IRB Brasil Resseguros S A : 1Q24 Results Presentation Transcript

Conference Call Transcript

IRB(Re)

1Q24 Results

Operator:

Good morning, and thank you for standing by. Welcome to the video conference to disclose the 1Q24 results of IRB(Re).

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We inform you that this video conference is being recorded and will be made available on the Company's IR site, ri.irbre.com, where you will also be able to find the release material. You can download the presentation on the chat icon, including in English.

During the Company's presentation, all participants will be connected in listen-only mode. Later, we will begin the Q&A session. To ask questions, click on the icon Q&A on the lower part of your screen and write your question to join the queue. Once your name is announced, you will be asked to unmute your microphone. Questions should be asked all at once.

We would like to clarify that any forward-looking statement contained in this presentation and any statements that may be made during this video conference relating to the Company's business outlook projections, and financial and operational targets are based on beliefs and assumptions on the part of the Company's management and on information currently available.

Forward-looking statements are no guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operational factors may affect the future performance of IRB (Re), thus leading to results that differ materially from those expressed in such forward-looking statements.

Today with us are the following executives: Mr. Marcos Falcão, CEO, CFO and IRO; Mr. Daniel Castillo, VP of Reinsurance; Mrs. Thaís Peters, Chief of Internal Controls, Risks and Compliance; Mr. Paulo Valle, General Director of IRB Assets; Mr. Daniel Volpe, Director of Underwriting; Mr. Ronaldo Pinelli, Director of Contracts; and Mr. Lucas Mello, Director of Facultative.

I now turn the floor over to our CEO, Mr. Falcão, to start his presentation.

Marcos Falcão:

Good morning, everyone, and welcome to another results presentation for IRB(Re).

I would first like to start by expressing my heartfelt sympathy to all the population of Rio Grande do Sul and all the gaúchos all over the world who have suffered the impact of the flooding. To Pay claims is one of the main responsibilities of the insurance market, and, currently, we are in contact with our clients, and we are committed to analyzing payments in the fastest way possible.

Also, last Sunday, on the 12th of May, our colleague Willy Jordan, who was on medical leave, passed away. He fought a lot, but, unfortunately, he did not manage to survive that terrible illness. We are also expressing our deepest sympathies to his family and to all his friends.

Today, you will meet three new officers who are reporting to Castillo and will speak on the Company's operations. This is what we are doing to bring our businesses closer to you. You will be meeting Lucas Mello, Ronaldo Pinelli, and Daniel Volpe.

Going back to the presentation, on the first slide, you can see that we had an important and significant development during 1Q24, in line with what we have been saying since last year. In IFRS 4, which is SUSEP's methodology and our methodology as well to manage the Company, we had a net income of R$79 million in 1Q24, with a loss ratio of 58% and a combined rate of 99%. So, compared to 1Q23, we improved these three indicators.

We are also presenting the figures for IFRS 17 in this ITR, which is the methodology that we are complying with with CVM, totaling R$237 million, compared to losses of R$25 million in IFRS 17 in 1Q23. At the end of the presentation, we will provide certain highlights of the concepts of IFRS 17.

In addition to that, I would like to mention some other highlights that have been taking place since the beginning of the year. On April 3rd, IRB(Re) celebrated its 85th anniversary, which was marked by a history of leadership in the Brazilian market and also because it is a hub of originating businesses in Latin America. We have people who have the technical and financial capacity to enable us to be leaders in this sector.

At the same time as our anniversary, we were awarded the certification of a Great Place to Work. We are very happy that, in such a short time, we were able to recover our collaborators' self- esteem and their pride in working for us. We are already working for new leaders to come up. We have also been working on a cooperative and high-performance culture.

As already announced to the market, we have also anticipated the payment of the debentures of the third issuance. We paid the debentures and received the court-ordered payments. This is a subsequent event to the ITR. We had the payment of the debentures at the end of April and the receiving of the court-ordered payments on May 2nd, resulting in a balance of around R$170 million in cash.

