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Good morning. We bid you welcome to our teleconference of Porto Seguro S.A. to discuss the results concerning the second quarter 2018. We have here Mr. Roberto Santos, CEO; Marcelo Picanço, Vice President of General Business, Investments and Investor Relations; Celso Damadi, Vice President of Controller and Finance; and Ricardo Fuzaro, Head of Investor Relations. We would like to inform that this is being simultaneously translated as well as recorded. [Operator Instructions] The audio and the slides are simultaneously presented on the web at www.portoseguro.com.br/ir and our platform, MZiQ platform. At this site, you will be able to identify the banner with the conference call that will lead you to the platform on the presentation. Questions can be also done by the webcast. If you click on the icon questions to the speaker, and then ask the speaker and they will be answered live during this conference.
Before proceeding, we would like to clarify that any statements that might be made during this conference relative to the business perspective of Porto Seguro, projections, operational goals, financial goals, or promises of the board as well as informations that are -- based on information that are currently available. Future considerations cannot guarantee performance. We're talking about future events and they depend on circumstances that may occur or not. Investors should understand that general economic conditions of the industry or other operational factors may affect the future performance of Porto Seguro and lead to results that are materially different from those expressed in future consideration.
Now I would like to give the floor to the company. Please go on.
Good morning, all. We thank you for being in this teleconference from Porto Seguro concerning the second quarter 2018.
Now going to Slide #4. On the main point for the highlights on this first semester. The -- we had significant increase in the operational result, having returned 4x higher than last year. And with that, we more than compensated the rate -- interest rates fall. And we had adjustment made last year to price recovery, better underwriting and higher operational efficiency. Besides that, the external environment also has contributed, especially in the drop of vehicles and a competitive environment that's more rational.
The auto insurance, the new strategies on brands implemented at the end of last year, with more focus in the results -- consolidated results also give us improvement in this semester. The new model will be -- has been presented almost all over the country except the State of São Paulo that -- where we intend to implement by the end of July or August -- I'm sorry, August.
In the other business, we're still expanding, with P&C, Life and Health insurance highlights in the first semester, Credit Cards and vehicles and autos increased a lot. And we also have concluded the sales of medical centers, Portomed for DaVita and achieving BRL 27 million. DaVita is a global company recognized by its expertise. It has very good professionals and provides good care for their patients. And we understand the negotiation of the clinic should contribute to increase our focus.
In the other businesses that -- where we act and also in this quarter, we have capital at certain amount of billions of reais that was assumed to improve in 2017. And also, we achieved BRL 500 million, increasing the company's capital efficiency. And besides that, we also announced the partial accounted credit recurrent -- in BRL 229 million concerning 2018. The extra value would have been defined in the last quarter, and we are satisfied with the results achieved. And we trust the capacity of recovery in the country and in the capacity of expanding our businesses.
Now Marcelo, please give detailed results on the operations.
Good morning. Thank you for coming to our call. I would like to go to Slide 5 and talk about the growth in the second half of 2018. We grew 8% as compared to the last period of last year -- same period of last year. And the most important point here is that we had a better increase in insurance, 30% of this increase.
Not according to what we had in our history, we are in a situation where we had to reduce margins, and the macroeconomic effect also pressed the growth of this segment. But we have healthier growth than we had last year. 40% of this growth came from other insurances, what we see as strategical importance, especially in the long run. We have 2/3 of our business in auto insurance, and we should become more diverse, especially in retail insurance, insurances for families and small and medium businesses.
And we also grew in financial investment that grew 22% as compared to last year. Services, not as much, 4%. We also have adjustments in operations that are looking for a more consistent result. And that demanded some adjustment in the operation, but hindered a little bit as well in services.
Historically, when we look from 2013, we have, in services, we grew 19% a year; insurance, 7% a year; and in financial business, it's 14% in the average of last 5 years. This will give us a better view, a better perspective of the growth that we had.
Talking about results, I think this is the most important aspect of this quarter. We have results -- we have a process of margin recovery, and I believe that this process is already finished. And with that, we had a quarter that captures all the -- our composition that led to combined results that were low as compared to history, 91.4%. In the first quarter of -- 92% was very good. And especially, this -- the most important change as compared to the same period of last year was due to the drop of loss rates in our main product, which is auto insurance, and with that, an increase of almost 4x in the operational results of insurance.
This drop in the loss ratio was because of 2 movements. One on certification that is quite important and also because of a decrease in frequency. So it's not just a matter of time but of adjustment and acceptance of the operations that were good.
