Morning, welcome to our conference call to discuss December 2022 results. I am Beatriz Izard, Head of Investor Relations. As usual, our CFO, Carlos Rodríguez Ugarte, will first walk you through the slides, then we will be happy to take any questions you may have. Now, let me turn the call over to Carlos.
Thank you, Beatriz, and welcome from my side as well. We start, as usual, with the highlights for the period in slide number 5. 2022 was a year marked by significant headwinds: inflation, war in Ukraine, energy crisis, capital markets turmoil. This unique combination of macro factors resulted in skyrocketing prices, affecting the claims side of the P&L. On the other hand, we are presenting a strong performance on the commercial side of the business. Premiums grew by 4.4% and policy holders by 3.4%. Motor is gaining momentum with premium growth of 4.6% in the Q4. We are also presenting strong increases across home and health. combined ratio rose to 96.3% because of cost inflation. expense ratio stood at an excellent 20.6%.
We are displaying, once again, resilient capitalization with a solvency ratio at 188% as of year-end. Finally return on equity stood well above our cost of capital at almost 18%. Moving to the next page, we would like to provide a short summary, sorry, on our huge improvement on disclosure as a listed entity and ESG integration during the year. Notable, the company include non-financial criteria and the recommendations of the Code of Good Governance in the remuneration policy of the board of directors. We publicize, among others, a sustainability investment policy and environmental management and climate change policy and a responsible purchasing policy. We also apply for the Dow Jones Sustainability Index for the first time ever, achieving a remarkable score of 64 points. Cutoff mark stands at 81 for the global index.
We have also rated our investment portfolio from an ESG perspective. We also reduce our environmental impact and made even further progress on the social front. You will find detailed information in the 2022 non-financial information report. Moving on, slide 8 and 9 provide our regular update on the Spanish motor market. In a nutshell, inflation has hit the sector hard. Inflation remained high despite loosening in the last few months of the year, CPI closed the year at 5.7%, with underlying inflation rising to 7% and industrial index prices at 15%. With regards sector premiums, the market has barely reacted in 2022, and there is still a long way to go. Average premiums are on the rise.
Positive impact in terms of P&L will be seen in future quarter, in future quarters as gross premiums convert into earned premiums. The market has experienced a strong margin squeeze. Sorry. Turning to slide number 9, vehicle registration decreased 5.5% in the year. New vehicles sold stood at around 800,000, far away pre-pandemic figures, about 1.3 million. Manufacturing and supply bottlenecks, rising interest rate and prices, and declining household disposable income has resulted in a vehicle population that continues to age. Home, conversely, continues with a positive development. Let's please turn now to slide number 10. Activity and prices in the real estate market have continued to increase, although there are signs of a slowdown with rising interest rates and bleaker economic outlook. House sales were up 14.7% for the whole year.
The insurance home market grew by 5.5% as of December, with prices rising across most of the sector. As with regard the Spanish health market, turnover for the industry continues to report significant growth at 7.4%. Yet the inflow of new customer is slowing because of the economic conditions. Let's move on the main figures for 2022. The year, as I explained before, was marked by strong pressure on margins. On the positive side, premiums are gaining momentum, up 4.4% in the year and 5.1% in the Q4. Customer increased by 3.4% with excellent retention rates. Technical result and cost of claim was explained by rampant cost inflation and higher frequency in motor and home as compared to last year. I will provide additional details on the loss ratio further down.
Expense ratio was excellent, financial result, up 14.7%, includes realized gains in the mutual funds with the aim of reducing P&L volatility prior to the entry into force of IFRS 9 in 2023. Additionally, we also realize capital gains in currencies profiting from the appreciation of the US dollar. Excluding such effect, financial result will have grown by 2.6%. All things considered led to a combined ratio of 96.3% and a profit after taxes of EUR 59.5 million, down 46%. Please turn to page 14, where you see the breakdown of policyholders and gross written premiums by line of businesses. All segments displays solid growth and motor reflects the changing trend. The portfolio increased by 3.4% and policyholders reached 3.5 million.
