Fundamental analysis of Linea Directa - LDA - P&C insurance

So recently Linea Directa was spun off from Bank Inter. I will take a short, simple and concise look if this spin-off is interesting for thoughtful investors especially qualitatively and in comparison to competitors.

Company profile
Linea Directa (LDA) engages in the direct insurance and reinsurance business in Spain. It offers motor, home, health, and other insurance products. It’s a property and casualty insurer.

LDA is organised in a simple way:
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Brands:

Business quality
Below some key metrics of LDA are listed from the most recent update

Metric 31/03/2021 31/03/2020
Combined ratio 85.40% 86.70%
SOLVENCY II RATIO (adjusted) 266% 221%
ROE 32%
Equity 498904000 321684000
IFRS PROFIT/(LOSS) AFTER TAX 29596000 29022000

From the prospectus we can also derive that LDA mostly in respect to the competition has always had higher margin policies:

The insurance side looks just fine but as with any insurance company investing also is a large, from the prospectus here’s a large overview:
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Yields on investing side parts

Bonds
Unsurprisingly interests rates on bonds aren’t that good and were declining (although it’s to see if this continues):

Equity
Quite the underperformance I must say

Investment properties:

Risks and outlook
The Home and Health insurance business lines represented 13.4% and 2.4%
of the Company’s total premiums, both have high market concentration so more competition coming in could be a problem. Growth in Home will be difficult as that kind of insurance is tied to mortgage formalisations. Health is new for the company and growth there is not certain as they’re a bit of a newcomer there.

The Motor insurance business line represented 84.0% of the Company’s premium income which is almost solely from Spain. Motor insurance also is a market with not too much competitions (top 3: Mapfre España, Mutua Madrileña Automovilista SSPF and Allianz account for 43.2%) so more competition there could be a significant risk.

The Spanish non-life insurance market in which the Group operates is very mature and extremely competitive.

Teleworking would significantly impact the car part of the business as it just means less driving and thus pricing pressure. Telematic devices also are listed as a concern as they have the potential to lower premiums by proving safer driving habits (although I also think this will decrease some risk so might not be as bad).

The market overall is experiencing a change in the frequency of use and type of vehicle, yet
traditional means of transport must remain insured. The challenge is to adapt insurance to those
new practices and maintain a competitive edge as pricing pressures and the complexity of risk
calibration increase

As @EquityInvestor has stated the company is in a more mature business and has already got quite an edge over the competition which most likely won’t get much larger (especially if others also adapt more efficient business models)

Autonomous vehicles are predicted to make a major impact on motor insurance business models. The use of self-driving vehicles will affect the traffic environment, and the ownership and nature of risk will obviously change given the fact that the cause of many accidents will shift from human error to the device or control system. To this end, the emergence of autonomous vehicles will require adaptions to be made by both insurance companies and regulators.

Relative Valuation
Now that we’ve taken the qualitative side of the business we can look at the quantitative side. There are multiple ways of valuing insurance companies and to keep it simple I’ll use a quick relative valuation here. The embedded value is more fit for life insurance than P&C, discounting cash flows, in general, is a bit more difficult with financials are cash flows from investing are highly varying

If you want to know more: http://www.columbia.edu/~dn75/Analysis%20and%20Valuation%20of%20Insurance%20Companies%20-%20Final.pdf

Here’s a mCap heat map of the US P&C insurance business:


Even though LDA is a Spanish company with a mCap of about €1.7B I’ll include some of the larger US ones. I’ll also include Mapfre and Grupo Catalana Occidente (Spanish insurance companies).

Country Spain Spain Spain USA USA USA USA USA
Stock LDA MAP GCO CB PGR TRV ALL HMN
mCap (€B) 1.74 5.67 4.13 65.21 50.60 33.25 32.55 1.37
Solvency II ratio % 266 193 216 N.A. ** N.A. ** N.A. ** N.A. ** N.A. **
Combined ratio % (Q1 2021) 85.4 94.3 88.9 91.8 89.3 96.6 83.3 86.2
P/B (yahoo finance) 3.74 0.68 1.15 1.34 3.55 1.43 1.61 0.93
ROE % (Q1 2021) 31.6 7.1 14.4 15.5 10.0* 10.2 23.2 9.3

*Progressive didn’t mention ROE or return on equity in Q1 2021 so I took the one from yahoo finance
** US companies don’t report solvency II

Based on this Allstate stands out because of its midpoint P/B, high ROE and lowest combined ratio, LDA seems to have the highest ROE of the bunch together with the second-lowest combined ratio and highest P/B. I have to note that LDA did pay a one of 120 million euro dividend to Bank Inter for the spinoff which might make some of it’s ratio’s worse.

Disclaimer: I already own Allstate and am looking into LDA.

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