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

Good morning, ladies and gentlemen, and welcome to the Porto Seguro's Third Quarter of 2020 Earnings Call. Please be advised that this presentation is being recorded and translated into English. Slides are available for download on the Investor Relations website. [Operator Instructions] Any forward-looking statements made during this conference call regarding the company's business prospects are based on beliefs and assumptions of the company's management and based on the information they currently have available. Remarks about the future are not guarantees of performance. They involve risks, uncertainties and assumptions as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors should understand that the overall economic conditions, the industry and other operational factors may affect the company's future results and lead to results that differ materially from those expressed in these forward-looking statements. Now I would like to turn over to the Porto executives who will begin the presentation.

Good morning. My name is Paulo Kakinoff, and it's a pleasure to be here to present the third quarter results for Porto Seguro. We have Celso Damadi, our CFO; Domingos Falavina, Investor Relations Officer and CEOs of our business verticals and the Head of Porto asset. This quarter, we have continued to advance in essential pillars in our strategy. We sustained high NPS and ratified our focus to provide a better experience for our clients. So we advanced across our 4 verticals in the Porto ecosystem, which can be seen by the expansion of 4 percentage points in combined operations for health, banking and services, both for income and revenue. They now represent 43% of the total. And we also reached consistent financial results, expanding the number of quarters in which we had double-digit growth and that is consolidated as we'll see soon. Here, we see a comparison between the results for this quarter and the first 9 months of 2025. Total revenue was BRL 10.5 billion, up 11% versus the third quarter of 2024, and Porto is reaching the second quarter in a row with a revenue above BRL 10 billion. And net income, this is the third quarter in a row with results above BRL 800 million, up 13%, and an ROAE of 23%. All of the figures for the first 9 months of 2025 are at the highest historical level for the company. Total revenue, net income and ROAE. So we have reached BRL 3.5 billion in total revenue. Net income is close to the total amount we had last year, BRL 2.5 billion and ROAE was 23.4%. The company is in its fifth quarter in a row with ROAEs above 20%. There are several factors behind this performance. And I'd like to highlight 2. The company's capacity through its reorganization across 4 verticals to continuously capture the huge potential that the brand has across its 4 business segments, and that will be a long road that we can continue trailing and especially cross sales for products across our 4 verticals to our ecosystem of over 18 million clients. We're currently reaching 32 million businesses distributed across these 4 verticals, at Porto Seguro, we have 16.7 million items, up 6% versus last year. And at the same time, we have had a very well-behaved loss ratio with a slight increase of 0.8 percentage points versus last year. In Porto Saude, we added 335,000 lives out of which 143 were in Health Insurance and nearly 200,000 in Dental. And the loss ratio was also at a healthy level with a slight reduction of nearly 1 percentage point or 0.8%. Porto Bank is growing in revenue and net income at a significant level. Our revenue went up about 30%. And or 29% to be precise and an increase of 19% to our net income. At Porto Serviço, we had a reduction in EBITDA, especially due to the lower number of claims in Porto Seguro, which is the main revenue-generating source for this business, but we were able to sustain the EBITDA margin at a healthy level. So to continue this presentation, I would like to invite Celso Damadi, our CFO. Go ahead, Celso.

