Linea Directa Aseguradora SA Compania de Seguros y Reaseguros

MAD:LDA

Earnings Call Analysis

Linea Directa Reports Strong Start to 2024

Linea Directa commenced 2024 with impressive financial performance, reporting a turnaround to a profit of €10.1 million, a significant improvement from a €5.3 million loss in the previous year. Premiums rose across all segments, notably 7.9% in Health, despite a 4.5% drop in policyholders. The combined ratio improved by 9.5 points, reaching 97.3%, attributed to effective expense management and digitalization. Investment results also increased by 10%, fueled by higher fixed income returns. With a robust capital position at 183%, the company's aim for a 94% combined ratio by year-end appears achievable, although challenges remain.

A Resilient Start to 2024

Linea Directa began 2024 on a strong note, reflecting a consolidation of profit and positive trends in key business segments. The company reported gross written premiums up by 3% across all lines of business, with net insurance income increasing 3.1% in Motor, 4.5% in Home, and a notable 7.9% in Health. This encouraging performance indicates a robust market presence, despite a 4.5% drop in policyholders due to stricter underwriting standards.

Improved Profitability Metrics

The company's combined ratio improved significantly, dropping to 97.3% — a remarkable 9.5 percentage points better compared to the same period in 2023. This improvement is primarily attributed to effective claims management, expense controls, and beneficial rate adjustments in the Motor segment, where the claimed loss ratio decreased by 9.1 percentage points. The technical profit saw an increase to EUR 6.3 million, marking a clear recovery from last year’s performance.

Financial Performance and Outlook

Profit after tax stood at EUR 10.1 million, sharply recovering from a loss of EUR 5.3 million in the prior year, demonstrating a impressive turnaround of EUR 15.4 million. The investment result saw a 10% increase meanwhile; excluding market volatility, the financial result would have increased by approximately 27%. This indicates a solid investment strategy and management of earning risk.

Market Dynamics and Strategic Adjustments

The hardening of subscription policies has influenced policy counts, particularly in Motor insurance. The company made strategic adjustments to address higher risk clients, though this led to a decline in the overall number of policies. Nevertheless, combined ratios in both Home and Health segments remained strong, notably with the Home segment achieving a 96.6% ratio despite losses from fire claims.

Efficiency and Cost Management

Linea Directa announced that it remains focused on a continuous roadmap for efficiency enhanced by digitalization. The expense ratio is trending favorably as costs associated with acquisition and administration decrease alongside growing business volumes. This is critical for maintaining competitive margins while enhancing shareholder value.

Dividends Strategy and Future Guidance

Regarding dividends, the management expressed a cautious optimism. Although the aim is to return to a high payout level similar to the past (90% historically), further consolidation of profits is prioritized before reinstating dividends. The Board is committed to a prudent approach, ensuring that the financial health is solid before distributing profits.

Expectations for 2024 and Beyond

Looking ahead to 2024, the company projects combined ratios to potentially land between 94% to 95%, emphasizing the strong management practices employed across departments. These ratios reflect a commitment to operating performance and customer satisfaction, crucially supporting the growth and retention of existing clients in a competitive market.

Earnings Call Transcript 2024-Q1

[Beatriz Izard, executive]

[Foreign Language] Good morning, and welcome to Linea Directa's First Quarter 2024 Results. This is Beatriz Izard, Head of Investor Relations. It's a pleasure to have here with me, Carlos Rodriguez Ugarte, Linea Directa CFO.Let's just start by reminding that we started to report under the new accounting standards, IFRS 17 and 9 last year. Yet in order to meet the different needs of analysts and investors, we are also providing in the Excel financial supplement local IFRS 4 figures in addition to IFRS 17 and 9. We will continue to do so all around 2024 and even further should you need it.As always, the Investor Relations department is here to help you with the transition and a full reconciliation has been included. Nonetheless, please recall that IFRS 17 and 9 doesn't have much an impact on our accounts and does not change the way we manage our business.With this brief introduction, over to you, Carlos.

