Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Analysis

Porto Seguro Reports Strong Revenue Growth and Optimistic 2024 Guidance

In Q3 2024, Porto Seguro achieved an impressive 11% revenue growth year-over-year, totaling BRL 739 million. The health insurance sector saw remarkable growth of 41%, while the bank's revenue rose by 24%. Notably, the company's EBITDA reached BRL 106 million with a 17% margin. Porto has reduced its health vertical loss ratio guidance from 77%-82% to 75%-79% and raised its overall revenue growth forecast to 18%-24% for 2024. The firm underscores its commitment to diversification and efficiency, anticipating continued profitability and potential dividend payouts of 50% as financial conditions allow.

Strong Revenue Growth Across Verticals

In Q3 2024, Porto Seguro achieved remarkable revenue growth of 11%, totaling BRL 739 million, and a 32.3% increase year-over-year. This surge was driven by strong performance in various segments, particularly the health vertical, which saw a 41% revenue increase and added 131,000 lives to its insurance roster. The bank division also performed well, recording a 24% revenue rise, accompanied by a notable 1% improvement in delinquency rates.

Profit Margins and ROI

The profitability metrics indicate robust performance across all business verticals, with return on investment (ROI) exceeding 22%. The health insurance segment achieved a 22% ROI, while the bank and services segments reported even higher returns of 29% and 24%, respectively. Notably, the auto insurance segment experienced a minor contraction in profitability due to ongoing policy adherence but is still recovering from an atypical prior year.

Business Diversification Strategy

Porto Seguro's strategic diversification has proven effective, offsetting reductions in traditional auto insurance profitability. The contribution of the health and bank segments increased significantly, evidenced by health insurance's rise from 5% to 10% of total profit. This shift aligns with a long-standing strategy that began in 2020 to reduce reliance on any single vertical.

Operational Efficiency and Cash Flow Management

The company reported strong cash generation and maintained efficient operational margins, aligning with its growth and diversification efforts. The return on average equity (ROAE) reached an impressive 23%, with projections suggesting it could approach 30% in foreseeable quarters due to operational efficiencies and strategic investments. Porto's dividend payout policy remains between 40% and 50%, with the potential to increase toward the higher end in 2025.

Updated Guidance for Future Growth

Porto has adjusted its growth guidance for 2024. The expectation for revenue growth has increased from 13%-19% to a new range of 18%-24%, reflecting strong performance in health and bank segments. Additionally, the loss ratio for the health vertical has been revised down from 77%-82% to 75%-79%, indicating improved claim management. This refined outlook suggests a positive trajectory for the company as it navigates upcoming market conditions.

Market Risks and Strategic Outlook

Porto Seguro acknowledges potential market risks, particularly related to regulatory changes and economic fluctuations in Brazil. However, the management team remains optimistic, emphasizing a commitment to maintaining operational efficiency and enhancing service quality. The company continues to explore strategic partnerships to bolster its competitive edge while ensuring robust governance over its diverse business units.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone. We welcome you to the Porto Seguro S.A. Third Quarter '24 Earnings Result Conference Call. Please be advised that the presentation is being simultaneously recorded and translated into English. I would like to inform you that the presentation is being recorded and translated into English. The slides presented are available for download at our IR website, on the bottom right side of your Zoom application and choose the audio in English. [Operator Instructions]

Forward-looking statements made during this conference regarding the Porto business prospects are based on the beliefs and assumptions of the company management and on information currently available. Forward-looking statements are no guarantees of performance. They involve risk uncertainties and assumptions as they relate to future events and depend on circumstances that may or may not occur. The overall economic conditions of the business sectors in which Porto Seguro operates and other operational factors may impact the company's future performance.

I would now like to ask Mr. Paulo Kakinoff to begin the presentation.

[Paulo Sérgio Kakinoff, executive]

Hello. I am Paulo Kakinoff, and it is a pleasure to be part of the earnings release for the third quarter, '24. With us we have Celso Damadi and the CEOs of the verticals and the Heads of Asset.

Before going through the figures, I'd like to emphasize the importance that business diversification has had on the favorable growth of our revenues and results. I would like to highlight the highlights with a revenue of a growth of 11% vis-a-vis the same period last year, ending up with BRL 739 million, an evolution of 32.3%. In Porto Seguro vertical, we reached 6 million vehicles with a 57.3%, while the loss ratio reached 57.3%. I highlight here that the comparison is with a very atypical quarter last year, which will also be spoken about in greater detail when we speak about the material.

At Porto Saude, we added 131,000 lives in health insurance. And along with this, we had a significant reduction of 2.3 percentage points in the vertical claim rate. At Porto Bank, revenues grew by 24% with an improvement in the delinquency indicator of 1 percentage point. And finally, at Porto Servico, we achieve EBITDA of BRL 106 million with an EBITDA margin of 17% obtained through the diversification of business and the growth of revenues for those customers that are outside of the Porto ecosystem.

