Morning, welcome to Línea Directa's conference call to discuss June 2022 results. I am Beatriz Izard, Head of Investor Relations. As usual, we will first walk you through the slides, and then we will be happy to take any questions you may have. Now, let me turn the call over to our CFO, Carlos Rodríguez Ugarte.
Thank you, Beatriz, and welcome from my side as well. We'll start, as usual, with the highlights for the period in slide number five. In a context that we can describe as extraordinary and uncertain, with a sharp uptick in inflation, we are happy to present a strong performance in the first six months of the year. Policyholders grew 3.8% and premiums by 4%. By line of businesses, we are displaying very solid development across all segments. Motor grew at 2.5%, with an acceleration in the Q2 . Combined ratio stood at 90% and return on equity at 28.3%. Additionally, it is now worth it to mention the excellent performance of the expense ratio, which stood at 19.8%. Solvency ratio as of June was 206.7%.
Moving on, slide 7 provides our regular update on the Spanish motor market, which is still presenting a complex environment. With the main developed countries all making progress in their vaccination rates, and with COVID-19 becoming somewhat less severe, economies are now focusing their attention on the conflict unfolding in Ukraine. The war has had major impact on the economy at a time when the recovery from the health crisis was not yet completed, leading to a sharp increase in prices. CPI rose to 10.2% in June, with underlying inflation rising to 5.5%. Correspondingly, the cost of claims in the sector is on the rise. Sector premiums are up 2.3% in the Q1 , and average premiums show small signs of a stabilization following the sharp decrease experienced over the last few years. Turning to slide 8.
Home continues with a positive development. Property purchases have continued at a good pace despite higher borrowing costs. House sales are up 24%, sorry. Revenues for the sector increased by 5.1% as of June, and average premium remained stable. As with regard, the Spanish health market, the growth in policyholders has slowed down while turnover continues to report significant growth, with premiums adjusting for higher healthcare costs and hospital tariffs. Now I'll take you through the main figures for the year. In the context I just described, the company continues to grow with robust profitability metrics. Premiums were up 4%. Customers increased by 3.8% together with excellent retention rates. Our technical result as of March was fully explained by higher frequency. Please note that the mobility of 2021 Q1 was still limited due to COVID.
The Q2 is also marked by additional frequency and higher personal injury compensation and repair costs as compared to last year. Financial result includes EUR 4.5 million of realized gains, mainly in mutual funds, with the aim of reducing P&L volatility prior to the entry into phase of IFRS 9 in 2023. We also took advantage of the window of opportunity to realize notable gains. Excluding such effects, financial result will have grown by 9.1%, driven by higher dividends on the equity portfolio. All things considered led to a solid combined ratio of 90% and a profit after taxes of EUR 49 million, down 15.9%. Please turn to next slide, page number 12, where you see the breakdown of policyholders and gross written premiums by line of businesses. The portfolio increased by 3.8%, supported by excellent retention rates.
Policyholders reached 3.4 million, with solid growth across all segments. Company premiums grew by 4%. Motor displayed positive momentum with premiums up 2.5%. Home and health continue their very positive trend. More specifically, if we turn to next page, the motor segment grew 2.5% or 0.2 percentage points above the market. Again, the portfolio recorded a solid growth in a still very competitive environment. On the technical front, combined ratio stood at a noteworthy 89.3%. Expense ratio was superb, and the performance of the loss ratio was driven by a gradual increase of the frequency in the first and Q2 and higher cost of claims as compared to last year. Net premium earned, however, increased at a lower rate with the rise of the unearned premium reserve. Combined ratio is well below the sector, almost 7 percentage points.
Please bear in mind we are comparing with the sector latest available data as of March, and we expect the market to deteriorate its margin in the first half. Moving to next slide. Home had an excellent performance during the first six months of the year. Premiums maintained its very positive trend, up 10.6%, a growth twice that of the market. Combined ratio stood at 90%, 1.2 percentage points below that of 2021, with remarkable performance in both the expense and loss ratio. Moving now to next slide. Health continues path. Premiums grew more than 13%.
