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Edited Transcript of GRUPOSURA.BG earnings conference call or presentation 3-Mar-20 2:00pm GMT

Medellin Mar 27, 2020 (Thomson StreetEvents) — Edited Transcript of Grupo de Inversiones Suramericana SA earnings conference call or presentation Tuesday, March 3, 2020 at 2:00:00pm GMT

Sura Asset Management S.A. de C.V. – VP of Corporate Finance

Grupo de Inversiones Suramericana S.A. – CEO & President

Grupo de Inversiones Suramericana S.A. – Manager of IR

Grupo de Inversiones Suramericana S.A. – Investment & Treasury Manager

Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer

Santander Investment Securities Inc., Research Division – Head of Andean Research

CrediCorp Capital, Research Division – Senior Analyst of Transport, Telecom, Media and Technology and Information Technology

Welcome to the presentation of Grupo SURA on the Fourth Quarter 2019, I’ll be your operator for today. (Operator Instructions) Please keep in mind that the teleconference is being recorded.

As of now, we give the floor to Juan Carlos Gómez, Manager of Investor Relations, to begin this teleconference.

Juan Carlos Gómez, Grupo de Inversiones Suramericana S.A. – Manager of IR [2]

Good morning, and thank you for joining us in this teleconference results of the Fourth Quarter of 2019 of Grupo SURA. I’d like to remind you, you could access the recording of this conference at gruposura.com. There, you can also find the presentation we follow today. (Operator Instructions)

Today, we have in this call from Grupo SURA, our CEO, David Bojanini; Ricardo Jaramillo, who is Vice President of Corporate Finance; Juan Luis Múnera, VP of Legal Affairs; Luis Fernando Soto, Manager of Accounting. And from our affiliates, we have Carlos Oquendo, VP of Corporate Finance of SURA Asset Management; and Juan Fernando Uribe, VP of Finance and Investments of Suramericana.

Now let’s give the floor to our CEO, David Bojanini.

David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [3]

Good morning and we’d like to especially greet all of those that have joined us in this teleconference of the results of the year 2019 of Grupo SURA. We’d like to begin inviting you to look at Slide #5, where we have the highlights of Grupo SURA during the year 2019. I’d like to begin mentioning that the company gained great results with a net profit that has record high. This profit was driven by great operational dynamics as well as better revenues from investments, which were achieved because of the good performance of the capital markets.

Our operating revenues during the year climbed to COP 21.9 trillion, up 13.3%. Our operating profit reached COP 3 trillion , up almost 20% and net earnings of the company reached COP 1.7 trillion, up 27.9%, displaying a record high for the company.

As to the developments of the strategy we can mention that one of our goals has been the increased profitability of our portfolio, and we advanced 55 basis points in the ROE adjusted of the company or of the portfolio and that we’ve been executing a project, which is the capital optimization where our goal is to optimize COP 2.5 trillion, and some of these strategies were executed during the year, and we’ll be mentioning them throughout this presentation. So these are really these investments, which were made during the year.

And in some previous years, we’ve had, for instance, divestments from 2017 to 2019 for COP 500 million, which mainly are disinvestments (sic) [divestments] in annuities made in Peru, Chile and Mexico. We also have other minor disinvestments (sic) divestments such as Sodexo, Palic Salud, and Brinks. So all of this has gained in this capital optimization process. There, we’ll see also that we have other operating strategies that we’ll be explaining throughout this presentation.

As to the reduction of the depth of Grupo SURA. Well, in 2019, we had a reduction of COP 380 billion and in the 2017-2019 period, we have reduced our debt for a value of COP 850 billion. It’s also worth mentioning that we’ve had major advancements in the transformation of the business. And the delivery of more value to our customers, topics that will rise as well during this presentation.

For our next shareholders’ meeting. We will present 2 major proposals. One related to profits. Our dividend will have a total growth of 15.3%. With regard to an ordinary and special dividend and both added created that growth of 15.3%. And we will also present the proposal of our repurchase of shares of Grupo SURA, which can reach up to COP 300 billion in a 3-year term.

It was also known recently the announcement of my leave of the company after 40 years of service in the group, and 13 as a CEO of Grupo SURA. And recently, we also announced the appointment of Gonzalo Pérez as the new CEO. Gonzalo Pérez has background as well of 38 years in the group and mainly, his background has been in the insurance sector where, among many, many things, he has contributed a lot of innovation to the insurance business and obviously participated with his team in the entire expansion process of Suramericana with the purchase of RSA and — in Central America and the Caribbean to be present today in 9 countries. Besides, Gonzalo Pérez is a person that has had a seat in different Board of Directors such as Bancolombia of Nutresa and Celsia, Boards in which today, he is a member and also in other times, he’s been a member of the Board of SURA Asset Management and of the Board of the cement companies. So he really has a very vast experience, not only insurance business, but he knows very well the entire portfolio of Grupo SURA, and we’re convinced that he is a very suitable person for this position.

So with this I end my comments about the highlights of Grupo SURA. And I give the floor to Ricardo Jaramillo, our CFO, who will give you a detailed explanation about the repurchase of shares and as a results we obtained during the year 2019?

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [4]

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Thank you so much, David. Now I invite you to look at Slide 6. On this slide, we can see the proposal to reacquire the shares that we are going to present to the assembly. First, pointing out that this is a tool that we want to have at — in the administration. To manage financial resources and the entire capital assignment process of the company. It’s amount that we’re talking about COP 300 billion for a 3-year term. And the idea is that the request will be made to delegate it. So the assembly can delegate to the Board, determining the conditions that will be held for these operations to adapt mechanisms for the equal treatment for the different shareholders.

