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 and 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. All participants will be in listen-only mode during the conference call while the company presents its information, and then we are going to have a Q&A session when further instructions will be provided. Should any of you need any assistance during this conference call, you should request the help of an operator by pressing star zero. The audio and the slide deck of this conference call are being simultaneously presented on the internet at the address www.portoseguro.com.br/ri and on MEIQ 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 Speakers. 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 regarding 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 of 2017. Moving to slide number four, now we have here our main accomplishments, the highlights. 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 interest rate 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. We won 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 now. Our policy rather of geographic expansion together with our diversification of products and our discipline in terms of rights recovery contributed to increase operational results by 3 x as compared to the same period in the year before. We also had a higher relative performance of financial investments that was significant in the year with strong reduction in interest rates.
Our main business, which is auto insurance premiums, have evolved with a reduction in loss ratio as a result mainly of price adjustments. The insured fee decreased because of more competition and weaker demand. However, the automobile industry already showed signs of recovery, and auto sales have increased by 9% in 2017. In other business segments and in premium of our property products, health, life, transport, and our revenues from credit cards, loans, and consortium increased by 9% - 10% in terms of the 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 channels 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 and insurance by Consumidor Moderno Magazine. The most reliable insurance according to IBOPE and Seleções Magazine. The top recall brand, the top of mind premium, and the first insurance in the satisfaction ranking of auto and homeowners insurance in the newspaper, O Estado de S. Paulo. Now, we are still moving or making the most of our opportunities, either in the 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 diversification, and especially of trust in our company. Now, I would like to turn the conference over to Marcelo, who is going to continue the presentation talking about specific details of each business line. Thank you very much.
Good morning, everyone. This is Marcelo Picanço. On slide five, the consolidated results Q4 of 2017 and for the year. In Q4, we had an acceleration of revenues with a growth of 9% as compared to the same quarter in the year before. Meaning a growth that is in excess of what we had along the year. That was something like 5%. This already shows a better trend of acceleration in comparing the way 2017 started and the way 2018 is starting. Insurance, as Fabio said, that was a quite challenging scenario that grew along the year. Non-insurance grew by 3%. There was acceleration of 8% growth. 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 and services have grown about 15%, our financial businesses, because we still have a significant opportunity for expansion in the business smaller base. We also have good opportunities for synergic expansion and we keep the same strategies. 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 we look at the five-year base, automobile industry, our main business or core business, it grew less than other lines, but it gained market share between 2013 and 2017. The three brands going 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, five-year scenario, that agrees with our strategy of diversifying in terms of our differentials and exploring the partnership with our channels, especially with our brokers. Both in terms of competition, when we look at 2013, that was 61% for auto, with 66%, without any loss in market share. This is an important number. Looking at the results of insurance operations in Q4 2017, we have had a challenging year. In fact, the whole year closed our profitability that increased by 3%. The return on equity dropped slightly. Basically, we've had a different growth when we look business by business with some significant acceleration towards the end of the year.
We believe that we closed 2017 with a trend that is way better than we had in the beginning of the year. Our combined rate is good, much better than we had been having for a while. It's been the best in many years of 96.9%. The main drop as compared to last year is due to the reduction in the loss ratio, especially comparing the adjustments and improvements in underwriting in our core product, automobile industry. We also had good results in other lines, too, especially in property, with an excellent result in terms of reduction of loss ratio. It's a portfolio that has been gaining relevance year after year in the composition of our businesses. Once again, with a more strategic look of Perspective in looking at our businesses since we started the year with the smallest interest rate in history.
In the known and measured past, it's important to say or to put into prospect how we've been behaving in terms of the changes in interest rates versus operational results. As we tell the market, we always look at the financial equation in an integrated manner with the two components, operational component and the financial component, and especially looking at the component with a long-term and prospective vision. Before any changes in interest rates, it takes place. Looking at the chart from 2003 - 2017, in 2003, our interest rate was 23.3% with an average, this was the average CDI, and now it goes into 10.1% in 2017, and the combined ratio varied much less because the combined ratio are movements at times when we have a reduction in interest rate.
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 price competition, which is not structural for us rather than macroeconomic factors. The macroeconomic factors are balanced by the operational result, as you can see here in the chart covering 15 years of results. Talking about the competitive environment, we would like to zoom in into this and to acknowledge the automobile insurance evolved 7% in the year with a reduction of 1.2% reduction in the loss ratio. This is for industry. It's lower than what we had. The year had two different halves. The first half of the year with fierce competition and towards the end of the year, a much better loss ratio scenario.
