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Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to ILC's Third Quarter 2020 Earnings Conference Call. Today with us, we have Trinidad Valdés, Investor Relations Officer of ILC; Gustavo Maturana; María de los Ángeles Arce; and Cristina Trejo, Investor Relations.

We would like to inform you that 3Q '20 earnings release and conference call presentation are available to download at the Investors section of ILC's website, www.ilcinversiones.cl. [Operator Instructions] Also, this event is being recorded. [Operator Instructions]

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of ILC's management and on information currently available. They involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry condition and other operating factors could also affect the future results of ILC and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Ms. Trinidad Valdés. Ms. Valdés, you may begin your conference.

[Trinidad Monge, executive]

Thank you, operator. Hello, everyone, and thank you for joining ILC's Third Quarter 2020 Results Conference Call. Before starting, I would like to invite everyone to download from our website a presentation prepared especially for this conference call. The purpose of this document is to go through the main events and achievements of the period as well as to explain the context and financial figures for each of our businesses. Additionally, we are broadcasting this conference call via webcast.

Now please move to Slide 3, where you will see the main highlights for the quarter. During the third quarter of 2020, ILC recorded a net profit of CLP 21 billion compared to a profit of CLP 20 billion for the same period of 2019. This was mainly explained by the better results of the health insurance companies, Consalud and Vida Cámara, as there were lower loss ratios during 3Q '20, the award of 4 fractions of the disability and survivorship insurance in July 2020 as well as by the consolidation of AFP Colfondos in December 2019.

The above was partly offset by the drop recorded in global financial markets, especially during September, as a second outbreak of COVID-19 affected the Northern Hemisphere. This resulted in a CLP 15 billion drop in the returns of AFP Habitat's legal reserves for Chile, Peru and Colombian aggregate and a CLP 14 billion decrement in the equity portfolio of Confuturo.

Regarding the health sector. COVID-19 continued affecting demand for all medical services. However, it seems the bottom has been left behind as September 2020 recorded a strong demand for outpatient and dental services, even better than in the same month of 2019. Inpatient activity remains with a certain lag when compared to operation services as selective surgeries have been just allowed by the health authorities in Chile.

Finally, it is important to remark that during the third quarter of 2020, all of our subsidiaries were 100% operative. Also, ILC is facing this scenario with CLP 100 billion in cash, which will support any of our subsidiaries if capital requirements are needed. Also, during 3Q '20, our company capitalized Banco Internacional and Red Salud, improving the solvency ratios of both entities.

When analyzing the company's performance, as shown in Slide 4, during the third quarter of 2020, there were better results in both Consalud and Vida Cámara as their loss ratios came down. All the above was partly offset by a weaker scenario in global financial markets, which affected investment returns of AFP Habitat and Confuturo, in addition to a lower demand in Red Salud due to the COVID-19 outbreak as well as by voluntary provisions recorded in Banco Internacional.

Now I will turn the call over to Cristina who will review the main operational events and key financial figures of AFP Habitat and Confuturo.

[Cristina Trejo, executive]

Thank you, Trinidad. As shown in Slide 5, AFP Habitat reported a 6% increment in net operating result. The consolidation of Colfondos in Colombia meant additional revenues for CLP 11 billion, whereas Habitat Peru increased its income from fees by 3% quarter-on-quarter. All the above was partially offset by a 3% drop in revenues from Chile.

Regarding Habitat Chile. Revenues decreased by 3%, mainly driven by an 8% decrement in the average number of contributors quarter-on-quarter. This was partially offset by the 1.5% increase in real terms in average qualifying salary. It is important to note that as of September 2020, the average qualifying salary for AFP Habitat exceeded the industry average by 20%. This is a result of the company's strategy to target the high-income segment.

AFP Habitat Peru registered a 3% quarter-on-quarter increase in fee revenue, totaling CLP 7 billion. Despite the temporary suspension of fees over salaries and the 25% withdrawal of savings due to COVID-19, the 17% growth in AUM recorded year-on-year allowed Habitat to continue growing in terms of revenues. This is an important fact as Peru has a mixed fee, charging based on salary and AUM.

As we have mentioned before, AFP Habitat has operated in Colombia since December 2019. During 3Q '20, AFP Colfondos contributed CLP 11 billion in revenue, representing 17% of consolidated income and CLP 6 billion in terms of net profit. The company is the third largest pension fund manager in Colombia, managing USD 10 billion in mandatory savings with 759,000 contributors as of August 2020, representing a 12% of market share.