So where does this amount come from? Basically, we looked at it at 3 fronts: One, it’s a significant amount related to the conditions of the Colombian market and the conditions of supply and demand that we have today; 2, it’s got to be reasonable according to the reference of international standards that we’ve made for these types of companies. Here, simply, I’d like to tell you that we look for instance, that 80% of the companies of 500 Standard & Poor make — conduct this and that this would be an innovation for our market with this order of ideas. We’re talking about 1.6% of the company. And the referentiation again is marked percentages at that level; and the third item is fundamental. And it’s also connected to the different assignments that we have for our free cash flow available, also with the same vision of a process to deleverage process investment and the process to pay dividends.

So what’s the rationale of the operation? This rationale should be seen from different viewpoints: One, to provide the administration, the option to have a new tool used to manage its capital; second, we are aware, or we see that the market price does not reflect the estimated value we consider, which is fundamental for the portfolio; third, we see the Grupo SURA shares as an excellent alternative of investment, connecting this with the prior item and therefore, we were to give a positive return to the shareholders and a way to do to return the money or capital to our shareholders.

Now let’s please move on to Slide 7. And there, we can see the financial situation. I’d like to highlight what happened on the balance sheet of the company, the title. And it’s basically a debt reduction, higher value of investments and also a reflection of the disinvestments (sic) [divestments] we’ve been conducting and everything contributed to the increase of the net profit, which explains the equity growth. Therefore, we observed that the assets of the company reached COP 69 trillion, down 2.9%. The main items that moved during the year, we’re getting out of the annuities, which decreased the investments related to this business. And on the other hand, the growth of investments because of the dynamics of the capital markets in the different companies.

When it comes to liabilities, these reached about COP 41 trillion, down 7.3%, and the main cause of this drop is because of 2 things: One, the sale of the annuities, which is taking out the reserves in our balance sheet; and second, the decrease of the debt that I will discuss ahead. So this remains a growth of equity of 4.4%, with a net profit of the period.

Let’s move on, please, to the next slide. As I said, I was going to give you an explanation of the reduction of debt and why this has been a purpose for Grupo SURA in past years. This reduction of debt is necessary for the consolidated individual along with what we’ve given to deleverage and connect it to what David said, initially, to optimize capital, which allow us to accelerate this deleveraging processes.

In terms of the consolidation, we are in a total of COP 9.4 trillion, the individual financial debt is at COP 4.6 trillion. And here, I highlight that we decreased in the past year, COP 380 trillion, equivalent to a reduction of 7%. And very importantly, this is from 2017 to 2019, understanding that in 2017 was the max, the highest point of our debt, how in recent years, we reduced this to COP 850 billion, and we can see this in the different indicators. In the net debt indicator of dividends, it’s now at 4.1x versus the highest moment of debt of 5.6x and the other indicator of leverage or low to value right now, we are at 13.1% versus 18.3%.

I’d also like to highlight a strategy we had during 2019, which was to decrease the exposure of the companies to the dollar. Today, we have about 10% of the debt of the company exposed to the dollar versus 33% that we had in 2017.

Lastly, as I said before, we have a series of initiatives that allow us to optimize the capital invested in the company. And that part of that optimization of capital and those flows coming from that optimization may be distributed, used to reduce the leverage quicker.

Now let’s move to Slide 9, in which you can see a summary of consolidated results. Here, I want to look at the main figures and the details or the cause. The main movements will be explained when we talk about the companies, or when we look at segments. So let’s begin to highlight what we said in the introduction. We have an excellent growth of the net growth, which reached a record high of COP 1.7 trillion, growing 28% and the gain of the controller holding of 29.9%.

When we look at earnings, we can see that we’re reaching COP 22 trillion, up 13.3%. And as you can see, each one of the items of our revenues had a positive growth, a growth which consolidated was above 100% basis points compared to expenses, which grew 12.3%, which allowed us to reach an operating revenue of a growth of 19.5%.

It’s important to highlight as well that the taxes item grew as well, mainly explained by some effects at SURA Asset Management that we’ll explain when we look at the detail of that company. In — on the right-hand side of that slide, you can see a quarterly development of our increased profitability. And here, you can see the adjusted ROE, which is not the accounting, but it’s really has to do with the — excluding the amortization expenses related to acquisitions, and the equity is also adjusted, understanding the economic share that we have in the operating — accounting of the operations minus our liabilities. So we see that although in last quarter, there was a reduction, that positive trend year-by-year continues developing in our increased profitability.

In Slide 10, we can graphically see this performance of the profit. And we can see that Suramericana subtracted here about COP 143 billion, and I’ll explain this ahead, SURA Asset Management was positive and it contributed [COP 52,000 million]. And everything has to do with the associates, especially Bancolombia contributed an increase reaching COP 87 billion. And when we look at the items related to Grupo SURA as an independent entity, we see the difference of exchange has a positive effect, not only because of the exchange rate, but because of the good management coverages that I mentioned when we look at that slide of debt.

Also when it comes to interest, so we can see an increase of COP 22 billion, related specifically to the IFRS 16 and to a higher expense of coverages because of the strategy previously mentioned. Another important item is that we see that there are COP 24 billion positive related to the investments made, like those of Sodexo that we made at the end of the year. And we also have different tax strategies of the holding made in recent years. So with this, we reached the figure of COP 1.3 billion (sic) [COP 1.3 trillion], and the net profit of the holding of COP 1.5 billion (sic) [COP 1.5 trillion], up 29%.

