U.S. Markets open in 5 hrs 4 mins

Edited Transcript of BBSE3.SA earnings conference call or presentation 6-Nov-18 1:30pm GMT

Q3 2018 BB Seguridade Participacoes SA Earnings Call

BRASILIA DISTRITO F Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of BB Seguridade Participacoes SA earnings conference call or presentation Tuesday, November 6, 2018 at 1:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Rafael Sperendio

BB Seguridade Participações S.A. - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Carlos Grein Macedo

Goldman Sachs Group Inc., Research Division - VP

* Rafael Frade

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for waiting. Welcome to BB Seguridade's Third 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 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. Werner Süffert, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of Investor Relations.

Please, Mr. Sperendio, you may now begin.

--------------------------------------------------------------------------------

Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [2]

--------------------------------------------------------------------------------

Thank you, and good morning, everyone, and welcome to our third quarter 2018 earnings call. I'm going to take you through the presentation. So let's start on Slide #2 where we have a brief summary of what happened in the quarter. So starting with our reported net income, which is BRL 874 million in the third quarter, impacted by only one extraordinary event that happened at our P&C business at MAPFRE BB SH2 to the amount of BRL 18 million. Such event came from the revaluation of the inventory of salvaged vehicles income aiming to readjust the accounting value to the, what we understand, likely recoverable value of these vehicles. So all the inventory was reassessed, and it impacted our net income at the amount of BRL 18 million in the quarter.

So by setting apart this event as well as the [one that] affected the bottom line in the third quarter last year. Just to remember, third quarter last year was positively impacted by the capital gains that we got from the IPO of IRB. So both quarters comparable. We are setting apart both the extraordinary events and looking at on a recurring basis, our net income reached BRL 892 million in the third quarter this year, down 12.7% from the year ago.

As you can see here on the lower left-hand side, the key driver for the decline in the earnings in the quarter was financial results. Financial results were down 44% year-on-year, and at a lesser extent operating result also contributed to the decline in net earnings with a reduction of 1.3% year-on-year on weaker volumes of pension and premium bonds.

Among here are the main highlights that helped us to [build] the net income for the quarter. We have 13.5% growth in premium SH1, driven by Credit Life and Rural. We also saw a very important improvement in the combined ratio of SH2, which came in below 100, owed to the improvement in the [loss ration] and the deduction in the G&A ratio. And finally, our pension's assets under management grew roughly 10% to BRL 248 billion, which in addition to the improvement in the cost-to-income ratio helped the operating results of this business should grow pretty close to 11%.

Turning to financial results on Page 3. I'm going to cover here in deeper detail what happened to the financial results that led to the 44% decline year-on-year in Q3. So as you may see on the lower left-hand side -- sorry, right-hand side, contribution of financial results to earnings, which have been all-time low levels 16.8% only. And the key drivers were the weak performance in financial results will be -- we will start with the most, say, straightforward one, which is the decline in the average Selic rate. The average rate in the third quarter this year was 6.4%, while in the last year, was 9.2%. So changing of the average interest rate variation, I mean, a 30% decline in the average Selic rate. So the most straightforward impact. On the right-hand side, we have here the forward yield curve that also showed some impact on comparables here. Last year, we have a downward move in the forward yield curve. It was almost a parallel move that happened in the third quarter last year. And should get the higher mark-to-market gains on [prefixed secure], I mean, zero coupon bonds mainly in our premium bonus company. While when we look at the dynamics of the current -- the yield curve this year, we can see that in the short end, the curve flattens a little bit; while in the medium to the long end part of the curve, we can see that there was a steepening in the yield curve that also affected the mark-to-market of the zero coupon bond in the third quarter this year. So, I mean, with these dynamics in the third quarter this year compared to the third quarter last year means lower mark-to-market gains.