I would now like to invite Celso Damadi to go into more detail about the results of this quarter.

[Celso Damadi, executive]

Thank you. A good day to all of you. It is a pleasure to be here with you. I would like to begin highlighting what Kakinoff mentioned, a double-digit growth in revenue for the quarter. Once again driven by the health vertical, with 41% growth, the Bank growing 24% and Servico reaching BRL 620 million. In terms of auto insurance, we had a minor retraction in the quarter because we maintained our profitability policy that I will show you in the next slide. In PC, we grew 11%; in insurance, a two-digit growth, and in all other insurance. So in the insurance vertical, we have grown according to our expectations for the year.

Here, in the next slide, I show you that our margin, our profitability for all the business verticals is above 22% of return on investment for the quarter. The insurance vertical with 29%; in Porto Saude, we reached 22% of ROI with 131,000 new lives; in Porto Bank, 29% profitability; and in Porto Servico, a profitability of 24%.

This quarter, we reached a return on asset equity of 23%. We have had good cash generation and have increased our margins to levels that we deem to be adequate for our growth and diversification strategy. When we eliminate the ROAE without capital excess or surplus, we have 28%. Our practice to pay out dividends is between 40% and 50%. Perhaps for the next exercise, we will be able to pay out 50% as we did in previous years.

Here, you see the diversification, which is a strategy we have been sharing with you since 2020. The growth of business of the health vertical, of the service vertical, this is materializing. It is a growth with profitability. And the growth of 32% is driven by the health insurance. But we remind you, as Kakinoff mentioned that last year, we had an atypical year, not a normal year with auto insurance giving us profitability of 45% in the second half of '23. It is very difficult to maintain that level of profitability and continue to grow.

And we perceive here the insurance vertical going from 71% to 59% as representation in our profit, and auto insurance from 72% to 62%. So this reduction in profit was offset properly by the other verticals because we had a 32% growth in profitability. Porto Saude goes from 5% to 10%, the Bank from 16% to 22% and Services attaining 7.2% growth in the quarter. So this is our strategy to diversify results and premium in accordance to what we had planned.

Here, you see our historical profitability. We have a longer period, we had a percentage of 130, 120%, 150% in CDI. We have changed levels, especially in 2021, where we reached almost 200% of CDI with profitability despite the CDI being higher. Here, I would like to highlight our diversification of applications. We are below CDI because of our securities linked to inflation. At the end of the presentation, we do maintain our financial results guidance, but above the range.

I would now like to give the floor to [indiscernible] to speak to you about our business units.

[Unknown Executive]

Good morning to everybody. Thank you for attending our call. I'm going to go quickly through the verticals in Porto Seguro, we had revenues of BRL 5.5 billion, stable year-on-year. We had a 5% drop in premium in auto insurance, offset by a growth of 8% in P&C and 10% in life. The comparison base year-on-year is very difficult. Even with these results and the drop of 5% in the 9 months, if we look at the average of historical growth in the last 5 to 10 years, this is a product that grew 6.6% in the last 10 years.

There is no structural change that could justify not growing in future years. It is a onetime effect. It's not only an issue in growth, but also in claims. As a basis of comparison, the annual growth of these products is between 8% to 10% in claims, 50.8%, very good level; 57%, we also approved this. It implies an ROI that is quite robust for us and the increase 3.5 percentage points year-on-year is because of an uncommon claim in the third quarter. In the other products, the claims are quite robust in P&C and life, one below 30%, the other one below 40%.

On this slide, we show you a breakdown of the underwriting automobiles with 63%, P&C with 24%, 9% in [ Life ] and the rest 5%. And here, you see net income and profitability, a profit of BRL 430 million in the quarter. And this quarter, we had no nonrecurrent or relevant climate impact.

To go through Porto Saude very briefly. This is the company with potentially the greatest growth in the company. The highlights are more than 40% of growth in revenue, driven by a growth of 25% in number of lives. Here, you see the evolution. This isn't the growth of a single quarter. It's a growth we have been working on quarter-on-quarter, 6% approximately of growth in the last quarter, 7.5% of revenue, 40% year-on-year. Here, we have a breakdown of our profitability, a growth of over 100% in profitability year-on-year.

For analysts that cover the health sector, the first and fourth quarter are quarters with lower claims. The second and third quarters tend to have higher claims rate. When we compare 22% ROI this quarter, the fact or the best comparison for us would be with 13% the previous year. By adjusting for seasonality, this is a quarter with very strong results. We had nonrecurrent or one-off effects this quarter in terms of strategic partnerships. To this side, you see the evolution, the claims migrating to the levels before the pandemic.

