To release the results of the third quarter of 2016. Today, here with us, we have Mr. Fábio Luchetti, CEO. Marcelo Picanço, General Director of Financial Businesses, Financial and Investor Relations. Celso Damadi, CFO and Controller. And Mr. Ricardo Fuzaro, Investor Relations Manager. The presentation is being recorded and simultaneously translated into English. All participants will be connected in listen-only mode during the company's presentation, and then we are going to start a question-and-answer session when further instructions will be provided. Should any of you need any assistance during this conference call, please request the help of an operator by pressing star zero. The audio and the slides of this conference call are being simultaneously webcast at the address www.portoseguro.com.br/ri. At this address, you will find a banner called Conference Call, which will lead you to the platform of the presentation.
Questions may be asked also on the webcast platform by clicking on the icon, Ask the Speaker. These questions may be sent at any time, and they 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. They involve risks, uncertainties, and assumptions because 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 turn the conference over to the company. Please, you may start.
Good morning, everyone. This is Fábio Luchetti speaking. I would like to thank your participation in Porto Seguro's conference call to release the results of the third quarter. Starting on slide number three, you can find the main accomplishments of the period. The third quarter of 2016, our main business lines grew, and the insured fleet has increased 8%, reaching the peak of 6.6 million vehicles. The number of life insurance, both in health and dental insurances, has improved more than 7%. Furthermore, Conecta has exceeded the number of 100,000 clients, and the credit card has achieved 2 million units, a growth of 10%, thereby strengthening our diversification strategy. We have also recently acquired insurance portfolio, strengthening our position in the premium segment, including 60,000 autos in our insured fleet.
In terms of insurance operations, the combined ratio was affected by a higher loss ratio, especially in auto and health segments, which has impacted the entire industry. Even though last year, auto insurance performance was much better than our historical average, this has also created a strong effect in the comparison basis. On the other hand, we are already seeing signs that our measurements to improve have proven to be effective, both for financial services and businesses are improving. In terms of expenses, we are improving our operational efficiency and admin expenses of insurance have declined in the quarter and have increased less than 1% during the year. In non-insurance businesses, we have had better returns, especially associated to the increase in our revenue from Conecta and lower P&L of our credit cards, especially because of our risk prevention measures that we have been adopting since last year.
Now, talking about our financial performance, the return of our financial investments has contributed to the quarter in line with CDI and exceeding our results in the same period of 2015 when our performance was poorer. In closing, we are optimistic that the actions and projects that we are conducting will help us to get through these challenging times in our economy. We still see many opportunities in the market, keeping our growth without failing to focus on profitability. Now, I am going to ask Marcelo Picanço to continue the presentation, giving you specific details of each business line.
Good morning, everyone. This is Marcelo Picanço speaking. On slide number four, you can see that in the third quarter, our revenue has grown 6%, especially driven by automobile that grew 8%, already taking in the inorganic effects of the acquisition of such portfolio.
P&C has also grown 19% and life 24%. As we said, these are products on which we have placed emphasis in our portfolio as a company. In terms of the breakdown of our portfolio, financial business is 80%, insurance 85%, and automobile has decreased slightly from 67%- 65%. Now on slide number five, you can see our combined ratio. For this year, we have had the best combined ratio for the year so far, 1.6 percentage points above the combined ratio of last year. Seasonality is relevant in our automobile business. Then the extended or amplified combined ratio considered in financial expenses, it drops to 0.9 percentage points. The financial revenue is quite relevant in the composition of our final results of our bottom line. That is why we have this amplified combined ratio.
It is not so much used in other markets, but we find it important to show it because the financial share in our overall result is significant, and insurance profitability is below the results we had last year, suffering slightly with a higher loss ratio, especially in the automobile and health too, due to higher increase and extension. This quarter was better already than last year, and we are in the process of recovering our results. On slide number six, talking about financial and service businesses, we have had a growth of about 11%, a consolidated ROAE of 3.2%, and we have operations in initial stage in terms of startup, but they are still developing.
