Porto Seguro SA
BOVESPA:PSSA3
Earnings Call Analysis
Q3-2023 Analysis
Porto Seguro SA
Porto Seguro S.A. demonstrated robust financial health in the third quarter of 2023, more than doubling its net income to BRL 621 million for the quarter, and achieving BRL 1.6 billion over nine months. The company presented an impressive recurring return on average equity (ROAE) at 22.1% for the quarter and 19.3% for the cumulative nine months. Notably, revenue growth was evident across all business verticals with a 13.3% rise for the quarter and 18.8% year-to-date, ultimately extending the company's services to 15.8 million consumers.
Porto Seguro saw a noteworthy increase in its auto insurance vertical, with over 200,000 additional vehicles insured. This vertical also observed consistent improvement in auto claims for the fifth consecutive quarter. In addition to the automotive sector, life insurance claims climbed 12.2% and property and casualty insurance expanded 16.4%. The Porto Saude vertical, which includes health services, recorded striking growth with a 38.5% increase in quarterly premiums and revenue, benefiting from a 23.5% growth in covered lives over the past year.
Porto Bank celebrated a revenue increase of 12.7% with a sustained growth in clientele and revenue exceeding 20% year-to-date. The bank's strategy for prudent risk management yielded results with an improvement in nonperforming loans by 0.1 percentage points from the previous quarter, staying below industry averages. The consistent focus on optimizing loan portfolio quality remains a cornerstone for their sustainable growth.
Porto Seguro's substantial net revenue of BRL 621 million and a 22% return on investment for the quarter underscores their financial prowess. Impressively, 75% of this year's results arose from operational achievements, while 25% were influenced by financial outcomes. The organization's aim is to maintain this momentum of profitability through the rest of the financial year, with a notable profitability rate that currently surpasses the historical CDI by 171%.
With an 8.6% premium growth resulting in BRL 5.6 billion, and effective claim reduction strategies, Porto Seguro's insurance division is flourishing. Particularly significant is the combined ratio, which reached an unprecedented low of 84%, delineating exceptional efficiency in underwriting profitability. The various insurance segments, namely, auto, property, and casualty, and life, all contributed to this positive performance, with claims decreasing by 12.4%, 4.7%, and 2.1%, respectively.
Porto Seguro's healthcare vertical had substantial reasons to celebrate, including surpassing half a million lives covered. The dental insurance also showed promising growth, with approximately 740,000 lives covered by the end of the quarter. These achievements translated into an impressive BRL 1.2 billion in revenue, potentially guiding the vertical to approach an annual income of nearly BRL 5 billion. This growth is further highlighted by a net profit of BRL 38 million for the quarter.
Reinforcing its image as a leader in corporate consciousness, Porto Seguro has given back BRL 12 billion to society year-to-date, aligning with its ethos of community support and development. Additionally, the company has been recognized for its organizational culture, being named as one of the top 10 best companies to work for by Great Place to Work. These accolades not only celebrate Porto's commitment to creating a nurturing work environment but also bolster its reputation as a trusted brand amongst consumers.
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Good morning, everyone, and welcome to the Porto Seguro S.A. Third Quarter 2023 Results Conference Call. Please be advised that the presentation is being simultaneously recorded and translated into English. The slides presented are available for download in our IR website. [Operator Instructions]
Forward-looking statements made in this conference call regarding the Porto business prospects are based on the beliefs and assumptions of the company management based on information available until this moment. Forward-looking statements are no guarantees of performance. They involve risks, uncertainties and assumptions related to future events and may not occur. 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 like to ask Mr. Roberto Santos to begin the presentation. You may proceed, sir.
Morning, everyone. Thank you for your attendance in Porto Seguro's Third Quarter 2023 Results Conference Call. Our results were robust in the third quarter and in the first 9 months of the year. We more than doubled our net income of BRL 621 million in the quarterly recurrent result and BRL 1.6 billion in the first 9 months of the year. Recurring ROAE was 22.1% in the quarter and 19.3% in the 9 months to September. Revenues grew 13.3% in the quarter and 18.8% year-to-date through the expansion of all business verticals, reaching 15.8 million consumers of our products and services.
