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Edited Transcript of GRUPOSURA.BG earnings conference call or presentation 15-Aug-19 1:30pm GMT

Q2 2019 Grupo de Inversiones Suramericana SA Earnings Call

Medellin Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo de Inversiones Suramericana SA earnings conference call or presentation Thursday, August 15, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos Esteban Oquendo Velásquez

Sura Asset Management S.A. de C.V. - VP of Corporate Finance

* David Emilio Bojanini García

Grupo de Inversiones Suramericana S.A. - CEO & President

* Juan Carlos Gómez

Grupo de Inversiones Suramericana S.A. - Manager of IR

* Juan Camilo Parra Osorio

Grupo de Inversiones Suramericana S.A. - Investment & Treasury Manager

* Ricardo Jaramillo Mejía

Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer

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Conference Call Participants

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* Fabian Perdomo

Corredores Davivienda S.A., Research Division - Senior Equity Analyst

* Katherine Ortiz Sogamoso

Corredores Davivienda S.A., Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Welcome to the presentation results of the second quarter of 2019 of Grupo SURA. My name is Hilda, and I will be your operator for today. (Operator Instructions) Please keep in mind that this teleconference is being taped.

As of now, we can listen to Juan Carlos Gómez, Manager of Investor Relations, to begin this talk.

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Juan Carlos Gómez, Grupo de Inversiones Suramericana S.A. - Manager of IR [2]

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Good morning. Thank you for joining us in the teleconference of results of the second quarter of 2019 of Grupo SURA. I'd like to remind you that you could access the tape of this conference at gruposura.com, where you can also find the presentation that we will be following during the teleconference. To the attendees in the English line and the webcast, you'll find the presentation in English and in Spanish.

Today, we have in this call from Grupo SURA, our CEO, David Baldini; Ricardo Jaramilo, our CFO; Juan Luis Múnera, VP of Legal Affairs; Luis Fernando Soto, Accounting Manager; and from affiliates, we have Carlos Oquendo, CFO of SURA Asset Management; and Juan Camilo Parra, Manager of Capital Management of Suramericana. Now let's listen and give the floor to Mr. David Bojanini.

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [3]

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Thank you, Juan Carlos. Good morning. We'd like to thank all of those that have accepted the invitation to join us in our teleconference of results of the second quarter of 2019 of Grupo SURA.

To begin, I'd like for you to move to Slide 5 where we have some highlights of the performance of Grupo SURA. Overall, I would say that the performance is still very good, especially with regards to the growth of revenues, both operating and total. And we should also highlight that in expenses, especially in insurance, we have some matters related to expenses, which we will cover ahead.

The operating profit of Grupo SURA during the first half of the year reached COP 1.54 trillion, up 23.7%. Therefore, the net profit reached the figure of COP 951,000 million, increasing 37.4%.

To date of this year, revenues have been growing much more than expenses. Revenues grew 13.3%, while expenses grew 11.7%. We see that in operating revenues, there is a good dynamics of all the operations, both in revenues from investments, meaning the result of the portfolios, the reserves of the insurers and of the AUMs.

We also see good sound results. In the equity method of the companies that are related or tied, and we can highlight the great performance of Bancolombia, which has a better growth of its accounts receivable and the credit cost, which is much lower than that of last year, reaching 1.8% which, somehow, is the goal that the bank had set forth for this item. Also, the AFP Protección has a good equity method, mainly because of the performance of the reserve.

With regards to operating expenses, as I said before, particularly when it comes to insurance, we have 3 situations that we'll be explaining to you ahead, which took place this semester and did not take place before.

Firstly, I'm talking about the hyperinflation in Argentina, which hurts us in figure or better in the adjustments of inflation, and it hurts us of COP 18 million -- COP 18,000 million. Only with the law of financing, the VAT from commissions of life insurance, which is a nondiscountable VAT, is hurting us in COP 22,000 million. And third, the biggest impact is with the EPS, in which the service rendered costs have dramatically grown and that we'll be explaining as well closely when we talk about insurance. Anyways, the retained claims do remain at proper levels.

