IRB Brasil Resseguros S A : 1Q23 Results Presentation Transcript

Conference Call Transcript

IRB Brasil

1Q23 Results

Operator:

Good morning, everyone, and welcome to IRB Brasil's RE 1Q23 results presentation.

Present at today's conference call are Mr. Marcos Falcão, the CEO and Investor Relations Officer of the Company; Mr. Wilson Toneto, Board Member and Technical and Operations Vice- President; Mr. Daniel Castillo, Underwriting Vice-President; Mr. Carlos Guerra, the Legal, Governance and Facilities Vice-President; and Ms. Thais Ricarte Peters, Internal Controls, Risks and Compliance Officer.

We would like to inform you that this teleconference is being recorded, and that all participants will be in listen-only mode during the presentation. Ensuing this, we will start the questions and answer session. Should you require any help, please dial *0.

This presentation was prepared by IRB Brasil RE and could not be considered as a source of investment. This presentation may contain certain forward-looking statements and information relating to the Company that reflects the current views and/or expectations of the Company and its management with respect to its performance, its business and future events.

Forward-looking statements include, without limitation, any statement that has a prediction, indication or estimate and projection about future results, performance or goals as well as words such as believe, anticipate, expect, estimate, project and other words of similar meaning. Such forward-looking statements are subject to risks, uncertainties and future events.

Investors are cautioned that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, projections and intentions expressed in this presentation. In no event shall the Company, its subsidiaries, directors, officers, agents or employees be liable to any third party, including investors, for any investment decision made based on the information and statements contained in this presentation or for any corresponding or specific damages resulting there from. Market and competitive position information, including market projections quoted throughout this presentation has been obtained from internal results, market surveys, public domain information and corporate publications.

Mr. Falcão, the CEO of IRB will now begin the presentation.

Marcos Falcão:

Good morning to all of you. 2023, we sped up the process that began and has been very important for us. In January, we have renewed some contracts and we had an increase in the share in some contracts and reduced in others, and a lower exposure to risk. We now have people focused on this and on the search of new businesses for the Company. Now we visited more clients than we had in the entire year of 2022.

And this has been transformative in our day-to-day work. After changing and overhauling the internal processes of our company, we will be working with a base 0 budget, which means that

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we are beginning the year 2023 with a very asset-light company. In April, we signed contracts based on a completely different base.

And finally, what had an impact on the results of the quarter, we closed an agreement with the Department of Justice of the United States and the Securities and Exchange Commission. That eliminates an uncertainty from 2020 and will mean an improvement in our internal instruments in terms of compliance and much more.

Let's go on to the next slide and see the figures. This quarter, we had a net income of R$9 million, R$34 million normalized, minus R$25 million in administrative expenses that are non-deductible to pay for the amounts from the agreement SEC-DoJ.

In the 4Q22, we were somewhat below breakeven, and this quarter of 2023, we already show you results a little above the breakeven, despite the impact of the Department of Justice agreement.

In this 1Q, we got a breakeven in our underwriting results. This figure alone should be observed as an evolution vis-à-vis previous quarters, but we are still attentive to the volatility of our activities.

Next slide, please. This slide shows you that, despite having consumed this quarter R$411 million in operating cash, we had an important reduction in our provision for settled claims of about R$3 million. This shows a significant evolution in the collection of premium and the recovery of claims, and we will speak about this further ahead, when Castillo speaks about technical provisions.

With this, I would like to give the floor to Daniel Castillo, our Chief Underwriting Officer.

Daniel Castillo:

Thank you, Falcão, and a good morning to all of you. After our strategy of concentrating in Brazil, on slide number six, you can see the 1Q21, 1Q22 and 1Q23 and the reduction of the international business of 46% to 33%. In the same period, we see an increase from 54% to 60% of our business in Brazil. We thus continue with our strategy of concentrating 80% of our business in Brazil, 15% in Latin America and 5% in international business.

At the top quadrant, you see a reduction of the total premium between 1Q21 and 1Q23. This is the result of the cleaning out of the portfolio that was accelerated in the 1Q23. In this reduction of 2023, although we accepted new businesses, we did decline others that were not profitable, always with the goal of having a better quality portfolio.