Through the Insurance vertical, we highlight the increase of more than 200,000 vehicles in the auto insured fleet. Auto claims improved for the fifth consecutive quarter. Life Insurance had a growth of 12.2% in claims and P&C with an expansion of 16.4%. In the Porto Saude vertical quarterly premiums and revenues continued with a strong growth rate observed in recent quarters with an increase of 38.5%. We reached 510,000 lives, an increase of 23.5% over the last 12 months. Claims improve both regarding the second quarter of the year and vis-a-vis the same period last year.
In our Porto Bank, revenues increased 12.7% with emphasis on the consumption, which maintained revenue and client growth of over 20% year-to-date. Nonperforming loans improved by 0.1 percentage points compared to the second quarter and remain below the market average. The focus on risk management and improving the quality of the loan portfolio continue to be pillars in our sustainable growth. In our businesses, we achieved revenues of 1.4%. And I would like to highlight the increase of cross-sell that went from 1.9 businesses per client to 1.62 at present. We also paid back to the society BRL 12 billion year-to-date.
Finally, I would like to also highlight some important recognitions. We were recognized as the most reminded brand by Brazilian through the Folha Top of Mind Award. And for the second consecutive year, we were elected as 1 of the 10 best companies to work by Great Place to Work in the largest company categories with more than 10,000 employees. This achievement reinforces our mission of continuing to make Porto a place where people are proud to work and is the result of our daily efforts to be increasingly a safe haven for people and their dreams. After all, every care is Porto.
I would like to thank all of you, and I ask Celso Damadi, our CFO, to speak about the evolution of our revenues and profitability.
Thank you, Roberto. Good day to all of you. I highlight our growth of 13% in the quarter, reaching BRL 8.3 billion in all of the business verticals with Porto Seguro growing 8.6%, Porto Saude 38.5%, Porto Bank, 13%; and other businesses growing practically 34%.
Of course, this was of great help in the results we show you in the next page. Our net revenues reached BRL 621 million with 22% return on investment. This includes the adjustments that we have detailed for our inventories for the car by subscription of BRL 54 million, and IR deferred based on future profitability, a lower expectation for profitability with the write-off of investment assets that we had to do in the digital account. We changed our strategy, and Marcos will be explaining this during the Bank explanation. During the year, we reached BRL 1.624 billion of ROI with a 20% margin.
Now this result for the quarter and for the year tells us that 75% of the results this year come from the operational result, 25% for financial results, 47% of results were financial and the rest was different. So the financial results in this quarter represent BRL 327 million, and the operating results in all of our business lines has improved considerably, especially in Auto and Health and other business lines that we will explore shortly.
Our profitability over the historical CDI goes to 171% CDI, even with a higher CDI during this year. Therefore, I believe that the results for the quarter and the 9 months of the year, are quite interesting for the year. And until the fourth quarter, we hope to maintain this type of profitability.
I give the floor to Rivaldo Leite now.
Good morning, everybody. We continue at a very good pace in terms of growth of premiums and results as well with a total growth of Insurance of 8.6% for insurers, BRL 5.6 billion in premiums and with a very good claim of 47% for the quarter, a drop of 12.4% in Auto and 4.7% in P&C and 2.1% in Life. So the reduction of claims is doing very well in all of our segments. That is why we have achieved a very good result. It doesn't arise only from auto, but from other segments.
We had a growth of 7.3% in premiums in Auto, in P&C we -- the growth was strong, 16.4%, and in Life, 12.2%. We reached a ROI of 46.6% during the period, benefited mainly by the enhancement in claims during the period. We had BRL 565 million net revenue with 46.6% percent of ROI. And we remind you that the second quarter was already a very positive and relevant quarter as well. Our expenses continue to drop somewhat in terms of commercialization, other expenses and claims, as I already mentioned, were much, much better. The combined ratio reached 84%. This is the best. Well, I don't remember in the past, if we had such a good combined ratio.
So that is it. Thank you very much. Very important news is the growth of our fleet, more than 209,000 added to our fleet with a very positive result. We have steady growth vis-a-vis the market, a growth of premiums in double digits of 13.8%, an increase of 209,000 vehicles and a substantial improvement in claims. Part of this improvement comes from our extremely good pricing in the last few months, and also due to the drop in the PP table about 0.5% per month. The value of the new vehicles had a slight increase, but the value of the used vehicles, and we have a large fleet of used vehicles has been dropping month after month. All of this has aided and abetted our results. Our claims for the third quarter reached 51.3%.
