Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Transcript 2022-Q1

[Operator]

Good day, everyone, and at this time, we would like to welcome you to the results conference call for the First Quarter '22 for Porto Seguro S.A.

With us today, we have Roberto Santos, the CEO and the IRO; Celso Damadi, CFO; Marcelo Picanco, the CEO of the Insurance Vertical; Marcos Loucao, the CEO of the Financial Business and Services Vertical; Sami Foguel, the CEO of the Health Vertical; Izak Benaderet, Director of Porto Investments and Emerson Faria, Head of Investor Relations.

We would like to inform you that this presentation is being recorded and simultaneously translated into English. The presentation is available for download at our IR site. [Operator Instructions]

Bear in mind that the forward-looking statements made during this teleconference relating to the business outlook of Porto business are based on the beliefs and assumptions of the company management and are based on information currently available. These forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions that relate to future events and they depend on circumstances which may or may not occur. General economic conditions, conditions of the business sectors in which Porto Seguro is active could impact the future performance of the company.

I would now like to give the floor to Mr. Roberto Santos.

[Roberto de Souza Santos, executive]

Good morning, everybody. Thank you for your participation in Porto Seguro's First Quarter '22 Results Conference Call.

On Slide 4, we present the main highlights of the period. I would like to start the presentation by highlighting the evolution of the brand recently announced at Porto Day. People already refer to the company officially as Porto and so we decided to officially adopt this name.

Additionally, the Porto verticals have also started to have their own brands, Porto Saude, Porto Seguros and Porto Seguro Bank. We also launched the new Azul brand with a more streamlined and lighter visual identity. The launch of the new brands is part of a strategy, which involves increasing our exposure in major events, aiming at boosting the businesses that make up the ecosystem we created. We have been successful in accelerating revenue growth and increasing business diversification, as can be seen by the numbers for the first quarter, with a 16% growth in Porto Seguro vis-a-vis the same period last year and more expressed variations in Porto Saude, Porto Seguro Bank and the services vertical with an expansion exceeding 35%, leading to an increase of 21% in our total revenue.

In relation to the operational result, it was a challenging quarter due to the increase in auto claims impacted by inflation of vehicles and parts. It is worth pointing out that our pricing and underwriting models are adjusted already to cope with these cost increases. On the other hand, our consolidated operating and administrative expenses for insurance operations reached the best result ever for a quarter due to our continuous efforts to increase operational efficiency. Regarding the financial result, the return on financial investments was equivalent to 83% of the CDI, mainly explained by the strategy we adopted for inflation index securities, which we will reap further ahead.

I would also like to highlight some important news in the quarter. The launch of our digital account with all the restructured financial solutions that will include payment services, credit products and investments, the expansion of subscription auto insurance for all capital cities and larger cities, the launch of the new insurance for cell phones, digital with a strong potential for penetration. And in ESG, the launching of a platform to concentrate all of our social and environmental actions.

In closing, I would like to thank the confidence of our employees, brokers, service providers, suppliers, customers, and other stakeholders of Porto. I would like to ask Celso to speak about the profitability in the first quarter of 2022.

[Celso Damadi, executive]

Thank you, Roberto. A very good day to all of you.

In Slide #5, we had a growth of 21.4%, as you can observe. Now if we break this down by vertical, Porto Seguro grow 16%, Porto Bank growing 36.7%, Porto Saude 37.4% and services 35.9%. So this shows you the intensification we had this quarter as well as in previous quarters with all of the health verticals growing, but services and auto growing beyond 35% for the quarter. And the previous quarter, we also had very strong growth. And of course, this gives us very good productivity.

Now when it comes to the previous quarter, we see that this quarter has figures that are somewhat lower, which will enable us to gain even more productivity and we are at the lowest historical level that we have ever had. We have already been capturing a great deal of productivity. Now with this increase of revenue, we observed, of course, a very significant increase in profitability. For the quarter, we had results somewhat higher than in previous quarters.

