Linea Directa Aseguradora SA Compania de Seguros y Reaseguros

MAD:LDA

Earnings Call Analysis

Línea Directa's Mixed Q2 Performance

Línea Directa reported a combined ratio of 108.5%, indicating higher costs than desired. They are focusing on top-line growth and profitability, prioritizing rate adjustments relevant to risk levels. Cost control measures led to an excellent expense ratio of 19.7%. The Motor segment grew by 3.4%, despite a challenging environment with inflation and tariff inefficiencies requiring market corrections. Financial results fell by 7.9%, with recurring earnings up due to higher investment yields, leading to a 2.6% increase excluding realized gains. The company maintains a robust capitalization with a solvency ratio of 186%, showing strength in their balance sheet amid persistent cost pressures and strategic adjustments for recovery.

Defending Margins in the Face of Client Turnover

In a strategic move to defend profit margins, the company has seen an overall average premium increase of approximately 7%, with patterns reaching near double digits in the second quarter. This approach resulted in a certain loss of policyholders due to realigned premium pricing based on risk, preferring margin over volume in the current market circumstances. In the broader picture, the loss of specific clients who do not align with the necessary premium adjustments is not a concern; the focus remains on maintaining a healthy technical margin rather than merely increasing the number of clients.

Expense Ratio Performance and Digital Efficiency

Efficiencies continue to be gained as the expense ratio stands at 7.7%, attributed to ongoing improvements in company operations and an increasingly digital client base—87% of clients have gone digital. This ratio is one of the most competitive both in Spain and Europe, and the company anticipates further improvements to this metric.

Reserve Provisioning and Release Prospects

The business is modifying its reserve provisioning, moving from a conservative 95th percentile approach to an 85th percentile. This adjustment aligns with the anticipation of future CPI and inflation increases, thus being more prudent in the near term. The transition is expected to result in reserve releases by year-end, although the precise financial impact is yet to be quantified.

Tackling Claims Inflation and Underwriting Margins

The company is working on passing the rising claims inflation onto customers to stabilize underwriting margins that have been under pressure. This process is reflected by the technical margin currently at 96%, which has yet to fully incorporate the average premium increases. An improvement in technical margins is expected throughout the remainder of the year, with further enhancements into 2024 where combined ratios are projected to settle around 95%-94%.

Impact of Exceptional Claims on Home Insurance

Home insurance saw a 2.6 percentage point increase in the loss ratio due to atmospheric events costing EUR 1.8 million. Despite this, the loss ratio in the second quarter improved to approximately 16.5%, better than the first quarter, with expectations for further enhancements as the company adjusts its operations and strategy.

Future Growth and Client Retention

While the company has a historically strong position on growing market share, the current strategy emphasizes defensive margins. Losses in client numbers have been strategic, shedding those unwilling to meet more accurate risk-related premium requirements. The expectation is to recruit new clients once the company reaches its desired combined ratio levels, cementing the emphasis on long-term financial health over short-term gains in client volume.

Earnings Call Transcript 2023-Q2

[Beatriz Izard, executive]

Good morning, everybody. My name is Beatriz Izard. I'm Head of Investor Relations at Línea Directa. We published our second quarter results earlier this morning, and I have here with me, CFO, Carlos Rodriguez Ugarte, to present this report. With this short introduction, over to you, Carlos.

[Carlos Rodriguez, executive]

Thank you very much, Beatriz and welcome, everybody. I will go straight to Page #5. Línea Directa is today reporting 108.5% combined ratio. We are not where we would like to be. Rest assured that we continue to prioritize rate adjustments, and we have the resolute strategy of rebuilding technical margin.

On the positive side, our top line growth with determination and prudency. We currently believe we are taking the appropriate measures to achieve both growth and profitability, applying rates at the current level of risk. On the cost side, expense ratio was excellent with the continuous control of overheads and continuous optimization of processes.

Solvency ratio was strong at 186%, benefiting from derisking of our investment portfolio and improved outlook for Motor margin as reflected in the past estimate of premiums.

Turning to Page 7 on the Spanish Motor market. CPI takes a softer line although the outlook for the year stands at 5% nowadays. Premiums confirm its reversal trend, albeit with a clear lag with cost of claims.

Turning to Page 8. I would like to address the specific components of cost inflation in the Motor line of businesses. The sharp increase of the last couple of years, both in Property Damage and Personal Injury have been a precedent and exponential. Neither customer nor suppliers were able to absorb or pass on these increases in one go. I would like you to bear in mind this slide throughout my presentation.

Turning to Page 9. Home sales fall 6.8%. Rising interest rates continue to put pressure on credit dynamics, and we should expect this trend to continue in the following quarter. Nevertheless, home insurance revenue continued to increase at 5.6%. As with regard to Spanish Health market, turnover for the industry continues to report significant growth at 7.3%. Yet the inflow of new customers is slowing in response to the economic cycle.

