BB Seguridade Participacoes SA

BOVESPA:BBSE3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to BB Seguridade's First Quarter 2018 Earnings Conference Call. This event is being recorded. [Operator Instructions] The presentation is available in the financial information presentation section of BB Seguridade's RI website at www.bbseguridaderi.com.br/en.

Before proceeding, let me mention that forward-looking statements that may be made during this conference call regarding expectations, growth estimates, projections and future strategies of BB Seguridade are based on management's current expectations, projections of future events and financial trends that may affect the business of the group and do not guarantee future performance since these projections involve risks and uncertainties that could extrapolate the control of management. For more information on the statements of the company, please check on the MD&A.

With us today are Mr. Werner Süffert, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of Investor Relations. Please, Mr. Sperendio, you may now begin.

[Rafael Sperendio, executive]

Good morning, everyone, and thank you for joining our Q1 earnings call. Let's start on Slide #2 where we have the main highlights of the quarter.

The net income adjusted by one-offs reached BRL 907 million, down 8.6% year-over-year, driven by the Selic rate for as you can see on your left-hand side, you can see on the -- that Selic rate led to the 37.3% decline in the net investment income while the noninterest operating result grew 3.5%. And the main drivers for this improvement in the noninterest operating result was mainly the commercial performance at SH1, our Life and Rural business raise premiums up 8% over same period a year ago and bonds and Credit life, the top performer in this business line.

Another important driver here would be commercial performance in premium bonds. Our collections rose 23% year-over-year. And finally, the pension business was also an important piece that help to build our operation results with AUM growing 16% year-on-year. And we think some ratio falling 90 bps reaching one of the lowest levels ever recorded by [indiscernible].

On Page 3, we have the breakdown of our adjusted net income. So in the first quarter, we have classified as just one event as extraordinary, which was then an additional provision for claiming traditional claims that Mapfre Seguros Gerais, which is a subsidiary of Mapfre BB SH2.

So during the first quarter, we have revised our database of pending judicial claims. And we did find that Mapfre Seguros Gerais, we were under provision. So we had to increase those provisions, which generated a net effect for BB Seguridade net income of BRL 21 million. So our accounting net income reached BRL 886 million, down 11%, but setting apart these one-off items adjusted net income fell 8.6% year-over-year to BRL 907 million.

On Page 4, we have our main [ highlights ] for the year, the financial results. So in the first part, we had the hardest comparable for the year. So financial results dropped to 37% and accounted for only 20% of our net income being the 4% to 7% decline that is now in the average Selic rate, the main drag on financial results.

On your upper right-hand side, we can see that the continued downward revision of the expected year-end. Selic rate led the full-year curve to move downwards. We generated some mark-to-market gains on our exposure in 0 [indiscernible] that helped somewhat to offset a little bit the lower Selic rate in quarter.

On the other hand, the lower IPCA rate on inflation-protected securities [ watched final sales ] to maturities, while the higher IGP-M brought a negative effect, increasing the financial expenses at Brasilcap in the defined benefit of pension plans.

On -- now from Page 5 on -- I will go over the main highlights of our main business lines and starting with SH1, our Life and Rural business. Premiums weakened Rural roughly 5% with a spotlight on the credit Life I mentioned at the beginning of the presentation that grew 76% over the same period last year.

Term Life increased 2%, while Mortgage Life rose 12.3%. On the other hand, Rural was down 8.8% explained here by the 34% decline in crop insurance. These are some things that [ optional ] does not concern us as much as the expected biggest in about the working capital loans to be granted now in second quarter recently from what happened last year where we had much earlier disbursement started in mid-February last year.

The other Rural insurance line -- I mean, Credit life for farmers and Rural lien, they are doing really well, rose 29%, Credit life, and Rural lien grew 7%. So they have been performing really well. The main issue is the [indiscernible] for comparables yields crop insurance. So if we were to exclude the performance of the crop insurance and the DPVAT, the mandatory insurance for vehicles in Brazil, that does not depend on us. It had a price reduction review. But if we were to exclude those lines, premiums written in as when-- second one had been grown 15% year-over-year, which is a very decent performance.

