Good morning, everybody. Welcome to our conference call. I am Beatriz Izard, head of investor relations. As usual, our CFO, Carlos Rodríguez-Figar, will first walk you through the slides. Then we will be happy to take any questions you may have. Let me turn the call over to Carlos.
Thank you very much, Beatriz, and welcome all. We start with the highlights for the period in slide number 5. In a nutshell, 2023 will be a challenging year where the focus will be on the technical margin. Premiums grew by 5.3% and policyholders by 2.4%. Motor is gaining momentum, with premiums also growing at 5.3% in the first quarter.
We acknowledge much remains to be done to adjust prices to the present level of cost of claims. Combined ratio rose to 107.3% because of cost inflation and high frequency as compared to the first quarter of 2022, which had less mobility due to the COVID-19 variant Omicron. Expense ratio stood at an excellent 21%.
We are displaying, once again, resilient capitalization with a solvency ratio of 183%. Finally, return on equity fell to 9.2%. Moving on, as slide number 7 provides our regular update on the Spanish market sector. Inflation remains high despite a slight decrease in the last few months, underlying CPI closing March at 7.5% and industrial prices at 7.8%.
As with regards estimates average premiums, the market has a long way to go before converging with claim cost. On slide 8, the buying and selling activity in real estate show signs of a slowdown with high interest rate and a weaker economic projections. Nevertheless, the insurance home market grew notable at 5.8% as of March.
As with regard the Spanish, the Spanish health market, turnover for the industry continues to report significant growth at 7.5%. Yet the inflow of new customers is slowing because of economic conditions. Let's move on to the main figures of 2023. The first 3 months of the year were marked by rising premiums and a strong pressure on margins. Premiums continued to gain momentum, up 5.3%.
The motor line of business also grew by 5.3% on the back of continuous tariff adjustments. Yet, much more remains to be done. Technical result is explained by historically high cost of claims and higher frequency in motor and home as compared to last year. Additionally, bear in mind we compared to last year quarter, where mobility was reduced as a consequence of COVID-19 variant Omicron.
I will provide additional details on the loss ratio further down. Expense ratio was excellent despite marketing investments. Financial results include realized gains in equity and fixed income. Excluding such effect, financial result will have grown by 12%. All things considered led to a combined ratio of 107% and a loss of EUR 5.3 million. We are reporting no material difference this quarter under the new accounting regulation IFRS 17.
On this matter, 3 key messages. Net income was not significantly impacted as compared to the previous accounting norm. Profitability could be slightly more volatile under IFRS 17 because of the effect of discounting. In a relative high interest rate environment, this can cause a higher insurance service result with offsetting effects in insurance, finance income, and expenses.
The mark to market of investment funds will add some volatility to the P&L. The current business management indicators and the current layout of the income statement will be maintained in parallel. In slide 12, we provide the profit and loss account under IFRS 17. The profit and loss account change format. Income from insurance service is pretty much equivalent to premiums earned before reinsurance.
Reinsurance result is presented separately. Net income from the insurance service will be the equivalent item to the technical result. On the right side of the slide, we present the WACC IFRS 4 to 17. The overall difference is explained by the home liability of included claims, the equity realized gains accounted for in OCI under IFRS 17, the market to market of mutual funds, and the one year and one day of interest discount.
Overall, results is pretty much the same. We additionally publish a general IFRS 17 presentation with the main impacts and criteria adopted by the group. Please refer to it for further details. Let's move to page 13, where you see the breakdown of policyholders and gross written premiums by line of businesses. All segments display solid growth. The portfolio increased by 2.44%, and policyholders reached 3.5 million.
Company premiums grew 5.3%, and motor continued its trend upwards. Moving to page 14, the motor segment grew 5.3%, outperforming the market by 0.6 percentage points. Average premiums are clearly on the rise, although we still have much ahead. We are prioritizing price adjustments on April already factor further increases.
On the technical front, combined ratio stood at 107.9%, reflecting average costs at record high levels, both in repair and personal injury claims. We admit much remains to be done to improve the loss ratio. Yet we are moving in the right direction, adjusting tariffs on a nonstop basis. The first quarter was also marked by higher frequency as compared to last year, which recorded low mobility due to the COVID-19 situation, as I have referred previously.