SG&A for the third quarter of 2020 reached CLP 34 billion, 31% higher than 3Q '19. This was mainly due to consolidating expenses of AFP Colfondos, which represented more than 95% of the total increase.

Regarding nonoperating income. During the third quarter of 2020, AFP Habitat was affected by the weaker performances of the Chilean, Lat Am and European stock markets, which were partially offset by better results in Asia. This resulted in a CLP 21 billion drop in the return on legal reserves in Chile, whereas Peru and Colombia showed positive variations of CLP 0.8 billion and CLP 5 billion, respectively.

Therefore, AFP Habitat recorded a CLP 29 billion profit for the third quarter of 2020, 25% lower than the same period in 2019 derived from the weaker performance of financial markets, especially during September. AFP Habitat's profits before taxes and legal reserves was CLP 31 billion, 6% higher than 3Q '19, as the acquisition of AFP Colfondos has boosted consolidated results.

Finally, it is important to highlight that AFP Habitat Peru and Colombia represented 18% of Habitat's consolidated results before taxes and legal reserves in 3Q '20 compared to the 10% recorded in the same period of 2019.

Slide 6 shows Confuturo's performance. This entity registered a CLP 15 billion reduction in operating results quarter-on-quarter mainly because of lower premiums collected during the quarter as well as by drops in investment returns, especially in local and foreign equity instruments during September.

As you can see in the chart at the bottom left, Confuturo's annuity premiums in the third quarter of 2020 decreased by 86% compared to the same period in 2019. The industry reported a 68% decrease in annuity premiums as the difference between program withdrawals and annuities rates increased 210 basis points quarter-on-quarter, reaching a record-high spread of 264 basis points.

The above led to a reduction in the preference for annuities from approximately 45% in 3Q '19 to 13% in 3Q '20. Moreover, the number of new retirees that chose annuities decreased by 80% quarter-on-quarter, reaching close to 1,000, whereas the number of people choosing program withdrawals totaled 7,000 in 3Q '20.

It is important to remember that during the third quarter of 2020, the Chilean Congress approved a 10% withdrawal of people's pension funds, modifying retirement decisions during the period. However, Confuturo has been increasing premiums from other life insurance products such as savings and voluntary pension savings, maintaining its leadership with a 25% of market share.

Also, during July 2020, Confuturo was awarded with 1 fraction of the disability and survivorship insurance, being the first time that the company participates in this category.

Confuturo decreased its net investment income by 42% as local and global uncertainty affected financial markets, especially during September. Excluding returns from life insurance with savings components, since Confuturo has a fiduciary role with them, the company recorded a CLP 55 billion gain in its investment portfolio, 23% lower compared to the third quarter of 2019. Equity, fixed income and real estate investment showed a weaker performance, decreasing results by CLP 18 billion, CLP 9 billion and CLP 3 billion, respectively.

All the above was partially offset by a CLP 4 billion recovery in the valorization of investment funds quotas, especially in private equity funds, as they were strongly affected by COVID-19 during the second quarter of 2020. As of the end of September 2020, Confuturo held CLP 217 billion in cash, which is equivalent to 6 months of pension payments.

Cost of sales in the third quarter of 2020 amounted to CLP 84 billion, 43% less than the third quarter of 2019. This was explained by lower reserves given that annuity collections decreased during the quarter as well as by lower accounting losses as the regulator updated the methodology to calculate discount rates for new reserves.

Regarding SG&As. During the third quarter of 2020, there was a CLP 6 billion reduction over the same period in 2019, mainly explained by a high base comparison effect as in 3Q '19, there was a CLP 7 billion impairment provision from a specific syndicated loan. It is important to note that as of the end of September 2020, 81% of total impairments are related to 5 specific issuers, most of them affected by the COVID-19 outbreak.

All in all, Confuturo reported a net profit of CLP 373 million for the third quarter of 2020 compared with a profit of CLP 7 billion in 3Q '19.

Now I will turn the call over to Gustavo, who will review the financial figures for Banco Internacional and Red Salud.

[Gustavo Maturana, executive]

Thank you, Cristina. If we turn to Slide #7, you will see Banco Internacional operating performance for 3Q '20. Its net interest margin was CLP 17 billion, 27% higher compared to the same period in 2019. Interest income went down by 19%, mainly explained by the lower inflation and rates recorded in 3Q '20.

