BB Seguridade Participacoes SA

BOVESPA:BBSE3

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to BB Seguridade's Second Quarter 2019 Earnings Conference Call. This event is being recorded. [Operator Instructions] The presentation is available in the financial information presentation section of BB Seguridade's 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 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. Bernardo Rothe, BB Seguridade's CEO; Mr. Werner Süffert, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of Finance and IR.

Please, Mr. Sperendio, you may now begin.

[Rafael Sperendio, executive]

Good morning, everyone. Thank you for joining our second quarter earnings call. I'm going to take you through the presentation.

So let's start on Page #2. We have here the main drivers of our revenues this quarter. The net income rose 18.5% year-on-year to BRL 1.78 billion, supported by the noninterest operating results which was up 82% as you can see it is written on the chart on the lower left-hand side. In the upper part, you can see that the return on equity reached 51% (sic) [ 61% ], well above the return posted for the same period last year given the strategy there that we have been deploying which mainly concerns on improving our operational efficiency, capital allocation and to increase even more the focus on life and pension business and the distribution in the Bancassurance channel.

Regarding insurance, premium written at Brasilseg comparing here apples-to-apples, I mean, considering the current formation in both comparables, premiums grew 20% year-on-year, and thanks to credit life which was up 90% driven by an improved credit origination and lower cancellations. Rural also did well. It grew 13% year-on-year. In Pension, our inflows grew 36%, while the net inflows rose 187%. Redemptions still quite well behaved -- go through our all-time low. And with the increase in inflows and lower redemptions and in addition to the excellent performance of our MAPFRE premium all these factors led our P/VGBL reserves to grow 13% to BRL 262 billion. Premium bonds also posted a very good performance, grew top line at 18.8%. And finally, as a consequence of a very robust, commercial performance that I've just described it, brokerage income grew 35% year-on-year.

Regarding our financial results on Page #3. In the second quarter, our combined financial results grew 3% year-on-year and accounted for roughly 16% of the net income, which was pretty close to the all-time low contribution to the ROI. During the second quarter, the yield curve flattened as you can see in the graph on the upper right-hand side, which resulted on some mark-to-market gains on premiums and some protective securities, which were the main drivers for financial results to grow. As you can see here the second quarter last year, the yield curve widened and the closing rate remained flat. Inflation rates dynamics were less favorable to the yield graph since the redemption of the IPCA was proportionally higher than the decrease in the IGP-M, which is the main index that compares the liability related to the decline of pension plans. We had a compression in the net interest margin at Brasilprev this quarter. So the increase in financial results on a year-on-year basis was fully driven by mark-to-market gains related to the downward move of the forward yield curve.

Moving to Page 4, consulting about our insurance operations. I'm going to focus on the pro forma figures, if I may, which is somewhat comparable to the current structure reorganization occurred at the end of the last year. So in second quarter, premiums written grew 19% year-on-year, supported by credit life as I've just mentioned grew 90% as compared to the second quarter last year then driven by better loan originations of individuals and also lower cancellations. Rural grew 13% and as we mentioned in our last earnings call, it began to gain some traction after the low teens of the COFINS in the second quarter this year.

Then Life grew 1.8%. This [ funded ] cost somewhat highlighted in the end up with -- year-to-date still growing 5%. It's worth highlighting here that, although we expect this pace to increase now in second half, the company has been working very hard to be more completely our range of products in this segment.

Moving to Page #5, talking briefly about the operating performance. Our combined ratio remained flat year-on-year. Again, look at comparables. So 70.3% in the second quarter this year compared to 70.2% in the second quarter of 2018. That is -- even though it has been flat on a year-on-year basis, it's rough -- it's a way better than the credit posted in the same period last year. I mean with a lower loss ratio, with a lower G&A ratio, it was fully offset by the increase in commissions remembering that now after the restructuring. 100% of the commissions are now flowing to our own broker. And the decrease is mostly related to the strong performance of credit life mainly and remembering that credit life and credit life whole partners, they are entitled to pay a performance bonus in case we outperform the expectations into that commercial performance for the premiums.