The expense ratio reflects more marketing investment because of the new client focus and multi-line product offering. Such expenses will be reduced in next quarters. Moving to the next slide. Home premium growth continues a good performance at a rate of 6.7%. Loss ratio was affected by higher frequency as a consequence of increased coverages and services.
Expense ratio reflects a higher deferral in the first quarter. Moving to slide 16, premium growth in the health segment stood at 4.2%. We keep our strategy of being very careful with the subscription and risk selection process. Our loss ratio continues to improve. Please, let's move now to slide number 17, where we break down management ratios by line of businesses.
Motor loss ratio increased by 18 percentage points, reflecting a steep cost inflation. Frequency also was higher as compared to last year, both in home and motor, as I explained earlier. Health continues to improve. Expense ratio stood at remarkable levels of 21%. Overall, combined ratios reflect the impact of sharp cost inflation and higher frequency. If we move to slide number 18, consolidated loss ratio was driven by heavy cost inflation, while premiums are lagging behind.
It is our firm commitment to keep firmly on price adjustments throughout the coming quarters. Frequency was 1.3 percentage points above that on last year. We have returned to the levels of 2019. Average cost in the home segment behaved well as compared to last year, whereas frequency had an impact due to increased coverage to catch up in its offering. As with regards to expense ratio, we maintain a strict control of expenses.
Acquisition cost reflects the new multiproduct campaigns, investments that will be significantly reduced in the coming quarters, and the termination of their insurance commission in the health line of business. Now we move to the next slide. The investment result is explained by realized gains in both the equity instruments and fixed income. Fixed income reinvestment rates, remuneration on deposits, and income from investment properties are on the rise.
On slide 21, you can see the overall yield of the portfolio stands that the overall yield of the portfolio stands at 2.668% excluded, excluding net realized gains. We estimate to reinvest in 2023 at around 2.8%. Moving on to our solvency position, the company capitalization remains as strong at 183%. Eligible own funds remain stable, as the loss for the quarter was more than offset by the change in the market value of the available for sale portfolio.
For its part, SCR increased by EUR 5.5 million in the quarter, mainly explained by the reduction in the symmetric adjustment and increased exposure to equities. To conclude, first quarter numbers display a very difficult scenario on the auto insurance segment, mainly driven by inflation.
Looking forward, 2023 should be considered numbers wise as a transition year, with positive improvement as the year evolves and prices increases are further implemented. Thank you. I will now hand the call over to Beatriz to begin the Q&A session.
Thank you very much for the presentation, Carlos. First, we will 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. If you change your mind, please press star five again.
Please ensure that your device is unmuted locally before proceeding with your question. Our first question comes from the line of Maksym Mishyn from JB Capital. Maksym Mishyn, please go ahead.
Hi. Good morning. Thanks for the presentation and taking our questions. I have three, if I may. The first one is on motor premiums. I was wondering what kind of price hikes you will be implementing in April, and to what portfolio they are being applied, and whether you see this impacting your return rates.
The second one is on costs. Now that inflation is easing, do you see that there are chances that repair costs can go down in the future? The last one is on home insurance. I was wondering if you could explain why frequencies have increased so much in a little bit more detail and what we should expect for 2023. Thank you.
Thank you very much, Max. I mean, in terms of keeping on increasing our average premiums, I think it's something that we have started last year. I mean, if you take a look at the increase in average premiums, you will see that compared to first quarter of last year, the increase on the new business was in the neighborhood of 7%, and the increase on the portfolio has been in the neighborhood of 5%. It is true that if you take isolated first quarter and you compare that to the fourth quarter, we are lagging especially on the portfolio. I mean, the increase on the portfolio has been 1.5%.
Keep in mind that, I mean, we renew the entire portfolio during the year. On the first quarter, we renew prices on around 20% of the portfolio. Still we have to renew prices on 80% of the portfolio. The idea of the company is keep on doing increase on the portfolio throughout the year. Is that gonna affect the churn rate of the company? Yes. If you take a look at the numbers, on the first quarter, our retention rate has deteriorated by almost 200 basis points. You know, that means that clients are still finding, you know, prices elsewhere, which are not increasing.
