BB Seguridade Participações S.A. (BBSE3) Earnings Call Transcript

Welcome to our virtual meeting to present the results of the third quarter of 2026. This event is being recorded and has simultaneous translation into English to listen to the audio in English press the interpretation, but at the low right-hand side of the screen. Event will be divided into 2 parts. In the first part, our CEO, Delano Valentine, our CFO, Rafael Sperendio, are going to present the main deliveries of the quarter. The slide deck, both in Portuguese and in English can be downloaded from our Investor Relations website at the address www.bbecury.ri.com.ba. In the second part of the event, there will be a questions-and-answer session when analysts and investors will be able to ask questions. I will be back after the presentation to give instructions for those who want to ask questions. Now I would like to give the floor to Delano, who is going to talk about the main highlights of the quarter. Delano, please floor is yours.

[Interpreted] Thank you, Felipe. Good morning, everyone, who's watching us. It's a pleasure to be with you to present the results of the period accumulated from January until September 2026. Despite the challenging context, we continue to deliver very consistent results. with a lot of discipline in terms of operational efficiency, preserving the profitability of operations and the company's ability to generate value. Going to the numbers, I highlight our recurring managerial net income of BRL 6.8 billion, a growth of 0.1% compared to the same period last year. Our operating income, net of taxes reached BRL 5.2 billion, down 1.1% in an economic environment, there's still with contraction, with high interest rates, which ends up sensitizing our products. At the same time, we have high-quality loss ratio and operational efficiency indicators, which has helped to offset part of this reduction in the volume of insurance premiums. On the other hand, the same high interest rate environment, that's are favoring our investment income, which reached BRL 1.6 billion after taxes growing 4.4% driven both by the rise in select interest rate and a more favorable dynamic of inflation indices that update Brazil pre assets. Going to a little bit more detail about our main performance indicators. In insurance, the loss ratio ended the period at 22.7% representing an improvement of 0.5 percentage points compared to the accumulated period up to September last year, remaining at the lowest levels in our time series. In benches reserves reached BRL 514 billion, a consistent growth of 12.1% in the last 12 months. Another positive highlight of our pension operation, and we recorded net inflow of BRL 4.5 billion in the year up to September, driven by the increase in contributions and redemptions and portability rates at the lowest level in recent years. In premium bonds, collection reached BRL 5.2 billion in the same period, and we distributed more than BRL 60 million in Rafael prices, an increase of 18% compared to the same period in 2025 and reinforcing the attractiveness and engagement of customers with our products. In our assessment, we have been able to deliver very solid results despite the maintenance of interest rates as still very restrictive level. And all the difficulty we have been facing in insurance products for every business. We are focusing our efforts on sustaining penetration in the credit portfolio and in products that do not depend on credit, especially pensions -- which has had an extraordinary performance this year. I understand that this set of indicators reaffirms the consistency of BB Seguridade's strategy. The diversification of our business model and the ability of our companies to continue to generating value in a sustainable manner for our customers, partners and shareholders. With that, I end my presentation, and I give the floor to Rafael, who's going to give you details about each one of our operations, and then I will join you back for the questions-and-answer session. Thank you so much.