Now to go through Porto Bank, once again, with very robust growth, 24% year-on-year with revenues of BRL 1.5 million. This is because of the number of businesses, scale gains, efficiency gains, profit growing 40% year-on-year, ROA of 29% and of course, efficiency rate, which we highlight because of the scale of Porto Bank. This is a figure that we deem to be good with a potential for enhancement. Here, you see the evolution of our credit portfolio, a growth of 9.2% driven by credit cards. Now in terms of the NPL, we are below the sector and with good averages. The intention, of course, is to focus on customers that have a relationship with the Porto Seguro ecosystem.

In Porto Servico, we highlight the magnitude of the services rendered 0.5 million homes visited. We service more than 656 car services with an NPS of 80 points. Now in the middle here, we also observed a vertical that was recently created. If we adjusted the base, it would grow 17% year-on-year because of B2B, B2C partnerships, strategic partnerships that are outside of Porto Seguro as the paying source. This is part of our strategy. Net income and profitability, EBITDA of more than BRL 100 million and ROAE of 40%.

Finally, our guidance. We have maintained it unaltered mostly with the exception of 2 points. One, the vertical loss ratio for the Health vertical. The guidance has been reduced from 77%-82% to 75% to 79% as we obtain better results that we anticipated in the 9 months and an improvement of guidance. Here, an expectation of growth of revenues from 13% to 19%, changing to 18% to 24%. These are the changes in guidance because of our expectations for 2024.

With this, I would like to end the presentation, and I invite all of you to join us in the Q&A. We have Paulo Kakinoff, Damadi and those responsible for Investment and Treasury.

[Operator]

[Operator Instructions] First question comes from Henrique [Ana Houston] from Santander.

[Unknown Analyst]

Congratulations for your results. My question is to Sami on the health vertical claims. As you have reduced the guidance because of the loss ratio, what are your expectations for loss ratio in 2025, which would be a normal level for the health vertical?

[Sami Foguel, executive]

Now for those who have followed up on our quarterly calls, if we look back at the last 2 years, what we have been saying is that we foresaw a return to the pre-pandemic levels, of course, respecting the seasonality for the health vertical, the first and fourth quarters have lower seasonality. The others have a more accentuated curve. We observed that this has been happening gradually. The third quarter is another proof of this. If we look at 2025, we will still disclose the guidance, but everything points to the fact that this trend is to resume the levels we had before the pandemic. I think it's a good assumption.

[Operator]

Next question comes from Antonio Ruette from Bank of America.

[Antonio Gregorin Ruette, analyst]

We have 2 questions at our end. If you could explore the trends for the auto segment, your vision on the competition, the environment so that we could speak about prices. And a question in services. You mentioned this in the release, the partnership to be able to grow your revenues. Of course, if you could explore what has been done in the last quarter.

[Paulo Sérgio Kakinoff, executive]

Antonio, we can begin, of course, with the topic of services. I will give the floor to the CEO of the vertical to remark on this, and then Rivaldo and myself will remark on the market.

[Unknown Executive]

Thank you all for your attendance. Last year, we remarked that we had carried out some structuring work, integrating networks with the acquisitions we had carried out. And this year, we're adjusting our in-house structure. This has allowed us to create a team completely devoted to strategic partnerships. As an example, in the second and third quarter, we were able to close 9 or 10 strategic partnerships with several different segments. Our working model on these partnerships is to offer services for customers from other segments. We go from utilities to banks to assembly plants, several services that we can offer to have a good partnership.

On June, we activated the Porto Servico brand with the large retailers. And this brought important links and brand exposure for Porto Seguro. And during the year, we had interviews, participation and brokers as well are allowing the Porto business to thrive. So whether it is in the retail segment or others, we have had very good expectations, and a good revenue source. Quarter-on-quarter, the growth is of almost 30%. And in the pipeline, we have several prospects that are underway. This is for Porto Servico.

[Paulo Sérgio Kakinoff, executive]

Antonio, if you can see this, you follow up on this every month, and we have had a very good year with good growth, always surpassing the market. We imagine that the competition would react at some point, and we did have that reaction in the third quarter. It's something that we have perceived and that is coming down. It is more balanced. So the outlook is for a fourth quarter that will fall within our projections or perhaps somewhat better.

Now regarding the competitive environment, a good indication of the strategy that we have followed in a very disciplined way at Porto is to preserve the consistency and coherence during the quarters when it comes to pricing, specifically for auto insurance. This proxy is called a bonus center where you observe great variations month after month, both positive and negative. But despite this, the company maintains its level of premiums, calculated in a very technical fashion to preserve the high levels of margins that we have been maintaining for several semesters. This is the most important aspect of the company's strategy, allied to diversification.