Turning to Page #12. The main message here is that recovery will take time, though we are acting with determination. We stick to plan, applying rates accordingly to the level of risk in the current environment. Expense ratio was excellent at 19.7% in a consolidated level, still technical result endures persistent cost inflation. Additionally, the provision for claims includes additional prudency in the quarter. Financial result was down 7.9%. Recurring earnings, though, are up on the back of higher investment yields. Excluding realized gains, financial result will be up 2.6%. Results under IFRS 17 and 9 did not differ much from IFRS 4.

To explain them in difference, let's move to the next page. On the left, you have the profit and loss account with IFRS 17 format. The right graph shows the WACC from IFRS 4 earnings before taxes to IFRS 17 and 9. Main items are the home liability for incurred claims with chain-ladder methodology as opposed to the case reserve. Equity realized gains not accounted through P&L under IFRS 17, but through other comprehensive income. The positive mark-to-market of investment funds through profit and loss and the 1 year unwinding of interest discount. Overall, results are pretty much the same.

Turning to Page 14. Here, the message is that we are prioritizing margins over volumes. We see a sliding impact on the retention rates. The company is focusing on rebuilding a technical surplus.

Turning to Page 15. We provide some history for the Motor sector in Spain. Back in the '90s and early 2000s, there was inflation, coupled with extremely high frequency. High tolerance alcohol, the demographic load of Generation X and easy access to driving resulted in rocketing high frequency in the sector.

Let's bear in mind that the phone-based driver's license was not introduced until 2006. Today, the market doesn't have a frequency problem. Frequency has been normalized to pre-pandemic levels. However, rates have not stopped falling since 2004 with a slight corrections year 2022 ended with the same market average premiums as 2015, just before the variable, whereas injury indemnities rising every year, the sky high cost of repair and the spare parts and normalized frequency. All these resulted in tariff inefficiencies that must be corrected by the market as a whole to adopt them to current costs.

There is not a problem of bad risk. It's only of adequacy of premiums to the current context. Línea Directa display worst performance back in the 2000s, but corrected well before the sector. Today, we believe the sector performance will weaken further as there are costs that hasn't been yet incurred.

With that, I'll turn to Page 16. The Motor segment grew 3.4%. We are growing with determination and prudency. Our focus is on rebuilding the technical margin. On the technical front, combined ratio stood at 109.8%. Cost inflation persists and will continue to put pressure on margins, although we are seeing early signs of easing in inflation. The provision for claim was a step up in the second quarter to a 95 percentile and will retain to the 85 by the year-end. For its part, expense ratio was [ acceptable ].

As with regard to Home, premium reflect certain slowdown in policy growth in response to the economic cycle. The combined ratio stood at 96%. Loss ratio dropped to 16.5% in the second quarter standalone, as was anticipated in our March results. Atmospheric events added 2.6 percentage points or EUR 1.8 million in the first 6 months of the year, 1.4 percentage points as of June 2022.

Turning to Page 18 on Health. Premiums grew 5.1% but accelerated in the quarter to 7.5%. Policy count slowed down due to lower household purchasing power. Loss ratio keeps improving. We continue with a very prudent risk selection.

Please let's move now to Slide #19, where we break down management ratios by line of business. Loss ratio is heavily affected by sharp cost inflation and a strong prudency. Together with rate adjustments, we are further optimizing relationship with suppliers and our claims management. Motor and Home also reflected one-off higher frequency, as I will explain in the next slide. Expense ratio stood at a remarkable 19.7%. The company doesn't stop in reviewing processes and improving efficiency. Combined ratio was, therefore, entirely down to the cost of claims in the first half.

Turning to Page 20. Consolidated loss ratio reached 88.9% mainly driven by average cost of claims while we continue with rate adjustments. We were extra prudent in the quarter with our reserving at a 95 percentile, which is expected to return to a normalized 85 by year-end. We also experienced some increase in frequency explained in the Motor on damage guarantees. Home in contracts reverse the first quarter peak and dropped significantly in the second quarter.

As with regard to expenses, we are being extremely strict when it comes to cost control and driven efficiency new measures. Consolidated expense ratio dropped to 19.7%.

Turning to Page 22 on financial results. Earnings were down 7.9%, explained by less realized gains in the semester. Last year, the company [indiscernible] an interest swap of EUR 25 million nominal of Italian bonds recording again. Also, we recorded EUR 3.2 million of capital gains on equities taking advantage of a window opportunity prior to the entrance of IFRS 9. Recurring financial result is up 2.6% by reinvesting at higher rates.