It is important to emphasize that in the case of our credit card, there has been a decision of the company of reducing the concession in some more risky lines, which has driven our financial revenue to shrink and at the same time, to comprise our risk profile, reducing risk, because in our understanding, we think that because of the economic crisis, we should be more cautious. It is important to emphasize that this caution has implications in our revenue from interest, and on the other hand, what will come afterwards is the offset of smaller provisioning for risks, which takes place at different times. But in our case, it has started showing its first signs of us getting the results of a smaller exposure to risk. On slide number seven, the results of our financial investments.
Even though we are right on the CDI in the DI allocations here, there are two stories here. First is variable income, which is very relevant considering the gains, and because of the shares we have invested on, we have had relevant gains. Also our tactics positions in prefix interest rates, which have also proven to be good. On the other hand, our positions in real interest that have been carried over for a much longer period with a smaller inflation that we have had along that period, suffered slightly greater. This is not a tactic short-term investment. This is a structural mid- and long-term, and this is in line of our liabilities and reserves, and we are basically exposed to inflation risks.
Even though at other times in the previous quarters, this position has provided significant gains, on this quarter, specifically in the short-term window, it has provided some losses. On slide number eight, we are showing that the allocation of exposure in our portfolio has increased slightly this quarter in these inflation index assets. So real interest, about 6%, is quite interesting as long-term allocation. We have reduced prefix, and we have increased our allocation in corporate bonds, which seems to be appropriate for the period, even though our annualized volatility has been the smallest that we have had over the past five quarters with the stress of 1.1%, and this stress is relatively low considering a maximum limit of having up to 3% of our portfolio at stress levels. To be transparent, we use the BMF/SUSEP ratings to run these stress simulations.
Lastly, our net earnings, BRL 200 million, relatively stable in the quarter as compared to the same period last year. Year-to-date numbers is 13% below year-to-date numbers of last year. On the other hand, the return on equity has reached 13.5% in a quarter and 13.9% in a year. So considering non-recurring tax gains in 2015, if we take that out, we would have had a quarter profit 13% and annual would go down by 10% instead of 13%. So we are trying to recover the results of this year. The situation of the economy in terms of sales of automobiles and insurance is still affected by the overall economic slowdown scenario. We are trying to recover, favoring the recovery of our results. Now, I would like to open the questions and answer session.
Yes.
Thank you very much.
We are now going to start our questions and answer session. If you have a question, please press one, or you may send your questions through the webcast platform on the icon, "Ask the speaker." Our first question comes from Mr. Tiago from BTG Pactual. Please, you may start.
Good morning. Thank you for letting me ask a question. I have two questions. The first one regards the recovery of results. Should we expect more price increases in the future? How do you see the competition environment, and could you mention numbers for us in terms of what we should expect in terms of price increases in the future? What are you expecting in terms of loss ratio? This falling trend that we have seen, do you think it will continue in future quarters? My second question regards the low-income auto insurance.
We've seen the latest changes by SUSEP. How do you see that? Are you planning to launch any new low-income motor insurance in the near future? How do you see the competition taking action? Could you give us some more comments on that?
Hello, Tiago. This is Fábio. So in terms of price increase, we have been implementing price adjustments since August. We've been slowing down in terms of growth. We expect the market to make its own compositions in terms of people, especially in the automobile portfolio. The prospect is for the market to start moving. Current numbers have shown that some players, some of them relevant, with indications with an upward trend. We are hoping that in the next two quarters, there will in fact be price adjustments to improve results, especially considering interest rates and very strong pressure of costs with cars.
Dealers are not selling new cars. So our intention is not to put too much pressure in the price adjustment. Yes, a loss ratio, we are expecting it to drop in over the next six months. I think that level will be adjustable in terms of loss ratio. In our case, 1.5 percentage points or 2 percentage point, and we are hoping to recover it. As to low-income insurance, we should have implemented some adjustments. Now each insurance is conducting its own analysis in terms of how to position their products. In our case, we have three brands in that segment. We will operate in low-income insurance this year with Azul, with a strategy more focused on prices. We will feel the market demand. We have Renova that is quite helpful in terms of their parts. So in terms of cars, we can't put them all now.