So talking about retaining premiums here. These lower volumes in crop insurance, which is the line that you see the most for insurance, retained premiums grew 7.6% as compared to first quarter last year.

About operating performance on Page 6, we can observe the improvement about 120 bps in the loss ratio over the same period last year supported by the lower than expected loss ratio in dual. We were expecting very severe damage coming from La Niña but didn't happen in this last cycle, which helped loss ratio for Rural, mainly in crop insurance in the first quarter this year.

Commission ratio rose 520 bps year-on-year, driven by the increase in commission in part of our term Life with [indiscernible] in the Bancassurance channel since the third quarter last year. This is a temporary increase as commissions have increased at the level of the average commission target in SH1, but it's something that hurt somewhat the performance, and the company felt that for BB Seguridade as a whole, [indiscernible] because the totality of all these increasing commissions will flow to our own broker, BB Corretora. So this is -- when we look on a combined basis, for combined basis this is very positive.

And the G&A ratio fell 220 bps over the same period 1 year ago, driven by the release of some provisions for impairment of overdue premiums that we managed to recover. So we worked those provisions. And the outcome of these dynamics, our combined ratio deteriorated by 180 bps year-on-year as a result of the increasing commission ratio that -- the increase in loss ratios and the lower G&A wasn't able to offset.

On Page 7, we can see that these increasing commissions dragged down the underwriting result, which fell 11% year-on-year to BRL 640 million. Net invest income down 49%, pretty cool show the decline the average Selic rate. And both the increasing commissions and the lower financial results dragged down the net income of this business unit to 15% to BRL 336 million with a return on average equity of 49.7%.

Talking about premiums written, Page #8. Premiums were up 1.3%, driven mainly by other insurance sold in the independent broker channel, also grew 4.7% as compared to first quarter last year.

On Page 9, we have the operating performance of this business line. We can see that the combined ratio of this business improved by 130 bps, as you can see on the lower right-hand side here, driven by the improvements in the loss ratio, mainly in casualties and the lower G&A ratio, also driven by the release of some provisions with impairment of overdue premiums and claims to be recovered from the reinsurance.

These 2 effects led the G&A ratio to decline of 130 bps year-on-year. On the other hand, commission ratio was up 150 bps, driven mainly by the increasing commission charted from independent brokers when selling auto insurance.

Page #10, we can see that these increasing commissions page independent brokers for all insurance dragged down the underwriting result, which fell 1% year-on-year. Financial results down 16% as a consequence of the lower Selic rate. And finally, this business unit recorded a net loss of BRL 18 million as compared to a net loss of BRL 4 million in the first quarter last year.

On Page 11, our pension business, Brasilprev, we would like to highlight here that, in the first quarter, we had a different strategy than the one we adopted last year. Last year, the distribution network had total flexibility in rising funds for periodic pension plans or sporadic pension plans. In this year, we created more incentives to them to focus more on the periodic contribution in nearly half of this first quarter. And this explains the 24% decline in gross deposits and the 59% decline in net inflows as the average ticket of periodic contribution is much lower than the one for the sporadic contributions that are -- is a very important source for a more stable revenue stream going forward.

When we look at the quality of these funds that have been raised, redemption ratio declined, maintaining this positive trend of declining 70 bps to 7.4% in the quarter, one of the lowest levels ever recorded by Brasilprev.

In terms of assets under management, reserves grew 16% over the last 12 months and drove the increase of 10% in management fees to BRL 628 million in the first quarter this year. The average management fees kept a space of decline of 1 to 2 bps per quarter, but it's something that was totally expected because of the environment now, the lower Selic rate.

Our cost to income ratio for this business improved 40 bps year-on-year. But on the other hand, the higher IGP-M dragged down the financial results of this business. Financial results dropped 20% year-on-year. That's why [indiscernible] management fee growing 10%. The net income grew 6% mostly because of the -- these lower financial results.