Another highlight is that, since the beginning of January, we have been working to capacitate our team to improve risk management and make our models more sophisticated, bringing them in line with the best international practices. Our goal is to be able to allocate capital per line of business. We expect to achieve this by the end of the year.

Another point that everyone has been following is the coverage rate for the adjusted net income, totaling 69% of surplus. In June, we will disclose our first sustainability report based on 2023. Even with the fall in premiums in 2023, we still hold the title of the largest insurance company in the Brazilian market with a market share of 17%, which is the lowest number figure in IRB(Re).

In the next slide, you can see that, quarter on quarter, we have consistently evolved the net income and underwriting results. As I have mentioned in other calls, between months and quarters, there will be a certain volatility, but our trend is still positive and gradual.

When we look at the chart on the right, we see a trend that we have maintained consistency and discipline in the last 12 months. We can ensure that we are committed to the profitability of the business by controlling everything that we are able to control, such as pricing, expenses, and costs, making reserves with responsibility, and investing such reserves with adjusted risk.

Events such as the catastrophe in Rio Grande do Sul may slow the pace or even reverse this achievement in the short run, but we are willing to turn this trend on its head and build a significant strategy.

Now, I give the floor to Castillo to talk about the reinsurance strategy.

Daniel Castillo:

Thank you, Falcão.

Going back to the consequences of the Rio Grande do Sul flooding, our exposure is in housing insurance, state property, rural, car, and life insurance. I would like to make a comment on each. Housing usually covers damage to the building and excludes content. Residential does not usually cover flooding. In rural insurance, although 13% of our portfolio is concentrated in Rio Grande do Sul, when the water started rising, 75% of the harvest had already taken place.

It is in automobiles and vehicles that we see our greatest exposure in the area of insurance. We believe that we will also see claims for commercial and industrial risks. With regard to equipment insurance, we see an exhibition of the sector called RD Patios, which is the coverage of vehicles at car dealer dealerships.

Finally, there is no doubt that we will also have exposure to life insurance. Our underwriting teams and claims teams have been working, analyzing our contracts, contacting our clients, and trying to estimate our losses. In our opinion, unfortunately, the coverage of insurance will be very low compared to the economic loss.

Finally, at the same time insurance companies protect themselves through reinsurance, we reinsurers also protect ourselves for possible catastrophes. This protection is called retrocession. I would like to comment that our retrocession program is the most robust and one of the best ones that I have ever seen in a reinsurance Company. Therefore, we will not be impacted by our businesses' negative factors.

On the next slide, in our strategy of focusing businesses in Brazil, we can see that, in 1Q22 and 1Q23, international businesses were reduced from 28.2% to 27.4% and then 20.2% in 1Q24. At the same time, we can see that, in the same period in Brazil, we went from 62% to 74%. That is our strategy to be able to concentrate 70% of our business in Brazil, 20% in Latin America, and 10% on other international exposures.

Please note that our premium percentage in Latin America is very low because the renewal of these businesses will only take place in 3Q24 since most of the clients in Latin America renew their businesses on July 1st.

The reduction of premiums by R$200 million results from the reduction of premiums in international business. The premium in Brazil has remained constant.

When we made the change in the underwriting schedule, adopting international best practices, we separated optional reinsurances from contracted reinsurances.

The first type is the one that has an individual risk, which means we reinsure a certain industry, a building, an oil platform, or an aircraft. Each risk is analyzed and priced according to the exposure

and the amount contracted. The underwriters involved are specialized professionals in each one of these areas. We have civil engineers, mechanical engineers, oil engineers, and agro professionals.

On the other hand, contract reinsurance is the reinsurance of a portfolio of risks. This analysis is more complex and is made by professionals such as actuaries, mathematicians, and economists. When we divided the sectors, we appointed two officers: Lucas Mello and Ronaldo Pinelli.

I will now first give the floor to Ronaldo Pinelli so that he can comment on the contract businesses that took place in 1Q24, and, following that, Lucas Mello will talk about optional reinsurances. I would also like to say that our Technical Director will also have his comments to make.

Now, I give the floor to Ronaldo Pinelli.

