Linea Directa Aseguradora SA Compania de Seguros y Reaseguros

MAD:LDA

Earnings Call Analysis

Reflecting on Improved Margins and Robust Capital

Linea Directa has focused on margin improvement rather than growth, resulting in a pre-tax profit of EUR 0.5 million for the third quarter, courtesy of a notable reduction in the combined ratio. The company exhibited expense discipline with a remarkable 19.5% expense ratio and a robust capital position. Although the home sales market declined, Home Insurance revenues increased by 5.8%. The Spanish Health industry grew by 7% despite a slight slowdown in new policyholders. The Auto sector still faces profitability issues, but a positive trend is observed with the combined ratio improving. Premiums in the Home line grew by 4.4%, facing a rise in the combined ratio to 97.7%. In health, a steady improvement in loss ratios was reported. The financial result was down by 3.7%, but recurring earnings were up 19% due to healthier reinvestment yields. The company's capital remains strong, at 180% solvency, now generating capital with positive quarterly results.

Margin Improvement and Financial Discipline

Linea Directa has demonstrated a noteworthy improvement in profitability for this quarter, as evidenced by a profit before tax of EUR 0.5 million, attributed mainly to an impressive reduction in the combined ratio. The firm has strategically prioritized margin enhancement over growth, exhibiting a disciplined approach to cost control and operational efficiency, resulting in an exceptional expense ratio of 19.5%.

Segment Performance and Economic Indicators

Despite a challenging economic climate with expectations of headline inflation reaching up to 4.1% for the year, Linea Directa has achieved revenue growth in its Home Insurance segment by 5.8%, thanks to increased average premiums. The Spanish Health market has also shown resilience with industry turnover up by 7%, though there are signs of deceleration in new policyholder growth due to the economic environment.

Core Business and Underwriting Strategies

Linea Directa places significant emphasis on restoring technical performance and has successfully lowered its expense ratio in the Motor segment to an impressive 16.6%, indicating stringent cost controls. The combined ratio in the Home segment, however, rose to 97.7% due to external factors such as atmospheric events and water damage. In response to these challenges, the company has taken decisive rate and underwriting actions aimed at improving profitability while also enhancing customer service and quality perception.

Financial Results and Investment Strategies

The company's financial results indicate a mixed picture, with overall earnings down by 3.7% due to fewer realized gains. However, when excluding these gains, the recurrent financial result is up an encouraging 19%, bolstered by higher fixed income reinvestment yields and successful hedging strategies. Linea Directa has been proactive in adapting its investment approach by reducing the duration of its fixed income portfolio to 3 years, aiming to respond to market conditions more effectively.

Capitalization and Solvency

Linea Directa's strong solvency ratio, sitting at 180%, reflects the company's robust capital position. Despite the challenges posed by the increasing market value of the available-for-sale portfolio due to higher interest rates, the company has maintained a positive capital generation, with a solvency capital requirement increase of EUR 2.7 million. This is attributable to a decrease in market and counterparty risks, counterbalanced by an increase in underwriting risk.

Earnings Call Transcript 2023-Q3

[Beatriz Izard, executive]

Welcome, everybody. My name is Beatriz Izard, head of Investor Relations at Linea Directa. We published our 3Q results earlier this morning and I have here with me, our CFO, Carlos Rodriguez Ugarte to present this report. With this short introduction, over to you Carlos.

[Carlos Rodriguez, executive]

Thank you very much Beatriz. Good morning to everybody. I will go straight to page #5.

The story of this quarter in a nutshell is the significant improvement of margins. The profit before tax for the third quarter stood at EUR 0.5 million, driven by the substantial reduction in the combined ratio. We continue to put margins before growth and maintain our strict control of overheads and process optimization as shown by our remarkable expense ratio. Capital position remains robust.

Turning to page 7 on the Spanish Motor sector market. CPI takes a softer lane, although headline inflation is expected to get to 3.6% at the year-end and 4.1%. For the underlying. Growth in the Motor segment gains momentum even if still trailing behind costs. Although the increases are modest, the change in cycle is confirmed.

Turning to Page #8. Home sales continue to decline, due to high financing costs and loss of household purchasing power. We should expect this trend to continue this year and in 2024. Nevertheless, Home Insurance revenues grew by 5.8% driven by average premiums on the rise.

As with regards to the Spanish Health market, turnover for the industry continues to report significant growth at 7%, although we have seen some signs of a slowdown in the growth of new policyholders in response to the economic environment.

Turning to Page #11. Our key priority is to restore technical performance. Expense ratio was excellent at 19.5% for the first nine months of the year and 19.3% in the quarter standalone. The claims ratio improved significantly in the quarter. Rate action continue to earn through our book. We believe we are taking the appropriate measures to achieve a prudent growth and profitability, applying rates at the current level of risk.

Financial result was down 3.7%. Recurring earnings, though, are on the rise, on the back of fixed income, higher reinvestment yields, remuneration of deposits and the revaluation of the hedging derivative. Excluding realized gains, financial result would be up 19%.

Turning to Page #12. Core messages in IFRS 17 are exactly the same as in IFRS 4, with the technical result displaying a significant improvement in the quarter. Here the key message is that comparisons with the former accounting norm expands as the year evolves. Further, IFRS 9 is not restated for 2022, adding an extra layer of complexity for comparison purposes. Nevertheless, a full reconciliation can be provided by the IR team should you need it.

Turning to Page 13. Rate actions have driven a sliding effect on retention and increased shopping around. We are focused on rebuilding a technical surplus.

