Auto-FinancingDivision

INDUSTRY INFORMATION

2017 was a very positive year for the auto industry, the best since 2013. The year began with a sales projection of 314,50022 new light and medium-sized vehicles, which quickly had to be revised as the year ended with sales of around 360,90033 units, an 18% increase compared to 2016. This sudden increase in the new vehicle business had a large impact on the used car industry, which dropped 2.8%4 compared to 2016, with a total of 980,000 transactions.

The positive year for new vehicles is explained by various factors, including:

1. The weakening of the U.S. dollar benefitted imports; the average value of the U.S. dollar in 2017 was 4% below the 2016 average.

2. Renewal of vehicle stock purchased 2 and 3 years ago under ballon loans5, publicly advertised as “Compra Inteligente”.

3. Greater restrictions on mortgage loans, with minimum down payments of 20%, released liquidity for vehicle purchases.

The sales estimates for light and medium-sized vehicles in 2018 are between 375,000 and 385,000 new units6, figures that surpass the record sales number of 378,000 units in 2013. These positive figures are supported by higher projected economic growth, favorable exchange rate conditions, a low level of vehicle ownership compared to developed countries and low interest rates.

(2) ANAC (3) ANAC (4) CAVEM (5) “Compra Inteligente” is a balloon loan which considers a 20% upfront payment, 30% amortization during the life of the loan and 50% payment in the last installment. (6) ANAC

BUSINESS DESCRIPTION

Tanner sources its customers through three sales channels and a sales force of approximately 200 people:

  • AMICAR is an electronic auction portal created by the auto importers Derco and AG for the marketing and financing of vehicles – in their own dealer network or other dealers that market the brands that they represent (Mazda, Suzuki, Renault, Hyundai, Mini, Mahindra and others). Sales through AMICAR accounted for a large share of the division’s total sales in 2017, positioning Tanner as the second largest financing company out of the eight that participate on this platform. Sales through this channel grew by 27.5% compared to 2016.
  • The dealer or traditional channel is the second most important sales contributor to the division due to Tanner’s presence across the largest auto dealership networks in Chile. Sales volume through the dealer channel increased 24.9% YoY in 2017.
  • The direct sales channel focuses on financing vehicle purchases between private buyers and sellers, as well as purchases that are originated via the major online vehicle marketing portals. Sales through this channel increased 9.7% compared to the previous year.

In 2017, the Company’s auto loan portfolio grew 24.9% or Ch$ 60,426 million compared to 2016, reaching Ch$ 302,728 million. The cost of risk increased slightly in 2017, reflecting the higher loan volume – because this product provisions since the origination of the loan – and the Chilean economic situation.

This division generated revenue of Ch$ 68,792 million (~US$ 111.9 million), growing 20.8% or Ch$ 11,837 million (~US$ 19.3 million) compared to 2016, driven by higher loan volumes that resulted from increased sales in new and used cars. On the other hand, costs increased by 20.2% YoY or Ch$ 8,350 million (~US$ 13.6 million), from Ch$ 41,391 million (~US$ 67.3 million) in 2016 to Ch$ 49,741 million (~US$ 80.9 million) in 2017, which led to a strong YoY gross profit increase of 22.4%, Ch$ 3,487 million (~US$ 5.67 million).

STRATEGY

In 2017, the profit contribution of the Auto-Financing business increased significantly, mainly driven by two factors: (i) the improvement in the risk premium charged to customers due to our enhanced ability to understand our customers’ risk profile from the outset and price our loans accordingly and (ii) the increase in sales due to the higher overall interest income.

Our loan portfolio increased 24.9% vs. last year, which is explained by our efforts to increase our share in the used and new auto financing market. On the used vehicle segment, we continue to be specialists; we have enhanced our partnerships with the largest dealers that play in the “semi-new” vehicle segment, using strategies that enable us to reach a target customer within our desired risk profile. As for the new vehicles segment, we employ a number of different strategies aimed at satisfying the needs of different customer segments. Furthermore, we have been keenly focused on developing a top-quality service for both the end customer and dealer through an agile and timely credit evaluation process and excellent after-sales service.

TANNER INSURANCE BROKERAGE

Seven years ago, we decided to enter the insurance industry via the creation of our subsidiary Tanner Corredora de Seguros. The objective was to add value to our corporate and individual customers by helping them formulate strategies to mitigate their risks. Our vision is to become a leader in the insurance brokerage market through a competitive, comprehensive and reliable value proposition.

Our insurance subsidiary currently employs 19 staff members, headed by a CEO, an Operations Director and a Commercial Director.

Our strategy aims to position us as a leader in auto insurance market through continuous improvement of our coverage and services; we are also seeking to grow in new segments of the market by establishing partnerships and developing new brokerage channels.

As of September 2017, the Chilean insurance industry showed an overall decline of 1.8% compared to the same period in 2016, with a reduction in life insurance lines of 3.4% and an increase in general insurance lines of 2.1%. As for the insurance brokerage market, the insurance brokers affiliated with banking institutions grew 2.8%, with operating income growing by 4.5% YoY during this same period.

Tanner Corredora de Seguros brokered Ch$ 13,887 million (~US$ 22.6 million) in insurance premiums in 2017, which represents a 59% increase when compared to last year. Operating income during this period increased in line with insurance premiums, mainly due to better performance and higher penetration of the insurance product in our customer base.