So now let’s listen to David to tell us about the highlights of Suramericana Seguros.

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [5]

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Thank you so much, Ricardo. Now I invite you to look at Slide #12, where we’ll look at the highlights of Suramericana. Now I’d like to begin by saying that this company had a very positive growth in its earnings, which is one of the major goals that we have, the consolidation of the acquisitions of RSA, where mainly what we want is to have a better position in each of the countries. And I believe that from the viewpoint of going — of the growth of premiums, this has been achieved. Unfortunately, there were specific impacts in Argentina, in Chile and in the Health sector of Colombia, which hurt the net profit, as we’ll explain to you ahead.

The premiums issued by Suramericana rose to COP 13.3 trillion, up 10.9% or 13.1% if we exclude Argentina. Also, we must highlight the revenue for services provided, which is that of health care of EPS SURA, which reached revenues of COP 3.8 trillion, up 23.6%. Here, we have to highlight that the EPS during the year received from other EPS’ that had difficulties a bit more than 500,000 new affiliates, and many of them arrived with repressed diseases or pathologies, which hurt the cost in Health, as we’ll explain to you ahead.

The net profit of Suramericana, therefore, reached the figure of COP 390 billion, meaning a decrease of 25.6% or of 10.3%, excluding Argentina. So what I said, there’s a good operating dynamics. There’s good growth of revenues and premiums. However, there were specific effects that I’d like to mention right now, for instance, the VAT or which the new tax reform is given on — is placed on life commissions is a new cost, which meant COP 52.1 trillion (sic) [COP 52.1 billion] during the year 2019.

When it comes to Health, as I said before, well, there was a higher claims ratio because of the massive arrival of affiliates from other EPS’ because there were premiums for incapabilities that decreases during the year and the rate of these premiums and everything like this hurt significantly the claims ratio of EPS SURA, which, despite it all closed the year with a net profit of COP 21 billion. But of that profit, there is a decrease in absolute terms of COP 47 billion compared to the year before. The good news, however, is that by 2020. Those premiums and the payment unit for capitation were revised by the government, and we hope to have better results in 2020, if there’s nothing special taking place when it comes to the EPS.

Also including those specific effects with regards to property and casualty, we have to mention the case of Argentina where the crisis there affects or produces a negative result of COP 88 billion, which, of course, hurts the profit of Suramericana. And also when it comes to the protest experienced in Chile and vandalism, there were additional claims of about COP 40 billion, which also has an impact on the profit of this company.

In these cases, both in Argentina and Chile, we hope that there is a stabilization and that we can have a better year ahead. As to the strategy of Suramericana. Well, we’ve established a project of SURA businesses, which is focused on SMEs in 8 countries with physical facilities to serve the SME customers, which, in all these 8 countries are about 1.2 million businesses, potential businesses to which we can provide the SURA businesses services.

We’ve also been implementing the Individual Life insurance in the region. We made this in 8 countries. We’re only missing Brazil, where we’re studying it to soon have our Individual Life insurance there. And in this capital optimization process, we’d like to mention that when it comes to Suramericana, we carried out with the health solution, what we call premium equal collection, which optimizes the amount of the reserves and improves the working capital. That impact has — will be fully seen in 2020. We also saw or observed the merger of the labor risks manager with the life companies. So this merger also optimizes the capital of debt insurance company already merged, which will liberate or — yes, liberates significant capital for the company. Soon, we’ll have a spin-off of the remittance portfolio to materialize that capital optimization.

As we mentioned before, among the disinvestments (sic) [divestments] made, we include that of Sodexo and Palic Salud in Dominican Republic. This also has an impact in the capital of the insurance company. This company had an ROE adjusted of 9% and ROTE adjusted of 11.4%.

And lastly, I’d like to mention that the company has been making alliances with several of the companies of the portfolio of SURA Ventures, such as that of Pager, in which we’ve been digitalizing the service of medical consultancies, where we have this assembly has been operating well. And with another company called Zendrive, which is in charge of monitoring the drive of vehicles from cellphones of the drivers. So we’ve been advancing with these alliances, and we expect this will provide benefits for the customers in both cases.

With this then, I give the floor to the Ricardo Jaramillo, who will provide you more explanations about the results of Suramericana.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [6]

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Thank you, David. Now let’s look at Slide 13. And here, you’ll see the most relevant figures of the income statement of Suramericana. I’d like to highlight that the increase of the cost of health in property and casualty, especially in Argentina, Chile, hurt the results of the year.

First, let’s begin with revenues. Here, I’d like to highlight how the premiums issued, plus the revenues for services provided reached COP 17.1 trillion, up COP 2 billion (sic) [COP 2 trillion], which highlights the scale of the company, and this represents a growth of 13.5%. Looking at the indicators, which are the reflection of the claims ratio that we observe or that we’ve been pointing out before, we see how the claims ratio of reserve — plus reserves grew 11%, 10 basis points above the year before. In the cost of services provided, we have — what we’ve seen in prior quarters, with an increase of 170 basis points in costs versus revenues. The technical result reached COP 2.4 trillion, and practically was flat in the year. Operating expenses displayed a slight improvement of 20 basis points, along with the different strategies efficiency.

In taxes, we see a decrease in the consolidated of Suramericana mainly reflected by the effects of Argentina, the topic of impacts and everything in the statement of the company. And lastly, I’d like to highlight the good dynamics and the revenues from investments, especially because of the fixed income of the portfolio, up 18.4%.

