Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. And at this time, we would like to welcome everyone to Porto Seguro's Fourth Quarter '19 Results Conference Call. Today, we have with us Roberto Santos, the Chief Executive Officer; Celso Damadi, Executive Vice President of Finance, Controlling and Investments and IRO; Marcelo Picanço, Executive Vice President of Insurance; Marcos Loução, Executive Vice President of Financial Businesses and Services; Izak Benaderet, Managing Director of Corporate Investments; Lucas Arruda, Head of Strategy and IR; and Emerson Faria, Head of Investor Relations. 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/ir. At this address, you will also find a banner called Conference Call, and this will lead you to the slide presentation. Questions can also be asked through the webcast platform clicking on the icon, Ask the Speaker. These questions can be entered any moment and will be responded live during this conference call.

Before proceeding, let me mention that forward-looking statements made during this conference call refer to the business outlook of Porto Seguro. Projections and operating and financial goals are based on the beliefs and assumptions of the company management as well as 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 in the future. Investors should understand that general economic conditions, industry conditions as well as other operating factors could affect the future results of Porto Seguro and lead to results that differ materially from those expressed in such forward-looking statements.

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

[Roberto de Souza Santos, executive]

Good morning to all of you. We would like to thank all of you for participating at the Porto Seguro Conference Call for the fourth quarter 2019. We go on to Slide #4 of the presentation where we highlight the main points.

We ended 2019 with the highest recurring net earnings in the history driven by a solid operational results and by an increase in returns above the CDI. We have also accelerated our premiums in the fourth quarter. The automobile sector has resumed its growth with a highlight for Azul going beyond 2 million insured vehicles. And the financial results expanded -- sorry, health insurance rose by double digits.

Now all of the other insurance had a growth of 9% during the quarter and 6% for the year. Thus continuing on the increase of the diversification of our portfolio.

In terms of insurance expenses, the loss ratio for 2019 was below the average for the last year, while administrative and operating expenses had a drop for the fourth consecutive year with an improvement of 0.5 percentage points vis-à-vis 2018. Despite the increase vis-à-vis the last year, the combined ratio was below 2 percentage points for the last 10 years.

In financial businesses and services, we had a substantial increase in results year-on-year due to the increase of credit operations and the reduction in losses in other businesses, especially the Conecta telephony company. The credit card product outran the 1 million credit cards and the portfolio went beyond BRL 8 billion, a growth of 21% in the period. And the CDC portfolio reached BRL 1.5 billion, presenting a growth of 29% vis-à-vis the previous year. We carried out several initiatives during 2019 with the potential to contribute to our growth in the coming years. Among these, we highlight the co-branding strategy that has simplified our product offering, bringing us significant gains in operating efficiency and business conversion.

We also launched the campaign auto insurance with a credit card, allowing payment in 10 installments for vehicle insurance. We made adjustments in our rules to give trust to the health segment for small and medium enterprises. We developed Conquista, an investment and business platform that makes it possible to market several of the products in our portfolio. We began selling D&O insurance for professional civil liability, a sector where we were not active. We also launched Reppara for emergency homeowner services, the first in the country. We have also launched a bike insurance with a complete protection for all types of bicycles. Once again, I would like to thank all of our employees and others for another year of dedication and trust in the company. I would now like to give the floor to Celso to continue to remark in greater detail the main highlights and results of the year.

[Celso Damadi, executive]

A good morning to all of you. Thank you for participating in the Porto Seguro call. We're going to begin with the growth in our operational results in the fourth quarter. In the fourth quarter, Porto Seguro accelerated its expansion in revenue by 5% vis-à-vis the fourth quarter '18, and this growth acceleration is one of the key strategic objectives of the company. We show you a CAGR of 5% for 2019. What is more important in this graph and that I would like to highlight is that in one of our strategies of diversification, we have greater growth in financial services: a 4% growth in pension plan insurance 8% in financial services and 7% in services, showing you very clearly are 2-digit growth in financial services in the last years and in services, 7%.

In the next page, #6, we speak about diversification. Once again, showing that in 2014, our automobile premium represented 60% of our revenues in 2019. The share of vehicles represents 54% of revenues, which means that we have been decreasing the participation of the vehicle sector in our total revenues.

