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Good morning. Welcome to the conference call of Porto Seguro to announce the results of the fourth quarter of 2017.
Today here with us, we have Mr. Fabio Luchetti, CEO; Marcelo Picanço, CFO -- IRO; Celso Damadi, CFO and Controller; and Ricardo Fuzaro, Manager of Investor Relations.
We would like to inform that the presentation is being recorded and simultaneously translated into English. [Operator Instructions] The audio and a slide deck of this conference call are being simultaneously presented on the Internet at the address www.portoseguro.com.br/ir and on MZiQ platform. At this address, you will find a banner called Conference Call that will lead you to the presentation platform. Questions may also be asked on the webcast platform by clicking on the icon, Ask the Speaker. These questions can be sent at any time and will be answered live during this conference call.
Before proceeding, we would like to clarify that statements made during this conference call relative to Porto Seguro's business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are no guarantee of performance because they involve risks, uncertainties and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur.
Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of Porto Seguro and may lead to results that will be materially different from those expressed in such forward-looking statements.
Now we would like to give the floor to the company. Please, you may proceed.
Good morning to everyone. This is Fabio Luchetti speaking. I would like to thank you for your attendance to our conference call to release the results of the fourth quarter of the year 2017. So moving to Slide #4. Now we have here our main accomplishments, the highlights. So in 2017, we still felt the effects of economic recession. There was a weak demand and there was an increase in criminality in some states in Brazil. Moreover, the strong drop in trade and a competitive scenario in auto insurance, they were factors that influenced the insurance industry. The premiums earned in the market excluding health increased by 6% in 2017 with a total -- with an increase of sales in the main segments.
In Porto, in spite of all difficulties, we were able to grow in all our business lines. The participation in our -- our policy, rather, of geographic expansion together with our diversification of products and our discipline in terms of price recovery contributed to increased operational results by 3x as compared to the same period in the year before. We also had the higher relative performance of financial investments that was significant in a year with strong reduction in interest rates.
For our main business, which is auto insurance, premiums have evolved with a reduction in loss ratio as a result mainly of price adjustment. The insured fleet decreased because of more competition and weaker demand. However, the automobile industry already showed signs of recovery and auto sales had increased by 9% in 2017.
In other business segments and in premium of our property product, Health, Life, transport and our revenues from Credit Cards, loans and Consortium increased by more than 10% in terms of its customer base.
During the year, we have developed several projects in order to streamline process and modernize our service structure, and we increased the focus on our digital channel with the aim of improving customer experience and especially to give support to our brokers.
Moreover, we were very happy with some awards that we received like the Most Beloved Brand in the category auto insurance by Consumidor Moderno magazine, the Most Reliable Insurance according to Ibope and SELEÇÕES magazine, the most -- or top recall brand, the Top of Mind Premium and the first insurance in the satisfaction ranking of Auto and Homeowner Insurance in the newspaper, Estado de São Paulo.
Now we are still using or making the most of our opportunities either in insurance industry or in other businesses that we operate on with our growth strategy focusing on profitability. In this manner, I would like to thank all our employees, brokers, partners and investors for another year of dedication and especially of trust in our company.
Now I would like to turn the conference over to Marcelo who's going to continue the presentation, talking about specific details of each business lines. Thank you very much.
Good morning, everyone. Thank you. This is Marcelo Picanço.
So on Slide 5, the consolidated results, Q4 '17 and for the year. So in Q4, we had an acceleration of revenues with a growth of 9% as compared to the same quarter in the year before, meaning the growth rate is in excess of what we had along the year that was something like 5%. So this already showed a better trend of acceleration comparing the way 2017 started and the way 2018 is starting, ensuring success. As Fabio said, there was a quite challenging scenario that grew along the year and only should grow by 3%, there was acceleration of 8% growth. And in our vision, this is a little bit the result of the recovery of market prices, especially in the automobile industry and also in some specific business lines, but especially in automobile industry because auto is 2/3 of our businesses.