That is all. I would now like to give the floor to Sami.
Thank you, Rivaldo, A good day to all of you. This was a quarter of celebration in the healthcare vertical with some important landmarks. We went beyond the mark of 0.5 million lives. We ended up with 510,000 lives and 700,000 lives in the Dental part ending with 740-some thousand lives in the dental part for the quarter. Therefore, we have reached BRL 1.2 billion in revenues, and this will take the vertical to an annual recurrent level of almost BRL 5 billion a year with net profit of BRL 38 million.
I highlight the process of repricing that we have been discussing for several quarters for 1.5 years. We increased 10% in Life, 15% in Premium and 23% in the last year and 42% in premiums. So we're showing here we're walking the talk and the consistency of execution we have here to speak about claims. We have had a difficult quarter with a drop in Claims vis-a-vis the second quarter. And this results from the different components that we mentioned through time. New products acceptance, the team of Porto and [indiscernible] to say several factors we have discussed a drop of [indiscernible] when we look Health and Dental services and only in Health, 34.2% to 81.5%.
In the third quarter, a counter seasonal movement that has been quite positive in the third quarter vis-a-vis the second quarter. And in the '22, it was 90.3%. We also bring light to help us in our debate throughout the year, we have questions quarter-on-quarter, and we have brought you a broader view trying to compare the pre-pandemic period with the post-pandemic period. When we look at this we can see that Porto Saude left the pandemic quite strengthened compared to other players in the market. We're resuming to claim levels premarket prepandemic with an asset-light strategy, as you can see.
Because of all of this, we achieved net profit of BRL 38 million approximately in the third quarter, a record for recurring net profit coming from BRL 8 million negative last year, a delta of BRL 45 million year-to-date. We have achieved a result similar to the entire last year, even with the exit of Cliniqa, a very positive quarter with room for the bank that will be presented by [indiscernible]
Good morning, Sami. Thank you, [indiscernible] at the bank, we're always doing very well after the activities implemented in 2022. We have had a positive impact of risk management actions and our relevance has allowed us to grow with profitability even in a moment of high default and product -- credit products. Once again, ROI greater than 30% and a very high revenue to speak about sales expansion as planned. We had a strong growth in products compared to 2022 with a special highlight for consumption in credit in the comparison between quarters, especially with a base impacted by a nonrecurring campaign of cars that was carried out in September, October of 2022. It brought in clients that were more distant from our profile with a higher risk. As we show you here in our sales mix, we see a significant improvement in the new harvest of credit cards.
And finally, I will offer you this vision of risk that began in the last quarter. The quality indicators capture the effect of the activities carried out in the granting and management of the portfolio. And our indicator is 90 below the market average regarding NPL greater than 90 days. We continue to work with negotiation of our clients reaching 3% of our base. Basically, this is my presentation.
We will now continue on with our investment portfolio. I would like to highlight a revenue of BRL 295 million, 79% of the CDI. When we exclude some assets of ARN, this result goes to BRL 282 million, 70-some percent of the CDI. The quarter was impacted by the IPCA. We had 60% in the quarter. It was the lowest in the Europe to present and most of our detachment with the CDI is due to this index.
I would also like to highlight regarding the second quarter, there are no significant changes in our own portfolio. And in terms of credit, we closed during the quarter with a positive result, which is offsetting our variable income position that had a drop in this last quarter. Therefore, this part of IRB is the one that has lowered our results in CDI in the third quarter.
I will now give the floor to Lene to speak about environmental, social and governance sectors.
Good morning, everybody, and I would like to redeem an important topic that Porto has a tradition of more than 25 years working in environment. In terms of people, Roberto mentioned that this is the second consecutive year in which Porto Seguro is among the 10 largest companies for great place to work. Now this recognition, of course, reinforces that we truly are a good place to work.