On Slide 23, you can see the overall yield of the portfolio is up 2.78%, excluding net realized gains. We reduced our equity exposure and we invested in fixed income at levels of 4%, 5% with short maturities.

Moving on to our solvency position. The company capitalization remains strong at 186%. Eligible owned funds remained stable as the loss for the quarter was more than offset by first the best estimate provision for premiums, factoring better margins in the future and to a lower extent, the change in market value of the available for share portfolio. For this part, SCR decreased by EUR 1.8 million in the quarter, mainly explained by lower exposure to equities.

To conclude, we closed the semester with an exceptionally strong balance sheet. We also stick to our strategy to continuously adjust tariffs to risk underwriting. We absolutely have a clear plan to respond to current challenges. Thank you. I will now hand the call over to Beatriz to begin the Q&A session.

[Beatriz Izard, executive]

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

[Operator]

[Operator Instructions] And the first question comes from Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

I have 3. The first one is on the price evolution of Motor insurance. What kind of price hikes are you able to introduce to new and existing customers? And then a follow-up on this. The decline in the number of policyholders, is it related to higher churn or less aggressive marketing campaigns to attract new customers?

The second one is on the expense ratio. It came in significantly better year-on-year and quarter-on-quarter and is the decrease related to one-offs, if you could provide more color on what to expect, that would be very useful.

And then the last one is regarding the change in percentile. Could you explain a little bit in more detail the reason to change? And does the reduction by year-end suggest we might see a reversal of reserves?

[Carlos Rodriguez, executive]

Thank you very much, Maksym. What I tried to explain on the price issue. What I tried to explain on the presentation is that we have been with a strategy of adjusting prices to risk premiums of the portfolio. That has been the case. We began that by the last quarter of last year. We have accelerated that strategy in the first semester of the year. With that, I could give you a couple of numbers. If we compare the first 6 months of the year with with last year, the increase in average premiums as a whole is in the neighborhood of 7%, more or less, but it is true that if you take the second quarter isolated, that increase is very close to a double digit. So that is the strategy. I explained in my March presentation that we should be in the neighborhood of double-digit increase in average premiums and that has been the case as of June.

In terms of the number of policyholders that we have lost during this period of time, it's a matter of not being -- trying to adjust price to risk premium. I mean we increased average premiums, of course, not in a mutualized approach, client by client. And those clients with worse risk premium, we have increased much more the average premiums, and we have lost some of those clients. So it's not a matter of not being proactive on the marketing approach because as you live in Spain, and you know that we are always on TV, it's a matter of adjusting prices and losing some clients on that ground, which is something that we are not concerned. I mean we like very much to grow a number of clients. But I don't think nowadays is the name of the game. The name of the game is trying to defend the margin, the technical margin. And that probably jeopardized a little bit the volumes of the company.

On the expense ratio, Well, it is true the -- that we keep on improving the expense ratio. It stood at 7.7%. I think it's one of the best in Spain and one of the best in Europe. There is nothing exceptional that we have done on those grounds. I think it's a matter of keeping improving the efficiency of the company, keeping improving our digital approach. I think to give you a number, 87% of our clients are digital. That is a big, big number. Our numbers on digital use by clients keep on increasing, and that has an impact on the expense ratio.

I just would expect that to keep on going. I mean, we are very much focused on that, and we should keep on improving that expense ratio. And then on the percentile, well, when you use statistical methodologies. I mean, you need to provide stability to the P&L. I mean it depends very much on how you manage claims and we have decided to be very prudent on the provision in this year, and that is why we put our percentile on 95. Looking forward, we will adjust that as the year goes on, and we will adjust that to an 85 percentile, which will mean that probably we will see some releases by the end of the year.

[Operator]

The next question comes from Francisco Riquel from Alantra.

[Francisco Riquel, analyst]

Carlos and Bea. I would like to start with the Slide 15, which is very interesting insight about the history of the Motor insurance cycle in Spain. So I would like to ask -- my question is in this cycle, you are underperforming at least at the beginning. I would like to understand why I listened to your explanation before. And it seems to me that you mentioned that it's a question of timing that you are more prudent in terms of recognizing losses and that the sector will still have to show up the further losses in the coming quarters. But I wonder if there has been any structural change in the cycle in terms of risk-taking frequency severity that you have relative to the peers.

And in this context, if you think that you will emerge stronger activity cycle compared to the peers or not? And why? And then also related to this, if you can please comment on how do you see the churn ratio and the policy count in Motor going forward?

And the last question is solvency. I am surprised with the increase in the best estimate offsetting the reported net loss. So it seems to me that the increased provisioning that you mentioned is prudent provisioning and that led to the net losses you are not considering them for solvency purposes. So if you can please explain why do you think the -- is the reason for the increase in the [ P&L ], you mentioned also higher margins going forward. And we are -- still have to go through the difficult part of the cycle. And in this context at the end, if you plan any capital action at all.