We started, the whole market started the year with 1.6% of loss ratio and closed the year with -3.9% in Q4. It was way different, a big difference here. In spite of the drop in loss ratio, that obviously 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 and total demand for items did not change so much in terms of pricing. Demand is more non-elastic here, or it is less elastic. When we look at premiums and their position, obviously there is a correlation, and that was present this year and many other years.
Here, in having a more strategic look in the longer term, there is a sacrifice or a worse extent rate as the growth increases compared to the market. We do not believe there is no magic here, but rather there is a movement of gaining market share with more pricey price aggressiveness that is practiced by one or more players on different quadrants, and there is a positive correlation of increase in premiums and the worse expenses. Still, in terms of a strategic view of auto insurance in Brazil, we are going back to 2011, and we have a look at the insurance fleet. There was a peak in 2015 with 17.4 million cars in terms of the insured fleet. This is related to the entire macroeconomic scenario, automobile sales.
When we look at total premiums, 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 smaller by 800,000 vehicles. We could expand our relative size in terms of premiums. We believe that this is an industry that is resilient in spite of crisis. It does not 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 five-year analysis in terms of performance of the leading auto insurers and how the insurance drivers behave. It is 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 it even more than the market.
Players that gain market, this is usually strongly related to an increase in loss ratio. The most important chart here is the one on the right-hand side showing auto loss ratio evolution as compared to the interest rates. It is very clear that these two curves are related, so the drop in interest rate and drop in the loss ratio. What we have been doing in terms of loss ratio and 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. The earnings in the quarter were slightly smaller, especially because of specific results of our telephone operation, 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. The telecommunications market has had the second half of the year that was very aggressive in terms of prices. 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. Our base is smaller than we would like it to be. This is a business that needs customer base to expand. All our other businesses are expanding double digits with a few exceptions.
You can see that in spite, even though this was 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. To offset the drop with interest rates because there was a reduction in rotation interest rates and that we were mandated to. We were obliged to allow for payment of bills in installments. Now talking about financial investment in our allocation. The conclusion is that this was a good year in terms of relative performance as if we compare it to the BRL. 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.
The three quarters were well superior to our reference rates and made it possible for us to have a good result. The drop of CDI in excess to what we expected in the beginning of the year, not just us, but everyone in the market. This was already in the price and in operational insurance guides, there was an expectation of drop. 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. The card on the whole is in line with what we've been doing for years. This has been the history of our financial investments.
Lastly, we were able to close with recurring our net income at 6% for the year and in the quarter at 9%, slightly more, and a total for the year in terms of net income and ROAE. Now, especially because of our 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% superior to last year, with 16.7% in terms of ROAE and recurring net earnings for the year, 15.1%. For a year that started with many challenges and even above what we projected earlier in the year, not just us, but the whole market will close the year with a quite significant operational recovery and helped us to have this performance that was superior to last year.
Now I would like to open the floor for our questions and answers. Thank you very much.
Thank you. We are now going to start our questions and answers session. If you have a question to ask, please press star one or alternatively, you may send your questions on the webcast platform at the item, Ask a speaker. Our first question is through the webcast, comes from Mr. Gustavo Schroden from the Bank of America Merrill Lynch.
In this quarter, the company had the smallest loss ratio of the past two 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. We expect that if we combine everything, we still have a room for a slight reduction, not at the same pace as we saw in 2017. Obviously, there are some factors that we believe are related. The drop in interest rates, the scenario of violence, and the problems of public security in many states. We believe there is room for a loss in the operation, considering that the scenario will be more or less as we've seen recently.
Now we have the next question through the webcast, coming from Mr. Rodrigo [inaudible ].
Should the company change its business model for auto insurance because of the significant increase of crime rates in Brazil?
[Break]
Hello, Rodrigo. Thank you for the question. This is Fabio. We are not expecting any major changes in the business model. The initial frequencies, they are monitored statistically. Robbery and theft, even though the media has been talking a lot about it, our 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. Here, I think when you're talking about underwriting, it changes depending on the region, circumstances. A state may be worse than the other. For example, the state of Rio de Janeiro is going through a very critical phase in terms of crime rates. This affects underwriting, and we cannot have the same policy in different regions in a country as big as Brazil. Of course, technology allows changes, and the use of smartphones make it possible for us to price, to have different behaviors, to know all the frequencies of car crashes today have reduced a little bit this year 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 in terms of driving behavior.
