Porto Seguro SA

BOVESPA:PSSA3

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. Welcome to the conference call of Puerto Seguro S.A. to release the earnings release of the fourth quarter of 2018. Today here with us, we have Mr. Roberto Santos, CEO; Marcelo Picanço, Business and Investor Relation Director; Celso Damadi, CFO and Controller; and President of Strategies and Investor Relations. And the presentation is being recorded and simultaneously translated into English. [Operator Instructions]

The audio and the slide deck of this conference call are being simultaneously presented on the Internet at www.portoseguro.com.br/ir, and on the platform, MZiQ. At the address, you will see a banner called Conference Call, that will lead you to the presentation. Questions may also be asked on the webcast platform by clicking on the item, Ask the Speaker. These questions may be sent at any time and will be answered live during the conference call.

Before continuing, 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 not guarantee of performance because they involve risk, 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 team. You may begin.

[Roberto de Souza Santos, executive]

Good morning, everyone. This is Roberto Santos, the CEO speaking. We'll be talking about the fourth quarter of 2018. So going straight to Slide #4 under the [indiscernible] lists the highlights. In 2018, we have increased our profitability through the improvement in loss ratio, and now also by increasing operational efficiency with the result of the best combined ratio in our history.

As to [indiscernible] , we have kept a discipline in pricing, have improved risk assessment models, and we also would -- have the benefit of reduction in car crash and theft. And we could get your benefits of all investments that we have made. We have grown in all our main business lines, especially in Auto, we increased insured fleet by 180,000 items. We have increased Health premiums and our credit operations by 20%. Life and Property insurance grew slightly less than previous years, but we think that the low penetration of those projects can still offer great potential for growth.

We also had a significant reduction of the costs of Conecta in Q4, which also contributed to our better performance. The total dividend paid out and their amounts that will be approved in the next shareholders' meeting, and we will get to about BRL 1.5 billion, the highest value in history since the IPO, that has increased the efficiency and the use of capital. We also have intensified our actions to have better customer experience such as a campaign behind the traffic, service request through WhatsApp, check box and a better self-service for customers. We're also very happy with some awards that we have received such as the most recalled brand in a category insurance company and the most beloved insurance company by customers, by the newspapers, Folha de São Paulo and O Estado de S. Paulo, the most trustable insurers by Revista Seleções and also considered the 17th most valuable brand in Brazil by the ranking, Interbrand.

In closing, I would like to thank all our employees, brokers, partners and investors for the results we have attained in another year of hard work and commitment. We are still optimistic with the potential of the businesses we operate in and will keep focus on profitability, seeking efficiency in the services that we provide.

Now I am going to turn the conference over to Marcelo Picanço to get into details of our operations.

[Marcelo Picanço, executive]

Good morning, everyone. On Slide #5, we will be talking about growth in revenues, which was moderate. Comparing our history, growing from a recessive cycle reflecting improvements now. But we had growth, especially in the line of insurance and this was a 2% increase below our historical growth of between -- after 2006. And in services, we had a decrease, especially the main [ sections ] because we discontinued the operations of Conecta and then we made a decision, we stopped selling lines, and, therefore, our revenues started to drop as a consequence. But this is because we are discontinuing a business, which was not presenting good results for us.

Now about insurance results more specifically, which was part of our revenues. In Q4 '18, we still had a growth in automobile that was smaller, and it's important to make it clear that this smaller growth, although it was lower as compared to our historical rate, it was still above the market. It was affected -- that affected the whole market, which was a reduction in claims frequency and there was a reduction in the premiums and there was a technical reduction, which did not affect margins. And this reduction affected the ratio between revenue and premiums, even though we increased our fleet. On the other hand, this quarter, we were able to reduce by 2.2 percentage points as compared to last year, the combination of the [indiscernible] [ yield ], which is important, especially in terms of claims. We had a reduction of 1.4 percentage points in the total combined ratio and 2.2 in the [indiscernible] [ yield ]. It's important to understand it, that because it explains the reduction of cost in the basis. And then we get the other end of quarter-on-quarter, Q4-on-Q4, there's even a sharper reduction along the year and it reached 1.2 percentages point. Looking at the combined ratio of the year, we had 92.2% for all insurance, this is the best combined ratio ever since the IPO. A very, very good combined ratio, which drove profitability of business lines to reach 20% of return on capital in Q4, and 19.4% practically along the year of 2018.