In terms of financial results, services have grown about 15% in our financial businesses because we still have a significant opportunity for expansion in this business, [ a smaller base ]. We also have good opportunity for synergy expansion and we keep the same strategy.
In addition to talking about the result in the fourth quarter and the year of 2017, I would like to have a slightly more strategic approach on a longer basis for you to look at the evolution of our revenues.
When I look at the 5-year base, automobile, which is our main business or core business, it grew less than other lines, but it gained market share between 2013 and 2017, the 3 brands growing from 26% to more than 27% market share. Other businesses, as I said before, with a focus on expansion that is significant especially in the lines of Life and Property insurance, we grew 13%, 14% looking at the annual growth rate on a longer scenario, 5-year scenario that agrees with our strategy of diversifying in terms of our differentials and exploring the partnership with our channel, especially with our brokers. So both in terms of competition when we look at 2013, that was 61% for auto with 56% without any loss in market share, so this is an important number.
Now looking at the results of the insurance operations. In Q4 2017, we have had a challenging year. In fact, the whole year closed with a profitability that increased by 3%. The return on equity dropped slightly. And basically, we've had a different growth when we look business-by-business, we found significant acceleration towards the end of the year. But we believe that we closed 2017 with a trend that is way better than we had in the beginning of the year.
So our combined rates is good -- much better than we had been having for a while. It's been the best in many years of 96.9%. And the main drop, as compared to last year, is due to the reduction in the loss ratio, especially when comparing the adjustments and improvements in underwriting in our core products, automobile industry. But we also had good results in other lines, too, especially in Property with an excellent result in terms of reduction of loss ratio and it's a portfolio that has been gaining relevance year after year in the composition of our businesses.
Now once again, with a more strategic look or perspective in looking at our businesses since we started the year with a smallest interest rate in history. In the known and measured half, it's important to say or to put into prospect how we've been behaving in terms of the changes in interest rate versus operational results because, as we tell the market, we always look at the financial equation in an integrated manner with the 2 components: operational component and the financial components and especially looking at the component with a long-term and prospective vision. So before any changes in interest rates takes place.
So looking at the chart from '03 to '17. In 2003, our interest rate was 23.3% with an average -- this was the average CDI. And now evolving to 10.1% in 2017 and the combined ratio varied much less because the combined ratio moves with the time when we have a reduction in interest rates and this may not happen on the first or second quarter. But looking in the longer term, we can rebalance this. The threat here in terms of profitability obviously is much more related to a cyclic dynamic of competition, which is not structural for us, rather they are macroeconomic factors. So the macroeconomic factors are balanced by the operational results, as you can see here in the chart covering 15 years of results.
Now talking about the competitive environment, we would like to zoom in and to acknowledge the automobile insurance evolved 7% in the year with a reduction of 1.2% reduction in the loss ratio and this is for -- in the industry, it's lower than what we had. But the year ahead, it's 2 different halves. So the first half of the year with fierce competition and towards the end of the year a much better loss ratio scenario. So started -- the whole market started the year with 1.6% of loss ratio and closed the year with minus 3.9% in Q4. So it was very different -- a big difference here. And in spite of the drop in loss ratio, that absolutely implied price adjustments and also in terms of underwriting, but also in pricing. The growth was greater in the second half of the year than it was in the first half of the year. Of course, this is related to price, but it also shows that the market has resilience in total demand for items, but not changed so much in terms of pricing. So demand is more -- non-elastic here -- or it's less elastic.
When we look at premium and their position, obviously there is a correlation that was presented to you in many other years. So here, having a more strategic look in the longer term, there is a sacrifice or worse expense rates as its growth increases compared to the market. So we do not believe -- there's no magic here, but rather, there is a movement of gaining market share with more price aggressiveness that is practiced by one or more players on different quadrants and there's a positive correlation of increase in premiums and the worse expenses.
Still, in terms of a strategic view of auto insurance industry, we're going back to 2011 and we're going to have to look at the insurance fee. There was a peak in 2015 with 17.4 million cars in terms of insurance fee and this is related to entire macroeconomic scenario, automobile sales. When we look at total premium, they are much higher in terms of revenues so the industry may have lost a little bit in terms of the peak in 2015 and we are a smaller by 800,000 vehicles, even so we could expand our relative price in terms of premium.
