BB Seguridade Participacoes SA

BOVESPA:BBSE3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to BB Seguridade Second Quarter 2020 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. Erik Breyer, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of Finance and IR. Please, Mr. Rothe, you may now proceed.

[Rafael Sperendio, executive]

This is Rafael. Bernardo is with us. He's going to join us in the Q&A session. I'm going to start the presentation. And please, let's flip to Page #2, where we have here how we behaved during this very unusual pandemic environment. So just to bring you a mandate of our action plan, based on taking care of our employees, supply to clients, looking at the business sustainability and to prepare the company for the after crisis. So over 90% of our overall staff is still working from home. They're working remotely in almost on a regular basis. Out of the BRL 40 million donation that we've announced, we've already disbursed nearly BRL 38 million, which is equivalent to 7.5 tons of food and 1.9 million essential items. It's worth noting that we also donated 207,000 masks to the sales force, which is in line with the part of our supporting client society and taking care of our employees.

With regard to COVID claims, we had a BRL 34 million reported claims and more than BRL 20 million were already paid. We also offered to our customers online psychological assistance and activities for kids. And we've prepared the return plan, but we still don't have a date final yet to put in place, but we are already prepared to come back. Anyway, it's important to emphasize that despite the pandemic, we are still implementing our strategic plan and the expected deliveries for 2020.

Let's start with Rural, where we are keeping expanding sales to areas that were not financed by Banco do Brasil. Only in the first half, BRL 63 million premiums were underwritten 3x more than we did in the first half 2019. It's also worth noting that in July, we started to focus on clients that are part of the PRONAF, small farmers mainly that were previously counting only on the Proagro, the insurance that's provided by the government. We are now reaching those clients and over 2,000 policies were underwritten in the first month since we launched this product for these clients.

In Life, it's also worth mentioning that we launched a new portfolio in May, which is doing really well with the sales force and even digitally, sales in digital channel increased 35% compared to the former portfolio. So we've remodeled completely not only the journey of the client online, but also the journey of the sellers, which is also helping a lot the sales process to understand better how the product works and to provide benefits for clients in Life, I would say, not only benefits on the client's eyes and help the relative -- benefit for clients who use Life.

In pension, we put in place retention strategy in April and May that helped us to retain nearly BRL 2 billion and also brought our redemption ratio to the lowest level ever. We keep working on changing the asset allocation with our clients to adapt to this new environment at lower rates. So the AUM balance of new-to-market funds rose 70% year-to-date.

And within this new environment, we have also been seeing an increase in usage of digital channels.

So sales in digital channels rose 11% year-to-date, accounting for nearly 10% of sales. And if we were to exclude a rural insurance product, the contribution of digital channels can reach up to 13% of total sales, which is also a good -- an improving number.

So flipping to Page #3 and talking about our financial performance in the second quarter and how we did year-to-date. So in the second quarter, our net income fell 9% year-on-year to BRL 982 million. And just to let you know, like, 72% of the gap comes from the equity income from IRB that added nearly BRL 70 million to the P&L in the second quarter last year and made no contribution this year since we divested completely from our stake in July last year. And the balance, considering the gap to the second quarter last year, the balance consists mainly of lower financial results on lower volumes, including capital refund and the falling Selic rate. Insurance premiums grew 2.7% year-on-year. And thanks to Rural and the term life, as I just mentioned, we have been doing good so far.

Since we launched the new product in Life in May and growing even in this pandemic on quarter-on-quarter basis. Combined ratio worsened by 6.7 percentage points, given the increasing claims. I'm going to provide more details later, and an increase in the commission ratio given the performance bonus.

Pension plans, the inflows were down 37% year-over-year all due a still very challenging environment caused by the pandemic, clients they are still recover. April and May were very tough. But in June we managed to recover. We have been seeing this across the board, most of the lines there keeping a trend of recovery. So last week of March, they were the most difficult one, but April was better, May was better than April, June, better than May and July, I think, that's going to be also better than in June.

Now going back to pension, besides seeing this decline in inflows after this spike in redemptions in March, we ended the quarter with the lowest ratio ever at 6.6% down 50 bps year-on-year. And the broker commissions fell 0.7% on lower volumes from pension and premium bonds as in the shorter term, the broker is more sensitive to the performance of these 2 lines as the commissions are booked on a cash basis. And the net margin at the broker was now 70 bps, not only because of lower revenues, but also in lower financial results. And talking a little bit how we have been doing year-to-date, recurring net income was down 11%, while dividends decreased much less, 1.7% lower than in the first half last year as we managed to approve a 95% payout ratio.

The main drag on the year-to-date comparable were also financial results and the equity income from IRB in the first half 2019. Insurance premiums were up 8.3% year-to-date, while the combined ratio grows 1.2 percentage points. Given the increase in commissions, year-to-date loss ratios they were down. I'm going to cover it later.