On Page 6, we can see the financial results of Brasilseg was down 76%. This was mainly driven by the reversal of book entry recorded in Q1 with positive comps recorded the impact of top line. So it's quite neutral to the bottom line and it was neutral in the first quarter. So it's just a matter of reclassification. Net income rose 7% year-on-year. And the ROE reached 74% given the early increases in addition to the reduction we have already accepted given the dividend gains and the realized gains on available-for-sale securities.

Moving to page -- now on the Page #7, gross inflows grew 36% compared to the same period a year ago. Redemptions vehicle should be all-time low at 7.1%. It's worth highlighting here that in the second quarter, we added roughly 150,000 new clients to our client base. Net inflows grew 187% to BRL 2.9 billion. And assets under management grew 12% to BRL 273 billion with management fees keeping the same pace of decline that was on the bid per quarter. Net income fell 6% on a year-on-year basis basically due to the redemption, the low fees of P/VGBL that we have been providing to our customers since September last year. And also the lower financial results as I mentioned earlier.

Regarding premium bonds are now on Page #8. Top line rose 19% year-on-year. Financial results grew 12% given the wider net interest margin. Due to the mark-to-market gains, the yield was flattened this quarter and declined in the same period a year ago as I mentioned in the beginning of the presentation. And this is also will -- I explained in premiums like in the top line moving from the net loss in the second quarter last year to a net income of BRL 33 million in the second quarter 2019.

Moving to the broker now on Page #9. Revenues were up 34% year-on-year, 17%, considering a leaner distribution of the performance overall we received in the year past 2018 as well as the different quarters. This is what is behind the adjusted concept here. Main drivers were credit life, pension and premium bonds. Net income grew 39% year-on-year not only due to the growth in top line as you can see in the chart in the upper left-hand side, but also due to a growth in the EBIT margin even sales mix more concentrated on high ticket products.

And finally, on last page. We have our guidance nonetheless. So as you can see, year-to-date June, we outperformed all our guided range. And to make it simple here, I would summarize in 2 the different factors that led to the deviation in the 2 indicators. So the first one was the performance in credit life, which came in better than our estimates given the stronger loan origination. There was a lower cancellation, which led us to outperform the guidance of premiums and helped us to over deliver the expectations in net income by helping the bottom line of Brasilseg and even more at the broker fees, the performance in this product is an increase in the payment on the performance bonus is traded off to over 1. The second factor was the financial results mainly due to the flattening yield curve. I don’t think that was completely unexpected when we worked on the budget for 2019. This is also evident to overcome financial guidance and help us to exceed our growth estimates for premium reserves. So we have a loss. It has now returned in our MAPFRE premiums.

So based on the -- as we've said to fine-tune our estimates considering that we delivered in the first half. The new configuration that the divestment of our stake in IRB, our new macro assumptions and also taking into consideration that some risks that we have stated for the year we have now anticipated. So our new aspects, as you can see, in terms of our net income growth, we have revised upwards from 5% to 10% to 8% to 13%. Premium bonds rose from 7% to 12% to 10% to 15%. And premium reserves, we increased our estimate from 7% to 10% to 9% to 12%.

So to wrap up here, in summary, we had a very solid results. And most importantly, it's something that we have discussed in our last conference call. We are working hard on the construction of our future earnings stream. So to give you some color, the balance of earned commissions and brokers has already pre-close to BRL 2 billion growing 18% in the last 12 months. The balance of provision for earned premiums already exceeded BRL 4 billion. It's growing more than 20% over the last call. So this is already booked in our balance sheet. And of course, assuming normal conditions, it's going to become part of the P&L over the next 3 to 4 years. So this is what I mean by building the future for our industry. So that's all. We can now jump into the Q&A session.

[Operator]

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

[Rafael Sperendio, executive]

I'd like to thank you all once again. And myself and the Investor Relations team is always available to -- if you may have any kind of further doubt about the results of the company. So 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.