At the bottom of slide 6, we see the evolution of the combined ratio of the 1Q23 vis-à-vis the same quarter of 2022, a reduction of 8 p.p. The loss ratio went from 81% to 77%, commissioning reduced to 25%, expenses had a small increase from 12% to 14%. Because the ratio of expenses is calculated with a view to the premium, the percentage increases.

With our strategy to further concentrate in Brazil and Latin America, you can see on slide 7, on the upper part, that there was a reduction in the international premiums from R$765 million to R$577 million. This reduction is due to a reduction in global businesses outside Latin America, catastrophic businesses in the U.S. and Caribbean, agro in India. And we do not want to keep those businesses because we are not being appropriately remunerated for the exposure.

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The reduction in premiums in Brazil has to do with the overhaul of our portfolio in January, as we thought for some businesses, the premium was not appropriate. And we also decided to reduce our share in some business lines, such as rural.

On slide 7, again, you can see the breakdown of business in our portfolio, especially property, 42% of the portfolio. If we look at the number of contracts renewed, we increased the number of these contracts from 86% to 88%, which means that we are underwriting a better quality portfolio with lower exposure contract.

On the following slide, on the upper part of the chart, you can see we retained premiums. We are retaining more. As we underwrite more risk of better quality, we are also retaining more and this has to do with the fact that we are underwriting lower limits. We want to acquire retrocessions that are more appropriate to our exposure.

On the lower side of slide #8, we see the reduction in the earned premiums in the 1Q23, abroad and in Brazil, which results from our strategy to overhaul the portfolio in the January renewals to have better quality portfolio with less exposure. The re-underwriting process resulted in a reduction in premiums in 2023. And in 2024, we should go back to growing.

I now turn the floor over to Toneto, who's going to make some comments about the loss ratio.

Wilson Toneto:

Good morning to all. We are now on slide 9. There is no doubt that loss ratio is the most relevant factor to allow us to achieve the expected results. We also need to highlight the volatility of that ratio in our industry due to several factors.

As we all know, the loss ratio of a reinsurer results from contracts signed in previous periods and depend essentially on the process of assessing risks as they are presented and of appropriate pricing. Therefore, it is more important to analyze the trend of the ratio rather than the quarter.

Having said that, I invite you to have a look at the upper part of the slide where we see the changes in the quarter of the amount of retained losses, retained claims. The last quarter of 2022 had an impact coming from the catastrophe of agribusiness in Brazil. When we compare 1Q22 to 2023, we see that the volume of retained claims is flat and is R$933 million. Above the bars, you see the loss ratios with and without the effects of LPT.

In 1Q23, the ratio was 77%, which was the lowest in the period and one of the lowest ever since the 2020 started. On the lower part, we see the breakout of the loss ratio per geography. This could have been better, but we had an uptick of claims coming from abroad, especially in life, having to do with contracts that were not renewed and also on major events in aviation in Brazil and abroad.

In this quarter, we had no relevant impact coming from agribusiness and very few claims related to COVID-19. We believe that the actions mentioned by Castillo in terms of adjusting prices, reducing exposures by decreasing our share in several contracts and the alignment of commercial conditions and technical changes in the renewed deals should contribute to improve this rati o during this fiscal year.

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We are now going to move to the next slide. On the upper part of slide 10, you see the 2 main provisions of the Company in net of our protections in retro, IBNR and OCR. Since 2021, the volume has changed and has remained so, despite the reduction in premiums and the dilution of risk which began in the beginning of 2020.

This is a strong indication that our balance sheet now has robust provisions and that we are managing our reserves for claims in a very prudent manner. This reduces the risk of deviation in the results.

On the lower part, you see the breakdown of our technical provision in gross values. In 1Q23, they amounted to R$13.7 billion. The reduction relative to December 2022 has to do with a higher volume in the payment of claims that can be seen in OCR. This provision reduced by R$903 million, which affected our operating cash.

We also had a reduction of PPNG include of the lower volume of underwritten premiums. The actuarial provisions trended in a different direction and had a growth in the last few periods. Robust provisions are necessary to face up to the risk of our portfolio.