Pension plans, the inflows were down 10%, while the redemption ratio increased 0.9 percentage points, given an increase we mentioned in the first Q. And P/VGBL reserves grew 7.4% over the last month.

And finally, at broker, commissions rose 7%, and thanks to the robust insurance sales while the net margin fell 0.6 percentage points over to the lower Selic rate.

On Page #4, we brought some additional information here with the purpose to help you to understand better our recurring performance by eliminating the noise caused by the time mismatch of the approval rates on assets and liabilities on the defined benefit pension plans. It has no economic impact and adds up to 0 over time, as you may see here. And we also set apart the recent events that made this 2019 data not fully comparable with the 2020 data, such as the equity income from IRB and also the capital refund.

So on the left-hand side, we have the impact of the 1-month lag on adjusting the cost of the liabilities of the defined benefit plans, which added nearly BRL 14 million in the second quarter this year and still BRL 18 million negative year-to-date. On the right-hand side, we have the chart that eliminates all these noises for the first half figures. So how would have been our normalized performance, and by eliminating the noise in both periods, as you may see on the light blue bar and the light yellow bar, our net income would have fallen by 0.8% only. And this is mostly explained by the falling Selic rate since operationally, our companies they have been doing good so far with a combined performance growing 7% year-to-date, which is actually very positive considering the challenges that we have been facing. So most of the decline on a year-to-date basis is caused by this very specific event that is not really related to the sustainable performance of the current structure of our business.

Moving to Page #5 now. And becomes very clear how our financial results was impacted by the changing macroeconomic environment. So on the upper left hand side, we can see the lower Selic that affected not only the second quarter, but more preeminently the first half. The forward yield curve also is steepened, which was negative for Brasilcap that's more exposed to the long end of the yield curve. But on the other hand, this was somewhat helpful for Brasilcap, which has a shorter duration. Regarding inflation, IPCA posted deflation in the second quarter, which ended up having a negative impact on the accrual rate on inflation-protected securities classified as held to maturity, especially in Brasilprev, which also had another negative impact on financial results, given the increase in the IGP-M, which impacted the cost of liabilities.

So this was how our financial results was impacted in the outcome of all these moving parts along rates, also lower volumes, as I mentioned, the capital refund and also lower sales in premium bonds and pension plans. Financial results fell by 29% year-over-year in the second quarter and 64% in the first half, accounting for only 9% of the net income figure that are used to be around the mid-20s. So it does show how the financial results have been weighing on the bottom online this year, which we already anticipated in -- when we had our earnings call to discuss the 2019 results.

Now moving to the performance of our insurance business on Page #6. Premiums grew 3% year-over-year in the second quarter. And thanks to Rural, which managed to keep a strong pace despite the pandemic. Term life also did really well despite a full quarter impacted by the pandemic and grew 1.6% year-over-year with some help of the new product launched in May. On the other hand, Credit life was down 11.5% and results laggard in the second quarter.

Year-to-date premiums were up 8% with the spot light on Rural that grew 21%, driven by crop insurance, given the anticipation of our working capital loans. Also, we had higher subsidies that are reaching close to BRL 1 billion this year. And also with somehow from insurance sold to areas that are not financed by Banco do Brasil, which now account for nearly 8% of our crop insurance premiums.

It's becoming more representative. The other business lines, as you may see on the yellow bars, they also showed a very good performance by growing low to mid-single-digit year-to-date, except for home insurance and commercial line, but these lines they are tiny.

Moving to the operating performance. As you may see, the loss ratio increased 4.3 percentage points year-on-year in the second quarter, impacted by higher losses in Rural, given the drought that affected the south region of the country, and also on hard comps since we had some reversals in provisions for judicial claims to be settled in term life in the second quarter last year. The impact from COVID has been manageable so far, as you may see in the grey line. It added 1.8 percentage points to the loss ratio in the second quarter and nearly 100 bps in the first half with the peak until now in May and made some of the things that are starting a downward trend. It's too soon to be sure about it, but we have been following this trend very carefully. Commission ratio rose 2.7 percentage points year-over-year with 2 commissions with the performance bonus and also lower commissions from reinsured operations. So last year, we received a bonus from agreements with our step-up commissions. And this year, the amount was much lower.

In terms of expenses, the G&A ratio was down by 40 basis points and helped too by lower expenses with the rural insurance stability fund and still very controlled admin expenses. And as a result, combined ratio weakened by 6.7 percentage points. And even with this increase in the combined ratio, the net income fell only 3% year-over-year, helped by the increasing financial results on lower financial expenses and also helped by the 9.5% increase in earned premiums.

