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 Rodríguez Ugarte, to present this report. With this short introduction, over to you, Carlos.
Thank you very much, Beatriz, and welcome, everybody. I will go straight to page number five. Línea Directa is today reporting a 108.5% combined ratio. We are not where we would like to be. Rest assured that we continue to prioritize rate adjustments. We have the resolute strategy of rebuilding technical margin. On the positive side, our top line grows 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 the risking of our investment portfolio and improved outlook for motor margin, as reflected in the best estimate of premiums.
Turning to page seven , 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 eight, 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 unprecedented 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 nine, home sales fall 6.8%. Rising interest rates continue to put pressure on credit dynamics, 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 number 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 deals. 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 the main 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 work from IFRS 4, earnings before taxes, to IFRS 17 and 9. Main items are the liability for incurred claims with chain ladder methodology, as opposed to the case reserve. Equity realized gains not accounted through PnL under IFRS 17, but through other comprehensive income. The positive mark to market of investment funds through profit and loss, and the one-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 for 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 point-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. 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. Injury indemnities rising every year, the sky-high cost of repair and spare parts, and normalized frequency.
All these resulted in tariff inefficiencies that must be corrected by the market as a whole to adapt 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 worse performance back in the 2000s, 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, we continue to put pressure on margins, although we are seeing early signs of easing in inflation.
The provision for claim was a steep up in the second quarter to a 95 percentile and will return to the 85 by the year end. For its part, expense ratio was exceptional. As with regard 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 six months of the year, 1.4 percentage points as of June 2022. Turning to page 18 on Health. Premiums grow 5.1%, 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 number 19, where we break down management ratios by line of businesses. Loss ratio is heavily affected by sharp cost inflation and strong prudency. Together, with rate adjustments, we are further optimizing relationship with suppliers and our claims management. Motor and Home also reflected one of 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 95th percentile, which is expected to return to a normalized 85 by year-end. We also experienced some increase in frequency, as explained in the model. Own damage guarantees. Home, in contrast, reversed the 1st quarter peak and dropped significantly in the 2nd quarter. 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 unwounded an interest swap of EUR 25 million nominal of Italian bonds, recording a gain. We recorded EUR 3.2 million of capital gains on equities, taking advantage of a window opportunity prior to the entrance of IFRS 9.
Recurrent 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 equities posture and we invested in fixed income at levels of 4% or 5% with short maturities. Moving on to our solvency position. The company capitalization remains strong at 186%. Eligible own funds remain 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 sale portfolio. For its part, SCR decreased by EUR 1.8 million in the quarter, mainly explained by lower exposure to equities.
To conclude, we close 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.
Thank you very much for your presentation, Carlos. First, we'll begin with the questions received from the conference call.
Ladies and gentlemen, we will now begin the Q&A session. If you would like to ask a question, please press star five on your telephone keypad, and if you change your mind, please press star five again.
Please ensure that your devices are muted locally before proceeding with your question. The first question comes from Maksym Mishyn from JB Capital. Maksym Mishyn, now your line is open.
Hi, good morning. Thank Thank you for the presentation and taking our questions. I have three. 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? Then, 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. Is the decrease related to one-offs? If you could provide more color on what to expect, that would be very useful. Then the last one is regarding the change in percentiles.
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? Thank you.
Thank you very much, Maks. 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, and we have accelerated that strategy in the first semester of the year. With that, I could give you a couple of numbers, you know, in, as, in, if we compare the first six months of the year with last year, the increase in average premiums as a whole is in the neighborhood of 7%, more or less.
It is true that if you take the second quarter isolated, that increase is very close to a double-digit. 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 increase 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.
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 in 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 jeopardize a little bit the volumes of the company. On the expense ratio, well, it is true that we keep on improving the expense ratio.
It stood at 7.7%, I think is 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 number. Our numbers on digital use by clients keep on increasing, and that, you know, has an impact on the expense ratios. You should expect that to keep on going. I mean, we are very much focused on that, and we should keep on improving that expense ratio.
On the percentile, well, when you use a stochastic methodologies, I mean, you need to provide stability to the PnL. I mean, it depends very much on how you manage, on how you manage claims. We have decided to be very prudent on the provisioning this year. That is why we put our percentile on 95. Looking forward, we will adjust that as the year goes on. We will adjust that to an 85 percentile, which will mean that probably we will see some releases by the end of the year.