[Carlos Rodriguez, executive]

Thank you, Paco. Nice to talk to you. Well, I think the slide I will try to put there, I mean trying to mirror what happened on the late '90s and what is happening nowadays. I mean, it's very clear. I think by that time, frequency was very high and combined ratios start to pick up, which is a similar thing that is happening nowadays in 2023.

In our case, we are highly prudent in this year in terms of provisioning. It's not a matter that we have worse risk, which is not the case. Our frequency, although it has increased by 100 basis points as compared to last year. That is not an issue. I mean an increase of 100 basis points is nothing, still frequency is very good as compared to what our expectations and again, it's not that we are reaching 2 worse risk in the market. Indeed, we are losing customers because we are increasing average premium.

Our idea here, our strategy is that still, we need to be very prudent. It's still inflation is there. Although inflation is going down and the underlying inflation, which really affects Línea Directa is still on 5%, 6%. And it's going to be like that by the end of the year probably. So we keep on adjusting opening provisions that will provide further releases in the future. So that gives you a sense of the prudency that we are putting that.

Looking forward on the provision side of the business, I think you should expect on the second half of the year a much better improvement on the loss ratio in the third quarter and specifically more in the fourth quarter.

In terms of churn rate for clients, of course, rising average premiums at the levels that we are raising, keep in mind that we have increased average premiums very close to double digit during the year. We have been increasing average premium since the last quarter of 2022. It is true that in that case, was kind of mild but it has been very strong since January that puts a little bit of pressure on the retention of clients. That is the reason why we have lost some clients.

If you were to ask me that if we are concerned about that, nowadays, no. I think nowadays, as I explained before, the name of the game is trying to defend the technical margin. I mean, we are preparing the company to improve the technical margin and thereof, having the opportunity to increase in customers looking forward 2024. So the churn rate is affected by the increase in average premium, but still I think Línea Directa has one of the best churn rates of the market.

And in terms of solvency. Well, solvency, I think, it's a good number, 186. I think one of the main impacts is on the best estimates of provisioning because we have lost clients, and that has a positive impact on -- a very good positive impact on the on the solvency ratio. It is true that the increase on the case-by-case provision has increased the best estimates of premiums for that, but then someone is offset by that improvement on the best estimate of provision because we have lost a lot of clients. And also, since it's an estimation of the future at the best estimate, also estimates that our our claims cost will decrease in the second part of the year.

[Beatriz Izard, executive]

Yes. Exactly because Carlos is saying, the best estimate liability is composed of 2 main provisions, right? One is the best estimate for [indiscernible] for claims and another one for premiums. For claims, existing already incurred claims. And we are accounting for that. I mean, if you see enough in our SCR is already taking account of that. But the theme is that the best estimate for premiums, which accounts for claims that doesn't yet being incurred is a future provision more than offsets the best estimate for claims and why? Because already it's taken into account, the trend, the outlook that the margin is going to get better.

[Operator]

Next question comes from Freya Kong from Bank of America.

[Freya Kong, analyst]

Carlos, Beatriz. Firstly, could you help us understand what the technical margins you are currently writing in the Motor business, given the focus on profitability? And what does this mean for the [indiscernible], do you think we should see a peak in the loss ratio this year or later this year. I think last quarter, you said that in Q4, you expected to have a combined ratio below 100%. Is this still the case?

Secondly, looking forward a bit, do you think the market will be able to eventually pass on the high claims inflation to customers such that market can return to pre-pandemic underwriting margins like you show on Slide 15. How many years do you think this will take? Or are you willing to accept a lower margin and grow at those levels going forward?

And last question, could you help quantify the one-offs or any one-offs in the Motor and Home results in Q2? Any weather-related impacts?

[Carlos Rodriguez, executive]

Thank you very much. On the Motor Insurance business, we don't have one-offs. I mean what we have is specifically in the loss ratio that we have been on an ongoing process of adjusting our provisioning, trying to anticipate further increases on CPI on inflation, and that is why we keep on adjusting opening claims, both in bodily injury and both in property damage. That on the short term, medium term, we will probably provide some releases for the company. I mean being very prudent nowadays will help us to be in a much better position in terms of provisioning by the end of the year.

Do we think we are in a peak in terms of loss ratio in the Motor Insurance. Yes, my perception is that and I explained that back in March, I think first half of the year was going to be very difficult, not only because of the situation of the market, but also because we decided to be very prudent and second part of the year, it will be much better. So I'm still shooting for that. I'm still shooting for us a fourth quarter isolated a stand-alone quarter below 100% combined ratio. And I think third quarter will be better than fourth -- than the second quarter and fourth quarter will be even better than the third quarter. So that I still stick to that number of trying to be below 100%.