[Carlos Rodriguez, executive]

Thank you very much, Beatriz, and good morning to all of you, and thank you for joining us. I will go straight to Page number 5. 2024 has begun with the consolidation of profit and a change of trend, which we anticipated on the second half of 2023. Gross written premiums, they were up a solid 3% by line of businesses, net insurance income, which is the equivalent to the former net premiums earned under IFRS 4, we're up 3.1% in Motor, 4.5% in Home and 7.9% in Health. It is noteworthy to mention the acceleration of growth in the Health segment.Policyholders, on the other hand, dropped 4.5% alongside the hardening of subscription for the most aggravated risk not updated in the first quarter of last year. Combined ratio dropped to 97.3%, 9.5 points better than the first 3 months of 2023 and also improving over the fourth quarter of 2023. Expense ratio keeps on improving due to our continuous efficiency roadmap based primarily on digitalization. Capital position remains very robust at 183%.Turning now to Page number 7. Insurance revenue were up 3.4% with a solid contribution from all line of businesses. Technical profit stood at EUR 6.3 million, confirming the positive trend and the success of the action plans in which we focus on insurance margins. Loss ratio dropped by 9.1 percentage points, an expense ratio of further 0.4 points. Correspondingly, combined ratio dropped to 97.3%.Investment result was up 10%, mainly based on higher income from the fixed income portfolio, credited interest, which is shown separately from investment result for clarity purposes, is the financial unwinding of the prior year discounting of the provision for claims incurred. The unwinding was an expense of EUR 2.2 million for the first 3 months of the year. All things together, profit after tax stood at EUR 10.1 million as compared to the loss of EUR 5.3 million over the same period of last year, a remarkable improvement of EUR 15.4 million.Turning to Page number 8. As usually, we break down premiums and policyholders by line of businesses. It is not worth the acceleration of growth in Health, both in premiums and clients. On the negative side, hardening subscription and risk selection had an impact on policy count, especially on Motor.Turning to Page 9. In Motor insurance, in the quarter, we made individual adjustments to the most aggravated risk in the portion of the portfolio, not updated in the first quarter of last year. As we have seen, this had a toll on policy count. Combined ratio on the positive side had an improvement of 10.3 percentage points. This phenomenal positive evolution is the result of rate actions that continue to earn through our book, the excellent management of claims and a strict control over the expenses. We can securely say we are back to technical profit, although not to the levels we would like to.Turning to Page 10. In the Home business, premiums were up 4.4% despite rate actions also triggering some slight effect on retention. The company is very much focused on innovation and on its multiproduct offering with the launch of a specific offering to our clients, such as the car-home formula and the carefree home policy. Combined ratio was strong at 96.6%. Several fire claims affected the loss ratio. The cost ratio continues to have an understanding trend on the back of growing business volumes at the same time as expenses keeps on declining.As with regard to the Health business, premiums accelerate its growth to 9% to 8.7%. Combined ratio also had an outstanding performance, specifically on the expense ratio. And this is precisely the area we know we need to improve the most to reach our breakeven goal. As I commented on previous calls, the integration of Health under the Linea Directa umbrella brand is generating efficiencies in both marketing and operational side.Full disclosure on combined loss and expense ratio by line of businesses is provide in Page 23 and also in the Excel financial supplement.Please let's move now to Slide number 12. Loss ratio continues to improve, and it stood at 75.1%, 9.1 percentage points down from last year with Motor, leading the improvement with adjustments on the own damages frequency, subscription and claims management actions. Further, Home and Health posted lower frequency, although we have seen some increases in the cost of claims.Turning to Page number 13. On expenses. The company keeps on being completely focused on our efficiency roadmap. The development of expenses has been exceptional along with growing business volumes. The trend in both acquisition and administrative expenses remains excellent.Turning to Page 14 on financial results. Investment result was up 10%, mainly driven by higher income from the fixed income portfolio. Excluding realized gains on the mark-to-market of investment funds, which, as you know, adds volatility, the financial result will have grown by almost 27%. As usual, we are providing the credited interest in a separate line for clarity purposes.On Slide 15, we disclosed the portfolio composition, the movements that flow directly through equity and some other metrics. The message here is that the overall yield of the portfolio increased to 3.1%, excluding net realized gains. The overall duration of the fixed income portfolio is 2.90.Moving on to our solvency position. Solvency margins remains very solid at 183%. As with regard to eligible own funds, we have positive contributions, earnings, the development of the portfolio and finally, the provision for premiums. For each part, SCR increased by EUR 6 million in the quarter, driven by market risk. The increase in the symmetric adjustments posted by regulators and a greater exposure to equities explains the vast majority of SCR movement.To conclude, in 2023, the company implemented many actions needed to adjust our business to the complex macro and micro scenario of the insurance sector. We knew and we share this with the investment community the short-term negative impact on the company's financials. But we also knew that those actions were appropriate for the future well-being of the company in the medium to long term.Now although market environment is still quite complex. We have started to see the result of past actions with an encouraging and consolidated change of trend, yet still much is to be done.Thank you very much. And now I will hand the call to Beatriz to begin Q&A.

