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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. Welcome to Porto Seguro S.A. Third Quarter '18 Results Conference Call. Today with us, we have 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 you that this event is being recorded and simultaneously translated into English. [Operator Instructions] We have simultaneous webcast that may be accessed through Porto Seguro's website at www.portoseguro.com.br/ir and also platform, MZiQ. There, you can find the banner with the title Conference Call, and that will take you to the platform of the presentation. Questions may be asked using the webcast platform by clicking on Ask the Speaker. Questions can be submitted at any time and they will be answered live during the conference call.
Before proceeding, let me mention that forward-looking statements will be made under safe harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Porto Seguro's management and on information currently available to the company. 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 conditions and other operating factors could also affect the future results of Porto Seguro and could also result to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to the company. Please, you may begin with the conference.
Good morning, everyone. We would like to thank you all for participating in our earnings release for the third quarter '18.
Slide 4. We sum up the main points in this quarter. We have expanded our profitability, carrying on with the results we presented in previous quarters. We have exceeded 3x the reserves from last year's compensating the effect of the interest rate. Our price discipline and focus on coordinating expenses has led to one of the lowest loss ratio ever and the best record in SG&A. Even so, we can still see more opportunities to increase efficiency of operations because investments in projects has resulted to significant gains in productivity.
Our revenues in the quarter, even considering a very difficult economic scenario and products such as auto, health, dental, pension and consortium, have increased our basis and portfolio of clients.
In terms of financial investments, we have been able to offset the drop in interest rates. The strategic purpose is to maintain our competitive advantage, and as such, we decided to close the operation of Porto Conecta, and we are starting to transfer the client's portfolio to TIM. And it has already been approved by our antitrust authorities, C A D E, CADE. We are launching the application Transito + Gentil, nicer traffic, and it offers up to 35% discount depending on the driving behavior of our customers. We have already had 2.5 million access, 400,000 downloads of the app, and over 12 million has already been documented. And we also have a credit card for the company. It's a corporate credit card to help small and medium enterprise companies and also a consortium for heavy vehicles. The company has been very resilient to deal with harder and rougher times based on the results we've seen. We are still very optimistic with the results and the prospect for the insurance market.
Also, I would like now to give the floor to our next speakers to go into the details of the operation.
Thank you very much. Thank you for attending our call. Now Slide 5. Let me tell you about operational results. We have experienced a growth of pension and insurance of 3%.
Financial business, we had a more robust growth of 19%, and this is due to the pickup of growth as a result of the economy. It's still running at moderate pace, and there has been a decrease in the average premium especially of automobiles with our main product because the product has presented better results in the [ back end ]. Conversely, we have observed some increase in items such as automobiles, 100,000 vehicles. So we are not only not losing fleet despite all the adjustments we have to do since the beginning of '17, end of '16, and we think that the revenues from insurance and pension will really keep on increasing as a result of the economic pickup of the country.
Slide 6. We can see some of our key products. We have had growth in health and dental, 10%; automobile, 13.4% (sic) [ 3.4% ], very good year for the company; decrease in Life because of adjustments in our operations that we had to do; and some commercial and promotion conditions, which we have already decided to dive into to be able to resume growth.
I would like to emphasize the combined ratio and a significant improvement, especially with the loss ratio and this is part of a cycle. We are at a very good point of the automobile cycle. And there is also some -- there are also some elements such as reduction of [ DADO ] despite we haven't had significant increase in premiums. It could have been even better if the premiums had increased. We had 2.1 percentage points of increase of [ DADO ] and total year, 1.3. So we had less loss because we have been able to capture synergies as a result of a number of projects, which have already been presented to the market. And likewise, we had had a number of other successful activities. Therefore, our profitability has increased significantly compared to the previous quarter. So with current profitability, apart from the nonrecurring gains of other operations, we had 38% increase in the quarter and 55% year-to-date 9 months, reaching a return on capital of 19.5% year-to-date and 20.2% in the quarter.
Now speaking about long term, a very important issue that really intrigues the market is how well we can deliver results when we have decreasing interest rates. As we are going -- as we have a new President-elect in Brazil and in our opinion, the interest rate will remain low. If there is a need to increase, it would be probably just by the end of next year. And here, we can see since 2009 our capacity to compensate with our operational activities for fluctuations in interest rates. There had been interest rates as high as 14% in 2016, and now, 6.5% in 2018 as an average interest rate. And if you can notice, the vast expanded combined ratio, which is not so frequent in Brazil but very much used abroad, the best results since 2009 in amplified combined ratio has been reached despite the lowest interest rate ever.
