Earnings Call: Q2 2021

Jul 21, 2021

Good morning, and welcome to Lina Directa 6 Months 2021 Earnings Webcast. We are pleased to welcome you today and also thank you for following up the business of Linea Directa. This is Beatriz Cesar, Head of Investor Relations. We have the pleasure of having here with us Carlos Rodriguez Huberte, our CFO, who will review our financial results and activity for the first half. Additional information can be found on our website as well as in the Excel spreadsheet that we uploaded. At the end of the presentation, we will open the Q and A session. We'll start with the questions coming from investors joining us through the conference call, followed by questions received by webcast. We'll be, of course, available afterwards to answer any pending questions. Without any further delay, I now hand the conference call over to Carlos. Good morning to everyone. Thank you very much, Beatriz, and good morning. Thank you very much. I'm pleased to present our first half 20 21 results as a listed company. We will be discussing how things were for Linea Directa for the 1st 6 months of the year with the accounts approved yesterday by the Board and that are public at the moment. In a nutshell, Linea Directeur had a strong 6 month performance delivery, recurring and stable high profitability metrics. Policyholders grew by 3.8% and gross written premium by 1%, mainly reflecting pressure on premiums in the motor line of business. In the same hand, we had outstanding technical development with a combined ratio of 85.5%, a strong testimony of our underwriting capabilities. Net result stood at €58, 200, 000 and return on average equity stood at almost 35%. And solvency ratio for the 1st 6 months of 2021 stood at 203%. This figure is also is already taking into consideration the €26, 600, 000 dividend pay on July 7, which represented a payout of 90% on our Q1 results. It shows, I think, the intention of the company to have a strong dividend payout. Moving to the context where the results are being delivered on the insurance front, the Spanish Motor, Home and Health line of business had a mixed behavior. As with regard to motor insurance, there is a slow recovery of vehicle sales, thus increasing the age of the fleet of the Spanish fleet, which now stands at 13.2 years. We are also observing a migration of all risk with deductible to 3rd party and extended third party, leading to a reduction in the average premium. Mobility is increasing and fatal accidents rose by 34% as of June. Gross written premium for the market as a whole decreased by 1%. Turning to Page 8. Home insurance had a different development. The purchase of homes is picking up. There is also more awareness about the need to insure the home as more time was spent at home during the pandemic. Market as a whole is growing at a rate of almost 5%. On the negative side, we can say that the atmospheric events are here to stay. Finally, sanitary assistant continues a steady growth with the market also growing at 4.9%. The sanitary activity, which was halted during the crisis, is back to normal. We are also seeing a rise in the health care cost. Now I'll take you through the main figures of the first half. Premiums were up 1%, reflecting a 3.8% increase of new clients. Pressure on premiums is still very high in the motor line of business. Average premiums are down almost 3% for the market as a whole. Technical result was strong, up 1.8%. The group combined ratio stands at a remarkable 85.5%. I would like also to highlight the 1.2 percentile points reduction in the expense ratio, thanks to our strict cost control measures. Financial results is resilient yet reflects the current extremely low interest environment with falling reinvestment yields of our fixed income portfolio. Profit after taxes stood at €58, 200, 000 a decrease of 1.2% against the same period of last year. Please turn to next slide, Page 12, where you see the breakdown of the policyholders and gross written premium by line of business. The portfolio as a whole increased by 3.8%, sustained by higher retention ratios. Gross written premium grew a modest 1%, with the Home and the Health line of business growing by more than 8% 25%, respectively, whereas Motor Insurance decreased by 1% on the back of a lower price environment. More specifically, if we turn to next page, the motor line of business experienced a modest decrease in gross written premium. New business was more challenging for the reasons explained before, whilst the portfolio experienced a solid growth and a strong retention rates. On the technical front, combined ratio was excellent at 83.7%, which is 4.1 percent 12 points below the sector with the latest available data. This is driven by ongoing cost discipline and a strict underwriting in a context of increased frequency and severity. Moving to Home Insurance. Premiums were up 8.5%, a growth rate that beats the market by 3.6percentfallpoints. New business had a remarkable performance. Combined ratio in the home insurance was up only by 2.5%. The combined ratio for the market stood above 100%, coming from 94% in the previous period, with atmospheric events deteriorating enormously the result for the sector in this first half of the year. Linear EBITDA posted a combined ratio of 91.2%, 10% 12 points below the market with the latest available data. Expenses remain stable, which translated into a lower cost ratio as business grows. The health line of business continues its development with almost 21, 000 new clients, average premiums was slightly lower, driven by a change in the mix of the portfolio. Combined ratio is improving, albeit claims frequency is rising due to the return to normal and recovery of the health care activity. Please let's move to Slide 16, where we break down claims and expense ratio by line of business. Claim