[Beatriz Izard, executive]

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

[Operator]

[Operator Instructions] And the first question comes from the line of Mak Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 2. The first one is on the evolution of the customer portfolio. Motor has declined in the first quarter. And I was wondering if you expect more declines in the coming quarters? And what should we expect for the whole year? And given that the pace of reduction in the number of customers has reduced, can we conclude that you are being less aggressive with increases in premiums for renovations?And then the second question is on the combined ratio, assuming we have no major shocks in the market, what kind of evolution for combined ratio do you expect for 2024? And if you could share some color on your thoughts for 2025, that will be very helpful.

[Carlos Rodriguez, executive]

Well, in terms of customer evolution, it is true that if you take a look at the first quarter and you compare that to last year, I mean we have lost throughout the year over 140,000 clients, I mean we knew that trend will keep on the first quarter. I mean, although we lost fewer clients than before. But given the fact that we needed to update pricing to the portfolio of clients on the first quarter, remember that we start increasing our premium on the second quarter. We knew that it was going to happen on the first quarter.Looking forward throughout the year, I think you should expect an improvement here. I mean we are not happy about losing clients. We are happy about defending the margin but not losing clients. So towards the year, especially on the second half of the year, you should expect an improvement on that.Have we been more relaxed on pricing adjustments? I might say no. I mean if you take a look at the price adjustments of the portfolio and on the new business, we have maintained more or less the same strategy as we did last year. I mean, looking forward, once the entire portfolio has been updated, as you know well, we will see how we adjust pricing looking forward. I mean, still CPI is there. CPI is in the neighborhood of 3%, 2.5%, and we have to take that into consideration.In terms of the combined ratio, I think the combined ratio for the first quarter has been superb. I mean, even better than we expected. It's not only a matter of the premiums, but it's also a matter of the management, of course. I think claim cost has been managed quite, quite well and average cost per repair has improved quite a lot since the second part of last year.What we should expect on 2024? Well, I said that our first goal was to try to reach a 94% level on combined ratio. We'll see what happens throughout the year. Probably you should expect that on an entire year, but in some isolated or standalone quarters, you should expect that 2024, well, that's the million-dollar question, but I think you should -- we should be shooting for those levels of 94%, 95% for entire year.

[Operator]

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

[Thomas Bateman, analyst]

Could you just give us a little bit more color on the claims trends in Q1, both on frequency and [ severity ], I think you talked about the easing benefit cost inflation and something on own damage guarantee. Can you just give us a little bit more color around those movements. That would be really helpful.And on Health, I guess the number is still a little bit volatile. What kind of guidance can you give us for this business over the next couple of years?

