Porto Seguro S.A. (PSSA3) Earnings Call Transcript & Summary

Good evening, everyone, and welcome to the Porto Seguro Fourth Quarter '23 Earnings Results Conference Call. Please be advised that this presentation is being simultaneously recorded and translated into English. The slides presented are available for download at our IR website. After the end of the presentation, we will start the Q&A session. We suggest that you send your name and company through the Q&A icon on the bottom of your screen. [Operator Instructions] Forward-looking statements made during this conference call regarding to Porto business prospects are based on the beliefs and assumptions of the company management and on information currently available. Forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and depend on circumstances that may or may not occur. The overall economic conditions of the business sectors in which Porto Seguro operates and other operational factors may impact the company's future performance. I would now like to invite the Porto executives to begin the presentation.

Good evening. Good evening, everybody. This is Domingos with the IR team. First of all, I would like to thank all of you for your attendance. We have changed the schedule of this call due to the request of some analysts as there were 2 calls happening at the same time. Here with us, we have Paulo Kakinoff, our CEO; Damadi and all of the heads of the verticals of Porto. They will all be at your disposal for the Q&A session. I will now give the floor to Paulo Kakinoff.

Good evening, everyone. It is a pleasure to be part of this first earnings results call because today, I am the spokesman of truly admirable performance carried out by the executive group that is sitting around the table. We have historical results from Porto, which gives us great enthusiasm if we consider what lies ahead of us and the positive environment of the beginning of the year in terms of the market. The results for the fourth quarter '23 have among the highlights that we would like to underscore, the group's net profit that grew by 24% year-on-year. For the entire year, the group's net profit doubled vis-a-vis the year 2022. Return on revenue was 23.9% in the quarter and approximately 20% for the year. It's worth noting that this return includes an excess capital of BRL 3 billion considered managerially at the holding. If we look at the return on equity of the verticals individually, excluding the excess capital, ROAE was 38.4% in Insurance, 37.7% in Health and 41.6% in the Bank. As of the first quarter '24, we will be reporting the service verticals with insurance rebates, as announced at our Investor Day. The service results under the new criteria would be BRL 265 for the year. Throughout 2024, we will speak about structural movements and the very relevant opportunities in that vertical. In operational terms, Porto grew in virtually all business lines with highlights in Auto, 245,000 more vehicles insured, an addition of 4%; in Health, 129,000 more lives or 31% growth; in Banking, a significant improvement in default, falling from 7.1% to 6.6% year-on-year. At the Bank, we saw growth of 84,000 plastics and 22% in Consortium revenue. Finally, the consolidated financial result grew 111% year-on-year, reaching 137% CDI. This quarter, Porto became part of the ISE portfolio of B3. I would now like to give the floor to Celso Damadi for further highlights.

Good evening, everybody. I highlight on Slide #5 the growth of revenue for the fourth quarter, we reached BRL 8.4 billion, a robust growth in all business verticals; and for the year, a growth of 16.2%, reaching almost BRL 31.7 billion in revenue. Now in Insurance, for the fourth quarter, we had BRL 5.4 billion in revenue. Porto Health, 1.3 -- almost BRL 1.4 billion in revenues, a growth of 48%; Porto Banking, BRL 1.3 billion in revenues; and other businesses, a drop of 8% due to the slowdown in subscription cars in the other business line item. During the year, Insurance reached BRL 21 billion with 12% growth; Health with a growth of 38%, reaching BRL 4.6 billion; Porto Bank, 12% growth, BRL 9 billion; and other businesses with 44% growth during the year. So here, we show a growth in profitability and significant growth during the year. On Slide #6, you'll see a significant growth in the net income for the quarter, reaching BRL 619 million in the fourth quarter. Historical profitability, although the fourth quarter historically is the best quarter, in 2023, it ended up being much better than the fourth quarter in '22. And in 2022, it was also our best year. For the year, a very robust profitability of 99.7% above the year 2022. Now this profitability is 100% recurrent. There are no nonrecurrent events. There are some nonrecurrent events that, of course, reduced this. We had some write-downs of intangibles of approximately BRL 40 million, representing BRL 2.3 billion. Otherwise, our ROE in the fourth quarter in Insurance, 38%; 42% in Banking; 38% in Health; and 28% for the entire holding, including that capital surplus already mentioned. Even with BRL 3 billion of capital, we are delivering a ROAE of 24% in the fourth quarter, 20% for the entire year, 38% in Insurance, 30% in the Bank and 28% in Health. To the right, you see historical profitability vis-a-vis the CDI. That CDI was quite steep. And despite this, we had 51% profitability vis-a-vis the CDI financial investments in the fourth quarter, 106% of the CDI; once again, a very favorable performance. Leverage by stability in variable income and private credit, although we do have real interest mark-to-market, our investments advance significantly in private credit and variable income. And our allocations were very good in the fourth quarter. I would now like to give the floor to Don (sic) [ Rivaldo ] , so he can speak about Insurance.