And we will show you this during the presentation, we have a profitability of 7.5%, somewhat below our historical profitability vis-a-vis the CDI, we worked with 76% of CDI in the quarter. And we show you since 2010 that we have always worked with levels that are historically above the CDI. Certainly in the coming quarters, there will be a recovery in profitability. Now this quarter, we did have some figures that are above what we're used to working with. But with the revenues that we are making, we will have the profitability that we have always presented since 2010.

I would now like to give the floor to Marcelo Picanco, who will share with you the results of Porto Insurance.

[Marcelo Picanço, executive]

Thank you, Celso. Good morning to all of you. Thank you for your interest in the company results. Regarding the Porto Seguros vertical, we had significant growth in all of the business lines, above 15%. In auto, we had a growth of 16.5% and P&C took 1.6% and in insurance we have significant robustness. We're using techniques, prices and new products to boost everything with considerable growth. We reached almost BRL 4 billion in premiums, which is a record for the first quarter. This is in the company's history.

And I would like to address perhaps the most challenging part of the quarter, which was the significant increase in loss ratio with an impact on our profitability with levels of more than 20%, 22.3% in the first quarter. Well here we had something in the pandemic and we went down to 7.5% and we reached a combined index that was very good for the period.

Now what I would like to show you on Slide #9 is something we have not seen in the last 9 years, not only for Brazil, but worldwide. We had an inflation of insurance reaching 27%. And we've been following up on this market for 25 years. Now this inflation began stronger beginning in the second quarter. Now even though the models do capture this trend, we have a base of prices in the first quarter which, of course, cannot be changed and this will impact the entire portfolio.

When we look at the market, it is no coincidence when you look at the graphs in the middle and in the right. The market, you will see a somewhat longer graph. We went from standards before the pandemic of 62% loss ratio to reach an average loss ratio in January and February of 73%, 11 points above the market standard, which was a standard we were using 3 years before the pandemic. We have had a drop in loss ratio. And now we have a slight distortion. We have full mobility at present. And we also have the mobility of the vehicles that we monitor that are above those before the pandemic.

And to be able to face this inflation, which is reflected not only in the autos, but also impacts the spare parts above the IPCA. Our average ticket had a growth of 25% in the first quarter of '21 and the first quarter of 2022. Now inflation is money that needs to be offset. It's not a problem of loss ratio. It's an issue of the cost of factors that are all much higher with a very rapid variation and change in level.

In the next slide, I would like to give the market a somewhat more global outlook of this phenomenon. We have carried out an exercise with the public data of the main health insurances in the U.S., and we see that the impact of inflation was caused by the chain of production. I'm not only speaking of spare parts, mechanical parts that are inherent to the auto market, but also chips and the global turbulence in the chain in terms of loss ratio. And this has been published by the companies, an increase of 21% to 35% only in the United States where this type of variation is extremely rare and never seen before. Some companies, because of this scenario, have stopped selling new insurance.

Some markets such as the North American market, in some states, have an issue of control, a pro forma control. They require approval for the price changes. And because of this, this change takes place at different dynamics than that of the Brazilian market.

On Slide 10, when we look to the right, we see some companies operating with 7 points above the pre-pandemic period, 10 points above the pre-pandemic period and 4 points above the best, which is for progress. Geico, which is a very well-known company and the market reached 89% of loss ratio in this first quarter. I believe, therefore, that this shows what is happening. We didn't carry out this survey in all of the countries, of course. But the mobility inflation is a global phenomenon. And in Brazil, of course, it has had an impact on our projections. And the drop in pace will happen. We believe in appreciation up to November, but the period of the greater shock is the one we're undergoing at present, and there will be an increase still in this index.

With this, I would like to give the floor to Sami to speak about Porto Saude.

[Sami Foguel, executive]

Thank you, Picanco. Good afternoon to all of you. I'm going to speak about the Health Vertical. We continue on with positive results, a strong growth in the first quarter. We had a growth of 37.5%, 34.5% and in health and with BRL 369 million, of course, benefited by the loss ratio and our activities in health. In the vertical, this reached BRL 1.2 billion in terms of products, 370,000 active clients, an increase of 95,000 members as we had spoken, this is the seventh consecutive quarter of increases.