And I highlight a very interesting project that is sustainable disposition in equity. It's a disposition of residues generated by our policy holders. Based on these projects since November of 2022, we have already disposed of more than 4.5 tons of these electronic residues. Transforming this information and environmental impact, we have preserved 21,000 liters of water, and we have stopped issuing 6 tons of carbon. It's also worth highlighting the part of education and learning, we have a journey of knowledge among our employees, and we have more than 1,700 people participating in this to disseminate concept. These are our main information, and we would now like to go on to the question-and-answer session.
We will now go on to the question-and-answer session. [Operator Instructions]
Good morning. Our first question comes from Daniel Vaz from Safra Bank.
Good morning, Alexandro. Good morning, everybody else. Congratulations for your results. We have two questions at our side. A question to Rivaldo. I would like to compare what happened with insurance vis-a-vis the past quarter. And also understand pricing in Porto and elsewhere, we have seen a pursuit that is somewhat more competitive. I don't know if this is the case or if you have renewed products and changed your pricing at Azul.
Second question, based on the partnership with Itau, if you're missing some product on the platform in terms of insurance, and what are you expecting going forward, so that we can work with the rollout of this.
Daniel, thank you for your question. Regarding the growth of our fleet, we already had a moderate expectation. We had already mentioned that we're creating products that are more clear to the C&D bracket and Azul fits in very well with those products. Part of the growth in the fleet is due to that. But Porto Seguro itself has had good growth as well. It's a sum of both factors, a larger part comes from that segment.
Now regarding Itau Bank, we have had a very good year, perhaps historically the best year in the partnership with Itau. We're selling very well, especially Residential Insurance, and their platform is also offering more accessible products. We carried out a broad residential campaign with very positive results and the offer of the Azul product by subscription that is for the C&D bracket had a very good fit. So this is the sum of things that has aided and abetted the growth of the Insurance vertical as a whole.
The next question comes from Guilherme Grespan from JPMorgan.
Good morning, Alexandro and team. Thank you for the presentation and for taking our questions, two more strategic questions. I believe you're in a budgeting process and this is when we hold broader discussions on strategic planning. This year, we have a more curious discussion that you must be having with the participation of executives that are working with insurance, and you should also have contributions of Paolo, who recently joined the team. And based on feedback, he seems to be focused on strategy, new products and innovation. Looking forward to 2024 as part of the strategy decisions, which are the main opportunities that you foresee? And what is it that the market should pay closer attention to?
My second question, a follow-up on Auto, which is your expectation of growth of premiums in the coming year? There are moving parts going in opposite directions. The premium, does this still benefit the increase of premiums for 2024? But there's also the drop in used cars on the other hand. If you could refer to these points and which will be the top line evolution for the Auto part for 2024. Thank you.
Well, good morning, Grespan, everything. Well, this is Roberto. Referring to our budget strategy process. In fact, we recently concluded our strategic planning and the budget for the coming three years. Evidently, I will be leaving at the end of the year, but I did participate actively. I am going to the Board, but we counted with the active participation of Paolo Kaki during the process.
I would like to highlight that there is no radical change in terms of innovation or different segments for the company. Porto, some years ago, began a process of putting the client at the center of its decision. So we have an intense journey of modifying our processes, adjusting them and this has led to two situations: one, with higher operational efficiency, and this will continue to happen going forward. It's part of the budget and on the other hand, a better quality of whatever we are delivering to the consumer.
All of these is a journey that began some years ago, and I draw your attention to some Net Promoter Score indicators that we recorded this quarter, and we're going to experiment to see what will happen in coming years. Auto Insurance closed with 77 points of NPS and 78 for Residential Insurance. And in credit cards, 72 of NPS. We know that this will continue going forward and Kaki will have to continue leading the team in this direction. So our agenda for coming years is the growth of revenue in all business verticals and consistent results in coming years. This is our agenda going forward, and Kaki will be responsible for continuing this intense growth process, serving our clients better. We do want to become a safe haven for clients and their dreams.
Guilherme, this is Rivaldo. Considering Automobiles in 2024, we expect a growth of approximately 10%. It has been a very good year. And we're continuing on with this work that we have created. Therefore, we expect a very positive year in line with the year 2023.
Our next question is from Antonio Ruette from Bank of America.
Congratulations for your results. questions. We have two. The first refers to the competitive environment. If you could speak about competition in Auto and Health, which will be the price and the rationale in both fronts?