Now if we delve into the verticals in the next slides, on Slide #9, for example, when we speak about services, while we had a growth in all business lines, 16% P&C; Life, approximately 9%. If we look at the loss ratio of vehicles, an improvement to 6% in the year; Life, 34%; and in P&C, we had an advance of 12 percentage points. And we have 2 events that are relevant, contributing to approximately half of this increase. And 41%, of course, is a very good loss ratio index. In Slide #10, to the loss ratio, we had a return on net equity and a combined ratio of 87.8%. On Slide #11, speaking about the Health vertical, we would like to underscore a very strong result in all the areas. An increase of lives to 129% (sic) [ 129,000 ], 31%; and the growth of revenues of 53% year-on-year. Now the net income was BRL 200 million, contributing with 10% of the consolidated results of Porto. On Slide #12, once again, we will speak a bit more about the loss ratio. When we look at Health individually, the loss ratio was 77.1%, dropping quarter-on-quarter. And in the consolidated position with Dental, 58.8%. We have 37.7% for return on net equity with BRL 66 million equity and accumulated BRL 200 million. On Slide 13, we will be speaking about the Banking vertical very broadly. We had revenues of BRL 4.9 million (sic) [ BRL 4.9 billion ] and a return on net income of 30% approximately. In terms of business expansion, what we would like to highlight are the consortiums with 29% growth, capitalization growing 10% year-on-year. And perhaps more interesting data that we would like to present for the first time is the prioritization of the Porto Seguro channel that we call the aquarium. And if we break down this information, we see that the open-sea sales, non-relational sales had a drop of 42%, while the relational sales where we have a better profile, we had a growth of 15%. The same dynamic can be seen in direct credit to consumer dropping 61% in the open sea and growing 6% with the Porto clients. We ended the year with 3.9 million cards. On Slide #14, to continue on with this vision, we have added a mix of sales with the same breakdown, once again, the Porto relational clients, the Porto aquarium compared to the open sea, reinforcing the prioritization of relational clients. Now the results of this strategy, which was used for previous quarters, is being captured, showing a better quality of the portfolio. When we look at the top right of the graph, we can see a drop of NPL of 15 to 90 days going to 4.2% and the drop of 90-day NPL dropping more than 80 basis points going to 6.6%. With this, I would like to end the presentation of the verticals, and I return the floor to Mr. Kakinoff.

Continuing on Slide 15, this semester, we have decided to show you the market share in some of our areas of action, and we have added segments where we have a growing focus in terms of investment and production consortiums held. Porto specifically in 2023 with 28% market share in the auto market and BRL 56 billion; 22% in residential, a market of BRL 5 billion; 25% in CNP with BRL 4 billion; 13% in real estate consortium. The entire market has BRL 376 billion and 57% in landlord protection, a market of BRL 1.4 billion. There are markets that have always been a more recent focus at Porto, include 44% in car consortium; 34% growth in Health, a market of BRL 228 billion in the first 9 months of the year, where we still don't have 2% market share in cards until September, Porto reached BRL 37 billion, representing 2% share, focusing mainly on its aquarium, its own clients. Now the idea of this slide is to show our beliefs that Porto still has an embryonic participation in some segments. Now we believe the strength of the brand, combined with the quality of services, evidenced by NPS above 75% and more products will allow us to grow a great deal. And for decades, this has been one of the most active parts of the company and has enabled us to work very positively with all of the products and services, once again, bolstering our growth even in areas where previously we did not participate. We are now going to open up for Q&A, and we're anticipating our vision for the year as this is of interest, we have had a very healthy first 2 months. We have been able to recompose our premiums. It seems we still have room to grow, and we see a benign and very robust environment to grow. It's still too early to have visibility for the quarter, and we don't give guidance. But in terms of strategy, the current focus and effort is towards recomposing margins, already taking risk into account. What I'm trying to convey here is that our focus, especially in automobile, will remain on the profitability of the operation and not on market share gains. I would also like to point out that the evolution of the current CP table with a small annual drop is more in line with long-term history. What happened during the pandemic with used car prices rising was actually the exception. We're all excited about the potential of the markets in which we have less relevant market share. We will now go on to the question-and-answer session.

