Investments In Technology And New Products Will Improve Customer Loyalty And Expand Market Reach

Key Takeaways

• Investment in technology and data enhances customer service and product development, supporting future growth in revenues and net margins.
  
• Strategic expansion into rural insurance and diversification with new products boost potential revenue growth and earnings stability through loyal customer retention.
  
• Economic factors, climate risks, and increased fees threaten BB Seguridade's revenue growth and margins, particularly affecting investment income and insurance lines.

Catalysts

Through its subsidiaries operates in the insurance, pension plans, and bonds, businesses in Brazil.

• BB Seguridade's significant investment in technology and data to improve customer service and product development signals future growth potential, positively impacting future revenues and net margins.
  
• Expansion into new rural insurance products, such as livestock lien, demonstrates an opportunity to capture a larger share of the rural insurance market, potentially driving future premium and revenue growth.
  
• Efforts to improve customer retention and satisfaction, as evidenced by a 17% reduction in churn and higher NPS, suggest better long-term revenue stability and earnings potential through a loyal customer base.
  
• Introduction of new products like personal protection insurance and pension products providing collateral for credit indicates potential diversification and revenue streams, potentially enhancing future earnings and net margins.
  
• Strategic focus on digital channels, which accounted for 26% of premium bond sales and significant new customer acquisition, points to increased efficiency and potential for higher revenue and margins as digital transformations continue.

BB Seguridade Participações Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BB Seguridade Participações's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 85.5% today to 96.5% in 3 years time.
• Analysts expect earnings to reach R$10.1 billion (and earnings per share of R$4.94) by about March 2028, up from R$8.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the BR Insurance industry at 9.0x.
• Analysts expect the number of shares outstanding to decline by 1.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.92%, as per the Simply Wall St company report.

BB Seguridade Participações Future Earnings Per Share Growth

Risks

• There was a drop in investment income, with a decline of 17% year-on-year, which was attributed to various factors such as the reduction in the Selic rate and inflation impacts, potentially affecting overall earnings.
  
• The premium growth for 2025 is uncertain due to potential economic slowdowns and higher interest rates in Brazil, which may particularly affect credit-related insurance lines and, consequently, revenue growth.
  
• Concerns about climate conditions, such as those influenced by La Niña, could lead to variable loss ratios in rural and agricultural lines, potentially increasing claims and impacting net margins negatively.
  
• Increased commission fees, particularly in credit life insurance, might offset revenue growth from premium increases, thereby putting pressure on net margins.
  
• The pension segment showed reduced net inflows and earnings decline due to a lower management fee rate, impacted by a continued shift towards fixed income investments; this could further pressure earnings if interest rate shifts negatively impact fund allocations.

Valuation

• The analysts have a consensus price target of R$41.5 for BB Seguridade Participações based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$48.0, and the most bearish reporting a price target of just R$33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$10.5 billion, earnings will come to R$10.1 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 16.9%.
• Given the current share price of R$40.38, the analyst price target of R$41.5 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.