Thank you very much. Very clear.
The next question comes from Francisco Riquel from Alantra. Francisco Riquel, now your line is open.
Good morning, Carlos and Bea. Thank you for taking my questions. I would like to start with the slide 15, which is very interesting insight about the history of the motor insurance cycle in Spain. 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. 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.
I wonder if there has been any structural change in this cycle in terms of risk-taking, frequency, severity, that you have relative to the peers. In this context, if you think that you will emerge stronger after this cycle compared to the peers, or not, and why?
Then also related to this, if you can please comment on how do you see the churn ratio and the policy counting model going forward? The last question is, solvency. Surprised with the increase in the best estimate, offsetting the reported net loss. It seems to me that the increased provisioning that you mentioned, it's prudent provisioning, and that led to the net losses, you are not considering them for solvency purposes. If you can please explain why do you think the is the reason for the increase in the PAL? You mentioned also higher margins going forward, and we are still have to go through difficult part of the cycle.
In this context, at the end, if you plan any capital action at all. Thank you.
Thank you, Paco. Nice to talk to you. Well, I think the slide that we tried to put there, I mean, trying to mirror what happened on the late 1990s and what is happening nowadays, I mean, is very clear. I think by that time, frequency was very high, you know, and combined ratios start to peak up, you know, 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 not nothing. Still, frequency is very, very good as compared to what our expectations. Again, it's not that we are reaching to a 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 gonna be like that by the end of the year, probably. We keep on adjusting our opening provisions that will provide further releases on the future.
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 our churn rate for clients, of course, rising average premiums at the levels that we are rising. Keep in mind that we have increased average premiums very close to double-digit, you know. 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, you know, 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, not 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, you know, to improve, you know, the technical margin, and thereof, having the opportunity to increase in customers, looking forward 2024. 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. In terms of solvency, well, solvency, I think, the second 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 very good positive impact on the solvency ratio. It is true that, you know, the increase on the case-by-case provisioning, you know, has increased the best estimates of premiums, you know, for that. Someone is offset by that improvement on the best estimate of provision, because we have lost a lot of clients, you know. Also, you know, since it's an estimation of the future, the best estimate also estimates that our claims costs will decrease in the second part of the year.
Yeah, exactly, Paco. As Carlos is saying, the best estimate liability is composed of two main provisions, right? One is the best estimate for claims and another one for premiums. For claims, existing, already incurred claims, we are accounting for that. I mean, if you see in our SCR, it's already taking account of that. The thing is that the best estimate for premiums, which accounts for claims that doesn't yet been incurred, is a future provision, more than offsets the best estimate for claims. Why? Because already taking into account the trend, the outlook, that the margin is gonna get better.
Mm-hmm.
Okay. Thank you.
Next question comes from Freya Kong from Bank of America. Freya Kong, now your line is open.
Hi, Carlos. Hi, Beatriz. Thanks for taking my questions. 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 earn through? 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 the market can return to pre-pandemic underwriting margins, like you show in 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? Last question, could you help quantify the one-offs or any one-offs in the motor and home results in Q2, any weather-related impact? Thanks.
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, you know, our provisioning, trying to anticipate further increases on CPI, on inflation, and that is why we keep on adjusting, you know, opening claims, both in bodily injury and both in property damage. That on the short term, medium term, will probably provide some releases for the company. I mean, being very prudent nowadays, you know, 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 on, 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 gonna 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. I'm still shooting for that. I'm still shooting for us, a fourth quarter, isolated, you know, a standalone quarter below 100% combined ratio. I think third quarter will be better than the second quarter, and fourth quarter will be even better than the third quarter.
That I still stick to that number of trying to be below, you know, 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 explain, the earned premiums, you know, it takes a while until they take all the impact of the gross written premium. Still, you know, 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 gonna take time until we reach a technical margin on double-digit that we used to have before, but we are shooting for that, you know. Our expectation is that 2024 will be a year where we will adjust pretty much our combined ratio. It's not gonna be on the 92%, that's for sure, but probably will be more on the 95%, 94%, and that's what we are shooting. Technical margin would keep on improving as we keep on rising average premiums, you know, and that average premium increase on the gross written premium will transfer to the earned premium. I don't remember, you have another question?