[Operator Instructions] Our first question comes from Antonio Ruette from Bank of America.

Congratulations for your results, and thank you for the disclosure of your sales and channels and the open sea, which is very good. Now I have 2 comments, one in Health, the other in Auto. In Health, do you think this will be another year for the transfer of prices and if the level of the loss ratio of 23% is the level that you would like to operate at? Now that's for Health. In Auto, in the last message given by Kakinoff, it's very clear that the path is recomposition and that the environment is very benign. Now nowadays, we see the fleet growing very close to 4%. Could we expect a price transfer to think about a growing premium from mid to high single? Or would you maintain profitability, not expect a drop in prices, and if the growth of the fleet would make sense for 2024?

Antonio, this is Sami. Thank you for the question. Regarding Health and the loss ratio, a year ago, we remarked that there was a natural process of going back to the pre-pandemic levels between 12 and 24 months. And in fact, this is what is happening, as we had mentioned. The results in the industry are not the same among different players. Some have already disclosed their earnings results, but luckily enough, we are on a very positive path. And we see the return of a seasonality that we had in the pre-pandemic in terms of loss ratios. A year ago, we spoke about a gradual return to pre-pandemic levels, that this is credible. It is ever more [ sensible ] than in the past. And we're going to see, unless we have news of pandemic or some externality, we hope to see this gradual trend, and review has been done in terms of this. Now we -- to simplify this, you can see the results we have obtained. We began pricing very early on at the end of 2021; beginning of 2022, we had significant repricing. But we also carried out other activities, anti-fraud, partnerships, the creation of virtual verticalization that was very important for us. We're going to continue to grow with our clients for the industry, perhaps not with the same magnitude that we grew last year. And each player will have to analyze their own portfolio, but of course, prices continue to be very important for the current year. Antonio, it's too early on at this point to share any forecast for growth in certain items, especially because Porto doesn't usually do this. When we speak about the realm of possibilities in the present-day moment, if there's the possibility of growing to a mid- or single-high digits, yes, there is that possibility. The market is attempting to capture all of the opportunities of price as well as risk. And this is the main component that characterizes our dynamic at present. So this is the utmost visibility that we have at present and that we can share with you. Rivaldo, who is the CEO for the Porto Seguro vertical, can perhaps refer more to what has happened with the market at the beginning of the year.

Well, I think we have offered a summary of what is happening at present. This is a satisfactory environment. We're recomposing our prices. This afternoon, I was in the performance room following up on the market during the last quarter of '23. And the market, well, it rehearsed greater competition. But -- so perhaps in January, we saw a recovery as well as in February. And we look upon this with very good eyes, and everything is aligned with the market.

The next question is from Kaio Prato from UBS.

I have 2 questions at my end. First of all, referring to the Auto segment, but focused on the loss ratio, thank you for the messages at the end, Kakinoff. Simply a follow-up, if you could approach those 2 factors somewhat more, the drop of the CP table. I would like to make sure that, that drop that we saw recently is aligned or better than you had imagined at the beginning of the year. This could be a relief for your loss ratio. And secondly, the climate effect from the beginning of the year, which is the visibility that you have in terms of rainfall in this region. These 2 factors and how they have performed in the beginning of the year and your view on the loss ratio.