It has allowed us to go beyond our budget of profit for the auto segment this year. While at the same time, we look upon other verticals and see that they are growing at very significant rates, which today points to the relevance of the auto insurance segment in our basket of profitability in the company. It represents 1/3, 10 years ago, auto insurance exclusively represented 80% of the company's revenue, preserving our portfolio and expansion at the pace of 1 digit, which is what the company also seeks in the auto category, happens concomitantly with a 2-digit growth in the other verticals.

Giving us that outlook growth in our revenues generally without allowing the attraction of the auto segment to miss out. This is how we work consistently in pricing, so we're not sensitive to the tactical movements of competition that tend to intensify during some months and also alter. This stability has been an important factor in preserving our margins and of course, important for our market share.

[Operator]

[Operator Instructions] The next question is from [indiscernible] from Citi.

[Unknown Analyst]

A question regarding Bank. There is a review of your expectation of revenue this year. Now formerly, your portfolio was growing 4%. Now is this the growth of the credit portfolio that we should work with during 2025?

[Paulo Sérgio Kakinoff, executive]

We will have a growth in all of the banking business portfolios as well as in the credit portfolio. We're growing in terms of loans and in cards. We had 20% growth in loans.

[Operator]

Our next question comes from Thiago Paura from BTG Pactual.

[Thiago Paura Mascarenhas, analyst]

If possible, I would like to ask 2 follow-ups. First of all, in health with Sami, he spoke about the review of the guidance and remark on the loss ratio going back to levels before the pandemic. There's a return of 22%, of course, with some seasonality here and there. I would like to understand if this is the level of return that the vertical intends to have going forward, an excellent level. And a follow-up in the Bank also regarding your returns. We see an ROAE of almost 30% in the last 5 quarters in adjusted fashion. So which is the level of return that you foresee as being optimal going forward?

[Sami Foguel, executive]

We come out of a business from 300,000 lives and go on to 400, 500 or 6,000 lives, an important focus is technology to gain efficiency and to deliver the products. And there, we have an operational leverage that is expected, and we have been feeling this gradually here in operational expenses and in the administrative items. This is very important.

Now we are capitalized and well capitalized at the appropriate levels of provision. And as the loss ratio for new products and the risk framework and with the health framework at a very mature level, we see that there is potential to increase our management, risk management, health management. And well, consequently, we want to have appropriate revenue levels. We don't offer guidance regarding this, but all of these components can allow us to be quite enthusiastic in terms of the levels of profitability of this vertical.

[Paulo Sérgio Kakinoff, executive]

Thiago, as part of the Bank, we had an important resumption of credit products, thanks to the policy we adopted since 2023, focusing on the customers we knew better in our [ aquarium ]. This led to a significant increase in revenues of almost 60% vis-a-vis 2023. With this, of course, our profitability is enhanced, and we continue to grow in our business as the consortium with a growth of more than 30% and this sustains an ROAE above 25%. And we believe in this trend of profitability in the next few quarters.

[Operator]

Next question comes from Guilherme Grespan from JPMorgan.

[Guilherme Grespan, analyst]

Congratulations for your results. We have a follow-up in the part of the auto segment. We follow up on your price data, and there has been a second peak of price in October? I think there was one in July when you recomposed your margins in Rio Grande do Sul and in October, a significant price increase in the industry. Now is this simply a re-composition of margins or have we missed out on something? Is it an outlook of a worsening of cars, used cars going forward? If you could complement your answer, if you could speak about the relationship between pricing and Selic. What will happen with that expectation that the Selic will increase significantly? And if you have an idea of how prices will behave.

A second question regarding Bank. This is a recap. You're going to roll out your platform, [ PRCK ], individual people and companies. How are you thinking about this rollout and which will be the new products? The Bank is less credit bank and works with systems. So perhaps this could become an avenue of monetization or have you thought about anticipating the process? If you could speak about the Bank ecosystem in terms of timeline, products and monetization?

[Paulo Sérgio Kakinoff, executive]

I'll begin. When you mentioned the price variation, you're referring to the industry as a whole. In the case of Porto, we don't have great variations neither in the month of August or presently because of what we said before, we have avoided these major variations month-on-month, preserving the technical and strategic issue of price. Now we have a proprietary technology in the company developed through decades to work with the right pricing level. And we take into account all important variables, including the Selic, as you have just mentioned, we have incorporated this into the model.

We don't see a deterioration in the foundation of this pricing introduced by a significant variation of loss ratio or price increase. Quite the contrary, the company continues to seek efficiency gains quarter-on-quarter. When we look at our historical trend, you will see that there are no interruptions in any quarter. We have had systemic gains in Porto Holding as a whole and in each of the verticals without any exception. And all of them are benefiting from the growth of revenue. As the group grows, of course, our administrative costs are at a less accelerated pace of growth, which brings us benefits. And we continue to foresee possibilities for new reductions. So the group as a whole is working towards that goal.