Regarding cost of funds. Interest expenses decreased 53% quarter-on-quarter due to a lower loan indexation and rates as well as by the positive effect arising from the resource injected by the Central Bank as part of its COVID-19 liquidity program.

Regarding credit risk conditions. There was a CLP 2 billion decrease quarter-on-quarter to CLP 4 billion. This was mainly explained by a concentration of provisions in the first half of 2020 as well as by a better payment behavior from clients.

The above was partially offset by a CLP 2 billion voluntary provision constitution in July 2020, in addition to CLP 4 billion recognized in December 2019 and the CLP 5 billion in 2Q '20 as the macro situation has weakened. As of the end of September, approximately 9% of total loans were scheduled compared to 10% as of the end of June.

Banco Internacional's SG&A in 3Q '20 were up by 5% compared to 3Q '19. This was mainly due to higher personnel and administrative expenses. The improvement in bank's gross operating income in 2020 resulted in a 20 basis point strengthening of the bank's efficiency ratio, reaching 42% as of September 2020. Therefore, Banco Internacional recorded a net income of CLP 6 billion for the third quarter of 2020, CLP 3 billion lower than the same period in 2019. Return on average equity was 10% with an annual trading net income of CLP 19 billion.

I would like to close our message about Banco Internacional, remarking the efforts undertaken by the organization to manage risk. During 2020, the bank has improved its solvency and liquidity, constituted voluntary provision, controlled its NPLs and increased its cash flow generation, among other measures.

Moving on to Red Salud on Slide 8. You will see that apparently, the bottom in activity was overcome. Red Salud's revenues reached CLP 102 billion in the third quarter of 2020, 8% lower than the same quarter in 2019. As of March 2020, Red Salud was affected by the COVID-19 global health contingency, which plants medical activity, especially during April. Since then, outpatient activity has recovered gradually, even reaching pre-COVID levels during September. Red Salud's dental centers are 100% operative since October 2020, boosting the recovery of the sector.

Finally, inpatient activity registered a significant recovery during the months of June and July given the peak of the first wave of COVID outbreak in Chile. In line with the decrease in active cases and drop in cost utilization since August, the health authority updated the restriction from elective surgeries, resuming part of the activity that was postponed.

In relation to cost of sales, there was a 0.5% decrement in 3Q '20 compared to the same quarter in 2019. This decrease was fundamentally due to a lower activity throughout the network. This implies a quarterly drop in medical participation of CLP 3 billion in addition to CLP 278 million reduction in the personnel expenses.

The foregoing was partially offset by CLP 1 billion additional cost in medical supplies as prices of personal protection elements kept rising in addition to stricter safety standards because of COVID-19.

SG&As in 3Q '20 were down by 19% compared to 3Q '19. This was mainly due to Red Salud's health expenses contract plan, which was launched in March 2020 to afford the lower activity cost by COVID-19.

All in all, consolidated EBITDA amounted CLP 11 billion, 22% lower quarter-on-quarter, explained by a reduction in the EBITDAs of metropolitan and regional hospitals, which was partially offset by the improvement of our medical and dental centers.

As a result, Red Salud recorded a net profit of CLP 1 billion in 3Q '20 compared with profit of CLP 4 billion for the third quarter of 2019.

Now I will turn the call over to María de los Ángeles, who will review the financial figures of our health insurance companies, Consalud at Vida Cámara.

[Maria de los Angeles Arce, executive]

Thank you, Gustavo. Moving on to Slide 9. We see that Isapre Consalud reported better results in the third quarter of 2020, following the upward trend seen this year in the health insurance industry as health care activity has been affected due to COVID-19. Consalud recorded an 8% increase in revenue, which was mainly explained by a 1% increase in the average number of contributors: inflation and the GES price adjustment carried out in October 2019.

Cost of sales during 3Q '20 amounted to CLP 134 billion, remaining stable when compared to the same quarter in 2019. There was a 25% and 1% drop in the total cost of outpatient and inpatient coverage, respectively, as the demand for this kind of services has decreased due to COVID-19. Consalud's 3Q '20 loss ratio decreased by 771 basis points compared to the same quarter in 2019, totaling 92%.