That in our opinion, I mean, that is kind of dangerous, I mean, given the situation on the cost inflation. Looking forward, we will keep on increasing average premiums. We have done another increase on April, well, we will keep on doing that as long as our risk premium continues to rise.
Regarding the cost inflation, our repair cost was not very good on the first two months of the year. We have seen increases on repair costs in the neighborhood of 7%, 8%. What we have seen on the last month of the quarter that increases are starting to slow down. Numbers on March were fine or were better than the previous two months.
We expect that that trend will come on the coming months. On the home insurance, well, what we did this quarter, I mean, we some of the services that we have externalized on the management of claims, not on the repair of it, but on the management of the claim. We internalized that in order to increase our quality of service, and that really didn't work that well. I mean, it really increased our frequency.
We have retrenched from that. On April, we decide to go back to the previous situation where we have externalized that services and that should help to improve, you know, the loss ratio on the home insurance on the coming months. I mean, that's basically what we did. I mean, we did a test and, it didn't really work. You know?
The next question comes from the line of Francisco Riquel from Alantra. Francisco Riquel, your line is open.
Good morning. Thank you for the presentation. The first question is, if you can please explain the rise quarter-on-quarter in the combined ratio in motor insurance. How much of the increase is explained by the Baremo? What cost inflation is still left here? That's the first question, this is in absolute terms.
Also in relative terms, I wonder how to explain that you are reporting a higher combined ratio than the sector average. If you think that the cost inflation or the frequency is higher for you or the tariffs or... The change in absolute and relative terms. The second question is about your guidance.
You previously were guiding for a combined ratio in the year, 2023 similar to 2022 on average. If you still think that this guidance is achievable given the start to the year in the first quarter? Thank you.
Hola, Marco. Well, if we look at the frequency, sorry, at the loss ratio and the combination of frequency and cost, what we are seeing is that frequency accounts for 30% of more or less, or 35% more or less of the increase, and 60% of the increase comes from the average cost. I mean, Baremo in absolute terms is I don't have the numbers, but of course is, I mean, rising Baremo about 8.5%, you know, on bodily injury claims has an impact. I don't really think on the first quarter that has been the case or it has been much more than we are used to.
I think it's more a matter of still average cost. It's true that we have much more frequency than the previous year because of the COVID. If you take a look at the evolution of the loss ratio increases, which are not good. I mean, the increase in the first quarter as compared to the last quarter is milder.
My expectation is that we'll keep on improving. It is really more still today an issue of average cost more than frequency, which, as I have said, frequency has increased by 1.5 percentage points on the previous numbers. In terms of how do I explain my combined ratio is above that of the market.
Well, we'll see the numbers of the market on the first quarter. I think it's gonna be a difficult quarter for the entire market. Having said that, Well, we are still been suffering from increases in all the repair costs, you know, and all that. Of course, we are not very happy with the combined ratio that we posted. I mean, being on 107, being a company more used to be on the 1995s, 1994, it's kind of difficult, you know, to cope with that. We'll see what happens with the market.
I mean, I think it's gonna be a very difficult quarter, and I think inflation on the 1st quarter is gonna have a hit also on the sector. Having said that, I mean, our numbers are on combined ratio, they need to get improved. The way to improve numbers on the combined ratio is increasing average premiums. I mean, we will keep on doing that.
If you will take a look at the market, probably we are among the top two, top three companies that are rising prices. Still today, there are still some insurance companies that they are decreasing average premiums on the current situation. We are on the rise. We will keep on the rise, and that will have to improve our combined ratio. On the target for the year.
Well, if numbers keep on the way we are right now on combined ratios of 107, we will not be able to reach, you know, combined ratios below 100%. My expectation is still today because I start to see some positive signs on the average cost. I frequency, I hope it will have a good behavior during the year, is that you will see an improvement quarter on quarter.