On Page 12, we have here our premium bonds business. So collections were up 23% year-on-year, so keeping this very strong commercial trend that started in the third quarter last year. We also had a very good performance in terms of cost on this business with G&A falling 9% year-on-year. But on the flip side because of the lower Selic rate, financial results were down 50%, and the net interest margin was down 220 bps year-on-year. That's why this business is totally spread basis. Net income was down 53% year-on-year but delivering return on equity some fairly attractive 53.4% while other [indiscernible] cost of capital.

And finally, on Page 13, we have our broker, BB Corretora. As you can see on your upper left-hand side here, the strong performance in sales for credit Life, Mortgage Life and premium bonds more than offset the weaker performance in pension in P&C, the Bancassurance channel. So the brokerage income rose 1% year-on-year with a slight improvement in the EBIT margins. But on the other hand, this lower interest rate environment dragged down the financial results of the broker where the investments are almost totally invested in floating securities. That's why despite increase of 1% and improvement in the margin, the net income was down 3%, and the same factors explained the decline of 240 bps in the net margin.

And to wrap up the presentation on Page 14, we have our accountability growth guidance for 2018. So in the first quarter, we underperformed the guidance. Our recurring net income was down 8.6%. And when we expect the net income to stay within the range of minus 2% to plus 2% for the full year. But it's worth mentioning here that this underperformance in the first half was already expected given the scenario of interest rate this year versus 2017.

So we had the hardest comparable in terms of financial results in the first quarter of the Selic rate falling roughly 50% year-on-year. But the expected dynamics for interest rate implies and it's low down of this space of decline in financial results, which is going to help the earnings to gradually converge to the forecasted interval in 2018 guidance. So of those, the consensus for the average interest rate for the year has been revised downwards. It's now lower than we had of the assumption for the guidance, but it's still feasible.

In addition to this, we also need to count on improvement in the commercial performance. It has been doing well in most of the lines as we talked about in credit Life, in Mortgage Life, premium bonds. But we still have some homework to do in term Life and pension and also need to count on the recover of the crop insurance from the second quarter on. It's not an easy task, but the guidance is still feasible considering all these moving parts.

Well, that's all I would like to emphasize, and we can now jump to the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from [ Philip Ecardi ] with Itaú BBA.

[Unknown Analyst]

The first question is regarding [ cyclic ]. Could you give us an update about the company? I know that the company is still in an early stage, but could you share with us your first impressions or maybe some numbers about this? And do you expect to expand the projects offered at Selic in the near future? And the second one is regarding the LIVELO points as an incentive for the sales force. How were the results from last year? And are you still using this to help sales?

[Werner Süffert, executive]

[ Philip, ] Werner speaking. First of all, [ cyclic ] as you said, is our company dedicated to digital channel outside Banco do Brasil channels. So we are talking here in the open market trying to sell products to clients that they are not clients from Banco do Brasil, and they are not reached by Banco do Brasil channels. So it's, in there as you said, in the early stage. We still don't have numbers to share with you. But as initiative in the channel, we think that we are in the right direction, just a very important wait to know more about this client -- this kind of client that they are not our main target, but they will be in the near future very important for operations. So we are understanding how this channel works, how this client, they want to have information about insurance and pension plan products. And this is the main important initiatives linked to [ cyclic. ] And talking a little bit about the other products that we will be able to offer using [ cyclic ] this broker. Our goal is to start with pension plans. But we will increase this throughout the years when we have more information about this client and what kind of product they want to buy. We will increase other products, and we will offer them all product linked to the company that we have and maybe other products that they will need to have -- we want to have via a platform like [ cyclic. ] So moving to the second questions about LIVELO points. We started this effort last year. And to have different ways to incentivize Banco do Brasil managers and employees to sell our products. This is completely in line with Banco do Brasil initiatives. It's inside their other programs that they have to incentivize products being sold using Banco do Brasil channels. And the performance started last year, I will say, in the second half of 2017. And now we are entering the, I will say, in the growing phase of this strategy. So this -- the managers, they can see in the databases how much they will receive as -- with their points because of the products that they are selling. And this is helping them to have more information about how much they will receive back as in this program that is, as I told you, is a complementary program besides others at Banco do Brasil they have to incentivize their sales force, but this is a very important one. We were all up last year, and we are increasing the pace this year to help us on the main drivers of growth that Rafael explained during the presentation.