Now let’s look at Slide 14, where we see graphically the development of the net profit of the company. Here, we’d like to highlight the specific impacts of the different segments, how these were compensated by positive operating dynamics and organic growth. Net profit in 2018 was COP 525 billion to end the year with COP 390 billion, down 25% or COP 134 billion. And so when we look at the 3 segments, we have some specificities. First in Life, we had a contribution that was positive of COP 52 billion, up 10% in the profit in the segment. Even with the net negative impact of the VAT, COP 52 billion. With casualty and property, we’re talking about a growth of COP 143 billion, mainly because of 2 effects because of Argentina because of the macroeconomic and political situation that you know of in that country. And in the case of Chile, there is an increase in the last quarter because of the place ratio related to the protest and social disruption that we’ve seen in that country. So that lead us to a decrease, again, of COP 143 billion. When it comes to Health, we’ve also mentioned the impacts of Health that reflect a decrease of COP 47 billion. And if we add those 4 negative impacts, we’re talking about COP 230 billion, which were compensated by COP 100 billion by the rest of the business in that message of the positive organic growth.

Now when we look at the Corporate segment, the different items that grew with a profit of COP 4 billion. This is reflected by lower taxes in Suramericana at the holding and a higher profit in others related to the disinvestments (sic) [divestments] that we mentioned as well as Palic and Sodexo. It’s important to clarify that the net profit without Argentina would be COP 477 billion, up only 10%.

Now let’s look at Slide 15, where you can see some of the main figures related to the segment of Life. Pointing out that we continue having this segment as a driver of the profits of the company had good operating results and investments. The net profit of this segment reached almost COP 560 billion, up 10.2%. We can see in the different solutions that they all have a very good positive and retained premiums, we grew 21.1%. The claims ratio at the bottom of the slide, on the left-hand side, you can see that it had a performance in the year of 30 basis points improvement. In the middle bottom, you can see the operating expenses dropped 60 basis points when you look at this as a percentage of retained premiums. And when it looks at the industry result and revenues for investments in the different quarters of the year, you can see that the result — the industrial was different in every quarter, and the net of both items gives us a positive net that we mentioned.

Moving on to Slide 16, you can see some of the main figures of the segment of property and casualty. We know now, the Argentina and Chile are hurt in this segment. The adjusted net profit was COP 36 billion. And you can see the good dynamic growth with the premium in time, especially in Colombia, you can see the contribution growing 8.5%. And the other countries which grew positively: Mexico, 36%; Brazil, 11%; Dominican Republic, 15%.

Looking at the bottom left of Slide 16. You can see the claims ratio related to the different impacts that we’d mentioned. In the total of the year, the claims ratio grew 16 — 60 basis points, and we also had an impact of these operation expenses that grew because of the impacts mentioned. On the other hand, we see revenues from investments’ great performance in the fourth quarter, which helped us to have this profit that we’ve mentioned of COP 36 billion.

Moving on to Slide 17. Now we look at the Health segment. And in the last quarters, we’ve been explaining to you extensively what’s happening in this sector in Colombia. Here, we want to show you the stabilization in the claims ratio and the effects, the positive effects, of the different initiatives we’ve had to control costs. At the end of the year, we had a positive results. As I said before, COP 21 billion. The quarter was great, growing up to COP 19 billion.

We’d like to highlight in the next graph, the dynamics of this sector in the past 5 years. And you can see how revenues related to services provided has doubled in that period of time. Also, you can see how the administrative expenses of this company have dropped, especially because of the scale and efficiencies to operate the business.

And on the right hand, you can see on this slide, the results that reached 3.7 million affiliates, 17.9% growth which is a growth of revenues of 50%, as David said before. And on the very bottom right, you can look at the development of the second quarter, where you could see a situation of more claims ratio related to the migrations of affiliates, which were repressed. But it’s important to see that in the third and fourth quarter, the figure of claims ratio or a cost versus revenues is stable, and the segment’s profit is more aligned with what we had in prior quarters.

Now let’s listen to David to talk about the highlights of SURA Asset Management.

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [7]

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Thank you, Ricardo. Now I invite you to look at Slide 19, where you can look at the highlights of SURA Asset Management. And its net profit in 2019 grew 66%, mainly driven by the yield of the reserve as we reset the capital markets had a better performance in 2019, and this is reflected in the company’s profits. But we’d also like to say that the operating results of the business also contributed to those good results.

The company closed with 20.5 million customers, meaning a growth of 3.7%. And here it’s worth mentioning that in Peru, where last year, we were awarded the bid of new affiliates for pension funds. We had 252,000 new affiliates, which has allowed the company to improve the average age of the entire portfolio of its affiliates, and that is very positive.

The net profit of the entire continuous operations of the company reached COP 716 billion, up 65.8%. The mandatory business displayed a great growth in the commissions, it grew 8.3% during 2019, which is very good. The performance of investments when it comes to the pension funds, they had a yield of 15%, and that 15% is really related to reserves, which is part of the revenue of this company. And of these funds, we observed alpha positive in Chile and Mexico.

When it comes to Colombia and Peru, we’ve been working on improving the portfolios. So that we can possibly announce positive alpha this year 2020 in this segment. Anyways, we have been increasing profitability levels in every country. When it comes to Savings & Investments, I would say that the most best is in Chile, still their discussions in Parliament, the chamber have approved the changes like contributions, and AFPs will not be handling the levels or the amounts. There is more flexibility for the age of retirement, the person can choose if they want to move back their retirement. We’ve also moved on proposals of commissions when the profitability of the funds is not that good. Anyways, there is a series of things. But overall, what we seek with these reforms is to improve the rate of replacements of pensions with the contributions.