There is maintenance and supply of alternative cars. Sometimes it's difficult to operate all over Brazil because of logistics. We're going to start from São Paulo. Then we gradually expand the strategy as we gain more expertise.
Thank you very much. Just a short follow-up. When are we going to see you starting it? Is it next year? Well, these low-income products, when we use this expansion, there are many different ones. Porto has launched Azul Light. Also some other projects with a tracer, with an inbuilt insurance, many people that we want. Also Itaú Seguros. But these projects, usually, they have a certain session with reduced coverages, people that will accept the payment of slightly less than the full market price of the car.
In terms of the legislation, the difference between low income and other types of insurance that we have been selling is the use of cars. I think that this is innovative. So for this type of insurance, specifically, I think that we will launch in the beginning of next year.
Thank you very much for your answers.
Our next question comes from Marcelo Cintra from Goldman Sachs. Please, Mr. Cintra, you may start.
Good morning, everyone. I have two questions. The first one regards Chubb. What was Chubb's impact in your numbers? Numbers of vehicles, and do you have a loss ratio with and without Chubb? What about AIG? When is it going to be incorporated? How do you see their loss ratio? Is it higher or lower than Porto's average? Afterwards, I'm going to ask you the second question. Thank you very much.
Hi, Marcelo. This is Fábio. Thank you for your question. As to Chubb, we have incorporated about 50,000 items worth BRL 17 million in terms of premiums, more or less. The main focus is on a premium segment. Also, Porto will benefit considering the segmentation in the segment where Chubb operated. AIG, we are still waiting for CADE's opinion. We think they will release an opinion this year. That corresponds to about 20,000 items that will be incorporated in AIG and was very much concentrated in the state of Minas Gerais, which is very interesting for us because that's a state where none of our three brands have a very good positioning. It also had a very low price strategy.
Considering our strategy that we allow channel to operate with the three brands, and we also show the three brands, we will probably offer to the distribution channel AIG items, and they will be renewed for Itaú or Azul, considering the price differences as compared to Porto.
Thank you very much. With regards to Chubb, we can see that in Porto alone, the loss ratio, when we look at it, did this acquisition have any impact on the loss ratio? Was it higher or lower when you compare it to Porto without it? Did it drive loss ratio up, down, or no difference?
Hi, Marcelo. I understand your concern, but the impact is still very small because the acquisition is still very recent, and it's being diluted in time. Anyhow, it's a very low impact. It's just 50,000 items.
It has been implementing some price adjustments, so we are talking about 50,000 items that will be diluted in a fleet of more than 8 million vehicles. So the impact in terms of loss ratio is practically null.
Also, now I have a question about admin expenses. It's dropped in the quarter, when we look year-on-year too. If you look at the historical trends, it's at its lowest level in the past 10 years, if I'm not mistaken. Is this really structural? Is there any more room to improve admin expenses? Is there any new initiatives related to that front? Thank you very much.
Hi, Marcelo. Yes, this is structural. We have adopted a position a few years ago considering that our business model is very much based on relationships.
Whatever translates trust and stability in terms of services, lots of logistics, providers out on the street, people who provide services to customers, independent brokers. So structural changes. By experience, we're trying to do it little by little, very gradual, trying to preserve the people's focus at the right place. So we have adopted a strategy of doing it systematically. This reduction should be systematic, not too abrupt. So we favor doing something systemic that would extend along many years. So much of what we've been doing is related to the projects that we have implemented. Most of them will be complete by next year, and we have other projects, other methods that we are include as they mature. Therefore, this is a scenario that will continue for some time in terms of gradual systemic reductions and not so aggressive.
Thank you very much.
Our next question comes from Mr. Gabriel from Bradesco.
This is a great team. [Gabriel Lemiza]. Two questions. First is about real estate properties that you own. Have you made any strategic decisions in terms of reducing your portfolio of real estate properties? Second question regards interest rates. Is there any room in your portfolio of increasing your portfolio with more risk and fixed income? Or even going to high exposure in equity and everything.