ratio had an excellent performance in the motor line of business despite increased mobility. Home insurance has recurring impacts of weather events and loss ratio stood at 65.3%. On expenses, it can be seen the cost discipline of the company that we apply across all line of businesses. Expenses ratio was down 1.2percent 12 points to 20.2%. All these ratios made it possible to achieve a combined ratio of 85.5%. So with a strict ongoing control of risk underwriting and of course expenses. As we can see in the next slide, historically, the company has been able to achieve solid technical margins across various competitive and macroeconomics environments. Consolidated claims ratio was up by just 1 percentile point, of which weather rents contribute by 0.5 percentile points. As with regards to the expense ratio, the company has a recurrent focus on cost control over the years. Expense ratio as of June 2021 is explained by lower acquisition costs, partially offset by higher staff expenses as a consequence, sorry, of the listing. The item other technical income and expenses reflects the amounts of settlement agreements between companies applicable in Spain. Let's please now move to the next slide. Financial results was resilient despite adverse interest rate environment. Fixed income revenue were down by 9.2%, yet equities and investment property had a remarkable performance. The investment portfolio is low risk with corporates and government accounting for 35% and 42%, respectively. Exposure to equities and equity investment funds increased in the fair 6 months of 2021 by almost 3%. We are also increasing the duration of the fixed income portfolio we invested in government maturities at a longer term. Moving on to Slide 21. What we display here is the prudent provisioning of the company. We are on average at 99.5 percent too. It must be noted that 2020 2021 reveal a typical claim management pattern due to the pandemic. Specifically, some claims took more time to settle, some 3 months were delayed, and it was also more difficult to adjust personal injury claims, not having access to patients and hospitals. Finally, solvency remains very strong and stands at 203%. It is already taking into account the 1st interim dividend and reflect the economic balance sheet changes occurred in the first 6 months of the year. I would like to close this presentation by very briefly going through our progress on a number of strategic initiatives. During the 1st 6 months of 2021, Linear Director has continued to develop its digital acceleration process with new functionalities, making application more robust. And improving the customer experience. As of June 2021, 50% of customers have requested towing via the application. Meanwhile, 47% and 29% of claims were opened digitally in motor and home, respectively. Customers who interact digitally with the company already add up to more than 83% of the total portfolio. The company also launched a new valuation and indemnification system for minor damages through artificial intelligence in real time and without any human intervention. Also, the company just launched an application that automatically analyze driving behaviors and rewards customers for good driving habits. Last but not least, the company is making further progress toward our sustainability plan with an overall 92% achievement. Notably, the company market share in electrical cars in Spain stands today at 10%. Unfortunately, electrical cars still have a very low penetration in Spain. However, the company is fully committed to it. Well, with this, I finished my presentation. Thank you. And now I hand it to Beatriz for to begin the Q and A sessions. Thank you very much for this presentation, Carlos. We'll start with the Q and A. First, we'll begin with the questions received from the conference call. Thank you. The first question comes from Mario Roberto of Best Inver. Mario, your line is open. Hi, good morning. I have a couple of questions. The first 1 is on the combined ratio evolution for Motor. It's still relatively low, particularly compared to pre COVID levels. Could you give us some sort of indication about your expectation there? And then on the combined ratio in home insurance, you mentioned that it is normal, atmospheric events are here to stay. So to control the combined ratio of the home insurance business, are you planning to implement additional cost initiatives to control the expense ratio in this business? Thank you. Thank you. On the first question on the combined ratio on the motor insurance business, I think it's a very good combined ratio. It is true that COVID-nineteen is still affecting the frequency of the business. I mean, especially in the Q1 of the year, where frequency there were lower than that of 2019, that for us is a reference as a normalized year. It will start to pick up a little bit on the Q2 and we'll see what happens on the Q3, especially with the vacation period in Spain. On the other hand, severity of accidents was higher than what we expected, but still on the if we take the 2 things together, still today frequency is better than in the past. Although in our budget and in our planning for the year, we estimated on the 2nd part of the year, especially in the Q4, frequency will start to pick up and it will get close to that of 2019. Having said that, I think the combined ratio of the motor insurance business is going to be as powerful as you can see it in the first half of the year. On the home insurance business, I mean, it's very difficult to do something on the atmospheric issue. We already plan every year that we will have a number of atmospheric. The trick here is to identify when it's going to happen. This year, it happened on the first basically on the first couple of months of the year and that has impacted the combined ratio. So it's very difficult