Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everybody, and welcome to the Fourth Quarter 22 Results Conference Call for Porto Seguro. Today, we have with us Roberto Santos, CEO and Investor Relations Director; Celso Damadi, CFO; Rivaldo Leite, CEO of the Porto Seguro vertical; Marcos Loucao, CEO of the Porto Seguro Bank and Services, Sami Foguel, CEO of Vertical Porto, Lene De Lima Corporate and Institutional Vice President, Luizalda, Vice President of Marketing Data and Client Director of Porto Investments; and Rafael Cosma, Controller Director.

We inform you that the presentation is being simultaneously recorded and translated into English. The sites presented are available in our IR website -- after the end of the presentation, we will go on to the question-and-answer session. We suggest that you say your name and company via the Q&A icon at the bottom button of your screen. By dynamic default, your names will be announced, and you can ask your question live. Should you not wish to open your microphone live, please write no microphone at the end of your question, so that the operator can read it out loud. Any statements made during this conference regarding the portals business prospects are the beliefs and assumptions of the company management based on information available until this moment.

Forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and demand on circumstances that may or may not occur. General economic conditions, of the business sectors in which Porto Seguro operates may impact the company's future performance. I give the floor to Roberto.

[Roberto de Souza Santos, executive]

Good morning, everybody. Thank you for your attendance in the Porto Seguro's Fourth Quarter 2022 Results Conference Call. On Slide #4, we present the main highlights of the period. In the fourth quarter, we achieved expressive results. Our revenues grew 31% through an expansion above 20% in all business verticals and our profit increased significantly, reaching BRL 555 million. It was the highest recurring result for a quarter in our history. Thus, we again delivered an annualized quarterly profitability above 20%. If we disregard the effects of intangible assets, adjusted ROAE was 25.1% for the quarter.

The increase in profitability in the period is due to an improvement in auto insurance claims favored by improved underwriting, greater control over claim costs and the rate recomposition reduction also in the loss ratio of property and casualty and life insurance and the increase in the consortium result, which as of September 2022 took on the leadership in the managed credit market and the real estate credit with a market share of 11.7%, surpassing consolidated players in the market. We also had an increase in the financial result, which expanded 48.9% vis-a-vis the fourth quarter '21.

Although the return on investments was below the CDI impacted by the locations and inflation index securities and variable income bonds. We also highlight the health segment, which despite the increase of 2.7 percentage points in loss ratio was due to a decrease in hospitalizations, the impacts associated to COVID-19 and the improvement measures in the underwriting and tariff composition and credit operations, despite a challenging year, we maintained high profitability with a 26.1% increase in gross margin vis-a-vis the fourth quarter '21 and despite the 0.2 percentage point increase in NPL, the indicator remained below the market average.

Regarding the results for the year, our revenues grew 30% with an expansion of 7% in customer base. We reached 12.3 million people. We also had BRL 1.1 billion in annual net income, a decrease of only 3.6% vis-a-vis the recurring results in 2021, considering intangibles, it was 12.8%, maintaining our profitability in the double digits since the IPO almost 20 years ago, in 2022, we had a strong increase in the visibility of our brands through high-impact actions such as sponsorships, participation in major events and brand campaigns. We were present in Formula 1, Rokan Rio Big Brother in addition to various other initiatives to become increasingly present in the day-to-day life of Brazilians.

Throughout the year, we also made great strides in the ESG agenda. We became signatories in the UN Global Compact. We launched our sustainability platform. We held collection campaigns with donations of approximately 200,000 items and 70 institutions of Brazil. We will consider the third best company to work among those with more than 10,000 employees -- we also achieved a strong recovery in the results of the fourth quarter '22. And we start the year 2023, confident about the company's potential to generate value for the shareholders and its community. I would like to thank all of you and as also to remark in more detail the evolution of revenues and profitability in the fourth quarter '22.

[Celso Damadi, executive]

Good morning to all of you. Thank you for your attendance. On Slide #5, I would like to underscore that we had a quarter with a growth of revenues of 31%, reaching almost BRL 8 billion, a robust growth, the best growth in the last 10 years. And during the year, we grew 29%, almost 30%. This year, we grew BRL 6.3 million in revenues. We remind you that most of those revenues, more than BRL 4 billion are in insurance, and they will be of help in 2023 with the retained and written premiums, and we will comment on this further ahead.

