Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Porto Seguro's Second Quarter '20 Earnings Conference Call.

Today, we have with us Roberto Santos, the company's CEO; Celso Damadi, Executive Vice President of Finance, Controlling, Investment and IRO; Marcelo Picanço, Executive Vice President of Insurance; Marcos Loução, Executive Vice President of Financial Businesses and Services; Izak Benaderet, Managing Director of Porto Investments; Lucas Arruda, Head of Strategy and Investor Relations; and Emerson Faria, Head of IR.

We would like to inform you that this event is being recorded and simultaneously translated. [Operator Instructions] We have a simultaneous webcast that may be accessed through Porto Seguro's website at www.portoseguro.com.br/ri. You will find the banner of Conference Call. The slide presentation will also be available there. [Operator Instructions] Our team will be arranging the order of questions to ensure comprehensive sections.

Before proceeding, we would like to mention that forward-looking statements will be made under safe harbor of Securities Litigation Reform Act of 1996. These forward-looking statements are based on the beliefs and assumptions of the company management and on information currently available to the company. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could affect the future results of Porto Seguro and lead to results that differ materially from those expressed in such statements.

We will now turn the floor over to the company. You may proceed.

[Roberto de Souza Santos, executive]

Good day to everyone. This is Roberto Santos. We would like to thank all of you for your participation in the earnings call for the second quarter '20.

We go on to Slide #4, where we highlight the main point. We had an increase in profitability in the quarter, thanks to a reduction in the loss ratio that contributed to an increase of 83% in our operational results, a period twice as large as that recorded the previous year. Our premiums had a drop of 4.9%, impacted by the sale of -- new sales. On the other hand, the measures we adopted to protect portfolio allowed us to maintain renewal rates at 80%. We had a total loss ratio for the quarter, especially due to Auto, that improved 15.4% and Health with a drop of 18.5% vis-à-vis the second quarter of last year, thanks to the responsible actions of our underwriting policies and benefited by the effects of the pandemic. We continue our trajectory to enhance operational efficiency that had a drop of 1.1 percentage points. And in G&A and O&E, we reached 16.1%, thanks to the efforts we have carried out in the last 2 years through investments in technology and the enhancement of processes. Thus, we reached a combined ratio of 83.1% in the quarter, an improvement of 10.3 percentage points vis-à-vis 2019. The Credit Card and financing revenues continued to grow by double digit compared to the second quarter 2019. The number of cards issued increased almost 30%. Despite the impacts of the crisis, the NPL reached 6.1% at the end of June, but even so it remained 1 percentage point below the market average, thanks to our effective management of the portfolio and measures to mitigate risk.

Our investments generated a financial result of BRL 498 million for the quarter, equivalent to 719% of CDI, explained by the realization of profit for inflation-linked bonds and an increased position in equity that we did in the first quarter. Thus, net earnings increased 72.4% in the quarter, reaching BRL 657 million with a return on annualized equity of 34.9%. In the quarter, revenues were BRL 885 million, a growth of 30% vis-à-vis the same period 2019 and profitability of 23.2%.

In this quarter, we began to include in the results release a section to speak about the ESG factors of Porto Seguro. We have a relevant background in terms of environmental and social actions as well as an observance of the best governance practices. An example of this is the launch at the end of the semester of the campaign, Meu Porto Seguro, my safe haven, a program that will generate 10,000 temporary employment, helping people that are seeking employment and training in this very difficult moment, generating leads for brokers and the company. Throughout the presentation, we will be speaking about these projects.

Once again, I would like to thank employees, brokers, service lenders, shareholders and investors for their partnership and reaffirm our confidence that we will overcome this moment. I wish you all very good health.

I will now give the floor to Celso, who will speak about the results of the quarter and the semester in greater detail. Thank you very much.

[Celso Damadi, executive]

Thank you very much. This is Celso Damadi. Thank you for participating in our call.

I will begin on Page #5, speaking about the growth of our operational results for the quarter and semester. Our revenues grew 0.4% for the half of the year and with a growth of 3.2% in the quarter, especially due to the growth of the -- sorry, to the impact of COVID-19. We had a retraction in April and May. But I highlight the month of June, where we had a growth of 9.5% in premiums. The month of April was very bad, the month of May less bad. And in June, we end the month positive by 9.5%. Of course, we haven't recovered the quarter, but June points to a reasonable growth of 9.5% for the month. We leave the month with the growth and during the first half of the year, the growth of 0.4%. And June, once again, with a growth of 9.5% in premium.