On slide 11, we see the cost of acquisition of the Company, which in 1Q23 was R$233 million, a 20.5% reduction relative to 1Q22. If we exclude the effects of LPT, the commissioning index would be 21% in 1Q22 and 19% in 1Q23. The smaller share of this, which is the second biggest cost of the reinsurer is in line with the strategy to improve the combined ratio and on changes in the mix of segments.

On the lower part of the slide, you see SG&A in 1Q23, which amounted to R$88 million. Despite the effects of inflation on contracts in our staff and personnel costs, the nominal value remained flat relative to the last few quarters of 2022. The administrative expenses ratio was 7.3% in 1Q, and if we exclude the provision for the payment to DoJ and SEC, this would be 5.2%.

On slide 12, on the upper part, we see the changes in our financial assets. The portfolio amounted to R$8.6 billion in 1Q23, up R$400 million increase relative to 1Q22 and a reduction by the same amount relative to December 2022. This reduction relative to 4Q22 is in line with the comments that we made relating to our operational cash, that is it has to do with disbursements to pay for claims. Despite that, as we will see, this has not affected our regulatory sufficiency index and the coverage for technical provisions.

Now looking at the lower part in 1Q23, the financial result was positive by R$146 million. When we compare this with the last quarter, this remained practically flat. If we exclude the one-off effects of previous quarters, the trend is positive and consistent. In 2023, we had no nonrecurring events.

As I said before in previous presentations, the increase in the interest rate in Brazil and internationally, especially in America, contributed in an important manner to obtain those financial results. Also, once again, we have an ALM strategy and we need to provide guarantees to international operations.

And therefore, 43% of our financial assets are linked to other currencies and have profitabilities which are not linked to the CDI. We expect that the reduction of our businesses abroad should allow that assets in other geographies should migrate to Brazil.

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I now turn the floor over to Castillo.

Daniel Castillo:

Thank you, Toneto. I would like to make some comments about the changes in the combined ratio in 1Q23 relative to 1Q22.

On slide 12, in the upper part, you can see the changes in the combined ratio in 1Q23 with and without the effects of LPT, which was carried out in January 2022. There was a reduction in loss ratio and in commissioning. Expenses increased slightly in percentage terms. And although they are stable in absolute terms, the percentage increases because this rate is calculated relative to the earned premiums.

So the combined ratio went from 114% to 109%. On the lower part of the slide, you can see the amplified combined index, which includes financial results. In the quarter, this went from 106% to 97%.

I now turn the floor over to Thais, who's going to talk about the regulatory ratios.

Thais Ricarte Peters:

As you all know, SUSEP monitors 2 regulatory indicators which should be covered by the Company. The first has to do with the sufficiency of adjusted net worth relative to the minimum capital requirement, which is a bit different from the general concept of solvency. The second indicator assesses the coverage of technical provisions, that is the need for coverage with the guaranteed assets.

In terms of the first regulatory indicator, it was R$72 million in terms of sufficiency that is 105%. The indicators supported one-off events as the agreement with the DoJ. When we look at the total solvency of the Company, the indicator jumps up to 260%. In the quarter, you will see that the regulatory indicator was at the same level as 1Q22, but the general solvency of the Company went from 231% to 260%.

The second indicator assesses the amount of eligible assets according to SUSEP to pay for the actuarial commitment of IRB and that was positive throughout 1Q23. And at the end of the quarter, the sufficiency was of R$239 million.

The regulatory index considers R$7.2 billion in guaranteed assets, which is below the financial assets of the Company, which were R$8.6 billion in the period, a difference by R$1.4 billion. The Company's projections indicate that those indicators should remain within the regulatory standard requirements.

Marcos Falcão:

Thank you, Thais. I am going to end this presentation by telling you that we have been working with the Company by establishing clearer and more officious targets in order to give good results to the shareholders. In the first week of June, we are finally going to move to our new offices in Rio. We are going to leave the historic building in Marechal Camara to the Ventura building, in front of the Metropolitan Cathedral.

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