In one-offs, maybe we can comment a little bit, the one-offs in home insurance.
Yes.
Because it's a small account, it takes. It has an impact. For example, in the first half of 2023, we had an amount of atmospheric events of EUR 1.8 million. That accounts in the home line of business for 2.6 percentage points in our loss ratio.
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 decided to retransform that on the second quarter, and you see the evolution on the loss ratio, which in the second quarter, standalone, is on the neighborhood of 16.5%, which is much better than on the first quarter. The combined ratio of the home insurance is on 96%. Keep in mind, the market average is close to 98%. We are much better there, and we should expect improvements in the home insurance looking forward.
Okay, thank you very much.
Next question comes from Carlos Peixoto, from CaixaBank. Carlos Peixoto, now your line is open.
Yes, hi. Yes, hi, good morning. Thank you for taking my call. First, apologies if I might be rewriting some previous questions, but I had some difficulties hearing the call. I was looking at the slide in the presentation where you mentioned that you expect provisioning to move from the 95th percentile to back to the 85th. My doubt there is, does this mean that throughout the second half, we should see re-release of reserves, and basically could that mean you'll get to the first few combined ratio below 100%?
Basically, how does that translate into the expectations for the combined ratio into the next year? The second question would actually be related to premium growth. Considering the efforts that you're making on the pricing side, but also the churn rate you're experiencing, particularly on the motor segment. How do you expect pre or what type of evolution of gross premiums do you expect to see at year-end? What type of growth, I mean. Thank you very much.
Thank you, Carlos. I have some difficulties in hearing you, but I'll think I got you. On the percentile, well, you should expect that, you know, much better improvement on the loss ratio looking forward. If we are in a percentile 95, and we are saying that we will put ourself on an 85 percentile, you know, all things together, it will mean that our provisioning of will imply some releases by the end of the year. We have to be cautious with that. I mean, statistical methodology applied to provisioning is an statistical methodology. You know, it takes the history of the company, you know, to calculate the provisioning.
What we did this first semester is, again, given the situation that we have on the cost side, trying to be prudent, you know, trying to be very cautious and putting ourselves on that percentile, which probably is one of the highest, for sure, in Spain and in Europe, you know. 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, you know, and that will provide some releases. 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 love to increase our clients, we love to grow, to increase market share. I think nowadays, I mean, we should focus on what we need to be focused, and that is, you know, 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. Feeling comfortable, it will come a time to try to increasing clients. We have lost clients, but we didn't lose, you know, a lot of clients. What we have lost is the clients we want to lose because they don't wanna pay the average premiums that they should pay accordingly to the risk premium.
Next question comes from Thomas Bateman from Berenberg. Thomas Bateman, now your line is open.
Hi, good morning. Thank you for the presentation. Just going back to the reserving one more time, could you give us like a nominal EUR amount for how much the, you've added or what the difference between 85th and 95th percentile is? Could you give us a split between home and motor? Is it all in motor, or is it really a bit in your other lines of business? Secondly, just on the motor price increases, could you help bridge the gap between... Okay, you, I think you reported 3.4% rise in premiums adjusted for the loss and policy account were about 5% up, 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? Thank you.
Well, thank you very much, Thomas Bateman. 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. It's difficult to give you a number on the percentile 85, 95. It's an important amount. I mean, I don't have a number to say whether it's EUR 10 million or whether it's EUR 5 million, something like that. Jumping from 85, 95 percentile, it really puts an important amount on provisioning that we will probably be releasing on the second half. It's very difficult to give you a number on what will be the impact.
Keep in mind that the evolution, we will need to see how is the evolution on the claim 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. We'll see how it performs, the 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. 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. The second question? Well, the second question is on the increase on average premium.
If you take a look at the year-over-year, our average premium on the new business is in the 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-over-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. That gives you an idea of how we keep on increasing average premiums as the year goes on.
Next question comes from Patrick Lee, from Santander. Patrick Lee, now your line is open.