You know, second quarter will be better than the first quarter, third quarter will be better than the second quarter, and the fourth quarter will be better than the previous one. Having said that, again, if we maintain this loss ratio on the motor insurance, it's gonna be difficult to reach those numbers.
Thank you.
The next question comes from Freya Kong from Bank of America. Freya Kong, your line is open.
Good morning. Thanks for the presentation. Firstly, your solvency level is now coming close to 180%, which is management's bound after which you wouldn't distribute any capital. How comfortable are you with the business if you were to drop below 180%? What level would more serious, I guess, corrective actions need to be taken on solvency?
Secondly, your motor business is still growing despite the very tough environment, and your Q1 combined ratio for motor was around 108%. Given that premiums are still below claims inflation, does that mean you're writing new business at above 100% combined ratio? How should we be thinking about this? I guess how do you see the evolution of your combined ratio improving throughout the year? Thanks.
In terms of solvency, it is true that I think last number we posted on December, they were in the neighborhood of 187. Now is on 183. I mean, I still feel very comfortable, and I explained that on my last call, that the company is still, we still think that we will be on the, that 180. I mean, it's 183. Solvency ratio is a dynamic number. It's very difficult to maintain always the same level.
I mean, you have a lot of issues that are seasonable in terms of getting the number of solvency. I mean, I'm not worried about being above 108, 183%. I mean, I explained that on the end year call, and I maintain that the company is still on 183. Having said that, I mean, I think we are among the companies with the highest combined ratio on the motor on the solvency ratio on the motor insurance business.
I don't see that that 180 could be jeopardized, you know, on this year, you know. Regarding the motor insurance, well, numbers are numbers. I mean, at the end, we are increasing still, the new business. We are increasing the business on around 2% in the number of new clients coming into the company. It's 1.9%, I think is the number.
It is true that if you do the numbers in terms of average premium versus risk premium, those clients are still not on profitable grounds. I mean, also we are a company that we manage very well the pollution of the profitability of clients, and those clients will come into profit in the short term.
Having said that, looking forward for the year, you will probably see that the evolution of the growth in new clients will become milder. I mean, our intention during the year is not to focus on gathering clients. It's more to focus on defending the margin. You know, that is what we will do.
You should expect more efforts on rising prices than on gathering new clients. I explained in my call that we did an effort on the marketing side of the business because we needed to transfer to the market. I will focus on multi-clients and multi-product. Looking forward on the year, we will reduce our marketing exposure, and that probably will have an impact on the gathering of new clients. You should expect, you know, the company keeping on growing in clients during this year.
The next question comes from the line of Thomas Wissmann from Berenberg. Thomas Wissmann, your line is open.
Hi, good morning. Thanks for taking my questions. Firstly, thank you very much for your IFRS 17 presentation. And I really appreciate you giving both the IFRS 4 and IFRS 17 numbers. That's really useful. I was just wondering, will you give us any more comparatives? I think you've just given us last year, last quarter in 2022.
Will you be able to provide, maybe the whole of 2022 comparatives soon? I know as we go through the year, that would be helpful. Can you discuss the company's reinsurance renewals? In particular, did this have any impact on the performance in home insurance in Q1? Just a couple of clarification points on the investment portfolio.
Did you say that you expect to reinvest at a yield of 2.8% or is the 2.8% yield guidance for the year? Can you just clarify your comment on growing exposure to equities? What's the thinking around that? Just finally back on motor, what do you think the positive or the catalyst might be for a more material change in pricing across the market? I guess it seems like your comments earlier saying that peers still declining prices is a little bit worrying to me. What do you think might change their behavior? Thank you.
Well, in terms of our 2022 IFRS 17 comparison, we don't have that information here. I mean, I'll get back to you on that but it's difficult because we don't have the detailed comparison on 2022. Really, we didn't afford, you know, to post the number on this first quarter. We, you know, but that comparison, we don't have it. In terms of the home guidance, my expectation for the year is that the expense ratio will not be maintained at that, you know, number. 26% I think is a very good number and is more, it has a component of seasonable situation.