We're not feeling pressure from any of the main indicators that are part of our pricing algorithms, thinking that they could change significantly. Now lately, they have become more neutral. If there's a variation in loss ratio, it will be 1 or 2 points. And we have the [ CP ] table with a slight reduction vis-a-vis previous quarters. So there is no important indicator in the horizon that could change this scenario. No, absolutely nothing.

[Celso Damadi, executive]

Let me comment on a point that is very important. It's obvious, that, of course, this would bring an impact if we didn't have other events. Our inflation is at 4.7%, 4.8%. And there is no room for a drastic reduction in price. We also do not have a steep pressure to increase prices and the PP table drops. But I think the most important part refers to the inflation variation, so we have price stability. And the risks have been minor. So predictably, we can say that we will have more inflation. We're working based on 24 months. We don't work in the short term. And this is what will happen with our pricing without significant price increases.

[Paulo Sérgio Kakinoff, executive]

We will go on to Loucao to speak about the Bank ecosystem.

[Marcos Loução, executive]

To speak about an update of our accounts, we have launched the individual person account initially for our employees as well as for our brokers. In October, we began the rollout to our customers, especially the credit card customers. Regarding the company account, we're developing it and the expectation is that it will be launched in the first half of 2025.

This is a platform of access and conversation with the customer. And we make it possible to work with new products, not only the flow of deposits in the account, but products that could service our ecosystem. We will have an offer of anticipation products developed for the entire chain for our own customers and companies. With anticipation, we have begun some pilot programs to test adherence, and of course, to test the channel to service the ecosystem as a whole.

[Operator]

The question comes from Maria Guedes from Safra.

[Maria Guedes, analyst]

Congratulations for your results. A quick follow-up on the pricing, to better understand that slight peak that you had in October and the follow-up you're carrying out. Perhaps that was a specific player trying to become more competitive? Is it due to margin re-composition or a trend generated in the industry, which is the reading for that slight hit in October and if there will be an accommodation going forward?

[Paulo Sérgio Kakinoff, executive]

Our reading is that it is a re-composition going back to a more rational level. As I mentioned, Porto did not foresee great variations during the period in August and in September, specifically in August, we did observe some movements, unjustified movements on the part of some competitors that have been eliminated in October. It seems to be a re-composition and a level of stability and not a significant variation for October. And in the first weeks of November, we observed a similar trend as we saw in October regarding the stabilization. That's exactly what we have seen in the market. And of course, our view is positive. We have a good positive future scenario.

[Operator]

The next question comes from Eric Ito from Bradesco BBI.

[Eric Ito, analyst]

Congratulations for your results. My greetings to the entire team. If we could explore the Bank further, there has been an expansion in performance. The cost of funding dropped for the third consecutive quarter, which are the main drivers to have a lower cost of funding? And the second question is an update in payout. We saw the ROAE expanding for another quarter, which will be the trends in your payout of dividends?

[Paulo Sérgio Kakinoff, executive]

Now to begin with the bank, we have perceived a credit margin that we have recovered from the products that we suffered within 2023 because of the delinquency rate. This is the explanation. We're also working with products where we can establish a better price, for example, the warranty of vehicles at a better price. This is what we have done.

If we look back to 2022 and 2023, we had a significant growth, the growth of portfolio, a growth of capital. In 2023, we worked with a re-composition of that capital. We eliminated the delinquency rate. We continue to do this in 2024. And we believe that we have come to a good level of solvency that allows us to be comfortable, which is how we worked in the past. We're following that trend.

Nowadays, we can't foresee anything for 2025. But in 2025, we will be able to go back to that 50% payout as we had in the past because of the free capital that we will have as we seem to be coming close to that level. This is what I remarked on, and this will be the trend for our coming exercises.

[Operator]

Next question comes from Thiago Binsfeld from Goldman Sachs.

[Tiago Binsfeld, analyst]

I think my questions have mostly been answered. If we could speak about Porto Bank and your line of expenses, you show a slight growth above in terms of expenses. In 2025, will the dynamic be similar or will you tend to slow down and maintain your expenses more under control?

[Marcos Loução, executive]

Our expectation is that we have significant lines of growth with investments in technology, especially the platforms for accounts for individual people and for companies. Now with this, we still have the expectation of making significant investments. We don't expect an increase in expenses because we do believe in a growth of profitability in line with what we have observed in the last few years. Because of that delta and efficiency, we should continue having the same efficiency that we had in 2024 for the coming year.

[Tiago Binsfeld, analyst]

You're referring to that ROAE of 30%. Is the Bank close to that?