... Hi, good morning. Thanks for the presentation. Again, my question is, Carlos, Beatriz. I just have a couple of related questions on the combined ratio, et cetera, et cetera. First thing is thanks, it was useful that for you to highlight some of the main components on the higher cost of claims. Can you give us some thoughts on how much of this is already in your numbers? In other words, is there a time lag in terms of what we are seeing today, in terms of inflation, in terms of the provisioning rates and injury conversion rate? Is there a time lag between what we are seeing today and the effects on your PnL? Second one is on the number of motor policyholders.
I checked in the first quarter presentation, it was up 2% at the time, while in the first half, it's down 0.8%. Was this, was there another specific step change in risk appetite in the second quarter, where you became even more ready to lose clients? Will this trend of selectively losing clients continue into the coming quarters? I guess finally, combining these two questions and 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 break even?
Again, if I combine, you know, the fact that you are more selective on clients and still high inflation, do you get to this break even by higher top line growth in the next few quarters, or are you expecting a meaningful fall in the cost of claims sequentially? Thanks.
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 the neighborhood of 4 point something in this quarter, and 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 will probably be almost 1 year since we start to increase average premiums, so you will see that positive evolution on the earned premium by the end of the year. Then on the cost, 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. You know, we are probably losing the clients with the worst risk premium, which means are the clients with the highest claim cost. You know, 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 the 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 the car before leaving the company, and that will not happen in the second half of the year for those clients, and frequency will improve. In terms of 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 our 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 Direct in increasing average premiums, but the market as a whole, I think, is increasing average premiums. 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. It's something that we are occupied, but it's not something that we are very much worried about. I think nowadays it's much better to improve our technical margin, that we need to improve our technical margin, that focus very much on retaining clients. We are adjusting average premiums to risk, to risk premium, and if clients don't accept those average premiums, you know, we'd rather lose those clients.
The third question, on the target on a 100% combined ratio. Well, the entire year is not gonna be below 100. That's for sure, you know. Again, I think you should expect a positive evolution of the combined ratio in the third quarter and a positive evolution on the fourth quarter. That will give us a possibility on a standalone picture of a combined ratio in the fourth quarter below that 100%. Should be in the neighborhood of 98, something like that, not much lower than that. Again, it's a combination of the two things. It's a combination of improving our earned premium. It's a combination of improving our expense ratio.
I think, the evolution of the claim cost is gonna be milder, you know, with all the actions that we are taking nowadays, it's gonna be milder on the second half of the year.
Next question comes from Fernando Gil de Santivañes, from Bestinver Securities. Fernando Gil de Santivañes, now your line is open.
Thank you very much. Thank you for taking my questions. Just a quick one and follow-up regarding price increases and number of clients. I wonder if you could give us a sensitivity of how much clients you lose, 100 basis points increase in price, increase in 1 percentage points increase in prices? Because I've seen the motor number of customers is down, and home insurance number of customers is down Q on Q. I wonder how the price and number of customers is working on and trying to be, I guess, looking forward. Thank you very much.
Thank you, Fernando. That's, we don't have that number. I mean, we could look at that, but I don't, I don't have the strategy of calculating and increasing in X% of average premium, how many clients are we gonna lose? It's very difficult. I mean, when you increase average premiums to clients, I mean, of course, you have negotiations with clients, be it through campaigns and all that. It's very difficult to give you a number of, you know, the impact of an increase of 1%, average premiums, how many clients are we gonna 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 premiums has slowed down. That means that the market, again, it's also in that path of increasing average premiums, you know. 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. Of course, you know, well, it has an impact also on the retention, you know. We don't have a number. We focus on... Especially because we don't mutualize prices, I mean, so we go client by client.
It depends very much on the client profiling, you know, whether we lose a client or not. I don't have a number on that. 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, you know, 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, you know, and that's how we do it, you know. Are we losing clients with the worst risk? Yes. I think most of the clients that are leaving the company are clients that have the worst risk for the company, and that will have a positive impact on the claim side of the business looking forward.
I think, hola, Fernando, reinforcing Carlo's message. I mean, this elasticity is moving. It's not fixed. You know, if, if the last quarter we experienced an increase 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, 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 much needed.
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, 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. 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, you know, in a difficult situation, and looking forward, you know, I'm talking about 2024. 2024, 2025, the company will be much better prepared to gain market share.
Thank you very much.