and it will depend how it will say, but it's very, very difficult to have any measures there. What we do on the combined ratio of the Home Insurance business is keep on working on the cost side. I mean, our cost ratio dropped from the last number posted on December. And our intention is to keep on evolving there as we get a scale of this business. And on the claims side of the combined ratio of the home insurance business, I mean, we have the numbers done at the beginning of the year of the amount that we will spend on atmospherics. And as of today, the cost of this atmospheric, especially Filomena, the cost for us was in the neighborhood of €2, 000, 000 gross before reinsurance. Yes, precisely. I mean Filomena was for us 2.1 gross and 1.9 net. The next question on the conference call comes from Ashik Masadi of JPMorgan. Ashik, please go ahead. Yes. Thank you and good morning, Carlos. Just a couple of questions I have. First of all, I mean, you were able to maintain still the growth in the number of customers basically, which compares with the decline in the premiums, average premium in this Spanish motor market. So I mean, how would you see that dynamic going forward? How comfortable you are that the growth in customer count will continue? And do you have any visibility on where the pricing is heading towards, especially given that the accident level or the claims frequency has started to normalize? Is there any visibility on that? That would be very helpful to know. The second is in the Home segment, again, I mean, the growth was strong at 5% as well as the prices are going up. I mean, any thoughts on that, like where do you see that heading towards? Well, first of all, sorry, go ahead. No, just last question is you mentioned that the combined ratio for second half for the group like is more or less looking like similar as first half. Was my interpretation right or you were saying trying to say something else? Okay. Well, first on the Motor Insurance business, I think, I mean, the number of new clients in this line of business was remarkable in a typical situation. I think especially on the Q1, I mean, given the fact that the demand on new cars, the demand of purchase of cars is very low as compared to a normalized year 2019, that put a lot of pressure on the growth of clients. So I think the numbers that we posted are quite well. In terms of average premiums, I still think there is going to be pressure on average premiums looking forward. I think the market is going to turn around probably by the end of the year. I don't see any improvement on average premiums on this year because still I think there's a lot of pressure, competitive pressure, combined ratios there are still lower than in a normalized year, and I think we will see that. So again, I think the number that we posted on new clients or increased portfolio is very good. And it's a combination of 2 things, the good retention capabilities that we have and that we have demonstrated during the years, and of course, new clients coming into the business. Indeed, I Indeed, I think all these atmospheric events, all these increasing frequency because of less mobility of the population, I mean, put a little bit of pressure upwards on the average premiums. I think as people start to go back to normalize, start to use less the homes and all that, probably the average premiums will tend to stabilize. But I don't see any pressure going downwards. And in terms of the combined ratio looking forward, well, I don't I cannot guess how it's going to look by the end of the year. What I think is that, well, first half was very good, very good, especially because of the frequency of the motor insurance business. I'm kind of worried about the frequency on the summer because people are eager to go out on vacation. So let's see how it evolves there on the summer. But I think as we reach the end of the year, I mean, frequency will start to look more or less like 2019. But keep in mind that on 2018, our combined ratio was in this neighborhood, 50 5%, 55% plus and on 2019 was on the 87%. So we will move in that ground. Okay. That's very clear. Thank you. The next question comes from Thomas Bateman of Berenberg. Thomas, please go ahead. Hi, good morning Carlos. Good morning, Britius. Thanks very much for taking my question. Just on solvency, I think there is an other adjustment for about $12, 000, 000 on the end funds. Could you just give us a bit of an insight into terms of what's in and what's driving that movement and whether we should expect to be recurring or is that a bit of a 1 off? And secondly, just on health insurance, do you have any change to the guidance there? Or is there any new guidance in terms of when this business might break even in the future? And I guess just on premiums on the health insurance, is this in line with expectations, 25%? Or do you expect that to pick up even more so in the second half of the year? Tom, this is Beatriz. Regarding the Solvency II question and our own funds work, Okay. So basically, what you have are the eligible own funds, of course, as 2020 year end. You have the profit, the change in the available wholesale portfolio, which basically is driven by further revaluation of our equity portfolio. And the €12, 000, 000 adjustment maybe comes from the best estimates liability under Solvency II, okay? So we have an increase in the best estimate provision, and that's basically what is included in this €12, 000, 000 Thomas, Nice to talk to you. And regarding the health insurance, I mean, the first half of the year was business as usual, I think. We are very happy of the evolution of the health insurance. I think now we have a portfolio close to 100, 000 clients, I mean, with good increase in sales, good increase in increase on the portfolio, keep on developing our value proposition in a very different