Now talking about strategies, talking about how we place our 3 bands -- 3 brands. So it’s a quarter that shows this recovery in the results of Auto insurance, our main product, that led to improvement in operational results and a very expensive one. But when we look for better clarifying even more that the tight short-term cyclic movement of the market. And we now have a peak of result, we believe that this is a process that has oscillations. And history shows that it's not always in the peak, not always in the trough, it's an industry that varies.
But looking from 2009, making a 9-year analysis, what's more important more than just looking in the long run is to see how stable we are relative to the combined results. It's an index that's not used in markets that are developed, where we have rates that are much higher than Brazilian ones. But when we consider Brazil, it's relevant to look at it in an integrated way, in a holistic way. In our case is that it's confirmed by figures and facts, is that oscillations in interest rates are compensable, can become compensated in the operational results.
We have here oscillations that varied between 14% and 6%, which is relevant. We also had higher ones. We can see that the much stable -- level of stability in the combined shows that we are managing in a way that we are looking at interest, and we're putting this in prices. And of course, this does not happen instantly or when we look only every month or every quarter, we have to look more -- we have to look further to see that it's not just a very short period of time, but rather look in the medium and long run.
Going to Slide 8. We see the growth in the efficiency, considering G&A plus O&E. The OpEx of business as a whole has decreased as compared to the first quarter in 2017, 1.4% -- percentage point. And we believe that this is the current decrease. And we have buffer here. We have here -- we improved processes that were put into place by the many projects that we finished, or we are finishing, in technology that allow us to achieve a gain in productivity that's quite expensive, and at the same time, other initiatives that go beyond the technological improvement.
So we had -- looking nominally, it's important for us not to look just at prices, what increases premium. The G&A and operational expenses quarter-by-quarter, nominally, has decreased 1%, more than the rate it decreased as compared -- when we compare the quarters. And looking at auto insurances, which is the most mobile part, we've maintained market share. And I would like to emphasize that the drop in loss ratio increased 9 percentage points. Our historical differential between -- when we compare it, we increased it 12 percentage points instead of 9. And our big challenge now is to expand the insured fleet in a sustainable way, acquiring and getting more clients at a sustainable price in the long run. We had period of reduction that is quite significant in the fleet, but we have already recovered. We grew again. And our great challenge is the mean price right now without not stopping guaranteeing adequate earnings.
On Slide 10, we have financial services business results. We had progress in revenue that was relevant in every business except mobile operator, where we had to refocus to accept clients or to reject clients, and that impacts our revenue, but it also improves quality of this revenue. We have more premium clients now, and revenue distribution considering in business is much more in Credit Cards. In consortium, these 2 are more than 75% -- or 2/3 of revenue. And a drop in earning, a decrease in earning, was essentially because of the result of mobile operations that still has some operational financial issues that are being fixed. So that really weighs on results.
In financial investment results, we had a quarter with a performance that was okay, a little bit less than CDI when we don't consider pension. It was quite volatile because there was worsening in market, especially in variable income. We had a variable income that is in long run, but it had abrupt movement. BOVESPA had a decrease, had a drop, and hence, our revenue for investment also suffered, and that hinders, a little bit, the result. But we do consider that, considering volatility of the market in this period, we had a reasonable result. A little bit lower than average of the year, but this is volatile and the characteristic's not recurrent.
We have an allocation in the second quarter. We increased a little bit more the installation index numbers. But we believe that this isn't important because of scenarios ahead, where we are going to have the election, government change. So we believe that Brazil -- in Brazil, it makes sense that real will increase a lot, and this fortunately makes us feel safer considering inflation. Our view is that this will increase in the coming weeks.
So it's sad when you consider last quarter, we have a backlog that is quite coherent, consistent with our history, not much oscillation. Second change in the second quarter, and that protected results a little bit, was that actions were reduced throughout the quarter. And we had 1.8%, what led to those results. So it was better than if this allocation were higher, as it was, last quarter, 3.4%.
And in Slide 12, I'll comment on results. We had good extension in the quarter, 41%, the result of this half. Operational results last year was a result that was much lower than the financial results, less than 1/3 of the financial result. And now it's the largest part of the results, so this is quite healthy. We improved recurrence of results. And it's not -- we are not as exposed to the volatility of the market. Hence, there was an [ exceptional ] drop in CDI, and we have backlog that depends on that, and there was a reduction in financial result and operational growth.
So regarding the mix of results, we like it like that. We have -- it looks like the result of an insurance company of a more normal country, financial-wise. And our return, our ROAE increased a lot, 20% result in this quarter, 18% in this semester.
So we'd like now to open for questions and answers. Thank you.
[Operator Instructions] The questions can be referred by the webcast. Can we ask the speaker?