Hi, Gabriel. Thank you for your question. As to investment in real estate, we have been reducing our exposure in real estate properties. Last year, we have completed the two buildings in our headquarters here in downtown São Paulo. From now on, we are not likely to have any major constructions. We are not planning any construction in terms of CapEx.
We are moving some of our branches, and we are not planning any major investments in construction and buildings. From now on, is to keep our fixed assets at a smaller proportion from now on. What was your question?
Yes. Are you thinking of divesting?
Well, divesting, well, we have some properties that are for sale with some level of divested, not very relevant. But yes, there are some. We are expecting of selling BRL 100 million of real estate properties over the next two, three years. It is not really relevant, but it is a reduction of our fixed assets.
Thank you. Second question about the financial result.
Hi, this is Marcelo Picanço. It is interesting that you ask this question. Today in the Brazilian market, considering insurance companies, we can have more both capital allocations.
It is 2.5%, 3% of equity, and this is a low share compared to the U.S. and Europe. In Brazil, it is comparatively bigger considering our basic interest rates and reasons. We are allocating private equity in these allocations, and 8% of our allocations is in private credit. We have been working for quite a few years. We are not talking about high yield or high risk. It is more sound companies. We always seek alternatives of having a more vanguard allocation, longer. On the other hand, we need to study the opportunities of doing this. Today, the balance between mid, short, and long-term results and the breakdown, they need to be in line with our strategic objectives. We do not have the intention of implementing any major changes in our allocation portfolio. We will change it slightly, nominal for real.
Sometimes we are more protective, sometimes we take more risk. But we have found a balance in terms of what I said.
Thank you very much.
Our next question comes from Mr. Philip from Rosas Participações.
Hello, good morning. It is a dividend payout. Last year, you reduced it to 35%. I would like to hear your expectations for 2017. Are you going to go back to that level, or are you going to go back to previous levels? In total numbers, what should we expect?
Philip, this is Marcelo.
Because the adjustment that we are making, investment in CapEx and some of them in a finalizing phase, they are important projects for the expansion of business lines that provide profitability to shareholders, such as the retention and life projects that have yields that are twice as much as automobile businesses that we believe will increase the return on investment or return on equity a long time. This is still in a process. It is difficult to tell exactly when, but we think that next year, we are not seeing any changes in that. We want to keep our payout at the level of 35%. While we do not know the exact number, this is the board that is going to define, and we will consider change from 2018 onwards.
But from now to next year, we think that we are planning, considering our medium long-term expenses in investments, this will not yet be possible or will not be recommendable.
Thank you.
Our next question comes from Mr. Gustavo Lobo from JP Morgan. Please, Mr. Lobo.
Good morning, everyone. I have a slightly more encompassing question. When we look at the scenario of weak sales of new cars and a reasonably stable penetration of car insurance, how do you see the prospect of growth of automobile insurance in two, three years' time? How do you see the positioning of Porto Seguro in the industry, considering that you are market leaders and Porto Seguro is a premium brand? How are you dealing with the current scenario? How do you see the growth of the industry and market share?
Hello, Gustavo. It is a difficult question to answer.
It is a very fair question. But the economic scenario from last year and this year, it is very difficult to tell whether this is going to sustain systemically. The level of penetration of insurance and cars in São Paulo as compared to other societies is still very low. The penetration rate of insured fleet in Brazil is very low. It is about 1/3 of the circulating fleet is insured. The market, and we are no different, and we are exercising how we can attract this new public. In some states, in the South, for example, there is a good penetration of Porto Seguro. They have some of the largest fleets in Brazil. We need to find mechanisms of attracting the fleet that is today completely uninsured. At the same time, we need to assess the real impacts of the economy in contrast with all behavioral change.