way as our competitors as we spoke in the past. So I think first half of the year, happy with the evolution and very much in line with what we expected for the first half of the year. Looking forward, I still think that in order to go to breakeven, we will need to double the number of clients. And I think that it will take at least a couple of years, as we spoke, 2024 or by the end of 2024. So no changes, no changes on that. I think in terms of the context or the index of the market, I think still the need I think the perception of Spanish for the need of a private health insurance is there. I think people are increasingly demanding health insurance. And in that regard, I think our value proposition is very proposition, which is very much linked to direct. So I think good numbers in that, very much in line with what we expected. So we don't change our expectations of getting to that breakeven by 2024 by the end of 2024. The next question comes from Carlos Piazzotto from KeyAxobank. Carlos, please go ahead. Hello, good morning. This is Carlos Burchard from Caixobank. Just a couple of questions. First 1 would be actually a small detailed question on financial income in the first half. I noticed that while overall income is more or less stable versus last year, but the financial costs have declined materially. Is this related to lower interest rates? And any type of detail you could give us on that? And the second question would be regarding the evolution of home insurance. I was thinking what type of growth do you expect to see throughout the rest of the year in premiums and particularly in 2022 as well, if you could share some visibility? And also, what would be the combined ratio that you would feel as being the normal run rate for this business? Thank you. Thank you very much, Carlos. Regarding the financial income, well, we still have €1, 000, 000, 000 portfolio, very prudent still, of which I think 80% of the portfolio is in governments and on corporate within with rating with investment rating. And it's a difficult environment. I mean, with interest rates on the negative side, let's see what happened with inflation. I mean, the good part of the second part of the year, we will have those maturities. So the 2nd part of the year, we will have those maturities. And then we won't have the problem of reinvesting maturities in a lower interest rate. We have tried to do a couple of things to do something equity side of the business with a prudent approach. But I mean, trying to increase a little bit that with this something on the real estate, which will provide us with good yields. I mean, but well, I think the financial result has been positive, given the fact that for the entire insurance business, it's going to be difficult to maintain those levels of financial income looking forward, unless interest rates will start to pick up. On the evolution of the home insurance business, I think the market is still moving upwards. I mean, home sales, both first hand and second hand are performing quite well. So I think there is still room to grow this year there. I mean, very happy with the numbers we posted. I mean, we grow by 5% by 8%, sorry, our premiums close to 9%, much more than the market, which I think is in the neighborhood of 5%. And I think what the positive 1 of the positive sides of home insurance is that our partnership with 3rd parties that are providing us with leads, they are working very well. I mean, we have a major partnership with Natuzzi, where basically we are getting very high conversion rates on the leads that we get from NATULGI, even higher than other channels that we have. So if that works, I think it's going to be a good year for the home insurance business. And you should expect looking forward growth rate very similar, the ones we posted on the first quarter on the first half, sorry. The next question comes from Patrick Lee of Santander. Patrick, please go ahead. I just have a couple related to solvency again. I noted that in this half, you saw solvency capital required went up by some 11%, which seems quite high compared to kind of the recent growth rate in recent years. I think some of the market risk was explained by what Beatrice mentioned earlier on, but I also note that the non life underwriting risk went up by around 9%. Is there anything that we should pay attention to why the growth was that high? And I guess related to that, that also contributed to your solvency ratio falling to 203%. While it is obviously high and very comfortable, it is lower than your recent levels at about 210%. And I guess whether we can take that as a sign or signal that you are ready to take your solvency ratio lower towards your minimum or management level of 180%. Thanks. Thank you, Patrick. Nice to talk to you. On the Solvices side and the increase on the SOAR capital requirements, well, at the end, I mean, as I it's a combination of a couple of things. Beatriz has also explained a little bit. But first, I mean, we have increased a little bit our position on the equity market and that requirements on that are higher than on the debt side of the portfolio. And second, there has been an impact, of course, on the adjustment that IOP publicized every quarter. I mean, during the pandemic, that adjustment was negative. I mean, it somewhat decreased the capital requirement on the equity market, whereas in the first half of the year, that adjustment that is published by IOPPA and you have to fulfill has been has gone in the positive side. So it has required more capital. So that is explanation of that increase on the capital requirement. Again, a little bit of more equity position and then the regulatory adjustment, police are by Yopa on the first half of the year. And looking forward on the solvency ratio, I think, was your second question. Well, we sent a message to