IRB-Brasil Resseguros S.A. (IRBR3) Earnings Call Transcript & Summary

This presentation may contain information about the company that would reflect current situation or its expectations. At its senior management related to its performance and future events, future statements will include with no limitation. Any statements that include projections estimates about performance and future objectives. Words such as believe, anticipate, we hope, we expect, estimate, project, among other similar words. These statements are subject to risks, uncertainties and future events. We would like to inform investors that several important factors may impact substantially these plans, objectives, expectations, projections and intentions expressed in this presentation. Now the company, its subsidiaries, directors, managers or employees will be held liable by third parties, including investors, by any investments decisions made during this presentation or for any related damage market and competitive position information, including market projections mentioned during this presentation, were obtained through internal surveys market, surveys public domain information and business publications. Mr. Raphael Afonso De Carvalho will start his presentation now.

Good morning, and welcome to our first quarter results. I would like to start somewhat differently. Would like to say to our Willy Jordan. He was submitted to a very complicated surgery. If you can hear us, we are waiting for you, Willy. All the best. Okay. Let me now start with the results presentation. I'd like to give you an overview of the quarter. It's on Page 2. We've had substantial improvement of almost 60% -- even -- it's even better when we compare to Q1 '21. These improvements have taken place to dramatic times during the pandemic. I'll be giving you further detail during the presentation. These uncommon results have impacted us. We have BRL 150 million positive from lawsuits Premiums were up 3.9% when compared to the same period of last year. Improvements in Brazil was -- were at 19% level. We keep on focusing on where we have more competitive advantage and having at least 2/3 in domestic operations. On the right, you can see how disciplined we were in executing our strategy. Brazil accounts were 62%, an 8% increase when compared to last year. Another highlight is the renewal rate, 86% that indicates that our clients have been very confident. Our expanded results was 97%, combined ratio and sales expenses along the lines of first quarter of last year. When we normalize these one-off effects about the weather, and the pandemic that hit us in 13 percentage points, the expanded or the combined ratio was 83%, way better than those last year. I'll give you more detailed information during the call. We've had robust financial results of almost BRL 160 million even when we discount that one-off BRL 150 million. We have maintained all the regulatory indices. I would like to highlight the high renewal rates. This is the most important period of the year as far as renewals go. We reviewed conditions and prices, which makes -- or which make the process more complicated. Risk dilution is up next. Quarter after quarter, we have improved those numbers, both abroad and in Brazil. When we include that to the high renewal rates and risk dilution, we have almost 90 new businesses in line with our goal to maintain sustainability. Once again, I would like to thank our customers and our brokers. On Page 4, premiums. This first quarter issues, or premiums written were up almost 4% over -- a little over BRL 2 billion when compared to BRL 1.93 billion in the same period last year, BRL 1.240 billion domestically, 19% above the same period of last year, thanks to equity, life and agricultural segments. Internationally, BRL 765 million, down 14% when compared to last year. That drop was caused by more stringency in underwriting in our international operations. We have been focusing on Latin America and it's important to dilute risk. I just would like to mention that. On the top right corner, you see information on retrocession, expenses were BRL 607 million, the rate was 30%. Let me remind you that we had an LPT and when we discount these LPT effect, these premiums were BRL 388 million, and the retrocession would be 19% showing that we had retained premiums at a higher volume BRL 1.150 billion, when we discount the LPT effect, BRL 1,270 billion, and they were concentrated domestically. On to the next slide, I'll ask Toneto to discuss the cost of admin expenses.