So in spite of a worse result and a slight increase in the profitability in the quarter was superior to the average profitability of the year, which was very high considering our history. So we're talking about 20% here. I would like to talk about this point specifically of the combined ratio and to highlight a very important aspect in our vision on Slide #7 of our presentation, which is our capacity of delivering operational performance. In spite of low interest rate. So as it's not a coincidence that we had the best combined ratio precisely in a year when we had the lowest CDI since 2009. This is no coincidence, in fact, this is a result of management, that when we seek good results in the bottom line and then when we see interest rates, we need to recompose operational performance. We don't have that in the short or midterm in our [indiscernible] we -- within difficult levels for a long time more than a year, but if it grows again, there may be room for it to increase the combined ratio. But looking the amplified combined ratio, so when we compare the Brazilian market and the international markets with low interest rates, you can see that it is much more stable than the combined ratio itself. So the combined ratio varies from 99% to 92% and the combined ratio between 91% and 87%.

On Slide #8, you can see our main product, which is auto insurance, and the dynamics of our loss ratio versus the market versus our history. And so the relationship of premiums -- the premium variation had been smaller over past few quarters because the recomposition of prices that led to an increase, especially in the second half of 2017 and first half of 2018 that drove our growth. The result is -- is result of our premium variation, and in this case, it was related to price to be more precise rather than item. And at the same time, we had a drop in loss ratio, which is also related to the price evolution and also to the drop in frequency. On the other hand, the price reduction leads -- well, this is the first worsening in loss ratio that we have had since the first quarter of 2017, practically 2 years with only better and better loss ratio. However, we believe that we are still at a very healthy level and there's still margin. The margin for loss ratio variation and you can see on the right-hand side of the page. And on average, it is 10 percentage points better than the market average and in 2018, we reached 11.5. It tells that the difference, the delta between our average and the market average. So there is a range there for us to move and this is what we've been delivering since 2014. We are also below our own average in the past 5 years. Our average was 56.1%, and we are at 52.7%.

On Page 9. You can see the number of robbery and theft in Brazil. This is total numbers for Brazil, where you can see that there has been a reduction in region -- in the Brazil as a whole first. So there was an increase that took place from 2013 to 2016, which was again reinforced, it's worse economic scenario was employment also leads to an increase in robbery and theft, but over the past 1 or 2 years, there is a falling trend in robbery and theft and this is important because this is also related to improvements that are not just economic but also better public management. But what we have learned over these years, that with better profit for the economy and a drop in unemployment, we can expect a reduction in violence and risk. So this implies that reduction in premiums that we may deal with in auto insurance is natural, if this trend really prevails.

On Slide #10. So we'll be talking about admin and operational expenses. Along 2013 to 2016, we invested strongly in systems processes. We reinforced a few departments, and then, once we completed these projects, most of them with a stronger agenda in terms of intensifying efficiency gains and then when we look, not just comparing 2018 to 2017, when they can compare the last 3 movements of 83.1 percentage points in 3 years. So 1 percentage point efficiency a year that we gained in the recent years. You can also see that we have had a drop in face value of admin and operational expenses in the year of 2%, and in the quarter, if we compare costs that we work on, along the year, we had a 7% drop in G&A, which shows that the company is very much committed to efficiency gains and to make it very clear that we do not believe that this agenda conflicts with our positioning of quality and now with service strategy. This is an agenda, which is complementary and synergistic when we improve the process, the system and the quality and this is good for customers too.

We also have a reduction in the level of complaints, which was very low already, but it's even lower now with our partners, the brokers, and this demonstrates that efficiency is not the opposite of quality. So in terms of financial results -- financial and service business results, we have 2 very different realities here in terms of financial businesses and growing by double-digit, especially loan and consortium growing too. We are the second largest consortium of real estate in Brazil. We are a leader. And in terms of loans, we are more of a niche market. We can be compared to other players in the market. And other lines grew less, but everyone growing -- and a very intense reduction in mobile and telephony, which was a decision that we made before to discontinue this product, which in revenue accounted for -- which accounted for 5% of our total revenue, but in terms of results along these years, it was heavy negatively in '18 in this chapter of our businesses.