[Operator]

Our next question comes from Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

I have just one question, really. Could you talk a little about the restructuring process that you're going through in SH2? What -- have you had any hard things that you can share with us or hard dates that you can point where maybe we're going to get -- or that we can expect some changes by. Trying to understand because it could shape the company and change how the company looks and operates. So just trying to get an idea of how we can set up for the future.

[Werner Süffert, executive]

Thank you, Macedo, for the question. About the restructuring of SH2 and SH1, our partnership with market, the main movement -- the main changes that we will have is to sell our -- that is already in -- that we have already exposed it to the market, but it's still in place. It's to sell the company is dedicated to independent brokers channel back to Mapfre and also our auto insurance and larger risk insurance business that we have part of them and they [ didn't ] Aliança do Brasil Seguros in SH2 and other insurance-related products from Bancassurance and other vehicles. So this -- in this business, we will be only distributing products via BB Corretora using Banco do Brasil channel to do that. And we will continue with [indiscernible] with Mapfre products for these 2 segments. So largely, it's in noninsurance. We'll sell with exclusivity products from Mapfre but without the underwriting risk of this business in BB Seguridade. So our main driver of growth will be bringing then top line, and they will do the underwriting part of this business. On the other hand, all other Bancassurance products will be in the new SH1. And there, our goal is to -- will continue to be increase in the top line but with high-margin products like the ones that we operating now, trying to continue and focus even more in this product to increase the profitability of the -- of SH1, and as a consequence of it, from the profitability of the broker as well. And this will guide to higher and better numbers for the holding level.

[Carlos Macedo, analyst]

Perfect. Just one question. Couple questions of follow-up. One, of their parts of SH1, particularly in the Life insurance business that are sold by third-party brokers, will that be also sold off as part of this? And the second, could -- is there any timetable for these changes to become effective?

[Werner Süffert, executive]

Yes. All the independent brokers in Life-related products, we are being -- our goal is to sell these products. We will focus completely operation on Bancassurance. So all Banco do Brasil channels and clients will be our target for this product. And -- but regarding the timetable, we don't have a deadline to close this negotiation, but we are -- we had some points -- a few points to reach an agreement with our partner. And -- but when we have some new information about it, we will disclose it to the market.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I'd like to invite Mr. Rafael Sperendio to proceed with his closing statement. Please, Mr. Sperendio, go ahead.

[Rafael Sperendio, executive]

Well, thank you all once again for joining our earnings call. Just to highlight that we will keep the guidance because we would have still, hopefully, feasible despite underperforming this first quarter. It was already expected because of the hardest comparable that we had in terms of financial results mainly with the effect of Selic rate dropping by nearly 50% year-on-year. It's very hard to offset this impact in the short term, but we believe it had [indiscernible] improvement in the commercial performance and the counting on the improvement mainly in Rural and pension. We will be able to gradually convert to this guidance range maybe the second half, not only in the 4Q, which was one of the weakest last year. It's not common. When we look historically, usually, the fourth quarter is the strongest one. So we're going to have some easy comp in the second half. That's why we believe the guidance is still feasible. And of course, it's challenging but feasible. Thank you, and have a good day.

[Operator]

With this, we conclude BB Seguridade's conference call for today. As a reminder, the material used in this conference call is available on BB Seguridade's Investor Relations website. Thank you very much for your participation and have a nice day. You may now disconnect.