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LÍNEA DIRECTA ASEGURADORA: MESSAGES FROM THE CAPITAL MARKETS DAY (ANÁLISIS BANCO SABADELL)

Below we outline our stance on the main messages from the the Capital Markets Day held yesterday by Línea Directa Aseguradora (LDA, 17.4% Bankinter). The registration in the CNMV will be carried out throughout this month and it is expected to start trading on the 29th of April.
 Company profile at a glance: 100% focused on technical margin (~>2x than its peers).
- Motor accounts for 84% of its total premiums’20 and almost 100% of the technical result with a 7% market share (still far from its immediate peer, Mapfre, with a 19% market share).
o The CAGR’18-20 in premiums stands at ~+1% vs. nil for the sector although we stress the lower gap seen (+3.3% in 2018, 1.2% in 2019 and +1% in 2020). This should be explained by the tough competition in prices and the company’s increasingly lower premium. Thus, in 2016, the average premium totalled € 319.00, -9.8% vs. sector that fell to € 306.00 in 2020, -11.5% vs. sector.
o LDA has underscored the key to its business model (digital+phone). The company is less intensive in operating expenses (without agents or relevant structure expenses, as 70% of quotes come through web platforms). This, along with the fact that 61% of claims are carried out in its own garages (71% including windshield) and its tight subscription control (without brokers and with a thorough assessment of customer risk) allow the company not only to adjust prices for its insurers but also to continue increasing its client base.
o This also explains the good performance of the combined ratio (CR) that has ranged between around 87% in 2016 (99% sector) and 81% in 2020 (vs. 88% sector) although in this case benefiting from the lower frequency claim due to Covid-19 (common in the sector). The company has stressed its target to keep a lower CR than that of its peers over the coming years, without specific guidance. This would be guaranteed by the facts already outlined: its competitive digital advantage (even though it admits that its peers have seen a good performance due to the pandemic) and its lower operating leverage. Although all indications hint at this direction, we believe that reporting >+2% growth in premiums against the current backdrop is complicated (especially bearing in mind its lower price), and that from a structural point of view the CR should stand at around 84%-85%, meaning a gap of around 10pp vs. the industry average.
- Home insurance accounted for 13% of its premiums’20 and 5% of its technical result with a 3% market share, far from its immediate peer Mapfre (with a 16% market share).
o The CAGR’18-20 in premiums stands at ~+9.5% vs. slightly 70% far above its peers in our coverage universe (vs. around 50% on average) without details on the payment process. This would mean an estimated yield of around 6.5% over the 2021-22 period based on our Net Profit estimates and the valuation given for the listing. LDA has stated this is consistent with a S-II guidance >180% (213% in 2020 proforma after the € 120 M of extraordinary dividend payment to Bankinter). Once its growth needs are stable and since it is a low capital intensive business, the excess above its comfortable solvency level outlined will be distributed to shareholders. Thus, as floor ROE target it set