The message here is that we continue with a prudent subscription policy and a careful risk selection. As we did last quarter, the expense ratio has been adjusted to take into account lower expenses referral and adjusted ratios fall to 32.2% and 42.1% in June 2022 and 2021 respectively. Please, let's move now to slide number 16, where we break down expense ratio by line of businesses. Motor loss ratio had an outstanding performance, up 3.5% in this quarter in a context of higher frequency and higher bodily injury compensation and repair cost. Home had an excellent semester, and health improves by 6.3% 12 points. Expense ratio dropped to 19.8%. Noteworthy to mention the expense ratio achieved in the motor line of business of 17.3%, which I think is remarkable.
Overall, we display strong operational resilience in a very, inflationary situation or context. If we move to the next slide, consolidated loss ratio was driven by the motor line of business, as I just explained. The Q1 was marked by higher frequency, and the Q2 begins to take into account higher average cost of claims. On the next slide, we elaborate on the expense ratio, which again, was remarkable. We remain firmly committed to efficiency and technology together with a strong control of overheads. Acquisition expenses are contained thanks to higher retention ratios. Let's please now move to slide number 19. As I mentioned before, we took advantage of a window of opportunity to realize gains. Equities and mutual funds were sold at 56% and 70% average return, respectively.
We also unwound an interest rate swap and the underlying bond generation capital gain of EUR 1 million. Excluding those gains, investment results will have grown by 9.1% on the back of higher dividend income. On slide 20, you can see equity mutual funds have fallen from 8% to 7% of the total asset allocation. As with regard investment returns, the overall return of the total portfolio, rolling twelve, stands at 3.9%, 2.7% excluding realized gains. Moving on to our solvency position. The company solvency margin stands at 207%. The main impact on eligible own funds was the drop in the mark to market of the AFS portfolio, particularly the fixed income portfolio as a result of rising rates.
Set aside the profit for the quarter, other adjustments include a positive variation in the Best Estimate of Premiums. For its part, SCR decreased by EUR 10 million in the quarter. This is largely explained by lower exposure to equities and the symmetric adjustment dropping to -5.34% compared to +1.4% as of March. I would like to conclude by saying that we expect the board to have or to keep the same dividend schedule as last year. Thank you all. I will now hand the call over to Beatriz to begin the Q&A session. Thank you very much.
Thank you very much for the presentation, Carlos. First, we'll begin with the questions received from the conference call.
Thank you. If anyone would like to register a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. Star followed by one on your telephone keypad to register a question. Our first question is from Maksym Mishyn, from JB Capital. Maksym, your line is open. Please go ahead.
Hi, good morning. Thank you for the presentation and taking the questions. I have two. First one is on Motor. I was wondering, how do you see premium dynamics in the sector going forward? It seems that your peers have already reverted discounts, and some are hiking premiums, but it should take some quarters until we see the impact on the combined ratios. I was wondering, in terms of lag between hikes to premiums and the impact on technical results, do you think you have an advantage over your peers because of the direct sales model? Can we see the improvements faster? Then, the second question was on frequencies. I was wondering if you could please update us on how you see frequencies in Motor evolving over last week or last month. Are there signals suggesting that high gasoline prices can reduce mobility?
Thank you.
Well, thank you very much, Maks. In terms of premium dynamics, I've been always saying that my expectation was that on 2022, we will see a change in the cycle. I think we are experiencing that. It's still slow. I think in traditional companies, it's kind of difficult to turn around the pricing strategy. The perception is clearly that the market is turning around and starting to increase prices. In our case, we have posted a 2.5% increase in premiums. If you take the last quarter isolated, you will see that our increase was 3.5%. Indeed, the growth from the Q1 to the Q2 was above 10%. My perception is that.
Of course, premium growth translated to the P&L, it takes quite a time because at the end, you basically put on the P&L the earned premium and not the gross premium, so it will take a while until, you know, it impacts the technical result. On the other hand, you know, the claim side of the business, any impact is immediately translated into the P&L. It will take a time, but my perception is that the market clearly, yeah, it's starting to turn around in the pricing study. Having said that, keep in mind that the market as of June grew gross premium by 2.3%, and Línea Directa was able to outperform the market, growing by 2.5%. On the second question, frequencies.
Well, I still don't see that impact that you were posing in your question. I mean, in terms of, gas and all that. It is true that frequency is very much in line with 2019. I think in our case, frequency is in the neighborhood of say 70%, more or less. I think we will see a change in the frequency evolution after summer. My expectation is that frequency will drop in the second part of the year, but as still today, we don't see that evolution. I think frequency is very much in line with Q1 . We still need to see some evolution of the impact of inflation, of the impact of the gas prices and all that.