Lastly, I'd like to mention that within our strategic priorities, what refers to financial strength and our capacity of investment during this year, we have amortized the debt of COP 265,000 million. And we hope that during the year, this figure will be, more or less, taken to COP 330,000 million as we projected from the -- early on this year.

So with these highlights, I'd like to give the floor to Ricardo Jaramillo, who will provide you more details regarding the figures of Grupo SURA.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [4]

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Thank you, David, and good morning to everyone. So let's look at Slide 6, and let's look at the consolidated financial statement.

And I'd like to highlight the strength of the balance sheet, the increased equity after the divestments we had early in the year and the reduction of financial liabilities on line with deleveraging process.

Equity reached COP 27.3 trillion (sic) [COP 27.6 trillion], up 2.6%, both in assets and liabilities. Given the divestments I told you about, there is a decrease when it comes to the debt. We can observe the graph. The consolidated financial debt is at COP 9.2 trillion (sic) [COP 9.2 billion], down 6.1%.

Now let's move on to Slide 7 where we can see that we're managing the deleveraging process and the holdings investment capacity. Look at the individual financial debt at COP 4.3 trillion (sic) [COP 4.7 trillion], down 6.1%.

We have amortized in capital COP 265,000 million so far, mainly in local bonds and with the bank debt at a higher cost. Right now, it's at 82.7%, expressed or tied to the peso, and at 17.3% with the dollar. And we see in the graph on the right how the profile of the debt's expiration or maturity is a proper profile because of the international bonds of '21 and 2026. Regarding the indicators of the debt that we can see on the lower part of the slide, you can see how the net debt of dividends reaches 4.89x aligned with what we projected. The leverage is measured as loan-to-value is at 13.4% and the cost of the debt, including the cost of hedges of the bonds and dollars, is at 7.55%, and that's the rate in pesos.

Please move to Slide 8 where we can see the consolidated income statement and where we would like to highlight how the operating results grew 23.7%. This 23.7% has an operating profit of COP 1.5 trillion in the first half of the year, which is quite positive, and is mainly driven by revenues from investments, the equity method added to the good operating dynamics in different operations.

Now let's look closely at the operating earnings. These are growing 13.3%, reaching COP 10.5 trillion. And we're seeing the different items how there are some that have displayed very positive growth: revenues from investments, 50.1%; equity method, 48%, mainly driven by Bancolombia, growing 59%; and Protección, 106%. That gives us then revenues that grow more than operating expenses. In operating expenses, we see that these grew 11.7%, and there, the operating profit has a great growth in 23%, as mentioned before. If we eliminate the operating -- from that operating earning, everything has to do reserves, we could say that the management has less control of those results and the growth of the operating earning would still be a very positive number, close to 8%.

On the other hand, we can look at the net profit, which reached COP 950,000 million, great result, up 37.4%. And on the right-hand side of the slide, we'd like to emphasize 2 additional things. One is the financial result in which the financial result shows the development of the exchange effect of it. And when it comes to interest, although the growth is 21%, gradually in this item, there are different things that are taking at once. The interest of the debt, which gives the amortizations that are dropping, the -- some of the costs of the hedges related to international markets and part of the interest related to the FRS -- IFRS 16 as well, and we've talked about that impact.

In 2018, this was an expense for leasing. And now in 2019, it's a depreciation, and it's an expense of interest, and that's part of the item of interest. So the implementation of this new IFRS gives way to some changes in interest. That's why we want to show you separately that total impact, which ends up being COP 38,000 million, more of expenses.

Let's move on to Slide 9, please. Here, I can show you the consolidated net income which reached COP 250,000 million (sic) [COP 950,000 million], up 37.4%. That begins in the first semester of 2018 of -- at COP 692,000 million. Let's look first at the net income of Suramericana, which is COP 80,000 million negative (sic) [COP 85,000 million negative], and that's because of the impacts I told you about before. And that will depend on ahead when we look at Suramericana closely. And this is mainly adjustments for inflation in Argentina less exchange effect because of lower volatility in Colombia and the EPSs. With SURA Asset Management, there's a positive contribution of COP 140,000 million, which contributes to Grupo SURA helping in COP 140,000 million when it comes to reserves and the equity method. And the investments in Bancolombia, Grupo Argos and Grupo Nutresa contributes a growth of COP 164,000 million.