On Page #7, we will speak about our consolidated results. Nonrecurring net earnings reaching a very high level despite the drop that we have in the interest rate. We have a sound operational result as well as greater results for financial investments. Our quarterly profitability was at 20.1% for the fourth quarter '19 and a yearly profitability of 19.3%. The profitability, of course, was within our expectations for the year. When we carry out adjustments and withdraw the surplus capital that we have internally, we can observe that our return on average equity while -- by applying 100% of CDI, this is a calculation that we carried out, stands at 22%. We do this calculation internally and the return on net equity of 22%, eliminating surplus capital and applying 100% of CDI, giving us a 22% of return.

In the following slide, #8, this is, of course, merely an illustration. We don't have the correct measurement, but we can show you how the CDI affects our profitability and how Porto has been able to overcome and continue to go with this business with a drop in CDI.

On Page #8, since 2010, we have been going beyond the CDI, especially in 2018 and 2019. And the drop of CDI was the years in which we had the greatest growth in profitability, 2018 and 2019 with percentages of 298% and 327%. Of course, we apply this calculation on the cost of capital and the return on capital. I would now like to give the floor to Marcelo to speak about the insurance results.

[Marcelo Picanço, executive]

A good day to all of you, and thank you for participating in our call. Our insurance and our growth in premiums for this quarter shows a resumption in the vehicle portfolio of 2%. The other insurances had a growth of 2 digits -- are very close to the 2 digits. The resumption in the auto business is important because we had a drop in the average premium due to a increase in theft and others. And what -- this figure is important.

On Slide #10, we observed a reduction in the risk premium. But despite this, we had a return on capital of 18% in 2019, something very appropriate for a portfolio like this one, and of course a loss ratio in 2019 with a drop. And I would like to make it clear that the combined ratio of 2019 is a record in the last 10 years.

In Slide #11. And despite the lower result in 2019, we're thinking about a longer horizon and results at a longer term. The results for the auto business is 2 points lower than in the last years, and of course the combined ratio will stand at 2 points better than the last year, and it will have to be increased. And we need the company to improve its operational performance due to this drop in technical results of the loss ratio and to have a gain of efficiency, which has already been mentioned. I would also like to highlight that the combined ratio, in the case of Brazil, brings us considerable revenues in the case of CDI. This is a very interesting ratio and very much aligned with those moments where we had much greater financial results, two or twofold better results. So this drop with the CDI was offset with this enhancement in our operational results. And finally, if we think about our entire OpEx, we had a drop of 3.6 percentage points. In the last 4 to 5 years, this was a significant efficiency gain that we continue to seek to be able to offset not only the drop in the financial results, but also the -- what we face with clients. What we want is also a gain of quality and not only cost to expand our margins. I think this is -- has been shown clearly throughout the years. This is not a timely effort that happens in 1 year or another, it is a continuous process. Having said this, I would like to give the floor to Marcos, who will speak about our financial results.

[Marcos Loução, executive]

A good day to all of you. Thank you for your presence. Now in terms of services, we had a fourth quarter that was very significant with a growth vis-à-vis the fourth quarter in 2018. Besides the revenues, the credit card and financing, we had 56%. As you can see, we have had an increase, thanks to the growth in the credit card, and we have had a growth of 10%, and the impact on return on investment has been important.

Now to speak a bit more about this. We have a growth of 16% during the last quarter and the year closing was 9.5% despite the fact that the first semester had a lower growth. In the last semester, this was quite leveraged by the resumption of sales. We had an increase in credit card, a significant increase in the sale of credit cards, and the release of financing, once again, leveraged by the financing of vehicles, which guarantees a rather sound portfolio with 29%. And a significant release for the year 2019 in terms of active credit cards, we carried out several activation campaigns and a greater use of our app that had a growth of 44% in terms of credit cards. And once again, this aided us in the increase of activation, which helps us in terms of active credit cards and sale. We had a growth of 22% when it comes to active credit cards.

Now, of course, what helped us in this portfolio is an indicator that is the quality of the sales and a risk coverage of 135%.

I now give the floor to Izak.

[Izak Benaderet, executive]

A good day to all of you, and thank you for your presence. Now in the last part, we speak about the financial results with a very positive result of 191% of CDI. And what I would like to highlight here is our ability to maintain, during the last 5 quarters, an extremely sound profitability. We ended the year with 10.2% of the CDI. And in the highlights, you can see that we're harvesting the improvement in portfolio we have had in the last few years, enabling us the ability that despite having a lower CDI we're able to achieve this type of financial results. This comes not only from our stock market portfolio that was quite positive vis-à-vis the BOVESPA Index. And of course, of other operations that brought us a very positive result.

