or less of the increase and 60% of the increase comes from the average cost. I mean, Baremo in absolute terms is -- I don't have the numbers, but of course, it's -- I mean, rising by about 8.5% on both the injury claims has an impact. But I don't really think on the first quarter, that has been the case or is has been much more than we are used to. I think it's more a matter of steel average cost. We have -- it's true that we have much more frequency than the previous year because of the COVID. But if you take a look at the evolution of the loss ratio increases, which are not good, I mean the increase in the first quarter as compared to the last quarter is a [indiscernible].

So my expectation is that we'll keep on improving, but it is really more still today an issue of average cost more than frequency, which as I have said, frequency has increased by 1.5 points on the previous numbers. In terms of how do I explain my combined ratio is above that of the market. Well, we'll see the numbers of the market on the first quarter, I think it's going to be a difficult quarter for the entire market.

Having said that, Well, we are still being very prudent on our reserving. We are still been suffering from increases in all the repair costs and all that. And of course, we are not very happy with the combined ratio that we posted. I mean, being on 107 being a company more used to be on the 95, 94. It's kind of difficult to cope with that. But we'll see what happens with the market. I mean I think it's going to be a very difficult quarter. I think inflation on the first quarter is going to have a hit also on the sector.

Having said that, I mean, numbers are on combined ratio. They need to get improved and the way to improve numbers on the combined ratio is increasing average premiums. I mean, we will keep on doing that. If we will take a look at the market, probably we are among the top 2, top 3 companies that are rising prices. But still today, there are still some insurance companies that they are decreasing average premiums on the current situation. So we are on the rise. We will keep on the rise, and that will have to improve our combined ratio and the target for the year.

Well, if numbers keep on the way we are right now on combined ratios of 107, we will not be able to reach combined ratios below 100%. My expectation is still today because I start to see some positive signs on the average cost. I frequency I hope it will have a good behavior during the year is that you will see an improvement quarter-on-quarter. Second quarter will be better than the first quarter. Third quarter will be better than the second quarter, and the fourth quarter will be better than the previous one.

Having said that, again, if we maintain this loss ratio on the motor insurance, it's going to be difficult to reach those numbers.

[Operator]

The next question comes from Freya Kong from Bank of America.

[Freya Kong, analyst]

Firstly, your solvency level is now coming close to 180%, which is management found after which you wouldn't distribute any capital. How comfortable are you with the business if you were to drop below 180%? And what level would more serious I guess, corrective actions need to be taken on solvency?

And secondly, your motor business is still growing despite the very tough environment and your Q1 combined ratio for Motor was around 108%. And given that premiums are still below claims inflation, does that mean you're writing new business at above 100% combined ratio? How should we be thinking about this? And I guess how do you see the evolution of your combined ratio improving throughout the year?

[Carlos Rodriguez, executive]

In terms of solvency, it is true that I think last number we posted on December, they were in the neighborhood of 187. Now it's on 183. I mean I still feel very comfortable, and I explained that on my last call, that the company -- this is still -- we still think that we will be on that 180, I mean, it's 183. Solvency ratio is a dynamic number. It is very difficult to maintain always at the same level. I mean you have a lot of issues that are seasonable in terms of getting the number of solvency, but it's still -- I mean I'm not worried about being above 183%. I mean, I explained that on the NGL call. and I maintain that the company is still on 183%.

Having said that, I mean, I think we are among the companies with the highest combined ratio on the motor on the solvency ratio on the motor insurance business. And I don't see that 180 could be jeopardized on this year. Regarding the motor insurance, well, numbers and numbers, I mean, at the end, we are increasing still the new business, and we are increasing the business on around 2% and the number of new clients coming into the company is 1.9%. I think it's a number. I [indiscernible] through that if you do the numbers in terms of average premium versus risk premium, those clients are still not on a profitable ground. I mean but also we are a company that we are -- we manage very well the evolution of the profitability of clients and those clients will come into profit in the short term.

Having said that, and looking forward for the year, you will probably see that the evolution of the growth in new clients will become milder. I mean our intention during the year is not to focus on gathering clients is more to focus on defending the margin. And that is what we will do. So you should expect more efforts on rising prices than on gathering new clients. I explained in my call, that we did an effort on the marketing side of the business because we needed to transfer to the market.

I will focus on multi-clients and multiproduct. Looking forward on the year, we will we will reduce our marketing exposure and that probably will have an impact on the gathering of our clients. So you should expect the company keeping on growing in clients during this year.

[Operator]

The next question comes from the line of Thomas Bateman from from Berenberg.

[Thomas Bateman, analyst]

Firstly, thank you very much for your IFRS 17 presentation. We appreciate you giving both the IFRS 4 and IFRS 17 numbers, that's really useful. I was just wondering, will you give us any more comparatives, I think you've just given us last year -- last Q1 in 2022, but will you be able to provide maybe the whole of 2022 comparatives soon. [indiscernible] as we go through the year, that would be helpful.