When it comes to the items that are in the gray-shaded box on Slide 9, you can see a net of COP 40,000 million related to the particular numbers of Grupo SURA as the whole and the holding, and here you can see the value of the hedges plus taxes. So this is a positive value for this semester, reaching COP 950,000 million.

When we look at the parent company's net company (sic) [net income], we're talking about COP 846,000 million, growth of -- with the growth of 42.4%.

Slide 10 shows you our vision of the portfolio. We'd like to remind you that we have the 5 parts of our portfolio and the others are under Other. Here you can see Suramericana and SURA Asset Management with -- and because of this recent transaction of SURA AM with CDPQ, we're at COP 10 trillion, Suramericana at COP 7 trillion and when it comes to Grupo Nutresa, Grupo Argos and Bancolombia, you can see the other figures, to reach a value of the portfolio of COP 34.6 trillion. Keeping in mind the debt that we have of the holding of COP 4.7 trillion, we're talking really about a port -- a net port -- a net value of the portfolio of COP 29,900 million.

So for market capitalization as of March 31 of this year, we're talking about 19.6 trillion shares or at COP 15,643 million and we're still third in the Colombian market list, and common share price grew 6.2%.

Now let's give the floor to David who can tell us about the highlights of Suramericana Seguros.

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [5]

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Thank you, Ricardo. On Slide 12, we can see the highlights that relate to Suramericana, which briefly, I would say that the company has displayed a dynamic that's positive in terms of growth in the consolidation of operations.

As growth, the premiums issued issues reached COP 6.2 trillion, up 12.3%, while those that are retained grew 10.8% because of a higher session with the reinsurers.

To talk about life, retained premiums grew 14.2% and in P&C, these grew 8%. And with P&C is where we are seeing the biggest premiums with the reinsurers. And this is part of the consolidation process of the operations that we have in different countries. Also I'd like to mention that the health segment grew 20.9%.

As I said before, the good dynamics of growth in premiums is being hurt because of some particular expenses, which I mentioned like those of life because of the corrections of the VAT, which is -- cannot be discounted, which is impacting us. And also, we have the case of adjustments by inflation in Argentina, which grew to COP 18,500 million. And for health, where the EPS is mainly, where there's a difference in the result of the first half of last year versus the first semester of this year, there is a negative difference of COP 61,000 million. And this can be explained mainly because this year since some EPS have had problems, we have received about 500,000 affiliates from these other EPS. And many of these persons arrive with repressed pathologies, which, of course, has increased our claims.

Also, there are other things that are related to this. The unit of payment for capitation has not increased to cover these higher claims that we see at the EPS that we've received. Of this, what we can say is that we have been talking with the government, especially with the Minister of Health, to seek a solution to this situation, so that the EPS can continue working as they have in prior years.

So we do expect that this situation can be solved in the following weeks or months. We've had very active discussions with the government. And we do hope that our petitions are listened so that the EPS can continue working in Colombia. Because of this, the net profit of the company had a decrease of 33% reaching a figure of COP 174,000 million. So I would say that that is the most important part that's worth mentioning about Suramericana in this first half of the year.

Now let's listen to Ricardo Jaramillo, who will give us more details about the results of Suramericana.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [6]

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Thank you, David. Let's move to, please Slide 13 to look at the figures of Suramericana in more detail. Here we see a positive revenue growth and the net income that's impacted by specific expenses in some operations.

Let's look at the revenues, how the retained premiums and revenues from services reached in the first quarter COP 6.9 trillion, up COP 800,000 million in the first 3 months and percentage-wise, 13.5%. The technical result, on the other hand, reached COP 2.4 trillion (sic) [COP 1.18 trillion], up 2.8%. Remember the technical result is equivalent to the underwriting before administrative expenses and investment income.

