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Edited Transcript of BBSE3.SA earnings conference call or presentation 12-Feb-19 1:30pm GMT

Q4 2018 BB Seguridade Participacoes SA Earnings Call

BRASILIA DISTRITO F Feb 13, 2019 (Thomson StreetEvents) -- Edited Transcript of BB Seguridade Participacoes SA earnings conference call or presentation Tuesday, February 12, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bernardo Rothe

* Rafael Sperendio

BB Seguridade Participações S.A. - Head of IR

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Conference Call Participants

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* Eduardo Nishio

Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Financial Sector Analyst

* Mario Lucio Pierry

BofA Merrill Lynch, Research Division - MD

* Thiago Bovolenta Batista

Itaú Corretora de Valores S.A., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for waiting. Welcome to BB Seguridade's Fourth Quarter 2018 Earnings Conference Call. This event is being recorded.

(Operator Instructions) The presentation is available in the Financial Information Presentation section of BB Seguridade's RI (sic) [IR] website at www.bbseguridaderi.com.br/en.

Before proceeding, let me mention that forward-looking statements that may be made during this conference call regarding expectations, growth estimates, projections and future strategies of BB Seguridade are based on management's current expectations, projections of future events and financial trends that may affect the business of the group and do not guarantee future performance since these projections involve risks and uncertainties that could extrapolate the control of management.

For more information on the statements of the company, please check on the MD&A.

With us today are Mr. Bernardo Rothe, BB Seguridade's CEO; Mr. Werner Suffert, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of FP&A, Accounting and RI (sic) IR . Please, Mr. Rothe, you may now begin.

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Bernardo Rothe, [2]

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Thank you, everyone, for participating in our conference call. I just want to make a few remarks before I give the floor to Rafael to make the presentation. It's a big honor to be the CEO of BB Seguridade, one of the best and the biggest and leader in the market, the company that went through a big transformational year. We are now a different company from what we were at the start of last year after a great job done by my predecessors.

We have a new team. Including in our companies and the insurance companies, we have very good (inaudible) to deliver better results in 2019 and 2020. We have big challenges ahead of us, but we are pretty sure that we can deliver and that we are going to return to an increase in profitability throughout these next years.

We are the leader, as I mentioned, in the market. And that makes us a big part in terms of the competition that tried to replicate what we have, our competitive advantages or even this construct that we have placed. That means that we need to keep it moving all the time, changing the way we do our business, changing the products that we have to be able to compete and keep the leadership that we have. And we are going to focus even more in client satisfaction and with digitalization of our sales force. And then counting on the network of Banco do Brazil, that's a very strong capacity in terms of selling insurance and our products in general. So we are very, as I said, motivated, keep delivering better results throughout 2019, 2020.

With that, I would like to now give the floor to Rafael for the presentation. So thank you.

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Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [3]

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Thanks, Bernardo. Good morning, everyone. I'm going to take you through the presentation now.

So let's start on Page 2, where we have the main highlights of Q4. Recurring stocks of BRL 840 million in the fourth quarter, down 10.7% year-on-year, [dreaded] by the 40% decline in financial results, partially offset by the 4.1% improvement in the operating results, as you can see in the chart on the lower left hand side. The financial results differed a lot in this quarter due to the spike H2 inflation rates in the period from September to November. But here, which eventually increased the cost of our financial liabilities, (inaudible) benefit pension plans, which are no longer sold but are still impacting our financials. So financial results at the Brasilprev had a big hit in Q4. We expect that was eventually exit -- it might reverse. It's already reversing.

In December, the IGP-M showed some deflation, but the main point is that it does not impact the income statement -- now it's going to help the P&L [judging] from the first quarter 2019 on.

In terms of dividend, our payout reached BRL 2.9 billion in 2018. Yes -- it's just, yes, an extraordinary dividend pay of BRL 2.7 billion with regards to the restructuring of our insurance partnership we have had with MAPFRE. It amounts to something around 10% [in the year], considering the current price of the stock. So -- and trying to return to shareholders. Our -- and realize that return on equity in Q4 reached 41.4%, down 80 bps.

So something that is worth mentioning here that, despite the decline we had in net income of almost 11%, we haven't seen that same proportion of decline in the return on equity, which shows that when considering the moves we made to the restructuring, it shows the more efficient capital allocation we have. So by restructuring our insurance company, we freed up some capital that was not really efficiently allocated. So it helped to hold the return on equity at a high level, around the 40s. And we expect that it can see even higher from now on, considering a lower level of capital allocated in this operation.