the market that our intention was to get into levels of 180, 180. We are in 203, which I think is 1 of the best solvency ratios of the market. I mean, we are not moving intentionally to get to that $180, 000, 000 $180, 000, 000 but we feel confident on that. The idea here is keep on growing the business, keep on maintaining a stable somewhat solvency ratio. And from that on, try to distribute dividends in the levels that we have. So 203 is a good ratio for us. But again, I mean, our intention is to move forwards to that 190 of the market. Yes. So Patrick, this is Beatrice. And just to reinforce Carlos' message precisely, I mean, what was driving the SCR this semester was basically underwriting risk and market risk. Market risk, as Carlos is saying, because now we have more exposure to equities, okay? So they are not listed, basically in private equity funds, very profitable, but there's a capital charge for that. And then underwriting risk, because the USP, the specific parameter that you use is based on historical basis. And paradoxically, last year was extremely good. So it adds volatility to the parameter. So we have a slightly above normal, I would say, specific parameter for the non life subscription risk. The next question comes from Phil Ross of Mediobanca. Phil, please go ahead. Hi, good morning. Thanks for taking the question. Just coming back to motor insurance. You mentioned the migration of policies from all risks to the 3rd party. Can you give us an idea whether that is mainly new or existing customers? And can perhaps you give us some steer on what the average price difference normally is between those 2 products, please? And then just a quick sort of second question, quite high level, but on claims inflation, that's been a talking point in some areas more generally across the economy. I just wonder if you have any signs at this stage, smaller than might be of claims inflation creeping into your claims costs? Thank you. Starting from the last, I think claim inflation was nothing new in the first half of the year. I mean, the inflation on the material cost is growing up every year on 3% to 5% every year. And I think this is what is happening this year. The good thing there is that in our case, I mean, we are able to beat the market. And as I explained many times, I mean, our positive gap in terms of repair cost compared to the market is quite high. But again, I think inflation on the shops, on our agreement with 500 repair shops in order to manage that cost and try to be more efficient because, of course, inflation is there and it's picking up. And the second question was, Nathalie? I think regarding the average premium and new business and renewals. I think once more on the I think I'm thinking you was also asking on the breakdown of those that they are changing the type of insurance that they are doing from extended to third parties and all that. I don't have the breakdown with me now. So feel that we will have to look for it and send it to you because we don't have that breakdown right now. But Beatriz and Mark will get back to you on that 1 and we'll send you. Yes. We appear to have no further questions on the conference call. So we can move to the webcast questions. The first question comes from Mario Santos from Soros Fund Management. He's saying, thanks for the presentation. Very helpful. Can you please develop the artificial intelligence engine initiative a bit more? How should we think about automation targets for the claims management process a bit farther away than 2022? Can you please provide us with an idea of what type of improvement in expenses ratio you expect to get by progressively implementing these types of initiatives? How much of the benefits of that will be shared with customers? This is a very good question, and I think I need the help here of the IT people because I'm not an expert on this. Regarding artificial intelligence, well, I cannot get on the technical part of that. I think we use the company is very much focused on using technology, especially on the management of clients, of course, on the selling part, but also on the management of clients. So I mean, artificial intelligence is something that we are using as we use other IT tools. But in order to give you an idea on how it works, I mean, I think we will have to ask our technical people and we will look back to you on that. And regarding of the improvement of the cost, which I can say a little bit more regarding on the improvement of the cost side due to our technological approach. We don't do numbers. I mean, we don't do numbers on that. I mean, we what we think is that we need to do something on the technological side in order to improve the customer experience. I mean, the relation of the client with us and that will improve the quality perception by clients, and that will improve our retentions and, of course, our selling possibility. But we don't do numbers on how much we are going to say. What we are seeing is our combined ratios. On the cost side of the combined ratio, they are improving. And they are improving because of the technology, but they are also improving because of the cost discipline of the company. So no numbers on that. It's more a strategy than doing numbers of how much I can save. And in order to translate that to clients, I mean, we always what we try to do is being very efficient to have 1 of the best average premiums of the market. So I mean, the answer is yes. As we get more efficient, average premiums of the market will be more competitive, of course. So I would add that the customer is extremely easy to handle this. There's a high percentage of customers that prefers indemnification as opposed to repair. And in this way, they can get the bank transfer in just a few seconds, just by 3 clicks basically on the app. So in terms of customer easiness,