IRB Brasil Resseguros S A : 1Q22 Results Presentation Transcript

Conference Call Transcript

IRB Brasil

1Q22 Results

Operator:

1. 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 would 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 subjected 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. Not only the Company, its subsidiaries, directors, managers or employees will be held liable by third parties, including investors, by any investment decisions made during this presentation or for any related damage.

Market and competitive position information, including market projections mentioned during these presentations were obtained through internal surveys, market surveys, public domain information and business publications.

Mr. Raphael de Carvalho will start his presentation now.

Raphael de Carvalho:

Good morning, and welcome to our 1Q22 results. I would like to start somewhat differently. I 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.

Let me now start with the results presentation. I would like to give you an overview of the quarter. It is on page two. We have had substantial improvement of almost 60%. It is even better when we compare it to 1Q21. These improvements have taken place to dramatic times during the pandemic. I will be giving you further detail during the presentation.

These uncommon results have impacted us. We have had R$150 million positives from lawsuits. Premiums were up 3.9% when compared to the same period of last year. Improvements in Brazil 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 for 62% and 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 were 97%, with claims ratio and sales expenses along the lines of 1Q21. When we normalize these one-off effects about the weather and the pandemic that hit us in 13

p.p., the expanded or the combined ratio was 83%, way better than those of last year. I will give you more detailed information during the call.

We have had robust financial results of almost R$160 million. Even when we discount that one- off R$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 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 four, premiums. This 1Q, premiums written were up almost 4%, a little over R$2 billion, when compared to R$1.93 billion in the same period last year. R$1,04 billion domestically, 19% above the same period of last year, thanks to equity, life and agricultural segments.

Internationally, R$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 is important to dilute risk, I just would like to mention that.

On the top right corner, you see information on retrocession. Expenses were R$607 million, the rate was 30%. Let me remind you that we had an LPT, and when we discount this LPT effect, these premiums were R$388 million, and the retrocession would be 19%, showing that we had retained premiums at a higher volume, R$1.15 billion. When we discount the LPT effect, R$1.37 billion, and they were concentrated domestically.

On to the next slide, I will ask Toneto to discuss the cost of admin expenses.

Wilson Toneto:

Thank you, Raphael. Good morning, ladies and gentlemen. In order to find ourselves, we are on slide five. And if you check the graph to the left, the trading costs and the commissioning index calculated over the premiums, and if we check the amounts that were recorded in March 2022, they were R$293 million, and that was the lowest observed in the last five quarters.

And the commissioning rates, if we check the points above, if compared to the last two quarters, at first seems reasonably high, in 27.5% and 35.5% respectively. But as Raphael said himself, because of the LPT effects and exclusions, then those rates are substantially reduced to 22% and 21% in the 4Q21 than 1Q22, 1 p.p. lower than the previous quarter. And that is obviously positive to our operational results.

On the graph to the right and checking on the admin expenses, the rates have been calculated with the form prices with and without the LPT, just as the commissioning expenses. So this is obtained excluding the LPT as well, we are deducting it.

So the admin expenses, which are subject to management, are reflected on the green line and in the yellow dots, and they range around 5% of premiums during this quarter. So a pretty stable level if compared, and it was R$20 million lower than the 4Q21. And I remember well that in that year we have reported some nonrecurring expenses.

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 quarter, for exceptional reasons, we have had a negative tax basis, and we obviously had negative results there.

If I could ask you to, please, move to slide six, we will now check the quarter progression of the main costs of the Company, which are our claims. You can see that the nominal amount of claims reported in this quarter has reached R$933 million, which is also the lowest if compared to the five previous periods.

The 81% claims ratio initially confirms the seasonal reduction that was observed in this 1Q. However, if we observe it year on year, 1Q21, that very first index there, 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 atypical 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 production years. This is an important information that confirms our previous forecasts. So we do not really have major effects of claims that were inherited from previous contracts to 2020.

Let us now move to slide seven, and I would like to, with your permission, start by explaining from the conceptual perspective how it is that we register and report the rural insurance in IRB. I think it is important for us to deeply understand how this product works.

We are observing here two fiscal years: 2021 to the left and present year to the right. It basically says that during the year of 2021, we have underwritten contracts that were contemplating both winter and summer crops. So half of the sales were for summer crops, and the other for the winter crops.

Those contracts transcend the fiscal year of 2021, and most of them end in the year of 2022. And likewise, those contracts, they got part of our 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 started before and are being renewed. So those contracts that were standing before, they might bring results to the impact of 2022 and 2023.

So it is an interesting dynamic, and the conclusion is that, during the fiscal year of 2022, we will see effects of contracts that were caught in 2021, and also the effects of contracts of this year itself.

It is good to remember that the renewals in 2022 have been 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. All of that should contribute to results 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 is important for us to start and pay attention to the climate conditions. Climate conditions, we could work as part of them in 2021, but part of them also happened in 2022, and therefore they are reflected in this 1Q22.

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 atypically, much more intensely than usual.

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, historically speaking. And if we check the state of Paraná, this was the worst, and in Rio Grande do Sul, the events hit basically the whole state. This was the worst drought in the last 70 years. We had heat waves and more than 300 municipalities that have defeated states of emergency due to the drought. So, the IRB results have been affected partly in the 4Q21 and the 1Q22.

And in terms of the performance reports, you can see that the claims ratio, if we want to compare the 1Q21, insurance was 73%. And this quarter, if we check year on year, the adjustment was pretty relevant and has reached 72%.

I also would like to give you an important example here, which is obviously the insurance part. We are insured against catastrophes, and reinsurers themselves have their own mechanisms, and this is usually hired at the international market. So in the case of the agribusiness in particular, we have this step up which is limiting the losses for the Company to specifically claims ratios. 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.

All those aspects considered, diversity, different conditions, contract basis, different protections, extrapolating the losses in the insurance market without checking, or without taking all those details into account, might lead to inadequate conclusions. So this is a good caveat for us to start with.

It is also important for us to consider that during this 1Q, considering all the geographic spread and an extension, and considering our portfolio of insurances, our Company has 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 we do the accountability for the 1Q, then we might be able to adjust our forecasts.

Based on everything that was said above, we obviously cannot disconsider the volatility of the agri because of the 2Q effects. We understand that such potential volatilities can be compensated by the results coming from the contract renewals that we also mentioned.

So now, let us move to slide number eight, 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 eight, 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, this is no different. And we can see here some important figures impacting the Company.

Since March 2020 to 2022, we have recorded R$232 million of impacts in our results, largely caused by covid 19. That impact was observed in many different portfolios, but in particular to the life and personal insurance, as you can see.

And as we mentioned, since 2021, IRB started to offer covid 19 coverage to our clients, with the specific pricing for the life portfolio. And such coverages accounted for almost R$64 million in 1Q22, basically derived from the omicron.

It is important to highlight that those coverages will result in additional income to IRB, not only this year, but in the coming years as well. And except for any other incoming adverse conditions, we hope that the claims ratio is going down during the next semesters.

Now moving to slide nine, I would like to report in a summarized manner the progression of the amplified combined index. As Raphael said, that contemplates financial results as well. In 1Q22, that index was presented to you in 97%, in the graph that you can see on the screen, and in the previous years, we can see an important cooling of the market. We can see that if we compare this to 1Q21, we can see a slightly lower result. It is 94% against 97%.

It is important to say that for a good comparison, we need to, number one, deduct the LPT. And