Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Porto Seguro's second quarter 2019 results conference call. Today, we have with us Mr. Roberto Santos, the company's CEO; Marcelo Picanço, Vice President of Insurance, Investments, and Investor Relations; Celso Damadi, Comptroller and Vice President of Finance and Support; and Lucas Arruda, Head of Strategy and Investor Relations. We would like to inform you that this event is being recorded and simultaneously translated. All participants will be in listen-only mode during the company presentation. Ensuing this, there will be a question- and- answer session when further instructions will be given. Should any participant require assistance during this call, please press star zero to reach the operator. We have a simultaneous webcast that may be accessed through Porto Seguro's website at www.portoseguro.com.br/ir.
At this address, you will find the banner conference call, and this is where you will find the presentation platform. Questions can also be made via the webcast, clicking on the platform at the speaker icon. The team will be arranging the order of questions to ensure a comprehensive section. Before proceeding, we would like to mention that forward-looking statements made during this conference call 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 as 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 cause results to differ materially from those expressed in such forward-looking statements.
We would now like to turn the floor over to the company. You may proceed.
A good morning to all of you. This is Roberto Santos. I would like to thank you for participating in the earnings conference call for the second quarter 2019. In the second quarter, our profitability growth was mainly by the increase in the financial and service business results and by the expansion of financial assets. In insurance, there was a drop in the premiums due to the technical adjustments in prices for auto insurance carried out in 2018 due to the drop in theft and robbery. On the other hand, although the economy of the country has not grown very much, we increased our fleet to 200,000 vehicles since 2018. We would like to highlight a growth of 10% in life and health insurance and 24% in the financial risks portfolio.
In terms of operating results, we have a combined ratio of 93.4, remaining 2.5 percentage points below the average of the last five years. In terms of loss ratios, there was an improvement because of a drop of loss ratios, for also in more than 4 percentage points. The rate for this quarter is below the historical average and within levels that we deem to be appropriate considering our strategic and profitability goals. Administrative and operating expenses and insurance also had good results, remaining stable in the first half of the year, explained by the expansion of our efforts to increase operating efficiency. We believe that our focus in optimizing course will be a relevant leverage to broaden our growth potential. In financial and service businesses, we also expanded our results through a greater contribution in credit operations and the reduction of costs associated to Conecta.
A new novelty this quarter was the implementation at nationwide level of a new co-branding for auto insurance. This is a new model that generates operational efficiency gains and the potential of offering three brands. Another important piece of news during the period was the choice of Porto Seguro as the best company in the stock exchange, as announced by InfoMoney. To conclude, we are very satisfied in ending the first half of 2019 with an increase in net earnings above 10% and an increase in our profitability. Our greatest challenge today is to speed up the growth of business, and for this, we are enhancing our product offering, focusing on differentiation, innovation, and profitability, aligned with the needs and preferences of clients. We believe that the markets that we are present in pose several opportunities that will be increased with the resumption of economic growth.
I would now like to request that Marcelo speak in more detail about our results.
Thank you for your presence at our conference call. I would like to go on to slide number five and show you the growth of our revenues and explain what underlies this. This was a quarter where we were faced with greater challenge in terms of the expansion of revenues, basically due to a technical price adjustment in the auto segment, corresponding to 73% of premiums issued. Obviously, this is below our historical growth. But I would like to highlight that this is not a problem of productivity, considering that in the last 12 months, we have increased our interest fleet by 200,000 vehicles.
Our challenge in the auto business arises from what happened in 2018, where we had an increase of prices in the first semester with a drop in the loss ratio that became more intense in the second semester, leading to a reduction in premiums. Differently to other sectors where we are impacted by inflation, or we remain between inflation and zero, our market states that in risk movements, we have this impact on our premiums. On the other hand, in other types of insurance, as we mentioned, we want to have a stronger expansion, and we had a growth of double- digits in life insurance and health insurance, particularly with results that are above the auto results. The combined insurance results, which in Brazil is relevant to compare because of the importance of the income statement for results, is very appropriate, as Roberto mentioned, according to our strategic goals.
The combined ratio that we had in the second quarter of 2018 and in the third quarter was below 92%. These were exceptional results, the best results we had in a decade. The present day results, which is approximately 2 points more of 93%, once again, is a very good result for the quarter, much better than the average of the last five years. Therefore, we feel comfortable with the combined ratio that we have. We have good margins. And when we speak about the company's products, to speak about the consolidated results for insurance on slide number seven, we see that the results have alternated since 2018 at 19% for the second quarter 2019 compared to 24% in the last quarter of 2018, compared to values that were much lower because of the market situation, margin compression, and prices in 2016, 2017.