[Carlos Rodriguez, executive]

Thomas, in terms of the claims side of the business, especially on the Motor business, I think the quarter was very, very good. I mean frequency was very much in line as we expected. Probably a little bit worse on the own damage frequency because clients who leave the company, they decide to fix the entire car. So frequency was not very good there. But of course, the weight of this guarantee on top of the entire guarantees is lower.So frequency performance was very good. Severity was very good, better than we expected, even though in Spain on general terms, we have seen that accidents have increased quite a bit for Linea Directa. Severity, I think, was better than we expected. And then average cost, which was really, really was driving our claims cost throughout 2023. I think we did a very good exercise in terms of managing costs and the increase on average cost per claim was very much flat as compared to last year.In terms of Health, I mean, Health, we decided last year to take a different approach, integrating the Health brand into Linea Directa, I think that really start to pay off. We didn't see still the beauty -- the entire beauty of that, but we should expect that to see alongside 2024. Expense ratio really went down, benefiting from the signages from the rest of the business.And in terms of growth, I think the first quarter gross written premium growth was better than the market, and you should expect that evolution to keep on going. We'll see what happened on the second part of the year that, as you know, 60% of the volumes they come from September to December. But as of today, we are very positive for the trend on Health. We are shooting for that breakeven.As I said on the call, it is mandatory that we manage expenses because the rest of the numbers of the Health business are going well. Growth is going well. Frequency is performing quite well. Cost of claims is below average of the market. So all indicators are very positive. And well, we have to wait until the second part of the year, but evolution is very, very much positive.

[Operator]

Our next question comes from the line of Carlos Peixoto from CaixaBank BPI.

[Carlos Peixoto, analyst]

Just actually a quick question on payout policy. So now that you're back to profits. How should we think a bit about it going forward? And basically, do you expect to resume the trend of quarterly dividends payment already with profit at these levels or should we expect that to take place only once net profit becomes a bit higher on a quarterly basis? Just to have a bit of color on that.

[Carlos Rodriguez, executive]

Carlos, well, I wasn't expecting this question, a little bit surprised. So in terms of dividends, well, I think taking a look at Linea Directa, I think this is a company which with an objective of providing dividends to our shareholders. It's something that happened throughout the year since we were listed in the -- we were in a 90% payout. So that's the intention of the company is still to be a company with a high distribution of dividends.But we also, I think we have to do an exercise of being cautious and try to consolidate the good numbers we posted in the first quarter. And I think the Board in those grounds, I mean, what is expecting is that consolidation to take out throughout the year. And once we see that consolidation comes in, the company probably if the Board considers probably will go back to a dividend and payout throughout the year is, I think, retribution for shareholders, it has to be looked on a yearly basis more than on a quarterly basis. And I think as of today, coming from a 2023 year with losses, I think is very prudent and cautious on the Board side to consolidate the income and then decide to pay dividends.

[Operator]

There are no further questions from the conference call at this time. I will now hand back to Beatriz Izard, Head of Investor Relations.

[Beatriz Izard, executive]

We will now switch to the questions received through the platform. We just have one question from [ Paco Riquel ]. He's asking whether you can give guidance for the combined ratio in Motor for the full year 2024. Are you accruing in first quarter your best guess for the year or do you expect the combined ratio to improve in coming quarters as you continue to reprice the portfolio with higher tariffs?

[Carlos Rodriguez, executive]

Paco, I think the combined ratio that we posted on the first quarter results is excellent. And coming from where we were last year and especially looking at the average combined ratio of the market, I think we outperformed probably the market. I think we did our homework last year prior to the market and the market now is hardening its combined ratio. So I'm very positive on that.Looking forward throughout the year, I think the combined ratio will be very positive throughout the year. I cannot give you a number because I don't have the numbers calculated. But I think claim costs will keep on providing good news for the company, earned premiums will keep on providing good news for the company and I expect at least in some standalone quarters to be in the neighborhood of 94%. Is that going to be the end of year combined ratio? I don't know. But I think the evolution that we had in the first quarter is something that we will keep or even improve throughout the year.

[Beatriz Izard, executive]

Thank you. There are no further questions. So thank you very much, Carlos, and thank you all for taking the time to connect. As always, the Investor Relations department is here to help you should you have any further questions.

[Carlos Rodriguez, executive]

Thank you very much. Have a good day.