We believe that this is an industry that is resilient in spite of prices. It doesn't mean that we are not affected by the crisis, but we are less affected than other industries.
On Slide 11, still talking about the competition scenario. In a 5-year analysis in terms of performance of the leading auto insurers and how the insurance drivers behave, it's very clear to us that with a few exceptions, market gain is very much related to a certain acceptance that loss ratio goes up with this even more than the market. So players that gain market usually -- this is usually strongly related to an increasing loss ratio. The most important chart here is on the one on the right-hand side showing auto loss ratio evolution as compared to the interest rates and it shows here these 2 curves are related, so the drop in interest rate and drop in the loss ratio. So what we have been doing in terms of loss ratio in the results, this is very much related to the projection of a smaller interest rate, too.
Now I would like to talk more about our financial and service businesses on the whole. So our earnings in the quarter were slightly smaller, especially because of a specific result of our telephone operations, Conecta, our cell phone company. We are making a few adjustments to find the right path for growth in terms of growth strategy focusing on Porto Seguro customers. But the telecommunications market has had the second half of the year that was very aggressive in terms of prices, so there was a very strong drop in prices in the second half of the year. This is not our position. We want to preserve a healthy margin, but we had to pay the price for that in terms of fewer customers. So our base is smaller than we would like it to be, and this is a business that needs customer base to expand.
So all other businesses are expanding double digits with a few exceptions. Our -- consider -- in spite -- even though this was a structural -- a year of structural changes caused by our regulators, especially in terms of [ cards ] and loans, we expanded in spite of that 14% in the year. In the last quarter, our growth was 17%. Here, we are talking about the Credit operations. And to offset the drop with the interest rate because there was a reduction in the rotation interest rates and that we are mandated to -- we were obliged to allow for payment of bills in installments.
Now talking about financial investments and our allocation. The conclusion is that this was a good year in terms of relative performance if you compare to the CDI. This has been a year with a quite challenging second half of the year, especially because of the volatility, political instability that affected the market. But the 3 quarters were well superior to our reference rates and made it possible for us to have a good result. They are possibly in excess to what we expected in the beginning of the year, not just us, but everyone in the market. So this was already in the prior [ genuine ] operational insurance price there was an expectation of drop. So in this manner, we have an interesting composition without changing much the risk of the portfolio. We have reduced our risk level because of pricing, especially in fixed income. It's very close to what we believe is fair, so reduced our exposure because there was not much more to gain. But the [ card ] on the whole is in line with what we've been doing for years and this has been the history of our financial investments.
Lastly, we were able to close with the recurring net income at 6% for the year and in the quarter 9%, slightly more. And the total for the year of net income and ROAE, now especially because of sale of the IRB, because of the IPO we did it on the following weeks, we didn't do it together with the IPO, our profit would be 20% compared to last year with 15.7% in terms of ROAE and recurring net earnings for the year, 15.1%. So for the year that started with many challenges, and even above what we projected earlier in the year, not just us, but the whole market, we closed the year with a quite significant operational recovery that helped us to have the performance that was superior to last year.
And now, I would like to open for questions and answers. Thank you very much.
[Operator Instructions] Our first question through the webcast comes from Mr. Gustavo Schroden from the Bank of America Merrill Lynch.
In this quarter, the company, we had the smallest loss ratio of the past 10 years. Do you still have any room to improve it any further? How could you do that?
Gustavo, thank you for your question. This is Fabio answering it. So we expect that if we combine everything, we still have room for slight reduction not at the same pace as we saw in 2017. Obviously, there are some factors that we believe related, the drop in interest rates, the scenario of violence and the problems of public security in many states. So we believe there is room for a loss in the [ op ] ratio considering that this scenario will be more or less as it's been.
So now we have the next question through the webcast coming from Mr. [ Rodrigo ] of [indiscernible]
Should the company change its business model for auto insurance because of the significant increase of crime rates in Brazil?