Thank you, Raphael. Good morning, ladies and gentlemen, and we should just in order to find ourselves. We are on Slide #5. And if you check the graph to the left, and the trading costs and the commissioning index calculated over the one premiums. And if we check the amounts that were recorded in March, 2022 were BRL 293 million, and that was the lowest observed in the last 5 quarters. And the commissioning rate that if we check on the points above, if compared to the last 2 quarters, at first seems reasonably high in 27.5% and 35.5%, respectively. But as Raphael said himself, because of the LPT effects and excluding then those rates are substantially reduced to 22% and 21% in the first quarter of -- last quarter of '21 and first quarter of '22 with 1 percentage point lower than the previous quarter. And that is obviously positive to our operational results. And in the graph to the right and checking on the ADM expenses, the rates have been calculated over the warm prices with and without the LPT just as the commissioning expenses. So this is obtained excluding the LPT as well. We're deducting it. So the ADM expenses, which are subject to management are reflected on the green line and in the yellow dots, and they range around 5% of the premiums wons during this quarter. It's a pretty stable level if compared, and that was BRL 20 million lower than the last quarter of '21. And I remember well that in that year, we have recorded some nonrecurring expenses. Now the overall expenses that also include the turnover tax represented by the blue line and the red dots, they represent approximately 10% of the premiums that were won slightly higher than the quarter-on-quarter comparison. And obviously, in the other part, for exceptional reasons, we've had a negative tax basis, and we obviously had negative results there. Now if I could ask you to please move now to Slide #6. We will check now the quarter progression of the main cost of the company, which are our claims. So you can see that the nominal amount of claims reported in this quarter has reached BRL 933 million, which is also the most if compared to the 5 previous periods. Now the 81% claims ratio initially confirms that seasonal reduction that was observed in this T1. However, if we observe it with the year-on-year first quarter of 2021, the very first index area, we will check an apparent increase of 9%. And I say apparent because as we will see in the following slides, this rate was also subject to the LPT variations, aside to some of the typical events that Raphael mentioned that will be mentioned in the future. So let me just highlight that as said by our CFO during this quarter, the claims derived basically from the previous years of 2020 and 2021, confirming a reduction of the impact of the previous productions -- production years. So this is an important information that confirms our previous forecast. So we don't really have major effects of claims that were inherited from previous contracts to 2020. So let's now move to Slide #7, and I would like to, with your permission, start by explaining from the conceptual perspective, the -- how is it that we register and record the agri or the rural insurance in the IRB. And I think it is important for us to deeply understand how this product works. So we are observing here 2 fiscal years 2021 to the left and the present here to the right. And so it basically tells that during the year of 2021, we have underwritten contracts that we're compensating both winter and summer seasons or crops. So -- and half of the sales were for summer crops and the others for the winter crops. So those contracts, they transcend the fiscal year of 2021. And most of them are in the year 2022. And likewise, those contracts, they got parts -- part of the claims results in 2021, predominantly from the winter crops. And also in 2022, in particular, counting on the summer crops. And if we check the year of 2022, we can see that the renewals have already started. In other words, the contracts that had started before and are being renewed. So those contracts that were standing before, they might bring results to the impact of 2022 and finally '23. So it's an interesting dynamic. And the conclusion is that during the fiscal year of 2022, we will see effects of contracts that were cut in 2021 and also effects of contracts of this year itself. And it's good to remember that the renewals in 2022 have been done in -- adjusted in specific conditions, given the claims ratio of the previous year. So many contracts have been terminated and canceled, but most of them have had the rates reviewed, the technical conditions reviewed and the IRB share was also reviewed. So all that should contribute to improved results for the fiscal year of 2022. So I think it is important for us to understand those movements. And once we conclude this conceptual explanation, it's important for us to start and pay attention to the climate conditions and the climate conditions in this we could forecast part of them in 2021, but part of them also happened in 2022. And therefore, they are reflected in this 2022 Q1. And as we know, those conditions were extremely relevant to the market as a whole, and they hit important production areas, both for winter and summer crops rather typically, much more intensely than usual. And so it is important for us to talk about this severity. And according to the public figures, ever since the rural insurance subsidy program was created 19 years ago, this was the worst in the -- historically speaking. And if we track the state of Parana, this was the worst and in the Rio Grande do Sul, the events have hit basically the whole state, and this was the worst drought in the last 70 years. And we had heat waves and more than 300 municipalities have retreated emergency state due to the drought. And so I know that the IRB results have been affected partly from the last quarters of 2021 and the first quarter of this year. And in terms of the performance, reports, and we can see that the claims ratio and if we want to compare the Q1 of 2021 of rural insurance was 73%. Now in this quarter, if we check the year-on-year, the adjustment was really pretty relevant and has reached 72%. So, I also would like to give you an important example here, which is obviously the insurance part. We are insured against catastrophes. And we have reinsurers and the reinsurers themselves have their own mechanisms. And this is usually higher than the international market. So in the case of the agri business in particular, we have the stop off, which is limiting the losses for the company to specifically claims ratio. So this is an important point to be highlighted. Another important point is the geographic diversity. In other words, the risks are pretty spread in a relatively interesting way through the national territory. And we also have to consider abroad. So considering the domestic environment, we have the risks with different conditions, obviously, with the different insurers. So -- and all those aspects considered diversity, different conditions, contract or contract basis and different protections and extrapolating the losses in the insurance market without checking or without taking all those details into account might lead to inadequate conclusion. So this is a good caveat for us to start with. And it's also important for us to consider that during