So our recurring net earnings in spite of the strongly negative result in 2010 because the operation is still going on, and we are transferring the lines to team our partners, and we will be doing it along 2019. In spite of this loss, we could expand by about BRL 24 million in [indiscernible] or 18% the recurring net earnings of financial and service businesses and we'll be seeing that more clearly in the future without the telephone business.

So we took a year with the lowest CDI in history in recent history in Brazil at least. Our profitability in the quarter was 2.6%, which is equivalent to 167% of the CDI discount -- the expansion. And these results were very good for us, and we are working with the lowest reference interest rates that we have had in years, and therefore, the certain impact in our result with the reduction, which was partially offset by our performance. This is related to allocation. So we are allocating more or inflation link bond. And also, we had the benefit of an over allocation in bonds as compared to the average we increase along the year. We were between 1.8%, 1.5%, and we had 3.2% in equity with a very strong movement in improving the variable income condition in the stock market.

Lastly -- not lastly really, but another important aspect in our consolidated results, I would like to show you the effective rate of taxes because this is important to explain. Basically, we saw an increase in effective tax rate if we talk about income tax and social contribution. So from 28.3% to 39.6% in terms of the effective tax rate and this is related to -- in terms of equity and stable taxes that we can deduct, but the result, the basis over which we apply was BRL 0.5 billion to BRL 2.2 billion. So I deduct the same amount of a basis that has grown a lot. And this -- so the effective rate grows too. Also, there was a movement such as 5% retention of social contribution, which is related to a drop, it is going to be good from now on in terms of social contribution. However, there is a reversal that was in the balance sheet that leads to an additional payment of BRL 42 million in taxes because of this reversal.

And we had also some write-off effect because of Conecta of BRL 21.6 million in other. So good news on one hand leads to some bad news here, but which are not recurring. We were not going to always see this.

[Roberto de Souza Santos, executive]

Now complementing what Marcelo said, we estimated the effective tax rate for 2019, and this will depend very much on the government and their approach with taxes. But looking at the tax laws today, the effective tax rate will go back to the level of 32%, 33% in 2019. So of the adjustment of social contribution of 5%, there was a negative tax in 2018, because there was a write-off which affects cash and accounting results, but in 2019, it will be the opposite, a smaller rate. So the effect in 2019 will be positive. And the write-off of Conecta was because the expectation of result of Conecta [indiscernible] session with team and the number that we had in the balance sheet, so we had to write it off. So there are no more past adjustments to be made. So we estimate at this rate, and obviously, this is going to depend very much on our profit, but this goes from 39.5% to 33% of effective tax rate in 2019.

[Marcelo Picanço, executive]

Thank you very much for complementing. And I think it's important to make it clear to the market. So we'll talk about consolidated results, net earnings and ROAE, comparing the 2 quarters and the 2 years of the 44% increase in terms of recurring net income and a 34% expansion in the year comparing the 2 years. So we went from BRL 982 million to BRL 1.318 billion in 2018. Also in terms of recurring ROAE in the quarter, it went from 15% to 22.5%, and year from 15% to 19.1%. And it's important for us to mention, the adjusted ROAE is adjusted to the financial results and to our capital. If we were working -- getting 100% of the CDI in all our insurance businesses and providing exceptional treasury results and at the same time, working with a necessary capital for each business. So return on equity.

So here you're seeing that in 4Q -- so we are reducing it on one hand and increasing on the other. And we are having 25% of return on capital, 22.5% rather, which is the bank level as compared to businesses that work that are leveraged. This is just to make it clear what needs to call a return, so we have cash because we are conservative and we are going to continue having it up to a certain point, and it is related to what we need to pay in adverse times of our business. We are not suggesting that all access should be paid out. We need reserves in addition to the minimum requirements from Basel. We need to have another margin, so to speak.

On Page 15, I would like to show you a slightly more strategic vision for 15 years. So this is no longer short-term vision, but looking very much at the long term. So from 2003, before the IPO, so along all this years was -- after the IPO, the average ROAE was 19.6%, 20% rounding it up on average between 2003 and 2018. And so we had more violence -- interest to violence going up and down, interest rate going up and down and the GDP -- the worse year here, we had 12.9% ROAE, which, in our vision is still above the capital. In 15 years, we never had a ROAE that was below the use of capital.