To conclude, once again, we would like to thank all of you that are participating in our conference call to release results, and we would now like to go on to the question-and-answer session. Thank you.

[Operator]

[Operator Instructions] Felipe Salomao from Citibank would like to pose a question.

[Felipe Salomao, analyst]

I have 2. The first question, if you could share with us the present day dynamic of prices and which is your expectation for the coming quarters. We have observed that in the last few weeks or days, the average ticket has increased, and there were some comments made during the call that your combined ratio would improve during the year. This is my first question.

The second question, if we can expect another year of enhancements in -- compared to what you delivered in 2015.

[Lucas Arruda, executive]

Felipe, thank you for your question. This is Lucas, I'm going to speak about price and then Celso will respond to your second question, CDI and CDA (sic) [ PDA ]. Well, in terms of the price dynamic, what we observed is a very mixed dynamic. December was an aggressive month. It was the end of 2019. The last month, the market was somewhat more active. And in January, we have observed a certain movement for price increases in only part of the market. Of course, we cannot generalize this. This is what part of the market is doing. But the end of 2019 and the beginning of 2020 shows a trend for improvement. There was a slight drop with a trend for improvement going forward that of course could become greater, and of course, we have had gains since the second semester of 2019. And this could have an impact on our results going forward due to this price impact. We presently observe a positive dynamic, but we do not see an increase in terms of the average premium. Thank you for the question.

[Celso Damadi, executive]

With the resumption in premiums that we expect to have in 2019, what we have is outlook of a reduction during 4 years, our enhancement and process and systems. And we do have an installed capacity to be able to absorb a great deal of growth in the coming years. With the growth in the coming years, we can increase the premium without having a growth in expenses. Of course, our focus is permanently on quality and on the client experience. But presently, we have more expeditious processes that will allow for this growth. And the outlook is that growth will also help us to continue gaining productivity based on our initiatives and in operational expenses.

[Operator]

Giovanna Rosa from Bank of America would like to pose a question.

[Giovanna Rosa, analyst]

I also have 2 questions. In the first question, I would like to ask you to give us a panorama for the insurance market, especially the auto market for 2020, which is the growth that you expect in premium? This year, it seems that there was somewhat more growth. So if you could speak about your vision for the year 2020. I will then pose my second question.

[Marcelo Picanço, executive]

Hello, Giovanna, this is Marcelo Picanço. I will refer to market figures and our outlook on sales and vehicles and the outlook of manufacturers as well. We believe that the sale of growth will be up 9% to 10%, at least this is a projection that we have heard from the automotive industry on passenger cars. And there has been a retraction of imports from Argentina, which means that the market will be focusing on domestic sales. The outlook for the economic resumption is somewhat better. And of course, this is backed up by industrial production, which leads us to think that there will be an improvement also due to the expansion of credit and of course, newer vehicles will lead to an enhancement.

On the other hand, the growth of the premium will depend on the technical aspects of frequency of robbery and theft. We think that the drop will be lower or new considering the drops that we have observed in the last 3 years. We have reached a level of stability when it comes to the historical risk, the risk of robbery and theft. The part of collision seems to be more stable, and of course this depends on the drivers. But we have had an improvement in public safety that was enforced strongly in 2018 and 2019. And that is why we see a stability in premium. And with the expansion of sales, we believe that the macro market will be positive.

Now what can impact this will depend on the rational behavior of the competitors. And the automobile market in general, if there is a tougher competition per room, of course, there will be pressure, and this will have an impact on the growth of premium. But in terms of fleet, we're quite optimistic this year for the market as a whole.

[Giovanna Rosa, analyst]

That's very clear, Marcelo. My second question refers to the share of financial services in -- well, this represents 20% of the company results. I would like to know if you have a target or an estimate or some projection, and how high will this be in coming years? Not necessarily for 2020 but perhaps in a longer term. You have referred to the diversification in your business lines and a growth in other business segments. So if you could give us some more color in terms of what you expect in this line of business. Thank you very much.