I think we should be during the year in the neighborhood of 30%, 31%, 32%, which is a good number as compared to the market. In terms of the loss ratio of the home insurance, you will see clearly an improvement on the second quarter and looking forward on the year. As I explained before, we have some one-off issues on the first quarter that will be, you know, solved on the second quarter or the third quarter. Regarding the equities, exposure to equities.
Basically what we did, Tom, is at the end of the year, we decide to reduce somewhat our exposure to mutual funds and equities, because of the entrance of the new regulation IFRS 9, together with the seventeen. What we did is, we somewhat rebuilt some of our exposure to equity, but I'm talking about EUR 10 million out of EUR 900 million of the portfolio. It's not a relevant number. As you know, in terms of capital, the equities are the instruments that they require more capital. On... I didn't get you on motor. I think you were talking about changes in prices.
Well, again, as I explained in a previous question, if you take a look at the increasing average premiums year-on-year, the portfolio which is really the one, you know, that hits on the combined ratio has increased by almost 5%. It is true that if you take first quarter 2023 versus fourth quarter 2022, that increase is still very low. It's 1.5% increase.
What we need to do is to keep pushing there. I mean, we need to manage of also the retention rate. As I explained before, the retention rate has suffered in the first quarter and has decreased by 200 basis points. It's a combination of that.
Looking forward, again, I think you will should expect further important increases on the portfolio. You should expect less growth on new clients coming into the company, and that will help us to keep on improving the combined ratio throughout the year. Having said that, I think 2023 for Línea Directa and I think for the sector is more a transition year, more than a year, you know, where numbers will come out, you know, during the year. I don't know if I'm missing some question?
Me.
The next question comes from Carlos Peixoto from CaixaBank. Carlos Peixoto, your line is open.
Yes. Hi, good morning. My first question and first of all, sorry if I missed the first part of the call, so if I end up repeating some questions. First question would actually be related with the average premium per policy. Running the math, the simple average on the motor business would be up by roughly 3% year-on-year versus last year.
I was wondering on a like-for-like basis or per within the different lines of coverage, what has been the average increase? When you look at inflation and overall inflation in repair costs and all that, the level of increase does feel a bit shy. How do you see this evolving throughout the year?
What type of measures you believe can be adopted to bring this increase more in line with inflation and eventually allowing for an improvement in the combined ratio? The second question would actually be related with the Baremo and the overall combined ratio there in the first Q. I was just wondering whether in the first Q there was any specific one-off either related with the Baremo with some retroactive impacts or something of that nature that could help to explain here the levels, or if there were no specific one-offs. Thank you very much.
Carlos. Starting with the last question, there are no one-offs on the Baremo on, for the first quarter. I mean, Baremo is gonna have an important hit on the loss ratio during the year, but in the first quarter is not been something exceptional. We knew it was gonna have an impact. It's having the impact that we expected.
I mean, at the end, an increase of 8.5% on the bodily injury claims, it has an impact. But, I mean, it's business as usual in that, in that regard. In terms of, you know, average premiums, well, I agree with you that still today increases in average premiums are kind of shy.
I explained before that, if you take a look on first quarter as compared to the fourth quarter, the increase on the portfolio is still very mild. I mean, at 1.5%. We need to increase that or speed up the average premium rises. That is a commitment of the company. I think I tried to explain during my presentation that the commitment of the company is to during this year and probably on the coming years is if inflation is here to stay, we need to improve that.
At the end, when you manage the company, you have to cope with rising average premiums, taking a look at competition that are still, you know, pushing average premiums downwards, which from my point of view is a clear mistake in terms of P&L. Also you have to manage the retention rates of the company. It's not that easy, you know, to take a decision to increase average premium per se and just do that.
Again, I agree with you. It's still very mild, the average premiums increase. You should expect that to keep on going during the year. Probably, you will start to see some color on the second part of the year in terms of gross premiums and improvement of combined ratio, as a consequence of that.
The next question comes from Fernando Gil de Santivañes of Bestinver. Mr. Fernando Gil, your line is open.
Hi, thank you for taking my questions and thank you for the presentation. Two quick ones on model, please. First one is on average price increases, what is the average price increase that you've doing or have done so far year to date in the new car versus the used car, segments? That is one question. The second one would be, you know, I get this is difficult, but assuming the frequency remains and loss ratio remains and inflation remains, do what extent need prices to increase to bring the combined ratio now to in motor, to 100%? Thank you.