On the other hand, on Page 16, you can see that recent improvements in spite of this return, we're still very much aware that we need to optimize shareholder capital in 2018. We made the highest dividend payout ever with 111%, almost BRL 1.5 billion of payout of dividend as we said that we were going to do, if we could. And we had a dividend yield of 8.6%. It was only lower of 2013 because 8.8x, and in 2013, there were special causes for that and so we had an extraordinary payment because of that. So here we did not have extraordinary result because of the fact that we almost doubled it. So we had reserve of profit from previous years. In addition to the dividend, we also had a reduction in CapEx of 36% because of the completion of many projects. Also a reduction in capital surplus from 47% to 40% in terms of adjusted shareholder's equity, which means that we still have a conservative position and we are not trading higher risk and more stability for more return. We're not offsetting one thing for the other. And even so we could have better return. And then also, we are rationalizing the use of real estate, concentrating real estate. So we have rented properties using home office, many of our employees are working from home. So we are saving in terms of footage and also for their convenience. And effectively, we have had BRL 23 million of [indiscernible] property that were sold in Q4 '18 alone.

In this manner, I believe that these are the main things that we would like to mention and share with you in terms of short-term results and also a little bit of the long term. And I would now like to open our Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Mr. Thiago Kapulskis from BTG Pactual.

[Thiago Kapulskis, analyst]

I have 2 questions. Number one, where are we in the cycle? So when you're looking at many different variables at the same time. So as you said in the beginning of the conference call in terms of frequencies getting better because robbery and theft have a falling trend and in crisis like this, different from what we had over the past 2 years. And so I would like to understand what was scenario for prices and also in terms of loss ratio. So I imagine that we should expect some worsening after the improvement last year. So what exactly are you expecting talking about automobiles, specifically? Now regarding the fleet that we had grown, is better in 2018. How do you see the growth in 2019 in terms of acceleration?

[Roberto de Souza Santos, executive]

Thiago, good morning. Well, in fact as we said before in 2018 so more theft and slightly less in terms of car crashes. So fewer car crashes also translated in a phenomenon that one hand cars have technology reducing slightly accidents, such as sensors and everything. But then on the other hand the use of smartphones also increases the frequency of car crashes. In our understanding for 2019 we do not see a significant reduction in a scenario of frequency. As Porto Seguro is a leader -- a market leader in the automobile sequence -- usually we are the first ones to price both scenarios. So I think that the average ticket that we have in the [indiscernible] especially in the second quarter, it will not be repeated along the year. Maybe some movement, we have margin for that, and we need to look at the loss ratios, and we are okay with our margins. We have margins to reduce prices considering the competition. But not to reduce frequency, it's not necessarily. So we don't have a scenario of significant reduction in average ticket in 2019. It's also we will probably will not find a very strong scenario in competition, considering the experience of looking at the competition according to information that we see it today. I don't think that most insurance companies do not have much margin, in spite of lower frequencies to reduce average ticket in the future. So what we see in December all the information that have been recently published, only 6 companies have the combined below 100 in automobile and of those 6, 3 are different brands. So we don't see much from further competition to make movement. So we are the leaders, and we have a margin, but we are -- have already priced for our frequency. As to the fleet, as we said in 2018 we increased our fleet by about 180,000 vehicles quite reasonable, which is -- was not translated in a growth in revenue, as Marcelo explained very well, average ticket -- we do not believe that all the reduction will come in 2019. So we have an optimistic vision for 2019 in terms of increase of the fleet, and we are really excited about that. We have some products related too, like Azul and Azul theft. We have slightly lower ticket products of course to penetrate in uninsured fleet.

[Thiago Kapulskis, analyst]

Just a follow-up. So we should expect a slight increase in loss ratio if we compare 2018 to 2019?

[Roberto de Souza Santos, executive]

Yes, you're right. There might be a slight worsening or increase in loss ratio, as you say, is our reaction to slightly fiercer competition, which on the whole we do not believe, considering the lack of ammunition of our competitors in the motor insurance business.

[Operator]

Our next question comes from Eduardo Nishio from Banco Plural.

[Eduardo Nishio, analyst]

I have 2 questions. I'm going to ask first one question. Picanço mentioned that there is an impact on average prices. Could you explain the technical impact in the quarter? So has unit price dropped this quarter or not for you because it did not drop we may adjust our models. This is important for us to understand the cycle a bit? And thinking of 2017, when you were more aggressive in terms of prices, and we -- and the loss ratio increased in the beginning of 2019 -- 2017 rather, sorry. Do you see the same risks this year? I know that probably interest rates will be lower, macroeconomic indicators are shifting, they're change but also the macroeconomics scenario is much better. So there might be another insurance company that will be slightly more aggressive?