And finally, the biggest burden on the financial results this quarter was the spike in the IGP-M inflation rate with a more modest increase in the IPCA inflation rate. So these dynamics, this led to a significant increase on financial expenses at the [Brasilprev] and over to the private benefit pension plans. Worth mentioning here that we still have it, but they are no longer sold, but we still have this liability in our balance sheet. Then a good proportion of the liabilities [pegged] to IGP-M is higher than the assets linked to the same index. Big numbers here, our liability is roughly 87% compared to IGP-M and less than 1% to IPCA; while out of our assets, 60% is target to IGP-M and 37% is indexed to IPCA. So that increase in IGP-M has been a headwind for financial results of Brasilprev , but now the business is more like a short-term impact, and we expect that both indexes should converge over time in the -- we can even notice in the chart on the lower left-hand side, IGP-M was too low last year. It even shows deflation and it's feasible to believe that IPCA will catch up, but this catch-up might happen maybe in 2019.

Focusing now to the performance of our main business lines on Page 4, starting here with SH1 business we can grow roughly 14% year-on-year, backed by a strong performance of Credit Life, which was up 34% year-on-year, and Rural which rose roughly 27%. Regarding to the operating metrics combined ratio improved by 20 bps year-on-year with the reduction in the commission ratio given the end of the temporary increase in the commission rate of some products within the term life insurance portfolio visibility in the Bancassurance share. So the increasing commission was enforced from the third quarter last year until the first quarter this year. So this is explained mostly with the improvement in the combined ratio.

In addition, loss ratio was up 50 bps year-on-year, given higher frequency, the higher cost per claim in credit life; an increase in the loss ratio to Rural. Increase in Rural was mostly related to the drought that affected the corn crop this year. G&A ratio was up 410 bps reported in terms of related to nonperforming premiums and the insurance receivables. Financial results grew 2% year-on-year. And all in, net income grow 6% year-on-year in the third quarter this year, reaching the return on average equity of 52%.

Turning now to P&C on Page 5. Premiums written were up 12.5% year-over-year, driven by [casualties in Auto] in the independent brokers channel. We do have in the operating performance combined ratio improved 780 bps year-on-year, driven by the lower G&A and lower loss ratio. Across the board, improvement in the loss ratio for the payment in the auto insurance, which keeps improving. Loss ratio was down 510 bps year-on-year. So as a result of this increase in premiums in addition to the lower combined, less -- the operating results should reach BRL 94 million as opposed to a low of BRL 45 million in the third quarter last year. And in addition to the decline in financial results of 21% on the back of lower interest rates, the net income of this company had reached BRL 66 million in Q3, up 246% year-on-year, reaching a return on equity of 8.2% in the quarter.

Next page, we have the performance in private pension plans. Contributions reached the highest level within the year, BRL 8.5 billion, but it's still down year-on-year. Year-on-year declined 19.7%, still back to fighting macro uncertainties, which we hope that will fade out from [November on]

With interim ratio normalizing, the impact of the increase in volatility that has started with the truckers' strike in May this year. Our pension reserves reached BRL 248 billion, up nearly 10% over the last year. And this is increasing AuM helped management fees to grow 8% on a year-on-year basis, with the average management fee declining 0.03 percentage points year-over-year.

And when we annualize something that is not here in the slide in terms of deposit structure in the -- the company household has been improving. Cost-to-income ratio improved by 270 bps. In addition to the improvement in the management fee, operating results grew 11% as compared to the third quarter of last year. But considering the decline in financial results that we already discussed in the presentation, financial results [at Brasilprev] were affected by the spike in the IGP-M inflation rate. So financial results dropped [88%] year-on-year, which led the net income of this business to decline 17% year-on-year and to reach a return on equity of 35.6%.

On premium bonds on Page #7 here. We ended Q3 with a BRL 1.1 billion in collections, down 16% year-on-year given the weaker sales volume. Financial results fell 62% year-on-year, driven by the compression in the net interest margin, which was mostly driven by the lower SELIC rate and lower mark-to-market gains, as I explained as well when we were discussing the financial result of the company. And for this business specifically, financial results are the primary source of earnings, the net income declined at the same pace, down 62% year-on-year with a return on equity still well above the cost of capital, reaching 30% in Q3.