Good morning, everyone. I'd like to highlight our 11% revenue growth as Mr. Kakinoff mentioned in his presentation. Porto Seguro grew 3.3% and auto insurance had a growth of 4% in items. But the product mix was at a lower average price. So we'll go deeper into this during the presentation. At Porto Saude, 26.9% growth reaching nearly BRL 2.2 billion. And in Porto Bank we grew by 28.7% to close to BRL 2 billion. In Porto Serviço, we had a reduction due to the lower utilization, the product mix and fewer services used from Porto Serviço. So there's a reduction here, but there is a positive offset with the reduction in claims. So this consolidated ROAE of 23% includes an increase in our revenue and also a reduction in administrative expenses. So we had a reduction of 0.3 percentage points quarter-on-quarter and 0.6 percentage points when we look at the 9-month figures. And this is due to diversification and dilution of our fixed costs, as we have been doing in the last few years. In 2020, our administrative expenses were at 14.8%. At the end of this period in September, we reached 10.8%. This third quarter, we reached the lowest administrative expense in the company. It's the first quarter in which we are at a single-digit administrative expense. And we also -- in health, we were below 5 percentage points. So we have been able to dilute our costs by diversifying products. Here, we see the results for this quarter, 32% ROAE, 28% in the accumulated figure, 26% in Saude and Bank and 18% in Porto Serviço. So returns over capital, as you know, we have a liquidity margin that allows us to grow easily across our business. and we have BRL 4 billion in capital sufficiency, which will allow us to grow in the next few years. Here, we see a net income of -- that increased 13% to BRL 832 million. It's the first time we have gone above BRL 800 million, and we see our portfolio diversification. Insurance at a share of 59%, and it is now at 56%. But again, with very interesting returns on our assets and we also see the shares of banking and health care, which have a higher share in our results. Within banking, we also have a very diverse products such as credit and cards. So within that vertical, we also have a lot of diversity. Looking at our financial revenue. We saw a significant increase due to 2 reasons. The average CDI went up about 30% in these 9 months, and we also saw significant cash generation due to business growth, which increases our reserves and also the free asset generation, which has increased both in the technical reserve and free assets. So we had expressive financial results this quarter. And here, we see the breakdown of our portfolio. We changed it slightly considering a nominal financial revenue for 2026 that will be higher than what we saw in 2025. There are still some things to do at the end of this year to prepare this for a compatible nominal revenue for 2026. Now, Dom is going to continue this presentation. Thank you, and have a good morning.

Thank you, Celso. Good morning, everyone. Going into the verticals. Something that is always a highlight is service quality. We have record NPS here for Porto. All of them have been above 8 points. When we look at auto premiums, we had a 1% growth, but over the year, we had a growth of 2.7%. Looking at P&C and Life, we also had double-digit growth. In P&C, it was around -- the accumulated figure is around 14%. When we look at the loss ratio for Auto, we had 58.2% and 52% for the first 9 months. In Auto, there was an increase of 1 percentage point. We're still at a very healthy level. And in P&C and Life, it is around 30. In P&C for the first quarter, we had a uncommonly low loss ratio. In 2025, we saw an increase in 1 percentage point and in Life, it went up to 39.5%. When we look at our results distribution. Here, we see per business area. What I'd like to highlight here is an ROAE of 32%, which we believe is very healthy for an insurance company. Another point worth highlighting is that we constantly get questions about migrating plans from Porto Seguro Azul at Itau. One of the benefits that we're going to mention now is a reduction in the required net income because of this. We had a reduction, and so that led to a capital benefit, which contributes to our ROAE and our entire structure. In Porto Saude, we saw an increase of 143,000 lives insured and a net income of BRL 126 million. And here, they are broken down between only Health Insurance and Health Insurance plus Dental. When we look at loss ratio. Health has the most striking seasonal pattern. So we saw an increase -- excuse me, a decrease of 1 percentage point in the third quarter. And in Health plus Dental, it was around 1 percentage point as well. Looking at ROAE, the same seasonal pattern appears. We finished the third quarter at 25.7% in ROAE, an increase in basis point year-on-year. Now Porto Bank, we had 30% growth in the number of businesses. Our NPS is also among the best in the market, 76 points. And an increase of 18.5% to our results. Our ROAE was 26.1% and income was BRL 196 million. So this is extremely healthy for any of our verticals. On the efficiency side, we had another increase year-on-year of -- another reduction of 0.6 percentage points, which is at the same level as other digital banks. We also have our average monthly revenue per active client going up. So we are not only expanding the number of clients, but we're also monetizing these clients better. Looking at tariffs and interest, the split is nearly 50-50. So we also consider that to be very healthy. Here, we see our NPL and there are some effects that have affected our market. Here, we see -- our credit portfolio distributed between credit cards, financing and loans and looking at NPL. We are splitting it into short-term NPL, which shows that it's not a structural issue. What we've seen from the first quarter is an impact from the change in stop accrual from 60 to 90 days. And this means that not only does that affect our NPL, but the market general NPL has also kept in the same pace. We saw a change in the number of basis points. And when you look at the equivalent central bank data, it was very similar, but our portfolio is healthier than the general market. Continuing with Porto Serviço. Our service level -- excuse me, the number of car services is still very high, close to 700,000 with an NPS of 81 points. Here, we see some dynamics that have been explained before. We saw lower demands from Porto Seguro, which made our revenue go down. So we see that there was a reduction, especially in digital products and a 95% reduction in the first 9 months. But we delivered in efficiency. So the 9.3% administrative expenses dropped to 8.3%, an increase of 100 basis points. Finally, here, we see our profitability. This is an operation that doesn't require much capital, so the impact of ROAE here is due to the discounts from previous operations. We revised our guidance, but they were held for most verticals, except for Porto Seguro, where we have been below in our G&A ratio. So we reviewed it to 10% to 10.5%. Secondly, there has been lower demand on insurance. So Porto Serviço had its expected revenues reviewed to BRL 2.4 billion to BRL 2.6 billion and our G&A is expected to be at 7.5% to 8.5%. One last comment before I conclude, in October, we had the pleasure of being among the top 50 most -- companies with the most liquidity in Brazil in our stock exchange. So here, we see a comparison of our growth to other -- to the rest of the market and some segments in which we believe we can still grow such as card, light vehicle consortium, Health and Dental, we grew 31% and Life, we grew 14%. So now we can continue with the Q&A. Thank you.

