Grupo de Inversiones Suramericana S.A. (GRUPOSURA) Earnings Call Transcript & Summary

Today, we are joined from Grupo SURA by Gonzalo Perez, the company's CEO; Ricardo Jaramillo; Mónica Guarín, VP of Human and Corporate Development; Juan Luis Munera, VP of Legal Affairs. From the subsidiaries we have Juan Fernando, VP of Finance and Investments of Suramericana; and Carlos Oquendo, VP of Corporate Finance of SURA Asset Management. Thank you for joining us. Let's give the floor to Gonzalo Perez.

Thank you, Daniel. What a pleasure to greet you and thank you for joining us to provide the results of Grupo SURA during the first semester of 2021. Let's begin by discussing the revenue of the company, which we want to divide as we have, traditionally. First, we have the revenue from premiums of Suramericana, which have been growing double digit. And it's important to clarify here that in 2020, revenue from premiums of the companies were also positive compared to 2019, up twice the inflation. There is something I want to underscore. Revenue from premiums today from Suramericana from 2016 to 2020 solely organic growth equals COP 4 trillion. This practically represents -- the revenue came from the acquisition of RSA operations in 6 countries of Latin America, which was $1.2 billion back then. So what entered Suramericana for premiums was almost that same figure organically from 2016 to 2020. Revenue from commissions reached a record high in the quarter of 23%. Revenue from commissions are very important in the semester of 2021, displaying a record high of 16% in the history of Grupo SURA. The equity method, in turn, during the second quarter of 2021 has also reached a record high in Grupo SURA. In total, we are talking about revenue that grew double digit, more than 14% for Grupo SURA. When we talk about the company's expenditure, let's tap first on the administrative expenses, which are growing 0.3%. This, in turn, paves a way towards the efficiency followed by every subsidiary in Grupo SURA clearly. Our head, Ricardo Jaramillo, will take a closer look of this indicator, which we will begin to follow day-by-day in the total expenditures of the group compared to our revenue. Secondly, let's talk about the huge effect of COVID-19, which reached COP 1.1 billion in losses in 2021 as well. However, we can underscore it here that despite these effects, the solvency of Suramericana and of the companies of Suramericana remain too positive, again, despite the impacts of the pandemic in 2020 and in 2021. As to the creation of value, we want to highlight something strategic that you may know of already, the creation of VaxThera, a company that will begin to investigate several important vaccines for Colombia and for Latin America, which are not produced here and need to be imported, which led to the delay of vaccinations in Colombia and in a good portion of Latin America. VaxThera will also produce vaccines on a short-term basis, I would say by 2022. And the plan -- we have a plan to open a plant here in Colombia for vaccines, not only for Colombia but for Latin America. Indeed, the strategy lies on the leverage made of every business line, giving priority to the life of people, which is one of our goals. Second, we think VaxThera is important since we foresee more pandemics. So it's our way to anticipate having more local resources for incoming pandemics. When I say local, I mean regional in Latin America to face these pandemics to protect life and, of course, to protect the economy and growth of our industries and all industries at large. Lastly, the net profit of the company, both -- regarding Suramericana, its profit moves from COP 1,000 billion negative below the budget. But remember, the impact of COP 1.1 billion in losses of COVID-19, and we underscore again that we have our solvency margin. Second, the profit of SURA Asset Management is quite positive, which we -- it arrives through the equity method for profit in the first semester of Grupo SURA of CPO 670,000 billion. So what we want to tell you today, regarding the strategy, is that we are way above what we expected for this first semester. Second, it's also important through the strategy to notice the reduction of the debt for more than COP 300 billion. Third, our program to reacquire stocks, which continues, and Ricardo will explain about. Fourth, at this investment of Clover, which was an investment that we had also, regarding the strategy of the company, creating value from this investment, and we've followed the path of creating the value of Grupo SURA for all of you and for all the shareholders. Now let's give the floor to Ricardo Jaramillo to give us a closer look of each of these figures. And again, thank you for joining us. And ahead, we'll have your questions.