When it comes to Colombia, we’ve been announcing a lot — a project, we hope to get to know it well to tell you what it consists of. We hope it’s something positive to improve the coverage and to improve the overall conditions of the person’s pension.

And in Mexico, some announcements have been made for an increase of the contributions to pension funds, which is very necessary in that country. With regards to savings and investments or wealth management, the year displayed a great net flow of COP 5.1 trillion, which means an increase in assets under management of 25.8%. The company has been working strongly in increasing this segment of Savings & Investments, and the results have been seen in the different countries.

And when it comes to Investment Management. During the year, 6 new alternative asset funds were created, such as real estate or infrastructure or private debt and we have 136 new institutional customers. When it comes to assets under management for Investment Management, fees grew 17%. Excluding the decrease in these assets, of the sale of the annuities business in Chile, which added up to $1.5 million in assets. So despite this exclusion, the company maintained the AUM levels that it has in investment management. Total assets — total assets managed — under management were COP 483 trillion (sic) [COP 483 billion], up 15.5%. You can highlight the participation of Chile, which represented 29%; Protección, 23%; Mexico, 21%; Peru, 14%; Uruguay, 2%; El Salvador 4%, and the Investment Management unit, 7%. With regards to the strategy, I’d like to mention that when it comes to investments management, the platform of Aladdin of Blackrock has been implemented in different countries. We received acknowledgment from Morningstar for handling the portfolio, especially in Mexico. And we adopted as well the principles for responsible investment, which is very important for sustainability to adopt these types of policies. When it comes to innovation and digital technology, we’ve been investing heavily in analytics to get to know our customers better, platforms that have AI and automation of many processes to optimize costs in the company as 2 channels. It’s important to mention the relevance that the digital channel has gained, especially in Chile, where 25% of the new affiliations are made through this channel. And the digital channel is also held in Peru and brought to Colombia as well.

The implementation of kiosks and self services, especially in Mexico and the different apps that we’ve been implementing, some of them interactive, others to consult information. All of those with the purpose of providing a better service to our customers and to provide information closer to them and for easier access.

Lastly, when it comes to human talent, the company participated in Great Place to Work, ranking in most — in every country with special places and seeking the opportunities so that every day, it can be more attractive and keep its human resources longer and to have it much more trained and professional. This ends the highlights of SURA Asset Management.

And now let’s listen to Ricardo Jaramillo to tell us in more details the results of SURA Asset Management.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [8]

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Thank you, David. Now let’s look at Slide 20, where you can see some of the main figures of the income statement of SURA Asset Management. First, you can see the growth of all the business revenues lines, and you can see the growth of 75% of the operating profit. Let me look at the company had operating revenues of COP 3.2 trillion. COP 836 billion, which represents a growth of 35.1%. And on the right-hand side, you can see , we moved from revenues to COP 3.2 trillion, especially because of the items of commissions, which grew 2.9%. And the item of yield of reserves, which we — as we’ve said, the capital work markets during 2019 performed very well, very different to what we saw in 2018.

Operating expenses of the company reached COP 1.3 trillion, up 14.2%, lower than the growth of revenue. This shows the control of administration expenses, higher expenses because of the acquisition of customers, this what we’ve seen in different countries. And expenses, they have to do the transformations of the company and more services provided to customers. Particularly, you can see that sales expenses grew because of the dynamics, especially operating costs also grew. We can see COP 1.4 billion, up of these costs. And as we mentioned, the difference of in 2018, 2019, there’s a good yield, an implicit yield of 15% in the investments of the company.

Moving on to Slide 21. You can see here graphically, the profit of the company, we see that the mandatory segment is still the one that drives the profits, growing almost 48%, or contributing COP 383 billion with this drive. Also, we have 2 partial impacts, 1 in exchange difference. Here, you can see a positive sum of COP 95 billion because of a cash flow that the company had in Chile, which managed well in dollars. And at the end, the result was very positive in terms of exchange difference. And on the other hand, an increase of the income tax of corporate, which was mainly explained by taxes, which had to be paid by — because we brought some money from Chile, and this was possible after simplifying the corporation underway — that we had underway in the company. And also, it’s reflected with the deferred tax that’s related to the dividends that the company expects to bring from the countries during 2020.

It’s also important to highlight that in the mandatory segment, we collect the taxes related to good revenues from investments made. The company, therefore, ended the year with a profit with growing 76%, ROE adjusted of 8.7% and the ROTE adjusted of 31%.

On Slide 22, let’s look at some of the main figures of the mandatory segment, where we have the high-yield of the reserve and the commercial management. Operating revenues reached COP 2.6 trillion (sic) [COP 2.6 billion], up 31.5%. And let’s look at the 2 items here. First, it’s Commissions, which reached COP 2 billion, growing 1.8%, that collects 2 things. In some countries, that has a driver-related to [UVRs], especially in Mexico and a component of Peru, which is a mixed commission, as you know. And the countries that have a salary base like Colombia, Uruguay and Chile, which have shown decreases like in Uruguay, and the salary base of Peru, which has grown 0.8%.

