Porto Seguro S A : Conference Call Transcript 1Q21 Results

Conference Call Transcript

1Q21 Results

Porto Seguro (PSSA3 BZ)

May 05, 2021

Operator:

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Porto Seguro's 1Q21 results conference call. Today, with us, we have Roberto Santos, the Company's CEO and Investor Relations Officer; Celso Damadi, Executive Vice-President of Finance, Controlling, Investments; Marcelo Picanco, Executive Vice- President of Insurance; Marcos Loução, Executive Vice-President of Financial Businesses and Services; Izak Benaderet, Managing Director of Porto Investment; and Emerson Faria, Head of Investor Relations.

Please recall that this event is being recorded and simultaneously translated, and all participants will be in listen-only mode during the Company's presentation. Ensuing this, there will be a questions and answer session when further instructions will be given. Should any participant require assistance during the call, please press *0 to reach the operator.

We have a simultaneous webcast at the address www.portoseguro.com.br/ir. There, you will see the conference call banner that will lead you to the platform. Questions can also be posed through the webcast platform clicking on 'ask the speaker' icon. These questions can be sent at any time, and they will be responded during the conference call.

Bear in mind that forward-looking statements made during this conference call referring to Porto Seguro business outlook, financial and operational goals are based on the beliefs and assumptions of the Company and on information currently available to the Company. They involve risks, uncertainties and assumptions as they relate to future events and depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Porto Seguro and lead to results that differ materially from those expressed in such forward-looking statements. We would now like to turn the floor over to the Company. You may proceed.

Roberto Santos:

A good day to all of you. We would like to thank all of you in the conference call of Porto Seguro for the 1Q21.

On slide number four, we highlight the following. Our net income grew 49% in the 1Q, and the ROI annualized reached 14.7%, leveraged by the results of insurance verticals and the good performance of our financial investments.

We had a revenue growth in all verticals in this quarter. The insurance vertical had a growth of 6.6%, with 6.7% for auto premium, 15.4% in individual life insurance, maintaining the growth that we observed in the 4Q20. The current revenues of financial business grew 16.2%, mainly leverage by the consortium with 29.7%, and the financing portfolio with 39.1%.

The healthcare vertical had an increase in premiums and revenues with a growth of 34.3% in the number of companies insured and 7.6% in the number of lives insured in the dental plans. The services vertical had an evolution of 21.9% in recurring revenues, with a highlight for the increase of 53.9% in the profit of Porto.Pet, and an increase of 25.2% in revenue for Carro Fácil.

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Conference Call Transcript

1Q21 Results

Porto Seguro (PSSA3 BZ)

May 05, 2021

The health of the verticals strengthens our vision that we are on the right path to accelerate growth and diversification, maintaining our assets updated and an attractive profitability.

The recurrent combined ratio reached 92.3%, favored by the auto business that reduced the claims in 6.1%, thanks to an enhancement in risk pricing and underwriting, and the impact of social isolation due to the pandemic.

We have the fifth consecutive quarter of reduction in claims. Additionally, we had a drop off all 0.3% in the recurrent consolidated G&A and O.E. ratios, also contributing to a better ratio, thanks to the efforts we have done to increase our operational efficiency through investments in technology and process enhancement.

The NPL for credit operations continue to improve when compared to both 4Q20 and the full year 2020. The 90-day default ended at 4% at the end of the quarter, 0.2 p.p. below the market average. This shows the efficient management of the credit portfolio and the measures we adopted to mitigate risk.

Throughout 2020, we reached R$194 million in our financial results, thanks to the investments in securities, inflation and multimarket positions, attaining a return of 2.4% for the quarter, equivalent to 488% of the CDI for the period. We ended the 1Q21 with R$2.8 billion in terms of cash availability, and this remained comfortable during the pandemic.

In terms of ESG, we highlight some initiatives that are part of Porto Seguro. The Crescer Sempre association, the apprentice program and the volunteer program. New Initiatives: Porto Seguro is now part of the Efficient Carbon Index of B3 and has become audited for greenhouse gases. We have Programa Meu Porto Seguro that positively impacted the lives of 20,000 people. We also have the program Quentinhas that is distributed in this difficult moment. We were certified by Women on Board as we have two women in our Board of Management.