Still today, I don't see that impact.
Thank you.
Thank you. Our next question is from Thomas Bateman from Berenberg. Thomas, your line is open. Please go ahead.
Hi, good morning. Thank you very much. Thanks for my questions. I was hoping you could just give me a little bit more color on what your expectations for the market combined ratios are. Hence, you know, why aren't we seeing a faster increase in premiums year to date and over the course of the rest of the year? My second question is just on the yield in the investment portfolio. There's been a few moving parts recently. What do you think like a running yield is on your investment portfolio, and how would you expect that to tick up over the next couple of quarters? Finally, you just mentioned that claims frequency is only 70% for Línea Directa. That seems quite low.
I don't really know how to think about that number. Could you give me a little bit more color? 'Cause if that goes up to 100%, that feels like that could be quite negative. Thank you very much.
Thank you, Tom. Well, the combined ratio, I mean, Q1 of the year still was impacted a little bit by COVID. The Q2 , you know, frequency started to pick up. Combined ratio for the company as a whole is in the neighborhood of 90%, a little bit lower. You know, much lower than the market, I will say. I don't have the numbers for the first half of the year for the market, but my expectation is that the market is gonna be very close to 96%-97%. In our case, looking forward to the entire year, I think we will be over 90% between 91% and 92%.
The key here is to be able to maintain that positive gap that we have with the market, which I still think that is the case. If you take a look at the Q1 results of the market, combined ratio was already close to 95%. We'll see what happens next week when we see the numbers of the market. My expectation is that combined ratio will start to pick up due not only for frequency but also to the average cost of repair, which is very much impacted by inflation. On the investment portfolio, the running yield is in the neighborhood of 2.1%. This quarter, what we did, as I explained in my call, is some realized gains on the equity portfolio.
You know, because we don't wanna put a lot of volatility next year on the P&L, so we realize some capital gains on the mutual fund business. The return on that capital gains were very good. It doesn't mean that the company is gonna use the investment portfolio to compensate the P&L. It's basically we took an opportunity on the equity market, but still, it's a very prudent portfolio with 75% of the portfolio on fixed income products. And we know when there was an opportunity, we took it, we make a capital gain, but the running portfolio is in the neighborhood of 21%. On frequency. Well, frequency 70% for me is high. You know, I don't know your perception.
I mean, my expectation is that it's gonna keep in that path during summer, and probably you will see a drop in frequency in the second half of the year. I mean, 70% is very similar to the frequency that we have in 2019. I mean, 2021 was lower, in the sixties, in the fifties, and now is in the seventies. Looking forward to the entire year, I think it's gonna end up below that 70% due to you know, the lack of the use of car in the second half of the year due to inflation and so on. 70% is very much in line with a normalized year.
Understood. Thanks very much for that. I think I misunderstood the frequency. 70% is a good number. All right. Thank you, Carlos.
Thank you. Our next question is from Francisco Riquel, from Alantra. Francisco, your line is open. Please go ahead.
Yes, good morning. Francisco Riquel from Alantra. Thank you for the presentation and for taking my questions. I want to focus on pricing in motor insurance in particular. In slide 7, you mentioned that average premiums for the sector are up 0.9%. When I look at your average premium is lower than that. I wonder if you can comment on this average premium. How much is due to prices, tariffs, and how much is due to the product mix, just to have a better sense of the underlying pricing trends. If you can also comment on how is the pricing for the new production versus pricing for the renewals of existing clients. You mentioned that you have an excellent retention rate. I don't.
I guess it might be coming at the expense of lower prices. Whereas the new production might be coming with higher prices, but net-net is not yet a main positive. How do you see pricing in the market? Are you ahead of competition in terms of price hikes, or are you typically slower because you can afford with a lower combined ratio? Thank you.
Thank you, Paco. On the mix of the portfolio of the motor insurance business, there has not been quite a change. I mean, you should expect that given the situation of the car industry, you know, people taking more third parties more than fully comprehensive. But if we look at the weight of the fully comprehensive policies in the company, it's still in the neighborhood of 40%, so it has not changed. The pickup on the gross premium has been driven by, you know, increase in average premium and of course, increasing the portfolio. The number that you were posting, point nine percent, I think is a number of the Q1 , I think.