[Operator Instructions] The first question will be asked by Mr. Daniel Vaz from Safra Bank.

I'll ask the same question that I asked to Milton at Itau talking about capital and dividends. I know that Porto is at around BRL 3 billion excess capital, roughly speaking. You mentioned in previous calls that not -- this entire value is not exactly -- it does not exactly have a lot of liquidity, about half of it has liquidity. So considering that your growth across less capital-intensive fronts and auto versus the entire thing has -- and since you have good capital generation ahead, how are you thinking about additional dividend payouts, especially with the reforms that we are expecting next year, tax reforms. So this might be a discussion of paying these in advance before -- still in 2025. So how are you considering that with your excess capital?

Thank you for your question, Daniel. This is Celso. So this is something that we're still monitoring. We're still trying to see is going to take place. I'm referring here to the tax reform. We might need -- if it remains the same, we will need to do this in 2025. But ideally, there should be a bill that allows us to allocate dividends now to be paid up until 2028. As was in the previous bill, but the current bill requires us to pay within 1 year. So we're still seeing how this is going to happen. We haven't made any decisions yet, but speaking in general about additional dividends. Last year, we went from 45% to about 50% this year, if everything goes well. That was our expectation to pay out about 50% in dividends. The following years, with the cash generation we have, there were a few possibilities paying out additional dividends is one of these possibilities, but I don't believe that it will happen this year. We have a structure that will help our verticals grow. We have a capital structure that will absorb this calmly without us needing to select what products will make us grow or not. So this puts us at a very confident moment for the next 5 years. So we expect to grow across our verticals and that, of course, consumes capital. Over time, as we generate more cash for the next few years, we're going to have a deeper discussion on what we're going to do and if we will have additional dividends or not.

Yes. And if I can ask a follow-on question. Of the BRL 3 billion that you have in excess at the holding, how much of it would be net? I think you mentioned that it was about half of it that had liquidity.

Yes, we have BRL 3 billion in excess capital at Portal SA. So -- of course, in November, we have to pay BRL 500 million in dividends. So this will go down. And then it goes up again, but we're going to work with an average of BRL 2.5 billion to BRL 3 billion for Porto SA throughout 2026. This is the number for us due to our growth due to our appetite for risk, and it's still healthy at BRL 3 billion. So our balance is BRL 3 billion. We're going to pay dividends in November, everything that has been scheduled, so it will go down probably to BRL 2.5 billion, BRL 2.6 billion. And then throughout the next cycle, it will go up again. So this is the level that we believe to be very healthy for Porto SA.