I would like to underscore once again that we are making a more efficient use of our capital and we have obtained profitability that is doing very well despite the challenges that we face in growth. When we focus specifically on each product separately for the results of the first semester 2019 and the second quarter 2019, we have a more robust expansion in health, in life, and a more challenging scenario in the auto business. Due to an impact that we had in the entrepreneurial sector of 2%, we have taken the appropriate measures to once again resume growth as soon as we are able to observe that the second semester will be better than the first semester. In the auto, the technical review that we carried out, despite the fleet expansion, was not sufficient to offset the technical price adjustments.
Despite this, the results were 3.2% lower than the last quarter. Nevertheless, we would like to highlight that the phenomena, the trends that we observed today do not point to another reduction, which means that the continuous expansion of items should lead to better results and growth. Of course, this is not a promise nor a forecast. This is simply a trend that we have observed more recently. In terms of insurance, in the last decade, what we have observed is that the concern that the market brings is the possibility that the company will be able to deliver a final or combined ratio in an environment with very low interest rates. Historically, we have attained very low rates of interest. A t present, our interest rate has been the lowest in the last 30 years.
But we observed that although the amplified combined ratio has fluctuated more in the last two years, this only reinforces the fact that the amplified combined ratio results from the management of two equations, the financial and the operational one. Evidently, in environments where the interest rates are low, we do adopt some measures. First of all, we have to deliver better operational performance in terms of pricing and efficiency gains, as we will show you further ahead, where we have achieved significant results in the last five years. We have to protect our financial portfolio so that we can work with these lower interest rates, seeking results that are above the benchmark. We believe that we have attained this in the last few years. In the long term, this long-term allocation should not be based on interest rates or post-fixed rates for the long term.
Now, if we look at the historical loss ratio, especially for the auto business, because when this grows, we need to understand where we are. Clearly, the figures show us that the loss ratio for the second quarter of 2019 mathematically was worse than in the second quarter of 2018, but we should look at some things in perspective. The second quarter of 2018, as mentioned before, was exceptional in terms of loss ratio of 51%, 52%. Secondly, when we look at all of the second quarters in the last five to six years, what we observe is that we are still at a loss ratio that is 2 percentage points below the average of the last five years.
Additionally, we have improved the loss ratio compared to the second quarter of 2018, as we had a more intense impact in the state of São Paulo due to the rainfall. The rainfall was outside of the curve and did not fit within the forecast and the historical rainfall for the period. We do have an enhancement in the margin of more than 4 points between one quarter and the other, and a position of the loss ratio 2 points below the average in the last five years, which means that we are comfortable with our present-day loss ratio. This is not a source of concern for the time being. As was mentioned by Roberto, we have implemented changes in our new offering model for automobiles. We are working with two factories, two technical models that are Porto Seguro and Azul Seguros.
We are taking advantage of the power of working with the most valuable brand of Brazil, Itaú. We maintain the Itaú offering that can be offered based on the consumers' and brokers' preferences, and can be done jointly with any of the other two factories. This is done with offers made through the bank sector and to bank holders and through any channel, and the most important channel for also being that of brokers. Once again, this is available on our quotation platform, and it attempts to reduce operational complexity, increase efficiency, and, of course, increase our competitiveness. The contracting processes for insurance have been simplified, and it enables us to maintain the level of attractiveness that we have always had with our clients. I would now like to refer to efficiency gains. As a company, we are focused on differentiation and service.
Nevertheless, this does not allow us not to focus permanently on efficiency and an enhancement in efficiency. We are not only concerned in increasing margins for shareholders. What we want is to focus on growth, have a nominal growth, because in the final account, this account has to be paid for by somebody. Therefore, while in the period of 2015, the accrued inflation reached 21% in Brazil, and our administrative and operational expenses had a drop of 2%, so that's 20% minus 2%. We like to show you this in a longer perspective so as to point to the coherence of our efforts that are not isolated or timely efforts in one year and are not repeated the coming year. We are not going to carry out any abrupt levels that will modify our service levels with customers.
But it is our obligation to improve processes and have efficiency gains, not only because they bring us financial gains, more competitiveness, but because customers demand better attention, as do brokers. For us, this is strategic and it gives us a strategic view of efficiency. Let us speak a bit about our financial and service business results. We had a net earnings that increased significantly, mainly due to the expansion of credit operations and because of a cost reduction related to businesses that did not have a good performance, such as Conecta. Here we look at the total figures with a slight reduction, and this refers to the discontinuation of the Conecta operations that was generating revenue but not results. Looking forward, we need to focus more on the revenue evolution of our main business as credit and consortium of 7.7% and 12%, respectively.