On the technical margin, I think we are on 96%, something like that on the technical margin. That is why we are working. I mean, still today, the technical margin is not reflecting entirely what we are doing with the average premium. I mean, keep in mind that, as I always explained, the earned premiums, that takes a while until they take all the impact of the gross written premium. So still, you will see improvements on the second part of the year, we will improve the technical margin of the company. It is true that it's going to take time until we reach a technical margin on double digit than we used to have before, but we are shooting for that. Our expectation is that 2024 will be a year where we will adjust pretty much our combined ratio. It's not going to be on the 92s, that's for 2, but probably it will be more on the 95%, 94%, and that's what we are showing. So technical merger would keep on improving as we keep on rising average premiums, and that average premium increase on the gross written premium will transfer to the earned premium.

And I don't remember if you have another question.

[Beatriz Izard, executive]

Yes, exactly. In one-offs, maybe we can comment a little bit the one-offs in Home Insurance. Yes, because it's a small account, and it takes -- it has an impact. I mean, for example, in the first first half of 2023, we had an amount of atmospheric events of EUR 1.8 million, and that accounts in the Home line of business for 2.6 percentage points in our loss ratio.

[Carlos Rodriguez, executive]

I think the evolution on the Home insurance, it's been very much in line on what we said on the first quarter. I mean, first quarter, we changed some operational procedures. We decide to retransform that on the second quarter, and you see the evolution on the loss ratio, which in the second quarter stand-alone is on the neighborhood of 16.5%, which is much better than the first quarter. The combined ratio of the Home Insurance is on 96%. Keep in mind that market average is close to 98%, and so we are much better there, and we should expect improvements in the home insurance looking forward.

[Operator]

Next question comes from Carlos Peixoto from CaixaBank.

[Carlos Peixoto, analyst]

So first, I apologize if I might be rerunning some previous questions as I had some difficulties during the call. I was looking at [indiscernible] the presentation where you mentioned that you expect provisioning to move from the 95th percentile to back to the 85th, might out there -- does this mean that throughout the second half, we should see release of reserves. And basically, through that means you'll get to the first [indiscernible] ratio below 100%. And basically, how does that translate into the expectations for the combined ratio into the next year?

Then the second question would actually be related to premium growth. So considering the efforts that you are making on the pricing side, but also the churn rate you're experiencing pretty [indiscernible] on the Motor segment. How do you expect -- what type of evolution of gross premiums you expect to see at year-end? What type of growth? I mean.

[Carlos Rodriguez, executive]

Thank you, Carlos. I have some difficulties in hearing you, but I think I got you. On the percentile, well, you should expect a much better improvement on the loss ratio looking forward. If we are in a percentile 95, and we are saying that we would put ourselves on an 85 percentile, all things together, it will mean that our provision will imply some releases by the end of the year. We have to be cautious with that. I mean a statistical methodology applied to provision is an statistical methodology. It takes the history of the company to calculate the provisioning. So what we did this first semester is, again, given the situation that we are having on the cost side, trying to be prudent, trying to be very cautious and putting ourselves from that percentile, which probably is one of the highest for sure in Spain and in Europe.

Looking forward, we will end the year. Our intention is to be in the 85 percentile, which I might say still will be one of the highest percentiles in the market and that will provide some releases.

And in terms of volumes of clients, I think you were asking a little bit about the evolution of the churn rate and looking forward on the year. I mean it's not something that we are very much concerned. I mean we'll have to increase our clients. We love to grow -- to increase market share. But I think nowadays, I mean, we should focus on what we need to be focused and that is to defend the technical margin. If that means that we will lose some clients, we will lose them, and we will gather them when the company reaches a combined ratio where the company feels comfortable and feeling comfortable, it will come a time to try to increase the clients. We have lost clients, but we didn't lose a lot of clients. And what we have lost is the clients we want to lose because they don't want to pay the average premiums that they should pay accordingly to the risk premium.

[Operator]

Next question comes from Thomas Bateman from Berenberg.

[Thomas Bateman, analyst]

Just coming back to the reserving one more time, could you give us like a nominal euro amount for how much the -- you've added or what the difference between 85th and 95th percentile is, and could you give us a split between Home and Motor? Is it all in Motor is [ sort of ] your other lines of business?

And secondly, just on the Motor price increases. Could you help bridge the gap between -- Okay. I think you reported 3.4% raising premiums adjusted for the loss in policy count, we're about 5% year-on-year in terms of pricing, but you're talking about double-digit increases. Could you help bridge the gap between those price increases that you talk about and the actual increase that we see in the accounts?