On Page #6, we show you our strategy for business diversification. For Auto in the first quarter, we had an increase in the operational results because of the positives from social isolation and the loss ratio. Auto represents the most relevant profit in this quarter, more relevant than in other quarters. And despite this, our other areas also represent a relevant percentage in our profit. Of course, in this semester, we were impacted by the financial results differently from the first quarter, where we had a negative result for the holding. Now this quarter, we have a positive result for the holding. And the share of Auto that in the first quarter was 51% of profit, in this quarter was 46% of our quarter. And we had very good results. And the share of results in the second quarter for Auto had a decrease. We had a more robust financial result. And the share of other businesses as like also had very good results, enabling us to diversify the results we had in the second quarter. And Auto had a participation of 46%. You will see that in other quarters, on average, in 2017 and 2019, Auto had a share of 31%, 32%. So this is our diversification strategy that has given us good results and Auto closes with 46% share in the consolidated profit of Porto Seguro.

In the next slide, the significant increase in profitability is mainly explained by a reduction in the loss ratio due to the lower claims frequencies and the increase in financial results, favored both by the increase in allocation in equities and realization of profit in inflation-linked bonds. Izak Benaderet will speak about this in greater detail. So there's a robust profitability this quarter of 2020, reaching almost 35%. Now if we do not consider the surplus capital and the surplus that we have in CDI, profitability is 31% on equity for 2020. An interesting profitability for our business in a consolidated way, a significant and robust profitability if we take away surplus capital at 100% CDI.

I will now speak about our historical profitability on Page #8. We carry out a comparison of our profitability based on CDI, and we come to a profitability of 665% in the first semester of '20 based on CDI and 1,800 and some (sic) [ 1,187% ] for the second quarter. So this shows us that we had a mixture of diversification of our businesses. And very shortly, Marcelo Picanço will speak about the insurance portfolio, where we had a better result.

I would now like to give the floor to Marcelo Picanço so he can speak about the results of the insurance portfolio.

[Marcelo Picanço, executive]

Thank you, Celso, for the introduction. A good day to all of you and thank you for participating in this results call.

On Slide #9, we had a quarter with a decrease in premiums of 4.9%, mainly impacted by the downfall in the sale of new insurance. This was, of course, the effect of the pandemic because of the closing down of stores, low sale of vehicles, a decrease in the sale of new and used vehicles and this impacted the Auto premiums that for the quarter had a drop of 4.9% (sic) [ 9.9% ]. Now the other portfolios maintained their growth trajectories, such as Health and Dental. We had a minor retraction of 1.3%; and in Property & Casualty, 6.7%. This because of our dynamic with companies. Now this impact was greater in the months of April and May. In June, we already perceived improvement and less extenuated drop and more recently, practically reaching the figures that we had last year for these portfolios besides those that have had a positive growth. Now despite the fact that the pandemic was more acute and critical in these months, going forward, we observe changes in the risk and this risk is different in the different portfolios.

I would like to speak about the combined ratio. Looking backwards, we had a significant improvement in the results. This has already been mentioned. We have 10.3 percentage points less in the combined ratio and chiefly due to 2 effects. We were recomposing our results in the first quarter of '20 before the pandemic, especially in the Auto business, where we had perceived a certain pressure on results and we were recomposing underwriting with different prices and acceptance measures. Additionally, we were working with more conservative prices and we had the effect of the pandemic. These are 2 conjugated effects which helped us in this improvement in the loss ratio. Now besides the fact that the premium was not what we wanted, we had an expressive drop in Auto, which is one of our main portfolios with 60% of premium. Even so, we were able to reduce G&A by 1.4% and vis-à-vis the second quarter of 2019, we had a total [ claim ] of 1.1 percentage points, which is very relevant if you consider this drop in the premiums. If the premiums had been stronger and we cannot consider this effect, the result would have been better. The combined ratio for the first half of '20 had an improvement of 5.7 percentage points, taking our results in insurance for the second quarter to reach BRL 552 million with a 36.2% return on capital. And for the quarter (sic) [ half ], BRL 747 million or BRL 748 million, with a return on capital for the 6 months of 31%.

