Good morning. Welcome to the Conference Call of Porto Seguro S.A. to report the results of the First Quarter of 2016. Today here with us, we have Mr. Fabio Luchetti, CEO. Marcelo Picanço, General Director for Financial Businesses, Investments and Investor Relations. We have Celso Damadi, CFO and Controller. And Ricardo Fuzaro , Manager of Investor Relations. The presentation is being recorded and simultaneously translated into English. All participants will be in listen-only mode during the company's presentation, and then we are going to start a Q&A 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 presented on the internet at the address www.portoseguro.com.br/ri. At this address, you will find a banner called Webcast 126 that will lead you to presentation platform. Questions may also be asked through the webcast platform by clicking on the icon, Ask the Speaker. These questions may be sent at any time and will be answered live during the conference call. Before proceeding, we would like to clarify that forward-looking statements made during this conference call pertaining to Porto Seguro business prospects, operational and financial projections and goals are beliefs and assumptions of the company's management, and they are based on information currently available.
Forward-looking statements are not guarantee of performance. They involve risks, uncertainties and assumptions because they refer to future events and therefore are dependent on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operating 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 to everyone. This is Fabio Luchetti. I thank you for attending our conference call to report the results of the first quarter of 2016. Now moving straight to slide number three, we have the main highlights and accomplishments of this quarter. This year, we are dealing with a very challenging market. The deterioration of economy has had its consequences in insurance industry, and we've had a not so good performance as we have been having over the past for few years.
Even so, the penetration in insurance industry is low, about 4% of our GDP, and the main product, the penetration is never more than 30%. For this reason, we still see opportunities that can be explored either in traditional markets or as well any niches or specific geographies considering that Brazil is a very large country. In spite of the challenging scenario, the company's total revenues have increased profitability. We have had a significant growth in many of our business lines, exceeding 15% with our products, auto, Itaú, in life and dental products, and also in the so-called consortium operations that it's been growing at a good pace for more than 10 years. Also, in auto insurance, we increased in a market that became smaller by 4%. Our customer base is still growing.
We have added more than 250,000 vehicles in our insurance fleet, more than 400,000 members, and insurance residents in the brand Porto Seguro. One important point is that today we are celebrating the purchase of Chubb auto portfolio with the aim of having a more strong position in the segment of luxury vehicles. The insurance fleet will be incorporated in our Porto Auto Premium, that we have recently launched, and it will confirm our presence in this segment. In 2015, our premiums from auto were about BRL 250 million, equivalent to about 3% of our auto portfolio. As a highlight, our cell phone operator, Porto Conecta, was ranked first in customer satisfaction in a research conducted by Anatel with all mobile carriers in Brazil providing post-paid services.
We are quite happy with recognition from our customers in terms of the quality standard of Conecta, considering that this was one of our main objectives in operating in this segment. Finally, we are paying attention to challenges, and we are ready to face even more challenging times. In this manner, we stick to our policy of improving processes and fostering whatever is necessary to improve our businesses, especially expanding to different geographies and also through our strategy of diversifying our portfolio, offering innovative solutions to our customers.
Now, I am going to turn the conference over to Marcelo to go into more details of our operations.
Good morning, everyone. This is Marcelo Picanço. I'm going to briefly go over the results with you. Then I'm going to talk about some more specific points. In considering the results, especially in our auto portfolio, that grew about 4%- 7%, we had an overall growth of 5% in spite of the very challenging scenario. Even one-digit growth is already good for us, and we have also managed to keep relatively stable the distribution of revenue with a slight drop in the share of our financial businesses, especially because of actions that we took to reduce and balance the risk level of our credit card. Our combined index is slightly better than it was last year, basically because of higher loss ratio in auto and health and also higher expenses with taxes. In Q1, we have had a certain benefit in terms of booking deferred assets related to COFINS. Anyhow, our distribution of insurance remains relatively stable.