[Carlos Rodriguez, executive]

Well, thank you very much, Tom. There is no percentile on the Home insurance, Home insurance is case by case, okay? We don't have an approved methodology on that. So the provisioning on the Home insurance is case-by-case. And it's difficult to give you a number on the percentile 85, 95. It's -- but it's an important amount, I mean, but I don't have a number to say whether it's EUR 10 million, whether it's EUR 5 million, something like that. but jumping from 85, 95 percentile, it really puts an important amount of provisioning that we will probably be releasing on the second half, but it's very difficult to give you a number on what will be the impact.

Keep in mind that the evolution that we will need to see how is the evolution on the claims side of the business in the second half of the year, the statistical methodology is very much in line with the case-by-case provisioning. So we'll see how it performs case-by-case provision and then releases will be higher or lower depending on the case-by-case. My expectation is that being on a percentile 95, it provides a lot of prudency to the company and that prudency will be somewhat released on the second half, but it depends very much on the amount. It depends very much on the case by case and the evolution of new claims and old claims as well.

And the second question. Well, the second question is on the increase in average premium. If you take a look at the year-on-year, our average premium on the new business is in neighborhood of 7.5% increase and on the renewals, it's in the neighborhood of 7.6%. If you take isolated the second quarter, second quarter versus second quarter, that number both in the new business, it's above 10%. And in the portfolio, it's also above 10%. I think it's 10.4% or something like that. So that gives you an idea of how we keep on increasing average premiums as the year goes on.

[Operator]

Next question comes from Patrick Lee from Santander.

[Patrick Lee, analyst]

I just have a couple of related questions on the combined ratio, et cetera, et cetera. First thing is, it was useful for you to highlight some of the main components of the higher cost of claims, but can you give us some thoughts on how much of this is already in your numbers. And in other words, is that time lag in terms of what we are seeing today in terms of inflation, in terms of the provisioning rate and injury conversion rate, is there a time lag between what we are seeing today and the effects on your P&L?

And second one is on the number of Motor policyholders. I checked in the first quarter presentation, it was up 12% at the time, while in the first half is down 0.8%. So was there another specific step change in risk appetite in the second quarter where you became even more ready to lose clients. And would this trend of selectively losing clients continue into the coming quarters? And I guess, finally, combining these 2 questions relating to your target combined ratio of 100% by fourth quarter stand-alone. If I look at your combined ratio today of 110%, how do we actually plot the path to breakeven because again, if I combine the fact that you are most affected than clients and still high inflation. Do you get to this breakeven by higher top line growth in the next few quarters? Or are you expecting a meaningful fall in the cost of claims sequentially?

[Carlos Rodriguez, executive]

Thank you very much, Patrick. Starting for the last question, I think it's a combination of both. I think you should expect a better improvement on the earned premium for the company. I think we posted in a neighborhood of 4 point something in this quarter and is still yet to come better numbers on the second half of the year as the increase in average premiums, which now is still impacting only the gross written premium will be reflected on the earned premium. Keep in mind that by September, it would probably be almost one year since we start to increase average premium. So you will see that positive evolution on the earned premium by the end of the year.

And then on the cost claim, we should expect some improvements as well. Keep in mind that the churn rate that we are having that we are losing clients, I mean that will also have an impact on the frequency. We are probably losing the clients with the worse risk premium, which means are the clients with the highest claim costs, those clients are somewhat leaving the company, and that will have an impact in the medium term on the cost of claim. When a client leaves a company, it have a negative impact because normally what they do is they fix entirely the car. That is why our property damage cost has increased quite a bit in this second quarter because clients leaving the company, they decide to fix a car before leaving the company that will not happen in the second half of the year for those clients and frequency will improve.

In terms of churn, well, if we look at the quarter on a monthly basis, I think April was not a very good month in terms of churn rate, but we have seen improvement of that on May and June, and we are seeing a positive evolution on July. That means that market as a whole is also on the trend of rising average premiums and clients when they look around for better prices, they are not finding those better prices. Of course, many companies are not being as aggressive as Línea Directa in increasing average premiums, but the market as a whole, I think, is increasing average premiums.

So I think we are seeing a better evolution of the churn rate for the company in the last couple of months. And I expect that to happen looking forward throughout the year. Again, it is something that we are occupying, but it's not something that we are very much worried about. Again, I think nowadays is much better, much better to improve our technical margin that we need to improve our technical margin that focus very much on retaining clients. I mean, we are adjusting average premium to risk premium. And if clients don't accept those average premiums, we'd rather lose those clients.

And the third question, on the target on a 100% combined ratio. Well, the entire year is not going to be below 100, that's for sure. But again, I think you should expect a positive evolution of the combined ratio in the third quarter and a positive evolution in the fourth quarter. That will give us a possibility on a stand-alone picture of a combined ratio in the fourth quarter below that 100% should be in a neighborhood of 98%, something like that, not much lower than that. And again, it's a combination of the two things, a combination of improving our earned premium. It's a combination of keeping -- of improving our expense ratio and I think the evolution of the claim comp is going to be milder with all the actions that we are taking nowadays it's going to be milder on the second half of the year.