In terms of innovation, we launched important innovations with a highlights to Bllu, the first subscription automobile investment that is contracted easily and with essential coverage, and with the potential of leveraging the growth of the portfolio in the Company.

Another news was the growth of Tech Fácil, a subscription program for smartphones. We also changed Porto.Pet for Pet Love. We made an agreement with the largest online store in the country. We will transfer the pet operations to Pet Love and we will have 13.5% share in their capital. This operation is pending the approval of CADE.

Experimentally. we are working with our Super App, an application that enhances the user's journey. Our services are being used by more than 75% of our clients.

We continue to move forward in terms of service offers with WhatsApp, 40% of our service goes through this channel. Besides enhancing the customers journey, it enables us to have efficiency gains.

To conclude, we are very satisfied with the results obtained, and this will enable us to reach our strategic growth of leveraging our customer base and enhancing the

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Conference Call Transcript

1Q21 Results

Porto Seguro (PSSA3 BZ)

May 05, 2021

customer experience. We are determined in our purpose of being ever more a safe harbor for our customers.

I would now like to ask Emerson Faria to comment in greater detail on the evolution of revenues and profitability in the 1Q21.

Emerson Faria:

Thank you, Roberto. We continue on slide number five. Before continuing, a disclaimer. Beginning this quarter, we began to publish our results based on business verticals and the revenues of the 1Q will also be posted by vertical.

On slide number five, you see the evolution of the quarterly revenues of the 1Q21 versus the 1Q20 in each of our business lines. In insurance, a growth of 6.6%, and all the verticals had revenue growth. Here in insurance, we have auto insurance, TMC, rural and civil responsibility insurance.

In financial businesses, the growth was 7.8%. This is the figure for the Company as a whole. We had impact of the IFTR 9 model with an impact on revenues and in our NPL and coverage ratio. Further ahead, Marcos Loução will speak about financial businesses and present these results, excluding this effect. The growth here was 7.8%.

Nevertheless, some financial businesses are made up of credit card financing, financial risks that have moved away from insurance and entered the financial business area, and risks relating to that capitalization that also left insurance and are now part of financial businesses, consortium and asset management.

Health has been separated from insurance. It is made up of commercial health, dental health and medical services, and occupational health as well. We had a 5.1% growth in revenues.

And finally in services, we have several new businesses that are part of services. It is made up of services, Carro Fácil, Porto.Pet, Reppara!, Renova and the auto monitoring. These are the businesses that are part of services with a growth of 11%.

We go on to slide number six, where we see the evolution of our profitability. To the left, our annual profitability, to the right, the quarterly the profitability. We had R$297 million in the 1Q21, as mentioned by Roberto, with an ROI of 14.7%, and a growth when compared to the quarter last year.

And these are the financial results, the operational results. And since the 2Q20, you can observe that the operational results have become more relevant. And this is what the Company wants. It wants to present operational results that cannot only depend on financial results, but that financial results back our profit as a whole.

On slide number seven, we speak about each vertical business. This is a novelty for the quarter. Besides speaking of revenues, we speak about profitability for each business vertical.

In the 1Q21, you see that the insurance vertical represents 50% of profit in the 1Q, and besides the four verticals, we have the holding, and part of the profitability, of course, is made up of the operation as a whole for the holding.

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Conference Call Transcript

1Q21 Results

Porto Seguro (PSSA3 BZ)

May 05, 2021

We go on to slide number eight to speak about consolidated results. We show you profitability versus the CDI. In 2020 and in the 1Q21, the growth was significant, the result was very good. Our ROAE was 14.7% versus 12.3% in the 1Q20, with a percentage of CDI that is 767% in the 1Q21. This figure is somewhat higher than the historical average due to the low CDI, and with the expectation of a return of the Selic, the CDI will increase and we will go back to more realistic levels of 150% to 300% of CDI.

I will now give the floor to Marcelo Picanço, who will speak about the insurance vertical on page nine.