Moving to the indicators on the right-hand side of Slide 13, we can see claims plus reserves, and how the claims of the company had an improvement of 100 basis points, closing at a 7.1% of revenues. When it comes to the cost for services rendered as a percentage of revenues, here you can see that impairments and the claims in the health sector, which we'll talk about ahead, which has increased in claims up 410 basis points, and it's one of the specific things that we have been talking about in this conference.

When it comes to investment income, it's showing a good performance with fixed earnings globally. We're talking COP 592,000 million. And operating expenses, you can see an increase of 10 basis points to 13.8%. And this has to do with the adjustments because of inflation in Argentina and everything has to do with the fees with insurers in Colombia. For taxes, you can see a good improvement with the lower rate dropping 43.8%, which compensate or upset the 3 events that we have explained before.

Let's move to Slide 14, where you can see here how we build the net income of the company. Here you can see that the company's net income is COP 173,000 million, and last year, we began with COP 259,000 million, and we had impacts on the 3 segments with Life, P&C and Health.

When it comes to Life, we've told you before, this has to do with that on commissions, which is about COP 22,000 million, which has to do with this decrease in the profit or the contribution to profit for the company.

When it comes to P&C, we have the adjustment for inflation in Argentina, which is about COP 18,000 million (sic) [COP 24,000 million]. And in Health, which we'll see ahead with more details, we have a negative COP 61,000 million and it's because of the Health Care situation seen recently.

Also, in the corporate segment, you can see that in the gray box, it has to do with Suramericana SA, we see a contribution of COP 21,000 million. And this makes us reach the COP 173,000 million for the net income 2019 as an outlook. The adjusted ROE is 10.7% and the adjusted ROTE is 13.9%.

Moving on to Slide 15. You can see the Life segment, where you can see there is a positive growth of premiums. However, this does not compensate the higher expenses because of the VAT on the commissions paid.

The net profit is COP 232,000 million in the first half of the year, down 8.4%. In the bottom of the slide, you can see that retained premiums grew 14.2%. Mainly here, we'd like to highlight the entrance of Seguros de Vida Mexico, which brings COP 80,000 million. Also, we'd like to talk about the good dynamics of the work risks area, and the business of life of the group, which grew 44.2%.

Also, you can look the better claims which increased 50 basis points, especially because of professional risks.

Now let's look at the technical results of the company, which reached COP 350,000 million (sic) [COP 335,000 million] up 8.5%. Administrative expenses grew 28.1%. And this shows the impact of the VAT on the commissions.

And investment income grew 8.4%. This investment income goes hand-in-hand with what we see with the interest rate of fixed income, globally.

On Slide 16, let's look at the P&C segment, in which higher reinsurance costs and Argentina's hyperinflation negatively had impact. When it comes to this, we're talking about an adjusted net income of COP 88,800 million, down 11.2%. Great growth of premiums are displayed. Issued which reached COP 3.7 trillion, which grew in local growth of 14.1%.

Moving to the bottom of Slide 16. When we look at retained premiums at the claims ratio, we can see that retained premiums reached COP 2.7 trillion, up 8%. So we increased the session. When it comes to the claims ratio, this decreased 7 basis points, but in the second quarter, the indicator had a reduction of 32 basis points, mainly because of less fire events and less liabilities for low claims.

In technical results, in this segment, this reached COP 600,000 million, up 2.6%. This reached a degrade -- a decrease of 3.2 basis points.

Administrative expenses grew 7.3%. In this item, we show the higher expenses because of the adjustment by inflation of Argentina for the first half of the year.

Lastly, investment income displays a positive growth, as I said before, because of the sound dynamics of the interest rates of fixed income, globally growing at 31.1%.

On Slide 17, we can see the Health Care segment which I told you, we have a particular situation. There is a high client growth and a higher claims ratio. The net income of the segment were -- in the first 6 months was a negative COP 16,000 million, which has a variation compared to last year of 22.6%.

Also, if we look at [136], we can see that the revenue growth PAC is basically up 62% because of 2 things: one, the total affiliates, which we can see on the right-hand side reach 3.4 million, up 17.3%. We're talking about 500 new affiliates. Just compared to Colombia, this is equivalent to having the population of Bucaramanga, entirely new. So this leads to more costs. And when it comes to claims ratio, it increased 500 basis points. And this goes hand-in-hand with delayed treatments.