When it comes to the CP table, we have observed that even though there is a trend towards a reduction, it is less deep than what we saw even at the end of last year. There is a slowdown, and it's important to say that when we look at the different segments, our breadth, our coverage is much greater than that of other segments. For example, auto leasing that is more focused on volume and compact cars, a reduction -- a significant reduction will take place. Now regarding the flooding due to the rainfall, this has been a first quarter that was better than that of last year. And well, everything that you follow up on in the press about these recent flooding, this affected peripheral regions. It has been a month that is well within our forecast. I don't believe there's anything alarming or outside of context. Now to underscore this, although we do have climate change, we cannot debate this. When we look at our own background and the risk modeling technology at Porto, there is no event that could suggest a systematic change that could impact our loss ratio when speaking about risk. An example was just given differently from the first month of last year that were characterized by the very strong rains on the coast of São Paulo. As a counterpoint, we have had a relatively dry period when it comes to rainfall. Of course, there are visible, evident changes in the climate, but nothing that could impact our loss ratio due to systemic changes.

That is very clear, Kaki. The second question, if you allow me, when we look at your investment portfolio, there is a shift, there was a growth of 20% in the portfolio. It has now gone to 28% with a drop in mark-to-market in the curve. If you could remark on your 2024 strategy and give us details in terms of what we can expect during 2024.

Yes, this has been a onetime change. We saw an opportunity in the prefixed income. We made very low applications. Because of the scenario at the end of the quarter, we decided to reduce our prefixed investment. And this quarter, we have made some movement to recompose that part. It was a tactical move pre and post the mark-to-market.

Next question, Daniel Vaz from Safra Bank.

My question is to Marcos Loucao. I want to ask about Porto Bank. I see the invoicing growing vis-a-vis the industry. I would like to know if you're going to speed up during 2024. And you have changed the risk profile of the card. If we compare this year-on-year, there has been a drop. So which is the concession or granting of the CDC? The last question for that vertical, which is the impact that you are expecting due to the change of the rotational credit?

Well, thank you. Let's speak about the impact of the drop of interest rates. Although we do have impacts on the revenue and the profitability of the credit cards, it will be immaterial when we look at the vertical as a whole. And this is part of the complementarity that we have among products. We have some actions to mitigate this, and we expect to have significant growth in the vertical. In terms of the credit card and the invoicing, well, the invoicing of clients that use our credit card has grown. The vintages that we sold in the past, we now see a better reactivation and a generation that is 30% higher. We believe that the more relevant these new vintages become in our portfolio, the more growth we will have. And we believe that the growth will be higher in the market. If we compare 2023 to '22, we had a significant environment of adjustment, especially in the financing of vehicles, focusing on our internal audience, and we have significant growth in another modality, which is financing in vehicles. We showed you the potential of consortiums, and I can refer to this. We have the release of financing and credit for vehicles, that is still very incipient, but it's an enormous opportunity we could explore in 2024.

Allow me to carry out a follow-up. Well, in terms of the rotational credit, you said it could reduce the revolving credit, you said it could reduce your invoice.

Now when we were speaking in other calls and when we had this question, this scenario was still uncertain in terms of the implementation and what would happen with the first vintages in the bank, Daniel, the impact will be immaterial.

And in terms of funding opportunities, do you have a disclosure in terms of CDP, if they will be pre or post, if you're going to increase what you do in 2024?

Now in the final funding strategy with the digital accounts we are developing, we are going to make sure we don't have a great impact on CDP. We have already seen an improvement because of the risk adjustment and the revenue that we have released for the known clients. Our strategy for 2024 is very similar to that of 2023.

Congratulations for your overall results.

Thank you, Daniel.

The next question is Thiago Paura from BTG.

Congratulations for your results. I have 2 questions at my end and a follow-up in terms of previous questions. Beginning with treasury, we saw a much better mode in 2024, less volatility that shift between the pre and the post. Now thinking in the short term for 2024, what is it that the company will pursue so that we can have the right outlook in terms of the drop of interest rates?

Well, thank you. Thiago, this is Izak. In terms of guidance for returns, we're speaking about risk factors very clearly. We have an allocation in real interest rate and allocation in the curve. And of course, we depend on the IPCA. Now the prefixed parcel has a relatively short duration. We're not going to change this. And the greatest risk is variable income where we have a strategic allocation for the mid and long term. That has fluctuated 4% to 5% per year. This is where we expect to have a return, IPCA with something very close to 5%, and this will be the gap in the results of the year.

