BB Seguridade Participacoes SA

BOVESPA:BBSE3

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, everyone. Thank you very much for standing by. Welcome to the conference call of BB Seguridade to announce the results of the first quarter of 2021. This event is being recorded. [Operator Instructions]

This presentation is available in the financial information presentation section of BB Seguridade IR 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 the management current expectations and do not guarantee future performance. Because these projections involve risks and uncertainties that could extrapolate the control of the company's management. For more information on the company's financial statements, please access performance assessment report available at the Investor Relations portal.

Today, with us, we have Mr. Marcio Hamilton, CEO; and Mr. Rafael Sperendio, CFO and IRO. Now I would like to give the conference over to Mr. Hamilton, who's going to start. Mr. Hamilton, please, you may start.

[Marcio Ferreira, executive]

Thank you. Good morning, everyone. It's a pleasure to have you here today at our conference call. And before talking about our financials, I have 4 slides to share with you to talk about our long-term strategy, our plan for 2021 and our digital evolution and our sustainability strategy.

Starting on Page 3. In our last conference call, we highlighted our priorities for 2021 aligned with the foundation for our long-term strategy, which can be summarized in our 5 strategic objectives: to be lean and efficient, to experiment without being afraid, to hit the bull's eye, to connect and accelerate the digital, to combine online and off-line to sell more, and to convert customers into fans.

As part of our priority, something that has always -- that we have always stressed is the focus on the sustainable growth of our operating results. So this is related to improved services to our customers, modernizing our technological complex, seeking flexibility and connectivity and speed. So focused on digital and winning new customers and the use of artificial intelligence, seeking to improve efficiency and using a new approach, in addition to placing focus in our sustainability -- in our ESG agenda.

On Page 4, we have the main developments of the quarter, with improved experience and increase of digital sales. On the left-hand side of the slide, we have customer experience improvements. And I would like to highlight the improvement of 2.4% points in our overall NPS. Our target is to increase it by 7.4 percentage points in 2021, and this will be above the 2.4% improvement that we had in from 2019 to 2021. It's a very challenging goal, but we are strongly committed to reach these results. We have launched our protection platform that works as an gamified engagement environment with personalized offerings to increase the customer protection level. So we present the suggestion of ideal projects based on customer interaction.

We had more than 2.4 million premiums written based on this. If you scan the QR code on the screen, you'll be directed to the platform that is very interesting. You should do it, it's very interesting. On BB app, there's a new relationship area for insurance that is integrated to the first page. And in addition to being able to buy insurance, they have access to already existing policies and can add coverages and assistance, providing access to all our services whenever customers need, in an agile and simple way. We have exceeded a number of 4,000 customers registered, which helps the construction and validation of improvements and new products.

So we have 30 usability tests and surveys carried out. And all of this will be relevant and will add value to customer experience even before we start the development. Now talking a little bit about our digital sales and the numbers that you can see on the right-hand side of the slide. Here, you see that 11% of our sales were made through the digital channels, mobile and internet. We sold more than 4x more life insurance in the digital channels than in traditional channels. Thanks to the new format and a new journey.

We tripled the sale of our dental plan as compared to Q1 '20, with marketing actions, focusing on digital and placing emphasis on the app. We sold 39% more pension plans focusing on analytical models, 44 more home insurance and 16% more auto insurance, encouraging simple and agile and digital renewals. As to the upcoming deliveries in digital, this year, we are going to have a new auto insurance in mobile, a new home insurance, new mobile insurance, a new experience in pension plans and premium bonds, always focusing on our customers' experience.

Now talking about the digital transformation and diversification of channels on Slide #5. You can see the main highlight here, Broto, which is still being developed and the idea is to be an agribusiness ecosystem. So we have already generated more than BRL 116 million in deals through digital fares. As to our IT platform, in the first quarter, we delivered the first product according to the new IT architecture. In addition to reducing time to market and deliveries to our customers, it will make it possible to integrate our products into new channels in a complete and multichannel approach. So all companies of our group are in this process, and we are going to focus more and more in solutions that can meet the needs of our customers in an agile way wherever they are.