[Roberto de Souza Santos, executive]

Nishio, good morning. This is Roberto. So the technical adjustments that Marcelo mentioned is the dynamic pricing process for the product. As we see a reduction in frequency, and we see that the frequency is not specifically recurring in terms of market behavior. So the price needs to be adjusted to the new reality. This does not mean that there is a reduction in margin because of that. So the price is technically adjusted in terms of frequency. It also happens with the average cost of claims. So here we have an adjustment in terms of frequency. I would like to highlight that this is dynamic we saw that movement, basically in the main capitals in the country especially in São Paulo and also in Rio de Janeiro that we have been a very -- had a very critical situation and also in the last quarter Rio de Janeiro had a significant drop in robbery and theft. So differently from 2017. You can see in our numbers that we did not reach the budgeted revenues in automobiles. In spite of everything, we are not tempted to reduce prices to sacrifice margins to get our results to meet the budget, so the budget that we define in 2017 for 2018 was much beyond what happened in the market in terms of frequency. Even so, we were not tempted to reduce prices unnecessarily to meet the budget. We kept the responsibility in terms of results. And this is what we are going to do in 2019. In 2018 just to give you an idea, even though the revenue did not meet the budget, it was 25% the market average. If we take Porto Seguro from the market, we grew even more than the market, but we were not tempted that to reach the budgeted revenue that -- we are not going to do that in 2019. We want to have our budget better and better calibrated and more sensitive, more accurately sensitive. So the technical adjustment is something that we do according to what happens in the market, and we should also highlight that we are using more and more analytic tools with machine learning and everything to be ahead of the changes. We are not just going to react with sophisticated actuarial models that react to market trends. Within actuarial markets, we look at the past. We want to look into the future and be ahead of future markets trends and changes and this will close the gap. So we are really okay with that regard in terms of the adjustments in pricing. It's really an ongoing process before -- in terms of reaction that we see in the market.

[Eduardo Nishio, analyst]

This is all very clear. My second question relates to admin expenses. So you got a lot better. Do you still have any more room to improve admin expenses?

[Roberto de Souza Santos, executive]

Well, we had a strong work seeking operational efficiency in 2018. So we started seeing the results of investments we made in technology over the past few years. We have accelerated all our processes for this hazard so to speak and now we have a very strong agenda in reviewing operational processes. So trying to make our processes less complex and simpler, because we believe that's very good. We did that during the year and during the year our expenses still reflect payment of termination -- labor termination contracts. There are still some costs of employment termination contract that they are not recurring, they will not affect our numbers in 2019. So as Marcelo mentioned, if we look at Q4, the reduction is even greater as compared to the first 3 quarters. And we believe in responding -- answering your question directly. We believe that operational efficiency agenda will continue in 2019. Maybe not as significant or as strong in the past quarter, but we still have a lot of room to move there. So we have a digital transformation agenda going on, this is another issue. It's not directly related, not just to operational efficiency. Well, operational efficiency too but also seeking excellence in customer service. So we want to transfer to the digital world all our -- the excellence we currently have in customer service. So we have -- want to go to the digital transformation, which will leads to a reduction in admin and operational expenses, maybe not as sharp as we had in Q4 but a continuing reduction in those expenses.

[Operator]

[Operator Instructions] Our next question will be sent by web -- was sent by webcast. The first by Mr. Pedro Gonzaga from Pacifico Asset Management.

[Pedro Gonzaga, analyst]

The better performance of your brands are as a result of pricing. So the third consecutive drop in your current basis is a result of the cleanup of your basis. So let's say, you [ are ] a property in life insurance it is related to the relationship between Porto and brokers, would this be anticyclic with the motor insurance market?

[Roberto de Souza Santos, executive]

[ Appreciate it ], this is Roberto. The first question regard, [ the though ] that is still growing, EBITDA was also growing and Porto slightly less. The question is -- the answer is yes, this is a reflect of the new strategy that we implemented in 2018 when we took out the safeguards between the products. So this led Itaú to have a better positioning effectively, as a brand for brokers, so Azul is the [ combat ] brand and Porto is our premium brand. So if we think of the 3 brands this year. The second question was?