The next question will be asked by Mr. Antonio Ruette from Bank of America.

Two questions from me. If you can talk a bit about competition, specifically for Auto, I think this is a question that is always asked, but it's important for us to get an update, especially when we look at the average ticket going down. I know that there is a mix effect here. You've been selling products that operate at a lower ticket, but there's probably some effect from your competition. My second question is to -- well, I'd like to ask a bit more about this issue between the loss ratio and services. We see that the revenue for services is weaker. It's actually going down. And you mentioned that this was due to a lower demand. But when we look at the Porto vertical, we see that the loss ratio has gone down. So how does that match?

This is Rivaldo, thank you for your question. So first, this is not just a current matter. For many years, if you've kept track. In Auto, we have been experiencing a moment that we've experienced before. But this is a passing thing. We see that the loss ratio in some of our competitors has been going up. So we believe that this is just a passing cycle, and it's probably at the end. We're very focused as we've been defending recently on gaining efficiency firmly. Our NPS have all reached record levels. And we're attempting to maintain our results. That's basically it. And the competition has been stronger in the last few months, but -- we believe that at some point, this will cool down because we've seen this in the past, and we know that at some point, the claims will appear.

I'll add to that. Last year, we have the fortunate coincidence of adapting our structure to the brands, specifically in Auto. So for example, we reactivated the Itau brand. We launched products in other segments, we practically revisited the entire structure of the motorcycle segment, which is a subsegment that is growing at a very good pace. And this year, we saw that for a few months, we had more motorcycles than automobiles. So this redesign and brand repositioning was the main driver behind these positive results that we've been having in the insurance vertical, specifically auto, and I'm referring here to ROAEs. Why did this happen? Of course, when you have irrational behaviors being produced by any market player. And Rivaldo said this very well. He's been seeing this happen for nearly 4 years. So there are 2 possible answers. The first one that we discarded completely, which is that we are in a price competition, we don't think that, that's the best or healthiest way of structuring our market, and it doesn't match Porto. Because this is a brand that has been investing in the quality of its additional services for many years beyond a policy. And the second possible answer is through a change in mix to simultaneously preserve high ROAEs and our global competitiveness. With that being said, this also addresses the second question you asked about the services vertical and revenue generation in Porto Seguro. When you have a mix of products or policies being sold to clients like Azul or Itau, that provides fewer services to clients. And as a consequence, this ends up impacting us because the service vertical will also have lower usage from our clients. This tends to be temporary. As was said, we have sustained high renewal levels in the company for insurance, and we've had a high demand for quotation. And these are the main indicators that we are getting the strategy right. So as soon as the market goes back to its normal levels, we should see higher utilization rates for services and policies because the mix will also -- excuse me, the sales mix will also follow a positive trend for other premium products.

Antonio, that's an interesting question because this is something that we have to answer very often. This also refers to a structural thing we have here. 1 percentage point increase in Auto is fine for us. And why am I saying that? Because as a reminder, one of the components of the auto price and our DRE is a financial revenue. When you have a higher level of financial revenue, you can have a higher loss ratio. And the opposite is also true. So the price component -- one of the price components is financial revenue. We had a budget for 2025. And then this increase was expected. The estimate was that the financial revenue would also be higher. So this DRE component was 32% even though there was an increase in 1 percentage point because structurally, our financial expense grew more than this percentage point in the loss ratio. And there's also been a reduction in administrative expenses. So when you look at the compound expanded index, the returns in the insurance company was very good in the quarter and in the first 9 months. So there's also a structural factor here. The increase in loss ratios considering these financial results.

[Operator Instructions] The next question will be asked by Mr. Guilherme Grespan from JPMorgan.