Thank you so much, Gonzalo, and greetings to you all. I'd like to begin with the generation of value that Gonzalo mentioned and complement some figures about this. First, the stock reacquisition program, we have COP 30 billion now, meaning 10% of the program approved by the assembly, which we believe is an efficient capital assignment that will continue in the next coming days. Second, the strategy and deleverage in the first semester of the consolidated debt. We have a reduction of COP 300 billion, specifically at SURA Asset Management. Third, we -- with regards to capital [assignment], we continue in this process of reviewing possible disinvestments. We have the news here that SURA Ventures, where we made the first successful disinvestment of the company, especially of Clover Health, in which we invested $3.9 million, about COP 11 billion, and we have this investment of COP 29.5 billion. I mean we multiple by 2.6% of capital invested in pesos with a profitability of 25.9% effective annual in pesos. Let's move to the next slide, where we can see the consolidated income statement of Grupo SURA. The main message here is that we have a good net profit for the quarter and the semester, mainly based by the growth of positive revenue, premiums and commissions, which we'll see in the sections of Suramericana and SURA Asset Management and a considerable improvement of the equity method that we'll see ahead. And as mentioned by Gonzalo, we have a strong control of expenses by each of the companies. This led us to end with operating revenue of COP 11.6 trillion, up 14.6% over the year before. When we see the quarter, we are observing some growth of 13.2% in premiums and 23% in commissions, which we deem as quite satisfactory. Obviously, the critical point in these figures is the claims loss ratio of COVID. Remember, the first quarter of 2020, both in life [as in] casualty, the claims ratio was low, the economies were closed, the disease curves were not high. So it's entirely depend on the situation that we've seen in the first half of 2021, where the curves are high and the economies are in full activity. So the claims ratio of -- has reached more normal levels. So here, we see a difference with regards to COVID of [ $1.1 trillion ], understanding that, that claims ratio of 2021 and 2020 were COP 236 billion. Operating profit ends at COP 1.2 trillion, COP 227 billion above the net profit of the year before, up 29.3%. It's also important to underscore that when it comes to the financial result, interests were paid with good coverages, contributing COP 132 billion in the profit, and it shows a decrease of debt and coverages. And we end up with a net profit that you can see of COP 672 billion in the first half and a gain, controlled gain, up to COP 622 million. If we look at the right-hand side graph on the very bottom with regards to net profit. In this -- and the profit of the second quarter was COP 460 billion. Now let's move on to the next slide where we can highlight 2 items which are important regarding revenue. First, equity method. And here, Gonzalo already said it. This is a record high for us, and we consider it's very important. There in the graph, you can see the recovery that it's showing, reaching a figure of COP 409 billion in the quarter, really driven not only by Bancolombia, which had a significant -- that was very good. But when we see each of the investments in Bancolombia, Grupo Argos, Grupo Nutresa and Protección, which are those -- which by accounting have the equity method, all had a positive contribution. So this is -- here, you can see the difference of COP 648 billion in semester versus COP 153 billion the year before. The difference is quite important. With regards to revenue from investments, I'd say that there's a difference in -- with Suramericana, which had an impact the year before because of the higher interest rates, especially in the portfolio valued in the market in Chile and Mexico. And when it comes to SURA Asset Management, we can compensate that partly with a higher profitability of the reserve. It's been moderate, not as good as in historical years, but added to the impact of Suramericana. Basically, what we see is that we have a revenue of term investment that's very similar to the year before. Next slide. Here, we'll see in detail the indicator of expenses that Gonzalo mentioned. And these are operating expenses as a proportion of revenue in the companies in the consolidated, excluding revenue, the revenues from investments and equity method. I mean operating expenses directly from the operation of Suramericana of SURA Asset Management and of Grupo SURA, which are the ones that we consolidate line by line and the financial statements. Here, I'd like to underscore that we will make a follow-up of this indicator. Right now, it's at 45%. And as you can see in past quarters, we have come from 47.3% to 45%, that's 200 basis points, which we consider it's quite relevant. And I'd like to also shed light on the fact that when we look at the variation of the accumulated of each company, it shows the effort of the expense controlled. And here, we see a reduction close to 0.44% in total, excluding expenses of COVID. Let's move on to the next slide, where we see graphically the profit or variation of the profit of Grupo SURA. It's clear that Suramericana had an impact related to claims ratio, very, very much related to claims ratio. The company, with regards to this, is subtracted COP 293 billion of the consolidated. However, we see the different positive bars and SURA Asset Management, excluding the reserve, we see a very