Now to go into greater detail in terms of administrative and operational expenses. And it is important to maintain our productivity gains despite the pressure of our increase in revenues. This part is strategic. There are aspects that may be longer lasting, having a lower average premium, but this has nothing to do with price competitiveness, but this is also by the lower mobility. And it is important to have a very high operational efficiency because of this change. Now the gains in the first semester of 0.9% and 1.1 percentage for the quarter is very important when we look upon our portfolio, where the margin is 5%. Now this is highly strategic for us. Administrative and operational revenue for insurance, when we put this in a time perspective and now look at a 12-month period, but based on years, we see that between 2015 and 2019, the drop of 6%, a nominal drop of 6%, while the consumer price index for the period was 5%. So this is a very important gain for us in terms of increasing efficiency to make the insurance business more feasible and to enhance the company's competitiveness.

Having said that, I would now like to give the floor to Izak Benaderet (sic) [ Marcos Loução ], who will speak about the Financial and Service Businesses and our other business lines. Thank you.

[Marcos Loução, executive]

Good day to all of you. Thank you, Marcelo.

We're going to speak about the evolution of revenues comparing the second quarter 2019 (sic) [ 2020 ] with the same period in 2019. We have an evolution in the car lease business with an annual and biannual deadline. It ends the quarter with a growth of 46%. And even with the pandemic and of course in the worst month of sales, we -- in May, we see that there is a resumption and we ended the semester with a 12% increase vis-à-vis the same semester last year. [ Look at ] average ticket, we were able to market our semi-new vehicles, the same level of commercialization as we had last year. And we placed these vehicles in the market through the [ FIT table ] at a higher percentage vis-à-vis 2019. Although these are minor gains, this business is doing well and shows a potential for growth.

Now when it comes to financing, despite all of the impacts we had, the revenues increased 10.2%. We have a highlight for our loan or financing portfolio focused on vehicles. Now we see that our revenues for the second quarter of 2020 are the most important. We have the Consortium as well. We had an impact due to provisions or allowances that we had to do for NPL and that is why you see that our ROAE is not the same.

In the next slide, and here we have a greater breakdown, we speak about financing and credit operations. We continue to grow. We have a 15% increase in the first quarter and 10% for the second quarter when we speak about our credit operations portfolio. In terms of financing, we had a growth of 33% for the second quarter of 2020 vis-à-vis the second quarter of 2019. Now once again, due to the growth that we have in the release of financing for vehicles, our CDC portfolio grew 25%. But most of the growth in the quarter is in vehicles. To give you an idea, 80% of this portfolio refers to vehicle financing, which, of course, gives us a greater security for the product. And we had 15% in installments and rotational financing. Now all of this is impacted by invoicing and credit cards, which was somewhat lower for the quarter. And what we can perceive is that in the month of June, we're only slightly below what we had before the pandemic in the consumption of credit cards. For the second quarter, we go into BRL 7,687 million, a growth of 13.8% in active credit cards, thanks to our strategy of issuance of cards and activation campaigns.

In terms of total credit cards issued, what draws attention is this growth of almost 30%. This is a strategy that we adopted in the second quarter of 2019 of offering the card with good benefits to those that have the Azul brand insurance. The second quarter of 2019 was good and the second quarter of 2020 even better. This is because of the campaign where you can pay your insurance in 10 installments and the marketing campaigns that began last year. Now the placement of this card for the Azul brand grew fourfold if we compare the semester 2020 with that of 2019, and the growth is 1.8 or almost 2x. In the credit cards, we also implemented sales through the digital means, a more controlled digital mean, enabling us to have some control. And in the first semester, we have sold almost 25,000 cards. This enables us to place the Porto Seguro card in the market.

When we speak about nonperforming loans, NPL, in the next slide, of course, we suffered with an increase. We have delays of over 90 days as was expected, but below the market average by 1.1%. But we also had NPL, we see that the peak happened in April and May. In June, we did not have a significant increase in our main portfolio, which is that of credit cards. Now in terms of the coverage rate, there was an increase. And our forecast models were able to capture this increase in NPL and this increased our coverage rate and risk cost as well. Now in direct credit with consumer CDC, we have loans and this is a portfolio that was renegotiated accompanying the financial market. If the customer wanted to postpone the payment of their vehicle, for example, they could do this for 60 or 90 days. The portfolio was impacted because of this, but at much lower rates than that of the market. And this ends up covering eventual problems that we could have because of this.

And this is what I wanted to say in terms of Financial and Service Businesses. I give the floor to Izak to speak about our investment results.

[Izak Benaderet, executive]

Welcome, and I would like to speak about our financial results that highlight 2 large events.