The second question refers to the tax reform. If you can already anticipate some information in terms of which will be the impact, nothing is very certain, but if you can anticipate information, we would be very grateful. Thank you.
Well, the competition is significant. We have perceived higher competitiveness, but we've been working to maintain our pricing models early on to sort of push the market and to focus on results. But it is true that competition has increased significantly -- to speak about the Health vertical, the market has shown significant discipline in terms of pricing. We began this process ahead of the other large players in the fourth quarter of '22, and first quarter of '23, we had more modest growth. And we think that this is positive. We're operating at a very adequate claims level and this competitive discipline, plays in our favor.
Now regarding your question about the tax reform, we're following up on that very closely. Now the impacts on insurance will not be very relevant. You did mention that it still has to go through the entire congress. Now what has been passed up to present means we will have minor impacts. We did obtain some benefit for the Insurance sector. Now the tax for the Insurance sector will be similar to the IOF. It will remove that tax load from the income statement of insurance companies. We deem this will be a benefit. Everybody will have to incorporate a part of this, but it will not be relevant. And this will depend on which are the details with which it is approved.
As it stands today, we will not have relevant impacts on price for the consumer in the Insurance vertical. The National Confederation of Insurers has been very active with the legislative body to minimize the impact, and we were able to be successful. The opinion of the [ reporter ] dealt with the insurance market as separate line item as Celso has just mentioned, market will not suffer any impact. Forecast is that the impact will end up being irrelevant. It's very good.
And a follow-up. In terms of the tax reform, if you could share a figure on your working capital and shareholders' capital?
I think it's too early to speak about that. What is going through Congress at present is not the end of [ shareholders' equity ]. So far, it is a discussion of a new way of calculating shareholders' equity. It's too early to speak about the impact. And I think it's best to wait more. The conversation now is no longer the extension of shareholders' equity. But instead, what it will be transformed into. So we will have to wait some more time to be able to speak about this.
And of course, this impact will be for the sector as a whole. The entire sector has a regulatory impact and has high equity. If this happens, everybody will have to pay the price. We understand that this discussion still has some more time before it advances and perhaps there will be a change in the calculation methodology.
The next question is Kaio Prato from UBS.
Two questions at our end, if you allow me. The first going back to 2024. The sector is getting to a level of strong profit if we see where you have delivered year-to-date. Looking forward, besides the comparison base being high, there are other challenges that will play against you. This year was benefited by the price adjustment that you carried out. We don't necessarily see this repeating itself in 2024. And the financial results might be under pressure because of the changes in the macro scenario. Which is your vision for 2024, do you agree with these assumptions? And if -- despite this, you will have a profit expansion in the coming year, and which would be the driver for this?
The second question, a quick question about the alteration in your write-off policy that you mentioned for credit cards in Porto Bank. What has changed in the policy? Why did you decide on the change? And which are the impacts in your bank indices and to understand the company mindset in terms of growth of credit cards going forward? Thank you.
Kaio, this is Celso. Kaio, you know that we don't offer guidance for 2024 results. But I will answer your question without mentioning the guidance. In terms of financial results, you are right. We expect to have nominal financial results even with the drop of [ Selic ] very similar to the results of this year. We will offset the drop in [ Selic ], with a very good cash generation. We will have a lower sale but a cash generation for this year and the coming year that will offset most of the drop of the average interest rates. We understand that the trough in the nominal financial revenues should remain stable in 2024.
Regarding claim or profitability. Of course, we're coming out of a very high level in 2023. But on the other hand, in 2024, we won't have adjustments that we're not calling as nonrecurrent because they're part of the game, they're operational. BRL 90 million of adjustments that we did at present value in cars by subscription because of our inventory, we won't have this in 2024. This adjustment value was done now we left from a level of 14,000 vehicles. We'll end up with 6,000 vehicles. Adjustments in 2024 will be immaterial compared to 2023, and this will help us in terms of results.
We also have the carryover of premiums of growth in 2024, and we have been gaining productivity and administrative expenses. We believe we will achieve a good level of profitability and that we will maintain our profitability in coming years in credit. We have had an enhancement. Our credit harvest have an improved health with a robust growth. So the diversity of businesses at Porto will enable us to maintain our levels of profitability in coming years.