And finally, on Page 8, we have our insurance brokers. Brokerage income fell 11% year-on-year, driven by self-pay of pension and premium bonds. And it's worth clarifying here the accounting dynamics at the broker. The lines that are growing at the fastest pace like credit life, like crop insurance, are the ones that are deferred into the P&L, while the lines that have been shrinking are recorded on a cash basis. So although the brokerage income has fallen 11% year-on-year in Q3, the balance of unearned commissions increased by 11% over the last [12 months] and reached BRL 1.8 billion as of the end of September.

The net income of BB Corretora dropped 17% year-on-year, driven by 2 factors in addition to the weaker top line. So the first one was the reduction in financial results and that is related to the lower Selic rate and the second factor was related to the compression in the EBIT margin, which was driven by the increase in the total items sold. Hence, so you can see in the lower right-hand side, the number of products sold in the third quarter this year doubled as compared to the third quarter last year. And this is totally related to the strategy that we talked about on our last earnings call to shift a little bit we toward low ticket insurance products. This strategy remained until the mid of the third quarter this year. But the flip side of this strategy is that it tends to take a toll on EBIT margin in the first moment as the cost of products sold consumes a big part of the commission. But this is a one-time effect. It can be related to the low ticket of the product or related to the deferrals. But this is a one-time effect because it might be a little bit of the time of revenues will improve through the P&L and we will not have the associated cost with the revenue. We can even see that the EBIT margins are already showing improvements on a quarter-on-quarter basis. It improved by 30 bps in the third quarter now as compared to the second one.

Move to the [last] part of the presentation, now on Page 9, we have our guidance monitor. So year-to-date, through September, we underperformed in the revised guidance. Our recurring net income was down 8.8% as opposed to the minus 6% to minus 4% expected variation in earnings according to our guidance. So the key drivers for the shortfall versus our estimates were better than expected move within the big layers in the pension industry to (inaudible). So we expect that it might have a negative impact of 0.5% of the forecasted net income for this year. It's also worth highlighting the higher-than-expected IGP-M inflation rate, which has been weighing on the financial expenses at Brasilprev and the higher-than-expected loss ratio for Rural because of the drought that affected the corn crops and also a higher than expected loss ratio in credit life. Another factor that also has been impacting, but more related to our commercial performance, with all the uncertainties around the presidential election that happened in October, it brought some additional [difficulties]to raise funds through a long-term product like pension plan. So although these factors have been weighing on the bottom line, we believe that it's still feasible to think about a convergence to the guided range in Q4. So our current expectations points to the 4th quarter being the strongest within the year. But in order for this to happen, we need to count on many -- on 4 assumptions. The first one is related to health plans. Let me cover the commercial performance in pension plan and then a normalization of the loss ratio in life and Rural as well. The approval of SH2 and we hope that we will not see any see negative surprises come from the yield curve until the end of the year. So according to these assumptions, we believe that the net income will converge to our asset base. So out of the last 4 months, in 3 months phase, we will add that the leverage monthly net income that we need to deliver in Q4 to reach the guidance. So I think totally feasible to think about this convergence until December. So that's all I would like to emphasize. And then we can now jump into the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Rafael with Banco Bradesco.

--------------------------------------------------------------------------------

Rafael Frade, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

I would like to hear from you a little bit of your view on the -- how is the competition on the pension business? How are you seeing competition from asset managers? And if you believe that the model of open to make partnership with asset managers to sell pension would be a strategy viable to you guys. Or if you would be in some [disadvantage to not] offer this kind of solution?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Rafael, for your question. The model that we have related to the banking channel, Bancassurance using Banco do Brasil branches and all the other channels available in Banco Brasil to distribute our pension plan. It will continue to be our main strategy. But we are open and we have an initiative in place. Q4, this trend that we have in the market, linked to the open platforms. So we will be able to distribute our products using other channels. We don't have any kind of problems doing this. And we are discussing this already in the market. And we have also [Selic]. That is an initiative that we have to distribute profits to people that they are not the main targets for banks. They are targets for this open platforms on investment, but they are not, nowadays, I would say, to the traditional banks, they are targets. So we are moving a little bit our strategy, but on the next years, we will still have a good part of our new flow coming and the net inflow coming to the bank coming from Banco Brasil channel. But, of course, we are ready and increasing our initiatives to deal with this change in the market environment with this new competitors in place.