We had very strong results. We had investments in variable accounts and equity. This allocation was done in the first quarter and we had a strong appreciation in the second quarter with positive results. Now these results were reduced during the quarter, but at levels much higher than we carried formerly. We also had results from our inflation-linked bonds. These are short-term bonds where we attain very good levels, the levels we had as a target. We maintained the bonds with longer maturities and this is where our results arises.

Now I would like to highlight the environment with very low Selic rates and this will continue on during some of the quarters going forward. We have a higher position in terms of equity vis-à-vis what we had in previous years.

I would like to speak, as we mentioned previously, about ESG, which we have included in our results. We are working in environmental, social and governance factors. Now environmentally, we do have some initiatives. We begin with the electrical winch that we began as a pilot project to help us service customers that have vehicle -- electrical vehicles. I would also like to refer to a program where our service vendors use subways to be able to service our customers, of course, based on specific distances. We also carry out service using bicycles. Now besides reducing the impact on the environment, all of these actions bring us significant reductions in operating expenses. Now we have Renova, which is our eco efficiency business line that recycles spare parts and resells them with the guarantee of Porto Seguro. With full respect to the environment, we have our eco efficiency panel; we have selective collection programs and water and energy resources management.

Now something that we have had for many years in place is Hora da Terra program that has generated savings of more than 1,000 kilowatts. We also have installed solar panels in most of the buildings belonging to Porto Seguro since 2018, with very significant savings in terms of kilowatts. We have also recently put in place a program for the recharge for electric vehicles at all of our service centers, beginning in São Paulo. We also offer this at our parking at headquarters.

Now in terms of the social arena, what draws attention is Meu Porto Seguro with the goal of the underwriting income through 10,000 temporary jobs. We pay BRL 1,500 per month for a 3-month period. Now we have an online training course that is fully free and we speak about the services and products of Porto Seguro and this enables us to generate leads. Now during the pandemic, besides supporting our stakeholders and the society at large through several investments in health and donations, we also were part of the manifest of not dismissing employees and we took a commitment of not dismissing anybody during the crisis. We also have a program that leverages the development of social and cultural programs in the communities with which the company has communication. We have the association Crescer Sempre to fulfill the demand for education and training in the Paraisopolis community in São Paulo.

In terms of governance, since our IPO in 2004, Porto Seguro has been part of Novo Mercado, the segment listing companies. We are part of the IGC, the corporate governance program; and the ITAG, the differentiated tag-along shares that brings together companies offering their minority shareholders greater protection. And we work with transparency and openness and equity and respect for our shareholders. Presently, we have a management board made up of 7 members, 3 are independent; and an executive committee made up of our CEO and 5 Vice Presidents that jointly manage 22 business boards. We also have statutory committees for auditing, for personnel, for compensation, integrated risk, investment, marketing, the digital area and the code of ethics.

These are the main financial highlights as well as the ESG highlights for our presentation. We would now like to go on to the question-and-answer session.

[Operator]

Thank you and we will now go on to the question-and-answer session. [Operator Instructions] Our first question comes from [ Thomas Bididi ] from BTG Pactual.

[Unknown Analyst]

I have several questions. The first, if you could give us more color, as Marcelo Picanço mentioned, in terms of your premiums for June and July for each business line. During the presentation, he referred to a considerable improvement in all of the portfolios. And I would like to know if you could go into more details regarding each portfolio, Health, Life, and give us greater color in terms of what has happened with the renewal of premiums. And the prices, of course, the issue of prices during the second quarter as well as presently when we are entering the third quarter. In principle, we're going back to some sort of normalcy.

The second question, if you could give us more color in terms of the NPL. We see an increase in NPL and there has been a reduction of a gap with the system. And if you could refer to which is the part of your portfolio that you have to renegotiate for 60 or 90 days? And what will happen going forward in terms of the cases that have gone back to paying what they owe? Or if the coverage rate that you have at present is adequate, or if you will have to increase the level of provisions going forward?

[Marcelo Picanço, executive]

[ Thomas ], this is Marcelo Picanço. I would like to respond to your first question in terms of the evolution of insurance premiums. In fact, at the end of the quarter, we saw a recovery going back to positive levels in most of our portfolios. When we look at the Auto segment, there has been a marginal growth vis-à-vis May and June. June last year was very strong and this is our base. I would say that all of the portfolios have had an improvement in growth, almost all of them going back to positive figures, eliminating the drops that we had, which means that we have much greater confidence in the second semester. Although the pandemic will continue on, it seems to be something chronic until a vaccine is discovered. But we have had a positive growth in our portfolio. And this, of course, is of supreme importance for us, this resumption. And it is thanks to the adjustments that we have made, not only in terms of price, to improve competitiveness. As I said, we began the year with more conservative prices for Auto, but also due to other techniques and the review of products and portfolios. Some of the clauses, for example, were reviewed to increase the competitiveness of our offer. And this is an organic growth. It is allowing us to have a better growth for the end of the quarter.