[ Rodrigo ], thank you for the question. This is Fabio. Well, we are not expecting any major changes in the business model. The issue of frequencies, they are monitored statistically. And robbery and theft, we've been told, and the media has been talking a lot about it, frequencies, today, are considerably smaller than we had a few years ago. Once frequency goes up, it goes up in the market as a whole, it's not just for us. So we're -- I think we are talking about underwriting, it changes depending on the region, circumstances. I'll state maybe [indiscernible] for example, State of Rio de Janeiro, is going through a very critical phase in terms of crime rates so this affects underwriting and we cannot have the same policies in different regions in a country as big as Brazil. So of course, technology allows changes and the use of smartphones make it possible for us to price, to have different behaviors, to know -- or the frequencies of car crashes today have reduced a little bit this year because -- as compared to a few years ago. If there's anything new to come up, it's related to the use of technology to know or to separate better drivers from worse drivers and in terms of driving behavior.
Our next question comes from Mr. Gustavo Lôbo from JPMorgan.
I have 2 questions. First related to Conecta, you were talking about the price wars and I would like to understand your strategies for 2018 to improve it. Are you going to invest more in marketing? Or you're going to have a leaner cost structure? What are you expecting in terms of results for 2018? And then I have a second question.
Gustavo, this is Marcelo Picanço answering your question. The strategy has a few fronts, but the most important one is to reinforce Porto's differentials with Conecta to work, to not go into this price war. This is not our game. We don't want to play that game. And we want to emphasize the benefits customers have to reduce their losses and to increase acquisition. And the second part, the discussion in terms of improving the efficiency of our business model and we are doing it in a slightly more organic way. So we are going to show benefits to show -- to sell more and then we are also going to work on efficiency.
My second question. When I compare your capital efficiency, your ROAE and your growth of premiums, your payout, that you believe in, there seems to be room to an increase in payout. So this growth in premium is clear, but it's not huge and the company is still generating results. Is this in your agenda even if it's a gradual increase in terms of increasing your dividend payout?
Well, yes, this is in our agenda. Of course, we have the concern to the drop in interest rate. We are aware of the effects there, although we have gone through many different times of investments and instability and evolution in the regulation. And there was also a significant change in the turn of the year in terms of an update of the capital that is required for some portfolios. But we have an even greater safety level, so I think the answer is yes, the scenario is positive today. And as you said on what -- then there is the organic recurrent dividend and then, on the other hand, we need to analyze possible extraordinary distributions. We don't know when that will be, but obviously this is in the scenario.
Our next question comes from Eduardo Nishio from Banco Plural.
My question regards the outlook for 2018. So you finished 2017 with 6.9, an excellent result. What are the prospects for 2018? Could you give us some color in terms of percentage points that you can improve in terms -- to deal with a smaller interest rate?
Eduardo, this is Fabio speaking. What we've been saying in effect, yes, there has been movement in the market in terms of adjustments. And here, we have a positive, not thinking just of the sales scenario, so profitability has improved. And there's a slight reduction in our fees. So there's a prospect of a good scenario for 2018.
So if you could talk to us, I think you've mentioned this, the competition scenario, there are many insurers that are still changing prices to tackle the drop in interest rate and all the effort. And then a second question.
Eduardo, we can see some movements in some insurance companies, but there is still a significant group that is lagging behind in terms of adjustments. So we do believe that competition scenario obviously, according to our point of view, still has room for some changes.
In terms of the evolution of the loss ratio and then the combined ratio with a marginal improvement for 2018 considering that the interest rate on average is going to go from 10% to about 7% on average in 2018, can you see any improvement in your earnings for 2018?
Sorry, Eduardo. In terms of recurring, we believe that, yes, there may be some opportunities.
Our next question comes from Vitor Mizumoto from Eleven Financial.