And also, the operating expenses grew 17.5%. And this reflects the investments showing the capability that the company has to provide or render the services to the new affiliates.

Another important point that has an impact of revenues has to do with the complementary plan of Health. And this is 5% of the affiliates that we have right now talking about this service. This is a very important service, which we think has the potential to increase the numbers of the company.

When it comes to the technical result, we can see that it reached COP 216,000 million. And also, when it comes to investment income, it's very important because you can see the growth of 13.7%.

On the right-hand side of Slide 17, you can see the figures of the different companies, which -- where you can see that EPS has the biggest impact, 500 -- going back to the 500 basis points.

Let's go back to David who will talk about the highlights and main figures of SURA Asset Management.

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [7]

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Thank you Ricardo. I invite you to look at Slide 19 where we see the highlights of SURA Asset Management, in which we can see a sustained dynamics of all of its business, and mainly the yield of the reserve, that's very good, that drives the results of the company.

The net activity of the -- net profit of the operations reached COP 430,000 million, up 48.1% in the semester. Also, we saw that in the second quarter of the year, there was a good growth of the net profit of 27.7%.

AUMs -- total AUMs reached COP 458 trillion, increasing 15.4%. And it's important to highlight that we continue registering alpha -- positive alpha of 81% of the AUMs of investment management.

And leadership ranks in terms of profitability in the main mandatory funds, in which we can talk about Chile, Mexico and Uruguay. In the mandatory business, in commissions, we have a resilient growth of 8.8% in pesos -- Colombian pesos and of 1.8% in local currencies, despite the reduction of fees observed in Mexico, Uruguay and Peru. Anyways, we still observe a positive contribution of the yield of the reserve, which significantly drives the results, as I said before.

When it comes to savings and investments, this business is still in an uptrend. With AUMs, it grew 24.2% in pesos, with a commercial positive dynamic and a net flow that's also positive, which show the highest revenues by commissions.

And lastly, when it comes to the investment management business, we're still focused on building the regional platform, launching new funds, and encouraging our investments team or strengthening it.

Now let's listen to Ricardo Jaramillo, who will give us more explanations about the results of SURA Asset Management.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [8]

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Thank you, David. Now let's look at Slide 20, where we can see the operating results of the semester and we can see how the profitability of the reserve and the insurance margin really have a weight here. When it comes to operating revenues, they reached COP 1.55 trillion, up 31.6%.

Looking at the graph in detail, looking at these revenues, we can see that in 2018, we had revenue of COP 1.175 trillion. And I'd like to highlight commission income, which grew 2.5% in local currencies and 9.4% in pesos.

The equity method which is Protección, 93.5% growth and the legal reserve, which grew COP 1,048% contributing COP 195,000 million reaching the COP 1.5 trillion that I said before.

When it comes to operating expenses, these grew 13.4%, reaching COP 834,000 million. And now let's look at these operating expenses closely. The sales expenses, which grew 10.3% as a percentage of the fee, they are growing 40 basis points and these 40 basis points are related entirely to the commercial dynamics displayed in countries like Mexico and Chile.

In administrative expenses, we have a 14.8% growth, which mainly is explained by the different projects that the company is implementing right now for the business with new technologies, new platforms and the investment management team, which has been building -- has been being built in recent months. So we reached in operating earnings a profit of COP 712,000 million, up 62.2% which is great, which has to do with the expenses observed. And obviously, with the return of the legal reserves, I'd like to highlight that behind this legal reserve, we're talking about 8% versus the yield that we had in the first semester of last year, which was close -- almost even 1%.

Moving to Slide 21. You can see the net income growth of the company, driven mainly by the mandatory pension business. We began with the net income in 2018 of COP 272,000 million. Then we see the mandatory pension, which contributes COP 202,000 million, and the other accounts items, voluntary, annuities, exchange effect and others in the corporate segment don't have much incidents. Although in the corporate segment, there is -- these are -- the FX and others are more negative. And it's basically because of what we mentioned before. To end with the net income in 2019 contributing of SURA Asset Management to Grupo SURA of COP 427,000 million. This company has an adjusted ROE of 7.3% and adjusted ROTE of 27.7%.