Next question comes from Maksym Mishyn from JB Capital. Maksym Mishyn, now your line is open.
Yeah. Hi, thanks. Just one more question on the investment income. You've increased your debt holdings notably in the quarter. 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. Thanks.
Thank you, Max, again. Yeah, 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, you know, in levels of 400 basis points, more or less, in governments with a very short duration. Our duration has dropped, you know, in the neighborhood of 40 basis points, you know, and that is because we are taking durations of 2 and a half years.
You should expect us, you know, to keep on taking opportunities on the fixed income portfolio, and 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. It is true that we have solved an important position on equities in this second quarter. We will rebuild a little bit our equity portfolio. Again, I mean, with interest rate in the numbers that we are seeing, our approach is be more on the fixed income, more than on the equity side of the business.
Our yield is in the neighborhood, for the portfolios, in the neighborhood of 270 basis points, but our investment, we have reinvested in the neighborhood of EUR 110 million this year on maturities. Our investment is in the neighborhood of 4%.
Thank you very much.
... Last question comes from Farquhar Murray, from Autonomous Research. Farquhar Murray, now your line is open.
Cool. Thanks. Morning, all. I have just two 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 a decision to anticipate subsequent impacts on the provision. Please, could you just clarify what those subsequent impacts are specifically within the modeling? Are you saying you anticipate those impacts, but then expect them to reverse out? 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? Thanks.
Well, thank you very much for your questions. On the second issue, I cannot comment on competition. I mean, I think many of our competitors are on the same mood. It is true that Línea Directa is among the two 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 two years, you know, I think that is the right way to move nowadays.
If others, they decide not to increase our experience, we'll see what happen with the combined ratio. In our case, I mean, we are here to try to make money, and that's what we are trying to do. 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 of 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, 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. You know, it's just a matter of deciding where you, where you wanna be. I rather having increased cost on the short term and having some releases on the medium, long term than otherwise, and that's the strategy of the company.
Okay. Just to clarify to me, 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 confidence ratio to do that?
Well, that's. 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. The provisioning is not only on inflation, the provisioning is on how you expect, you know, the evolution of the claims. How it's gonna impact you know, losing portfolio of clients in the property damage claims. All of that is a mixture of that. Again, well, it's a matter of being prudent and expect that, you know, looking forward, those releases will come, you know?
It's a strategy of the company to be very prudent and to put ourselves in a percentile above us, as a percentile as that we are used to. Looking forward, you should expect by year-end to be in an 85% percentile, you know, which is more or less in the percentile that we move always, you know. That will imply that you should expect some releases looking forward.
All right. Many thanks.
There are no further questions at this time. I will now hand back to Beatriz Izard, Head of Investor Relations. Beatriz, now your line is open.
Thank you. We continue with the questions received through the webcast. We have one question coming from Ángela Rabadán Navarrete, from Afi. She's saying, "Could you please detail the impacts on IFRS 17 on the balance sheet and PnL?" Okay. Angela, if you go to slide 13, which is where we break down the work from IFRS 4 to IFRS 17 and 9, the first item that you see is the 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. 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 PnL. This is not the case in IFRS 9. You have a negative impact because these are accounted for directly in other comprehensive income. That's why you have this negative impact of EUR 2.3 million. The third main item is the mark to market of investment funds. Again, under IAS 39, this mark to market was accounted for in other comprehensive income. Now in IFRS 9 is accounted in the PnL, in profit and loss. This semester, the mark to market of mutual funds post data realize an increase of EUR 1.3 million.
Lastly, the four main impact is the unwinding of the one-year unwinding of interest and discount, mainly on the motor line of business. These are the four main impacts, but those are not pretty significant.
That's important to know that, giving a non-life insurance company with a short-term contract with our clients, Línea Directa is applying the simplified model on IFRS 17. I think looking forward, I mean, you shouldn't expect, you know, major changes between IFRS 4 and IFRS 17. What we have done, all the decisions that we have learned in applying IFRS 17 and IFRS 9, they were all towards providing stability to the PnL and, you know, taking all the movements to the balance sheet. Again, I think for this semester, the impact has been positive in a little bit more of a half a million EUR, you know. Again, 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.
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.
Thank you. You all have a good summer. Thank you.