Company premiums grew by 4.4%. Motor displayed positive momentum with premiums up 3.3%. Home and health continue their very positive trend. Moving to page 15. The motor segment grew by 3.3%. This line of business recorded a solid growth in a very competitive environment. Average premiums are clearly on the rise in both new business and the portfolio. This pricing trend will be gradually reflected in the third and Q4 of 2023. On the technical front, combined ratio stood at 95.4% with an expense ratio again, superb at 17.7%. The performance of the loss ratio was driven by sharp cost inflation, having a strong impact in repair and replacement property costs, higher personal injury costs, and an increase in fatal accidents.
Let's also bear in mind the injuries scale Baremo was increased at an unprecedented 8.5% for 2023. In a nutshell, premiums are being earned at a lower rate than the cost of claims. This situation is expected to last for another couple of quarters. Moving to the next slide. Home premiums growth continue its good performance at a rate of 9.5%, 4% points above the growth rate of the market. Expense ratio is gradually decreasing. It stood at 32.5% for the full year, more than 2 % points below that of the market. Loss ratio, however, was affected by frequency of water and glass damage. Moving now to slide 17. Premium growth in the health segment stood at 10%. We are experiencing a slowing growth as economy deteriorates.
We continue, nevertheless, to improve our technical result with a prudent risk selection and underwriting. Please, let's move now to slide number 18, where we break down management ratio by line of businesses. Motor loss ratio increased by more than 8 % points in a very difficult context of cost inflation and to a lower extent, a rise in frequency. The loss ratio in the home segment increased by 7.7 % points. On the other hand, health remains stable. Expense ratio stood at 20.6%. It is noteworthy to mention the excellent levels in the Motor segment and the decrease in both home and health. Overall, combined ratio reflects the impact of sharp cost inflation on the claim side and robust performance on the company expenses.
If we move to slide number 19, consolidated loss ratio was driven, as I explained before, by severe cost inflation. Specifically in the Q4 standalone, 100% of the motor claims increase is explained by higher average costs, whereas frequency was slightly lower than that of the Q4 in 2021. Motor is enduring heavy cost inflation and premiums have a longer cycle to be earned. As with regard the home segment, 46% and 54% of the increase is explained by higher average costs and frequency, respectively, as compared for the Q4 of 2021. As with regard the expense ratio, it was again remarkable. We continue with our strategy of efficiency and commitment to technology, together with a long control of overheads. Acquisition expenses also reflect increased efficiency in policy retention. Now we move to the investment result.
During the year, we realized gains in mutual funds prior to the arrival of IFRS 9. Since 2023, changes in the market value will be accounted through the P&L. The company decided to reduce P&L volatility. The company profited from the dollar appreciation and realized $3.7 million in currency gains. Excluding such gains, financial result will have grown by 2.6%. On slide 22, you can see the equity mutual funds have fallen to 6% of the total portfolio composition, while government bonds were gaining weight. As with regard investment returns, the rolling 12 overall deal of the portfolio stands at 4.39%, 2.61% excluding net realized gains. Moving on to our solvency position. The company capitalization remains strong at 188%.
The main impact on eligible own funds was the best estimate liability factor in increasing margins because of higher premiums. For its part, SCR increased by EUR 5 million in the quarter with positive and negative effects. On the positive side, lower market and counterparty risk were offset by the increase in underwriting risk with business volumes. To conclude, claims inflation heavily affected 2022 results and also harmed the entire sector. On the positive side, I would like to reinforce the fact that premiums development is encouraging. We are confident that our pricing strategy, strict cost control, and high retention ratios should and will provide a positive development in the medium and long term. Thank you very much. I will now hand the call over to Beatriz to begin the Q&A sessions.
Thank you very much for the 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. 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 Markets. Mr. Maksym Mishyn, please go ahead.