And on the other hand, the revenues from reserves, which you can see in the bottom center, and you can see in 2018 was bad, but 2019 was great. I’d like to highlight as well the new affiliates of Peru, 252,000 that we mentioned before. And this really is — surpasses our expectations. And the positive dynamics of the evolution of alternative channels, which, although, as you can see in the administrative expenses and of acquisition have been growing because of the commercial dynamics, especially in Mexico and Chile. This climb is lower because of the lower of these alternative channels.

Moving on to Slide 23. We see some of the main figures of the voluntary segment, which has to do with AUM — A&I and Investment Management. We’d like to emphasize the positive cash flow and the revenues. Revenues reached COP 400 billion, up 24.1%. And here, we could see the AUMs in Savings & Investments, grew 26%, reaching COP 35 trillion (sic) [COP 35 billion]. Again, you can see a net flow, which we observe as well in the graph bottom right. And you can see, comparing 2019 with the other years is very positive, looking at the commercial capabilities we’ve been developing in this business unit.

On the other hand, when it comes to AUMs of Investment Management, we have COP 34.4 trillion. And if we can exclude the annuities of Chile, it really grew 17%. And let’s look at the trend of this business in the last 4 years, you can have a growth of operating revenues, compound of 17.4% from COP 246 billion in 2016 to COP 200 billion, and we see that growth really was driven by 24%. And on the bottom graph, you can start to — you can see the positive leverage where the administrative acquisition expenses grew lower than the revenues. These are the main figures of this segment.

So with this, let’s begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Right now, we have Julian from Davivienda Corredores.

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Julian Felipe Amaya Restrepo, Corredores Davivienda S.A., Research Division – Equity Research Analyst [2]

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Specifically, I would like to make 2 questions. One, with regards to Suramericana, we’d like to know if the claims ratio effect that Chile has been registered already? Or will it be registered during this first quarter? And please tell us more about the taxes of SUAM and everything has to do with the annuities. And if the repatriation has been done entirely? Or do you still have money tended to bring to Colombia?

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [3]

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Okay. Juan Fernando Uribe from Suramericana will answer your first question. And Ricardo Jaramillo, the second question.

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Juan Fernando Uribe;VP of Finance and Investments of Suramericana, [4]

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Okay. When it comes to the claims ratio of Chile in December, it’s right now, and also with the component of the reinsurers so we had a higher effect than the claims ratio retained ahead. We have a — we’re starting really to look at conversations with reinsurers, we’re going to be looking at the rates, we’ll also look — looking at what’s happening with the transfers and how we’ll be correcting some accounts receivables, that’s basically what we’re looking at. And the second question will be replied by Carlos Oquendo from SUAM. Thank you, Julian.

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. – VP of Corporate Finance [5]

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Julian, when it comes to the taxes that we incurred in Chile, because the money that we brought from there, I must clarify something. Because through a partnership restructuring as of this year, as of 2019, we also start to bring dividends from Chile that we didn’t bring before. So the effect is both because of the dividends and because of the cash that we have after selling the annuities business. So for 2020, we have thought to bring the dividends from Chile, but not the cash that we still have, after selling the annuities business, we’re going to leave that in Chile invested and waiting for investments that the company can make. That cash that will stay in Chile exceeds $100 million. So on that side, we do not have a budget, really of any impact for taxes, but we do believe it will be more recurrent because of the dividends that we bring from Chile, year after year.

Julian, a question, did you listen well, the answer from Fernando, we heard you want us to repeat it. We’re told that his sound wasn’t good.

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Julian Felipe Amaya Restrepo, Corredores Davivienda S.A., Research Division – Equity Research Analyst [6]

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Yes, I did listen to his answer.

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Operator [7]

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We have Andres Soto.

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Andres Soto, Santander Investment Securities Inc., Research Division – Head of Andean Research [8]

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I have 2 questions. One, when you look at the results of the company in 2019, a positive factor was the profitability of investments, and that compensated, overall, several negative effects that took place some one-off.

I would like to understand, when you look at 2020, where the portfolio’s performance is more normalized, what can you expect when it comes to growth of profitabilities, both at the holding as well as SUAM and Suramericana? And particularly, given the recent volatility of the markets, what’s the — how have the shares performed since then? Let’s begin with that, and then I’ll ask you the second question.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [9]

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Perfect, Andres. There are several items that you’ve mentioned. Let’s begin with the last part. In — January was very positive in terms of the returns of the portfolios. But definitely, although we don’t have the figures yet, but February will display what’s happened worldwide because of the coronavirus. This is something we have to look at how the markets will evolve step by step. In both companies, we have budgeted that the return of investments will return to a normal “level.” We have statistical and fantastical analysis of the portfolios and what we can expect in different scenarios. But clearly, as you have said, our financial statements are — have volatility related to the return of investments, and that’s a significant part of our balance.

When it comes to structure, we do believe that we will have the increased profitability of the company. It’s not only in Suramericana and SUAM, but also Bancolombia according to the guidance that the bank has in the market. And with these ideas and with all the strategies that we’ve mentioned with efficiencies, new channels, et cetera, we expect to have a positive growth of profits. Not one similar to what we had in 2019, clearly, but we do expect, provided there are no specific impacts like the ones we had last year, our growth this year will be positive.

In terms of Suramericana, we hope to grow again and to show the strategies we have in different countries and to reach profit levels that have good gains to the SUAM. I think that it can have a drop of profitabilities, but when it comes to commissions, efficiencies, expenses of acquisitions and operations, we do hope to have proper levels that will allow us to handle the volatility related to reserves. Overall, I would say that, that’s our expectation.