Now in the next graph, I will continue to speak about health. Health had a growth of 43.2% and life 34.5%. And it is important to see this increase in the risk premiums, increasing the revenues, the premiums, much more than the number of lives, which already was interesting. We had been speaking about pricing. And this is the second quarter that we speak about this more specifically.

In the first quarter of 2021, we had 9% increase in premium and then 5.7% in lives. And we see a more accentuated impact of growth, which is still higher to the growth of lives, maintaining a very accelerated growth in lives in the quarter, vis-a-vis the fourth quarter last year. Now the loss ratio at a very interesting level, 76.9%.

Now, we should highlight the influence of Omicron and flu in the first quarter. They had both a very significant impact. We had an increase in loss ratio because of these, but we despite this had a very appropriate level for the quarter. All of this meant a net profit of BRL 35.6 million with an ROI of 26.4% compared with 24% in the first quarter of '21.

Thank you very much. I would now like to give the floor to Emerson.

[Emerson Faria, executive]

Well, good afternoon to everybody. I will speak about the results of Porto Seguro Bank, where we have credit and investment products. Now to speak about the results, we have a consistent growth despite the macroeconomic scenario, which is under pressure. We had a growth of 19%, which is quite aligned with all of these products that are seeking growth. And despite our size now, a growth in revenues of credit card and financing and in the consortium, a growth of 20%. In terms of clients, we had 3.5 million clients with a highlight for our rental guarantee, reaching a growth of 40% vis-a-vis the previous quarter.

As a highlight, of course, we began a digital account. We had the launch of the sustainable nautical and high-income property consortium. Once again, we also created a capitalization with installments in the credit card. Another incentive for customers that are looking for a building to rent and we have offered them an additional option which leverages the real estate sector, which we're highly interested in.

In digital evolution, we would like to gain efficiency with a more digital service. 44% is already done through our WhatsApp and SuperApp. And we have several initiatives to increase the use of our products, especially credit cards offering greater comfort and ease through Porto text and some is in the use of gas stations.

Now when we speak about the net earnings more specifically, we have a reduction vis-a-vis the first quarter of last year. Now despite having a growth of revenues, as I have already mentioned, we had an impact due to investments in technology and new products. We are consistently reinforcing all of our risk management platforms, credit, fraud prevention to sustain the growth that we would like to have.

We have a significant impact on the auto funding business because of the SELIC curve last year that exerted pressure on this portfolio. Now -- we now have a different level of SELIC at present. And as in any other market, we have had an increase in default. In our case, we have had a positive surprise in the largest portfolio that we have is credit cards. The entire premium segment has been more shielded. But yes, there was an impact on the auto funding portfolio that presently we're attempting to leverage.

Now on the next page, to speak about the credit business more specifically, and we begin with our credit portfolio. We have a growth of 30% vis-a-vis the previous quarter. And we have sort of moved sideways compared to the last quarter. This, of course, already forcing several cautious actions to eliminate risks in the auto funding and to maintain the credit in credit cards. Now in credit card, a growth of 16% in active card users and the value of transactions with a growth of 25%. Well, after the pandemic, we have had a resumption and we're following up on the use of credit cards, which has been very good regarding the CDC. We're being very careful once again in releasing active cards, but we had a growth of 12% to 14%.

When we speak about financial solutions for rents, we have had a growth of 10% in the last quarter. A special highlight is the development of a new platform called Olho Magico, our real estate partners and our customers can seek a rental solution. We have more than 50,000 announcements and an expansion of real estate base with 20%, a growth of 14% vis-a-vis the previous year.

On the following page, we speak about what we call the capital accumulation businesses that was quite favorable during the quarter. We have an expansion in the consortium and the complementary products in this Vertical allow for this. We have a macroeconomic scenario that is more restrictive to credit, and we are able to distribute our products at a faster pace through this portfolio. A growth of 30% vis-a-vis last year and 5% for the quarter, we had 15,000 installments sold 30% above last year. Credit sold BRL 2.2 billion and a delinquency rate which is the lowest in the market, and this is a characteristic of our portfolio, a strong capitalization with a growth of 27% vis-a-vis last year. We have 73.5 current bonds, a growth of 12% and a volume of BRL 246 million. We have a review of our investment strategy, which also generated BRL 8.5 million additional in terms of financial results.