The revenues per business line in the fourth quarter, we grew in all business verticals. 27% in insurance financial business, 21% held 35% and services, 41%. We will explain this to you. We have recomposition, but we have also improved significantly in terms of underwriting risk. And this will enable us to have a better harvest this year. Now these revenues in the fourth quarter allowed us to have a recomposition of items, although this is not our main goal. At least we stopped losing and we begin to increase in some of the items of our products. Our relative profitability. We had 3 quarters below our historical average.

And in the fourth quarter, we once again show a profitability, 107% of CDI and historical profitability since 2010. This fourth quarter had a relevant operational result with a growth in business reduction in the loss ratio. As we had commented in the previous quarters, the reduction of price and acceptance would convert to results that are more compatible with our average historical profitability. This quarter, we end with 170% of profitability over the CDI somewhat above our historical average, as mentioned by Roberto. This is one of the best quarters we had operationally. We continue to gain productivity and administrative expenses, operating expenses and other business lines. So we end the year with a more robust profitability. I give the floor to Rivaldo, who will speak about the insurance vertical.

[José Rivaldo Leite Silva, executive]

Good morning, everybody. Thank you, Celso. Thank you, Roberto. -- now to focus on the insurance vertical. It was a very good fourth quarter, somewhat above our expectations in truth. The insurance vertical had expressive growth in premiums, BRL 5.3 billion,26.5 million more on a year-on-year basis, preserving its consolidated market leadership in some of its main businesses. At the same time that the loss ratio improved significantly when compared to the fourth quarter '21, the growth of premiums in auto was 30.7% and a reduction in loss ratio of 4.8% from 63.1% to 58.3%. Now in the volume of premiums, this percentage, of course, is significant in P&C and Transportation, a growth of 9.6% and a drop of 4.2 percentage points in loss ratio. Life had a good year in sales and results, we had a result of 31.4% with a loss ratio of 28.7%, 2.5 percentage points lower than the previous year.

An important fact that I would like to convey is that we continue to be leaders in the auto segment, in the homeowner segment and in the corporate property segment. All of these had growth in 2022 with a very good profitability, especially in the homeowner insurance and the corporate market, and we see an improvement, especially in the homeowner segment -- now the profitability of Porto Seguro improved 18.3 percentage points compared to the fourth quarter '21 and 18.9 percentage points compared to the third quarter '22, benefited from the improvement in the combined ratio.

It was the highest result achieved by the vertical in the last 8 quarters, as mentioned by Roberto and Celso, BRL 401 million and 118.1% higher vis-a-vis the fourth quarter '21. Now all of this has allowed us to get to 41.3% in ROE, a historical result and a historical return as well. The combined ratio for Porto Seguro stood at 89.6%, a significant reduction, of course, vis-a-vis the fourth quarter of '21. Now the adjustments carried out by the company associated to a more favorable trend in the evolution of car prices has led to a significant improvement in loss ratio for auto insurance. Now the measures adopted to adjust the loss ratio. I will mention them very quickly. An improvement in the risk underwriting an increase in claim control and a tariff-free composition -- we have been speaking about this tariff for composition in the last calls.

Evolution in the new and used car prices, you can analyze the graphs and observe that there have been changes. And in the last few months, a trend for maintenance, no longer pointing towards the growth. Now in the segment of used cars, we do observe a slight drop perhaps. And a volution of the average premium as well of 32.9% and -- this is a significant increase in average premium and an evolution in the earned premium also because of the written premium, the growth is somewhat lower, increase of 28.3%. The auto loss ratio for Porto with a significant improvement in the fourth quarter.

In the third quarter, it was 64.2%. Now we now had a loss ratio of 58.3%, which points to a very expressive decrease. Now to quickly summarize the fourth quarter for Porto Seguro, -- it was a very good quarter. And of course, we hope to continue this way in 2023. I now give the floor to Sami Porto Health.