Ronaldo Pinelli:

Thank you, Castillo.

It is a pleasure to be here to provide you with details on contracts, which are responsible for around 70% of the premiums issued by IRB(Re). The first quarter of the year is usually the most important for contracts, especially January, where we renew most of the largest global contracts. Since the beginning of 2024, our largest contract in Brazil in agro was also renewed on this date.

Before going into details on our portfolio, I would like to give you information on the global market, which also influences Brazil, according to the top right-hand corner of the slide. The movement of the market is "hard", which means more aggravated prices and conditions, which favors reassurance.

We also observed more stability in renewals in 2024 when compared to 2023. The increase in retention mitigated claims and contributed to better results, and, lastly, there was an increase in capacity for the market in general.

In 1Q24, automatic contracts remained stable. The automatic contracts represented around 79% of the premiums issued in 1Q24 versus 72% in 1Q23. On a total basis, we had 90% of the contracts renewed in 1Q24, whereas in 1Q23, the renewal rate was 87%.

Lastly, on the bottom right-hand corner, I would like to highlight the 50% renewal rate of the yearly premium in 1Q24, highlighting the displacement of our highest contract in agro from April to January, which increased our participation by ten percentage points.

We continued increasing our business in Brazil, and, in line with our strategy, we also continued the expansion to Latin America. We are also monitoring new opportunities in Europe to diversify our portfolio.

In this chart, we also show our underwriting discipline, focusing on results. In that sense, we declined more offers, which was 246 versus 164 compared with the same period last year. However, we achieved more contracts, 174 versus 157, consequently reducing the number of businesses in which we offered capacity but were not accepted by the clients due to our most profitable terms and conditions, which were 62 versus 78.

I would now like to give the floor to Lucas Mello, our Optional Reassurance Director.

Lucas Mello:

Thank you, Pinelli.

The underwriting of optional reinsurance by IRB represents today 30% of the volume of premiums of the Company and offers today the most comprehensive set to mitigate and transfer risks in the country, supporting the analysis of individual risks, the distribution of energy, great industries, infrastructure, and also oil and gas, where we are leaders in the market.

On this slide, you can see the income for optional reinsurance in 1Q24. We have shown that our defined strategy is being implemented, focusing on increasing and taking up the commercial agenda, better risk selection and pricing, achieving new businesses with new underwritings, and an increase in the participation of renewals where we were able to implement or keep our reference terms, which ensured profitability.

Compared to 1Q23, we ended 1Q24 growing by 6% points and achieving R$318 million in premiums, renewals, and news ones. The difference between the number of optional contracts in 1Q23 is because of three features of optional contracts that differ from automatic contracts.

The first feature is the seasonality. Optional contracts do not have as much concentration as automatic contracts do. Therefore, the renewals are more spread out throughout the year. As the second feature, there are issues with optional construction contracts where the risk is not renewed. Lastly, there is the third feature. The issue of optional contracts whose period is longer than 12 months usually causes a mismatch in the comparisons for the same periods.

Therefore, because of seasonality, we have R$112 million issued in 1Q23, which will be renewed in quarters after 1Q24.

On the right-hand side of the slide, you can see the evolution of our distribution of the total issued premium of optional contracts per line of business, which has not been unaltered, being the patrimonial and oil and gas risks the most representative for the IRB(Re) portfolio, which is in line with our diversification strategy.

I now give the floor to Daniel Volpe.

Daniel Volpe:

Thank you, Lucas. Hello, everyone.

I am responsible for the pricing, retrocession, and business intelligence parts of the Company. Today, I would like to talk about the retrocession expenses and the quality of our partners.

The retrocession expenses are divided into two big groups. The first one, which corresponds to 14% of expenses, or R$360 million in the last 12 months, is the expense associated with the protection of the Company's risks. This operation has the goal of protecting the assets and the results of the Company against significant claims, whether they take place because of one single risk or because of events that affect several risks at the same time, as is the case in Rio Grande do Sul.