Regarding medical licenses. During 3Q '20, there were 21,000 medical leaps related to COVID-19, which represented 25% of total licenses approved by Consalud during the quarter. Looking forward, it is important to mention that as the number of COVID-19 infections continue decreasing in Chile, we should see a greater demand for health services, adding pressure to Consalud's operating costs.

All the above resulted in a CLP 301 million net loss for Consalud during the third quarter of 2020 compared to CLP 9 billion loss in 3Q '19.

Regarding Vida Cámara. Gross profit during the third quarter of 2020 increased by CLP 9 billion when compared to the same period in 2019. This was mainly explained by improved figures in the life and health insurance segment as a result of a lower loss ratio derived from COVID-19 as well as by the award of 3 fractions of the disability and survivorship insurance in July 2020. Net operating income was also boosted by a 6% rise in premiums, following the growth trend for the past few years.

Vida Cámara has more than 341,000 beneficiaries of supplementary health insurance products, which is roughly half of the total beneficiaries of our mandatory health insurance company, Consalud. For the third quarter of 2020, Vida Cámara ranked third in the life and supplementary health insurance industry with a market share of 11%.

Now to conclude our 3Q '20 results conference call, please turn to Slide 10, where Trinidad will refer to final remarks.

[Trinidad Monge, executive]

Thank you, María de los Ángeles. Given the global scenario that we are currently facing in 2020 because of COVID-19, we would like to highlight that ILC is 100% operative in all of our business divisions. Additionally, the company is pursuing a greater flexibility through all of them as this new reality demands more dynamic companies because of the last sudden and unexpected changes. This flexibility can be reflected in the case of Habitat with its geographic diversification; in Confuturo with the commercial strategy that the company has been following since 2018, which correlates premiums with investment opportunities; or the rapid change in the focus of Banco Internacional, which switched from growth to risk and solvency; or the immediate adaptation of Red Salud's operation once COVID-19 arrived in Chile; or the commercial change in the services and coverage offered by Consalud and Vida Cámara after the pandemic; and finally, in the sustainability program applied by ILC to support all its stakeholders.

Moreover, we would like to emphasize that ILC has approximately USD 130 million in cash, which allows us to face a potential scenario of restricted liquidity in a better way.

Finally, in 2019, we refinanced 45% of our liabilities and capitalized our subsidiaries, Red Salud, Confuturo and Banco International, which leave us as of today with no further material capital requirements for the year 2020.

Before ending, I would like to invite everyone to our fourth Investor Day first online, which is going to be held on the morning of December 1. Here, our CEO, together with the CEOs of Red Salud, Consalud and Vida Cámara, will go through the main lessons of COVID-19 and how these strategies will be modified from now on.

Okay. So with this invitation, we conclude today's presentation. Operator, we will now open the floor for any questions.

[Operator]

[Operator Instructions] The first question is from Daniel Auza from Banchile.

[Daniel Auza, analyst]

I just wanted to follow up on the -- on your SG&A expenses both on Consalud and on Red Salud. I want to understand how is the running rate going forward given the savings you've reached during the crisis. What levels of SG&A should we see on an annualized basis, assuming normal levels of activity?

[Trinidad Monge, executive]

Yes, Daniel. First of all, you know that the SG&As in both, especially in Red Salud, are related with the level of activity. So if you have a lot of activity in the Red Salud, that is going to help the operation, and that's the situation that we have been seeing during the last couple of months.

So if I can give you more detail on that. First, in the patient, as you may know, the trend in the recent -- or inpatient services has been mixed, with the first 2 months of 2020 being very strong. Then, as you may know, once COVID-19 arrived in Chile, we reached a bottom line or activity plunged 65% in surgeries in April. And as COVID-19 infections grew, we reached a hospitalization rate 20% above June 2019 compared with 2020 due to the peak of the first wave of COVID.

For you here, to have an idea, 85% of hospitalizations at that time were related to COVID. So once we begin the first outbreak, the health authority allowed elective surgeries, which were forbidden since March. So that, of course, has a huge impact on SG&As. So because of that, nowadays, SG&A has been recovering, especially in surgery rooms, which right now are 15% above the levels of November last year, whereas hospitalizations are, I would say, 3% up year-on-year.

So finally, our network, it's important to say that it's also well prepared to eventually face another COVID outbreak. If that is the case, we can double the [ COVID ] beds in 5 days, if the health authority requires it.