Another highlight we have, in part, is with the growth in the management fee of 8.5% at Brasilprev, driven by the 9.5% increase in the assets under management in the pension segment.

If we move on to the main highlight, as we alluded to the -- included in the net interest margin of 90 bps. It helped the financial results to grow 25.7% year-on-year in Q4, driven mostly by the yield curve which flattened throughout the quarter. So it helped a lot, the financial results at a premium bond company.

And lastly here, we have the accounting of BRL 276 million recorded as an additional commission at the broker, where it refers to the new agreement that we have in our insurance company related to our commercial performance of credit life and credit life for farmers. So in case we exceed the targets, the commercial targets for these products, the BB Corretora is entitled to receive an additional commission at the end of the year. So this BRL 276 million refers to the commercial performance from April to December. It was only recorded in December because we got late approval from the regulators of this reorganization only in November. So those will be booked in December. From 2019 on, the -- this volatility will not exist anymore. We're going to look month -- on a monthly basis according to our estimates related to how much we expect to receive as an additional [meeting], end of the year. So from 2019 on, it's going to be different. We will not see this [towards] the end of the year [anymore].

Moving on to financial results on Page 3. On your lower right-hand side, you can see that financial results fell 43%, as I mentioned in the beginning of the presentation, accounting for 20% of the company's net income. Well, among the main factors that led financial results to post such a decline, we have the most straightforward ones with the lower Selic rate, as you can see it on the upper left hand side. But despite the GPM equation index was the main drag on financial result in Q4. So this led Brasilprev to post financial losses in Q4 for the first time in a few periods. So recalling that most part of the liabilities at Brasilprev, it refers to the final benefit pension plans. They are back to IGP-M, while the assets that are back in these liabilities have a growing share of securities back to the IPCA, a retail station index in Brazil. So although the -- in Q4, another thing that's important to highlight here is, you can see on the lower left hand side, in Q4, the IGP-M was lower than the IPCA. But it does not really reflect the performance of the financial results in the P&L because when we look at the way that interest is compounded on the liabilities, it's worth mentioning that there's a lag effect here of 1 to 2 points. So a period from September to November is the one that's responsible for this spike in cost of our liabilities. So it's worth highlighting here that September and October ranges within the 4 highest inflation index of the year. So that's important, as I mentioned, to emphasize that it wasn't a onetime effect, we can consider the onetime. It's -- it hits the financial results in Q4 but it's already showing some improvement that we might expect from the first quarter of 2019 on because of the deflation of the IGP-M in December.

What -- and talking about -- because this slide having financial results, I mean, the most important one is the move seen in the forward yield curve. As you can see, the light colors represent the beginning of the quarter, and the dark colors represent the end of the quarter. So we can see on the gray lines that the yield curve flattened in the fourth quarter 2018. It helped a lot Brasilcap with mark-to-market gains in view of coupons and inflation protected securities in the end of the year.

Now on Page 4. We have a brief review of the performance -- the commercial performance of our life and rural operation, which also began to operate with the home insurance and commercial lines from December on. We observed here that the lines that are more correlated to the credit origination, posted a very strong performance in 2018, and let premiums to grow 7% in the year with a spotlight on credit life, which grew 20% and a very strong performance resulting in credit life and -- sorry, in mortgage life and in rural.

Now on Page 5. In terms of the operating performance of our business, because we are still in a transition period from the old formation to the new formation from December on, we have brought here, I hope you'll find it useful. Pro forma analysis, it basically assumes the information that it had been for since the beginning of 2017. So the blue lines show the numbers as reported, while the yellow lines show the pro forma figures.

Another adjustment we have here is related to the commission ratio to normalize the commission effect that was only recurring in December. So the linear -- when we look at the dashed line here, it shows the normalization of this commission paid as -- it has been paid since April, not only in December.

Well, it's something that's worth highlighting here in terms of our performance as reported that the loss ratio increased by 4.8 percentage points. It was mainly driven by the increase in the [frequents of] points we had in rural, mostly related to the drought we had in the deep west and excess rain we had in the south part of the country. And in addition to that, we also saw some increase in the loss ratio related to the life segment due to a specific claim we had in a coinsurance of a group life policy we have in another insurance company. So we think that it doesn't -- it's something that was maybe one-off in the Q4, (inaudible) about life specifically and should not repeat going forward.