important contribution of the equity method of COP 429 billion. In addition to Grupo SURA, which -- when it comes to interest and coverages to reach a profit of COP 672 billion. Now let's move at the section when we look at Suramericana closer. We already gave you some ideas of the result of the company. And here, I would like to underline and give you more details of the consolidated -- of the segments. First, look at the growth of premiums, look at the controller expenses, which compensated somehow the impact from the claims ratio of COVID. So we have premiums issued, reaching COP 9.7 trillion, up 10.8%. And when we look at the graph, compared to the second quarter of 2020, it's growing 14.4, which is fundamental because it's giving us COP 1 trillion in growth in the last year. And that COP 1 trillion will give us -- give a contribution to the liquidity of the company. Looking at the claims ratio, as I mentioned before, compared to the second quarter of 2020, which was 59%. The claims ratio right now is at 71%. And those differences practically are related to COVID. Right now, the -- without COVID, it's close to 57%, which we think it's a proper level. And specifically, we're talking about life and health as we'll see in each segment. This leads us then to have a technical result that's dropping 500 basis points. We have a technical result of COP 1.3 trillion in 2020 to COP 1 trillion in 2021. Those 500 basis points, as a percentage of the premiums issued, are being compensated partly with savings and expenses. You can see expenses move from 16% to 14%. There we have 200 basis points. So the difference for profit is 300 basis points of premiums issued related to claims ratio. The other 2 highlights in Suramericana are revenues from investments. We see a decrease in these, mainly because of the increase of interest rates. However, we have to highlight as well that the interest paid by the decrease of debt and by having the debt index to inflation, gives us lower interest paid. So with this, the company is reaching a negative profit of COP 1 billion, practically in 0. Some message is important to highlight here first. The Company had a budget of about COP 52 billion. I mean, the difference that we're having versus what we budgeted is COP 53 billion. That's one point. And second, we like to reiterate that we have -- what we have said from the very beginning of the pandemic, both the liquidity [ and ] the solvency of Suramericana's different companies are at healthy and positive levels. It's also important to say this even after the claims ratios that we had last year and those that we have this first half of the year. We hope that the evolution of the company in the second semester will continue with the curves that are favorable as we have the vaccination process underway, which gives us more peace of mind in the region and that these figures [indiscernible] half of the year improve. Next slide shows us graphically the profit of different segments. Here, basically, I have 2 messages for you. The profit of the segments of life, general and health, have been positive. I mean the company in its fundamental segments is showing positive profits. Obviously, their operating expenses and expenses related to interest that give that profit of COP 1 billion negative that I talked about. But the profit of the segment is still positive. And second, the evolution of the quarter, we see the fourth quarter of '20. The first quarter of 2021 were negative in the profit of the company. But now we have positive figures. Let's look at the segments now. First, let's look at Life, which continues making major efforts in controlling expenses, mainly because the impact -- the big impact that the pandemic is seeing in this segment. Premiums have a growth, as we've said, positive in the second quarter of 17.6%. Claims ratio is about 68%. This segment quarterly is reaching levels of COP 1.5 billion in revenue. We see on the top right graph, how the workers' compensation is showing big growth in the past year, growing 28.8% compared to the second quarter of 2020. And we see how commissions and expenses have been contributing significantly to counteract the impact of the claims ratio. The commissions -- regarding commissions, there is a blend of the channel. We see less commissions in the channel affinity. There's a reduction, as you can see, close to 620 basis points. And in expenses, we have a reduction close to 640 basis points. All this to end the property of this semester close to COP 38 billion in the quarter. Specifically, you can see a minus [ $10 billion ]. But in the accumulated semester, it's a positive profit. Next slide shows the Casualty segment. Here, we want to reiterate that it returned. It's now on positive ground, specially [cards], which is the main solution that we have, showed a very positive quarter growing 20.6%, and you can see also the claims ratio had an improvement in the first semester of 2021 to the second quarter. We have to highlight that the growth is not that strong because in this segment, there is an issue of a series of multiannual policies that don't last a year and that were issued in the first semester of 2020, and that will be renewed at the end of the second semester of '21 or in the year 2022. So that's why we see growth close to 1%. We see stability in different topics of administration expenses, commissions and technical expenses. We see an improvement in the first quarter of the combined ratio. And we have positive profit, again, in the quarter and in the semester. Understanding that in this segment, as we mentioned in previous