I’ll turn now to Page #14. The Auto industry continued to show profitability challenges through the third quarter 2023 with loss trends outpacing premium growth. We are responding with determination to the changes we experience in loss trends with both rate and underwriting actions. The combined ratio, albeit still very high, begins to show a change in trend with a notable improvement in the quarter standalone. In addition to our focus on addressing profitability, we continue to work on advancing our capabilities on customer service and perceived quality.

We are further targeting our digitalization and customer experience that will improve our ease-of-use and low-cost value proposition. We continue with the general operational expense discipline as reflected in the exceptional 16.6% expense ratio.

Turning to Page #15. Premiums grew at 4.4% in the Home line of business, despite rate actions also triggering some sliding effect on retention. The combined ratio rose to 97.7%, affected by atmospheric events and water damage in the quarter. Atmospheric events added 4.8 percentage points or EUR 5.1 million in the first nine months of the year that compares with 2.6 percentage points as of September 2022.

As with regards to the Health business, premiums reflect certain slowdown in policy growth in response to the economic cycle and mix of businesses. Loss ratio is steadily improving, with a prudent risk selection. Expense ratio shows the absence of the proportional reinsurance commission, which is no longer received as of January 2023.

Please let’s move now to Slide #17, where we breakdown management ratios by line of business. Despite a still very high loss ratio, Motor shows a change in trend in the quarter, with a significant improvement. Home, as I already mentioned, includes atmospheric events and water damage this quarter. Health keeps steadily improving, with prudent underwriting. Consolidated expense ratio improved to 19.5%, with Motor at an outstanding 16.6%.

Turning to Page #18. Consolidated loss ratio reached 87.3%, 84.3% in the quarter standalone. Motor continues to be affected by high average costs and higher frequency especially in the own damage guarantee, yet overall, we begin to experience a change in trend in the quarter.

In addition to rates, we continue to improve our underwriting efforts to try to ensure the business we’re writing is classified and priced adequately. Further, we are streamlining the management of claims, expected to bear results in 2024. Home this quarter is mainly driven by the higher costs of atmospherics as I mentioned before. As regards to expenses, we are being extremely strict when it comes to cost control and in driving efficiency in new measures. Consolidated expense ratio further dropped to 19.5%.

Turning to Page 20 on financial result. Earnings were down 3.7% explained by less realized gains in the first 9 months of the year. Recurrent financial result is up 19% backed by higher reinvesting yields in the fixed income, the revaluation of the hedging derivative and the remuneration of deposits.

On Slide 21 you can see the overall yield of the portfolio is up to 288 basis point excluding net realized gains. We are reinvesting in shorter maturities and the overall duration of the fixed income portfolio was reduced to 3 years.

Moving on to our solvency position, the company’s capitalization remains strong at 180%. The company is now generating capital with this positive quarterly result, yet we had also negative impact affecting eligible own funds, including the change in the market value of the available-for-sale portfolio driven by higher interest rates. For this part, SCR increased by EUR 2.7 million in the quarter driven by two opposite effects: on the one hand, lower market and counterparty risk, offset by higher underwriting risk as a result of higher cost of claims incurred.

To summarize and conclude, we closed the quarter with an encouraging change of trend in our combine ratio and a strong balance sheet. We believe we are taking the appropriate measures on addressing profitability. In addition, we continue to work on advancing our capabilities on innovation, customer service and perceived quality. We are targeting further our digitalization and customer experience that will improve our ease-of-use and low-cost value proposition. We’ll continue with the expense discipline as reflected in our exceptional expense ratio.

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 the presentation, Carlos. First, we’ll begin with the questions received from the conference call.

[Operator]

Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions]

Our first question comes from Freya Kong, from Bank of America. Now, your line is open.

[Freya Kong, analyst]

Good morning. Thanks for taking my questions. How much -- in Motor, it’s good to see that you’re prioritizing margins over volumes. How much rate do you think you and the rest of the market still need to push through to get back to pre-COVID levels? Or are you expecting claims inflation to moderate and potentially turn negative to help on this? And secondly, other than rate, what other underwriting actions are you taking and how much improvement do you expect this to drive through for the coming year?

[Carlos Rodriguez, executive]

Well, on the rate side of the business, for Linea Directa I think year-on-year, the core business in the Motor Insurance average premiums have increased very close to 10%. I think the market, the latest numbers we have seen is 4.4% in terms of average premiums, so we are well above the market. Looking forward, I don't see CPI becoming negative, so I think CPI for the next year is going to be in the neighborhood of 3%, 3.5%. So, our intention is to keep pushing average premiums on the rise, at least to cover the increase on CPI. I think, as I tried to explain it over the call, I think the name of the game today is technical margin, improve our margins, and I think we still need to increase average premiums.

It is true that if you take a look at the market, many of the companies are following up, are increasing average premiums, but I still see some companies or some competitors that are being very aggressive on pricing, which is something that I think will turn around negatively looking forward.

In terms of underwriting, we are very much focused on trying to price accordingly to risk premiums.

Risk premiums for the business have increased due to inflation costs, due to repair costs, and that is basically what we are doing. Of course, in that approach, we are losing some clients -- we are losing the clients we want to lose. We are probably cleaning a little bit the portfolio off the worst clients. This is something that we did not do since 2020. I think the market, since COVID, was not in the move of cleaning portfolio and that is something that we have been doing for the year, that is shown on our retention that has suffered a little bit more than we are used to.

[Operator]

We will now begin with the written questions. Thank you very much.

[Beatriz Izard, executive]

I think we have no further questions. So thank you very much to all of you. And 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. Have a nice weekend.