Can you discuss the company's reinsurance renewals? And in particular, does this have any impact on performance in home insurance in Q1? And just a couple of clarifications points on the investment portfolio. Did you say that you expect to reinvest at a yield of 2.8% or is the 2.8% yield guidance for the year?

And also, can you just clarify your comment on growing exposure to equities? What's the thinking around that? And just finally, back on motor, what do you think the positive or the catalyst might be for a more material change in pricing across the market? And I guess it seems like comments earlier saying that they are still declining prices a little bit worrying to me. So what do you think might change that behavior.

[Carlos Rodriguez, executive]

Well, in terms of 2022 IFRS 17 comparison, we don't have that information here. I mean, I'll get back to you on that, but it's difficult because we don't have the detailed comparison on 2022. Really, we did an effort to post the number on this first quarter, but that comparison, we don't have it.

In terms of the Home guidance, my expectation for the year is that the expense ratio will not be maintained at that number, 26%. I think it's a very good number, and it's more -- it has a component of a seasonable situation. I think we should be during the year in the neighborhood of 30%, 31%, 32%, which is a good number as compared to the market. And in terms of the loss ratio of the home insurance, you will see clearly an improvement in the second quarter and looking forward on the year.

As I explained before, we have some one-off issues in the first quarter that will be solved on the second quarter or the third quarter. Regarding the equities -- exposure to equities. Well, basically, what we did, Tom, is at the end of the year, we decided to reduce somewhat our exposure to mutual funds and equities because of the entrance of the new regulation IFRS 9, together with the 17. And what we did is we somewhat rebuild some of our exposures to equity, but I'm talking about EUR 10 million out of EUR 900 million of the portfolio. So it's not a relevant number. But as you know, in terms of capital, the equities are the instruments that they require more capital.

And then I didn't get you on motor. I think you were talking about changes in prices. Well, again, as I explained in our previous question, if you take a look at the increase in average premiums year-on-year, the portfolio, which is really the one that hits on the combined ratio has increased by almost 5%. It is true that if you take first quarter 2023 versus fourth quarter 2022. That increase is still very low. It's a 1.5% increase. So what we need to do is to keep pushing there.

I mean we need to manage also the retention rate. As I explained before, the retention rate has suffered in the first quarter and has decreased by 200 basis points. So it's a combination of that. Looking forward, again, I think you will so expect further important increases on the portfolio. You should expect less growth on new clients coming into the company, and that will help us to keep on improving the combined ratio throughout the year.

Having said that, I think 2023 for Línea Directa. And I think for the sector is more a transition year more than a year where numbers will come out during the year. And I don't know if I'm missing some questions.

[Operator]

The next question comes from Carlos Peixoto from [ Caixa Bank ].

[Unknown Analyst]

So my first question, first of all, sorry if I missed the first part of the call, so if I end up repeating some questions. the first question would actually be related with average premium per policy. So running the math, the simple average on the motor business would be up roughly 3% year-on-year versus last year, but I was wondering on a like-for-like basis. So within the different lines of coverage, what has been the average increase. And when you look at the inflation and and overall inflation in repair costs and all that, the level of increase as feel a bit shy. How do you see this evolving throughout the year? And what type of measures you believe can be adopted to bring this increase more in line with inflation and eventually allowing for an improvement in the combined ratio.

And then the second question would actually be related with arm and the overall combined ratio in the first Q. And I was just wondering whether in the first Q, there was any specific one-off either related with [indiscernible] with some [indiscernible] impacts or something of that nature that could help to explain here -- the levels? Or if there was -- or if there were no specific one-offs.

[Carlos Rodriguez, executive]

Starting with the last question, there are no one-offs on the Baremo for the first quarter. I mean, but Baremo is going to have an important hit on the loss ratio during the year, but in the first quarter, it's not been something exceptional. We knew it was going to have an impact. It's having the impact that we expected. I mean, at the end, an increase of 8.5% of the [indiscernible] injury claims has an impact. But I mean, it's business as usual in that regard. And in terms of average premiums, well, I agree with you that still today, increases in average premiums are kind of shy. I explained before that. If you take a look on first quarter as compared to the fourth quarter, the increase on the portfolio is still very mild.

I mean, 1.5% and we need to increase that or speed up the average premium rises. That is the [indiscernible] of the company. I think I tried to explain during my presentation that the commitment of the company is to during this year and probably on the coming years if inflation is here to stay. We need to improve that.

At the end, when you manage the company, you have to cope with rising average premiums, taking a look at competition that are still pushing average premiums downwards, which from my point of view, is a clear mistake in terms of P&L. And also, you have to manage the retention rate of the company. So it's not that easy to take that decision to increase average premium per say and [indiscernible] do that. But again, we will do. It's still very mild, the average premiums increase. And you should expect that to keep ongoing during the year. And probably, you will start to see some color on the second part of the year in terms of gross premiums and improvement of combined ratio as a consequence of time.