The commission ratio increased, but it was -- there is a straightforward effect came -- coming from the renegotiation we had with MAPFRE related to this commercial performance fee that we received. It's a function of our commercial performance in credit life and credit life for farmers.

And lastly, when we look at the outcome of all these movements in the combined ratio, we can see that it worsened by 4.6 percentage points. And this is all probably related to their increase in commissions and increase in the loss ratio.

On Page 6, we have a brief explanation of our financial results, which fell 32% year-on-year due to a lower average Selic rate in the quarter. And also the basic fact here, it's worth reminding that in the fourth quarter 2017, we booked some capital gains on the spot market transactions. So it wasn't repeated again in the fourth quarter 2018. So these gains amounted to BRL 82 million. And this basic also dragged down the financial results comparison in the fourth quarter 2018.

So the net income fell 53% year-on-year. And so mostly related to the increase in the loss ratio, the performance fee paid to BB Corretora and also the decline in financial results. They were the main drags of earnings [other than ones] in Q4.

On Page 7, we made here our performance in the pension segment. So in terms of gross deposits, it was a decline of about 7% year-on-year -- gratefully reducing the rate of decline that we have been observing until the third quarter in maybe a year. Net inflows fell 36%, while redemption rate reduced by 20 bps year-on-year. Our pension reserves grew 9% and reached BRL 257 billion in 2018, helping management fees to grow 8% year-on-year in the fourth quarter and 10% growth in 2018.

Well, on the other hand, you can see that performance of the net income of the company, it is down 37% year-on-year in all markets. I think it was totally driven by the financial loss we had related to the higher cost of our liabilities, as I mentioned in the beginning, (inaudible) despite the IGP-M inflation rate.

And on Page 8, we have our performance of our premium bonds operation. So collections fell by 29% year-on-year (inaudible) Q4, that's profit over the year. So this decline was hopefully related to the hardest company sales that reflects collections should be good growth trends that was -- since (inaudible) at the beginning of the year until [September]. So these growth trends (inaudible) in 4Q 2017.

Financial results were the main highlight here in this company with a year-on-year increase of 26% in the fourth quarter. And the net interest margin expanding 90 bps due to the mark-to-market gains we had (inaudible) securities [fourth] quarter. And due to the strong performance (inaudible) in the fourth quarter, the net income grew 7% year-on-year, reaching a 40% annualized return on equity in the quarter.

On Page 9, we have BB Corretora. So commissions grew 26% fourth quarter year-on-year, basically due to the BRL 276 million recorded as additional commission that BB Corretora received due to its performance related to credit life and credit life for farmers. By adjusting these effect of the light blue bars in chart on the upper left-hand side, it shows that an analysis but this is due to the additional commission [in a linear way] throughout the year from the April to December, and we did the same for 2017. You might remember that we had a write-down of commissions receivable which was fully concentrated in the fourth quarter 2017. So we also made a kind of adjustment here in the revenues by [splitting a linear lead] throughout 2017. And by making these 2 adjustments, we can see that the brokerage income on adjusted basis declined 8% year-on-year and dreaded by soft performance, commercial performance we have in pension plans and premium bonds in 2018.

The EBIT margin increased by 40 bps, also adjusted by new impacts that reached 81.3%. It declined 200 bps in 2018 and it was fully driven by the strategy that we had. In the middle of the year, when we focus more on the lower ticket products, and by doing that, we have some compression in the EBIT margin. It's already reversed in the third quarter of the year and we believe that it's going to normalize to the average we had until 2017.

On Page 10, we have our accountability for our 2018 guidance. We ended 2018 with net income down 9.3% following below our revised guidance range of decline 6% to 4%. We can assign here 2/3 of this deviation to 2 effects. First of all, something that completely escaped our control, it was very difficult to predict, was the spike in the IGP-M inflation index during the election period which ended impacting a very significant way because of our liability related to the decline in benefit pension plan at Brasilprev.

And the second was also in the pension segment, which was the extension of the loan fees. So we put something that we were already expecting. We have been incurring these fees a long time, but we were doing it more gradually, but it was not the way that market responded, which led us to cut this fee more abruptly in the end of September because [all of them] to 0. And remaining 1/3 of the deviation was assigned to the declining -- the premium bonds collection. We ended up impacting the BB Corretora's results along with the increasing [frequents] of claim in life and rural in the end of the -- these were the main drags on earnings.