[Sami Foguel, executive]

Thank you, Rivaldo. A good day to all of you. I'm here to speak about health insurance. We closed the fourth quarter after a very good quarter in health as Celso has already mentioned. The close of the year in general was positive for health despite some sectoral challenges. We end the year with 64,000 additional lives, 18% growth. We have attained BRL 3.3 billion in premiums and revenues a growth of over 40% and a net income for the vertical of BRL 86 million, giving us a premium profitability during the year, that is quite interesting compared with players that have already disclosed their profitability. I would like to highlight that this quarter, we had lower growth than us a marginal growth of lives.

And basically, this can be explained because we did not renew 2 corporate accounts with 13,000 lives that had a very high loss ratio as we focus on the profitability. We did not renew these accounts, and this explains the lower growth. In this chart, despite having stable lives with premiums written in the fourth quarter and in Health specifically, we had an increase of 6%. This shows what we have been mentioning for quarters, the tariff recomposition and this becomes more evident here, a growth of 6%, which is the result of the new harvest coming in with adjustments compared to our stable base. We go on to the next graph, showing a healthy loss ratio drop.

It's still at the level of 80%, 80%, but a drop of 10% vis-a-vis the previous quarter and 9% in the vertical at a more appropriate level. We still have not gone back to the pre-pandemic levels. As we mentioned in the last call, we believe that this will take 12 to 18 months but will materialize. We're on the right direction. We have a tariff recomposition. We have had good acceptance, and we have some processes that will gradually take us to that. With all of that, we got to 26.3% for the quarter, which is a very appropriate return.

Finally, and not less important, of course, I would like to highlight the construction of the port of the future. The results are good, but they do not show what we are doing, working for the future. Last year in April, we spoke about how we had advanced in the vertical in 3 dimensions: technology and innovation, virtual virtualization and care and, of course, brand growth, which will sustain us in coming years. We had significant investments and gains when it comes to the broker experience, the experience of the company and experience of clients because of the automation.

We are going to grow in this way in a controlled way in virtual verticization, not having hospital clinics and brick-and-mortar care, but having a core management for medical care to have an adequate loss ratio and to have good care. We have had good evolutions. We have created the Porto team. And in 1 year, 18% of our consultations are carried out within Porto. -- service in medical cohorts we do have tele-medicine. And we have also launched our tele-medicine that we are expanding. We take away the patients from the door hospital and offer a more adequate care. We ended 2022, where we have several JV onco clinics allowing for a virtual integration and an integrated care assistance.

Finally, not less important. Our brand 9% increase in brand awareness, 23% increase in brand search intent. Some companies were not aware of Porto Seguro and we increased these intentions through our app and through investments. We have included several investments, and we have now entered the Federal District, which is the first point of expansion. I would like to thank the colleagues from the vertical of the Porto of colleagues who have supported this and give the floor to Marcos Loucao, who will speak about Porto Bank…

[Marcos Loução, executive]

Thank you, Sami, and thank you all for your attendance. Well, Porto Bank delivered sound results even in a challenging year for the entire market. The highlight was consistent growth. We reached 3.8 million deals with a growth of 7% year-on-year. We grew 27% in revenues, reaching BRL 4.5 billion. Another highlight mentioned by Roberto is that we achieved leadership in the real estate consumption, which shows the complementarity of credit risk, credit business and businesses that don't have this risk and enable us to work with a better mix. As in any market for us, the year 2022 was of great attention to credit and collection.

We showed resiliency -- and although we had growth during the year, we had defaults below the market beginning in the third quarter because of the changes in credit management policies, more sophisticated predictive models, focus on prospecting customers with lower risk. We increased our digital contact base by more than 1 million clients, reaching 2.7 million customers at the Porto Bank, and we're monitoring. We're working with virtual cards and other products, strengthening loyalty as a whole. In the results, revenue was BRL 385 million. If we don't take into account recurring Investments of revenue was BRL 4.5 million, which was a good result considering how challenging the year was because of funding and risk. ROAE got to 25.8%.