calls, we also have impacts from COVID-related to the operations from Mexico and Panama. Here, we see close to COP 68 billion of that impact in those countries. Now let's move to the segment of Health in the next slide. This segment shows a growth very important in premiums. We'd like to highlight the management that's being made in this segment. First, because the quarter is reaching a level of premiums and revenue of COP 1.7 billion. This compared to the first quarter of 2020, which grew 43%, and the company has been able to maintain the level of the control of expenses and claims ratio. Even with that big growth of subsidiary -- of affiliates close to 200,000 in the semester, now we're almost at 4.4 million affiliates, which gives us an important scale and allows a profit in the quarter of COP 25 billion. Here, I want to underscore the importance of [indiscernible], one of the companies that we have in this segment that contributes to everything has to do with tests and the diagnostics made by the company, it has been very busy, as you can imagine, during the pandemic. As to vaccines, we'd like to inform you that the company has vaccinated or given close to 2.4 million vaccines and the death rate continues at very level -- very positive levels, 0.88%. With regards to reference, you can see why we think that this is positive for the customers of SURA. And it's an added value, which because of the bottom line, we're giving this to the clients. In Colombia, the fatality is 2.61; and in the world, it's at 2.16. On the other hand, we see a growth in the complementary plan still. We're reaching close to 250,000 affiliates, which also we consider is quite significant. Now let's move on to talk about SURA Asset Management. First, we'll see the consolidated income statement pointing out also some of the items I mentioned before. I would say that SURA Asset Management moves through 3 large pillars. First, we'll see closely the business line. It's a very positive growth of commissions in the savings for retirement as well as voluntary. The second item has to do with the equity method that comes from Protección. And the third item is a major effort made to control expenses. This allows us then to reach an operating profit of COP 528 billion, up 65% in the profit of the company. And at the end, in the item of net earnings, we see, in the first half of the year, a profit of COP 305 billion, up 154%, which is quite positive. Here, we'd like to highlight the revenue from commissions, quarter-by-quarter, growing 23.4%. Also, I'd like to highlight the operating earnings without reserves showing on the [ dotted ] line on the upper right-hand graph, a very good progress. And the variation of profit seen in the graph how the segments contribute to those 305 in the company. So now we can look at the segment of savings for retirement in the next slide. Here, we talk about revenue from commissions that are growing significantly. It's important to highlight the growth of AUM, keeping in mind the retirement that you know of -- that happened in Chile and in Peru. We've seen growth of AUMs, and we recovered the salary base in the region. Revenues from commissions are separated, revenues related to charges of AUM [indiscernible] Mexico and charged by flow. Both are close to 20%, which is quite positive. Part of that is related to the exchange rate, understanding that Colombian currency devaluated a bit more than the currency of other countries. It's about 5% of that figure is related to the exchange rate. In the lower left-hand side, you can see the particular trend of this segment in the control of expenses from 56.2% to 51.2%, showing that drop in [control]. And we also see how in revenue -- here, we see throughout different geography what's happening. In Mexico, Chile, Peru and Uruguay, we see growth that are very positive. I'd like to highlight here the alpha in the portfolio. For the first time, we have an alpha of 83% of AUMs with Alpha, which we consider is quite strong in our management, especially in moments of high volatility in the markets like those of today. Now let's look at the investment business of SURA Asset Management, which is the voluntary business, and we have different messages. First, we have a fast growth in the revenue, as we mentioned. And in the third quarter in a row, we have positive figures and we have a profitability on the short and medium term in the segment that will be above the capital cost. The idea is to recover all of the charges that we have invested in the latest years in the platform that we added the company regionally. Growth of relevant AUMs. We see growth against the second quarter of 2020, up 21.4%. Net flow is still in the quarter, negative of BRL 1.2 billion. And in total, of the semester, we see a positive net flow, which we think is quite relevant, understanding the situation in the region. And we'd like to highlight the levels of revenue that we're reaching now in the first quarter reached COP 100 billion in this business line. And the operating profit, as we mentioned, is positive for the third quarter in a row. So with this, we end the summary of the figures, I'd like to emphasize that these figures give us satisfaction. We have the challenge to overcome the COVID. But these are figures that are better than expected, better than the budget and aim towards a clear goal that we have in each of the company and each of the business line to reach that level, to create value from our profitability of a ROE above the cost of the equity. So now let's go back to the team and begin our Q&A session -- live Q&A session. Thank you.