[Unknown Executive]

[ Thomas ], when it comes to your questions about NPL and the coverage rate in general, what is it that we perceive? And I will begin by speaking about our coverage rate. Our models were able to capture the delays in payment. And perhaps there will be a second wave because of an acceleration in employment beyond what we have projected here. And this will contemplate the NPL that we had in the first quarter and we're comfortable with it. Now when it comes to our renegotiation, this happened in May with part of our financing, especially for vehicles or working capital for our in-house chain in our clean loans. All of our service vendors, our brokers and consigned loans, we had a renegotiation of almost 15% of our portfolio. Now the portfolio that was renegotiated still has some maturities. Most of this was done in April and May. Now what we see now is we have an NPL that is worse vis-à-vis the portfolios that were renegotiated, not much worse.

Now when we speak about the Credit Card portfolio and the division in installments of the invoice, this hasn't grown as we expected. It has increased, there was a growth in NPL with a peak in May, and we now see a slowing down. And we're somewhat concerned with revenues in non-NPL. A 15-day delay, for example, has dropped to levels below the pandemic. We think that our coverage rate is adequate. And if there is no new [ cap ], we should maintain these ratios for the coming quarters. Now compared to the market at large and there is an adjustment in the vacation period, we had a more accelerated growth than the market in the last quarters. And this perhaps explains why we have this difference in terms of the gap with the market. I hope that this has explained your question.

[Operator]

Our next question comes from Giovanna Rosa from Bank of America.

[Giovanna Rosa, analyst]

I do have some questions. My first question refers to the loss ratio in the different segments. What will happen with your churn until the end of the year? Are you going to go back to historical averages? Is there some unfulfilled demand that could take place in the coming semester? If you could give us more color on this. My second question refers to the proposal at the Senate in terms of a cap in terms of the credit card levels or ranges. How will this impact you? And which are your intentions if you intend to reduce the limits? If you could speak about this, I would truly appreciate it.

[Marcelo Picanço, executive]

Giovanna, this is Marcelo Picanço, once again. Well, we do have some different effects regarding your first question, and I'm going to speak about this per portfolio. In new vehicles, we had an increase in mobility. But until the end of the year, we do think that we will have a lower mileage than the normal one because of the change of habits, of structural changes. On the one hand, we have the home office, people who are not going to work. That's on the one hand. On the other hand, we see a loss ratio frequency that has remained at low levels with a trend to increase. And this is theft and others. In crisis, historically, this tends to increase, but this will depend on public policies. There is no guarantee that this will happen. So in net figures, I think the Auto business will be positive.

Now in terms of Health, we may have that effect of the resumption. I don't know if we will have an exacerbation. Now we do believe that we have a positive result because we have the phenomenon of telemedicine that has helped a great deal. A patient does not need to go to a first aid center when they can work with telemedicine because for low complexity diseases and because of a reason of convenience and because they can set up an appointment. So because of this, there will be a benefit for Health.

Now in terms of Life insurance, the pressure is greater because of the COVID cases, which is a loss ratio which is relevant in the Life insurance portfolio. And in companies, the loss ratio has had a very good behavior and there has been an increase in the premiums. Well, the effects here are positive. Of course, there are some risks, but not with the same intensity that they had in the second quarter.

[Roberto de Souza Santos, executive]

This is Roberto speaking, and I would like to add something to what was said by Marcelo in Health and Life. In the case of Health, our actuarial elements have already captured part of the unfulfilled elective surgeries that were held back during this period. And certainly, this will be a relief for the loss ratio in the coming quarters as this has been captured in the loss ratio of the second quarter. These are the actuarial models that we have and the provisions for losses incurred but not reported. Now because of the pandemic, this business has been sought out more by society at large. So we expect an increase in the number of life insurance sold and this will offset part of the loss ratio because of COVID.