In the next slide, I further break down our diversification strategy differently from digital banks. We have a mix that enables us to extract the benefit of diversification of products with and without credit. In the credit card, we reached an increase of 28% vis-a-vis last year. And we work to ensure that our clients will have credit cards. We are the second app in terms of functionality in the market. This enabled us to have a high participation. The volume transacted in our cards in 2022 was BRL 46 billion, 20% above 2021. We also enabled more than 3 million techs, and we launched the Formula 1 card.

In CDC, we reached BRL 3 billion. If we consider the customer base that has ensured vehicles, we foresee a high potential of growth in credit secured by a vehicle -- and we worked with these in the second semester of last year. We distributed BRL 273 million. In lease solutions, we grew 17.3% in the base of current contracts, raising 391,000 items. We are the best partner in the real estate market. Our main product is consortium. We have devoted several products to this portfolio with more than BRL 42 billion under management, BRL 12 billion in credit sold and BRL 2.8 billion in contemplated credit for the year 2022.

In the next slide, I would like to highlight the basic pillars that sustain our growth. In technology, we enhance the visibility, the experience, and we strengthened our data infrastructure, increasing performance in analytics and bringing in more knowledge about the risk and the customers that use our product with a greater focus on cross-selling, which will set us aside. In operations, we reached 39.5% of efficiency.

We were looking at margin below 40%, and we have attained our goal. And because of digitization and automation of processes in risk, we have strengthened our tools with anti-fraud models. -- we reached 2.5 basis points, a significant achievement for those who want to grow. We work with modeling risk simulation and these are some important advances in structuring the foundation, giving us agility and speed to grow sustainably. Now in the next slide, you will speak about services.

Well, in services, we had a year of business expansion in Porto Ciena, we ended the year with 4 million 4.8 million services rendered. This encompasses more than 1 billion people with access to our assistant services. We have additional services, the reference automotive centers that had 770,000 services performed 331 automotive centers and Renova, where we reached 58,000 spare parts return to the market that are tracked and certified by Detra, reinforcing our commitment to circular economy.

In subscription car, we focused on increasing operational efficiency with a better fleet management, reducing inventory and increased used car sales. All of this was impacted by investments and the cost of funding, especially for products where the subscription of goods, although we have a revenue of almost BRL 500 million and a growth of 40% year-on-year -- these were the highlights that I have set out for financial services. And I give the floor to Izak.

[Izak Benaderet, executive]

Well, thank you, Loucao. Good morning to all of you. I will speak about the performance of our financial applications. We ended the last quarter with EUR 205.6 million, 70% of CDI somewhat above the average of the year that was 68%. Now this distancing from the level of CDI is due basically to 2 factors. First, our stock market portfolio was somewhat lower than the Bovespa Index in the last quarter. Our performance, therefore, dropped a bit and the portfolio was on the curve, but the rates plus the IPCA allowed us to, of course, fall back somewhat in the comparison with CDI. To conclude here, I would simply like to show you the change that we implemented during the year. We ended the fourth quarter with a 6% investment in credit and 11% in prefixed investments, and we have 50% now in prefixed, and the credit parcel has been reduced. We have 3% for credit. And when it comes to prices that were negotiated, this was being done at a level that was not very attractive to maintain a high exposure do want to underscore this. I now give the floor to Lene to speak about ESG.

[Lene De Lima, executive]

Good morning, everybody. Besides what was already mentioned by Roberto being signatories of the UN Global Compact. In 2022, we work with the mentoring of executives, top management so that they can work with an ever more inclusive management, including gender, racial and ethniquality ,LGBTI+ and people with visibility. So everybody can have equal opportunities for development. We have 705 volunteers in Brazil 118 volunteer actions were carried out with 3.79 hours devoted to communities. Recently, we began to work with the first electric ambulance.

We have 21 electric cars in our fleet, thus showing our responsibility towards the environment. We got the third place and the best companies to work for according to a great place to work. Now this award reinforces our mission to make a for a place where people are proud to work. And we make efforts daily to become a true haven for people and their dreams. Now these were the main operational financial and ESG aspects that we wanted to highlight in the presentation. We would like to thank you for your attendance, and we can now go on to the question-and-answer session.

[Operator]

[Operator Instructions] We have a first question from Kaio Prato from UBS.