Our first question comes from Frederic De Mariz from UBS.
I have 2 questions that I would like to hear your opinion on. First thing on loss ratio in Auto. When -- in the frequency, I would like to hear from you, when do you think competition could become more aggressive? And if you have room for frequency and whether there is a rate fluctuation that is quite good, do you have room for other processes? And second question has to do with diversity of the revenue as part of your strategy. I would like to hear from you whether you have, in the medium or long run, any ideal mix of revenue between Auto and other insurances and other products that you have? And if that's the case, what other products would you like to increase or add? I would like to understand a little bit more what products would be interesting. And if you expect to do this in an organic or inorganic way, do you think you lack something in house, or do you have everything you need?
This is Roberto speaking. In relation to the specific question about loss ratio and competitiveness. Talking about Autos, we in -- the first semester, we had a competitive environment that is a little bit more rational. We understand that, most likely, this second semester will not behave the same way. What I mean is we do not imagine a scenario of reducing loss ratio. Although we are firm on the progress using models of analytics to reduce loss ratio -- reduce the frequency of claims. So in summary, we believe that we still have some room to reduce the frequency of claims, but that does not mean that we are really going to decrease because we don't believe that the second half will behave in a rational way, if the -- our competitors will be rational. This is what we understand. We will go on reducing frequency via improving substitution or replacement. Although as you said, we still find opportunities to reduce -- to have more efficiency in processes that will end up in reduction of operational expenses as well as administrative expenses. But we do not understand that we're going to have more reduction this semester. In relation to your second question, I give it to Marcelo to answer.
On your second question, actually, we intend to grow in other businesses, basically through our priority product, which is a personal individual insurance, for families, small and medium companies and also residence. We are leaders, but even being leaders, we believe that the market is not an area -- a question of gaining market share, but increasing the market. The market is very small in Brazil, although we do penetrate a lot in the market, we depend on tools, communications. And yes, we intend to grow in an organic way. This market does not demand a price focus in very specialized lines, and we have a specific way of making business and strategies. And the idea is to grow. So it's a growth in the long run, medium run in order to really enter our businesses. We don't have specific target in mix, but we would like to grow in an important way. And also financial businesses that are quite [ energic ], like insurance and Credit Card, within our relation network -- relationship network, we can increase, but this increase is conditioned to increasing insurance clients because we're focusing on our customer. So one depends on the other. And it's happening, it's growing a lot. So I think that this are what I could say.
Our next question comes from Gustavo Schroden, Bank of America.
I will ask 2 questions. The first one is a follow-up on the -- I would like to understand a little bit about distribution of the Auto network. It's quite clear why you had slow growth. But if you look forward, and we think, as you mentioned, that competition may become stronger in the second half, Porto Seguro itself. Marcelo has mentioned that we're focused on growth of fleet, and with a more stable interest that may also strengthen the competition. Since you mentioned you don't have much room to decrease, is there a possibility of increasing? I would like to understand how much we can grow or what can we work on? This 50% level is lower. Now could you think of 60%? To try to understand how we project the loss ratio of claim? And my second question is based on the breakdown of results. As Marcelo emphasized, it's 60-40 the operational results and financial results. And of course, here, we have an effect and operational improvement that's strong. And SELIC dropped where it's -- if it becomes normal in the interest within a year or something, what's the breakdown of results that you believe is reasonable for us to have a forecast? Do you think 60-40 is a number we can think of? Or considering the interest, financial results will increase in the breakdown?
This is Roberto speaking. Thank you for your question. I cannot disseminate the guide, but what I can say is that if our forecast will prove that -- or will really come true and competitors are more competitive, our claims will increase a lot, our loss ratio. Nothing more than what we have forecasted, nothing alarming the other way around. But it also may be that the market does not behave as we think. We may be wrong. If that happens, most likely, our loss ratio for this period will behave according to the first half or maybe even better, depending on how the market's going to behave. But I'd like to emphasize that should the environment not be rational, maybe a little increase in numbers, again, emphasizing that nothing more than what we expect for our standard. Marcelo, could you answer the second question?