As to corporate venture capital that we approved last year, we already have some investment commitments. The 3 main objectives here are to accelerate the development of our businesses, to increase our current projects and to improve customer experience. As to channel diversification that you can see on the right side, in channels and new products, we had 47% of premiums contributions and collections outside BB channel. So we -- Moody markets funds and pension funds grew 71% of investments. The assets under management launched last year, already accumulated BRL 6.3 billion in assets under management. In the open platform, we already have BRL 4 billion allocated to third-party managers that are sold through Brasilprev products.

So what's coming up next? So we are going to focus intensely in implementation of CRM and relationship journey, new product accumulation and protection that we don't have today in our portfolio, intensification of our rural insurance strategy into nonfinance areas and new customers, expansion of livestock insurance in terms of revenues, and we have life family farming insurance for loans already contracted. So these are some of the points that we are focusing on now for this quarter, with significant deliveries that undoubtedly will be related to our future results.

Now moving to page or to Slide #6. So we have the highlights in the quarter and everything in terms of sustainable development, which is supported by our protection solutions. So we focus on our social call. We encourage our customers to save for their retirement and be prepared families and customers if they have severe diseases with credit life insurance or life insurance and protection for farmers for climate adversities.

This quarter, we have already paid BRL 341 million in claims paid. So we have indemnity for that due to COVID, BRL 79 million; indemnity for severe diseases, BRL 6.1 million; and compensation due for climate events, BRL 74.5 million. So these are claims that have already been paid. In terms of pension, we had BRL 2.2 billion in reserves paid to pension plans beneficiaries after the death of the holder or the policyholder. So we had BRL 538.3 million paid to COVID-19. In addition to our natural call, we are trying to increase more and more features and functionalities to our products to induce a more sustainable behavior for our customers.

In Q1 2021, we had 16.6 million assistances and benefits that promote health and well-being paid through life insurance, such as genetic mapping, checkup, nutritional orientation, psychological counseling. Our products make it possible for our customers to have the sustainable disposable of waste amounting to 68 tons. In pension, in addition to our policy for the allocation in companies that our benchmarks in terms of ESG practices, we have BRL 378 million in pension assets invested in companies aligned with ESG practices. And we had BRL 21 million of collections to philanthropic premium bonds, donations to AACD. So these are the highlights for the quarter. So that now we can go more into numbers, and then we move to our questions-and-answer session.

Now I'm going to give the conference over to Rafael Sperendio to share the numbers with you, and then we have the Q&A. Please, Sperendio.

[Rafael Sperendio, executive]

Thank you, Marcio. Good morning, ladies and gentlemen. Talking about the quarter, it's always important to highlight that the macroeconomic conditions made it possible for us to deliver BRL 977 million. So in Q1 2021, we had the full impact by the pandemic. So in Q1 2020, it was not affected by the pandemic. Only the last weeks of March, whereas Q1 '21 was fully affected by the pandemic in an even more adverse manner than we had originally expected or planned. So in spite of these more difficult conditions, in spite of adversities and all the setbacks, we had a good performance in terms of operational performance. And in terms of loss ratio, we were able to deliver BRL 977 million in Q1, a 2-digit growth of 10.7% over Q1 2020. So we're working in forming these numbers. If we break down numbers, we have a 7.4% growth in operating results, in spite of the more challenging basis for the comparison. So our consolidated net income grew 33%. Here, it's a combined number. We had a significant high, even though this accounts for a small share of our bottom line but it's been gaining share in our performance.

And on the next page, you can see that in Q1, the main positive impact came from a slightly more beneficial dynamic of inflation rates that are used to update our assets and liabilities. Commercial performance was very good in a very broad way. In terms of insurance, premiums have grown 7%; in pension, we have grown 6%; premium bonds, almost 8%; and brokerage revenues grew 5.2%.

Now on Page 9, you can see the breakdown of our results, in terms our operating results versus net investment income. So we had -- consolidated operating results grew 9% year-on-year. So this is after tax so that we can compare the results as a whole with a consolidated invested income. So it's a significant growth, close to 2 digits in terms of consolidated operating results after tax and BRL 75 million, 6.6% of our result, which is still a quite low level if we are to compare with our historical numbers when the investment income accounted for as much as 30% of our bottom line. So we are seeing a recovery, and this is what we are expecting for 2021. And what we have observed over the past few years is that the investment income has a more significant share of our bottom line. But as of the first quarter of 2021, we are seeing a more favorable trend.