The second question, it's kind of difficult to give you a number. I mean, I don't have the answer to the $1 million question. I mean, it's a matter of risk premium on clients, analyzing each risk premium on clients and rising prices of them.
One of the things that we are doing, of course, to improve the combined ratio is also, you know, with these average increases, try to clean a little bit the portfolio that is increasing average premiums more on the more risky clients, which means that those clients, you know, a number of them are leaving the company because they don't agree with the pricing.
It's difficult to give you a number how much I do have to increase average premiums to cope with the combined ratio. Keep in mind that the combined ratio is the result of two things, average premiums and also the loss ratio. My expectation is on the loss ratio that average cost will improve during the year. As I explained before on the call, I have seen some positive signs on March in terms of average cost, which is going also 200 basis points below that number that increase on January and February.
Having said that, what we know, because all the insurance companies, we use the same valuation tools, that still today, Línea Directa, Average cost per repair is still below that of the market. To give you a number on how much we should increase our premiums to cope with the combined ratio is kind of difficult. My commitment or the company's commitment is that we need to further increase quite a bit, average premiums, on any kind of client. That is something that we will do.
In terms of the split between new cars and used cars, the first thing is that new cars numbers are not very good in still in the first quarter. They have improved since last year, still numbers are shooting for less than 1 million new cars sold in Spain.
That's very difficult for companies like Línea Directa than whenever it's a transaction, normally people look for prices on Línea Directa. The split between new and old car, it's kind of difficult because normally new cars, they go for fully comprehensive, and old cars, they go for third parties, you know. It's kind of difficult. We'll try to look at those numbers, and if we have those numbers, we will share that with you.
The last question comes from the line of Thomas Wissmann from Berenberg. Thomas Wissmann, your line is open. As a reminder, if you'd like to ask a question, please press star five on your telephone keypad. If you change your mind, please press star five again.
On the live, we go for the questions that we have received or the email or the webcast.
Okay, thank you. Now we continue with the questions received through the webcast. The first question comes from Patrick Lee from Banco Santander. Good morning. He says, thank you for the presentation. I would like to understand the higher frequency in terms of your clients' behavior.
In the past, you had expected higher prices and higher petrol prices and lower activity, may lead to lower usage of cars. Has that trend played out in the last few quarters? I would like to have a feel for how much of the increased frequency is due to COVID normalization and how much to other economic factors. Thanks.
Thank you, Patrick. Well, we are not seeing that less mobility that we expected. It's something that it kinda is kinda weird because if you take a look at the evolution of the, you know, increases on the prices on gas, on petrol, it's normally very much linked to less mobility, but we are not seeing that. It is the first quarter, mobility has been very similar to last year or a normalized year, so that really has an impact on the frequency.
Our frequency has increased. I think as I think I explained that is 1.5% above, you know, last year. That really had an impact on the cost side of the business. Are we expecting that frequency to become milder? Well, we'll see. I see the numbers of Easter. Easter has not been very good in terms of accidents in Spain, so we'll see.
I think it will be better on summer as compared to last year, but frequency is very, very back to normal. In terms of COVID impacts, difficult to get a number, but I will say that is more in the neighborhood of, you know, EUR 10 million to 30 million more this year as compared to last year due to the COVID situation last year.
Thank you. I think Thomas Wissmann is having some problem with the line, so I will read your question through the webcast, Tom. Could you please comment on the company's reinsurance renewal cost and attachment points? Mm-hmm.
Well, in terms of renewal, we, I think we are the first insurance company in Spain that renews its reinsurance program or reinsurance scheme. We do that on October last year, being the first one always because I think it's a good opportunity for that. Prices has increased, of course, you know, for the entire sector and for Línea Directa.
I would say that if you compare Línea Directa prices with like for like companies, you know, with the same priorities and so on, you will find that Línea Directa has the lowest tariffs on their insurance program. Of course, prices has increased, especially on the motor insurance, not that much on the home insurance, but nothing to be remarkable.