Hi, good morning. Thanks for the presentation and taking our questions. I have three. The first one is on motor. I was wondering what will your strategy be for 2023 considering customers. Do you plan to keep on growing your base or focus on keeping it stable? Have you noticed any change in churn rates after price increases? Do you think that potential market consolidation in motor insurance markets can help you growing faster? The second one is on frequencies. Could you update us on evolution of frequencies in January and February? What are your expectations for 2023? The last one is on health insurance business. The slowing pace in growth does it have any implications for your target to break even by the end of 2024? Thank you.
Thank you very much, Maks. Regarding the first question, looking forward, I mean, the strategy for the company is on 2023 is on keeping increasing average premiums for the business. I think that is necessary in order to cope, you know, with still a strong inflation in Spain. I mean, the focus will be that in trying to keep on increasing average premium. Of course, we are not in the mood of saying that we don't want any new clients. I think it's important to gather clients, and I think, probably in the H2 of the year, I mean, there will be an opportunity to increase the number of clients of the company.
If I were to say, you know, the main goal is keeping on doing what we have done on the Q4 specifically, which is increasing average premiums, not only on the new business but also on the portfolio. In terms of frequency, I think the year 2022 was a good year in terms of frequency as a whole. I mean, on summer, we suffered quite a bit, not only in Línea Directa, but also the sector. Looking the entire year, I think frequency was fine. It was even below that of 2019. My expectation looking forward, I think economic situation will help to have a lower frequency or a milder frequency than 2019.
It is yet too soon to see that a trend. I think January has not been a bad month in terms of frequency. It's still affected by the cost inflation, but I don't think frequency is a problem as of today. Regarding health, we are growing more than the market. I think the market is growing at 7% in terms of premiums. We are growing at 10%, so we are above the market. I think we are more or less on track to reach that break even that we say in 2 years, 2 years and a half. It is true that what we are seeing is signs of a slowdown in new clients or new customers coming into the private health insurance.
Private health insurance is very much linked to the economic situation. Still today, I think we are more or less on track with good evolution in customer growth and very good evolution in the claims side of the business.
The next question comes from the line of Freya Kong from Bank of America. Ms. Freya Kong, your line is open.
Hi. Good morning. Thanks, thanks for taking my questions. Firstly, could you give us some sort of steer on the combined ratio outlook for next year, given the run rate of 106% in Q4? It's tough to see this coming down below 100% in the coming year, given that market prices, like you said, have barely reacted. Secondly, what's the impact of weaker profitability on your non-life capital requirements? What tools do you have to manage capital requirements if rates continue to move and impact solvency? Last question is on home. Could you give us the atmospheric impact that you saw in Q4? Thanks.
Well, as starting from the last question, I mean, in terms of atmospherics in the home insurance, looking at the entire year, I think we experienced a very good H1 of the year in terms of atmospheric. Of course, we were comparing with a very bad year in 2021. It is true that after the summer and for the Q3 and for the Q4, with some, we had some events in terms of raining, and we have some events in terms of fire in some houses. That really impacted the claims side of the home insurance business, you know. It's not that we are worried.
I think the combined ratio that we have in the home insurance is still very much in line, you know, with the sector. It's true that the last part of the year, I mean, having some atmospherics, you know, which include rain and fire, you know, really hit the, you know, the combined ratio on the last part of the year. In terms of combined ratio looking forward, I think I explained that in many of my presentations. I don't see. I expect to be in the neighborhood of 90%, 95%, 96% during the year. I might say that it's gonna be a difficult 2023 in terms of combined ratio for the H1 of the year. Inflation is still there.
You know, Baremo increased 8.5% for the year on bodily injury claims. It's gonna be a difficult year. My expectation is that in the H2 of the year, you will start to see an improvement on the combined ratio. I don't see combined ratios in the neighborhood of 100%. I see combined ratio more in the neighborhood of 95% and 96%. The first question was...
Regarding the capital requirements.