Our Porto Seguro's equity compared to the global market is already bigger than health insurance, and this was not like that one year ago, which sort of represents the growth, especially considering in Porto Seguro portfolio, corporate and residents and of higher challenges in the area of health. But we've been getting there. On page six, financial and service businesses. Total revenues have expanded at a lower pace than it did in other quarters, and this is basically related to a strategic action with the aim of reducing risk in our credit card because we've reduced our exposure to segments or sub-segments that represented a slightly more risk in our credit portfolio, defining more stringent limits. In this manner, our revenue from interest rates has gone down.
On the other hand, we find that this is important to stabilize our risk level, which has remained practically stable as compared to the previous quarter with a slight opening. Even so, in the credit card portfolio, in our credit businesses as a whole, including loans for our auto buying, it is still good. The result of our financial investment in this quarter has presented a growth of 30% as compared to Q1 2015, basically because of a recovery of the value of some higher-risk assets and also the valuation of the portfolio that we have been carrying over along a few years in terms of inflation index bonds. Because of market movements that have been beneficial for this exposure, it has produced a result that is quite positive at 3.9% in the quarter, equivalent to 119% of the CDI.
It also includes variable income, and we need to be careful. This has been a good quarter financially speaking, and we recovered part of our losses. We should also emphasize that the greatest variations in this portfolio in this quarter are not a result of new allocations, but rather of a strategic exposure that we have been carrying over for the long term. Also, we have not changed the portfolio of our investments, the features of our investment portfolio in terms of risk measured as stress or volatility. It has been relatively stable, especially considering the higher volatility in the market after the second half of 2015.
Now on page nine. We have a net income of BRL 340 million, 4% above the same period last year in return on capital of 16.8%. If we consider the higher CSLL, which was an exogenous factor determined by the government, then income would have been BRL 14 million, above all would have grown 10%. On the same basis, the result of the operation itself would have been 10% higher than last year, and the return on capital would have been almost 18%.
Now I would like to open for our questions and answers session, which is the best part of our conference call.
Thank you. We are now going to start our questions and answers session. If you have a question, please press star one or alternatively, questions may be sent through the webcast platform. In this tab, ask the speakers. Thank you. Our first question comes from Mr. Gustavo Lôbo from BTG. Please, Mr. Gustavo.
Good morning, everyone. I have two questions. The first one regards your expectations for growth in premiums in terms of also considering all your brands. We have seen a quite significant growth in the branded Azul and Itaú in the quarter where Porto brand was more or less in line with the industry's performance. Why? Where does such a strong growth come from? Is it new regions or pricing? What do you expect in the future? What is your outlook?
Hello, Gustavo. Thank you for participating. This is Fabio. Well, of course, in our current economic scenario, the project's focus is slightly more on pricing, end up getting more space. There are two things. First, at Itaú, we have structured quite a few things. I am not sure whether you remember, but in previous cycles, Azul had been growing quite shyly. But now it is better with brokers. We are favoring this project. We are using the opportunities that are inherent to this portfolio.
In the case of Azul, it is kind of related to the economic scenario. If you remember, last year we had an excellent scenario. We thought it was not an appropriate timing to find equivalent prices in the market. We have had price adjustments that we find reasonable, but we have reduced the prices of Azul within margins that are quite small, and it gains some more space. Our competitors, the players competing with Azul, also have repositioned from last year until now. It has gained slightly more space in the market.
Porto, of course, because of the drop in sales and the economic scenario, all of that impacts the brand. We believe that some competitors are not yet positioned, but looking at the economic scenario, unemployment, and the overall degradation of the economy in terms of public security and structural factors, we think that we will have a better scenario over the next cycle.
My second question is a follow-up on what you have just said. How do you see the competition scenario? Is there more pressure because of theft and robbery, but then on the other hand, there are fewer cars out on the street and fewer accidents? Looking into the future, it is kind of a consensus that interest rates will be dropping in the medium long term. How do you see the competition? Do you think you can be slightly less aggressive in prices? Do you think you have to recover in terms of loss ratio?