The second question, while I don't have my calculation -- calculator open here. We are not as much concerned of looking at mix or directing the mix because we have to look at benchmarks, and the operational has to give their return also, and we have to consider CDI. Then we'll look at -- what I can say is that the mix we have today is quite positive for the operational side, and it will probably be normalized. Financial may grow a little bit more than operational. Operational is great. We don't have the combined results. We had a peak, and in the long run, a peak maybe will not be sustained. But we have to be pragmatic here. On the other hand, we have -- we believe that Brazil does not have as yet. If the government is orthodox, maybe the interest will remain as it is. But we don't believe that Brazil will remain in a crisis for 1 decade. On the other hand, it also depends on reforms. If reforms happen and become strong, they may increase a little bit. If they don't come true, then we'll see. Thinking about an orthodox management. So with the increase of 1.5, working with 8, 1.45-plus. And also seeing that we have cash management that we have to consider the capital we have in the company. So working with a little bit more finances -- financial side in long run is more realistic. But it would not be bad for us if it remains as it is today, 60% operational and 40% financial. With -- what's important is that we're always looking for operational efficiency and we have to be competitive in relation to benchmark, that starts in CDI -- CDI and also BOVESPA because we have a shared portfolio that we have in the long run.
Our next question comes from Rafael Frade from Bradesco.
I would like to explore the quarters. We have many factors in the quarter concerning the strike. And it's not quite clear how much this may have impacted on your activities. Because it's dropped within Rio and Sao Paolo. I'd like to know your opinion in relation to that. I understand there are many factors of operational improvement, prices -- full price, as I'd say. But I would like to understand if you -- how do you see the frequency? Was it very low? Maybe we are looking at some movement for July, we're looking at July, maybe. So do you see anything that was specific peculiar to this quarter, to the third quarter?
Rafael, this is Roberto. Actually, the 15 days that were impacted in this quarter during the truck drivers' strike, we did notice an expensive reduction, especially in tariffs in that specific period. But as a whole, it did not impact so much. The fact is that when you look at the whole semester, we notice a reduction in the frequency of losses, not just tariffs, but also accidents. But it's good to remember that during the strike, the peak of reduction of frequency in robbery car attempts, but also reduction in sales, sales were also affected as the negative side of this strike, it affected sales. So I would say that this is something that's of concern for the next month, that this repeats or not. The reduction in the loss ratio and also in food business, for instance, is consistent. This reduction is consistent during the whole semester.
Next question comes from Thiago Kapulskis, BTG Pactual.
I have 2 questions. The first one on Auto insurance, I would like to go in premiums because at the beginning of the year, some premiums -- we're talking about double-digit growth in the market for those who are more optimistic. Since the last month, we saw a deceleration in spite of the good news of increasing the fleet after a long time. I'd like to understand how you see the dynamic for the rest of the year. Of course, there is -- the competitors who have commented around that. But you believe that the market will accelerate, especially concerning fleet? And what is the strategy that you will implement in order to increase the fleet, sequentially speaking? Any specific strategy among brands, different prices? Could you talk a little bit about that? That will be interesting. And also in efficiency, we noted for the first time in a long time, as you showed on the slide, efficiency improved in a significant way. And you commented a little bit about the initiatives that you had. And that seem to be bringing yield. I would like to understand how you look at the efficiency rate. And could you give us an idea of what the initiatives will be? Your initiative are over? Is there something more in the horizon?
Thank you for the opportunity. This is Roberto. Although we are a little bit concerned about the scenario of next semester, but we see the economy not having consistent signs of recovery, what is negative. On the other hand, we see an increase in Autos, so our position is conservative. Although we work with the scenario of a timid growth in fleet recovery -- insured fleet recovery. The scenario that we work on is that. It is scenario, a little bit more optimistic than the first quarter. Certainly better than the last quarter of 2017. We do not work with the scenario of double-digit growth. This was not our understanding. Maybe a few markets worked with that, we never did. Although we do believe that there will be a little recovery in relation to efficiency. The efficiency is a process, and itself, it's a way of seeing the business. And I would say that we have many opportunities in our company that we have looked at. And to summarize your answer -- the answer to you, we have -- we still have a lot of water in the wheel -- in the well.
Next question, Eduardo Nishio from Rural (sic) [ Plural ] Bank.
Also 2 questions. One, a follow-up on G&A and operation expenses. We can use those figures that is very important more than 1% of -- for the rest of the year. As you mentioned, a little bit, there is some gain, but on the -- considering 17.7%, that's an excellent figure. And what also do we have to do, integration of Itaú is -- has already been done. If you could mention a little bit more about that? Second talking about technology, in fact, that a lot for many years in technology, could you also further elaborate on that and the impact estimated on this part of efficiency? And second question is about capital. You paid BRL 500 million extraordinary, which was excellent. Your capital dropped about BRL 1 million (sic) [ BRL 1 billion ], but it will recover throughout the year. So it's a good year as far as results is concerned confirmed. CapEx should be smaller this year. I would like to know if you see any room to improve this cash management. And whether you're going to have excellent -- or surplus capital is going to be reasonable, most likely. If you have anything -- if you're thinking about anything to improve capital management? So payout and dividends, extraordinary dividends, or even management of real estate that I follow more your rate of [ solvency ].