Now to change a bit and speak about our service products. We have a strong growth in revenues and client subscription, strengthening the recurrency of our customers and helping us in our cross-selling ability in the verticals. We reached revenues of BRL 106 million, a growth of 30% vis-a-vis last year. Of course all of this aided by Carro Facil was 77.3%, K Reppara and Tech Facil, which is a solution for the repair of cell phones. We had negative revenue, but all of this was given thrust by the investments in technology and the sales of Carro Facil were under pressure due to the scarcity of cars and because of an adjustment that we were doing.

We had a recovery in March. And in April, of course, we can expect better results in clients' subscription. We have 51,100 customers, services provided in an isolated way that have nothing to do with the insurance portfolios. 31,000 and Porto Auto repair 137,500 Renova Ecopecas. These are auto parts sold 99,000 parts sold, dismantled cars, 456 collected scrap tones 818 tonnes.

I would like to thank you for your attention. I now give the floor to Izak.

[Izak Benaderet, executive]

Good morning to all of you, and we're going to speak about our financial investments. We ended the quarter with BRL 149.8 million, 83% of the CDI. Now by breaking down these results, we had a quarter with IPCA and IGPM, indices that are much higher. This helps our public bond increase, and we had an increase in the stock market. Although the makeup of our share portfolio was below the BOVESPA Index, but with positive results.

On the negative side, I would like to highlight 2 factors, a drop in the exchange rate. And this brought us results somewhat above what we had imagined. And we also had relevant movements in our securities where we lengthened our maturity of 2023. We have a somewhat longer term. And through this, we can guarantee greater profitability because of the longer term. However, for this quarter, the result is negative in terms of this specific security.

Now on the other hand, it is a fact that going forward, in the coming quarters, we will have a better result for our securities portfolio. We have reduced the inflation part and we have included this in prefixed and post-fixed funds without significant changes in any of our inflation-linked bonds.

[Roberto de Souza Santos, executive]

Thank you, Izak. Now to speak about ESG on Slide #17. Well, we've launched our Porto sustainability platform that highlights our main indicators. We do want a sustainable growth and the platform helps us to showcase them. They had a significant impact last year. We have more than 260,000 items donated. We had 200,000 tonnes of automotive residues and expansion of our electrical fleet so that our attention can be carried out with more sustainable modes, among other initiatives.

Another topic we would like to approach is our 24-hour assistance. We have a water bike to support special operations for landslides that we had in Bahia, Minas Gerais, Rio, and Sao Paulo this year. We have a long-standing history of offering support not only to our customers, but to the entire society as a whole because we are a safe haven for people as our name indicates. These are the main operating financial and ESG indicators that we wanted to highlight in the presentation.

We can now go on to the question-and-answer session.

[Operator]

Okay. Roberto, thank you very much. To all the participants, once again, we thank you for participating in our conference call. We will now go to the Q&A. [Operator Instructions]

We begin with the first question that comes from Guilherme Grespan from JPMorgan.

[Guilherme Grespan, analyst]

My doubt refers to the auto segment. It is our understanding that there was a change in accounting in terms of the loss ratio. I would like to confirm 2 points for the loss ratio in the quarter. If you could explain to us the behavior month after month of the loss ratio, we still did not have March included, and we would like to know about the evolution if we have reached a peak? And the second point, although you had a relevant growth year-on-year. We observed a drop of practically 7% quarter-on-quarter in consolidated auto figures. And given that most of your business depends on renewal. This is a significant drop. And you put in a very interesting graph of the increase in the average ticket. How is this ticket increasing at the extremes quarter-on-quarter if you're following up on the inflation or if your prices are still below this?

[Marcelo Picanço, executive]

Guilherme, this is Marcelo Picanco. Thank you for the question. Now yes, we do observe a trend, a drop month after month when it comes to the loss ratio. And in fact, we need to understand that there is seasonality, especially on Mondays, for example, when the loss ratio becomes ever more evident because of the weekends and everything is recorded on Monday. So this is a trend that we observed towards a reduction.