[Interpreted] Thank you, Delano. Good morning, everyone. So going to a little bit more detail of our numbers for the third quarter. third quarter this year, we delivered a result of BRL 2.4 billion, down by 5% as compared to the net income last year. This reduction is essentially explained by the reduction in the sales volume of insurance products, especially those related to credit and also in premium bonds that is in BP Corridor. I'm going to give you details further ahead. Another factor that impacted for the reduction and the lower performance in the third quarter and year was the investment income. So this is a more difficult comparison basis with a reduction in the average Selic comparing year-on-year and this drove down the net investment income in in addition to more details that I'm going to give you further ahead, which was the constitution of additional provisions at Brazil prefat is fully reversed in the bottom line, but these are the main movements explaining the reduction in the profit if we compare the third quarter. Year-to-date numbers, the net income is BRL 6.8 million, helped by the time mismatch for the first 9 months last year, there is a time mismatch of 1 month in the update of liabilities of pension plans. This has also contributed to the net investment income that grew 4% year-on-year in addition to the average SELIC -- and even though it's there, the third quarter year-on-year, if we look year-to-date numbers, the first 9 months of 2026, there is an average Selic that is above what we had until September 2025. So here, the second level of details going into the numbers and the movements that I have just explained in the previous slide, our traditional comparison looking at the year-to-date numbers and breaking it down in its main components. And here, it's very clear this offset movement. Well, the operating result dropped, the net investment income is up 66, 1 offsetting the other, also explained in the retraction of operating results in lower retained earned premiums at Brazil affecting the profit until September this year. So brokerage revenue suffered a little bit of the impact down by BRL 54 million in the bottom line because of the collection of premium bonds. So these are the revenues with management fee for Brazil pre affecting the the profit, especially due to higher volume and loss ratio of Brazil also had a positive contribution with BRL 28 million adding BRL 28 million to our bottom line, especially because of crop insurance and credit life, if we look year-to-date numbers. compared to 2025. On the net investment income, the negative aspect comparing the first 9 months of the year, we have BRL 68 million with a negative impact because the cash volume rate is a reduction in average balance, taking out BRL 68 million from the bottom line more than offset by the time mismatch because it was negative last year, positive this year. The delta was BRL 119 million positive in addition to mark-to-market positive by BRL 8 million in the first 9 months of 2025 and also positive by BRL 24 million in the first 9 months of this year. Contributing with 15% for the BRL 66 million in the year-to-date numbers. Now going to the details of each one of the operations. So written premiums dropped 19% year-on-year in the third quarter, 9 year in year-to-date numbers. Here are the highlights of the lines that have a direct relationship with credit origination, especially room insurance that has suffered a lot this year, so 24% in the third quarter this year, 13% drop year-to-date numbers and 27% drop. So here, home insurance made positive 4.2% of the portfolio growing 29% year-on-year and 25% first 9 months. So here, we have more of the impact if we see year-on-year, both of the accumulated numbers. So retained premiums behaves very much similarly to retained premiums down 18% year-on-year and 7% in year-to-date numbers. Now the performance ratios, we can see an increase in combined ratio, especially due to the increase of commissioning with 2 factors explaining the more directly 1 is a reduction in the share of rural with lower commissions in terms of the share of other products with higher commissions -- in addition to the factor that I mentioned before, a reduction in profitability of rural crop insurance. So it goes in a positive amount. It's a reduction factor for commissions. So it loses share. We have less revenue from reinsurance commissions. And what happens here is that the reduction factor is smaller because of that because of increase in commission ratios. Loss ratio had a marginal increase of 0.4 percentage points year-on-year. And here essentially because of increase in loss ratio of crop insurance. If we look at year-to-date number, loss ratio dropped year-on-year, especially before crop and credit life at a very healthy level. And I highlight another fact, very positive factor here is for the operation of Brazil saying an improvement in general administrative expenses that we've been following up during the year dropping 0.4% year-on-year on the third quarter and improved 10.2% in year-to-date numbers. And then financial income dropped on year by 18% and 9% in the first 9 months percent -- so the main factor explaining the drop in year-to-date numbers is here on the screen. And then when we look at everything together combined, you can see the recurring net income with a drop in premiums and investment income. So the net income dropped 11% year-on-year, 4% in year-to-date numbers. Now going