Moving to Slide 22. We see closely the figures of the mandatory pensions where there's a return on the reserve and the commercial activity. And there's really an impact on lower fees in some countries. The business is still looking at innovative models, like robotics, analytics and artificial intelligence, seeking to add value for the customers.

Here, we began with COP 1.3 billion, up 34%. And in the middle, you can see the main drivers for the growth in this segment. First, the AUMs, which reached COP 405 billion, up 16.4%. These AUMs are very relevant in Mexico and Peru, given the regulatory scheme that they had in those. In Mexico, it grew 23.7% and in Peru, 14%.

When it comes to salary base, there are very positive growths as well, above the inflation of the countries where the salary base is very important: Chile, 3.9%; Colombia, 5.5%; and Uruguay, 16%.

Commission income reached COP 987,000 million, up 8.8%. And here, I'd like to tell you, and it's the bit of new affiliates that we have in Peru, highlighting that in June, we're starting the reception for 2 years for these new people in AFP Integra. During the first month of the bid, we have a record of 28,000 people in Peru. And the bid will have a very good impact on the sustainability of the business, with more than 800,000 new customers in 2 years and a better base of the clients that's younger.

Also, we're talking about a growth of 1,038% (sic) [1,036%] when it comes to the priority, when it comes to the investment teams, and with regards to the positive alpha in the different countries.

When it comes to sales expenses, these are growing 11.4%. As I told you before, it gathers the commercial dynamics seen in different countries, mainly in Mexico and Chile.

And lastly, the administrative expenses, which show a growth of 14.8%, which is seen -- in local currency, it's up 7.1%.

Now let's move to Slide 23, where we see very good details of the voluntary business which has to do with a great dynamics of growth in the last quarter growth. Net operating revenues reached COP 186,000 million, up 19.1%. Total AUMs of voluntary reached a growth of 8%, especially this is -- this was seen in the last quarter.

And first, we'll look at AUMs, which reached COP 31.8 trillion (sic) [COP 31.8 billion] with a net flow of COP 2.3 trillion (sic) [COP 2.3 billion], returns of COP 1.6 trillion (sic) [COP 1.6 billion] and with AUMs Investment Management, reached COP 33.5 trillion (sic) [COP 33.5 billion], up 1.8%.

Here, I would like to remind you that we have about COP 12.4 trillion which is handled by Investment Management. The priorities for this business is the proposal for more value for our customers, offsetting the pressure that we have from lower fees. And with Investment Management, we're working with launching new mandates and funds to compensate the loss of the portfolio of annuities that we had in Chile.

The specific part of commissions is seen on the bottom of Slide 23, where you can see that it grew 10.3%. Sales expenses are related to the commercial dynamics which grew 9.8%, growing more AUMs than sales expenses, which is good for the retribalization of the segment. And administrative expenses grew 24.7%, after the different investments, especially in platforms and the team for the -- in the different regions.

Also, I'd like to talk about the positive alpha of 80% of AUMs that we have and which is the biggest strength that we have right -- we're providing our customers in terms of products.

So with this, we end the presentation, and we give way to the session of questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question of Katherine Ortiz from Corredores Davivienda.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division - Senior Equity Analyst [2]

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I would like to know firstly if you have a guide related to the performance of Suramericana for the second half of this year that you could share with us because of this effect of the VAT, especially with the Life commissions or at least, in terms of profitability of this company?

And second, I'd like for you to share with us the development of the pension reform in Chile? Where it stands after the latest events?

And thirdly, what's your opinion on the new proposals in Colombia made by the market mission of capitals? Among many things, we're hearing talks about savings for voluntary pensions that will be managed by entities other than pension funds. So I don't know what's your opinion about this. Could you please share with us about that topic?

(technical difficulty)

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Operator [3]

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Please bear with us. We have a technical problem right now. Please bear with us.