[Marcos Loução, executive]

Well, I don't think we can give guidance in terms of ROAE. What I can say is that we have had significant growth in business. We have been able to balance out the risk and return, especially in the part of credit. There is no indication that the strategy will be altered. We're focusing on the strategy with customers that we know as part of the process, and we will have a significant growth in the business. We're not linked to the credit risk or capitalization. So we will maintain our list of investments and expenses at the level that we have presently with an ROAE above 20%. This is all I can say about that.

[Paulo Sérgio Kakinoff, executive]

Now of course, we have the understand your desire to work with your modeling and the more information regarding the future, the better, the more accurate will your models be. Although we cannot and should not offer guidance, I believe that a good analysis of the results for this quarter could be the best proxy of what we will be doing in the future. We haven't had any nonrecurring effect, extraordinary effects. It's a sum of results of different products and services, bringing together the traditional ones, the consortium, credit card, leasing guarantee, all performing at very sound levels without significant variations, isolated variations and at the same time, the expansion with new lines and products.

The Porto way of doing things consistently, gradually without significant surprises preserving the quality of services of delivery, which gives us that outlook of continuity on this trajectory. So we do have that positive outlook of continuing on with this moment that Porto is going through now. This is what we can say regarding any projection or forecast.

[Marcos Loução, executive]

Congratulations for the results.

[Operator]

Next question comes from Kaio Prato from UBS.

[Kaio Penso Da Prato, analyst]

We have 2 questions at our end. There was a previous question, but I would like to ask a follow-up. What can we expect in the Insurance vertical in 2025? Which are the lines of business that caused greatest enthusiasm?

And secondly, we have spoken at breadth with price, but which is your vision in terms of fleet, if we take into account new sales, if there is a specific area that in your vision does not have a fair share and could become stronger in 2025?

[Paulo Sérgio Kakinoff, executive]

I'm thinking about this before I give this to Rivaldo. Our market share is not something linear in the different regions. We do foresee a potential for growth in terms of our penetration in several areas. You're asking about the auto segment, but there are important variations when we compare this with the highest market shares. Now the way that Porto has been creating this market share throughout the years has been well structured on the quality of services and the structure offered to our brokers.

Now the results that we are presenting to you here today, would never have been attained if it were not through a very positive relation dating back decades with our broker base. We listen to what the brokers tell us regionally so that we can model specific products for each of the regions. Even when it comes to pricing levels and the structure of services to our insured customers. So all of this is under the championship of Rivaldo and his team when we speak about regional penetration. Regarding the size of the fleet --

[Operator]

Ladies and gentlemen, please hold while our speakers reconnect.

[Paulo Sérgio Kakinoff, executive]

Very good growth with very strong results. It has been promising and interesting to see how a higher level of awareness on the importance of insurance has begun to materialize with a highlight for the entrepreneurial part, transportation, cell phones and bicycles. For example, we have seen that there is a growing demand, which is measured based on the interest of our brokers themselves. Porto has grown significantly through the diversification of brokers working in new segments. And this is an important indicator of what we call the level of awareness or level of interest. The brokers look for us interested in expanding their portfolio of products and services. And of course, this points to a growth in demand.

[Operator]

The next question comes from Eduardo Nishio from Genial Investimentos.

[Eduardo Nishio, analyst]

We have 2 questions. The first refers to your other businesses. You had positive results this quarter. If you could explain what happened and if we can expect more stable results going forward? As you're doing the write-off of the car by subscription, if this will be discontinued? If you have a forecast on when the write-off of this unit will happen? And because of the scale gains can we imagine a drop in operational efficiency? There was a slight drop last year, but perhaps you could refer to what you expect going forward in your SG&A?

[Paulo Sérgio Kakinoff, executive]

Well, the program [indiscernible] last year, we had a significant movement because of the drop in the [ PP ] table. Now this year became better and our expectation is that until December 31, this operation will have been materialized in the coming year. This operation will have a null effect on our balance, I think this is the first question.

Now referring to the other business lines, the results of the holding is where we have our free assets. Now when our reserves are higher, the holding on that business line will also have better results. And the trend is that this will happen in the coming year as well. We also have the profitability of Porto asset. We don't disclose this, but it has been presenting positive results better than the last year, and it has been growing. At Porto asset, we have attained BRL 10 billion in resources in that business unit. Now this group of things shows that our line item will have better results than last year.

And in terms of operational efficiency, in the last 5 or 10 years, we have had a recurrency in the efficiency gains in all of our business lines, insurance, bank, health, services, and we have invested heavily in technology in the past. And in some years in the past, it reached 40% of our profitability. Nowadays, it is at lower levels. And of course, we have been harvesting the positive results, an enhancement in the process and the change in the platform that we are creating.

We're also changing the platform of Azul, bringing in the platform into the Porto platform. We have unified 3 automobile plants. And this will also generate a trend towards gains in the Insurance vertical, which means we have several projects that point to the fact that this productivity gain should continue on.