Well, I mean, in terms of capital requirements, I mean, we are very happy with the evolution of the solvency ratio. I mean, we are in 188%. It is true that with this year, we really had a negative impact on the portfolio up to September. I think the last quarter, you know, the unrealized gains of the portfolio was more or less stable. Well, if interest rates will keep on the rise, of course it will have an impact on that. It is true that our portfolio, we are reinvesting, you know, our portfolio at a higher rate than we used to do. I mean, last year, we hope we have more than 150, 170 maturities.
We'll invest that in a much better interest rate. Of course, I mean, if interest rates keep on the rise, you know, it will have a negative impact on the solvency ratio. Having said that, we manage that, you know, with our managing our liquidity, managing our equity exposure to the market. I'm not concerned that Línea Directa will have a problem with the solvency ratio. I think you should expect 2023 to be above a 180% solvency ratio for sure.
The next question comes from the line of Patrick Li from Santander. Mr. Patrick Li, please go ahead.
Hi, good morning. Thanks for the presentation, Carlos, and for taking my questions. I just have two questions on, you know, the cost of claims, et cetera, et cetera. Firstly, referring to your slide 19, you have provided some useful color on the combined ratio. One specific question I have on that slide is your disclosure on the Q4 standard loan level versus 2021, where frequency is down 4% according to that disclosure. Is that a comparison of Q4 alone versus full year 2021? I guess I want to get a feel for how much of that is due to seasonality in the quieter winter months. Looking ahead, have you seen any signs of slower frequency because of lower economic activity or higher fuel prices?
I just want to get a general sense of how much that could potentially offset inflation impact in 2023. Secondly, on premium pricing, what's your general view on the level of competition in the market you are seeing now? If I ask you to split the premium pricing into new business versus renewal, what levels of premium inflation can you put through to your customer base currently? Thanks.
On the frequency in the Q4, I think I tried to explain that during my presentation. Really the Q4 increase on the claim cost is really due to cost inflation, because in terms of frequency, I think it was even below that of the previous year. I think it's something that we thought that we expected a milder frequency in the Q4, and that really happened. I think mobility is somewhat slowing down, especially on weekdays, you know, and that really had an impact on the frequency. Frequency was almost down by 4%. Basically, the entire increase on the claim side of the business has been due to inflation.
Keep in mind, if you take a look at the entire year, by the H1, the increase in claim cost was 50% due to inflation, 50% due to frequency. When we reached September, 80% was due to inflation and 20% was due to frequency, and now we are in that at almost 100%. That, that is the case. In terms of average premium, what we are seeing on the market, I think clearly the market is on the rise, as well as we are. You know, I think we have read from many of our competitor that it's time to increase prices. We have been saying that since, probably, June.
I explained in my previous presentations that I think the market was somewhat is low in turning the cycle. Of course, today, what we are seeing is really companies, you know, increasing average premiums in the new business and in the portfolio. If we were to do an split for Línea Directa, it is true that for us, we have increased average premiums more on the portfolio than in the new business. I mean, especially in the Q4, I think the increase on the portfolio was very close to 5% increase in average premiums. Looking forward, I think the trend will be, you know, important increases in average premiums both in the portfolio and in the new business.
Of course, that will jeopardize somewhat the increase in volumes in clients, although we hope to keep on increasing in clients. Probably you will see a slowdown in new clients coming into the company, whereas you will see clearly an increase on average premiums that will have an impact probably in the H2 of the year.
The next question comes from the line of Thomas Bateman from Berenberg. Mr. Thomas Bateman, your line is open.
Hi, good morning. Thanks very much for the presentation. I have three questions. Just coming back to solvency again. I think I missed the answer on how much the non-life capital requirement is going up because of the weaker performance. If you could just clarify that. Also more broadly, is there anything else that we should be watching out for in terms of solvency during the year? Any changes to the capital model? I think flat interest rates could be a potential headwind. Any other things that we should be looking out for would be helpful. Also there seems to be a bit of a, an uptick in the expense ratio in Q4. Clearly for the full year was a, it was a good number for Q4, I think we're about 22%.