(technical difficulty)

Katherine, can you hear us?

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division - Senior Equity Analyst [4]

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Yes. I can hear you. Thank you so much.

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [5]

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Okay. Firstly, we do apologize for this technical problem, but we hope that it's settled.

So Katherine, with regards to the performance guides of Suramericana for the second half of the year, I will give Juan Camilo Parra the floor. Carlos Oquendo will talk about the reform in Chile and Ricardo Jaramillo will talk about your question of the mission of the capitals market. So Juan Camilo?

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Juan Camilo Parra Osorio, Grupo de Inversiones Suramericana S.A. - Investment & Treasury Manager [6]

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Thank you for your question, Katherine. With regards to Suramericana, it has had an impact that's relevant. Our purpose is to create internal efficiencies to offset the VAT expense and to meet our budget and our profitability levels for 2019 and years subsequently.

So internally, we are creating the operating efficiencies needed to offset the expense of COP 22,000 million that, so far, Suramericana has.

Now let's listen to Carlos Oquendo, who will talk about the next question.

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. - VP of Corporate Finance [7]

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Katherine, with regards to the pension or rent reform of Chile, this discussion has expanded for many months. And we are concerned about it because it had a very political touch when it comes to the debate of who's going to manage the 4%.

Technically, the AFPs have had great results managing the savings, and there is no additional cost thereof. So technically, for us, the AFPs would be the best option for the affiliate. Today, a pension person in Chile with the money accumulated, 60% comes from the yields of that savings, while 30% comes from others. So there are people in Chile who are waiting for the reform to be enacted to look at their pensions, but we are concerned that there are other items in the debate that are very valuable, and they have been left on standby, and basically that the discussion on the 4% is more political than anything else.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [8]

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Katherine, I am Ricardo Jaramillo, and let's talk about the met -- the capital market's mission. Firstly, we are positive about that mission. We participated in the different desks constructively with this because remember, we are significant players with regards to the investments, AFPs, the issuer of Grupo SURA of debt and shares and obviously, for the insurers. So the results for us are the first step that we need for the materialization of everything, which is very complex because we have different changes of law and everything, but I think it gathers a diagnostic that we clearly have because we are aware that there is a deep illiquid market that are underused.

So keeping that in mind, we are the really interested in having more competition because we think that having more players, we can have more liquidity and more power with different players.

Also, we are pushing for the initiative of the pacific alliance to think about integrated market is great, especially because the insurers can invest in other countries. As a local issuer, it would give us much more drive and strength. And I don't want to focus on the different parts, especially when it comes to the fact that -- again, I think it's the first part in which we'll have discussions, in which the government will have with all the players actively. Because if you look at what's happening in this setting, it's a very drastic change to the regulation that we have today in the capital market.

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Operator [9]

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Next question comes [Kyle Dunn] from [HSBC].

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Unidentified Analyst, [10]

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I had a question. When it comes to your business in Mexico, we understand that the government has said that it wants to reduce the commissions in the next 5 years. So I would like to know how this would affect you. And would you reconsider if you would stay in Mexico or if this would hurt the system in any way?

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [11]

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Okay. [Kyle], I think that Carlos Oquendo is the best person to answer you from SURA Asset Management.

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. - VP of Corporate Finance [12]

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Look, the scheme of low commissions in Mexico is something that we need much more reflected. Also, we understand that our models are better when there is a change in government. Generally, the new government intensifies lower commissions. Also, we see the need in Mexico that -- of a higher contribution margin. In Mexico, it's a very low margin. It's only 6% of the salaries saved by the workers. And we believe that Mexico needs a reform to increase that percentage.

On the other hand, something else that offsets that lower or decrease of commissions in 5 years could be driven by the growth of the yield. So I believe that there could be an impact, but I think that lower -- the lower commissions will be having an impact, yes, but if there is a higher -- or a reform that increases -- the government has even discussed it, increases a higher contribution rate in savings by the workers, that way we can offset on a medium-term basis this acceleration of the lower rate of the commission.