Well, their loss ratio, at least in the southeast, I think, yes, there is still room. We have no more room to reduce prices even further. There are some new projects. Azul has some new projects, and we might cut it down slightly just a little bit, but that specific. On the whole, we do not really see much space for price reductions in the near future. If you look in Rio de Janeiro, in the south, when you are going through very difficult times in terms of loss ratio, and prices are somehow being adjusted. We need to preserve whatever we have already attained. The opportunity is there.
Competitors will have to adjust their prices. We may have some level of comfort in the future scenario, considering that people should do their homework. We are not going to cut our prices, but the market will be more favorable.
Thank you.
Our next question comes from Mr. Marcelo Cintra from Goldman Sachs.
Hello, good morning, and thank you for allowing me to ask a question. The first one regards the comment that you made during this conference call and changing slightly. About P&C and health. We are seeing different trends, where health is going down while P&C is still growing quite strongly. How should we see these lines into the future? How do you think P&C can sort of support growth considering total premiums? I will ask my second question.
Hello, Marcelo. Thank you for your question. This is Fabio. Well, let us just recap our position. It is not that health is not our focus. This is our focus, but we are very conservative. We are very much focused in the market, in capital of the state of São Paulo. It is very difficult for us to penetrate in the interior where Unimed is very strong, and it is very difficult to compete with them. We have a model that we have been trying to adjust over the years. There is a driver for cutting down on expenses. The economy is not easy. We are reviewing costs. We have had downgrading of coverage. We have managed to stop the reduction of the portfolio.
The thing of increasing our portfolio with profitability is more related to a seasonal issue in terms of the market picking up again. We know that automobiles have still a lot of room to grow. But we are not going to grow 30% or 40% in this market because of our share too. We are focusing on new distribution channels so that we are activating more and more our offers and the sale of products related to what we call P&C. They are all property and casualty, everything that is not auto. Life has also been very much driven by our actions so that there is bigger growth and we attain a bigger share. Because we are still very much driven by automobile, and we can feel competitiveness.
If premiums go down, commissions will go down, too, and that is where we are working together with brokers. This needs to be more and more part of our business strategy.
Okay, thank you. The second question regards Chubb. Could you give us some more color on numbers or how much you paid? I know it is a small operation compared to Porto Seguro as a whole. But how is the operation going from what I have seen at SUSEP? It operated at a loss in 2014 and 2015. Is that accurate? I would like to understand better this operation.
Hello, Marcelo. In terms of amounts, we are not disclosing because of strategic reasons. We are not sharing these details. I apologize for not answering your question. But in terms of operations, the aspect of the loss that you have been seeing at SUSEP are there, but we do take into account in terms of negotiating, in terms of reserves, frequency. Chubb had been making many adjustments. They had a drop in the portfolio because of the changes in pricing. Look at their fleet and future aspects. We consider this future frequency and the capacity of renewal that we will have over the next three years.
Also, there is something else to consider. Because we are very well-positioned in auto, and this is Auto Premium. It is a segment that we have been trying to have a better positioning. This is very much in tune with what we already have. We have a previous experience, and this is kind of simple for us. Something that was operating at a loss with them, for us, it will be zero. We gain in productivity. The pricing of this operation takes into account the prospects for renewal. The distribution channel is the same that we already have, and we have many relationships because we already have three brands. We are very confident about the operation, both in terms of positioning and also economically speaking.
Our next question comes from Mr. Eduardo Nishio from Banco Plural . Please, mister.
Thank you for the opportunity. Congratulations on the acquisition. Now continuing on Chubb. How are you going to incorporate this feature? How is the integration going to be? Should we expect an improvement in the company's combined ratio considering an operation that is almost zero? Should we expect a deterioration in the combined ratio in the short term considering this acquisition? I would just like to understand what to expect over the next few periods with regards to this acquisition.
I would also like to think about your portfolio. Excluding Chubb, your gain of share in Azul and Itaú, should we expect a two-digit growth in the future or not? Thank you.
Hi, Eduardo. This is Fabio. Thank you very much for joining us. Well, operationally speaking, as soon as we have the approval by the authorities and SUSEP and CADE, we will take over the operation and it will be the transition. We will be taking over the customer, hence all the numbers and everything. We will have a runoff of all our systems to and fro all our service structures. We will start seeing this customer, and we will preserve all services provided in a customer relationship throughout the entire value chain. We will get the reserves and everything because of that.