[Pedro Gonzaga, analyst]

Was the drop in property and life, and Marcelo can answer it.

[Marcelo Picanço, executive]

Well, we accelerated the growth. So there was a smaller growth than we had in the past. We had a few cancellations, a few issues in the portfolio. A few adjustments that we had to do in the portfolio in terms of cancellations. So we were cleaning up our portfolio. We cannot conclude that, that there are fewer brokers. So we have more and more brokers selling our products, in 5 years, we doubled the number of active brokers selling life insurance for us, and we are market leaders. We have issues to improve the processes, and we are working intensely in that for these 2 products. So to increase by 15%, 20% and in fact there were some cancellations in terms of our reducing our basis. As to the credit card that you also asked a question. There are a few effects. The first effect is that sales suffer slightly more when it's more difficult for us to have new sales in automobiles. And in the last year and 1.5 years we had to implement significant price adjustment, and we are fully aware of that because of automobiles, especially the Porto level, which is the main vehicle for the sale of the cars, and I think we are going to recover that with the strong sales in the new economic scenario for the brand Porto and this leads the credit cards to have better sales. Secondly, we also had a cleanup in our basis and this is recurring, this is not going to happen every time but it's not a one-off event. So we're being very careful. So the revenue grew strongly. So we are having quite a robust increase in revenues this year, the fact that we cleaned up that there are fewer cards, plastic cards, physical cards. We don't think it's the best use for our shareholders' money to be attached to plastics that are not being used. So as those initiatives are not 100% successful and they are not always fully successful, we need to cancel those cards to clean up the basis to free the capital. So we had some rationalization movement there. So this year, as Marcelo mentioned, so we sold many real estate properties that we were not using and also that are -- we merged some properties that we were using and we decided to reduce. So we sold almost BRL 100 million in real estate property, and we still have quite a few properties on sale. In this manner, we reduce the fixed assets, realize revenue and cash and reduced the maintenance cost of those properties in terms of taxes and maintenance. We have many properties that's close to our headquarters and that can still appraise, and we're not going to sell them, maybe in the future we're going to go back to that discussion in 2019, we are not going to discuss our real estate properties. Did we answer all the questions?

[Roberto de Souza Santos, executive]

I believe we have answered all of them. We can move to the next question

[Operator]

The next question [indiscernible] by webcast by [indiscernible] from Citibank. Could you talk about the expectations of the management on issuance prices for cars and loss ratio for 2019?

[Roberto de Souza Santos, executive]

So going back to the previous question. So last quarter we had a significant reduction in frequency, and we adapted without any margin forecasts, and we do not see the continuity of these reductions next year. There may be a slight reduction. We don't think that this frequency is going to have a trend of -- a falling trend in terms of dropping. We don't see a generalized price war, considering the margins of our competitors. So low financial results does not give room of working with price to attain financial gains and also the operational result. So we also had an increase in fleet and the strategy and repositioning of the brands in another 180,000 items, there are products, such as [ light blue ] somewhat lower ticket for penetration and in insured circulating fleet. So we think we're going to continue our fleet growth cycle, that will not directly leads to a growth in revenue, considering the recent price positioning, considering our lower frequency. So we're going to have more revenue in automobile but rather an increase in insured fleet. This is a scenario that we foresee without any abrupt movements in loss ratio in 2019.

[Operator]

Our next question comes from Mr. [ Lucas ] [indiscernible].

[Unknown Analyst]

What is the main reason justifying the reduction in admin loss ratio and increased efficiency in 2018?

[Roberto de Souza Santos, executive]

I think that we have addressed this in previous questions. In 2018, we were very successful in terms of getting the results of all investments that we made in technology processes and systems in the company. We're not on agenda of classes review trying to reduce the complexity of our processes. Simplifying them intensely, it's even goes through a change that might even be a cultural change or now our managers in the company as a whole. And we are very successful that -- what's done in 2018, we now understand that this agenda continues in 2019 but maybe without such a significant reduction as we saw in the last quarter of 2018. But yes, we do understand that this will continue in 2019.

[Operator]

Our next question comes from [ Casio Fermeses ] [indiscernible] Investments.

[Unknown Analyst]

Could you tell us the auto insurance sales in Itaú branches?