the stage A1 Q1, considering all the geographic spread and extension and all the -- considering our portfolio insurance, our company has a pretty robust reserves to deal with the underwriting year contracts of 2021 And according to our better understanding, they are more than enough to face all the losses that could possibly come from the portfolio. And only when the -- when we do the accountability for the Q1, then we might be able to adjust our forecasts. And based on what was said and everything that was said above, we obviously can't disconsider the volatility of the agri because of the second quarter effects. We understand that such potential volatilities can be compensated by the results coming from the contract renewals that we also mentioned. So now that we are -- let's now move to Slide #8, where we will basically focus on another important point, which is the COVID-19 effect on the company's results. So here we are, Slide #8 and the pandemic has indeed -- had an important role in almost all insurance companies around the world, and the effects, of course, have impacted the reinsurance market as well. IRB is no different. And we can see here some important figures of the impact in the company since March 2020 to 2022, we have recorded BRL 232 million of impact in our results and logically caused by COVID-19. That impact was observed in many of our -- in many different portfolios, but in particular to the life fund and then personal insurance, as you can see. And as we mentioned since 2021, IRB started to offer COVID-19 coverage to our clients with a specific pricing for the life portfolio. And such coverage is there. Accounted for almost BRL 64 million in the Q1 of 2022. And basically, you derive from the Omicron. And it's important to highlight that those coverages. They will result in additional income to IRB not only in this year but in the coming years as well. And I mean, if except for any other incoming adverse conditions, this -- we hope that the claims ratio is going down during the next semesters. And then we would like to now move into Slide #9. We would like to report in a summarized manner the progression of the amplified combined index, as Raphael said, that contemplates financial results as well. So in Q1 of 2022, that index was presented here at 97%. And the graph that you can see on the screen. And in the previous years, we could see an important cooling of the market. So you can see that if we compare this to the first quarter of 2021. we can see a slightly lower result. So it's 94% against 97%. So it's important to say that for a good comparison, we need to, number one, deduct the LPT and just for you to visualize in the last column, we can see the COVID effects in the agri part. So when we do this balancing and exclude those effects, it's the best figures of the last quarters. So it is very important for us to acknowledge this atypical effects on the agri sector. It's not recurrent, but it's rather atypical and the COVID effect. So it's really important for us to -- once those 2 events have been excluded, we can clearly see a growing trend and in the more assertivity and the actions taken by the company in how they conduct the businesses. And just to complete, let's now move to Slide #9, and I do not intend to spend too much time here, but the combined index or rather -- still on Slide #9. rather, Slide #10. Sorry, I got myself a bit mixed up here. So Slide #10. And can state that our balance today has much better provisions if compared to before. And we have reduced here the deviation risks in between the claims and provisions. So that could obviously result in important negative results. And we would like to highlight that in the past, we had important growth in the premium with the higher risk exposure and in terms of the reserves, 60% of the premium won. So that was the worst. And this is a twice fold pretty consistent vis-a-vis to in Q1 of 2021, the year-on-year. And so that indicates that we are competently managing the claims reserves. And so now let's move to Slide #11, where we'll talk about the regulatory indexes. In this slide, I'll show you our position as to the regulatory indicators. IRB had sufficient adjusted equity at BRL 65 million, very similar to what we had in 2021. The 231% rate remained unchanged as of December '21. When we talk about sufficiency of technical coverage, we are at BRL 17 million when compared to BRL 160 million, we had in Q1 '21 and BRL 236 million in Q4 of '21. I would like to once again repeat that statement, its up to the management to analyze IRB capital structure to keep the company float whilst maintaining all the regulatory requirements. We have used some levers this quarter, such as the LPT, if necessary, we'll implement other measures, and we will, of course, keep the market informed. Moving on. This is our cash flow. In Q1, we had negative cash at hand when compared to Q1 '21, a change of BRL 463 million. This is the operational cash flow that is derived from the amount of premiums less sales volumes, especially abroad, the local currency appreciation. Our balance sheet is in reals, in local currency. It was substantially appreciated. And we have better deposits, other receivables, we had an important variation. That is due to that settlement of these third parties or deposits that haven't been identified. They affected our receivables. On the other hand, claims payment. Nominal values have remained the same with that smaller premiums and improving the settlement process. This effect impacts our cash in the quarter, improvement in processes, speedier settlements have kept that volume of claims when compared to '21. Nonoperational cash generation showed important changes there, reimbursements paid out. It's a one-off event and that reimbursement to Eletronorte like we said last year. This is our cash position. On to the last slide before I give the floor over to Raphael again. On the top chart of Slide 13 on your left, our top left chart, financial assets, BRL 8.2 billion in Q1 and BRL 800 million decrease when compared to December '21. That drop can be explained by the fact that we have a significant exposure in foreign currency. When you take the appreciation of real in the quarter, that impact alone brought those assets by BRL 500 million. And the remainder of that difference is the operational cash that I talked about in the previous slide, 10, [ 82 ], when you add up these 2 effects, you have that BRL 800 million drop in our financial assets. On the bottom left chart, this is the nominal evolution, BRL 260 million in the quarter. Just like Raphael said, BRL 150 million was a one-off event when we booked lawsuits, something that we made available to you in detail, higher interest rates. It's worth mentioning, too, that benefited our results and profitability of assets in reals were at 131% when compared to the CDI. On the pie chart on your top right portion of the slide, you can see the breakdown of our portfolio, 59% is in local currency, 41% pegged to the dollar. That change in foreign currency from 36% to 41% when you look the first quarter of 2021, that is caused by more technical reserves in foreign currency as a consequence. We have to maintain more assets in the same currency to have the required hedging. That concludes my presentation. And I'll turn the floor over back to Raphael for his final remarks.