My perception is that pricing is starting to go up. I mean, if you take a look at the last numbers, our gross premium for the market was growing at 2.3%. It's somewhat contaminated by the material impact of the shift of two months last year. In the case of Línea Directa, I mean, basically, the increase in gross premium is driven by increase in average premium. Regarding the mix between new business and the portfolio, well, we are not lowering the price on the portfolio. I think it's a matter of having a very competitive average premium in the portfolio, maintaining that average premium, you know, and providing quality to the clients.
Of course, the gathering premium for new clients is probably a little bit lower than the portfolio. We are not increasing or maintaining our retention supported by lower average premiums. I think as a whole, the average premium of the company in the motor insurance business is picking up, and on the market is also picking up. I always say the same thing. Changing pricing strategy for a direct company is faster than a change in pricing strategy for a traditional company. I think that is the case. The third question. If we are ahead-
Yes, if you are.
If we are ahead. I don't know. I mean, I don't know. Probably we are a company faster in anything that we do because we are direct. Keep in mind that when we change a strategy, all our sales force is in the same building. We can do that very fast, and it takes much shorter than the competition. I think the move for the market is changing pricing and start to pick up on pricing. I'm not sure if I'm faster on or not. What I'm sure is even with an increase in average premium, our premium is much more competitive than that of the market. I couldn't comment on whether we are faster or not. I can say that we are very fast in any strategy change that we try to accomplish.
I don't know the market.
Thank you.
Thank you. Our next question is from Carlos Peixoto from CaixaBank. Carlos, your line is open. Please go ahead.
Yes. Hi, good morning. Most of my questions have already been asked and replied. Just an add on. When I look at the gap between the growth rate we've seen in gross written premiums and net earned premiums, I was wondering if this is mainly related with an accrual effect or whether it is because of a change in the reinsurance policy within-
Within the group. If so, if you could elaborate a bit on what drove that change?
I have some difficulties hearing you, Carlos, but I'll try to. I think I got you. Well, no changes on the reinsurance scheme of the company. I mean, we have an excess loss program, which is the same as we have last year, so no change of that. The difference between the gross written and the earned premium is the difference of the accounting. I mean, if we were to sell all our policies January first, there will be no changes, no difference between the gross written premium and the earned premium.
The thing is that you sell policies every day of the year, so you only can account the earned premium on the proportion of the premium used. Again, if we were to sell January first all the policies, gross premium, gross written premium was very similar to the earned premium. No changes in accounting and no changes in the reinsurance program. I mean, the reinsurance programs, we have a small reinsurance program with an excess of loss both in the Motor and in the Home insurance, as well as on the Health insurance, but it's the same as in the past.
I think, Carlos, you will be seeing this acceleration of premiums at the top line. You will see it included in our P&L on an earned basis next year.
No. The thing, Carlos, yeah, I tried to explain that during the presentation is that any impact on the claims side of the business or on the spend side of the business, it's completely translating to the P&L at the first moment. The growth in gross written premium, it takes a while. The thing here is being able to grow much more on gross written premium than on earned premium, because that will have a very positive impact on the future.
Okay. Very, very clear.
Thank you. Our next question is from Patrick Lee from Santander. Patrick, your line is open. Please go ahead.
Hiya. Good morning, everyone. Patrick Lee from Santander. Thanks for the presentation and for taking my questions. Just looking at the multi-segment, I think that claims went up by around 9% in the first half, even though you managed to lower the expenses by some 5%, which is obviously encouraging. If we were to break down the claims increase into components hypothetically, can you give us a feel of how much of this increase in claim is driven by higher frequency and how much of it by current inflationary environment? I guess my underlying question to it is that how much of the inflation pressure we are seeing today are in this set of numbers or is it going to be a further headwind in the second half of the year affecting both claims and expenses? Thanks.
Well, thank you very much, Patrick. It's kind of difficult to do a split between frequency and inflation, you know? I remember when I posted Q1 numbers, I'll say, I was saying that inflation was kind of mild in the P&L. Q2 has not been the case. I mean, inflation impact has increased our cost by 6%-7%. My perception is looking forward in the year if CPI is still on in double digits or close to double digits, that is gonna be even worse for the end- of- the- year. I mean, inflation on the Q2 has been very much important. Indeed, frequency was a little bit better than we expected, but inflation really impacted the Q2 .