Regarding the write-offs that you asked about every year, we review all of our models. This year, we identified an opportunity considering the low recovery above 560 days. It doesn't impact our results because of our rate of provisioning with that age of accounts. Basically, that was it, an annual review of the model, and we saw the need to work with this write-off with immaterial impact.
Thank you very much. Now in terms of your mindset for origination going forward, origination of bank products, credit products, yes.
Well, in credit, we're highly focused. We have several opportunities, and this is our main focus. Of course, without putting aside other segments within the risk profile that we have altered in the last few months, we're working with an audience that is more remote, but they're insurable. We also know them and the new harvest are very similar to the rates we already have in-house. This is our strategy when the market is more favorable to expand with clients that presently are more remote. And this is a focus for the clients that we already have gained.
Our next question is Karina Martins from Citi.
I would like to go more in depth in terms of competition and price. We saw in the market that the price of Auto Insurance dropped 10% at the beginning of the year. Which is your vision regarding that figure if it makes sense? If it's what you see in the market and presuming that you spoke of a premium growth of 10% for 2024, how does this converse with a drop in prices? Will this come through an increase in fleet? How do you think you will deliver this 10% the coming year in a year with greater pressure? Thank you.
Karina, simply to reconfirm what we said formally, this is a market growth that we have been observing. This is where the market is heading to in the range of 10%. Now regarding the drop of 10% in Auto Insurance price, that's not the case perhaps in one line or another vehicle that occurred. But in general, that is not something that we observed. We now see a market that will be more cohesive. Why? Because we have large players in the market and any wrong price will create losses. Therefore, we see a market that is more connected with correct pricing.
One or another player would be working differently. But in general, that's something that we observed. Our expectations for 2024, we're launching several products. We also have a very strong regional growth plan in some regions where we still do not have market leadership, and that is why our figure converts ery well when we read the scenario as a whole, looking for growth in large regions where we do not have strong penetration.
[Operator Instructions] We have just received the question from Thiago from BTG.
Congratulations for your results. We have a single question to conclude referring to financial results. We understood in your message that we cannot link profitability to the CDI because of their real interest rates. But every quarter, there is something that has to be explained. My question regarding that is the following. Even though it is not fully indexed to CDI, is there some sort of a target and can you remove some of that volatility in quarter releases to give us more comfort when we project that specific line item?
Thiago, this is Izak speaking. Thank you for the question. Regarding our year results. It is mainly explained by the real interest rate. We have a portfolio that has other assets. It's not only real interest rates, we have variable income. The sale of assets and the great filling has been the interest rate.
Now regarding the volatility, our portfolio is on a curve exactly to remove the volatility. We're in a year where the level of IPCA should be 460 or below that with an average CDI of 13. This already highlights how far away we are from the CDI level.
And finally, I would like to mention that in the last quarters, we have seen that we have a focus on our capital, we want to preserve our capital against inflation. In a medium and long-term horizon, our concern is to have profitability with a real interest rate to have a healthy control of our resources. In 2021, we had negative interest rates. In the last two years, we have been suffering with the [ accrued ] interest rate, implicit with the fact that CDI rate is much higher than that of our assets in our portfolio. It's very important.
Our portfolio has a benchmark, and that benchmark, of course, has that medium-term concern with the true interest rate. In the last two years, of course, we ended up being impacted. And it's important to mention that we have an internal benchmark coming from the Board with a certain range. And we do this -- we work with this based on each different location. Basically, this is what happens.
The question and answer session ends here. I will now return the floor to Mr. Roberto Santos for the company's closing remarks. You may proceed, sir.
Thank you very much for attending our result conference call, for your questions, your contribution and interest in Porto Seguro. I would like to report here as is of everybody's knowledge, I will no longer be the CEO of the company at the end of the year. This is my last call with you. I would like to thank you for the provocations and contributions I have received throughout my management. They were very important for me. I also hope that participation devotion and everything else will be transferred to Kaki. Should you have any additional doubts, please contact our IR team that has now been reinforced with the arrival of Don, who is participating in the call. And all the contact information is available at ri.portoseguro.com.br.
Thank you very much for your attendance. Thank you.
The results conference call for the third quarter of 2023 ends here. We would like to thank all of you for your attendance. Have an excellent afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]