[Operator]

Next question comes from Fernando Gil de Santivañes from Bestinver Securities.

[Fernando Gil de Santivañes d´Ornellas, analyst]

Just a quick one and a follow-up regarding price increases and number of clients. I wonder if you could give us a sensitivity of how much clients we lose per 100 basis points increase in price -- increase in number and the point increase in prices because I've seen that Motor number of customers is down and Home insurance number of customers is down Q-on-Q. And I wonder how the price and number of customers is working on -- I'm trying to do a guess looking forward.

[Carlos Rodriguez, executive]

Thank you, Fernando. That's I -- We don't have that number. I mean we could look at that. But I don't have the strategy of calculating an increase in X percent of average premium, how many clients are we going to lose. It's very difficult. I mean, when you increase average premium to clients, I mean, of course, you have negotiations with clients with a through campaigns and all that. So it's very difficult to give you a number of the impact of an increase of 1% average premiums, how many clients are we going to lose.

As I tried to explain before, my perception is that on the last couple of months, I mean, the rate of losing clients because increases in average premium has a slow down. That means that the market, again, it's also in that path of increasing average premiums.

On the Home insurance -- in the Home insurance, we are increasing also average premiums. We have been doing that for the last -- even before increasing average premiums on the Motor insurance business. And of course, well, it has an impact also on the retention. But we don't have a number. We focus on -- especially because we don't mutualize prices, I mean. So we'll go client by client. So it depends very much on the client profiling, whether we lose a client or not. I don't have a number on that. While -- Of course, what we do when we start to increase average premiums, we don't increase average premiums to the whole base -- client base. I mean we go -- we start with the worst client in terms of risk premium, then we go to the next step, then we go to the next step, and that's how we do it. Are we losing clients with the worst risk? Yes. I think most of the clients are -- they are leaving the company are clients that have the worst risk for the company and that will have a positive impact on the claims side of the business looking forward.

[Beatriz Izard, executive]

I think Fernando, reinforcing Carlos message, I mean, this elasticity is moving. It's not fixed. If the last quarter, we experienced an increases in churn, that means, of course, that the clients are able to find a better price elsewhere at a loss for the company, by the way. If now we are seeing that this elasticity is squeezing. It's getting down. That means that the market as well is coming with us in this change of cycle, which is very, very much needed.

[Carlos Rodriguez, executive]

But I mean, yes, to go back to my presentation, I mean, I think it's important to understand that the clear strategy of the company is try to defend margin on top of volumes. And that's something that we will keep on doing this year. I mean, again, we need to prepare the company to go back to combined ratios at levels that we feel comfortable. Of course, you can imagine that with levels of 108%, we are not comfortable on those grounds. We need to adjust our combined ratio. And let me be clear, it will come a time where the opportunity to go back to growth will come and what we need is to be prepared for that. I think the market still will suffer in terms of combined ratio. I think we are still in a difficult situation and looking forward, I'm talking about 2024, 2025, the company will be much, much better prepared to gain market share.

[Operator]

Next question comes from Maksym Mishyn from JB Capital.

[Maksym Mishyn, analyst]

Just one more question on the investment thinking. You've increased your debt holdings notably in the quarter, and I just was wondering if you could guide us on what to expect as a run rate investment income for the rest of the year.

[Carlos Rodriguez, executive]

Yes, we have increased our exposure to fixed income, especially governments on the last part of the year on the second quarter. I mean we are reinvesting in levels of 400 basis points, more or less, in governments with a very short duration. Our duration has dropped in the neighborhood of 40 basis points, and that is because we are taking the ratio of 2, 2.5 years.

You should expect us to keep on taking opportunities on the fixed income portfolio. I'm probably not waiting so much on the equity side of the portfolio. The equity side of the portfolio has an impact on solvency. The equity side of the portfolio has an impact applying IFRS 9, so it is true that we have sold -- sorry, we have sold an important position on equities in this second quarter, we will rebuild a little bit our equity portfolio. But again, I mean, with interest rate in the numbers that we are seeing, our approach is to be more on the fixed income more than on the equity side of the business. Our deal is in the neighborhood -- for the portfolio is in the neighborhood of 270 basis points. But our investment, we have invested in the neighborhood of EUR 110 million this year of maturities. Our investment is in the neighborhood of 4%.

[Operator]

Last question comes from Farquhar Murray from Autonomous.