I think it has done to the entire market, not only in the insurance business, but in any kind of sector. If we maintain that 9%, 10% you know inflation, so the second part of the year is gonna have an impact for Línea Directa, and it's gonna have an impact for the market. Having said that, again, I mean, if you take a look at the combined ratio, you know our gap with the market is still there, 6, 7 percent. Six, seven percentage points. My perception is that we will be able to maintain that. Again, you know, inflation has an impact on the claims side of the business, but we did a real good effort on the expense ratio of the company.
Having an expense ratio of 17.3% in the Motor insurance will help us very much to cope with that inflation pressure that will come in the second half of the year, as well as it has been impacted in the Q2 of this year.
Great. Thanks, Carlos.
Thank you. We have no further questions, so Beatriz Izard, any other closing remarks?
All right. Thank you. Now we continue with the questions received through the webcast. The first question comes from Jaime Pallarés from GVC Gaesco. He's asking, with the share price at these levels, are you considering a share buyback plan?
Thank you. Well, no, share buybacks are not on the roadmap. Our intention here is, we have been working since April 29 last year to increase liquidity on the share. That is the effort that all the Investor Relations team and myself are trying to do and, there is no share buybacks program on looking forward in the medium term.
Thank you. Also, Jaime Pallarés is asking on the combined ratio, and what could we expect in the coming quarters?
Well, I think I already answered to this question. Combined ratio is at 90% and we should expect a little increase looking forward by the end- of- the- year. It's difficult to say a number, but. Of course, we will be over 90%, between 91% and 92%. Again, we'll see what happens with the market, but the market is gonna be very close to 97%-98%. That's the way I see it.
Thank you. The next question comes from Phil Gross from Mediobanca. For Motor, you mentioned lower net earned premium due to higher unearned premium reserve. The gap to gross written premium looks larger than last year. Are there any changes here?
No changes. Again, I tried to explain that before. I mean, the accounting of the company is very similar. It depends very much on the selling calendar of premiums. It depends very much on when you sell the policies. The unearned premium basically is discounted from the gross written premium, the proportion of the premium that doesn't enter into P&L, you know. No changes. It's a seasonal impact more than anything else. Again, what is important is that the gross written premium is above the earned premium, and that will have a very positive impact looking forward in the coming months and in the next year.
Thank you. He's asking as well about the Motor line of business and our expected combined ratio. What kind of forecast are we making for year-end?
Well, I think we already talk about that, you know. Again, you should expect an increase on the combined ratio, mild compared to the market, but an increase on the combined ratio. Not that much frequency because, again, I expect frequency to drop a little bit on the second half of the year. I think inflation pressure is gonna be in there. We'll see what happens, you know, with the latest interest rate increase, whether it will have a positive impact on inflation. If inflation is in the neighborhood of 8%, 10%, of course, the claim cost of the business is gonna be impacted by that.
Thank you. The last question comes from Mario Santos from Soros Fund Management. He's asking whether you can expand on the comment made in the press release regarding a target to reach EUR 1,000 million of turnover. I see no year attached to that, so we understand this is a 2023 target. Thanks.
Well, that's an ambition of the company to reach that EUR 1 billion, you know, of gross written premium. I mean, it's difficult to put a date there because when we have COVID, then we have the Ukraine war. It's very difficult because we are not in a stable situation regarding the economy. It will depend very much on the economy, on how it works. Of course, we are close to that, very close to that, and it's gonna be on the short term, really short term. I couldn't put a date on that, whether it's gonna be 2023 or not. I mean, if you take a look at the number and the growth rate of the gross written premium, you can figure out when it's gonna happen.
It depends very much on how the economy evolves, how, you know, things evolve. We are very close. It's a target of the company, but we don't put a date on that because, I mean, when we decide to put that target, then came COVID, then the Ukrainian war, now the inflation, it's difficult. We are very close to that.
Thank you. We have a final question, just came in from Richard Lake. He's asking whether the inflation in claims cost in motor is very broad-based or are there key areas driving this, for example, glass, paint?
Well, it's spread around all the repair costs, but it is true that, you know, there are some areas, for example, the painting, has increased quite a bit. I mean, the painting is basically ruled by a couple of companies in Spain, so there's a lot of personal pricing there and also in labor costs, you know. It's very much spread around all the material costs. It is true that in our case, I mean, we try to manage this with our own repair shops, with our network. You know, if you break down the increasing in cost of materials, it's very much spread around.
If I were to pinpoint something, I will pinpoint, you know, the painting materials which has increased quite a bit since January.
Thank you.