to pension -- this is the positive highlight that we've been following along 2026, which is natural in a very restrictive interest rate environment. This is the best performance. So the volume of contributions growing 5% year-on-year, 6% in year-to-date numbers. In terms of inflow, there is a significant reduction going from 11% in 2025, down, and the rate of redemptions goes down to the level of 8%. This is what we've been seeing this year. So and inflows of BRL 4 billion this year and reserves in the balance going BRL 514 million at the end of September with a 12% year-on-year growth in the last 12 months. Management fee grew a little bit compared to the previous period because of the lower average rate, both in the quarter and year-to-date numbers, growing 6% year-on-year and 7% in year-to-date numbers because of the reduction in average rate which is slightly below BRL 1 billion in quarter because of the flow that is concentrated in lower risk products. So there is still an aversion to risk that remains with more conservative resources with lower management fees. . So in terms of efficiency, the highlight for the operation here, despite quite robust growth in revenues, the discipline in costs remain on 2.8 percentage points in cost-to-income ratio and 2.5% down in the year-to-date numbers. So net investment income down 11% year-on-year considering the third quarter. So there is a time when we update the assumptions for the update of liabilities, we updated the actuarial schedule -- so because of that, there is an increase of longevity affecting risk and liabilities and most of the adjustment explains the difference here in the net investment income compared to the third quarter last year, which is neutralized. So it's positive in appeal and in the liabilities adaptation test -- we also confirmed the surplus. So the adjustment here is reserved in So the adjustment here is reserved in the more comprehensive bottom line. So year-to-date number, 3% growth in net investment income. And so the effect is more diluted here with a better performance because of the time mismatch and also a growth in revenue, better efficiency offset by efficiency. So managerial net income is stable year-on-year. We grew in the first 9 months of the year, an improvement both in revenue efficiency and investment income drove the 7% increase compared to the first 9 months of 2025. Now in premium bonds, you can see the drop of 5% year-on-year for the year-to-date number. Reserves dropped 1% in the first -- in the 12 months in terms of lottery prices paid, down 9% year-on-year, but a growth of 18% in the first 9 months of the year. This year, we have already paid BRL 60 million, and this is related to premium bonds. net investment income. Here, there is a drop of 8% year-on-year, considering in the quarter and 40 basis in the financial margin explained by Selic rate and year-to-date numbers, the investment income grew 17% with 60 basis in the margin and average Selic is still a very positive factor. Now net income dropped 1% year-on-year and grew 23% in year-to-date numbers following the trend of the investment income in year-to-date numbers, we should remember that there is a driver here. So the net income grows more than investment income because of adjustments that we did in the beginning of the year because of a higher social contribution rate on net income. Now BB Cortorial, our brokerage business. So here, we have brokerage revenues. So insurance premiums with a positive impact and a reduction in collection of premium bonds too, partially offsetting in brokerage revenues dropped 5% year-on-year in the quarter and 2% in the first 9 months of year -- 1 year against the other. So here, net margin down 0.9 percentage points year-on-year and because of a reduction in the investment income, operational margin grew, but the average Selic is lower, offsetting the investment income in thebeordor with the post fixed bonds. Year-to-date numbers, the effect is diluted. Net margin remained stable. And as a consequence, so there is a 6% drop in net income year-on-year considering the quarter, considering the first 9 months it dropped at the same pace of 2% drop in revenue and net income. And lastly, we move to the guidance for 2026. And what we have here are the indicators, the growth indicators, pension plan reserves, premiums written and noninterest operating results. We have exceeded here -- so we delivered 12.6% in terms of the reserves. So which is above our guidance and in premiums written, we exceeded the estimates. The first 2 lines, we are very confident. This is very good along the year that for these 2 indicators, we are going to deliver results that will be at the top or marginal considering the range. Now for premiums written is slightly different. So there is a marginal deviation in the first quarter, considering the projections and the main variable that we have to observe was the performance, especially in terms of crop insurance premiums. The scenario was quite uncertain. There was a government plan and renegotiations. And now -- after the last quarter, this recovery didn't come as we expected. So because of this movement, especially we had a range between minus 3% to 2%. We ended with a drop of 9% after 9 months. We are reviewing our guidance review our expected drop from minus 15% to minus 11% for 2026. So these are the main factors explaining our performance. And now I will join Delano and Felipe for the question-and-answer session.