[Eduardo Nishio, analyst]

Simply a follow-up then, so that line item of other businesses will be less limited than last year. Can we expect a positive result going forward?

[Paulo Sérgio Kakinoff, executive]

Yes. Now let's explain this to you in accounting terms. We have BRL 3 billion in terms of capital surplus there and the holding works like a bank treasury. The verticals have 100% of return on CDI. The difference of 100% of return on CDI and what is obtained is allocated to the holding as a market result. So when we estimate the coming year, we have BRL 3 billion of free reserve.

[Eduardo Nishio, analyst]

And all of the other lines would have to lose their relevancy. But the total results will depend mainly on that factor. Isn't that correct?

[Paulo Sérgio Kakinoff, executive]

Well, there are other managerial aspects, but these 2 facts are the most relevant. And there are other factors that are less relevant in the holding. Now besides the management of our own capital, this team doesn't like businesses that don't have a positive result. Yes, I think you can have positive expectations in that line item of other businesses when it comes to investments and projects. Everything has been tested in the market. Perhaps they were not very efficient. And in the coming year, we will have a level of results that will be significantly higher. It's in that phase where we are restructuring those products. That's what we have in that line item when it comes to capital management.

[Operator]

The next question comes from Gustavo Schroden from Citi.

[Gustavo Schroden, analyst]

I would like to discuss with you the structure of the holding. For some time already, the company has changed the way of reporting results. It gives us information and detail per business unit and all of this is very welcome. Now the results of the units are improving. Porto Bank help the Auto segment has always been a fortress at the company. And we now see that the other 2 verticals are doing very well. Now does the company have a plan for a spin-off to unlock value? Or are you going to continue as you have been doing? Any insight in that direction will allow us to think better about how to think about Porto Holding going forward?

[Paulo Sérgio Kakinoff, executive]

Now this conversation with you, of course, will demand a critical mass for the decisions we will take going forward. They won't be made based on capital needs or situations. And I can say that we have had a conservative policy when it comes to our own capital, and we are quite satisfied to be in the position we are in at present, with a capital surplus at a level significantly higher than the regulatory minimum. This is part of the company policy, which I believe is very healthy because we are exposed to a market, to a geography that is subject to variations.

Now in the horizon of the next 4 or 5 years, if we maintain that trend of profitability that perhaps we can increase the payout of our surplus capital. And even in rougher, more difficult scenarios, we don't see anything that would limit the growth of verticals due to a need of capital from third parties. Our approach, therefore, is strategic. We are preparing the companies for the highest level of governance. This is a natural movement to record these companies as open companies as we have done for Porto Servico and Porto Saude. These are units where we do consider the possibility of having partners that could speed up our development in technological know-how, or in terms of services so that we can act in segments that we're interested in penetrating.

What we have done in the last 24 months are very illustrative of this, the CDS and other companies that have already represented additional revenues for Porto Servico when they were incorporated. So we prepare the companies we have observed interest from potential investors. But this will only happen because of a strategic motivation and not due to a need for capital. This is how we have acted in the development of verticals. We have several potential partnerships that could contribute hills to from specific segments. And all of this could translate into movements of capital, but it's not because of any bottleneck in investment. And of course, I highlight and underscore that we're very exposed to volatile environments in Brazil.

[Gustavo Schroden, analyst]

No, that is clear. If you allow me a quick follow-up. the hypothesis that this movement will occur, the Porto Holding has the idea of preserving control of the potential business units? Or would this be defined case by case?

[Paulo Sérgio Kakinoff, executive]

Now Porto, throughout the years, has been refining its business model, establishing which will be the areas in which it acts for the long term. The company has never worked in an opportunistic way of building up a business and then selling it. We have a great deal of pride and responsibility because we link the Porto brand to a certain segment in which we act in. And of course, this is a long-term vision. In our radar there is no discussion of not having control over the businesses that we operate, especially because we believe that there is a Porto technology of management, brand and services that adds value. It would not make sense to put all of this at risk if we don't have the ability to control the businesses. So we don't have any discussions in that direction. Quite the contrary, we're thinking of expansion and attraction of partners that can add value to our trajectory. But there is no plan for the long term where we will not be having a strong impact on the management of our own verticals.

[Gustavo Schroden, analyst]

Congratulations for your results.

[Operator]

Our next question comes from Mr. Jitendra Singh from HSBC.

[Jitendra Singh, analyst]

Congratulations on the results. I think we have discussed most of the points, but just a very quick comment from you maybe on your investment income. I mean, with this new monetary tightening environment we are seeing in Brazil, which is likely to be a short cycle, I mean, how do you plan to position your portfolio mix? And what are your expectations for return on your portfolio? And can you just remind me what is the current sensitivity of banks earning to interest rates?

And second, I mean, in terms of like what are the key risks that you consider as we move into 2025 and for the coming years?