The second, which corresponds to 86% of the expenses, or R$2.2 billion in the last 12 months,

corresponds to retrocessions that we have with strategic partners. In these operations, IRB(Re) keeps part of the risk and retrocedes the remaining, usually for groups abroad.

Concerning the expenses to protect IRB(Re) from the retained risks, on the right-hand side of the slide, we can see that the Company has a policy of working with sound partners. These partners usually have ratings over A on a global scale. This selection of partners also brings us safety in protecting our portfolio.

I now give the floor to Daniel Castillo for his comments on claims.

Thank you all.

Daniel Castillo:

Thank you, Volpe.

There is no doubt that, in our activity, the loss ratio is an extremely relevant factor to allow us to achieve the expected results. On this slide, you can see a reduction in the loss ratio from 124% in 2022 to 58% in 1Q24. Remember that, for a reinsurance company, the loss ratio results from the contracts signed in previous periods, and it depends essentially on risk assessment at the moment that these risks are presented and also on appropriate pricing.

On the lower part of the slide, you see the breakdown of the loss ratio by geography, where you see that, in Brazil, there was a slight deterioration. The loss ratio abroad was reduced by 33 percentage points. Do not forget that our business is subject to volatility, and it would be a mistake to look at one quarter only. We have to look at the trends presented on the upper part of the graph.

On the next slide, on the left-hand side, you can see the evolution of the combined ratio, which was down by 12 percentage points in 1Q24. The combined index is the index that demonstrates the healthiness of the underwriting and has the effect of previous years. The reduction to levels lower than 100% tells us that we are on the right path.

On the right-hand side of the slide, you see the components of the combined index, which are loss ratio and commissioning. You can also see, separately, life and no life. You can see that, in our life portfolio, there has been more volatility because of the commissioning of a major account, which we have not renewed but which is suffering because of the tail effect. The PNC, or no life, is more stable.

I now turn the floor over to Falcão for the analysis of provisions and expenses.

Marcos Falcão:

Thank you, Daniel.

On the next slide, we present the SG&A. I would like to ask you to have a look at the right-hand side of the graph, which shows the administrative expenses with a bit of breakdown.

The account I would like you to look at is the following: compare the expenses of 1Q24 and deduct depreciation. The comparison I would like to show is R$64 million without depreciation of 1Q23 against R$77 million. Therefore, the discretionary expenses of the Company were reduced by

R$13 million.

On the next slide, you see again the evolution of the claims provisions, IBNR and PSL, in relation to the earned premium. Here, you see the same trend. We have been very prudent and disciplined in managing reserves and provisions. You see that they have changed in line with the earned premiums, and there is a greater percentage than we had been presenting before. This trend started after 2020.

On the next slide, we present a new concept that we are now going to report here. Our float, which is cash and financial investments discounting adjusted net worth, was R$6.3 billion in March 2024, down from the R$7 billion achieved in March 2023, but in line with the reduction in the volume of retained earnings.

Here, we use the concept of float in the sense that the financial market uses, which is the concept of money from third parties that we retain to cover any losses. This is a very important part of our business.

On the graph, you can see the cash position ever since 2020 and its stabilization, in line with the movement of premiums. It is very important to see that this trend has been reversed from what we saw before, between 2015 and 2020. So, in 2020, we started to reverse this trend, and it is now stabilized.

I now turn the floor over to Paulo Valle, who invests our assets.

Paulo Valle:

Thank you, Falcão. Good morning to all.

At the end of 1Q24, the financial result was R$142 million, which is above the R$125 million reached in 4Q23 and slightly lower than the R$145.5 million of 1Q23, despite the lower levels of CDI, which was 11.35% against the 13.75% of 4Q23, and also the smaller volume of assets under management, which was R$8 billion against the $8.3 billion of 4Q23.

We obtained good results in the portfolio, especially in multi-markets and credits with banks. We want to continue to have these favorable results considering the higher level of interest rates by year-end, given the change in the interest rate scenario in the US and Brazil. In terms of final Selic, we went from 9.25% to 10.25% at the end of 2024.