In terms of growth in the next few years, what is it you see that you have kept your program of buyback of shares? Is it relevant or not the message that you think your shares are not overpriced? Considering that scenario, I can't see where the growth is coming from because if we look at the auto industry, there's quite fierce competition, it's a very commoditized market, it's very much price-driven and you have grown so much. How did you manage to do that, especially considering the overall scenario and everything here is difficult, and you have been growing fast. So I would like to understand where do you see growth coming from looking into the future? And if it's coming from auto industry, where do you think it's going to come from when we look at new technologies? We think that auto is the one where entry barriers are the smallest, regulation is [ the smallest ] so this business line is the most sensitive to market changes.
Well, I think your question is easy to understand why you have that question, but we should not make projections for the future. But there is some evidence to believe that. Number one, that the economy will arguably be different and better than it was in 2017. There was growth last year, but we see that in domestic market, it's picking up. Secondly, our indicators, our renewal [ maps ] if we compare ourselves to the market show that we have suffered less, showing that our portfolio almost 60% are renewals. This has an important role in terms of preserving the average premiums which is important for the presentation of the portfolio. And we also see a convergence of the volume of price quotes that we get every day that looks quite significant. We have been seeing evolutions depending on the region and market. But the market is really repositioning itself. So strongly believe that in the auto portfolio, which is our main driver for revenue, that we will be able to grow, combining with home insurance that had been growing significantly recently within automobile.
Okay. Even though you're expanding your revenues, the fleet is going down still. So this growth is coming from price adjustments, then you might not be so competitive, and the scenario is very competitive. So what do you think is going to be your strategy in the future? What are you going to do about that?
Well, deep down, we have lost a little bit fleet, especially this year because we didn't have any loss of fleet in previous years we did to adapt in terms of underwriting in some regions and repositioned underwriting. At this time, it's important to preserve our margins and our profits. It's not a loss that we it's impossible for us to recover. So I believe the scenario that we saw in 2017 will repeat itself and it's perfectly possible for us to recover the fleet that we may have lost because we have to make these changes. Thank you very much.
[Operator Instructions] Our next question comes from Gabriel da Nóbrega from UBS.
We saw that your financial revenue has dropped because of the interest rate. In an environment with more pressure, which strategy do you want to implement to make up for this drop?
I think those are 2 questions. First, in our investment portfolio strategy, there is a curve with higher rates than we have in over in CDI. So we have a certain buffer. And we do it on purpose because whenever there is an unexpected change, we don't want to suffer so much. So yes, we do believe that it is necessary to have a result. We try to recover -- we want to have -- make investments that sound good to us. And there's no magic. If you look at the 15-year long chart, we've been delivering a level of loss ratio that is lower, not to talk about admin and operational expansion. So we have a lower loss ratios in more difficult scenarios. It's not that we take advantage of another component. So this is an equation and you need to look at it as a whole. So it is already in the price. It's not going to go into the price from now on once [ selling ] go down to its record low ever. So our prices are appropriate for this interest rate scenario since this falling trend started many months ago. But this is how we [ deal with ] the situation and then I think that our 15-year history shows that it's possible to transfer that at some point the market discusses whether it's possible to transfer the first, second or third month, but it depends on the year. There are some delays on implementing it, in some companies this might influence the market. But when we look at that long-term history, which I think is what investors look at when they analyze the company, these 2 variables [indiscernible] have been well balanced for over a decade and we want to keep the same strategy.
My second question is how do you see the evolution of the new businesses at the start-up phase? And how do you think it can affect your results in 2018?
Gabriel, this is Fabio. The start-ups in our scenario will all improve their margin in 2018. Some of them were even breakeven and others they're still at a phase of loss. They are going to improve their margin, which will be less -- with a smaller impact in the final results. So in the case of Conecta, and a question that asked about that, there has been some setbacks in terms of reducing our problems in terms of product. But also in 2018, there will be a significant improvement, as Picanço already said.
Our next question comes from [ Felipe Campo ] from [indiscernible].
Well, a question has already been asked about payout, but is there any numbers? Do you have any numbers in terms of payout to disclose? So we'll be then capped at about 40%, 35%, 50%, do you have a more concrete number in terms of a payout? And also with regards to the business year of 2017, whether -- will there be any additional payout in extraordinary payment?