To speak a bit about our investment results that this quarter had a notable profitability of 158% of CDI. I would like to underscore that the growth of 46% refers to a strategic allocation geared to offsetting the drop in the interest rate. This is not something that began yesterday. It has been ongoing for years and has allowed us a better historical position in post-fix. Many years ago, this was 70%-80%. Presently, it is 35%. Once you have a very low cash, you need to carry out allocations, not that are high risk. We have a historical volatility of remaining at 4.5%. This is not high, but there are three factors here, strategic allocation: t he positive weight in several assets, especially variable income, the low interest rate, and the comparison basis harmed vis-à-vis the second quarter of 2018.
That was a quarter with significant difficulty for these assets in Brazil. Because of this, our financial revenues were hampered, and we had a negative result vis-à-vis other assets such as pension and insurance, referring to some securities that have greater risk, such as equities and others. When the market is strongly impacted, these are the assets that are more impacted, and this is what happened in the second quarter of 2018, where our results were not good. In this quarter, we are delivering positive results, allowing us to feel more comfortable as we go forward in terms of our allocation vis-à-vis the economic scenario, especially in the short term. Finally, I would like to underscore what has appeared to market comments or questions, and that refers to the effective tax rate. Here we have some phenomena.
Part of this refers to a decrease of the tax rate set forth by the government. Part refers to the discontinuity of Conecta, and a very significant part refers to the mix of financial revenues that I have just mentioned. Because of a structural tax issue, we have the concentration of our greatest assets and our tax rate is practically zero, lower than in the insurance business when we have financial gains in the Porto Seguro S.A. company and the totality of the revenues are financial, the effective tax rate is the lowest in the company. Now, when this company has losses, you do not obtain these gains. Last year, we had a loss in financial revenues of BRL 35 million at the S.A.
Now, this year, we had a gain of more than BRL 54 million variable income assets with a very poor performance in the second quarter of 2018 and with very good performance in the second quarter 2019. This phenomenon of where we generate our financial revenues impacts the average tax rate. Every time that we have had a financial result in our more risky assets, shares in multi-markets, every time this has been negative, the effective tax rate increases because they are allocated to a company that pays less taxes because of its company set up. I think this is something that has not been properly explained. I would like to shed light on these doubts that have arisen in the market. We go on to slide number 16 and speak about our net earnings and our ROAE. Our net income has been above 18%.
In the second quarter, this was somewhat more difficult, and we were able to increase our total net income by 14%, as you can observe. We continue to remain in a situation of profitability and with an expansion of net income when compared to the second quarter of 2018. The consolidated results, when we look at these from a more strategic viewpoint, and if we go back a decade, show the soundness of the results of the company despite the different economic scenarios, microeconomic scenarios, the competition in the sector, and interest rate levels. It is a fact that we do have a cycle, some very poor years, some semesters that have been very poor, such as in 2011, 2016, but these are rare. Mostly, we have historical results above the cost of capital, and more specifically, expanding to levels that are over 20% with a certain soundness.
More than 20%, not only because of an expansion of net income, but also due to a more efficient capital allocation. Last year, we carried out a record payout of dividends. Insofar as possible, what we try to do is optimize our results and our payout to optimize our return on capital. Finally, as we have always done, we show you the main figures for the semesters and the year. We would now like to offer you the floor for questions and answers.
Thank you. We will now go on to the question-and-answer session. Should you have any questions, please press star one, or alternatively, questions can be sent through the webcast platform at the icon, Ask the Speaker. Please wait while we pull our questions. Our first question comes from Felipe Salomão from Citibank. You may proceed, sir.
Good morning, gentlemen, Marcelo, Roberto, and Lucas. Thank you for taking my question and for the presentation as well. I would like to further explore the expectation the company has with the growth of earnings or revenues in the auto business. This issue has already been mentioned during the presentation. Notwithstanding this, what is it that you have in mind for the second semester? I think there has been a loss in market share when it comes to the insured fleet in the second quarter vis-à-vis the first quarter of this year. Despite this, prices continue to drop. It seems that the market is quoting below what Porto Seguro is quoting. Therefore, what is it that you have in mind? Are you thinking of having a price reversion in the industry? Has there been a decrease in the loss ratio of other competitors?
Are we going to be entering a new cycle of growth that will be healthier, perhaps? Once again, what is it that you're thinking in terms of the second semester regarding these issues?