Will people want to have car or not? All these things are in our radar, and they are part of our strategic plan more systematically. At the same time, we have been looking at a distribution channel that is increasingly more active in segments. We have invested greatly in training over the past three or four years. Not just in training, but also in improving the software that translates some of the products that are more complex to facilitate the distribution and to offer in case of products in a P&C insurance. Of course, it is difficult to have a full coverage in the case of automobile, and this is not going to change overnight. We try to have a combination of factors that may overlap a possible pressure on the automobile portfolio. Azul has been growing significantly. Nationally, it is in a significant position, surpassing some other brands.
When we look into the future scenario, it might be much more favorable to Azul and Itaú than Porto that is slightly more segmented in the premium brand segment.
Your strategy is to promote many initiatives to try to cope with the more challenging scenario in the industry. More specifically, do you see the recovery of automobile premium prices next year, or is it still low single digit, a weaker scenario with a falling nominal rate?
Gustavo, in terms of premium, yes, I do believe there is a positive scenario with growth prospects because the results of the industry, if you look and also see that, and seasonality and the combined rates of many different scenarios, they are different. The future scenario is not really favorable. Many players are using financial results with very poor operational results, so there needs to be a recomposition.
The growth in business, I still believe in a slightly more moderate organic growth. Of course, car insurance in Brazil is one of the most mature insurance segments, but still there is a lot of room for growth. In the consolidated numbers, this curve will be moderate for the item, but definitely slightly more optimistic.
If you allow me one last follow-up. This composition is already happening. We have been hearing some players in the industry talking since August about a stronger price recovery. Is this what you are seeing in the short term?
The market doesn't always react in the way we wish they would, at least not just as fast. But we have seen quite a few movements towards this direction. In some regions in Brazil, such as Porto Alegre, Salvador, and Rio de Janeiro, levels of robbery and theft has really exploded.
It's 30% in some of these places. So definitely, people will need to do their homework as soon as possible.
Thank you very much.
Our next question comes from Eduardo Nishio from Banco Plural. Please, you may start.
Good morning, everyone. Thank you for the opportunity. I would like to go back to the loss ratio question versus price. You have increased it in July and August. The prices that you've increased would make up for your loss ratio for the next six months. My question is, if this 1.5 percentage points improvement, is it based on the third quarter of 2016, or is it in relation to last year's? Question number one. Or if, looking back, you increased prices in July and August. This must have been very much driven by robbery and theft rates.
This 1.52 percentage points increase already contemplates higher robbery and theft rates, and this is the main driver or trigger for higher loss ratio. How do you see this issue of robbery and theft, and is this going to get better or worse in future quarters?
Hello, Eduardo. This is Fábio answering. Thank you for your question. Actually, this issue of improving loss ratio by 1.52 percentage points, of course, not all of it is going to come during the year of 2016. This will occur gradually, probably until Q2 next year. As to robbery and theft, there are two variables here. In the short term, what an insurance company can do is to increase prices to suit the frequencies that we are observing. But I do not believe that robbery and theft rates will go down rapidly.
At the same time, it is very important for us to review the underwriting policies of the insurance company to understand what is going on out in the streets, which kinds of cars are being robbed, which are the modalities, where those robbed cars are going to, what is the purpose, regions, and everything, so that the combination between price adjustment and underwriting policy may lead to good results. Because increasing prices alone is very unstable in terms of preserving our profitability. This is a little bit what we are doing, and we think we are doing it well. Only after the next two quarters, we will see the recovery of our loss ratio by about 2 percentage points.
Just going back to loss ratio, these 2 percentage points of improvement is compared to the previous year, or is it compared to the point that we started in the Q3 of 57.7%? Also taking the opportunity, can we already see an improvement of prices in the fourth quarter? Because this is usually gradual, and it only comes after a few quarters. But are we going to see a reflection of the price improvement in the fourth quarter and also the review of your underwriting policy?
Hi, Eduardo. This is in relation to this year, in relation to the year of 2016, and not in relation to last year. As to prices, this is more complicated because it is one quarter as compared to the whole year. You are talking about 25%. This is very much diluted.
When the perception is smaller, we need to be careful because the fourth quarter in automobile insurance is very seasonal. Usually, and last year was an exception because, for some reason, December was slightly more impacted, but usually the fourth quarter has a much lower loss ratio as compared to other quarters. This is more seasonal rather than the result of some action that we take.