Now on Page 10, I'm talking about Brazilseg and comparing year-on-year per business line. Here, you can see the 7% year-on-year growth in terms of premiums written, insurance premiums. Most of it was driven by the growth in life insurance of 15% year-on-year and then rural and home growing almost 30% each. So we had -- credit life insurance, we had a drop as compared to last year, and there are many factors accounting for this.

A new product that is good to remember, it has a lower price than the previous product because it assures only the outstanding balance. The one we had before, along the effect of the operation, this only covers the outstanding balance in line with best market practices. So prices go down and then we expect it to be more profitable than the product we used to have. But in a transition from the old portfolio to the new portfolio, we already expected this a higher impact in premiums, but this impact will go down as time goes by.

In addition, there are other effects that had an impact considering the macroeconomic scenario where some customers needed slightly more credit. In the renewal or in the rolling of the debt and when they try to renew the insurance, they were in a situation when they needed slightly more credit. And this had an impact year-on-year, especially in the beginning of the year, January and February. If we notice, you can see the number here based on our publications. It's been having a growing performance with a gradual recovery along Q1. And in March, we went back to an average of BRL 200 million in the month. So we have an expectation of a recovery of this commercial performance but this will take place gradually and more markedly in the second half of the year.

Now moving to operational results. Here, you can see a more direct impact of the pandemic with a high of 8 percentage points in terms of loss ratio as a result of claims due to COVID deaths, in a broader way, all our products with the death coverage. The dotted line that you can see here, you can see a much more stable behavior long term and the loss ratio is practically flat year-on-year. If we exclude it, the impacts resulting from the claims paid to COVID deaths, we have already paid almost BRL 80 million in terms of COVID indemnities, plus the notices, we are close to BRL 70 million in Q1 2021.

In terms of commission ratio, there was a drop year-on-year. Here, the main factor leading to the drop in commission ratios was the credit life insurance, as we showed in the previous page, because of the reduction in terms of premiums written for credit life insurance. It has a component of performance bonus and as the brokerage house exceeds the targets, they will pay performance bonus that is incremental. So as credit life is below the year's goal, so we didn't have the performance bonus, and that's why it went down in Q1 2021.

In terms of G&A, we had a drop 14.8%, 12.9% in Q1 2021, especially because of less expenses with rural lines and also lower expenses with travel. The combined ratio, you can see here there was an increase that was driven up by loss ratio. It was partially offset by the reduction in commission rate and then G&A. So there was a rise as compared to Q1 2021. The net investment income had a drop of 26%, a direct effect of the reduction on the average Selic rate in Q1 '21. Adjusted net income has grown, so the increase in the volume of earned premiums -- so we are accumulating our results drove or had an impact in the adjusted net income year-on-year. And also taxes had an impact, thereby affecting Brazilseg's performance if we compare year-on-year with a slight -- with an increase.

Here, on Slide 11, you can see this chart showing the COVID pandemic, both cases and deaths. So we can see an exponential growth along the first quarter with a higher impact in March, and obviously, with an increase in restrictions of the social isolation that we had in April. And the increase of vaccination of the population as a whole, we can already see a stability in April, and this trend is not going to repeat in April and the expectation will come as we vaccinate more and more people. We're going to see a reduction in deaths and in COVID cases.

Now talking about Brasilprev on Slide 13. We can see a 6% increase year-on-year in contributions, getting to BRL 11 million, and this is the best first quarter ever. Very robust this year. So net inflow had a drop of 44% year-on-year, especially because of a higher volume of the payment of benefits. Here, once again, this is the COVID having an impact in our numbers, people who died due to COVID, and this had an impact in the inflow. And as the redemptions went up quarter-on-quarter, even though year-on-year we had a 0.2 percentage points drop, but still very far from the higher rates that we see in the longer historical case of this indicator.

Reserves of pension have grown 7% in the last 12 months. Here, the highlight is the increase in the multi-market funds in a total of assets under management, which almost doubled recently, very much in line with what we've been reporting to the market in terms of increasing the share of these funds in the company's reserves seeking to have investment strategies that will add more value to our customers, always respecting the quite conservative profile that we see on average in our customer base. But little-by-little, gradually, we seek to add more value, and we have the maintenance of our average management rate with an increase if we compare Q1 '21 to Q1 2020 with a growth in the management fee -- and the revenues from management fee of 5% year-on-year.