On Page 8 -- Slide 8, we can see a very important point about the loss ratio in automobile. A very important variable of our overall results. The loss ratio of the market from '14 to '17, the average was 63.8% as market loss ratio. The same market today has 61.1%. So the result has improved, so let's say the market is more rational. And I would like to highlight that the difference between the loss ratio of Porto Seguro and the market is measured in 2 ways, against its 3 main competitors and against the market overall. And our performance has improved in 2014. There was a difference of 8.8 percentage points compared to the market, so all the market except for Porto Seguro. Now the difference is 11.6%. As opposed to our main competitors, we had a 7.7% difference in '14 and now it's 12.6%. So we can see a difference in loss ratio that has expanded in recent years and can also explain the improved profitability.
It also means that maybe the market hasn't experienced the same increase in profitability that we have. And that is also strategic to show that we have more [ space ] for profitabilities gained than the market overall because the progression has not been proportional in the market. As a consequence, this level of rational prices should be maintained for a while, it's difficult to predict. It depends on individual decisions of companies, but that's our feeling.
So there has been a positive evolution of loss ratio of the market as a whole. And our share since 2014 has increased 1 percentage point going from 26.6% to 27.6%. Yes, there was a decrease compared to '16, but in our own understanding, probably some of the products were not priced at their best. And they had to be returned to the market because they wouldn't produce sustainable profitability to Porto Seguro.
Now speaking about efficiency on Slide 9, our G&A and OE ratio with [ DADO ] in Portuguese. But here, you can see the first month seasonality as well, 19.8% in '15. And since then, it has been decreasing yearly, and this year, 16.9% or a 3 percentage point within 3 years. Very relevant decrease. The nominal growth, which is very important to point out in this year compared to last year was negative, minus 2%. And despite salary increase, the collective salary bargaining, there has been an increase. And a number of actions have already been taken throughout the year, some of -- are recurring. But we can see a trend, a 7% decrease, and we still have got space to pick up growth and keep on reducing the indicators and enhancing efficiency. Our priority is growth, but this is -- please understand that we are not going to cut costs, that would hinder growth. It's quite the opposite. We want to keep on fostering growth.
Concerning other businesses, financial and service businesses, our recurring earnings have improved. We have improved the operations of credit. 25% growth from revenues of credit card and funding lines, but it's still below the market average. And I believe we still have got some room for growth. And it's just a matter of risk management and additional investments. So focusing on our own Porto Seguro clients, which we know quite well, and dealing with different growth leverage, granting and maintaining credit.
Net profit in the quarter improved 178%, in the year it's still lower. And there are some adjustments of the operations with Conecta, which are taking place this year. And for the upcoming year, we are not going to be accounted for anymore because within other business, we decided to leave the business of telecom and we are having a smooth transition of our clients to TIM, the telecom company, T I M, in Brazil. It's an operation that used to produce significant losses, and this is not going to happen as of next year. Therefore, recurrent ROI in the third quarter reached 19%, which is a very attractive return on investment.
Now speaking about the result of financial investments. Despite the decrease in CDI and a relevant drop compared to last year of 30%, there was an improvement in terms of performance of 128% CDI and 2% nominal profit. In the period, we have been using bonds index inflation, the interest rate was at very high level, and it was strategic to allocate with the interest rate. And we should probably maintain it since the first quarter, which we had 26% assigned to inflation-linked bonds and maintain a fixed [ event ] and fixed funds and also private and a small part in shares. We have reduced the amount of post fixed bonds, and it helps us have additional return on our assets more than the post fixed rate bonds, especially when we have this kind of environment. And if the inflation goes up again, this is the kind of bond and share that's still quite useful because there is some correlation with inflation as well.
On Slide 12, we talk about recurring net income, 18.9%. And I would like to highlight some extraordinary effects or nonrecurring. The once-in-the-year nonrecurring events in the year are not relevant. They have a minute relevance of minus -- of less than BRL 2 million between the write-off of assets of Conecta from external write-offs, provision of tax credits that we had for Conecta, and some positive effects such as selling the medical centers, the sales of medical centers, and the real estate REIT evaluated at fair value, which meant also BRL 42 million in gains.