Now to refer to the question that you made about the project that is in Senate. We're following that closely as is the entire market. What is happening at present is a discussion. This discussion may go on and we don't know what will happen and based on what was proposed by Alvaro Dias. Now in Credit Card and in CDC, especially in Credit Card, our revenues are somewhat different. Our propension to finance is much lower than that of the market. We depend on revenues and we try to increase the financial revenues from this. But on the other hand, we have collections, we charge for annuities and we're going to continue to do this. It's an important revenue. And because we have several other businesses in Porto Seguro and we think that we can develop products to counterbalance the revenues if we have a stronger drop in terms of these interest rates. We will have complementary products to continue to have profitability in this portfolio.

[Operator]

Our next question comes from Mr. [ Itimoto ] from Santander Bank.

[Unknown Analyst]

I have 2 long-term questions. You have spoken about the diversification of revenue. Now what will become more sustainable for you in terms of revenues, a limit of 30%? And which are the areas where you will grow more, Health insurance or your Financial and Service Businesses? And an update on the digital part that you're working with, your online sales and much more that is done digitally.

[Unknown Executive]

I will, first of all, refer to your first question, the diversification and the issue of vehicles. It's not easy to base this off on a percentage in time specifically, but we have worked on that diversification. As we have shown you in 2019, the profit from Auto was 32%, fluctuating between 30% to 40%. More recently, it could go below 40%, below 30%. It depends on the time horizon, if we have a lesser dependence on this. And this because we don't want to grow our portfolio at any cost and in any way. Now in insurance, it's easy to make money. But to do both of these things, it's quite complex. So we're using this strategic procedure. Now which are the portfolios we most believe in? We mentioned 2, we have those that have a double-digit growth, an increase of 15% or 20%. We currently [indiscernible] in Health, at least, which is a business we have BRL 500,000 a month; and Life, we have a lower ticket per year. Now this growth of the portfolio has a different impact on our earnings. Now we have a renewed appetite in terms of Life and we have a modest market share, approximately 7%, which means that we have quite a bit of room to growth and a very strong demand. Now in Life -- well, we also have the Financial Business, which has been an important leverage to help us in our insurance business. Credit Card, for example, we work in an integrated way with a great synergy between the businesses. Is there anything else that you would like to add?

[Unknown Executive]

Yes. To speak in isolation of the main 2 Financial businesses, in Credit Cards, we still have a great deal of room for growth. And it is our understanding that this is a product that will continue to move forward with new options for those customers that we cannot service with our product and of course, the financing of vehicles. To dominate this chain that we already dominate in terms of insurance could be important for the Auto segment and we could have a significant growth in auto financing.

When it comes to the digital part, we have 2 significant concerns. One, operating efficiency, where we have already carried out several actions that have been perceived by our customers. The more classical is to allow our customers to be serviced through the WhatsApp, even when they have an emergency. We have also made a great deal of strides in terms of our service through chat. We have a long way to go to have a better solution in this. But we also have a service center where we have the operating efficiency. We are the first issuers in credit cards to do this business through a chat. We work through Apple and we service our customers through text. And we're also developing an app that integrates several of our businesses. We have the credit card app with more than 1 million customers using this every month. And this other app will also be used by all of our customers, which means that we begin with a customer base with an app that is considerable. And we're going to integrate all of our apps so they become ever present in the life of our customers, which will simplify the service. We continue to service through telephones and tech.

Now to center the digital platforms for customers will enable us to make better offers, cross-selling products, taking into account the moment of life of our customers and gearing good leads and complementing this through our brokerage channel. And we're going to move forward with our online business strategy, maintaining the work of brokers. And that's what we have at present with some of our minor targets. The strategy is this: 2 large blocks, operational efficiency and to help in the sales process; and 2 different moments, regeneration and customer cross-section.

[Operator]

Our next question comes from Eduardo Nishio from Plural Investment Banking.

[Eduardo Nishio, analyst]

Congratulations for your results. I go back to the question that was asked and I would like you to refer more to the pandemic. You have some very clear movements in terms of digitizing. If you could refer to these, besides those that you have already mentioned, more in the medium and long term, what is it that you expect from this digitizing movement? And in the market, we also see several companies anchoring themselves more on the credit operations. If there has been any interesting movement that came about during the pandemic, if you could also refer to your investment, pandemic? Now your business is quite traditional. You operate with brokers, but perhaps you could enhance the sales journey and become more assertive in terms of sales. I think this will be an interesting topic to explore. We had a very strong result. Now in the long term, in the longer term, if we can expect results perhaps not as this one, but where we will observe some structural changes. Some of the companies have truly benefited from this during the pandemic. And perhaps this is not only a one-off event, but it could be something for the longer term. And I would like to know what you're thinking about going forward.