[Celso Damadi, executive]

This is Celso speaking, Giovanna. Thank you for your question. We do have expectations to grow, not only in the financial business, but also in credit cards, consortium as well as in other business lines, in life insurance and others. This year in 2019, we had a growth in the health market; a growth of 13% and 18% in the fourth quarter; individual life, 4%; corporate insurance with a growth of 2 digits. So our diversification is not only in financial products but in other segments of insurance.

And the year 2020 should not be different. Our strategy is to continue on with our diversification. This is our strategy for the coming year. But we would like to remind you that the auto segment is a portfolio that we're going to try to grow, especially in niches where we have growth expectations as well as in other segments of the automotive insurance. And it's the expectation that the participation of this segment will reach 30% in coming years.

[Giovanna Rosa, analyst]

Do you have a target?

[Celso Damadi, executive]

No. We don't have a target. This has already been happening. The share of the automobile results has been 32% of the consolidated results. So the auto segment does have a lower share. And with the growth of revenues of other segments with higher profitability, consequently, the profitability of the auto segment will decrease and the share of the auto business will be lower through the year. We do not have a target for this. Once again, we will be less dependent on the auto segment through time with a greater diversification. This has been happening and will continue to be in place in coming years.

[Operator]

Our next question comes from Mariana Taddeo from UBS Bank.

[Mariana Taddeo, analyst]

I would like to follow up on the question made by Giovanna. You spoke about other products in the auto segment. If you could give us greater color, does it refer to a geographic expansion? Or are you going to try to reach fleets that you do not cover at present?

Regarding your payout, do you still have [ 2,300 ] in terms of capital surplus? What can we expect from this?

[Marcelo Picanço, executive]

This is Marcelo Picanço speaking. Yes, I would like to make this very clear. The auto product is a leader product and is very relevant, and it's going to undergo a great deal of its innovation. We have 30% or 28%, 27%, 29% market share, and our growth, of course, depends on a market expansion. Not only market share, we end up being somewhat exposed to price pressures. And our vision for this is to work with more differentiated products, to have different products, to work with channels along with brokers, and with an innovative approach with products that are approachable and with a completely different coverage. Of course, always worth something that will be affordable because people are not protected against it. And we're also thinking about Property & Casualty to have other lines in this, not to work only with traditional insurance.

Now this is the automobile, once again, is the product that is considered to be the more mature with 30%. Non-life insurance doesn't reach 15% of share. So in the auto segment, specifically and based on your question, we do have a focus for inclusion. And as part of this inclusion strategy, we're thinking in the medium and long term. And our results will, of course, see a greater pressure.

Now to offer a new insurance vis-à-vis the insurance we offer to clients that have been with us for 5 years, we will have to have innovative products for segments that have not been serviced so far.

I will now give the floor to Celso.

[Celso Damadi, executive]

We do not have a policy in terms of the payout. This year, our proposal is to pay out 50% in terms of dividends. Now in the past, we carried out an extraordinary payout because internally, we had some calculations and rules to deal with risks. But nowadays, with the 50% payout, we will be very adherent to our risk policies. And if nothing extraordinary happens, we -- and with our forecast for growth in the financial area and financial products and insurance where we will be doing well. And of course, this will depend on our capital structure. Now if we have a growth above what we expect, so far, we are not planning on an extraordinary payout of dividend nor having a reduction in payouts, unless something truly exceptional takes place.

[Operator]

[Operator Instructions] Mr. Guilherme Grespan from JPMorgan would like to pose a question.

[Guilherme Grespan, analyst]

If you could speak about the non-auto insurance, we have observed a very good trend in most of your businesses. And I would like to further explore the health insurance and know which is your positioning. I know that you have increased your exposure to small- and medium-sized enterprises. Now which is your position in terms of geographic segmentation, and which is the trend for growth in the business?

The second question also refers to life insurance. We have observed a somewhat higher loss ratio. It's not high because you have a growth seasonality during the quarter, but you did speak about higher costs with hospitalization and exam. If you could refer to the greater impact in terms of this higher loss ratio and which are the movements that you foresee in this industry.