We have the runoff as the policy expire through the Chubb brand, and then we will make a proposal for the renewal with the Porto Seguro brand through our sales channel. The process is to have a quite smooth transition into Porto. In terms of outlook into the future, considering that they are not so big, obviously it is slightly more relevant when we look at Porto, where we have Porto Auto. There will be a slight reduction of expenses, even though we have been doing a good job in terms of cutting expenses. We are not seeing a worsening of the combined because of that, and we have seen some adjustments that Chubb had been doing.
As well as I do not believe there will be any significant improvement over the first year because of all the adjustments that we need to make. We will see the premiums that we lost in the first half of the year, but this will not have a significant impact.
Now, as to your second question, auto Chubb in terms of Azul. We do not really think the auto business may grow by two digits. We are not working based on that type of forecast. This is May already. Well, the scenario, the market in terms of sale of cars and construction, this will not change significantly this year. We think that everything will remain at the same prospect that we are seeing this year with a slight improvement.
Thank you very much.
Ladies and gentlemen, I would like to remind you that if you want to ask a question, please press star one. Our next question comes from Mr. Rafael Frade from Bradesco.
I have two questions. The first one relies regarding the composition of your results. There has been a significant improvement in terms of the amount of the results coming from the controller. Are you allocating more capital in the controller? How do you see that going into the future? The other one is related to your more low income, so to speak, insurance. Then we have this low-income insurance. SUSEP is regulating it and for many players in the market, this is not ideal, and maybe some minor adjustments need to be made.
Hi, Rafael . This is Marcelo Picanço. Actually, the result of the controller is a financial result. Why is it more relevant? Why has it been more relevant this quarter? Because the funds at the level of the controller, they are free. They are not reserved, which is allocated to the controller company. In terms of free funds, they carry more risk than reserves as it is natural. In this manner, what happens is that the highest risk asset, especially stock, have had a very good performance this quarter, and they are located especially at the controlling company. The result was significantly higher this quarter. Considering that this is marked to market and this affects.
The volatility of the results of the controlling company is higher than the volatility of the affiliate companies that are below that work with financial reserves that carry a smaller financial risk. Going back to this point, was there a capital allocation in the controlling company? It was slightly higher, but this was not the main thing. The main thing was that the risk assets that are concentrated there had a performance that was much better than lower risk assets. It was a good quarter for higher risk assets. The opposite happens at difficult times for higher risk. Once the stock exchange goes down, the results may be negative sometimes.
Thank you.
Our next question comes from Mr. Francisco Kops from Safra Bank.
Sorry, Francisco. I am just going to answer Rafael's previous question. I will get back to you in a minute.
Yes, please.
Rafael , you asked about low-income insurance. Well, I think you sort of asked and answered your question. The way SUSEP has been regulating it is difficult to generate a perception of gain to the customer because many of the older cars, sometimes you need to use a new part and the cost of spare parts is much higher in cases of accidents or car crashes. The market as a whole is not happy. We are talking to SUSEP. We are reassessing of the circular letter, and then the market will be able to regulate on more low income. There should be an adjustment, otherwise it is not going to be possible.
The discussion is going on for possible adjustments. SUSEP is paying attention. They are promoting meetings. There is intense discussion at SUSEP in terms of understanding the adjustments and solving this issue as quickly as possible. There might be developments or novelties in the second half of the year.
Now there is a question by Mr. Francisco Kops from Safra Bank.
[audio distortion] Commissions in the combined index, it goes down significantly as compared to what you reported in the second quarter last year. Is it related to increase in loss ratio? There is a discount in commissions whenever there is a high loss ratio. Is there any relationship?
My second question is focusing more on auto loss ratio. In the beginning, you mentioned that you are expecting some stability from now on, but looking how this number was built along the quarters, it advanced very fast. If you look at SUSEP, the evolution from January to February, and from February to March, the industry as a whole, not just Porto Seguro, the evolution was very strong. So I do not know whether we can expect it to stabilize and why it would stabilize.