This is Marcelo, and thank you for the question. I'm going to try to explain it in the following way. First of all, we observe a market scenario for auto insurance in general that is not very irrational. There is no price war. There is one player, in general, but we do not observe this in general in the market. This is a market with very tight margins. Historically, the players work with negative results or with combined points above 100. But this is a test.
Now, the drop in the average premium that you have observed is minimum, not because margins have dropped, but because we have changed the situation due to the loss in risk that is a structural factor. We have seen an increase in robbery and theft. This year we had a drop in robbery and theft. As you change your harvest, and we change every month by one twelfth, that is why the premium drops, because the total stock of the insured fleet for each company is trending towards a lower risk ratio. Our outlook for the second semester is more positive than in the first semester. First of all, the economic reality and the confidence of people, we think this will lead to a greater expansion.
Expansion here is not only in GDP. It is also an expansion in confidence, leading to more purchases, more investment, and so on and so forth. The second factor is that in our vision, we will not have another technical price review. We do not have the elements that would lead us to doing this once again, and of course, this had an impact on our results last year. Thirdly, we are setting forth several initiatives that have nothing to do with price. We should not think that an increase in sales should only base itself on price increases. We are struggling with this in the last four years. We need to be better equipped to work with credit cards.
For example, recently, this month, we launched an incentive campaign to purchase cards for new clients with facilitated payment conditions and discounts for the auto customers within that vision of working with cross-selling and retaining the customer longer without us decreasing that direct comparison only with price, and to feel that there is more added value and greater ease. This is what customers seek sometimes. Customers not only base themselves on price, but of course, we cannot generalize this. We are working with cross-selling, of course, trying to leverage auto sales, which is our main product. We do have a card, and the card has been created to be an instrument of relationship. It is not only for credit. The question we are asking is, how does a card help us in improving customer relations? So we feel very positive going forward.
The adjustments have been implemented for this, and our main concern is the growth of our main business, of course. But I would like to highlight once again that we have an increase in fleet. We have not lost in terms of the fleet, and it shows that we are very competitive. The problem is comparing with last year, and we have comparisons with two different risk levels.
This is Roberto Santos, and I would like to add two points to what was said by Marcelo. First of all, our co-branding strategy, where we are exploring three brands and two factories, two products only. As Marcelo reminded you, there is an operational efficiency factor, but also the conversion of business.
The base of account holders in Itaú is quite large. In the previous strategy, the account holder had only one possibility with the Itaú brand, a single product with the Itaú brand. They will now have two brands, two products with the Itaú brand, the Porto product and the co-branded Itaú product. We have already perceived an increase in the account holder segment, and this will help us expand our auto business. Another point that I would like to add is that we see a thinning down of our Azul Leve product, a version of Azul, a lighter version of the traditional product, and we are using this as a combat product in the segments that are being explored by associations for auto protection. There has been a great expansion in this product as well.
So to support what was said by Marcelo, we are quite optimistic for the second semester when it comes to an expansion in the auto business.
That is very good, Roberto and Marcelo. Thank you for your responses.
We would like to remind you that should you wish to pose a question, please press star one. Please hold once again while we pull our questions. Once again, should you wish to pose a question, please press star one. Please wait while we check our questions and pull our questions. Our next question is from Eduardo Nishio from Genial Investimentos . You may proceed, sir.
Hey, good morning to all of you, and thank you for taking my question. My question is on efficiency. Do you still hope to increase efficiency in the coming quarters? I know that you have made great strides when it comes to cost, but I would like to know if you think that you still have room for improvement. Thank you.
Nishio, good morning. This is Roberto. We do believe that we have a great deal of room to increase our efficiency. We have some initiatives underway. We have several projects that are being implemented, the review of processes, investment in technology, but mainly a review of our processes in all of the company areas. I would like to highlight that in the company, we have begun to have a culture of efficiency that is being awarded in-house, and this is something that is here to stay.
Without a doubt, therefore, we are going to move forward with this. With a growth in earnings that we expect for the second semester, we will still see a continuity in the reduction of operating and administrative expenses.
Thank you very much. Could you give me perhaps more details, more color in terms of where you can continue to cut costs? Is it in the brand integration process or investment in other units, perhaps, that are not that profitable?
Well, without a doubt, we are still going to have a great deal of advantage from the closing of a plant. We have three automobile plants. We can still reap several good results here. There are several opportunities, just to give you an idea. This is part of our day-to-day work.