Were there any one-offs or things that we should be looking out for in terms of the expense ratio? Finally, just going back to cost inflation, you obviously highlighted that Q4 motor was mostly driven by the cost inflation rather than frequency. Were there any contract renewals that kicked in in Q4, for example, your suppliers, that made it so much worse in Q4 and is there anything else, other key dates to watch out for in 2023? Thank you.
Thank you very much, Tom. I mean, regarding solvency, I mean the first thing I wanna say is that we are very comfortable in the numbers that we have. We are very comfortable looking forward. I think again this year, 2023, you should expect solvency to be in the grounds that we have posted by the end of the year, above 180. Of course, one of the things that affected the most the solvency ratio is the evolution of the portfolio linked to interest rates. I mean, what we have done this year, of course, is we have decreased a little bit our exposure on the equity market due to the new accounting ruling.
Also, you know, managing that, you know, because as you know, the equity portfolio in terms of capital consumption is the highest one. We have managed our liquidity. We are a company with a high degree of liquidity, which has a lot of impact in our counterpart capital requirements. We have managed that by investing in more short-term instruments that require less capital. That is what we do. I mean, it is true that it's not been a very good year in terms of the evolution of the portfolio and realized gains. Again, the good part there is that our reinvestment yields of the portfolio are very close to the entire portfolio yields.
Are good news not only for the portfolio, but also for the investment income of the company. Again, I think to summarize, you should expect solvency ratio to be on those grounds above 180. Are we thinking about doing something on capital adequacy? No, that is not on the roadmap. I think we feel comfortable on the levels that we are, and we don't have anything on the roadmap, you know, in order to become more efficient on capital.
I mean, I think being in the neighborhood of 188%, whereas the market should be more or less 100%, 160%, 170% if you take out the mutual companies, you know, say it's a good number. In terms of expenses, no, there's no... It's evolution of the company. I think numbers on expense ratio are very good. I think on the motor insurance, we posted at 17.7%, which is a very similar number or even the same number we posted on September. In terms of the company, I think, expense ratio was 20.6%. I think, the last number we posted was 20.5%. No, it's... Well, it's the evolution of the business. I mean, there has not been one officer.
Maybe there's a little bit of impact also of inflation. I mean, no worries on the expense ratio. You should expect that on improving. Depends very much on the moment of the year, but I'm not concerned about that, you know. Then on the cost inflation, the reason why we keep on being impacted by the cost inflation is not a matter of new contracts, renewals and that. It's probably a matter of the evolution of the repair side of the business.
What we have tried to do during the year on the inflation side with especially with the repair side of the business is try to negotiate, you know, with our suppliers, you know, longer contracts in order to put less pressure coming on 2023 and 2024 on inflation. I mean, what we have tried is we have raised, you know, prices, but we have tried to compensate that in order to not have a strong impact looking forward. Many of our contracts, instead of being 1-year contract, we have tried to sign longer contracts in order to cope, you know, with future inflation costs. Nothing new on the Q4.
I think it's the natural evolution of the claims side of the business and the natural evolution on the inflation.
The last question comes from the line of Francisco Riquel from Alantra. Mr. Francisco, please go ahead.
Yes. Hello. Can you hear me?
Yes, Paco. Hello, how are you?
Yes. Thank you. Hello. Nice to speak to you
Carlos and Bea, first question I want to ask is about motor and more in relative terms. I mean, you stand out in terms of the expense ratio, but the loss ratio is higher than the sector average for the first time in our records, even if the average premium has also increased in line with the sector. I would like you to explain the gap, and if you believe that you are more affected than the sector by the cost inflation, any change in the risk taking and risk profile of the new clients. You expect to recover this historical gap that you had in the past, and how? The second question regarding motor is more in absolute terms and regarding the guidance you gave them for 2023.