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Unidentified Analyst, [13]

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May I ask more? We know that right now, you have the idea of reforming and increasing your contribution rate. Do you have any idea how this reform will affect the pensions as well?

Then secondly, we're in August already, and I would imagine you're discussing the commissions or if there will be any changes in your commissions?

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [14]

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Well, look, what the government stated in Mexico is that the pension reform would take place during the second half of the government standing. And usually, this takes place in December. We come from a negotiation, which last year, we reached 0.95%. And we think that it could be still in the model that lowers a bit more this, during this first year. And yes, we are waiting, as the government said, to have a more drastic measure in the negotiations made in December. However, this year, we have had good growths of AUMs and yields and the performance of our net flow has been very good. So I think that impact won't be that big.

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Unidentified Company Representative, [15]

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Ricardo, I would like to complement by saying that what we've been seeing in the region and we've been doing is working with initiatives within the companies, so that we can offset that pressure, so that we could be more efficient and have sustainable profitable levels.

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Operator [16]

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We have another question from Fabian Perdomo from Corredores Davivienda.

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Fabian Perdomo, Corredores Davivienda S.A., Research Division - Senior Equity Analyst [17]

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I have a question about the ties you have with the government and the problems with the other EPSs. So what did the government respond to this? And could you give us an idea of the AUMs in pesos?

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Unidentified Company Representative, [18]

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Fabian, let me answer your Health question. The problems seen in Health Care involve different problems or items that are being discussed with the government.

First, we have the capitation that was not [justed] to include the new inclusion of the processes of the basic health plans, and that, of course, involves a cost. Because if you include more procedures, which were not covered, and they're not concluded with the value, the proper value which has happened, the (inaudible) will -- won't be enough.

Another topic that has been very sensitive is that the premium for noncapabilities dropped to 0.34% and that has had an impact throughout the system, which is important because the incapacities or claims for these have not dropped. And there was no reason for the premium to drop.

Also, there is something that we mentioned, which is perhaps a topic that's creating the most impact, and it's because the people that arrive or the new affiliates that we have at the EPS come with very expensive and repressed diseases. And when it comes to the first year, that has a huge impact. So after this will be standardized and will drop, but we must have a compensation because of those higher costs in the first year. So I would say that those are the most important points that we've been discussing with the government.

It's not an easy discussion. We've talked with the Minister of Health, with the President, and we're doing our task of showing very, very clearly what's taking place, and we hope there's a positive response in the coming weeks on these items.

In terms of total costs, truly, these are things that are at COP 175,000 million, which compared with the final point, is not so significant. But still, it's important for the segment to continue operating and to be able to liquidate or close the EPS that are not working as they should. So that's what we're doing. And particularly, we are focusing on what I just mentioned, and we hope we have a positive response from the ministry and from the government, in general.

As to your other question on the debt in pesos will be answered by Ricardo Jaramilo.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. - CFO & Chief Corporate Finance Officer [19]

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Yes. Our debt in pesos for Grupo SURA, individual, most of the debt is indexed to the IPC. Some is to the IDR and for Suramericana, which has bonds in Colombia, it's indexed to IPC entirely.

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Operator [20]

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Right now, we have no further questions.

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [21]

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Are there any questions through the web? We were asked the same thing about the Health Care sector, which I think we answered. And we also have been asked if we have any mechanisms to offset the -- if law of -- the financing law, the effect of this financing law?

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Unidentified Company Representative, [22]

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Are you talking about the effect of VAT on the Life Insurance?

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David Emilio Bojanini García, Grupo de Inversiones Suramericana S.A. - CEO & President [23]

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Well, yes, we have seen some mechanisms, especially, there is a way to manage the banking insurance, but we're very careful. But I would say that this is a reality that we had in the budget early on in the year because we knew that this financing law would talk about this and will have an impact on this.

Okay. We'd like to ask if there are any other further questions.

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Operator [24]

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(Operator Instructions) Right now, we have no further questions. We'd like to thank you all. This ends the teleconference of today. If you'd like to listen to this conference, again, it's available on the website soon.

Thank you for attending. Have a good day.

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