[Kaio Penso Da Prato, analyst]

At my end, I have 2 questions. The first referring to the auto segment. I would like to better understand the loss ratio of the segment. There has been a significant improvement better than the market, which are the reasons underlying this strong improvement at the end of the year, did you have an atypical December? Or is this due to the price factor? And what can we expect going forward, which will be the evolution of car prices, both used and new, if you see a drop in prices. And if there has been a price transfer to the policies, I will then go on to my second question.

[Unknown Executive]

This is Evan [indiscernible]. Now when you look at our background in the last calls, we had mentioned that we were readjusting prices. And a part of that result, of course, arises due to these price readjustments. We also had a somewhat atypical December. Generally, we have a very rainy December and a higher loss ratio because of the flooding. Now this year, we did not have that. We had a very good year. There's also perhaps the issue of the vacations were all -- or holidays were all on weekends. If you put together all of this besides the enhancement in the loss ratio process, all of this led to a very good result for the fourth quarter. Now regarding the future, which is your second question, I give the floor to Roberto Santos.

[Roberto de Souza Santos, executive]

Thank you, Kaio, for the question. When we look forward, we have done our homework with a great deal of discipline during the year 2022. And we're now harvesting the fruit of that discipline. In the insurance business model, we price now to harvest in the future. We use a harvest model and -- we have the loss ratio under control within a normal situation of pressure and temperature controlled situations, appropriate loss ratio prices. And our pricing, of course, is well adjusted here. The FIP table has stopped increasing, but it hasn't decreased either. And we believe that it should have a reduction, which means that we do not see a situation with problems going forward.

Notwithstanding this regarding your specific question about a price reduction, in 2022, our results, especially in the first half were severely impacted not only for those results, but all companies working in auto insurance. At Porto, we made less than BRL 600 million of contribution in capital because of the limited growth of revenues. Therefore, we don't see any room in the coming months for a price reduction. This is our rating going forward. We're in a comfortable situation that is controlled inappropriate thanks to the rigor that we have maintained with our pricing criteria risk underwriting, the control of loss ratio, and we continue to monitor this very closely, but we do not see any room for price reductions in the coming months.

[Operator]

Our next question comes from Antonio from Bank of America.

[Antonio Gregorin Ruette, analyst]

Congratulations for your results. We have 2 questions at our end. The first referring to the loss ratio in the fourth quarter, it has gone to 61%, which is your adjusted and historical loss ratio. Of course, there was that help from seasonality, as you mentioned. But I would like to understand if, given the recomposition of prices in the last month, if you could have a loss ratio before your historical levels, a loss ratio for the full year of 2023, closer to 60%. A follow-up on Ciao's question about prices in your presentation, prior prices have had a growth of 30% year-on-year approximately. Now what is happening with this week of growth? How long will we be seeing a growth of this magnitude for your entire base?

[José Rivaldo Leite Silva, executive]

This is Rivaldo Leite. Well, regarding the loss ratio, as we mentioned here in, we have worked with a repricing gear to those indices when it comes to price recomposition and future scenarios, I think we're very well prepared. Evidently, we could be faced with one surprise or another, but I believe we're highly prepared for the 2023 scenario we're not concerned in terms of negative surprises regarding the loss ratio index. Antonio, allow me to clarify something. You mentioned that you have observed a price increase of 30%. This is not what is happening. There's an increase of revenues of 30%. Now prices. There is a price standard. And in the last 3 months, we have not seen an impact of the average ticket issues.

We're not increasing the price by 30%. The revenues have been impacted by 30%. And this refers to the prices that we practiced 12 months ago vis-a-vis the current prices. When I compare prices with the previous month, there is no increase in the average ticket. Once again, the prices are perfectly adequate for the situation, we have a frequency and the cost of loss ratio. This is an appropriate situation. And the FIP table has stopped increasing, but there is no reduction. And there is absolutely no room to practice price reductions. The prices are not increasing in the amount that you mentioned. Yes.

[Operator]

The next question comes from Daniel Vaz from Credit Suisse.

