Brazil’s BB Seguridade Could Deliver Returns Near 60%, Despite Poor Economy

By Guillermo Parra-Bernal | February 23, 2016

BB Seguridade Participações SA, the insurance unit of state-controlled Banco do Brasil SA, could deliver returns near 60 percent this year even as Brazil’s worst recession in decades hampers growth in underwriting premiums and fans delinquencies, Chief Financial Officer Werner Süffert said on Monday.

The outlook for annual return on equity implies a dividend payout ratio at Brasilia-based BB Seguridade of 80 percent and healthy underwriting trends, Süffert said in an interview to discuss fourth-quarter results. The company expects growth in recurring profit of 8 percent to 12 percent this year.

Analysts expect 10.3 percent profit growth at BB Seguridade this year, citing slowing yet robust sales of rural and life insurance policies and strong financial income as interest rates stay at a nine-year high. BB Seguridade stopped disclosing estimates for premium underwriting and reserves for the core SH1, which accounted for one-fourth of revenues in the quarter, and for annuity units.

“It’s time to prioritize margins over market share growth, especially with the outlook being challenging,” Süffert said. “We are focused on obtaining quality margins in core segments.”

Fourth-quarter profit came in line with estimates after rising interest rates helped offset flagging premium underwriting revenues. The insurer earned 1.013 billion reais ($252 million) in recurring net income last quarter, compared with an estimate of 1.005 billion reais in a Reuters poll of analysts.

BB Seguridade’s shares rose for the second session in three as investors lauded the company’s strategy to focus on profits instead of trying to increase market share. The stock advanced as much as 4.1 percent to 25.21 reais, extending its 12-month gains to 23 percent.

While profit growth may fall 50 percent from last year, Süffert said cost controls and the fine-tuning of strategy in key segments will allow the company to weather what seems to be Brazil’s longest and harshest recession in more than a century.

Revenue growth slowed further in the fourth quarter, including from brokerage commissions, life and rural insurance premium underwriting and annuity contributions. Reinsurance and property and casualty premiums rose sharply, helping offset the flagging performance of the SH1 and annuity units.

“Given the backdrop, this trend is likely to continue, and may make this year’s guidance challenging,” said Carlos Macedo, an analyst with Goldman Sachs Group Inc.

Still, financial income jumped as the implied yield on BB Seguridade’s inflation-linked debt portfolio soared.

($1 = 4.0141 Brazilian reais) (Editing by Bill Rigby and Richard Chang)

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