Now going into outpatient, Red Salud as well as the industry reached the minimum during April, with medical consultations falling 50%; images, 60%; laboratory, the same; kinesiology, 65%. So here after the first COVID-19 outbreak, together with the greater flexibility in terms of mobility and lockdowns, outpatient activity started recovery, especially during August and September.

Nowadays, November, medical consultations are at the same level than 2019, whereas images and laboratories are 22% and 13% over the same month of 2019, respectively.

Finally, which is important, especially on the results of the third quarter, dental activity, probably we saw the greatest COVID-19 impact here as dental consultations and procedures fell 90% in April. Since then and given all the security and safety measures, in addition to the lower mobility restrictions, as of November, dental activity is 20% lower compared to 2019. And we are with 100% of our dental centers operative. So with that higher activity, the -- probably the SG&As of Red Salud are going to be benefited.

In the case of Consalud, more than SG&As, and we're going to have more color on that next week on our Investor Day, the variable that we must be seeing is the cost because, as you may know here, the loss ratio of Consalud went down significantly during the second and the third quarter. In the third quarter, if you see especially the outpatient was -- went down significantly. Inpatient was more -- a little bit more stable, and licenses went up. As you may know, we have to recognize the parental leaps due to the contingency. So I would say that maybe more than SG&As in Consalud, we have to follow the loss ratio, so all the reimbursements that you must be seeing related to inpatient and outpatient services, which, if the trends continue, it could be going up. And the same happens for Vida Cámara.

I don't know if I answered your question. Maybe I gave more color in the level of activity in order to understand better the trend in SG&As and costs.

[Daniel Auza, analyst]

Yes. Yes, very complete. I mean I'm going to assume it will go back to normal levels as a percentage of sales as we -- as activity reassumes ahead.

[Trinidad Monge, executive]

Okay. Yes. We have another question from Andrés Cereceda, CrediCorp asking about the strategies for Banco Internacional and Confuturo looking at 2021.

Yes, it's a good question. It's an open question because here, we have to do the assumption of what is going to happen in 2021. Probably this question a year ago, if you were asking about 2020, the answer will be very different. But -- however, we are going to give -- maybe this is a spoiler of the Investor Day that we're going to be holding next week. But yes, you know that at the end of the day, strategy for both entities, especially Confuturo and Banco Internacional, is probably the same that we were having the last year or 2 years ago.

The thing is that during 2020, we had more flexibility in our entities. The case of Banco Internacional, it's very good. You know that Banco Internacional was growing from 20% to 30% per year in terms of loans because this organization has, let's say, a potential of having CLP 4 billion in loans without making any strategical and structural change, not entering Vida, for example. But they moved from growth to solvency and also to risk that you've seen they are doing in the next couple of months.

So what we learned this year is to be very flexible because it's really difficult to predict what is going to happen in 2021. But if -- let's assume if everything goes to normal, we can resume the same strategies that we were pursuing before, in the case of Banco Internacional growth, because this pack has a potential of reaching USD 4 billion in terms of loans; and in the case of Confuturo, we can also continue growing in terms of premium. Because as you may know, here in Chile, we have aging population. We, of course, that -- the key debottlenecking here is its investment rates market. And that is also going to affect the premiums that we can sell. Of course, also, we -- here, we depend on the program withdrawal rate, which has been going up. And the split between the program withdrawal and release reached a maximum of 260 basis points last quarter. So it's very difficult to compete with that. But if that situation continues, we are managing over USD 9 billion in AUM in Confuturo. So we must be focused on managing that, and that is going to be the case.

So the question was quite difficult because I don't have a crystal ball on my hand. But if we resume a more normalized scenario, especially for Banco Internacional, the organization has been demonstrating that they have the flexibilization to speed up or to reduce the speed of growth. And in the case of Confuturo, we depend more on financial markets. But if they also get stabilized, we can start selling more in order to match investment opportunities with annuity premiums.

[Operator]

There are no questions at this time. This concludes the question-and-answer session. I'll now turn over to Ms. Valdés for final remarks.

[Trinidad Monge, executive]

Okay. So thank you, Jason. That's everything for today's call. Thank you all for entering this conference call. Regarding IR activities, which we are attending online investors events in Spain today and tomorrow, in addition to our Investor Day that coming week. Anyway, all of our activities are published in our website. Now if you have further questions, please feel free to contact our IR team. So have a nice day, and hope you and your families remain healthy. Goodbye, and see you next quarter.

[Operator]

Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.