‘The remedy was given, but the impact does not come now’, says CEO of Porto (PSSA3) about the fall in profit

Porto (PSSA3), formerly Porto Seguro, had 21.4% higher net revenue in the first quarter of this year, but its profit fell 40.6%, in a result considered “weak” and “slightly negative” by Credit Suisse. The company’s CEO, Roberto Santos, blames the higher loss ratio in the auto segment, higher residential expenses and a greater default in financial services for the performance, admits that “the situation is not comfortable” and says that “the remedy has already been given, but the impact does not come now”.

Santos is both CEO and director of Investor Relations at Porto, an unusual combination in the market. He accepted a suggestion from the company’s Board of Directors, which changed its name and abandoned “Insurance” to try to show the transformation it is undergoing: to be more than an insurance company to double the number of customers by 2025 and increase revenue. .

Also part of this strategy are Porto Saúde sponsoring Rock in Rio, Porto Seguros Bank sponsoring Formula 1 in Brazil, in addition to the launch of subscription auto insurance, by Azul Seguros, during a leading BBB event this year (the new Porto was divided into three broad areas: insurance, health and financial services).

The company is also investing in its “super app”, to have all services in one place and increase the penetration of business per customer – the CEO says that Porto has more than 20 businesses for individuals, but each customer has in mind average 1.6 product. “Not two, since we have more than 20. We are structuring ourselves to increase the number of deals per client. Before we had 16 apps, one for each service. We built a ‘super app’ and are now migrating services there”.

Santos gives a hypothetical example: based on the location of the cell phone, it is possible to estimate where the customer lives; from his credit card expenses, it is possible to estimate even the size of the apartment. From there, Porto can send a notification offering free residential insurance to the customer. And then the broker can offer some options for him to hire, improving the policy.

The executive also states that the “super app” allows the company to control the services that will be offered to each type of customer (and at the right time). “It’s no use offering everything to everyone. I will not offer a private pension to a low-income client; I will offer cell phone insurance. You have to have that kind of intelligence.”

1st quarter detractors

Santos points to the increase in the cost of claims in the automotive insurance segment, a higher cost in home insurance and a greater default in financial services, but says that all problems have already been addressed: mainly with a significant increase in the value of new insurance and change in the acceptance of loan risk, in addition to the closing of some distribution channels considered problematic.

The loss ratio rose 10.5%, to R$61 million, and the auto segment’s loss ratio stood at 65% (against 50% in the annual comparison). Delinquency over 90 days increased 2.2 percentage points to 6.2% (against 4.0% in the first quarter of 2021 and 5.3% in the fourth quarter).

The financial result also harmed the result, but Emerson Faria, head of Investor Relations, says that the company made occasional short-term losses thinking about the long term: it increased exposure to fixed-rate securities with longer maturities, making a loss in inflation-linked bonds, and reduced the portfolio’s exposure to equities from 4% to 3% (this may not seem like much, but it is a 25% reduction).

“The remedy has been given, but the impact is not coming now. To solve the auto accident, for example, our average price [do seguro] rose from 30% to 40%. A very strong increase. That’s why the impact on revenue was strong [a receita líquida da companhia subiu 21,4% no trimestre]”, says the CEO. “Today, the situation is not comfortable. But we believe that in the quarter, the loss ratio will return to historical levels”.

The executive says that the company has robust pricing systems, but it was impossible to predict the sharp rise in the price of used cars and parts last year, due to the scarcity of new vehicles on the market. “It was very unusual. What happened in the second half [de 2021] I had never seen. They stopped selling new cars and there was a huge appreciation in used and parts. And there is no way to issue an endorsement to increase the price of insurance for those who have already contracted it”.

“The way to solve this is with price. We have been increasing the price since August, but this only affects the new contracts – the old ones continue to impact the business. The loss ratio was 65% a lot by vintages [meses] before August”, says the executive. “You price at the value of when the insurance was taken out and required to pay the indemnity at the time of the accident. There was no way to price this climb.”

Another segment that negatively affected the result was residential insurance, for two reasons: a greater use of assistance services and a greater disbursement due to the rains in January and February, which caused flooding and landslides. Santos says that the second point “has already been put on track” and the first is not all bad. “It means people are using it, which is good because it builds customer loyalty and helps with retention.”

Positives and valuation

But not everything was bad in the result. Net revenue rose 21.4% to R$5.9 billion, with the insurance area growing 16% to R$3.9 billion, health 37.4% to R$720 million and of financial services 36.7%, to R$ 1.058 billion. In addition, service revenue increased by 35.6%.

The company reached 11.7 million customers and the volume of lives served increased in all areas – with emphasis on a 34.6% growth in the health segment, to 369 thousand lives (the highest ever recorded). The number of auto customers grew by 3.6%, to 5.7 million, and life by 1.3%, to 4.3 million.

Credit Suisse said that Porto’s first-quarter result was “slightly negative for equities” and that the company “delivered weak results primarily due to increased claims in the auto segment, with the impacts of inflation continuing to weigh negatively.”

But the bank highlighted that the numbers “were widely anticipated” and the April data “should start to show an improvement”, in a movement that should become more visible in the second half. He also highlighted that the company’s shares have been trading below the historical average, with a discount of 27%.

A report from the UBS bank says that the result was lower than estimated due to higher auto claims and weaker financial results, but highlighted some positive points on the balance sheet: better-than-expected written premiums, Porto Saúde’s result and revenues from credit operations.

Despite this, UBS has a neutral valuation for the shares, with a target price of BRL 22 (the stock closed at BRL 19.32 on Monday, down 3.3% in the first trading session after the results were announced) .

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