On pension plan, Page #8, contributions amounted to BRL 7 billion in Q2, down 37% year-on-year, while the redemption ratio reached the all-time low at 6.6%, driving reserves up by 7% to BRL 293 billion after posting decline in Q1. So of course, that's not only about the increase in the reserves, it was not only driven by the decrease in redemptions that also helped by the recovery that we saw in the performance of the investment funds that did really well, mainly in the end of the second quarter.

Revenues with the management fees were up 3% year-on-year, while the average management fee charged fell 3 basis points to 0.99. The cost-to-income ratio also improved by 2.6 percentage points. But all these improvements on the operational side were almost fully offset by lower financial results given the IPCA, IGP-M gap that has been widening and also lower mark-to-market means in the low -- the upper end of the forward yield curve. And that's why the net income rose only 0.1% year-on-year in the second quarter and virtually flat compared to around the same period last year.

Moving to premium bonds on Page #9. Collections were down 24%. Premium bonds they struggled a lot at the beginning of the pandemic but managed to close part of the gap in June. June was the best month year-to-date. Financial results were up 65% year-on-year despite lower volumes helped by lower expenses with management fees. Net interest margin widened by 30 basis points as the company has been doing really well with some tactical provisions taking opportunities of the steepening yield curve. And with this improvement in financial results and some help from other operating income, the net income increased 97% year-on-year to BRL 45 million in second quarter.

And to wrap up the presentation on Slide #10, we have our distribution business. So commissions were down 1% year-on-year on weaker volumes from pension and premium bonds, almost fully offset by the increase in commission from insurance, proving the resilience of our business model, even in tough scenario, like this one. Net margin was down 70 basis points on lower financial results, given the falling Selic rate. And as a result, net income decreased 2% year-on-year in the second quarter, while it keeps increasing year-to-date on the back of the increase in the insurance commission and an improved EBIT margin that has been helping the performance of the broker.

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

[Operator]

[Operator Instructions] Our first question comes from Gustavo Schroden from Goldman Sachs.

[Gustavo Schroden, analyst]

One question here. I remember that in the first quarter, you guys mentioned that the first quarter should be the worst quarter that net income should be the worst at that time. So indeed, we see an improvement in earnings in the second quarter. So my question is, how should we be -- how are you expecting earnings evolution in the coming quarters? Should we still work toward an improvement sequentially going forward? That's my question.

[Bernardo Rothe, executive]

Gustavo, thank you for your question. It's Bernardo speaking. We still think that the first quarter was the worst of the year. So we should see the third and the fourth quarter better than the first quarter. So moving forward, I would say the second half as a whole should be better than the first half.

[Gustavo Schroden, analyst]

Okay. Okay. If I may, just one question here. How have you seen competition in the pension plan? We saw a strong impact in as we closed the quarter, it was quite negative in our view here. But I believe this is impact is related to the COVID-19 pandemic. But if you can elaborate more on the pension plans and how have you seen the competition as well on the pension plan?

[Bernardo Rothe, executive]

Sure. Well, before the start of the -- in fact, until the end of the first 2 weeks of March, we were leading the rankings in terms of net contribution. So we had a very good start in the beginning of the year. And in the end of the first quarter and the beginning of the second quarter with the pandemic and some panic somehow in the market with interest rates impacting the quota of some of the mutual funds and the performance of the stock exchange and so on, we saw people redeeming and moving money to current accounts and savings accounts.

So the move that is not really a problem with the product itself, but it was people willing to keep money on their hands because of the uncertainty that was created with this pandemic. So after -- from May on, we started seeing things moving to a normal type of business. We're still not there, not normal yet. So redemptions, as we showed, improved in the end of the second quarter. And the profitability is not picking up, it was lower than last year, but people are more worried about the pandemic than what we had before.

So in terms of market share, we are pretty much in line with the end of last year market share in this business. So we are keeping our business competitive, and we are working with our clients to provide them all the support they need to make the right decision about how to prepare for the future, for the retirements, how to invest their money and to keep their business growing over time.

In fact, we've seen the best month of the year so far was February. In fact, the first 2 weeks of March was the best in terms of daily average in terms of contributions and net contributions, but we are not better at this point in time, meaning that June was much better than May and April. July seems to -- seems that it's going to be better than June. In net contribution, it's possible that we are going to have July better than February.

So things are moving back, but it's not normal yet. So we still have a long way to go to be back to normal. But we've been able to work with our clients to get them to be comfortable with the investments for their retirement.

[Operator]

[Operator Instructions] Our next question comes from Tito with Goldman Sachs. [Operator Instructions]

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

[Rafael Sperendio, executive]

Thank you all for joining our second quarter earnings call. And myself and the IR team, we are available in case you have any further doubts. 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 Investor Relations website. Thank you very much for your participation, and have a nice day. You may now disconnect.