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Andres Soto, Santander Investment Securities Inc., Research Division – Head of Andean Research [10]

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Okay. Ricardo, second question, when it comes to capital optimization plan. Could you share with us more about this? You talked about COP 2.5 billion , 70% already executed, what happens with the 30% remaining? And is there an impact of the reduction of debt for 2020?

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Juan Camilo Parra Osorio, Grupo de Inversiones Suramericana S.A. – Investment & Treasury Manager [11]

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So let me explain better the capital optimization. This is an initiative that the 3 companies took. And we have several teams from all 3 companies and the idea to look at each operation, in each country to understand if the capital level they have is proper or if we can have efficiencies through different methods. Maybe if it’s very high. It could go to the holding or if, for one reason, it’s got a nonstrategic asset that we could disinvest or if it has working capital, a premium equals charge.

So we’ve been working on this all year, I’d like to highlight the big thing is not only the figure, but to look at the discipline acquired by the companies to monitor carefully the balance sheet and that way, to optimize the capital and increase profitability. Protect about 17 initiatives that have an execution plan for 17 years. And by 2020, we will have new initiatives or a capability that we will maintain, and that figure will, as you said, will — is already executed. The other topics are underway. And at — and the bottom line here is that we will have a capability to recirculate the money in what we want to invest to give back to the holding or sub-holding to decrease the debt. And they’re — going back — going on to your second question, all 3 companies have made a cash flow exercise, consolidated individual and each one has planned to advertise its step. So let’s begin with Grupo SURA.

As you see, it dropped its depth and the expectation for this year is that we will have a disinvestment — no, a deleverage close to COP 280 billion. And here, I’d like to say that the use of capital or resources available for cash flow of Grupo SURA, this year, will be divided by the service to the debt or the reduction for the deleverage. The possibility, because it’s a possibility to reacquire the shares, which will be presented to the shareholders assembly. And we are aware that this company should increase its yield today. So according to this, we want to give you peace of mind that we have all the components of cash flow connected for that deleveraging.

Now let’s listen to Juan Fernando Uribe, who will talk about the deleveraging of Suramericana.

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Juan Fernando Uribe;VP of Finance and Investments of Suramericana, [12]

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Yes. When it comes to — remember, we have a reduction of pesos and you mentioned this year. And also, we have resources for — to make the due payment. Also ahead, we’re talking about the resources retained. So with what Juan is saying and what I mentioned, Andres, I end by providing you information of our plan of the indicators of Grupo SURA. And it’s to reduce the indicator of dividends, I think it’s [here] 3.8, which is lower than what we presented in the highest debt level in 2017.

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Operator [13]

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Katherine Ortiz from Davivienda Corredores.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [14]

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I have a couple of questions. First, I’d like to know if the update made of the payment of capitation is what you expected. Or could we still see additional adjustments? That’s my first question. Second, the proposal of the decree to regulate in Colombia, the management of voluntary pension funds. I would like to know what’s your opinion about that new bill and mainly focused on the — on opening the possibility to fierce competition in this segment, and that will provide some impact on the commissions of the funds? And the proposal of repurchasing the shares, could you provide us more details of the mechanism thought that to execute this repurchase, and how it will be conducted?

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [15]

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Okay. With regards to the unit of payment per capitation, we feel very pleased with the adjustments made for this year and the results show them. When it comes to the bill or the decree of voluntary pensions, Carlos Oquendo can give you the response. And with regards to the repurchase of shares, Ricardo Jaramillo

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. – VP of Corporate Finance [16]

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Katherine, we are closely looking at the development of the bill or the decree. However, based on what we’ve been doing at Proteccion for many years, we’ve seen that our voluntary pension segment has been acting in an expanded market, not simply acting within the world of the AFPs and voluntary pensions. That’s why for about 2 or 3 years now, we’ve been decreasing, unilaterally, the commissions. But also, we’ve been providing our customers alternative products, which make that reduction of commissions through the market can be compensated. So from that viewpoint, the strategy of the company has been, for some years, to compete in an expanded market and to — and really, to get used to the commissions used in that market.

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [17]

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Katherine, and your question when it comes to the reacquisition of shares, I’d like to highlight our proposal it’s that the assembly will delegate to the Board of Directors that how to determine the conditions to execute this transaction. When it comes to the mechanism used, we’re analyzing different mechanisms, understanding that there’s a fundamental premise. And we have been clear to say that. It’s got to have equal treatment of all shareholders, that’s fundamental. We’ve been discussing this with the superintendents as well. And it should keep in mind that it’s got to be efficient and suitable for this practice because we believe that it could bring about some innovation, not only for us, but for the rest of the market, which could be interesting. And if it’s efficient, it will be great for every player involved.

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Katherine Ortiz Sogamoso, Corredores Davivienda S.A., Research Division – Equity Research Leader [18]

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Ricardo, an additional question. Is the Board forced to publish the mechanism that will be used once the assembly approves this? Is the Board — will this mechanism made — be made public?

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Ricardo Jaramillo Mejía, Grupo de Inversiones Suramericana S.A. – CFO & Chief Corporate Finance Officer [19]

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Well, Katherine, this topic, as I said before, it’s so innovative. For us, it’s fundamental to communicate this highlight in time. So we — since we’re going to be giving equal treatment to all shareholders, we will be taking small steps, in which we will be telling the analysts, the shareholders, we’ll be explaining this new practice that will be assimilated by all to increase the dynamics of the marketplace.

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Operator [20]

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Steffania Mosquera from CrediCorp Capital.