Congratulations on these results. I have 2 questions. First, on your revenue from tariffs and services at the bank. There was a significant increase. I understand that there was a turbo campaign. And I understand that for the third quarter, there's a seasonal pattern but there's an accrual. And in this quarter, we saw an increase of BRL 40 million in consortium, which sustained the bank's growth. So I'm not so interested in the commercial campaign, but in accounting, what led to this increase? My second question is about financial results. You did not review your guidance even the upper threshold will imply a significant reduction in your returns, the market is expecting that Selic will remain flat until the end of the year. So what -- how are you -- why are you expecting this drop in financial results until the end of the year?

Thank you. So actually, when we think about consortia, this is paid on a monthly basis, differently from insurance. So it's a pro cash regime. There are different ways of accounting this, and we can analyze this in a separate call, but DC is deferred and revenue is closer to the cash regime. So this BRL 40 million, we'll take a look and see if that was actually a consortium and respond to you later. But -- well, Guilherme, we're sustaining the guidance because, as I mentioned in my presentation, our expectation -- well, we're still planning for the financials results we will see in the fourth quarter. And with the opportunities we have in the risk premium, we should rule some of the debt and investments to 2026, so that we keep a financial result nominally above in 2026 versus 2025. So we're sustaining this guidance because we don't have the exact values, as I said, but we are rolling some tunnels with lower interest rates, and we want to make use of this opportunity of having still very good interest rates. We still have a window for 2026 to conserve our value, our balance. This is similar to what we did in -- at the end of 2024. So we will have some more time for this so that we can improve our financial revenue for 2026.

I had a question about the third quarter. You mentioned that you expected to roll this out. Did you have any impact on the third quarter? And if so, what was the impact in this quarter?

No, we did not do that this quarter.

The next question will be asked by Mr. Marcelo Mizrahi from Bradesco BBI.

Congratulations on your results, and thank you for this opportunity. I'd like to ask about Porto Bank. We saw a growth that was higher in your portfolio this quarter. We saw that the portfolio grew. The composition of it grew more in revolving cards than upfront cards. When you look -- well, the issue for me is when we look at profitability, first, the credit revenue versus the portfolio had a significant reduction this quarter. The yield -- and you had mentioned that we were going to try to find a more adjusted level for PDD, but it's still at a lower level than I expected. So I'd just like to understand if the average level of profitability for your portfolio is different. If there is a reasonable level for the future, this mix and if you adjusted per risk, your NIM is at 3.9%. So should we consider that? Is there any upside for next year, also provisioned. They were slightly higher. So what provisions do you expect to have for the next few months considering that this -- that your defaults are being considered through an accounting perspective.

Thank you for your question. So talking about this, reconsidering our strategy of focusing on higher profitability products. We had a NIM of 3.8%. In 2024, it was 2.4% and now we're at an average of 3.5%. What happened this year in the first few quarters was a drag effect, especially due to the stop accrual that went up to 90 days, and prices in the first quarter if we had a higher -- we had a higher NIM and now we see that's normalizing. But structurally, we can see that we went from 0.8% to 2.4%, and we're now at 3.5% so far. And we expect to continue at this level considering the strategy we have of operating with credit products with higher profitability. When we look at this makeup of the portfolios, you mentioned that credit card went up. Yes, there is a strategy that we have of anticipating debt, there are installments plan -- installment plans that may have affected us. We don't have a guidance for the year. But what I can say is that for revenue and for losses, we are at the upper part of our guidance.

I was going to ask a different question.

Yes, I was going to add to that because you used a different NIM than what we're publishing. So when you analyze it, remember that we might -- we are using -- if you go to our Investor Relations website, you can see this the way we analyze it.

Okay. And my next question was that if there was anything different about your appetite for cards?

And we saw that this was very strong this quarter, and financing was at a lower level than the previous quarters. We're very confident in the clients base that we've been having in card and credit. Especially from 2024 to 2025, we saw good indicators. So nothing has changed in our appetite. And of course, our appetite is much more cautious and much safer than the overall market. Our portfolio of products and loans has been very good, and our origination has also grown. So we're growing versus the third quarter of 2024 for over 50%. We're also seeing a better mix in Porto Bank.