Nishio, this is Roberto. Thank you for the opportunity. In relation to efficiency, I would say that, as I mentioned before, we still have many opportunities. As you mentioned, the current rate of 17%, we're not satisfied with that as yet. There is much opportunity. We invested in the last years, as you said, a lot in technology, BRL 1 billion almost, in the last few years. And we are now seeing the yield of this investment, the return of this investment in technology, efficiency, reduction in [ IDL ] and also process review. When you use technology to improve process, the way of doing the process is different, it's much more simple and brings positive consequences. So we understand that this process goes on, it's an ongoing process, and we have much opportunity. And we are not satisfied with the reduction rate. Consistent, as we saw in the first quarter, we will have good results in this segment. In relation to Bancassurance, as with Itaú, we have progressed a lot. The residential insurance that had an operation that was a little bit sales. In last -- first quarter, we saw an increase in the portfolio. This was a result of process review. And also, we sold through different processes. And it will advance a lot inside the bank. And in relation to efficiency, we conclude a process called embarking, [Foreign Language], for the individual insurance for automobiles. And we're launching the second phase of this process -- of this project in relation to the fleet, process identification. And this will bring an improved or better process in sales, and also cost reduction. So answering similar demands, the rate that we reached in the first quarter still has much opportunities to progress in the coming quarters. Now second question, Marcelo.
In relation to the CapEx, dividend, how do we see it? First, the result, as Roberto said, we have a cycle where we invested in technology and we don't have in the pipeline, projects that are so relevant. So CapEx of technology should -- have decreased -- should remain as it is for some time. And of course, new opportunities will come up. We have digital sense that's important. And we are -- we were changing decades, so there was much investment to be done. And we did it in a concentrated way that it was concentrated, but not recurrent, so were not mentioned as CapEx. In relation to real estate, we have reduced a lot in the last 2 years. We do have some maintenance, of course. We have sold some. Optimizing. We concentrated our real estate we have rented. So -- and we have invested in our technology to high-availability building. But the CapEx that we expect for next coming years will be lower than in the previous year. Not that the company's not going to invest, we will invest, but not the way we did that it was so concentrated in the last 5 years. And second point about dividend, yes, we had some extraordinary -- we have perspective of increasing payout to around 50% and maintain it throughout the years. We don't like -- in the past, we had to reduce, we did not like that. But we intend to maintain CapEx at stable levels. We do not intend to have high oscillations. This does not mean that we cannot pay or give extraordinary payment in dividend. And it will depend on investment and inorganic opportunities. We're not a company that does much inorganic movement. The market does not offer that many opportunities for acquisitions. And we have International players that invest in insurance. And of course, we did some acquisition that were not large, 1%, 0.5% of the Auto portfolio in the last few years. We believe that using capital like that will allow us not only to increase payouts, but also some extraordinary dividend, as possible, depending upon the results of the year. We know that we are in a good moment of result, it's not going to be forever. There is variability that's inherent to business, and we believe that the capital use will be done -- we'll keep on doing in a rational way, and we are growing.
Now [ Jefferson Oliveira ], webcast, question.
I found it interesting, the result concerning the earnings in financing and Credit Cards. Is there a projection of connecting the [indiscernible] with Itaú Bank? Was there a study or anything in that sense, since the bank has important participation in the company?
[Marcelo Picanço answering]
The -- our card focus is very focused and dedicated to Porto Seguro client, especially associated to Porto Seguro. They have discount, like facility of payment in automotive centers, discounts in franchise. And so it's a product that's quite specific, hence the management is done in an independent way, and it's 100% by Porto Seguro, not by the bank. It's not sold at the bank. So the answer is no. There is no integrated actions between bank and Porto Seguro as far as cards are concerned. And this has been like that. We understand the relevance. Itau is market leader in Latin America, where it's quite respected. It has its strategy that is a little bit different from ours, quite focused, quite different. And the shareholders understand that there is the need of having a differentiated focus. Management is focused here. In this, it's comfortable among ourselves in relation to going on with the card's operation and also financing loans. And we have this financing operation that is quite focused on our Auto Porto clients, our service providers, we have vehicles that provide service, and also insurance clients.
Since there are no further questions, I'd like to give the floor to the company for their final considerations.
So I would like to thank all of you for your questions, contributions, for the interest in our company. We enforce that if you have any further questions, please be comfortable to contact us or visit our section of relations with investors at our website, www.portoseguro.com.br. Thank you.
Thank you. This teleconference of Porto Seguro is closed. We thank you for participating. We wish you a good day.