Marcelo Picanço:

Thank you for your presence on our call. A good day to you. I would like to begin on slide number nine, and the figures I think you are familiar with, I am not going to present them in detail.

I would like to say that strategically, for the 2Q, we have had expressive growth in insurance. Even with a reduction in risk, which, of course, naturally reduces our pricing, we were able to grow, and this is an important goal for us, the number of customers that is at 120,000 with the pace accelerating in the last two quarters.

We believe that this year will be very important in a sequence of over ten years of growth in the fleet that has been ensured, the auto fleet. This resumption of growth in a more strategic and persistent way, of course, is very important.

And I would like to perhaps refer to the concept that we have of the insurance market and say that it is not mature, it is far from being mature and having as good penetration as another countries. Even though the auto segment is deemed to be mature, it has only 30% of penetration in the fleet. And the way of approaching this potential has to do with innovative offers that are expanded, that will bring more security, comfort and convenience in a country that needs this thoroughly.

Bllu is an example of this. It is in a pilot program in two important regions. The market was addressed by no insurance solutions, and it is a response of Porto as we understand that the market is there, it should be addressed, it should not be ignored or deemed to be marginable.

We do not only want to gain market share. And I can say that this conclusion is even stronger in other insurance markets such as life and P&C. We have had consistent growth, but the potential is enormous. 80% or 90% of these markets have as yet not been approached. And we need more innovation, we need to simplify several things.

Our essence of being a safe harbor takes us back to bringing to people excellent services mixed with products that will truly offer a genuine offer of convenience and comfort.

We are not only thinking of offsetting income or ensuring a good. People are looking beyond this. They are looking at what is around them, services, and services in general.

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Conference Call Transcript

1Q21 Results

Porto Seguro (PSSA3 BZ)

May 05, 2021

And it is important to mention what we think of insurance. When it comes to the combined ratio and results, this is one more quarter where we were able to show that, yes, it is possible to have a pricing model, an intelligent model that takes into account financial variables.

That thesis that with low interest rates you cannot have profitability is not confirmed. The sector has been growing despite the drop in the interest rates. And of course, it refers to the enhancements in our operational results because of the works in a differentiated underwriting and pricing processes.

We will be doing this in other lines as well. With the database that we have with our portfolios of more than 5 million people, this, of course, will help us to generate excellence even in moments of pandemic. We will be able to segment portfolios that can benefit from this. This is a level of granularity, but it is made feasible through a sophisticated model and a truly large database.

The 1Q was somewhat more difficult for insurance because of the natural seasonality, but once again, we improved the results versus the 1Q20 with a substantial increase of one 195 to 219 million revenue for the 1Q21 versus 1Q20, and an increase of 15% in capital, 1.5x the capital of the Company.

In terms of administrative and operational expenses, we had a nominal decrease. I would like to look at the index and the nominal decrease, an improve to a level of 0.3 p.p.

We have some expenses with Covid-19, the contributions we made in this very difficult period of society. This not part of the operation, of course, donations and contributions. Although they are accounted for, we eliminate the part from the Meu Porto Seguro, where we offered more than 10,000 work associated to the Company.

We continue on with this discipline, and we look upon this not as margin expansion. This is something strategic that will enable us to have more accessible products for consumers who are not willing to pay beyond a certain level. And we continue to do this to have the security inclusion, which is strategic for us.

Finally, in the health vertical, despite all of the impacts on companies such as unemployment, our portfolio is made 87% of commercial health. Unfortunately, because of the crisis, many companies have reduced their invoicing. But despite this, we were able to grow 5% in premium and add 70,000 additional members, including dental health in the scenario.

Of course, this is not the growth that we would like to aim for. The health care model is undergoing a transformation. We are creating something so we will have a more digital, sophisticated company, with an intelligence that sets this aside in terms of patients, physicians, the way of bringing together these issues. We have a partnership with Red Ventures for technology and digitalization. And as pillars are standing and have become concrete in health care, this growth will be ever more vigorous.

Some trends that are mentioned, the invoicing of insurance market in other countries where insurance is mandatory, this does not happen in Brazil. In terms of vehicle, for example, we have a great deal of room to expand penetration in income brackets that to not have this protection.

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