And to wrap up the presentation on Page 11. We have here our estimates for 2019. As you can see, we have introduced 2 more guidance for this year. And for net income, we expect a growth of 5% to 10%. For insurance premiums, we are working here on the pro forma analysis that is replicating the post corporate reorganization structure of our package with MAPFRE for the full year of 2018. And we are also excluding DPVAT, the mandatory government insurance. It doesn't depend on us for its performance. So we are excluding it from our comparable. And so with regards to this pro forma analysis, we expect premiums to grow 7% to 10% in 2019. And in terms of the reserves at Brasilprev, we expect it to grow from 7% to 10%.

So with this, the presentation is over. And we can now move on to the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Thiago Batista with Itau BBA.

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Thiago Bovolenta Batista, Itaú Corretora de Valores S.A., Research Division - Research Analyst [2]

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I have one question about the possible impact of the pension reform on -- with regard to business. We saw in '16 a material increase in the pension inflows during the discussion for the pension reform. Do you believe you can see something similar now? And also, what are the main impacts that you believe are the potential approvals of the pension reform should have in the -- with regard to business?

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Bernardo Rothe, [3]

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Thiago, Bernard speaking here. We consider that the pension reforms which -- these are followed for the country as a whole. For our pension business, it's a more medium to long-term impact. We see some people running to do something this year, but it's not something that we are expecting or pulling our numbers. It's a very positive thing in the long run, right, because it's going to increase the need for a pension plan, then so what. So it's positive in the long run, medium to long run, maybe next year more than this year. As I -- that's how we see it. Although, again, we consider the pension reform should be approved this year. That's the impact that's going to come over time. But the pension reform also can increase cost base in the market, so on and so forth, and that can impact unemployment in Brazil. And the increase in unemployment and increase in available income, disposable income by Brazilians overall is very positive for any insurance group. So we see that as -- with positive impact in other parts of the business overall.

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Operator [4]

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Our next question comes from Mario Pierry with Bank of America.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [5]

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I want to ask you 2 questions. First one, I am trying to reconcile your guidance for 2019 of growth of 5% to 10% in net income. Because when we look at your operating results in 2018, excluding financial results, they increased 3%. So I would imagine that, under a better economic environment, that this should be growing faster. And then on the other hand, when I think about the financial results that declined 40% in '18, I would imagine it has to be much higher in '19 because interest rates aren't likely to be much lower in Brazil. So I'm trying to understand why the 5% to 10% seems conservative to me. If maybe you can give us a breakdown of what are you expecting in terms of operating results and financial results and what is the Selic rates that you have embedded on your guidance. Similarly, when I look at the premium growth that you're guiding for the SH1 segment of 7% to 12%, it is not much higher than what you reported in '18 of 7%. Also when you talk about growth in reserves at Brasilprev of 7% to 10%, it's actually lower than the 10% you've delivered in '18. So I'm just trying to understand, why do these forecasts seem so conservative?

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Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [6]

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Mario, Rafael speaking. So first of all, the assumption that we have in guidance for Selic rate is expected to remain flat for full year. So we don't expect any increase or decrease in interest rates throughout 2018. In terms of the operating performance, it's worth mentioning that we expect it to increase. If we were to break it down, the guidance in terms of operational performance and financial results, I would tell you that we expect the operational performance to be more close to the top of this guidance. While in terms of financial results, our expectation for 2018 is that it can post even a decline, right. And why? It's worth mentioning that part of the contribution of financial results which come from SH2, it's not part of our conglomerate anymore. So because of the exit of SH2, we can expect a decline on financial results. If we were to compare apples to apples, of course, it might post an increase, but it's not the reality. Now we need to compare the numbers with the ones reported in 2018. Because of this effect, financial results might decline. But related to the expectation we have in premium growth, we are very optimistic with the performance in the lines that are correlated to credit origination. So credit life and mortgage life, these ones might be the main drivers for premium growth in 2019. Of course, the different banks use credit life -- [use to grow into less here] more concentrated on individual segment. We expect that the SME segment might show some recovery in 2019. But overall these are the main drivers. But in regards to the performance in term life, of course, it's something that accounts for 40% of the premium we had in SH1. So it's hard for such a big portfolio to grow in such fast pace. So that's why when we analyze our performance in 2018, net premiums grew 7% in 2018. We are now using this 7% as the bottom of the new guided range. So we are expecting a very good performance, but it might be gradual, of course, according to the improvement in the activity in the economy, what we believe it's going to show some more, I'll say, material improvement from second half on. That's why -- what is embedded in our guided range for net income. And the thing, okay, for reserves as a pension segment, one of the main threats we have is related to the lower Selic rate. Of course, it's not a big decline as we had in '17 and '18, but it's still a decline. So the 7% to 10%, that's a lower Selic rate, considering that we are assuming that we will offset part of it without some recovery in pension inflows, but it's still a significant impact that we have in SH1 growth.