Thank you. On to the final remarks, and this is what we can expect for the future to a certain extent. I would like to once again -- restating our commitment to be very disciplined to the strategy we came up with. Local businesses will be on the rise because it's there that we have more competitive advantage and IRB can make a difference in the price setting realm another pillar to reduce concentration by contracts will remain the same. Of course, there is a limitation there. And just like we see opportunities to deconcentrate. We're paying very close attention during the renewal phase to improve our positions even further in those contracts we are interested in to acquire new businesses. Admin expenses demand our full attention, and they may be variating below inflation rates, helping us have more scale, conditions and prices will be adjusted according to the risk. That is our guiding principle. Toneto just mentioned how important it is to invest in the country with higher interest rates and expanding our operations in the country, we expect to have positive effects in the quarters to come. And finally, just recently, we had an assembly -- shareholders' assembly. We changed our bylaws to adapt to the B3 requirements to have better governance. And we also had a BRL 1.2 billion increase in authorized capital because that had all been used. We have recently hired financial consultants to keep on helping us to do what makes sense to us, which is to assess options to optimize our capital. That's a commitment on our part, and we'll keep doing it. That is key to make the best out of all the possibilities. I'll turn it over back to the operator for the questions.

[Operator Instructions] We'll now start the Q&A session. If you would like to ask a question, an -- if your question is answered, start to remove your question from the queue. Questions will be answered in the order they are received. -- keep your -- the webcast platform brings us the first question. Tesli Takahashi asks the following question. Will the company give you any more guidance?

2020, we have withdrawn some forecasts and informed that as soon as the higher management would be comfortable with assumptions and forecasts, we would release them again. So we would assess how convenient it would be to release them. So -- and what I can say is that this we are keeping the same stance and we are committed to being extremely transparent towards stakeholders and shareholders, and we will keep everybody posted as soon as we have relevant information to be shared. So far, we think it doesn't really make sense for us to have any guidance being released.

[Operator Instructions] Maurilio F. Cruise asks the following question. For layman investors, what are these LPT operations? What are the fundamentals there? What are the benefits for the company?

Well, Maurilio -- Well, let me go a little deeper on the LPT. So in reality, what we do with that is as follows. So we try to look for a set of risks and claims that were taken up by the company, and we sort of transfer those claims through retrocession operations to either we ensure that might be interested, usually from abroad or even here in the domestic market. So we basically assign those portfolios, and this assignment basically exempt us from covering reserves and as provided, we pay a fee. So this -- the assumption of those responsibilities or the reassignment of that to a third party will obviously result in a cost. But on the other hand, this will increase and improve the technical provision indexes in the regulatory compliance, and this will have some seasonal effects in the solvency at the company. So this is a tool that our IRB has resorted to before for other times. And this is obviously something that other insurance companies do as well. And we obviously keep it up our sleeves just to maintain the company within the regulatory standards that are required by the legislation. So in short, that would be it.

[Operator Instructions] We do have a question here. What are the next steps to cover provisions? Can you give further detail?

Well, I guess Don Neto has covered 1 of the tools that we have been resorting to the provision coverage, which is LPT that basically exempts us from using reserves. And bear in mind that we have a few tools, which are not only capital tools. So -- and maybe the question is if we have something planned about the capital. And I would like to remind you that we permanently assess capital opportunities and not only to be fully compliant from the regulatory arena. But obviously, in order to give good deliveries. And we have been assisted by Itau BBA and Bradesco investments in order to identify opportunities to be more assertive with our strategy and the execution of our strategy.

We're still selecting a few questions. [Operator Instructions] this concludes the Q&A session. I'll turn over to Mr. Raphael Carvalho for his final remarks.

I would like to thank you all for your interest and participation. And if for whatever reason due to connection problems, we have left any questions unaddressed, please feel free to just send it to us and see you in the next call.

IRB Brazil conference is now closed. Thank you for your participation and we wish you a great day. [ This call was translated by an interpreter present on the live call ]