Our next question comes from Mr. Gustavo Lobo from JP Morgan. Please proceed, Mr. Lobo.
Good morning, everyone. Thank you for the call. I have two 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 are you going to have a linear cost structure? What are you expecting in terms of results for 2018? Then I have a second question.
Hi, 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 the price war. This is not our game. We do not want to play that game. We want to emphasize the benefits customers have to reduce their losses and to increase acquisition. The second part is a discussion in terms of improving the efficiency of our business model, and we are doing it in a slightly more organic way. We are going to show benefits to sell more, and then we are also going to work on efficiency.
Very clear. Thank you very much. My second question, when I compare your capital sufficiency, your ROAE, and your growth of premiums, the payout that you are delivering, there seems to be room for an increase in payout.
This growth in premiums is clear, but it is not huge, and the company is still generating results. Is this in your agenda, even if it is a gradual increase in terms of increasing your dividend payouts?
Well, yes, this is in our agenda. Of course, we have this concern to the drop in interest rates. We are aware of the effects here, although we have gone through many different times of investments and instability and evolution in regulation. 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. I think the answer is yes, it is in our positives. As you said, on one hand, there is the organic recurrent dividend.
On the other hand, we need to analyze possible extraordinary distributions when we do not know when that will be. But obviously, this is in a scenario. Thank you very much.
Our next question comes from Eduardo Nishio from Banco Plural . You may start.
Thank you very much. Thank you for the presentation. My question regards the outlook for 2018. 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 of to deal with a smaller interest rate?
[Break]
Hi, Eduardo. This is Fabio speaking. What we have been seeing is that, yes, there have been movements in the market in terms of adjustments. Here we have a positive, not thinking just of the sales scenario.
Profitability has improved, and there is a slight reduction in our fees. There is a prospect of a good scenario for 2018. If you could talk to us, I think you have mentioned it, the competition scenario, that our main insurers are still changing prices to tackle the drop in interest rate and all the efforts.
Then the second question. Thank you very much.
[Break]
Hi, Eduardo. We can see some movement in some insurance companies. But there is still a significant group that is lagging behind in terms of adjustments. We do believe that competition scenario, obviously, according to our point of view, still has room for some changes. Thank you very much.
In terms of the evolution of the loss ratio and then 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?
Hi, Eduardo. In terms of recurring, we believe that, yes, there may be some opportunities. Thank you very much.
Our next question comes from Victor Mizumoto from Eleven Financial. You may ask your question, Mr. Mizumoto.
Good morning, everyone. Thank you for taking my question. In terms of growth in the next few years, what is interesting is 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 the scenario, I cannot see where the growth is coming from, because if we look at the auto industry, there is quite serious competition. It is a very commoditized market. It is very much price-driven. You have grown so much. How did you manage to do that? Especially considering the overall scenario, everything is very difficult. You have been growing fast. I would like to understand, where do you see growth coming from looking into the future? If it is coming from auto industry, where do you think it is 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. This business line is the most sensitive to market changes.
[Break]
Well, I think your question is easy to understand why you have that question, but we cannot make projections for the future. There is some evidence that could be the effect. Number one, that the economy will arguably be different and better than it was in 2017. There was a growth last year, but we see that in domestic market, it is picking up. Secondly, our indicators, our renewal maps, if we compare ourselves to the market, shows that we have suffered less, showing that our portfolio, almost 60% are renewals. This has an important role in terms of preserving average premium, which is important for the preservation of the portfolio. We also see a convergence of the volume of price quotes that we get every day that was quite significant. We have been seeing evolutions depending on the region and market.
The market is really repositioning itself. I 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 have been growing significantly recently. In automobile, okay. Even though you are expanding your revenues, the fleet is going down still. The growth is coming from price adjustments, then you might not be so competitive. The scenario is very competitive. 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 did not have any loss of fleet in previous years, and we needed to adapt in terms of underwriting in some regions and reposition underwriting. At this time, it is important to preserve our margins and our profit.
It's not a loss that it's impossible for us to recover. 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 had to make these changes. Thank you very much.
As a reminder, if you want to ask a question, please press star one or use the icon, "Ask a speaker." Our next question comes from Gabriel [inaudible] from [inaudible]. You may continue, Sir.
Good morning, everyone. Thank you very much for the opportunity. We saw that your financial revenue has dropped because of the interest rate. In an environment with more pressure, which strategies do you want to implement to make up for this drop?