Thank you very much.
Our next question comes from Mr. Gustavo Schroden from the Bank of America. Mr. Gustavo.
Thank you. Good morning. It is just one question that I want to ask. There are two quarters that we have been seeing increase in robbery and theft, and how this may be offset by prices. Last answer you mentioned a process review.
I think this has not been the first cycle of slowdown that we have gone through. It will not be the last one probably. These are well-known problems that always happen at certain times. How does the company, how are you going to prepare yourselves for the next cycle if we assume that we are coming to the end of this cycle? We see some signs of improvement. Why are the initiatives other than price, they are not so effective in this cycle? What are the lessons that your company has learned from this cycle in order to try to reduce your exposure to cycles?
Well, it is natural, but we have been talking a lot about prices, and I would like to hear more about your internal initiatives, why they were not so effective in the cycle, what you can improve in the future, if reviewing underwriting policy is already a good indicator. I would like to hear you on that, please.
Hello, Gustavo. I think it is perfect, even though your question sounds more academic to me, because practically speaking, insurance needs to work on statistics and data, and there are some variables that are not under our control. The ones that are, yes, we control. Whatever is very much dependent, and it is there. There is one economic aspect with a higher, lower impact depending on the segment. For example, bankruptcy of states such as this year when the police does not have money to fill up the tank with gas to go out on the streets.
This is a very serious problem. So states all over Brazil are in a chaotic situation. Policies change because technology changes too. You introduce a new technology for a fraud prevention strategy, and soon criminals find ways to get around with your technology, and one needs to evolve to introduce new tools for fraud prevention and networks formed by many segments, and soon afterwards, criminals also find a way out or a way around. So we need to preserve the provision for bad debts. So there is an impact in the short term, and you reposition yourself.
The main problem in terms of the fraud technology industry, it is like you are always lagging behind a little bit. You are running after something that is always ahead of you. That is why we need to have a price combination that in the short term, you manage to preserve the profitability of your properties.
We have a research and development area that is very strong, both in fraud prevention, underwriting, choosing appropriately the best risks. This is an art. If we knew exactly who is going to have a claim or not, well, that would be ideal. So we need to have data intelligence, and now the technology makes it possible for us to have that. We need to have hardware technology that makes it possible for us to monitor the circulating fleet with more than 5.5 million cars that are out on the streets.
Very good. I think that prices might be the first antidote in the beginning. But my point is, for example, we have seen the Chop shop law being approved in São Paulo. It passed and was enacted last year, and it was very good.
I was referring more to this type of initiative that could somehow minimize the impact. Could you discuss the Chop shop law for us?
They know that crime is around, it is all over. They are innovative too. This is more what I was hoping to hear from you. Well, in fact, it is what I said in our last quarter. Deep down, the law is there. The state needs to adapt, and everyone needs to follow the example of São Paulo following the legal steps so that you have the best regulation in terms of chop shops with legal chop shops. But the states are bankrupt, so they can hardly pay their payroll. And through the Federation of Insurance Companies, FenSeg, we have been talking to all public securities secretaries of all the states. There is a policy to understand when each one of the states will do what they have to do.
The economy is not really working in favor of that. There are other priorities, for example, in terms of health, public security. Unfortunately, there is a chaos in the country because of the economy, and it has delayed these actions, which undoubtedly and inarguably reduced our problems. São Paulo is taking the lead, and we have finished the benefit of the law by 5%. It contributes greatly for a better control of car robbery and theft in the state.
Thank you very much, and have a good day.
As a reminder, if you want to ask a question, please press star one. If there are no questions, I would like to turn the conference over to the company for their closing remarks.
I would like to thank you all once again for your questions, contributions, for your interest in your company, and I would like to remind you that if you have any questions, please feel free to get in touch with our investor relations department in our website, www.portoseguro.com.br. Thank you very much.
The conference call of Porto Seguro has now ended. We thank you all for your participation, and have a good afternoon. Thank you.