Hi, Francisco. This is Fabio. Thank you for your question. Well, commissioning index. This comparison with another quarter, because usually, the last quarter in the year is much more basic. Usually, the first quarter is weaker. We have traditional commissions, and they are related to results. If results go up, they end up going down. There is a certain oscillation in terms of commercial expenses that might go along with results intrinsically.
I think this is much more related to seasonality and results related to that than to control of the payment of commissions or something. And the relationship between loss ratio and stability.
Well, yes, of course, there is some seasonality. It is much more stable. There are other variables. It is very difficult to talk about the competition. It is really hard enough to talk about ourselves. There are underwriting and pricing policies that the competition needs to implement in order to make up for their losses. But we cannot speak for them. So some of our branches have a more stable seasonality than others. In Azul, we really did something to the pricing in trying to find markets. And we kind of allowed some of our competitors to take up some of, let us say, our frequencies. It indicates a certain stability.
In the case of Rio de Janeiro and Porto Alegre, we have adjusted our prices. But on the whole, it does not really have the capacity of undermining the stability.
Our next question comes from Mr. Felipe Salomão from Morgan Stanley.
Hello, Mr. Picanço. Thank you. I have a question about your strategy for 2016 in terms of non-organic growth. The crisis is affecting everyone. I am sure there are many players with difficulties out in the market. And you, as one of the most efficient companies in the segment, could take advantage of that in terms of acquisitions. So are you expecting, are you seeing opportunities out in the market, and are you working on that? Should we expect more acquisitions, more M&As, or you acquiring portfolios or even the whole company?
Thank you all for your participation. Well, looking around, we hear brokers, our staff talking to the brokers. Well, making acquisitions in the area of insurance, it is always very delicate because on the whole, brokers are very representative in the Brazilian scenario, and we do not usually gain the channel. Customers that could be with you are already with you for many different reasons. This is our distribution channel.
Sometimes they have a history with a given brand and in terms of pricing too. We could be buying something that would be very volatile. In the case of Chubb, we had the purpose. It is a very well-positioned segment. It would reinforce recent movements that we had made in terms of having communication more targeted at the premium segment. And it really made sense. Of course, we analyze everything. If it makes any sense, and if it is adequate, we can analyze it and pay attention. But we are not proactively trying to make acquisitions. The market is consolidated. There are good brands with good products. But we are always willing to hear.
As to other businesses, we made some acquisitions last year. Maybe one or another thing will be more regional, and we might monitor. The market is very segmented, and maybe if we find good opportunities. Opportunities always come up, and if they do appear, we might certainly use them. But in terms of results, we are still studying those.
Okay, thank you. Thank you for your answer.
Our next question comes from Mr. Barias from FAR Investment.
Good morning, everyone. Congratulations on the results that you are reporting. In terms of financial allocation, as we noted, there is a significant variation in Q4- Q1 in your position of post and prefix bonds. Did you change any of your strategies, or you are waiting for a new scenario?
Hello, this is Marcelo. Thank you for your question. We have some management layers. The first one is the strategic layer that we think about the long term. And we have bonds that are tagged to the inflation, and we also have long-term bonds that are related to assets and liabilities.
We also have a more tactic management that is more related to relative prices. In this case, we have increased our position recently, and we were more comfortable in terms of our interest rates, which did not happen in the second quarter last year. The scenario then was different. It was a more tactical allocation, more focusing on the short and mid-term. There is part of it that does not change, that is more strategic and structural.
Yes, we may change it, and this will depend basically on everything that happens. Of course, if in the future interest rates go down so much that this will not make any more sense in terms of the scenario, we are going to reduce that position too. But it is very dynamic. It may be tomorrow, in 20 days, or never.
Our next question was sent by webcast by Mr. Curry, shareholder. "Which are the main strategic challenges that you see in the Brazilian insurance industry in the medium/long term, and what have you been doing about that? In digital insurance startups that do not resort on the services of brokers, are you worried about that?"