[Interpreted] we are now going to start our questions-and-answer session. [Operator Instructions] So our first question comes from Tiago Binsfeld from Goldman Sachs. Tiago, you can open your microphone and ask your question.

[Interpreted] Delano, Rafael and Felipe. I would like to ask about the review of the premium guidance with the drop between 15% and 11% -- the fourth quarter is usually weaker and this is implied in your range. So if you could give us details about those expectations from which lines would come this series of weakening, so would be this run rate in early 2027? Or do you see any levers next year to drive it up.

[Interpreted] Tiago, thank you very much for the question. As to the revised guidance, the answer is going to focus on insurance lines that are direct related to credit origination. So the environment today's area was with interest rates in the long term that is very restrictive -- and the consequence of that is impacting origination and penetration and credit is more expensive and it's more difficult. So the impact that has driven us to review the guidance for the year was precisely that and we are looking at the performance in credit line than in the rural insurance all segment lines, not just crop, but all other kinds of insurance with a slowdown, for example, with the reline with a more restrictive scenario in terms of interest rates. Same thing today based on information that we have available despite everything that is update almost every day based on information currently available. We do not yet have an optimistic vision of recovery and acceleration of those lines in 2027. And everything can change before the end of the year. But considering what is implicit in the curve of what has been announced by the focus policy. So we're going to still have a restrictive environment in 2027, and this is going to be no different for credit life overall insurance comparing to next year to this year. And everything that we've been doing is to try and offset that in some way. Even in terms of credit lines, we have some opportunities. There are some lines for credit life -- we want to expand sales channels for credit life insurance to use the whole potential of credit origination that the bank provides but especially for the products that have no relationship that are not related to credit. And we hope to focus then on 2027 and we do not take part in underwriting. This is small, there is brokerage, less than 1%, but it's been growing in a very accelerated way, 50% of the revenues coming from products that today we do not underwrite especially vehicle insurance and large risks. So this is what we've been doing in 2026. This is going to be our focus in 2027 in addition to pension. So we have insurance has a more challenging environment because it is dependent on credit almost 3/4 of the insurance companies in premiums written are for products related to credit. On the other hand, our pension products benefit from higher interest rates. So there is more assets under management, more stability of inflows, fewer or less outflow -- and this is what we see in '26, '27, and we hope that this more beneficial behavior remains along next year.

Now we have a question from Guilherme Grespan from JPMorgan.

[Interpreted] Hello. Thank you so much for the presentation and for opening for questions. I just have a follow-up question considering the previous one. And as a reminder, and Spring might be able to answer is the duration and the booking of premiums. The main lines that we see more difficulties is in terms of credit lines, and rural for the different segments. And if you could remind us how you book premiums for each 1 of those lines? Is it 1, 2, 3 years of duration -- so to understand the impact of this worsening in premiums written and how it impacts noninterest-related performance. So -- how do you expect X percent in 2027? Is there any spillover into 2028. So how do you see that.

Grespan, thank you very much for your question. In a nutshell, if we consider both in crop with duration of 1 year and lean about 2 years. And we have products that have a shorter insurance. So credit life is slightly longer comes from individuals consigned credit, so it has lost space for companies that has 1.5 years. So if we consider the payroll loans for individuals and companies, it's important to highlight, it's not related to the duration of the credit because they do not evolve at the same speed that are different audiences in their social security payroll alone considering the turnaround rate is about 2 to 3 years. But this portfolio is losing space to companies that is about 1.5 years of duration. So overall, -- if I understand your question correctly, your concern is with a carryover of earned premiums into 2027 most of that. Buffer has been taken on in 2026 and in 2027, earned premiums is more sensitive to written premiums. Okay. Yes, of course, it's clear. And of course, there is a revenue booking that is based on that.

Next question from [indiscernible] your microphone and ask your question.

Good morning, everyone. Thank you very much for the space. I have 2 questions. The first 1 is about contracts. Do you have any predictability about the negotiation time lines? Is it going to be towards at the end of 2027 when the land term ends, and we are getting to the end of the year, maybe you're already designing projections and budgets for 2027, which is the interest rate that you're working with for next year? And could you please remind us of the sensitivity of the net investment income.

Well, first, the contracts. So far, we haven't started any discussions with the bank. The bank leads this conversation. But for now, no prospects and nothing has been defined yet. So Rafael, if you want to talk about the financial aspect.