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Steffania Mosquera, CrediCorp Capital, Research Division – Senior Analyst of Transport, Telecom, Media and Technology and Information Technology [21]

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My first question is on the voluntary business of SUAM. I see that this quarter, this displayed loss is higher than those before. I’d like to understand a bit more why that change took place at trend? And also, if you could give us more guidance on what you expect on the profits of this business in that — in coming years?

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [22]

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Carlos Oquendo will respond.

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. – VP of Corporate Finance [23]

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Yes, Steffania. Really, we have budgeted towards the end of the year, because of the major commercial dynamics we have, the higher expenses and acquisitions. However, keep in mind, the growth of AUM and revenues compared to the organic growth of the market and inorganic growth, and that ratio is quite low. We grow AUMs compared to the money that we lose. In this instance, the ratio is 0.3%, 0.5%, even if we don’t keep in mind the yields of the investments, it doesn’t go beyond 1, 1 — 1.5%. So with the — so for us, strategically, those indicators are still low, and it’s important to keep the investment’s pace, especially because of the acquisition expenses, the alternative channels that we are developing for our customers. So on that hand, we’re backed by the net positive flows and record highs we had in Chile, Mexico, Peru, even in the voluntary business of Colombia. However, we do believe that these dynamics will continue 2 or 3 years, keeping in mind that this year also, we launched a project in Mexico for the retail savings and investments business.

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Steffania Mosquera, CrediCorp Capital, Research Division – Senior Analyst of Transport, Telecom, Media and Technology and Information Technology [24]

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Perfect. And my second question has to do with the coronavirus. How are your investments distributed in the reserve to have a dimension of the effect of this virus on your balance sheet?

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. – VP of Corporate Finance [25]

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Let me tell you, really, we have about, in variable income international, which is — which has felt the hurt — the effect in the last weeks, we have about COP 35 billion, COP 35 billion. So the impact initially, in the first weeks, has been compensated with what’s happened yesterday and today, where basically, the effect has been only half. So our structure in variable income because of the philosophy and the condition of the reserve makes these — this overreaction of the market go hand-in-hand to bounce back positively. So we have to wait. I think we economically don’t know with what the effects of this virus will be. But I can say that in these 2 — past 2 days, we’ve seen a bounce back of more than 30%.

When it comes — let me complement, when it comes to Suramericana as to the exposure to variable income. Looking at our liability to the assets. We — it really is — has a very low share, minor share in Colombia. It’s very significant and very low effect. When it comes to coronavirus, with the EPS, we are, obviously, preparing. It’s not the first time that we have a virus in Colombia. We’ve had H1 and H2 and Chikungunya, which have led us to make preventive campaigns to treat them. We expect to have emergency consultations for this virus, but we’re prepared. So the treatment given to patients are the best. And I said that coronavirus will handle is not mortal. So along with the Ministry of Health, we will be taking a good look at this to contain this virus.

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Operator [26]

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Right now, we have Daniel Guardiola.

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division – Director of Equity Research [27]

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I have a question on the return of the reserve. Looking at the results of AUMs of — SUAM, you’re talking a lot about the reserve, but I’d like to understand this return, my conception is that this is more of an accounting item, it’s not cash. So I’d like to know if you deem that the profit of this in [SUAM] when you give the dividends away, how do you see that difference?

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Juan Carlos Gómez, Grupo de Inversiones Suramericana S.A. – Manager of IR [28]

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Carlos Oquendo will answer this question.

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Carlos Esteban Oquendo Velásquez, Sura Asset Management S.A. de C.V. – VP of Corporate Finance [29]

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Daniel, you’re right. The concept of reserves is one, in which we have to maintain our equity invested in a percentage in the same funds where we also have invested the affiliate. So from that viewpoint, it’s clear that these are concepts of cash. However, for us, when we make the measurements of the company operationally and we look at the indicators of depth and our cash flow, we clearly see that when we are going to look at dividends. We look at them through cash when it comes to depth of service. And so anyways, when we have these reserves that are positive in the companies where the mandatory business charges over the AUMs, very positive impacts that turn into cash. For instance, in Mexico. Mexico after the positive reserve of last year, the AUM increased to 20%, where 65% of that AUM increase came from yields, while 35% from contributions. And in this case of Mexico and also charging in Peru because of the regulatory changes in the 5 — last 5 years, we’ve been charging over AUMs, those increases do turn into cash. But we’re talking more increases of commissions from yields and the increase of UM (sic) [AUM] than reserve. It’s not the reserve.

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Daniel Guardiola, Banco BTG Pactual S.A., Research Division – Director of Equity Research [30]

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And along with the previous question, could you share with us, which would be the adjusted ROE if we eliminated the reserve, eliminating that reserve of [SUAM]?

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [31]

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The EBITDA and other indicators that we handle, excluding the reserve with Juan Carlos, we can send you that information.

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Operator [32]

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Right now, we have no more questions. Now David Bojanini will give the final remarks.

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David Emilio Bojanini Garcia, Grupo de Inversiones Suramericana S.A. – CEO & President [33]

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Before I say goodbye, keeping in mind that it’s my last chance to share with you the teleconference. I’d like to thank you all for your interest and for joining Grupo SURA during the 13 years that I’ve headed this company. Beyond all the situations of the market, I feel very satisfied for what we’ve obtained these 13 years, and especially, the achievements made with the expansion of the group and enhancing our portfolio.

So again, I would like to thank you for your trust at all times that we’ve had to discuss with you. Have a good day.

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Operator [34]

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Thank you all. This ends our teleconference for today. You may hang up.

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