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Mario Lucio Pierry, BofA Merrill Lynch, Research Division - MD [7]

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Okay. Just a quick follow-up. On your management fees at Brasilprev, they stayed flat on a quarter-over-quarter basis. I think for the first time in a while, 1.08%. I think we're used to seeing this decline at least 1 basis points per quarter. Does it mean that the pressure on asset management fees are over? And then we should expect them flat? Or is there some seasonality in this figure?

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Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [8]

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No. There are no seasonality. The main thing is that it declined quarter-on-quarter, but you can see because of the (inaudible). So that's something that's important to note. Of course, the Selic stays at 6.5% for longer, this competition might increase. And of course, we need to respond to it by providing more (inaudible) financial advisory services to clients in order to improve their capital allocation and to increase their exposure to private securities and to the stock market itself. But -- well, we expect and if we were to consider a trend for management fee, is that it will keep declining, but at a lower base, a great quarter. If you remember, it used to be 300, 200 bps per quarter, reduced to 200 and 100 bps per quarter. And now it's more closer to 100 bps per quarter.

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Bernardo Rothe, [9]

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Just to add, it's part of our job to offer new set of products to our clients in the integration plan, so we can have funds that carry a higher fee, right. So it's part of what we've been doing. That's going to be a positive impact on one side, but on the other side, we want to increase the taxation also for lower income, middle income people with pension plan. They tend to be more conservative in terms of what they do. They like to compare more to savings than anything else. So fixed income funds tends to grow, although with a higher management fee in these middle income type of clients than what we charge in private banking clients. For example, they tend to be lower than the (inaudible) funds and the equity funds and so on and so forth. So the trend over time, we tend to grow the participation, the total management funds through these type of higher management fee type of funds, okay.

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Operator [10]

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(Operator Instructions) Our next question comes from Eduardo with Banco Plural.

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Eduardo Nishio, Brasil Plural Corretora de Cambio, Titulose Valores Mobiliários S.A., Research Division - Financial Sector Analyst [11]

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Question to Bernardo. Bernardo, congratulations for the new post. Just wondering, if you -- a few days you've been in charge as a CEO, just wondering your views and what you can do, any changes you can do to make BB Seguridade growing a little bit faster than it has been for the past few years. If you can give us your impression and what is strategy to boost earnings, I would appreciate it.

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Bernardo Rothe, [12]

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Nishio, I can tell you that the first 2 quarters of the year [pretty much done], right? Because we have a lot of inertia, [see], in what we do. So we are going to see the good job done in the last year that's going to start reflecting in the results that we're going to see this year. What I -- I'll try to do here is focus on price perfections to make things more sustainable over time, even that increasing competition and issues that come into the market so on and so forth. So we have to increase quite substantially with our products. We have to increase the -- ultimately the employee satisfaction in selling our products. So we are going to focus pretty much in improving our products, improving the process of selling our products throughout different channels, right. This difficult journey has to improve, and we are going to do a lot of things in terms of that because we have also a new broker, right? The (inaudible) broker [cyclic]. So we have to improve the portfolio of products in cyclic to grow. So we have several measures that we're going to focus from now. One, to make reserves improve and improve sustainably over time, right. Not only thinking about 2019 but also to any query and so on. So focus on client satisfaction, improvements of products and the process of selling our products, that's the main drivers of our strategy this year.

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Operator [13]

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Ladies and gentlemen, this concludes today's question-and-answer session. I'd like to invite Mr. Bernardo Rothe to proceed with his closing statements. Please, Mr. Rothe, go ahead.

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Bernardo Rothe, [14]

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I just want to thank everyone for participating in our conference call, and to -- you have all our IR team at your disposal to clarify any doubts that you may have in terms of our performance last year and what we expect for this year.

So thank you very much, and see you in the next conference -- in the next conference call.

Bye.

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Operator [15]

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With this, we conclude BB Seguridade's conference call for today. As a reminder, the materials used in this conference call is available on BB Seguridade's Investor Relations website.

Thank you very much for your participation, and have a nice day.

You may now disconnect.