Well, financially speaking, as I said it's quite difficult because it's been changing every year. And we have macro aspects and that we have the interest rates in essence or in a nutshell, everything indicates that it may be implied in the interest rate curve until we have a higher Selic next year. So this affects the operational numbers or rates because it's more restrictive that are embedded in the credit operations. On the other hand, there is a direct positive impact in investment income, especially in post fixed, which is part of our portfolio. So -- this is the most up-to-date information that we have, and this is implicit in the interest curve. Even though -- it means reduction in a reduction. The curve is still high, and we need to be based on the market, and this is going to -- this is what defines as to inflation, which is another important component, it's also beneficial what we see realized numbers for 2025, where we would have a reduction in IPC but the reduction of IGPM that is going to be stronger, which would benefit the composition between assets and liabilities in Brazil prep. In terms of sensitivity to bottom line, were post fixed. So we think about Selic each 100 basis have an impact to BRL 120 million, more or less symmetrical, whether it's up or down. So 1 basis, BRL 120 million in our income up or down. Inflation slightly different for each point up at IGPM, there is a negative impact of BRL 12 million in our results. And so this is what we are expecting a reduction in IGPM next year. So it would be the opposite. So we are going to have a positive impact of BRL 12 million. For IPCA for each point up it's BRL 34 million of positive impact and reductions in BRL 34 million down. So today, the focus is projecting a reduction -- so this is in the assumptions of today focused bulletin. So if there is an impact of those movements, except for Selic because there we're using prices and it's implicit in the interest curve with a positive impact in Brazil Pratt.

Our next question comes from Antonio Ruette from Bank of America.

Just a few things for 2027 in terms of growth of premiums -- you have said that there is no reason why we should wait a very strong acceleration. And this year's guidance is double digits down. So next year, should we expect something similar to that to something slightly better. Still thinking about next year in terms of operational results, -- and please correct me if I'm long, but the most likely scenario is a pressure in brokerage as you have explored and also the earned premium with a weak origination in 2026. I think that the main variable is loss ratio. I know that you haven't yet given a guidance for 2027. But if you could comment on those 2 lines, it would be great.

We are still working on our budget for the year and our projections and one point that is very relevant, which is a starting point that is not yet defined for 2026. So this is associated to our projections and the shopper slowdown. As I said before, considering that scenario remains restrictive compared to the monetary policy and the interest rate curve with a high of 7%, 8% and 15% we are not really expecting any major recovery in terms of lines that depend on credit origination. On the other hand, if we think, especially in the loss in the share of rural insurance and all the initiatives we mentioned of alternatives to offset that we imagine that even though today, the best information that we have available that there may be a drop in premiums in 2027. We don't think it's going to be as big as it was in 2026. It's going to be less, but still too early for us to say anything. Now as to 2027, thinking in terms of loss ratio, in the main variable that we need to observe -- so 2026, what we saw in the third quarter also has some impact in the third quarter from an impact from El Nino -- and what we saw is a high in crop is because of the draft or dry season in the center of the country affecting corn. And in the South with a bailie, wheat an impact of 0.4% in loss ratio. So as we've been seen, it will have some impact. But today, we do not yet have any evidence that the impact will be material. And once we consider the share of crop insurance in the portfolio, the impact is not less than 1% in our bottom line. So just complementing El Nino is the main component that we should pay attention at and follow closely would be the planting of soybean crops. So maybe there is a delay -- so there is the of season and the crop there is a second crop, and there is a more sensitive climate window. Today, if we look at lending calendar, so more than 50% of the soybean crop area has already been planted. It doesn't mean that everything is so -- so 50% has been planted slightly above the average the historical average. So still being developed or still subject to some deficit -- for example, there is a higher temperature and might lead to a need to replant and also delaying the window. So there is reletting and the main risk event is the delay of the planting window for the second crop. Now we need to monitor November and December to see what happens to see that there is an appropriate growth and then we could prove roll down the risk and then especially considering the open crown. So we have property, residential and other lines of insurance that will need to monitor closely. So despite they have a small share in our portfolio, especially in the South and Southeast and on the coast -- where normally, El Nino has a higher impact with flood collapses. So the Brazilian cost, especially in the southeast and south of the country that might cause some damage, but the both combined should not cause a material impact for the whole year results.

The next question is going to come from Arnon Shirazi from Citibank.