The net investment income, you see here was minus BRL 25 million in Q1 '21, a better performance than what we saw last year, especially because of the reduction of the difference between IGP-M and IPCA, the 2 Brazilian inflation indexes. And the net adjusted income grew 56% year-on-year if you compare Q1 '21 to Q1 2020, driven not just by the increase on revenues and better efficiency for Brasilprev to accompany that demonstrated improvements that were significant, and this is a behavior that we observed in almost every company of our group. With an improvement in our efficiency rates and the adjusted net income also improved and provided a significant contribution to the results of Brasilprev, overall.

Now going to Brasilcap on Slide 14. Our premium bonds collection grew 8% year-on-year, with a highlight for the single payment and then the net investment income with a quite positive performance with the margin growing 80 basis points and obviously, contributing for the improvement of the rate as a whole a 35% growth year-on-year with a significant impact of the hedge that we performed all the operations that we invested with a breakdown, and Brasilcap already invest in pre-fixed bonds. So we adopted the strategy to provide protection that was very strong, protecting most of the pre-indexed assets, and this had a positive impact in the financial results of the company. And then, obviously, most of Brasilcap performance -- its investment income was the main driver for the growth of 20-odd percent in the first quarter of 2021 if we compare year-on-year.

Now talking about distribution, BB Corretora, this is brokerage revenues here. We had a growth of 5% year-on-year, especially driven by rural and life and the increase in collection from pension and also premium bonds. The net margin had an improvement of 1 percentage points, this is year-on-year. This is because of the sales mix and focusing more on products with a lower cost. And our net adjusted income grew more than the revenue, 6% year-on-year, reaching BRL 506 million in Q1 2021.

And to end our presentation, here, you can see a comparison of the performance, and here, the guidance that we released earlier this year. So we are adjusting all the intervals in the guidance to accommodate the impacts coming from the second wave of the COVID pandemic. So the operational result is holding here, so it's 7.4% growth, very close to 8%. So we are comparing Q1 fully impacted by the pandemic with the first quarter last year, almost 0 impact from the pandemic. In terms of premiums written of Brasilseg, 7.3% and the range from 7% to 12%; and pension plan reserves of Brasilprev, 6.4%, with a range from 4% to 7%. So overall, very good performance. Once again growing at 2-digit rates, in spite of the worst effects of the pandemic comparing to the first quarter last year. So this is a quite robust result. Once again, here, you can see the resilience of our business model. As you could see in the first quarter of this year of 2021, these are the main points that I wanted to stress or to highlight in the presentation.

And we may move to the Q&A session.

[Operator]

[Operator Instructions] First question by Thiago [indiscernible] from Itaú BBA.

[Unknown Analyst]

So you talked about new channels. So this is more digital channels, your own digital channels or third-party channels, such as investment platform? I think you've even mentioned and you talked about pension and corporate plans, but what are other examples and opportunities do you see in specific channels? This is my first question, and I'll ask you a second question afterwards.

[Marcio Ferreira, executive]

Thank you for the question. So this is a combination. We have our own digital channels. So we have fetched to do that -- to focus and leverage the issue of all these availabilities and also making our products available in other digital channels. We've been talking -- and we talk about everything. And we do the 2 things, it's a dual approach. Never the -- Banco do Brasil channel will remain important for us, of course, but we are likely to seek new platforms and new digital channels, and this is an overall market trend. So with the right time and we're seeking the best timing to do that, we are going to expand our strategy.

[Unknown Analyst]

And my second question, slightly more specific regarding loss ratio for credit life insurance. Is there a lag in terms of notices and claims that are filed in terms for the payment of compensation? So what we see in March, is it what happened in February? What is the timing in terms of the processing of these claims?

[Rafael Sperendio, executive]

This is Rafael answering your question. Well, there is not a very significant delay in terms of the claims. What may happen is a delay in terms of the classification of those claims, whether it's COVID or death due to other reasons. But the expense in itself, it reflects all the claims that we received almost immediately. What may happen is that afterwards, we may change the classification between what is COVID and non-COVID.

[Operator]

The question comes from Otávio from Bradesco.

[Otávio Tanganelli, analyst]

It's about credit life. There was a slightly higher rate of cancellations. And there was an influence of the government programs last year. And is this a risk where you see more cancellations?