Now the drop in the quarter-on-quarter and you're referring to these items. Now the issue of items is not under renewal. This depends on the speed with which we had adjustments on how the market has been following up on this with lower options. And I can say that at present, the market is quite rational. This has been made clear and the figures recently have been better. But at the beginning of the process at the end of last year, we had perhaps greater impact on the newer vehicles. But this was the price that we had to pay in quotation marks, and we're quite comfortable with this.

Now this adjustment in the average ticket is at the level that we shared with you. And if you compare this to September-October, it hasn't changed very much, and it should remain at that level for some quarters, I would say. And everything will depend on the behavior of the FIPE comparing our projection and theirs to have a change in going forward or perhaps decreasing this. But for the time being, we won't have any changes. Inflation is still a concern, but we are not charging for retrospective inflation and the projection of inflation in vehicles will no longer be 0, of course.

[Guilherme Grespan, analyst]

If you allow me a follow-up. The message that you conveyed the last quarter is that there should be a falling loss ratio during the year. Does this base scenario continue on that the loss ratio of the first quarter will be a peak? Or will you still face challenges in the second semester?

[Marcelo Picanço, executive]

Yes, the answer is, yes, the loss ratio will come lower quarter-on-quarter, which means that it should arrive at the historical levels of profitability, perhaps no. But it will be descending quarter after quarter because of what we call the change of harvest. And in our vision after the first quarter with all of these adjustments and with the peaks, and you can observe the peaks accumulated in the FIPE that the worst is behind us.

Now for the entire market, we would like to convey this information so that -- well, we look at the loss ratio significantly. And if we look at the data from SUSEP in January and February, the market moved 78%. This was the worst loss ratio in the market since 2008. This is a phenomenon that also impacted other companies, as I showed you in the United States. It was the worst in the last decade. Well, this wasn't due to something irrational. It's not the company's increasing prices. This is due to a very strong inflation that is growing at a speed never seen before, not only for the entire body of the vehicle, but also for the spare parts.

[Operator]

So our next question comes from Thiago Paura from BTG Pactual.

[Thiago Paura Mascarenhas, analyst]

Congratulations for the results. I have 2 questions if you allow me. One, in terms of the breakdown of your profit, we see stronger financial results as expected. My question is if during the rest of the year, how should we think about this breakdown? Are you working with a target? You could have a recovery and loss ratio. And in the financial part, you have an increase in interest rates, and you won't be able to lengthen the securities anymore. So will we have more relevant changes in the breakdown going forward? The second question, if you could give us a little more color in terms of the tax rate for this quarter? It was somewhat below expectations.

[Izak Benaderet, executive]

This is Izak. Thiago, in fact, we did have that one-off this quarter. It was a relevant and onetime revenue. Our securities portfolio has a better rate going forward. And yes, when we think of the rest of the year, we should have an improvement, but we do have other risks, not only based on CDI, which could cause volatility in our results -- but definitely, the financial revenues should offer good results going forward. Eventually, we could have an operation of that sort if we understand that there is an opportunity. But that is it.

Our true tax rate was somewhat better this quarter, although the results were somewhat lower. And when we have a makeup of results at the controlling company, it impacts our results. In the parent company, we have a tax issue. And when it is higher or lower, it does have an impact on the tax rate. And we had an impact last year, but we also have a result of BRL 3 million that were launched this year a non-recurring tax credit of BRL 3 million. It is an adjustment for technological innovation, BRL 3 million of credit. And the result of the quarter was not that high and that is why it has an impact on the effective tech rate. Now last year the effective rate was somewhat higher. And well, these are the 2 basic components of why we have a lower effective tax rate.

[Operator]

The next question comes from Flavio Yoshida from Bank of America.

[Flavio Yoshida, analyst]

My question refers to the loss ratio for the auto segment. I understand there is a new way of calculating this, why do you have this change? Why did it occur now? And which was the loss ratio of the month of March, which would it have been had you not had this change. We had a loss ratio in January that was quite high at 70%, an improvement in February to 67.5%, which would be the recurring level for the quarter, therefore?