[Daniel Vaz, analyst]

What do you expect as a result from the insurance segment for 2023. I ask you this because by looking at the results of the fourth quarter, the results were better than expected with all of the dynamics that we have with less pressure on loss ratios, I think you could improve your figures, which is your mindset in this point?

[Celso Damadi, executive]

Daniel, thank you for the question. This is also Celso, I think you said it very properly. We had seasonality in December. And this seasonality cannot be replicated. We cannot replicate the result of that quarter for the entire year. We also carry on the premiums of 2023. We have a better harvest. We don't tend to give guidance, but our expectation is that the results in 2023 will be much better than those of '22, especially in the first 3 quarters. In the fourth quarter, of course, there might be changes.

As Roberto mentioned, we do not intend to have price reductions to seek more market share because we have to recompose our margins, our solvency, our free capital is used for reserve I'm not telling you which the results will be, but to annualize the results of the fourth quarter would be complicated because we do have that seasonality in the fourth quarter. We believe that the results in 2023 will be better because we have already implemented most of the harvest, we don't expect the FP to increase. Of course, if there is a reduction in the FP during the year, our results should be somewhat better than what was projected for '23. Thank you for your question.

[Operator]

The next question comes from Guilherme Grespan from JPMorgan.

[Guilherme Grespan, analyst]

The question is the number of assets linked to the fixed price and what will happen with the CDI and your profitability in 2023.

[Izak Benaderet, executive]

Guilherme, this is Izak speaking. Our index bond portfolio has an average duration of approximately 4 years. And it's natural in 2022, the central bank worked strongly on the interest rate to reduce the IPCA. Now the real interest rate of an application was 7%, and we have a portfolio that is some percentage points below that. Now going forward, we believe that our portfolio will be recomposed through time at a higher rate and the sale rate should have a lower weight compared to the real interest rate. We believe that in coming years, the interest rate will be lower and our portfolio will be closer to the CBI in the coming quarters. But of course, we don't -- we do have a relevant allocation in real interest rates. Real Investment.

[Operator]

A question from Thiago Paura from BTG.

[Thiago Paura Mascarenhas, analyst]

I was going to ask a question about your financial statement. But I will ask about health. You had strong premiums this year, good loss ratio. We know there is seasonality in the last quarter. In terms of your growth strategy for 2023, what do you foresee adding life, repricing? And what would be a more normalized loss ratio that we can expect when the operation is more mature?

[Unknown Executive]

Thank you for the question Thiago, the loss ratio -- we see a gradual recomposition in the coming 12 months back to the historical levels we had before the pandemic 2017, 2019, it was around 79%. The next step, therefore, would be to recuperate that historical loss ratio that we had, and we will do this gradually. It's already happening. The new harvest are reaching good levels, historical levels and have been performing for some months. We have a significant part of our portfolio with a SME pool with an annual readjustment in April. And as of that point, we will begin to have readjustments with an impact in April. We have a readjustment for the older vintage harvest. So we think that there will be a gradual recomposition. In terms of growth, we're quite enthusiastic this year. As I mentioned, we have been working with an expansion in places.

Our market share in Sao Paulo. -- is interesting, but we can still grow in the hinter lens of Sao Paulo and the different coastal regions in Sao Jose and much more, we're becoming ever more present in those sites with a strengthened network and teams. And throughout the year, we will be launching new products, more specific products for those sites, and the same applies to Rio de Janeiro. We have -- we entered Brazil in December. We have been working there for 2 months. We have very positive initial sales. Now this year, we don't believe we will expand to other sites.

Once we strengthen these sites, we will have a significant concentration of small and medium enterprises with new products and services. We're quite enthusiastic. We think it could be a year with robust growth and a year with a reduction -- resumption of profitability, especially in the second half of the year as the prices are more current and the harvests are more mature. Thank you. Thank you very much.

[Operator]

I would like to thank all of you once again for attending our earnings results call. Thank you, especially for your questions and contributions, and thank you for your interest in Porto Seguro. If you have any additional doubts, please contact our IR team. And I would like to remind you that all of our contact information is available at our website at r.portoseguro.com.br. Thank you very much, and we hope to see you again in the coming quarter.

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