Hello, Renan. Thank you for your participation. This is Fabio answering your question. It is a quite broad question. Both. Giving you an overview. Our main challenge in Brazil, that we have a very concentrated distribution channel, very much based on brokers, and we pay close attention to the development in this market. Your question about digital startups, we are not really concerned about that. Most of these digital startups are related to consumers and that ask for many quotes but do not really close businesses.
They are building very large call center structures in terms of providing the necessary support to consumers. The insurance market in Brazil is very much related to profile and different coverages. The insurance culture in Brazil is very much related to accessory coverages and services. It is like people go home, sit down, and then get quotes from 10, 15 different insurance companies before they decide which one they are going to go for. It is difficult to see the difference between different insurance companies. Many of those websites take up very high investments when considering the mass of customers that they end up concentrating their commercial negotiations slightly better.
On the other hand, their results do not pick up. Usually, domestic or individuals, they rely on human relationships. There is something implicit in insurance brokerage activity. In the past years, the thing the brokers just sold. Well, they do not really just sell. They have commercial agreements with insurance companies. They are not interested in mixed sales that will not provide results. The margins and profitability end up being affected if we do not work together. Not having the broker is like opening a door for risk to come in. Underwriting is usually not so good. Results are not so good even as a consequence. These have been going down with time. We have not been seeing any significant advances.
We have not been losing market share, neither are brokers. This is much more related to price-finding than in they just go there, take a look, see the price, and then they use that to negotiate pricing with the broker. Of course, in the scenario and all the insurance and how much they are related to their automobiles and the traffic in cities is getting increasingly more complex. Young people that today want to work and work close to their homes instead of getting a car from their parents. This also would depend on very high-quality public transportation, things that are not available. There are some and very few capitals in Brazil that provide this. In the Northeast, if you do not have a car, you cannot do anything.
Cars that might be driven without the driver, like driverless vehicles and new technologies that are also in our radar, but this is very far out in the future. It is like 10, 15, 20 years into the future, and we are mapping. People will start doing the math. Should I buy the car or use a taxi or Uber? If you keep your car in your garage and you only use it once a week. In Brazil, just 1/3 of our circulating fleet is insured. There is a new generation that might provide us new insight. There is a huge market to be explored. Along with that, of course, the threatening scenario that is always hovering us affects our distribution channel.
People are investing more and more in life insurance in Brazil. This is very low. The level of family protection in Brazil is very small. Families get way poorer from overnight. Everything is up to the state. The state has its own limitations. A country that does not invest its life insurance at a reasonable level also has a greater likelihood of poverty. As one manages to make auto segment into a very mature segment, now it is playing a more social role of life insurance. They are getting bigger and bigger. Brokers protect their auto portfolios and use it to introduce new products.
At the same time, we have been trying to find more synergy with new products that will help brokers to talk to their customers, and making them understand that they are not just protecting one car or one person, but the whole family. Sometimes they might lose something in selling car insurance, and 10% of everything that they consume will go back as a discount in insurance. We have been trying and looking into our call of protecting Brazilian families, working more with individual and SMB, and to have a distribution channel that is ready and skilled to do that.
We think that in the long term, this should happen in a healthy way, and we may go through this process looking much more in terms of evolution than just looking at statistics.
Our next question sent to webcast by Kawe Amaral. "What was the loss of Conecta this quarter, and what is your update plan for breakeven?"
Hi, Kawe. Thank you for your question. Conecta's loss this quarter is about BRL 6 million, and our breakeven prospect is for December this year. In 2016, we are expecting it to be generating profit.
We move on to our next question. We have no further questions now. I would like to turn the conference back over to the company for their closing remarks.
Well, I thank you all once again for your questions, for your participation. Your questions are always very good to improve our management, and especially for your interest in our company. I would like to emphasize that if you still have any questions to ask, please feel free to contact our investor relations in our website, www.portoseguro.com.br. Thank you all very much.
The conference call of Porto Seguro has now ended. We thank you for your participation, and we wish you all a good day.