[ Felipe ], this is Picanço answering your question. Yes, I think in the short term, it's possible that we get to 40%. Yes, it is a possibility. We still have to finalize a few discussions, but we are very much inclined towards that number of 40%.
[Operator Instructions] Our next question comes from [ Daniel Manzano ] from Bradesco.
I would like to understand the falling trend in terms of people having their own cars considering that Porto's core business is auto insurance. How can we make up for that? Is there any action to avoid it? Or if it effectively occurs, do you think property insurance would become your focus so that you could keep on delivering your results?
Daniel, this is Picanço speaking. I think that this a question that is important, strategic. We've been researching other countries in the world on this trend. What you need to know we need to be very practical in terms of Brazil. Number one, the behavior -- in terms of behavior, this is a long trend, it's not immediate. It's not going to be like that here, not even anywhere else in the country or in the first world. It's not related to some niche segment or class. In the case of Brazil, there are a few unique features that -- where automobile saw a consumption drain. Public transportation is really lagging behind in terms of more developed countries. So oftentimes, you cannot give up a car, and if you [ can ] have a car, you will buy a car and buy insurance because you can have the coverage and capillarity in terms of public transportation as it is offered in other places and you cannot give up your car without suffering. But in terms of acknowledging that this is a trend and we don't know how soon this will happen, we have a business that is still incipient, which is we also call Carro Fácil or easy car. So we have a subscription for a car for people who don't -- who no longer wants to own a car. They want to use the car for certain period of time and then they may renew it or not after a year. So these issues of urban mobility, owning the asset or not, we analyze it and we also have our enterprises there in order to be ready for the changes yet to come. This is part of our strategic plan and our vision to diversify our sources of revenue. We know that automobile is still a significant source of revenue. Still, it's the main one, but it's smaller than it used to be a few years before. So this is in line with the movement, but once again [ to us, this movement ] is -- or rather is not disruptive in the short term, it's more in the long term and we need to be prepared and ready to explore better opportunities. We do not believe this is a short-term threat. And even the behavior of people so the launch of Carro Fácil, customers say, well, they still want to own the asset, it's emotional. They want to feel that they own the car. Thank you very much.
Now we'll turn the conference over to questions in English. Our next question comes from Mr. Tito Labarta of Deutsche Bank.
Just one question. If you can give an update just on your succession planning and how much longer you think [indiscernible] will remain as Chairman and Fabio as CEO, just any update on that process?
[Audio Gap] Fabio along -- during 2018. So this year, however, we do not have a definition for the board. So for partners of the board, it's not defined the succession or the person or timing. So I don't have that. We want to just leave that to the market, but I don't have that yet.
Okay. Thanks, Marcelo. I missed the first part of it. I heard you say that it should happen in 2018, but I didn't get any color on when. I don't know if I missed the first part of it.
Probably that's going to happen in the first half of the year. But I do not have the exact month when it's going to happen.
Okay, first half. And the Chairman will retire and Fabio will become Chairman, is that the plan? And you don't have -- who will be the CEO yet, that's -- you haven't decided also or not?
Please -- could you repeat the question, please?
Yes, just wanted to clarify. So in the first half, there'll be some kind of announcement. Is it clear the [ indiscernible ] will retire and Fabio will become CEO? Or you don't have who will replace Fabio yet. So I just need to get some more understanding on what exactly will be announced.
No, no, no. I'm only referring to the movement of Fabio stepping down from CEO and Roberto step up to the CEO. I'm not talking about the movement of the board because that movement is not final.
Since there are no further questions, now I would like to turn the conference over to the company for their closing remarks.
I would like to thank you, once again for your questions, contributions, for your interest in our company. And I would like to stress that if you have any further questions, please feel free to get in touch with our Investor Relations department or even to come and visit our Investor Relations section in our website, which is www.portoseguro.com.br/ir. Thank you very much.
Thank you. The conference call of Porto Seguro has now ended. We would like to thank you for your participation, and we wish you a good afternoon.