Well, for the whole company, a combined ratio, 95%-96% on average, but you ended the year at 106. Meaning that, for that average in 2023, you need to end the year in low 90s unless you start below 100. Have you front-loaded any impact in the Q4 that makes you comfortable that you will be in this guidance, for example, the Baremo, or will you be already below 100% in the Q1, so you can explain a bit more the guidance of, for 2023? Just a last question on the solvency ratios and the impact of the mark-to-market of the investment portfolio.
You mentioned there is limited impact from the available for sale in the ratios. I wonder how much is in under available for sale? I want to ask specifically about the real estate assets, if you have updated appraisal valuations, if you think that the unrealized capital gains have come down or not, and this is affecting your capital ratios. If you can explain the accounting impact and solvency impact of the real estate assets, and how do you offset this in the solvency ratio? I was expecting a headwind on the mark to market from the investment portfolio. The Q4 has been neutral. Thank you.
Well, thank you, Paco. Well, in terms of the motor insurance, it is true that if you take the last quarter isolated and compare that to the market, it is true that the deterioration of the loss ratio for Línea Directa was higher than that of the market. I think in our case, it's more than the 300 or 400 basis points, whereas the market has been around 100 basis points. I mean, if you take the entire year, we are still a lot better than the market. I think we are in 95, whereas the market is more close to 98 or something like that. Still we have the, on a yearly basis, a positive gap. Are we affected, more affected by inflation than our competitors? I don't think so.
My personal view is, I don't think so. We've been really affected on the Q4. I don't know competition, I don't have a perception that Línea Directa is more exposed, you know, to cost inflation than our competitors. It is true that Q4's number reflect that our loss ratio was worse. Again, in terms of general terms, we are still have a positive gap. It is true that, I'm trying to go to the second question, it is true that in the last quarter, we have been very conservative on managing claims that will be affected by the entrance of the new Baremo 8.5% increase.
As you know, that will affect, you know, those bodily injuries claims that are yet to be stabilized. We more or less on the portfolio, we know which those claims will be affected, and we have been very conservative, you know, in managing those claims. That probably has increased a little bit, you know, our costs, you know. Looking forward, I think that will help next year because we have been conservative on the last part of the year, and that will help us, you know, to again, you know, start to improving our loss ratio on the motor insurance by the H2 of the year, you know. In terms of solvency ratio, we have done appraisals on our real estate assets.
We do that every 2 years, as required by regulators. The outcome of that has been very positive. We didn't have to deteriorate any of our real estate assets. All those assets are being revaluated by the end of the year. On the investment portfolio, well, we had a hit of unrealized gains, which impacted the solvency ratio in September. It was EUR 90 million. In the last quarter, that has remained stable, you know. Looking forward, 2022 has been a very bad year in terms of that. Keep in mind that on 2021, we ended the year with unrealized gains of EUR 54 million, and we have ended the year with unrealized losses of EUR 90 million.
What we are doing is what I try to explain, try to manage a little bit, you know, the equity portfolio, trying to manage a little bit our liquidity portfolio to cope with that deterioration on the investment portfolio. Of course, as, you know, the portfolio starts to mature, this year we have maturities in the neighborhood of EUR 170 million. Next year, we have maturities in the neighborhood of over EUR 100 million. That will help, you know, to reposition our investment portfolio, especially on the fixed income side, you know, and try to mild any impact or increase on interest rates.
Just to complement what Carlos is saying regarding real estate, Paco, which is the only thing that, as Carlos was explaining, we revaluate every two years. We have unrealized gains on the balance sheet of EUR 32 million before taxes. You know, we don't have any loss, and on the contrary, we have EUR 32 million to be added to the value on the balance sheet.
There are no further questions at this time.
Thank you. Now, we continue with the calls received through the webcast. All right, I think we have no written questions received from the webcast. Thank you very much, Carlos. This concludes our meeting, and thank you very much for your time. Bye.