Porto Seguro reported a higher than expected net income of 254mn reais in last year's fourth quarter, excluding "business combination," or the impact of goodwill from acquisitions, leading full-year profits to increase 14% compared to 2011 to 702mn reais.
Improved operating trends should allow Porto Seguro to sustain healthy profitability in a lower interest rate environment, the investment bank said in a research note.
"However, our new 2013 net income estimate implies limited earnings growth from 2012 levels of only 2%, as we forecast net investment income (which represented 83% of 2012 pre-tax income) to fall considerably from 2012 levels," the note reads.
Deutsche Bank's estimates imply that Porto Seguro should deliver a 16% ROE without business combination in 2013, below 17% in 2012 but in line with a six year average, and an amplified combined ratio (which includes financial results) of 89.7%, roughly in line with 89.1% in 2012 and its previous forecast of 91.1%.
BETTER OPERATING TRENDS
The investment bank now expects the insurer to deliver faster premium growth of 15% compared to 12% before as the auto pricing environment is much more supportive than previously anticipated and a lower loss ratio due to higher prices and lower auto theft.
As such, underwriting gains should grow by around 3.5x in 2013 (although from a low level in 2012) to 439mn reais, leading the combined ratio to improve to 95.7% from 98.6% in 2012 and Deutsche Bank's previous forecast of 97.5%.
However, net investment income will likely fall 28% this year to 683mn reais, reflecting unsustainably high mark-to-market gains in a declining interest rate environment in 2012.
These gains led Porto Seguro's investment portfolio to yield 156% of market rates compared to a six-year average of 108%.
Deutsche Bank said it is expecting the investment portfolio to yield 100% of market rates in 2013.
Better earnings quality and higher net income estimates led the investment bank to increase Porto Seguro's price target to 25 reais from 21 reais before.
"However, our new price target is in line with the current share price and we maintain our hold rating," the note reads.