--------------------------------------------------------------------------------

Rafael Frade, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [4]

--------------------------------------------------------------------------------

And then just a follow-up on this. So it's very clear that you are looking for other channels. But the question is if you are also looking for other projects, as you mentioned about this open platform. The idea is mainly focus on Brasilprev through different channels? Or also maybe you could be offering other products through those different channels?

--------------------------------------------------------------------------------

Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [5]

--------------------------------------------------------------------------------

Yes. Just to clarify, we will have -- there are different channels and also different products. So for some segments, they want to have access to other asset managers and products that we don't have in our asset manager that provide the products for Brasilprev. We are able and now we already have our plans that they are able to reach this product from other players. So this is the trend, as I mentioned. It's a trend for the channels and also a trend to diversify the products available, not only from our own asset managers, but also products from other asset managers.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Carlos with Goldman Sachs.

--------------------------------------------------------------------------------

Carlos Grein Macedo, Goldman Sachs Group Inc., Research Division - VP [7]

--------------------------------------------------------------------------------

A quick question on -- Rafael, you mentioned during the presentation that one of the reasons why you weren't seeing an inflection in the revenues for the (inaudible) quarter was that some of the brokerage fees we are seeing were deferred because of the nature of the product. When do you expect those -- I mean, you obviously know the mix there. You know when they're going to start hitting your books and be recognized as revenue. When do you expect a deflection to take place? And for the revenues that are going to better reflect the recovery that you've seen in sales, particularly in SH1?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Macedo, for the question. Starting with SH1, we already have a good trend of premiums -- written premiums coming there. But because we are growing very fast on credit life, this trend of increasing earned premiums and also -- has a positive effect on our broker on deferred commissions. And as I mentioned in our presentation, these commissions, they are increasing 11% on unearned commissions. But they will start to be part of our earnings from next quarters on because we started this trend of a higher credit life growth last year in the fourth quarter, and we are entering the second year now. So this would start to have a positive effect from the fourth quarter on, but will be more strong through 2019, because we will have 2 whole years of good performance. And this growth that we have, and we will have also a positive effect, in fact, coming from other products. So the difference that we have coming from the contributions from Brasilprev comparing with the contributions that we had in 2017 and '16 is impacting the costs, of course. But from now on, we will continue to have higher commissions coming from Brasilprev because of the election that happened in October. And the end of this uncertainty that we have until now, people they are now restarting the year saving investments and so, long-term profits like the ones that we offer in Brasilprev. So these 2 factors, the second year of a very positive trend in credit life and SH1. And a better year on Brasilprev will guide to higher commissions on our brokers.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) This concludes today's question-and-answer session. I would like to invite Mr. Rafael Sperendio to proceed with his closing statements. Please, Mr. Sperendio, go ahead.

--------------------------------------------------------------------------------

Rafael Sperendio, BB Seguridade Participações S.A. - Head of IR [10]

--------------------------------------------------------------------------------

Well, I'd like to thank you all for joining our earnings call, and I would like to reinforce our commitment to the guidance, which I remind [is totally] feasible after all the uncertainty related to the political environment is (inaudible) is that now we're able to (inaudible) be the next president of the country. We do believe that investors will be, let's say, less concerned about committing their savings with long-term products. And when we look at the return of the products, they have been showing good performance due to the second dynamics of the forward yield curve. And we also remind that December is always a good month for pension because, indeed, they will seek to get their tax benefits related to [JBL]. Unemployment is also showing some signs of improvement. So the environment is changing for the better. That's why we feel confident that it's totally feasible maintaining the guidance range. And we hope that we are going to deliver a good performance until the end of the year. So thank you all, and have a good day.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

With this, we conclude BB Seguridade's conference call for today. As a reminder, the material 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.