[Farquhar Murray, analyst]

Just 2 questions, if I may. And apologies, firstly, I just want to come back to the provisioning question. Slide 12 states that the use of the 95th percentile reflects the decision to anticipate subsequent impacts on the provision. Please, can you just clarify what those subsequent impacts are specifically within the modeling? And are you saying you anticipate those impacts, but then expect them to reverse out.

And then secondly, why are you not seeing peers move as aggressively in terms of repricing as you are? What exactly is holding back the restoration of industry profitability here?

[Carlos Rodriguez, executive]

On the second issue, I cannot comment on competition. I mean, I think many of our competitors are on the same move. It is true that Línea Directa is among the 2 companies with the highest increase in average premiums. My personal opinion is that if you are not in the mood of increasing average premiums, you will have further problems looking forward. I think, again, the right strategy maybe for Línea Directa, but I think for the market is to increase average premiums on the sector. Inflation is there. Inflation has been there for the last 2 years and I think that is the right way to move nowadays. If others they decide not to increase average premiums, we'll see what happened with the combined ratio. But in our case, I mean, we are here to try to make money, and that's what we are trying to do.

And on the percentile issue, again, I mean, you can be prudent or aggressive in the management of the claims that you have. You can be prudent or aggressive on the opening provisioning of the claims that you have. In the case of Línea Directa, we have been always a very prudent company in terms of provisioning. And in this year, we are even more prudent on the management of the claims, which means that we are increasing our opening provisions, expecting further impacts on the inflation, which will be milder. But again, it will be on the 5% probably by the end of the year. And it's just a matter of deciding where do we want to be. I'd rather have an increased cost on the short term and having some releases on the medium and long term than otherwise. And that's the strategy of the company.

[Farquhar Murray, analyst]

Okay. But just to clarify, why would inflation expectations into the second half of the year not already be in the reserving expectation? Why are you [ having to ] play around with the confidence ratio to do that.

[Carlos Rodriguez, executive]

Well, it's not only the inflation. I mean, inflation looking forward, of course, is embedded in the percentile because it's always embedded in the percentile, but the provisioning is not only on inflation, the provision is on how you expect the evolution of the claims, how it's going to impact you losing portfolio of clients in the property damage claims. All of that is a mixture of that. And again, well, it's a matter of being prudent and expect that looking forward, those releases will come. It's a strategy of the company to be very prudent and to put ourselves in a percentile above as the percentile that we are used to. Looking forward, you should expect by year-end to be in an 85% percentile, which is more or less in the percentile that we move always. So that will imply that you should expect some releases looking forward.

[Operator]

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

[Beatriz Izard, executive]

Now we'll continue with the questions received through the webcast. So we have one question coming from [indiscernible]. She's saying, could you please detail the impacts on IFRS 17 on the balance sheet and P&L?

Okay. [indiscernible], if you go to Slide 13, which is where we break down the walk from IFRS 4 to IFRS 17 and 9. The first item that you see is a home liability for incurred claims. What happens under IFRS 4 is that we account with a case reserve. This is a much more prudent methodology than any statistical methodology. Therefore, when we move to IFRS 17, you have this positive impact in the Home reserve for an amount of EUR 2.9 million.

The second item you see is the realized gains in equities. If you recall, under IAS 39, realized gains on equities are accounted for in the P&L. This is not the case in IFRS 9. So you have a negative impact because these are accounted for directly in other comprehensive income and that's why you have this negative impact of EUR 2.3 million.

The first main items -- item is the mark-to-mark of investment funds. So again, under IAS 39, this mark-to-market was accounted for in other comprehensive income. Now in IFRS 9, it is accounted in the P&L in profit and loss. So this semester, the mark-to-market of mutual funds posted realized an increase of EUR 1.3 million.

And lastly, the 4 main impact is unwinding of the 1-year unwinding of interest discount, mainly on the Motor line of business. So these are the 4 main impacts, but those are not pretty significant.

[Carlos Rodriguez, executive]

That's important to know that giving a non-life insurance company with short-term contracts with our clients, Línea Directa is applying the simplified model on IFRS 17. And I think looking forward, I mean, you shouldn't expect major changes between IFRS 4 and IFRS 17. What we have done -- all the decisions that we have done in applying IFRS 17 and IFRS 19. They were all towards providing stability to the P&L and taking all the movements to the balance sheet. But again, I think for this semester, the impact has been positive in a little bit more of EUR 0.5 million. But again, but I don't expect major changes on the comparison looking forward. We are not a life insurance company. We are a non-life insurance company. I think it's -- the impact is much milder for those type of companies.

[Beatriz Izard, executive]

I think we have no further questions. So thank you very much to all of you. As always, Investor Relations is around for any follow-up. Thank you very much, Carlos. And this concludes our meeting.

[Carlos Rodriguez, executive]

Thank you, and you all have a good summer. Thank you.