[Unknown Executive]

Thank you for the questions. And we were speaking amongst ourselves. Now when we speak about this digital transformation movement, what we saw during the pandemic is that maybe we were ready for the year 2030. All of the activities carried out by companies were accelerated and Porto Seguro was not different. We do have a digital board. We have a large number of products, more than 20 products, and there is a great deal that we can gain through cross-selling and by crossing these projects. And we're working with structural projects in this with customers' areas of life and pension to extract the most from this. Now during the pandemic, some of our initiatives were tested and we did very well. We can continue to service our consumers, very close to them. Some of them are being serviced remotely and this because of platforms that we created during the years.

Now to speak about this process that we have undergone along with our brokers. Of course, we control all of that movement of offering quotes for the insurance and this has enabled us to develop models for our offer. This is something that we have done in the last 2 years and this explains part of the success we had in vehicle financing. We have structural processes, some of them for the online service, they are available to our customers, they were used during the pandemic; and also with the business in terms of vehicle financing. And simply to add to this, the vehicle financing portfolio grew 33% quarter-on-quarter.

[Eduardo Nishio, analyst]

Now the strategy in terms of financing or credit for vehicles, does this also involve a credit card? If you could refer to your new products, your longer-term products, you have had this project ongoing for some time, but the first case apparently was not launched very successfully. And what will happen with the credit card in lower ticket operation? If you could speak about this product more at length as part of your pipeline of launches.

[Unknown Executive]

I will begin with financial services and Marcelo will complement with a part of the Auto. We have several development projects for new products. And as part of our product range, we do have solutions that will better service the market. For example, when you speak about the traditional consortium with a financing company, perhaps we can generate a new product. Now confidence can also give way to a new product. We have several initiatives underway and in the pipeline, we have new products involving these solutions.

To refer to that question about credit cards, it is our understanding that we have grown so far by exploring the auto insurance, which is a closed market, but we have learned a great deal. And to give you an idea, as part of our credit card customer, we have 40% that presently do not have auto insurance. We have a good product compared to the market products and we would like to expand this to the customers that have the right profile. This could be complementary for our chain and we can also sell auto insurance through the credit card and this would be an evolution of our traditional products. We also would like to have a product, an entry product, for credit cards. We have a project for this and we are analyzing the creation of a digital account to round up all of these businesses.

[Marcelo Picanço, executive]

This is Marcelo from Insurance. Now in fact, we do have a product with a lower ticket for the security inclusion and the focus is to bring in the customers that don't have auto insurance. We're thinking of coming out with a very competitive product. It wasn't launched in the past. We're working with an architectural strategy to avoid any sort of cannibalization and of course, to respect the channels that we have. But of course, a competitive product that will bring in people that formerly did not have insurance. Now although the price is an important component, it is not the only one. We want to work with this inclusion in the way that this is offered. It is packaged for those customers that only have mandatory insurance and who have certain difficulties in understanding the product. We acknowledge that the market could improve in terms of this. We are working on this and very shortly, we should have more news for you.

[Eduardo Nishio, analyst]

Excellent. And my first question, referring to that sustainable [ hold ] in times of the pandemic? Some portfolios, of course, will grow more than the Auto portfolio. In 5, 6, or 10 years, will you be able to maintain this balance? And if you can maintain your return on investments for Auto? For Health, Health has had a significant growth. If you will maintain the levels of growth in Health, for example? Once again, if you could refer to this in greater detail in this very difficult and competitive environment.

[Celso Damadi, executive]

Nishio, this is Celso Damadi. Of course, we do have a very broad product diversification in the company. And the drop in the Selic rate brings in a challenge for the insurance business. It is a significant challenge. But in our graphs, we have showed you that Porto Seguro has a very good background in terms of its quest for profitability. Marcelo showed you the gain of productivity, the reduction in G&A, O&E. Part of this goes to profitability, a part of this goes to competitiveness. In the coming years, we will have growth. This growth will bring us productivity gains and increase the competitiveness and profitability.

Now we can transfer this drop in the Selic rate to prices. Of course, we will try to maintain our average profitability in the last years. Now with the drop of cost of capital and the Selic rate, we will see which are the levels we will be working with in coming years. But we're going to work with a very satisfactory return on annualized equity. And we want to maintain our combined ratio at levels that will bring us a return on equity, something we have always sought to offer to our shareholders. And we are going to follow on the drop of the Selic rates, having a lower combined ratio, but maintaining a return on annualized equity.