So all in all, there was an extraordinary fact in '18 to be considered irrelevant. In the quarter, somewhat higher, but the year-to-date is irrelevant. I would also like to make it clear that concerning Conecta operations, all expected transits have already been made as of next year. Everything has already been accounted for and will be recognized at the end of the operation and the completion of the transition process.
Then Slide 13, I would like to tell you about our ROAE, over 15% in the past year. There has been an increase more than what we had in 2015, which was good, 18.6%. But this year, our result is even better than what we have had historically.
And finally, let me tell you, our strategy and capital use. We have been adopting different strategies on capital use. We have recently increased the payout of dividends, paying extraordinary dividends of BRL 500 million this year. We have also reduced our CapEx by 21% as opposed to the first 9 months of '17. We have reduced capital surplus from 47% to 42%. And we have also been optimizing the use of real estate. Working from the home office or optimizing the use of some floors and focusing on call centers. We are focusing on selling out a number of real estate. So that is something that takes time. Of course it's not easy to sell properties like that. It's going to keep on being done, reanalyzing dividends and the way we pay back to our shareholders and really giving back the capital surplus that we don't need right now.
So with that, I would like to open our Q&A session. Thank you very much.
[Operator Instructions] The first question comes from Thiago Kapulskis, BTG Pactual.
I have 2 questions. I would like to start by asking the competitive scenario in auto insurance in automobile. We've seen another very good quarter of loss ratio. But now looking ahead and as we've mentioned in the previous quarter, now there is going to be a harder comparative effect. The fourth quarter last year is when we started observing greater improvement. So I'd like to hear from you about the automobile product specifically. My second question concerns CLR, which was somewhat higher in the semester. And I want to understand if there was any different effect or something that can explain a different figure.
Thiago, this is Roberto speaking. While the market as a whole has had a decrease in loss ratio, and we do not expect for the upcoming 3 months any greater reduction in numbers of loss ratio. Concerning the average ticket, the market has already incorporated to the prices this reduction of frequency of claims. So for the last quarter, we expect a price war with what we anticipate is that our main competitors will run phase campaigns to work more with their brokers and encourage brokers to sell more, which is a channel we also use. Last year in the last quarter, there was a reduction of claims frequency and improvement in loss ratio overall. So we do not expect to have any further drop in loss ratio for upcoming months. However, we are not expecting an increase in loss ratio either because there is no plan to reduce prices. Prices are at the right range. So I think the market is not going to bring down product prices. And there is not going to be any impact on loss ratio. The loss ratio will be maintained. As Marcelo explained, this year, despite a decrease in frequency of claims, our loss ratio got down -- the market got down. But there was a decrease greater than what the market had, had in our case. So as a consequence, there has been greater competitiveness, and we've managed to reduce the -- going from a loss of insured cost to an increase in the number of our insured fleet. So for the next quarters, we expect a stability of our main indicators of the automobile insurance.
Thank you, Thiago. This is Celso. Concerning profit and loss in the quarter, we had a decrease more than in the year-to-date. But it was 8% only. This is probably due to the provision that we have based on our internal indicators and the number of employees we have. There has been an increase in number of employees as well. So we would expect to have that, if we have a reduction of head count and then there was a reduction of 8%. So very much aligned with our head count, because when you look in the quarter, there is greater drop. But an 8% decrease, very much aligned with the head count reduction that we had in the period.
Just one follow-up. So concerning the fleet, the trend would be to keep on increasing the number of insured automobiles. Does it make sense to think about that? Obviously, the car dealers have been selling more, for example.
Our expectation is to have an increase in our insured fleet because we are going to have a better control of claims as a whole. And yes, more new cars being sold. We've been noticing more cars have been sold, especially brand new cars.
The next question comes from Nicholas Baines, Bradesco BBI.
I would like to piggyback on Thiago's question. Concerning the campaigns of competitors, could you explain the increase in commission rates that you had? Is this going to be a new level for upcoming months?
Well, this is Roberto, Nicholas. It's exactly that. We have noticed the need to protect our portfolio. We have run some campaigns to retain the fleet, and our commission ratio has increased as a consequence. This is what we observed for the upcoming months. At least next quarter up to the end of '18, the market tends to get fiercer competition close to the end of the year. This year, even more focused on price and also offering higher commission rates. So yes, we could expect that.