[Celso Damadi, executive]

Flavio, this is Celso. Well, in truth, there are 2 points that I would like to explain here that adjustment that we have in what we call the PCL, the change of churn that we did. We match the term to our average term of settlement of the PCL. Now we carried out this cleansing in the PCL that we do not pay. Simply to give you an idea of what happened, we have a PCL where we break down the loss ratio, but the loss ratio does not happen for several reasons. The franchises may be higher than the loss ratio. And so we had this inventory of PCL that we could not settle -- and we had a very long term, as we settle the PCL in shorter terms, we decided to do an adjustment.

The loss ratio of March would be approximately in terms of accounting 10 percentage points lower and that for the quarter would be 8 percentage points lower in terms of accrued figures. But this is not an absolute truth. During January and February as we were going to change the rule in March, in January and February, we did not write down this PCL, which is something we would normally do. So we can say that the total effect would be 10 percentage points. In March, it was somewhat lower. It's easier to speak about the figures for the quarter.

We don't calculate the effect per month. In the quarter, the impact of this change of rule is between 3 to 5 percentage points. That is the most correct figure. In the month of March, we also carried out adjustments. Adjustments that I would have also carried out in January and February, I would have written down some of this. So to analyze this portfolio, we have to think of the accrued figures and because of the change of the rule, we had a reduction of 3.6 percentage points. These are loss ratios that we were not going to settle for a variety of reasons. We did a write-off of the PCL and we calculated how much of this loss ratio would return in April. And the results were sufficient for what we had again in April.

[Flavio Yoshida, analyst]

So it represents 3.6 percentage points of reduction that would be the additional for the entire quarter. So in the quarter had that not happened the loss ratio for autos would be approximately 69%?

[Celso Damadi, executive]

Yes, exactly, 68%-69%. Now if we continue looking forward to the second, third, and fourth quarters, we should base ourselves on that figure 68.7%. Yes. Precisely, that is correct.

[Flavio Yoshida, analyst]

And my second question, referring to the quality of the portfolio when we look at Porto Seguro Bank. You had an increase of NPL of 90 days of 6.2% compared to 4% a few years ago. Well, 4% was a very, very low level to operate with. So how are you dealing with these nonperforming loans? Have they reached a peak, which are the measures that you're adopting so that this portfolio doesn't get worse?

[Celso Damadi, executive]

We have a portfolio where we separate our 2 large products, the credit card and vehicle funding. These are the ones that most suffered, especially in the auto segment. And this is what I said during the call, we have made all of the adjustments. We simply anticipated the closing of the release in the last quarter of 2021 because we believe that in the first quarter, we would have a restriction in the release of vehicles and a drop in the sale of vehicles.

And because of all of this, we have non-performing loans coming from this change in harvest. We have had a significant growth, of course, in auto funding in the last 24 months. So we decided to have restrictions at the entry. And this has an impact on the indicators in the short term.

Now when we speak about credit card portfolio, which is our largest, we're suffering what the entire market is suffering in terms of indebtedness, there is a certain slowdown in this. And I think we're going to navigate through this. Well, our portfolio is more resilient because of its characteristics. This is an insurable customer. Now in terms of the credit cards, we expect that the market will make adjustments. And if the default does not increase, we should have indicators that are better than that of the market, and we already perceive this.

Now what have we done? We increased the activities that relate to the recovery and the collection policies, anticipating them carrying out negotiations with the customer as well. We do not believe that in the coming quarters, we will have an increase in this indicator. We believe that something will be there because of the macroeconomic characteristics and not because of the features of our portfolios. If we look at the reports of the banks in the last few days, some institutions have a lower growth of portfolio compared to ours with higher NPL.

We have 30% in terms of the growth of our portfolio. And the other part is auto funding where we're proceeding with caution, accelerating our collection activities. But of course our focus will continue to be on growth.

[Operator]

[Operator Instructions] As we have no further questions, we would like to thank all of you for your participation. We return the floor to Roberto Santos.

[Roberto de Souza Santos, executive]

We once again would like to thank everybody for participating in our results call for their questions, their contributions and for their interest. Should you have additional doubts, please contact our IR team. All of the accounting information is available at our IR site, ir.pertoseguro.com.br. Thank you very much. We hope to see you in the next quarter.