[Rafael Sperendio, executive]

We don't see much of an impact. So this was really -- overall, there's no specific factor that we may attribute to a specific audience. But considering the economy as a whole, this has driven some customers to decide to take the amount of the credit in full. So many customers, especially in the beginning of the year, in Q1, as I said, this event went down along the first quarter. The main impact was in January and February, we saw many customers rolling over the operation and choosing not to renew the insurance once they renegotiated the loan.

This is a behavior that we saw in the beginning of the year, but went down significantly in March and April. And the effect that was predominant in March and now in the second quarter is much more related to the dynamics of the product in itself. It's a new product. It has a lower ticket than the previous products. So this is something that we are going to see in this transition from the old product to the new product. And this will have a higher impact in Q1 and lower in Q2 as the portfolio grows, and there is a turnover in the portfolio.

[Operator]

Our next question will be from Kaio Prato from UBS.

[Kaio Penso Da Prato, analyst]

It's a follow-up on Otávio's. It's related to the current dynamics of the credit life insurances compared to the new product that you have launched, which leads to a slightly lower premium. It sounds like in Q1, the expected effect of a higher demand was not enough to offset this drop. So I would just like to understand how do you see the demand for this new specific product? Does it meet your expectations? Because now we're already seeing the products performing in April, and what should we expect in April and until the end of the year?

[Rafael Sperendio, executive]

Thank you, Kaio, this Rafael. What we see in terms of demand is really slightly below what we expected. But in fact, most of the effect is related to an environment, to the overall macro environment that we're dealing with, when most people did not imagine such a bad impact of a second wave of COVID. So we are working on the basic scenario of more social isolation, again, in the beginning of 2021. So yes, this has had an impact in sales and in the income of customers. In the end, the conversion of credit life insurance did not meet our initial expectations. But I do not believe this is something that is going to go on.

It's much more related to the scenario in this first quarter that we see in the chart and as you can see in the presentation. So there was an exponential growth of new cases and that's due to COVID, but we are working on the basic scenario for the year as a whole. And the expectation is that, in the second quarter, there will be a reversal converging much more to what we expected.

[Operator]

Now we have a question that was sent through the webcast. The question comes from Gabriel Gusan from Citi.

[Gabriel Gusan, analyst]

Could you explain something slightly better the Brasilprev investment income? I understand that it was better than Q4 '20. But as compared to Q1 '20, the improvement was very good in spite of inflation rates were worse in this quarter in 2020? Could this be explained because the bonds were helped to mature with the future curve of the interest rate that has the present value of the liabilities?

[Marcio Ferreira, executive]

Well, actually, Gabriel, this impact is not so much related to the curve, but rather to the rate in itself, the IGP-M and it's dynamic, along the quarter. If we look back to 2020, there were liabilities that were updated to an inflation rate that is 2.09% and 4% and minus [ 0 0 4 ]. This was a downwards behavior a long time. The asset was impacted in 0.48, an inflation of 0.24%, and this was the dynamics of this rate in the first quarter of 2020.

So this deflation, especially in February, had a quite severe impact in the accrual of interest rates in the asset in Q1 2020. When we look at the dynamics of the rate of IGP-M, in the first 3 months of 2021, we can see a more stable behavior of the rate, although very high, but less volatile 2.6% in Jan, 2.53%, 2.9% in March. So this explains this improvement in Q1 '21 as compared to Q1 2020, especially because of this deflation that had a negative impact in February 2020, and there was nothing similar to that in the first quarter of 2021, and that's why the net investment income was better.

[Operator]

[Operator Instructions] We will now close the questions-and-answer session. I would like to turn the conference over to Mr. Rafael Sperendio for his closing remarks. Mr. Sperendio, please?

[Marcio Ferreira, executive]

So this is Marcio Hamilton. I would like to thank everyone for your presence in our conference call, and our team is entirely available to answer any questions you may have regarding our financial performance. Thank you all very much.

So we would just like to reinforce our acknowledgment. Thank you very much for listening to our conference call, and we are available for any additional questions you may have. Thank you all very much, and have a good day. Have a good day. Thank you.

[Operator]

The conference call of BB Seguridade has now ended. The materials that we use in this conference call is available at BB Seguridade Investor Relations website, www.bbseguridaderi.com.br. We thank you very much, and we wish you a good day. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]