The next question comes from [ Alexander Masuda, SSI Investments ].
As you have an expectation of extension of the insurance market and you've said the market is more rational, how do you expect to deal with price loss ratio and market share gains? Maybe we can have a breakdown, Porto Seguro and Azul, to understand.
Well, [ Alexander ], this is Roberto. Within this perspective, we are going to keep on focusing on growth in the competitive market but within a more reasonable understanding. So we expect to have an extension of our insured fleet and maintaining profitability as we always do at Porto Seguro. You've talked about the different brands, and we have somewhat changed our strategy. We'll be working with 3 products and 2 brands, working somewhat differently, Porto Itaú and Azul. Brand Azul is expanding further because it offers greater competitiveness. And for automobiles, it makes a difference. So we have brand Porto Seguro positioning at a premium level, Azul at a high competitive market, and Itaú for bank account owners in the bank. So this is going to help us sustain the growth of insured fleet for coming months.
The next question comes from [ Carlos Eduardo Moreira, Tribune Capital ].
I have a question concerning the perspective of growth outside insurance. Because of the change in strategy, the [ investment ] with Conecta, I would like to hear a bit about how do you expect to grow? Is it going to -- are you going to focus on any additional areas? How is it going to be?
This is Marcelo speaking. We are always focusing on innovating and differentiating in the market. Sometimes, it's by acquiring business and also organic innovations. And we are going to keep on doing it whenever we think there is a likelihood that it's going to be successful. Of course, there are always risks when we come to doing new business. Closure of Conecta operations after 5 years of trying to have a breakeven. We have had a good acceptance by the clients for 3 years. We were the best carrier according to consumers' perception, so this is something important. But the market requires technology investment. The price scenario got too competitive, and we really could not maintain that small-scale operation we had. So that's the case in Conecta, a very specific case. But we will keep on looking for additional possibilities. In the financial business, we have greater scale. We've been offering robust and attractive profitability. We are expanding to other portfolios in the company. Azul insurance, for example, also have a credit card. So we'll be considering all the possibilities. I cannot predefine anything, what will come up to us. It really depends on what is brought to us and what we come across in the market. We've been trying to expand the businesses more than what we do with insurance for obvious reasons because we have -- they are still new businesses, others have been, what, in place for over 40 years. In new businesses such as a health insurance, a health plan to pass, which is to emphasize the positioning with the -- as a family company, a company that sells products to entire family. We have some other innovations such as Carro Fácil Easy Car, which is a car rental service with a combo of services. And the person can have the convenience of having maintenance services, payment of the taxes, insurance. And you pay monthly fees and use the car, pay for gas, and also if you have any traffic tickets. We've decided to go into that because now people have a different perception with the use of cars, there has been a change in the scenario. So we thought about mobility, offering a solution of mobility and not only of insurance. And this is the initiative that we have. It's related with insurance, with customer care, with services and the needs of people on a daily basis.
The next question comes from [ Santiago ], Citibank.
I have a question concerning Life and pension. Do you think that you haven't grown more because of part of a cycle? Or because the market is more competitive or there are other things? What is your business perspective on Life and pension?
Well, we still think it's something with a great potential in the market and for the company. We have 5.3% of our premiums in Life, 5.3%. And we want to expand this portfolio in the company. And in the Brazilian market, the penetration is very low. Life insurance -- individual Life insurance is less than 12% in the market based on the estimates of the industry. So what has happened in the quarter are some specific facts such as mismatch of commercial promotions that we had. It was not as strong as expected. We have already adjusted that, and we want to go back to the level of growth that we have experienced in the past 5 years. We really think that the market will become more competitive. But the level of penetration is so low that there is still room for things to be done. The problem is not price or competition, but what we need is a clear purpose, a clear understanding of what is offered so that customers can see long-term value. Life insurance industry in Brazil still has a lot to get refined. It's not only availability. It is also quality of the sales we make.
[Operator Instructions] If there are no further questions, I would like to hand it back to the company for the closing remarks.
I would like once again to thank you all for your questions and contribution for the interest in our company. Should you have any additional questions, please feel free to contact our Investor Relations office or visit our -- the tab on the web page, www.portoseguro.com.br. Thank you all very much.
The conference call for Porto Seguro is closed now. We thank you all for your participation, and we wish you a good day. Thank you.