[Operator Instructions] And we have Andres Soto from Santander.

My question is regarding expenses. We saw improvement in this quarter. Could you give us more details about the goals you have on the medium term regarding this reacquisition of stocks that you have right now?

Andres, overall, and then Ricardo and my colleagues can reply, we clearly know that the efficiency of this company is fundamental for its competitiveness. Depending on each of the solutions, there are goals that are different. The insurance business, we have set goals year-by-year that have been met. And really on a medium and short-term basis, the goal is to reach 9% of expenses over premiums issued. Also the reduction of gold in the SURA Asset Management business is also determining. So we do have goals for 3 and 5 years from now that seek precisely that efficiency in the operation to create value. So -- and it's also important to clarify that the goals of efficiency are not only at a control of expense but operational models to develop strategies and, in turn, to have more efficient processes so that the reduction can be more structural within the businesses or not just something temporary. I don't know if Ricardo would like to add something.

Yes, Andres. I'd like to take advantage of this moment to tell you that we are looking closely how to have more gains in the market. This has been something that we have been asked about a lot. Right now, as Gonzalo said, we have a 5-year projection in each of the company. That's part of the portfolio of Grupo SURA and that shows indicators. And little by little, we have been showing the -- where these indicators reached that you could have more visibility of our goal to have a higher profitability level. We are a bit behind but -- with the COVID, but particularly, the indicator that's at 45% will really depend on the expenses and the levels of expenses that we'll have. What I want to understate here is that we will begin to look at this indicator of revenues versus expenses, and we'll be keeping you posted about this. Also -- we've also had -- well, we've been asked a lot of why we're not reaching our goals, but, Andres, I think that this gives you a good answer.

Perfect, Gonzalo, Ricardo. Definitely, it will be great to have more information about that. Another question that I have for you has to do with the leverage. To reduce your debt, right now, what's your real goal when it comes to the deleveraging?