[Operator]

The next question comes from Fernando [indiscernible] of [indiscernible].

[Unknown Analyst]

Two quick ones on motor, please. So first one is on average price increases, what do you think average price increase that you're doing or have done so far year-to-date in the new car versus the used car segments. That is 1 question. And the second one would be -- I guess this is difficult. But assuming the frequency remains and loans ratio remains and inflation remains, what does the need prices to increase to bring the combined ratio to motor to 100%?

[Carlos Rodriguez, executive]

Well, the second question, it's kind of difficult to give you a number. I mean, I don't have the answer to the million dollar question. I mean some matter of risk premium on clients analyzing each risk [indiscernible] compliance and rising prices of them. One of the things that we are doing, of course, to improve the combined ratio is also with these average increases try to clean a little bit of the portfolio that is including average premiums more the more risky clients, which means that those clients -- a number of them are leaving the company because they don't agree with the pricing. But it's difficult to give you a number how much I do to increase average spend to cope with the combined ratio.

Keep in mind that the combined ratio is the result of 2 things, average premiums and also the loss ratio, my expectation is on the loss ratio that average cost will improve during the year, as I explained before on the call, I have seen some positive signs on March in terms of average cost, which is going also 200 basis points below that number, that includes on January and February.

Having said that, what we know because all the insurance company, they will use the same valuation tools, that is still today, linear direct increases in average cost is still average cost per repair is still below that of the market. But to give you a number, on how much we should increase our experience to cope with the combined ratio is kind of difficult. My commitment or the company's commitment is that we need to further increase quite a bit average premiums on any kind of client, and that is something that we will do. And in terms of the split between new cars and used cars, the first thing is that new cars numbers are not very good still in the first quarter, they have improved since last year, but still numbers are shooting for less than 1 million new cars sold in Spain. So that's very difficult for companies like Línea Directa than whenever it's a transaction, normally people look for prices on the direct.

The split between new and old car, it's kind of difficult because normally new cars, they go for fully comprehensive and old cars, they go for third parties. So it's kind of difficult. We'll try to look at those numbers. And if we have those numbers, we will share that with you.

[Operator]

The last question comes from the line of Thomas Bateman from Berenberg.

[Operator Instructions]

[Carlos Rodriguez, executive]

On the Live. So we go for the questions that we have received for the e-mail or the webcast.

[Unknown Executive]

Okay. Thank you. Now we continue with the questions received through the webcast. The first question comes from Patrick Lee from Banco Santander. "Thank you for the presentation. I would like to understand the higher frequency in terms of your clients' behavior. In the past, you had expected higher prices and higher petrol prices and lower activity, mainly to lower usage of cars. Has that trend played out in the last few quarters? I would like to have a feel for how much of the increased frequency is due to COVID normalization and how much to other economic factors".

[Carlos Rodriguez, executive]

Thank you, Patrick. Well, we are not seeing that less mobility than we expected, and it's something that it kind of -- is kind of where because if you take a look at the evolution of the increases on the prices on gas and petrol is normally very much linked to less mobility, but we are not seeing that. It is to the first quarter. Mobility has been very similar to last year or a normalized year. So that really has an impact on the frequency. Our frequency has increased. I think as I explained that is 1.5% above last year. So that really, really had an impact on the cost side of the business.

Are we expecting that frequency to become milder. What's -- I don't -- I see the numbers of Eastern. Easter has not been very good in terms of of accidents in Spain. So we see, I think it will be better on summer as compared to last year, but frequency is very, very back to normal. In terms of COVID impacts, difficult to get a number, but I will say that is more in the neighborhood of EUR 10 million, EUR 30 million more this year as compared to last year due to the COVID situation last year.

[Unknown Executive]

Thank you. I think Thomas Bateman is having some problem with the line. So I'll read your questions through the webcast, Tom. "Could you please comment on the company's reinsurance renewal cost and attachment points".

[Carlos Rodriguez, executive]

Well, in terms of renewal, I think we are the first insurance company in Spain that renews its reinsurance program or reinsurance scheme. We do that on the October last year, being the first one always because I think it's a good opportunity for that. Prices has increased, of course, for the entire sector for Línea Directa, but I would say that if you compare Línea Directa prices with like-for-like companies with the same priorities and so on, you will find that Línea Directa have the lowest tariffs on the insurance program. So of course, prices have increased, especially on the motor insurance, not that much on the home insurance, but nothing to really remarkable.

[Unknown Executive]

All right. So I think we have no further questions. from the webcast. Thank you very much, Carlos. This concludes our meeting, and thank you very much, everybody, for your time. Bye.