[Marcelo Picanço, executive]

Hello, Guilherme, this is Marcelo once again. I'm going to speak about health insurance. In health insurance, we had several internal and management issues, perhaps intelligence and product issues. We have much stronger growth in PDA and in the small- and medium-sized enterprises. And this shall persist. Our intention is to further accelerate this. We do like the SMEs for several reasons. In the larger accounts, we have a mix of insurance, and this can be quite confusing when it comes to risk exposure, and these large accounts tend to pressure our margins. And we are not a verticalization company. We're not positioned as a company that works with hospitals and clinics. What we're betting on, specifically, is to offer a differentiated services and intelligence. Intelligence not only to debate about the cost of a procedure. We use our intelligence to avoid whatever is unnecessary and whatever is waived. So we want to work with the best price possible. We paid 15% in hospitals because we have a good scale.

We're working in the Southeast. We have an expansion to Rio de Janeiro and eventually, São Paulo. We're not in a hurry to continue on with this expansion. We like to have proximity to our service vendors, physicians and hospitals. And of course, this is a very critical part for us. We very carefully follow up on what is done, by who it is done and how it is done. And of course, we do pay attention to details, perhaps but excessively slow. We do have a geographic concentration. And when we gain critical intelligence in the states, we will continue on with our expansion.

In terms of the loss ratio that you mentioned, we don't have a trend for increase in this. We do have some peaks and very specific issues. But we do not have any concern at this point in time of having a pressure on our results in health. We have had a very sound growth. And our focus, of course, is to have even greater growth in this portfolio that we have repositioned and turned around. And once again, we're ready to grow in a quite robust way.

[Operator]

Mr. Felipe Salomao for Citibank would like to pose a question.

[Felipe Salomao, analyst]

Simply to confirm something, Marcelo Picanço, in terms of the message that you gave to respond to another question. Which is your mindset when it comes to the loss ratio for the auto sector in 2020? Is the expectation for this to be flat, to have a downfall? Taking into account everything, the trend for robbery and theft, the cost and much more, simply to understand if I have understood your message correctly.

[Marcelo Picanço, executive]

Felipe, this is Marcelo. Once again, well, your question on the loss ratio should be divided into 2 or 3 of the most important variables that we include in our operational results. So in terms of frequency or loss ratio, what we observed is stability in the country, significant stability and a more stable drop. We're achieving a level that tends to be more stable without ups and downs as we had in the past. Now the variable that is very typical to forecast at this point in time and to know how this will impact the loss ratio is price. We had more pressure at the end of the year because of more competitive pricing in the market. And all of this will depend on whether this trend is confirmed or not in the market.

There were 2 movements that were exogenous in the market. We began the year with a low record for the year, a record low. And secondly, the entire market has made movements during the year to increase the payment terms. And of course, this decrease of what is charged for those who paid their insurance and installments and it exerts a pressure on the operational results. And this should be incorporated into the price, technically, to offset this with longer payment terms. We should have a somewhat higher base price.

Now if the market is or not going to include this in the price is the great bet, the great discussion that we can have going forward this year. So the price variable is the one that could lead to greater instability, and it is very difficult to forecast.

Now to think of a reduction of the loss ratio vis-à-vis 2019 is less probable. Well, the year 2019 was a record year in a decade. And therefore, to maintain the levels of 2019 would be a very healthy level with growth evidently.

[Operator]

We have a question through the webcast. Mr. Eduardo Nishio from Brasil Plural who asked, do you have any plans for your surplus capital that has reached BRL 2.3 billion?

[Roberto de Souza Santos, executive]

Thank you for the question, Eduardo Nishio. And as we had explained previously, we carried out an extraordinary payout in the past. And we have a certain risk appetite that we work with in-house, forecasting future growth, financial businesses, the insurance business. And nowadays, in-house, we are quite comfortable with our capital structure. This year our proposal for dividend is to maintain our payout of 50% of dividends. If we do end up having an extraordinary result or an extraordinary acquisition, perhaps there will be an alteration in this percentage for the payout of dividends. And as is, as a safeguard, what we intend to do is to maintain the 50% payout rate as we have done in previous years.

[Operator]

[Operator Instructions] As we have no further questions, we will now return the floor to the company for the closing remarks.

[Roberto de Souza Santos, executive]

I would like to once again thank all of those who are participating in our conference call for their questions, for their contributions and for their interest in Porto Seguro. Once again, should you have additional doubts, please feel at ease to contact our IR segment or to directly contact our IR team. Thank you very much for your participation.

[Operator]

The conference call for Porto Seguro is concluded. We would like to thank all of you for your participation, and we wish you a good day.

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