Perfect. In that discussion, we've always said that we have to understand that our goal is that we have to look at the debt and the consolidated. Right now, we have COP 8.5 trillion in debt between SURA, SURA AM and Grupo SURA. This year, particularly, as we said already, SURA AM has dropped 300 -- about COP 90 million, which is part of the liquidity that the company had in past investments. So this company this year will deleverage and even with the acquisitions of capital, we can continue more deleveraging when it comes to SURA AM. When it comes to Suramericana, you can imagine with the claims ratio and the profits, we have to be very careful. We do not have a maturity until 2023. So Suramericana will have lower debt levels. And if we look at this through indicators and with the rating firms, you could say with dividends received, we really understand, based on the results of the company's last year, what we see, our results that are much more higher than expected from all these companies. So the idea is to have indicators that are more proper and go hand-in-hand more with rating firms. At Grupo SURA, the debt is COP 4.4 trillion. And as we've said in the past, we have resources available of cash flow, close to COP 900 trillion -- COP 900 billion. So that's a third that provide it to dividends. So again, we've been consistent really to return the dividends. And the third part is for the reduction of delveraging. We have to keep in mind that the reacquisition of stocks is one of the projects that we think is interesting to deleverage and to assign capital efficiently. As we said before, we're beginning this process, and we have to start seeing how to continue deleveraging in the best way. I would say that during this year, the results of our debt in Grupo SURA are not as good as expected. However, when it comes to the disinvestments with Clover. Here, you can see that we're managing constantly how to use that -- are to manage that negative capital figure because the idea is to reduce the deleveraging. So surely, we'll have this investment that will allow us not only to have the organic growth needed for the leverage, but also to have better capital at hand. So we do expect this year to have a level of debt in Grupo SURA way below what we saw last year. It really will depend on the processes of the acquisition that we have. And with the processes of use and the standardization of the dividends received, we can increase the speed of deleveraging.

I would like to add particularly this. The assignment of capital seeks to reduce debt, yes. but to optimize equity because as you've seen that in Suramericana and SURA Asset management, both companies have released capital to reduce their debt. SURA Asset Management, for instance, this first quarter and -- did very well this first quarter of the year as well as Suramericana last year. So every day, because when we look at this equity, we can improve and release capital that can help us -- as Ricardo said, help us to accelerate the process of reducing the leverage. I would like to add also that we see this as marginal increases semester by semester. But it's important to see when was the maximum term of deleveraging compared to today? Why? Because we have taken an important path on this. We -- before, we were at COP 11 trillion, now we're COP 8.5 trillion. And really, the company has been consistent in this process, and we have to reach that middle term in which we disinvest and we reduce debt again. We have to keep in mind that deleveraging is done especially with companies that are in better position than in recent years.

And another question, if you allow me. Regarding the tax reform that's discussed in Congress. What are the implications or the impact that this will have on your business? That is only applied to Bancolombia or the other subsidiaries, we have in Colombia? Is there a change in the law of percent of tax?

Andres, I would say, overall, that we're very cautious because what's on the table right now is a proposal and the impact on the different companies, really it's very significant. However, that -- we have to take a step -- baby steps because we have to see what really will be approved. And it is important to keep in mind that we're very aware that we all have to make sacrifices for our countries. So when we have higher interest rates or taxes that will have to have an impact on deferred taxes and also to reduce the [ ICA ]. But also in the insurance companies -- in the constitution, they have conditions that are more determined, much more defined. I don't know if somebody else would like to add something?

No. Everybody has said already. But really the really the impact that we see with that is not very significant.

Right now, we have no other questions by phone. Let me read some questions we received by chat. First from Daniel Guardiola from -- could you tell us why -- could you tell us more about the results of the mandatory segment? What is your forecast of the returns for 2021?

Okay, Daniel. Look, withdrawals in Peru and in Chile have had a condition that has forced us to generate liquidity and to disinvest in assets that we had, to be able to meet for our investors or those that request the funds. This, in turn, even in Chile, it has forced us to have a negative, when it comes to the yield of the reserves. But in countries like Peru, Uruguay, Mexico and Colombia. We have had a yield of the reserve above 5% or 7% even in Mexico and 16% in Uruguay. When it comes to the recovery in Chile, if there are no more withdrawals, I think that the discussions held for our fourth withdrawal in Chile won't take place. And it will really depend if we have to make those investments to reach the proper yields. However, this year, we are above figures of last year. Last year in the months of April and May, we had good recovery levels. And this year, we expect to close with total reserves to compensate 2020. So really, it will depend if we have the withdraws or not and the investments we are forced to make.

Another question from Julian from Corredores. There are 3 questions in one. The number -- the increase of numbers of subscribers in health care is organic. What's your expectation of this -- for this year and next year? And when it comes to the capital ROI, what's your expectation of that?