[Eduardo Nishio, analyst]

Could you give me an approximation of the levels of ROAE?

[Celso Damadi, executive]

Well, Nishio, as you know, we don't offer guidance for the future. We're still working with the 2021 budgeting. This is a great challenge, but we do intend to maintain a reasonable profitability for the coming year as we have delivered in the last few years. This is the outlook going forward. I'm sorry, I was not able to understand your question.

[Eduardo Nishio, analyst]

Which was the ROAE in 2019?

[Celso Damadi, executive]

It was 17%, 16%, 18%. These are the figures that we have worked with in the last few years. And with the drop in the Selic rate, we could deliver this figure or perhaps a somewhat lower figure. We truly do not know. And we have had a good return on equity in the last 2 years. Now because of the Selic rate, perhaps our levels will be somewhat lower than that. In-house, we still have not discussed which would be our balance, but we will, of course, attempt to have very good profitability in the coming 5 or 6 years. We don't know which will be our breakeven point so far.

[Operator]

Our next question comes from Guilherme from JPMorgan.

[Guilherme Grespan, analyst]

The first is a quick question, refers to the provisioning for the semester, which is your construction of IBNR for the coming semester. You spoke about what happened in mental health, but we still don't have a dimension of that provisioning. We see that there's an increase of approximately BRL 40 million in this IBNR. Now what should be the magnitude of this? And if you could speak about your financial business and the provisioning, it was BRL 190 million. Now if we have a deterioration in financing, have you also increased in this provision losses? And a second question. Based on the taxation reform, if there's anything that you can convey to us, a drop in that [ CVF ] on the first part that was presented.

[Celso Damadi, executive]

This is Celso Damadi speaking. In terms of the IBNR provisions, provisions for losses incurred that now are reported and for credit, what did we do during this quarter? We tried to leave the balance of the first quarter in such a way that we will not have a withholding because of events that technically has already happened in the quarter. We worked on a technical provision. And we believe that if any event happens in the second semester, based on a statistical calculation, we would have been warned of it, of a person not going to a physician, for example, and not carrying out a surgery because of COVID-19. Our forecast tried to approach this type of procedure. I believe that our balance is quite robust to withstand this type of event. The main portfolios that had an increase in IBNR were the Health -- was the Health portfolio mainly. I believe we have sufficient IBNR provisions considering these events.

In terms of CDC and Credit Card, this was already explained. In the months of May and -- June and July, we observed a healthier portfolio, going back to more reasonable levels. And our risk model has already captured the risk that we had, especially in April and May. And we believe that the worst phase of provisioning is over and that the provisions we have at present are sufficient for our credit risk, unless we have a second wave in the future. But we don't believe in this. So in terms of the provisions, these are our responses.

When it comes to the taxation reform, we have worked with some simulations. So far, we do not see any material effect on our consolidated balance. We have followed up very closely on this. We have a committee following up on these discussions. Every week, we have an update. And in our base scenario, there will be no material effect. Of course, there will be an impact, but no material effect on our consolidated balance.

[Guilherme Grespan, analyst]

If you'll allow me a follow-up on the first question. In terms of magnitude, we're looking at BRL 40 million in your income statement for IBNR, an increase of BRL 40 million. Does that figure make sense? This is what we do at the bank. We think about this makeup of provisions. Now the order of magnitude, we would like to know if this is correct.

[Celso Damadi, executive]

Guilherme, the reading that you have done is not correct. The provision we have in balance is somewhat greater. When we look at the balance, the IBNR balance is different. We have a reduction of the portfolio this quarter and in principle, the IBNR should have decreased. Now the amount that we have in the balance is more than BRL 40 million. Technically, I can't tell you how much more we should have additionally. I would say that it is more than BRL 40 million. The amount that you see is BRL 40 million, but the provisions go beyond that. That difference that you see, therefore, is not the right reading. What we have additionally goes beyond the BRL 40 million.

[Operator]

We have no further questions. We would like to return the floor to the company for their closing remarks.

[Roberto de Souza Santos, executive]

Once again, I would like to thank all of the participants at this conference call for their questions, for their contribution and for their interest in Porto Seguro. Should you have any additional doubts, please do not hesitate in visiting our IR section at the website or you can directly contact our Investor Relations team. Thank you very much.

[Operator]

Thank you. The Porto Seguro conference call closes here. We would like to thank all of you for your participation and we wish you a very good day.

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