The second question also refers to insurance as a whole. If we look at the last quarter, we had a combined ratio that was somewhat higher. The loss ratio of November had an impact. I would like to understand if it's due to that behavior of the loss ratio, the combined ratio of approximately 90% is more sustainable for the short and midterm or for the mid and long term or if you can still capture some improvements in that index through G&A or if the interest rates drop again in 2024.

This is Celso, Thiago. Our pricing for insurance, very generally, and we're referring to Auto is -- has had good results, such as in Life, Residential. And Auto, of course, our vintages are very well positioned. We understand that fluctuations and result in 2024 will tend to decrease. We will have a stable result during 2024, of course, if we respect seasonality. And the fourth quarter tends to have higher seasonality in Health, for example, that always has a good result in the fourth quarter. I do believe that we won't see significant changes in commissioning, for example. We should have gains of productivity this year. And yes, we're seeking productivity gains and results that are compatible in 2024, compatible with those of 2023, something more stable, always respecting the seasonality of each quarter. But during the year, the results will be quite compatible with those of 2023.

The next question is Guilherme Grespan from JPMorgan.

I have 2 questions. I would like your help to think about profitability. Now for some quarters, Porto has been reported -- reporting 22%, 23% of ROAE. Now in the long term, 5 to 8 years is ROAE has increased 15% to 16%; and before the pandemic, to 21%, 22%. When we look at this by product, we're speaking about margin recomposition. And then if we look at the SUSEP data, some players are operating at levels of 25%, 35%, in that range. I'm asking for your help to see how we should think about the Porto profitability going forward, if the ROAE above 20% is sustainable and if it should be increased to higher profitability because of the company? Secondly, speaking about banking, one of the banking things was to have a digital account to pay third parties through the accounts so that Porto can have the float of the operation. Is this a short-term or long-term desire?

Guilherme, to speak about the strategy, we have 2 avenues for opportunity: one for deposit, we've already spoken about funding; and another avenue are accounts that will work with the case, and we will capture the value of this anticipation. We're developing this. We're trying to work with individual people and then company. Now what we're doing is to work a bit with potential anticipations to extract value regardless of the account being digital or not. For the short term, yes, we will be using anticipation products to capture some of the benefits.

Guilherme, to speak about ROAE, ROE, of course, we do have certain outlooks here, but it's very, very difficult to give you figures or levels. If we consider the exogenous factors now to speak about the present-day moment, a benign moment, a coherent and robust positive competitive market. Now the main drivers of high return rate will be the structuring actions carried out by Porto. I'm going to refer less to the Auto vertical. We're always speaking about the Auto vertical and its perspective. I would like to underscore other products, other verticals. The Consortium, for example, a product with very consistent growth throughout the month with an enormous potential for expansion and with offers that are ever more frequent in this product, we foresee significant growth here in terms of Health. We see enormous consistency in delivery. The strategy when it comes to how we act, the quality of the portfolio management as a whole, I think that you will agree that this has been a highlight in that industry with significant potential for growth. Now perhaps the most important vertical that I would like to mention in terms of potential and the right to penetrate that Porto has is our service vertical. It is an asset of the brand. Now the market perception is the high quality that we have in Porto services. And through organic growth and through M&A opportunities, we can accelerate that expansion in terms of the portfolio and in terms of our geographical footprint. We can do this significantly. And this is one of the main agenda for Dom among all the other hats that he has of M&A and strategic planning. So that perception of the brand can be joined together with a very important infrastructure, and this includes the Auto agenda. We have accredited car workshops. We have Renova, which is the greatest automotive spare parts renewal system in Brazil. Now all of this under the management of the service vertical to make up some of the examples that I would like to convey to you, enabling us to sustain these high levels of ROAE that we have observed.

[Operator Instructions] The question-and-answer session ends here. We would like to return the floor to the company executives for their closing remarks. You may proceed.

Once again, on behalf of the entire team, I would like to thank all of you for your attendance, especially at this time of day. And thank you also for the questions that allow us to go more in depth in some of the important issues that we want to share with you. Our IR team is always at your disposal for any additional doubts or questions that you may have. Once again, thank you very much for your attendance. Have a good evening.

The earnings result for the fourth quarter '23 for Porto ends here. We would like to thank all of you for your attendance. Have a wonderful evening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]