[Paulo Sérgio Kakinoff, executive]

So we don't anticipate doing any substantial change to our technical reserves allocation. Historically, we're like 30% to 40-something percent into inflation-linked bonds, a portion of it into floating, and we have some private credit and usually below 5% in equity. We're basically oscillating between 2% and 3% lately. With the tightening, we don't anticipate any change to that allocation. Brazil is a pretty volatile country as far as it comes to rates. So it's something Porto has been navigating in the last decade. It shouldn't change substantially.

When you look at the bank portfolio, the bulk of our interest income actually stems from fixed rate products. So if you look at the credit card, Brazil averages in the 10% to 14% monthly rates. The funding often comes from the float of the operation itself. We, as banks, we generally have a couple of days of positive working capital. So the higher rates shouldn't have any major impact also on the banking book. The car financing we do is fixed rate as well. Most of the unsecured consumer loans we do to service providers of Porto Seguro, they are fixed rates as well. So the slight tightening shouldn't have anything like that.

As far as expectations for this year, we are probably going to be in the upper range of the guidance we provided, so probably closer to BRL 1 billion of net financial result, as a result of a little bit of a portfolio reshuffling within the previous quarter. And lastly, most of our portfolio is 2 to 3 years duration at most. So we have less impact of asset and liability management as some of the U.S. banks, for instance, have because we tend to have shorter duration of technical reserve allocation. I hope it helps.

[Jitendra Singh, analyst]

Yes. Maybe a quick follow-up. What do you consider the normal level of policy rates in Brazil? I mean, maybe the terminal rate when you consider medium term?

[Paulo Sérgio Kakinoff, executive]

We don't forecast terminal rate here in Porto Seguro. When we talk to some of the banks and investment banks we talk to, we often see in their models 11%. Usually, a lot of people will look into the 10-year curve in Brazil. Because it oscillates a lot, we see financial models stabilizing at around 11%, 11%, 12%, 10%. Rarely, we see a lot lower than 10% for the 10 years, but usually around there, I would say.

[Celso Damadi, executive]

At the moment, it's pretty hard to make any kind of prediction, mainly considering the future curves, inflation and prime rate. The gap is broader in a level which we do believe is not sustainable. So I think that, we all think that something might change, but there are a lot of speculations in the market at the moment, which makes any prediction even harder.

[Jitendra Singh, analyst]

And maybe on the key risk which you see, would you consider for next year or maybe coming years?

[Celso Damadi, executive]

Key risk you mentioned?

[Jitendra Singh, analyst]

Yes.

[Celso Damadi, executive]

We're always looking at regulation, I would say. I think Brazil is a pretty -- it's a market that we do see changes in policies. So any time there is a regulation, a new law, often there for the good. They're improving client relationship. We're a company -- Porto is a company that differentiates itself truly through better client service, high NPS and things like that, which we believe is a good way to differentiate and is a very positive defense mechanism. But we are going -- we're currently discussing taxing changes, for instance, right? So it's something we pay a lot of attention to what's going to come out. Is this going to render and viable a product that we sell? I think the regulatory framework, capital allocated, opening insurance, change in accounting, change in taxing, I think that's something we always keep a special attention to.

[Paulo Sérgio Kakinoff, executive]

Yes. And even considering the regulatory outcomes, there are some reasonable measures being taken, and those are benign towards a healthier market system and a more positive approach towards the customers. I mean we never know what would could come from the regulatory environment. But there are also very interesting movements being discussed and deployed along the last few years. And we are also quite optimistic on the level of the discussions being implemented by the market and the government in order to enhance our segment, our industry, which is pretty relevant to any economy.

So even though we believe that we are in a good trajectory in the country. But talking about key risks in a world like this is always a quite challenging exercise. We have been discussed this -- we have discussed these aspects every single month, trying to build and to strengthen our current process, our pillars in order to make this company able to deal with any kind of material variation that we could face coming from the external factors. I think that we are in a good shape, but trying to enhance it every single month being more effective, increasing operational efficiency and all the things that we have already mentioned today.

[Operator]

The question-and-answer session has been concluded. I will return the floor to the company for the closing remarks.

[Paulo Sérgio Kakinoff, executive]

Well, in this quarter, I would like to work with some special thanks beginning with all of you. It's very gratifying to have such a wonderful question-and-answer session like this one, covering all of our business verticals. It's also very illustrative of the level of diversification the company has achieved. So our many thanks for that, our thanks to our teams that are striving to deliver the strategies of the company and our thanks to the Brokers that I mentioned. We thank you for your interest as we see through the questions. And it is important for you to see how important the broker is in our ecosystem. Once again, thank you very much, and have a very good day.

[Operator]

The Porto video conference ends here. We would like to thank all of you for your participation. Have a very good day.

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