I think that there are two questions. First, in our investment portfolio strategy, there is a curve with higher rates than we have been over in CDI. 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. Yes, we do believe that it is necessary to have a result. We try to recover. We want to make investments that sound good to us. 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 expenses. We have a lower loss ratio in more difficult scenarios. It's not that we take advantage of another component. This is an equation. You need to look at it as a whole. It is already in the price.
It's not going to go into the price from now on, once Selic goes down to its record low ever. Our prices are appropriate for this interest rate scenario. This falling trend started many months ago. This is how we deal with this situation, and 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 in implementing it in some companies. This might influence the market. But when we look at the long-term history, which I think is what investors look at when they analyze a company, these two variables in our case have been well-balanced for over a decade, and we want to keep the same strategy. Thank you.
My second question is, how do you see the evolution of the new businesses that are in startup phase, and how do you think you can capture results in 2018?
[Break]
Hi, Gabriel, this is Fabio. The startups in our scenario will all improve their margins in 2018. Some of them will even break even. Others are still at the phase of loss. They are going to improve their margins, which will have a smaller impact in the final results. In the case of Conecta, and the question was asked about that, there have been some setbacks in terms of reducing our problems in terms of products. But also in 2018, there will be a significant improvement, as Picanço already said.
Our next question comes from Felipe [Tempo] from [Rose Participations].
Well, a question has already been asked about payouts, but is there any numbers? Do you have any numbers in terms of payouts to disclose? Will it be kept at about 40%, 35%, 50%? Do you have a more concrete number in terms of payout? Also, with regards to the business year of 2017, will there be any additional payouts? Any extraordinary payouts.
[Break]
Felipe, this is Picanço answering your question. Yes, I think in the short term, it's possible that we get to 40%. Yes, this is a possibility. We still have to finalize a few discussions, but we are very much inclined towards that number of 40%.
Once again, if you want to ask a question, please press star one or use the item, "Ask the speakers." Our next question comes from Daniel Mendonça from Bradesco. Please continue, Mendonça.
Good morning, everyone. Thank you for the opportunity to ask a question. I would like to understand the falling trend in terms of people having their own cars. Considering that Porto Seguro or businesses, auto insurance, how can we make up for that? Is there any action to avoid it? If it effectively occurs, do you think property insurance will become your focus so that you could keep on delivering your results? Thank you.
Hi, Daniel, this is Picanço speaking. I think that this is a question that's 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 result. Number one, in terms of behavior, this is a long trend. It's not immediate. It's not going to be like that here, not even in 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 where automobiles fuel a consumption dream. That 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 don't 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 us 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 what we call Carro Fácil or Easy Car. So, we have a subscription for a car for people who no longer want to own a car.
They want to use the car for a 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 this, and we also have our enterprises there in order to be ready for the changes that we expect 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 is the main one, but it's smaller than it used to be a few years before. This is in line with the movement, but once again, to what this movement is. Rather, it's not situative 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 trend. Even the behavior of people, the launch of Carro Fácil, what customers say, well, they still want to own the asset. It is emotional. They want to feel that they own the car. Thank you very much.
Now, we will turn the conference over to questions in English. Our next question comes from Mr. Tito Labarta of Deutsche Bank. You may proceed.
Hi, good morning, and thanks for the call. Just one question. If you can give an update just on your succession planning and how much longer you think [Luciano] will remain as Chairman and Fabio as CEO. Just any updates on that process. Thank you.
[Break]
I succeed Fabio during 2018, so this year. However, we do not have a definition for the board. For President of the Board, it is not defined the succession or the person or time. When we have that, we are going to disclose that to the market, but we do not 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 did not get any call on when. I do not know if I missed the first part of it.
Probably that is going to happen in the first half of the year, but I do not have the exact month when it is going to happen.
Okay. First half. Jaime will retire and Fabio becomes chairman. Is that the plan? You do not have who will be the CEO yet, or that is ahead to decide also or not?
Tito, please, could you repeat the question, please?
Yeah, I just wanted to clarify. So, in the first half, there will be some kind of announcement. Is it clear that Jaime will retire and Fabio become CEO? You do not have who will replace Fabio yet? So, I just hope to get some more understanding on what exactly will be announced.
No, I am only referring to the movement of Fabio stepping down from CEO and Roberto step up to the CEO. I am not talking about the movement of the board because that movement is not final.
Okay, clear. Thank you very much.
If 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 session in our website, which is www.portoseguro.com.br. 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.