[Roberto de Souza Santos, executive]

So our banking channel is doing very well. In 2018, we had many interactions with this channel through our operational committee and in 2018, I can tell you, that we had a growth in Automobile segment, which was superior to the average of the company, considering the channel -- the broker channel and also in the bank channel was superior than the broker channel. So it did very well in 2018, and we're still optimistic for 2019.

[Operator]

Our next question is from Mr. Nishio from Plural Bank.

[Eduardo Nishio, analyst]

Thank you for another opportunity to ask a question. I would like to ask about return on equity. You had almost 20% in the quarter more than 20%. I think that you can sustain the 20% or even exceed it. Do you still have any rooms to pay more extraordinary dividends along 2019 or -- for capital surplus as you increased this quarter, according to the performance in the quarter. So theoretically, we would still have some room for more payout. Could you explain this part of return, which was really a highlight more recently in terms of capital release and the combination of the 2 things. If we can envisage a sustainable ROE around 20% or even above?

[Marcelo Picanço, executive]

Nishio, this is Marcelo Picanco answering your question. Well in fact, when we were talking about return on equity slightly above 20% -- 20-something, it was based on the reality of capital allocation. This was higher as compared to the size of the business. I think that I believe with the optimization that we have conducted in many different fronts and in automobile and real estate and margins. I think that our -- in this manner it may keep at the level recurrence to -- close to the current ones, I think this is sustainable. Once our mind's set for dividend, wants to keep it slightly stable -- the level of recurring dividend, we want to keep it stable and to have our policy of extraordinary dividend payout whenever possible, whenever we exceed our internal margin we work with. So we prefer to use this method rather than increase payout, a lot in one year and then the market might be a little confused, whether this is going to be recurring or not, is it stable? No [ estimations ], and we're going to work with extraordinary payouts -- dividend payout. If numbers keep as healthy as they are, we are going to accumulate and it will still be possible to pay extraordinary dividend. It doesn't mean that it will be at the same level as this year because there was payout that had some history. Yes, it is possible to keep paying extraordinary dividend, and I cannot precise the amount but yes, I believe that 2 things are possible, profitability and dividend payout that is very appealing as compared not to our own opinion but to national/international dividends of payout -- dividend payout of insurance companies. We are not a utility company. We have an expansion level that is very low in terms of expansion. We are in the industry where penetration level, it's a very low differently from utilities. So there is room for us to grow on different fronts, people, things -- even with inorganic movement, and we are paying attention at all those movements. Our market is not saturated. We can have organic and inorganic growth too. If there are any potential movements at some point in time, we might use our cash. So we want to hold on till we slightly -- because we envisage the movements and there might be interested opportunities for capital, that we use our capital. We want to find the opportunities to use the capital. If we don't find, we are going to pay out the dividend to shareholders. We want to be very active in the market of acquisition.

[Eduardo Nishio, analyst]

So ROAE around 20%. Do you think this is sustainable or not?

[Marcelo Picanço, executive]

Well, it's difficult to assure the maintenance in terms of results of the combined ratio. So the interest rate and operations. If interest rates keep at the level where it is and operational results at the record, it may drop a little bit. We don't want it to drop. If it's between 20% and 18%, I'd say, level, which is above our historical margin, which was 16% -- between 16% and 18%. So important initiative regarding efficiency have been adopted as Roberto said, our management body is committed to that and this has come to stay. Differently from the loss ratio that is very subject to the market both in terms of efficiency and pricing. Our efficiency gains is something recurring, and we have changed a level. And the third question will depend on a higher growth of the businesses with intrinsic profitability. There is very high in superior events the automobile business, also considering the level of maturity of this business, such as property and casualty and life. And as our portfolio grows in those business lines, we still have a lot of room for policies because there is a very low market penetration, because we have a low penetration in life and property. We can have more return on portfolios with higher returns and that this growth along years, this will contribute for even higher ROAE.

[Operator]

If there are no further questions, I would like now to turn the conference back to the company for their closing remarks.

[Roberto de Souza Santos, executive]

I would like once again to thank you, all, for your questions, contributions, for your interest in our company. Still reinforce and then if you have any additional questions, please feel free to get in contact with our Investor Relations department or to go to our website, www.portoseguro.com.br. Thank you very much.

[Operator]

The conference call of Porto Seguro has now ended. We thank you for your participation and have a good day. Thank you.