Sometimes we are in a board meeting and we identify the opportunity to cut down on accommodation and air ticket costs. These are not large projects only. We have just gone through a middle segment where we see a cut in expenses, not observed expenses, but there is the opportunity to cut down on costs. Managers have detected opportunities in all of the areas of the company. This is thanks to the culture that we have disseminated in-house, something that was not so clear in the past.
Thank you very much.
Our next question is from Guilherme from JPMorgan. You may proceed, sir.
Hey, good morning, and thank you for taking my question. I have two very short questions. The first referring to taxes that you commented on. I just want to make sure if I understood properly of allocating on the holding, the S.A. You pay taxes of 40% there, and everything that is not a technical reserve goes into S.A., and you pay 34%. Now, the surplus capital that you have, you allocate in the S.A. company. The second company refers to non-insurance. If you could give us a rapid overview of the credit area. How is the environment and the demand for your products?
This is Celso, Guilherme . Good morning. I will respond to what refers to taxes, and Marcelo will speak about credit. The taxes are very simple. Our technical reserve have to remain in each insurance company because of regulatory issues of SUSEP. These technical reserves remain in each area. In the first part, we had a drop of taxes because of social contribution on net profit. It was 5%, but not fully 5% because of the negative impact on shareholder profit.
The average ended up being a drop of 4%, approximately. Now, when we have surplus capital, we carry out allocations in the holding, in our controlling company, because at the holding, the tax rate is of 34%. Besides having the tax rate of 34%, we have accumulated fiscal losses and the JCP. Depending on the amount that we have at the holding, the effective tax rate can be zero. What happened the second quarter is that we had net earnings and the effective tax rate was zero. Because we had the JCP in the second quarter and the effective tax rate was zero. If we compare this with the second quarter of last year, we had a loss in the holding last year.
When we compare the effective tax rate for both quarters, 2018 and 2019, the holding represents a reduction of 7% in the effective tax rate, and it comes from that capital allocation based on revenues of the holding itself. If we had not had that reduction of tax rate, the effective tax rate and the consolidated results would have been 7% anyway because of a reduction due to the financial allocations where we had greater profitability this quarter. Based on social contribution, it was only 3% for the consolidated results in the quarter. I am not sure if I was able to explain this to you.
It was very clear.
Therefore, based on regulation, whatever is not a technical reserve, any capital surplus is allocated at 34% as excess tax. It is to optimize our capital gains. Because at the 34%, we have an accumulated fiscal loss, and normally what we pay is less than 34%. Invariably, the tax rate ends up being zero.
Guilherme, this is Marcelo. Let me speak somewhat about credit and our viewpoint on this. We do think that we can have a further expansion. We have been cleaning out our portfolio. We no longer have inactive cards or cards that are used little because this consumes capital. So we went through some quarters reducing the inactive customers, but we would like to have a further expansion in credit. Of course, this expansion has to be done within our strategy. Porto customers are those who could become Porto customers. As I said, the credit card is a relationship tool for us, and we offer it to reinforce, to improve other relationships that are already existing or that could exist.
Of course, because of this, we do look upon our default rate a great deal. If we are faced with a very restrictive position, we will no longer be able to offer this product to customers that have a greater risk. Now, having a greater risk doesn't mean having worse profitability. We could work well, as long as we're very conservative in the offering of credit cards. We do have some customers with a higher risk, but if they pay, they are part of our customer base. Now, if customers would pay everything cash, we would have lower risk. So we work with customers with a moderate risk that give us greater profitability, customers with a better score. Now, if we base ourselves only on the default per portfolio and not the cost of risk, we also divide this by the revenue generated.
We would have a bias, and we would try to simply minimize default. We do have an advantage as we work with customers that have lower risk compared to the customers from banks or from the retail market. But evidently, we do not want to be excessively conservative, putting up a barrier in the expansion of this business.
This is Roberto. I would like to go back to the question that was asked before that refers to efficiency. We have an installed capacity at present to take on a much larger volume of business, and doubtlessly, this is also important, and it will translate into greater operating efficiency with a reduction in operating expenses.
We would like to remind you that should you wish to pose a question, please press star one. Once again, should you wish to pose a question, please press star one. Should you wish to pose a question, please press star one. Please wait while we pull a question. As there are no more questions, we will return the floor to the company for their closing remarks.
I would like to once again thank all of you for your questions, your contributions, and interest in our company. Should you have additional doubts, please do not hesitate in contacting our investor relation areas or visit our IR area at our site, www.portoseguro.com.br. Thank you very much.
Thank you. The conference call for Porto Seguro. Here we would like to thank all of you for your participation. Have a nice day.