On this slide, you can see the breakout of our assets, which, currently, is 60% onshore, which means investments in the domestic market, and 40% offshore, which means investments abroad. Of these 60% invested in Brazil, 34.8% are post-fixed bonds, which are Selic linked or committed operations; 16.8% are linked to inflation, which are used for the hedging of all the debentures; and 7.3% are in private credit, which are linked to CDI plus and inflation.

In terms of the 40% that are held offshore, 15.3% are Brazilian Treasury bonds, 14.5% are Canadian and US bonds, and 9.2% are time deposits and deposit certificates in different currencies to hedge our FX exposure.

The Company's policy is to be hedged in terms of foreign exchange. In other words, we do not speculate in dollars or in any other currency. The allocation of funds is exclusively to pay out the commitments we have to pay according to the technical provisions and is also indexed according

to currencies.

On the next slide, you see the profitability of our assets. In the onshore portfolio, we have two parts. The first one is where we actively manage the funds, with 74% of the onshore portfolio and a profitability of 102% of the CDI.

The second one is the part of the portfolio that we manage passively, which is used to manage our assets and liabilities. This is 26% of the portfolio and includes assets linked to inflation for the hedging of the debentures. Currently, this portfolio has a profitability of 68% of the CDI, once the coupon plus inflation did not reach the CDI of the period.

In terms of offshore, which also serves for hedging, the profitability of the assets is close to 4% a year.

I now turn the floor to Thaís Peters.

Thaís Peters:

Thank you, Paulo. Good morning to all.

It is a pleasure to be here again to talk about regulatory ratios and capital management.

First of all, we are going to talk about adjusted net income sufficiency relative to the minimum capital requirements. According to the left-hand side graph, you see that this ratio reached R$697 million, which is an increase of 30.5% relative to the end of last year. This means a sufficiency of 169%. This result has to do with the lower minimum capital required.

In comparison with 1Q23, the reduction in capital requirements totaled R$572 million. This reduction had to do with the minimum capital required for the risk of underwriting, especially in view of the decrease in retained losses in rural and in our international exposure. All the other parts of the capital requirements remained flat during the period.

On the next slide, we see the second regulatory indicator, which assesses the amount of assets qualified by SUSEP to meet our actuarial commitments. The indicator for coverage of technical positions, at the end of 1Q24, had a sufficiency ratio of R$370 million. The drop in the ratio had to do with the cash flow in the Company, which is very seasonal in the first quarter. Going forward, the receipt of court-ordered payments will have a positive impact on this indicator.

I now turn the floor over to Falcão, who is going to talk about our results considering IFRS 17.

Marcos Falcão:

Thank you, Thaís.

On this slide, I will make some comments about our results on IFRS 17. According to this methodology, in 1Q24, the net income was R$236.8 million, compared to a loss of R$24.6 million in 1Q23. The main effects were the drop in the loss ratio, the drop in the revenue of reinsurance in view of the smaller volume of issued premiums, and an increase in the financial results of reinsurance, which are not the investment results.

It is worth remembering that, in IFRS 17, the financial results of reinsurance are the financial

results of operational accounts and not investment accounts.

Therefore, we had an increase in the financial results of reinsurance because of the variation in discount rates and a lengthening of the payment curve for those losses that had been provisioned. When this happens, we have better financial results from operations. However, I have to remind you that the Company is managed based on IFRS 4, which is the one adopted by SUSEP.

On the next slide, to wrap up our presentation, I would like to make some comments.

The first one is about the protection gap. The event in Rio Grande do Sul is going to give rise to a lot of thinking. Unfortunately, Brazilian society is not protected enough, and we have to think hard about that. The insurance market has to grow to protect society's assets. I am very concerned because the economic losses in Rio Grande do Sul are going to be substantial and the percentage of protection is going to be insignificant.

Therefore, we came to the conclusion that the insurance market is not protecting society. We have to get together with the regulatory authority, the authorities, and the market, and we have to change the culture of insurance to be able to protect our society. We want to have a major role in this discussion, and we are here to discuss this with anybody who is interested.

Lastly, I would like to show you our new events. Some of them are part of our IR schedule, and others are from the underwriting operation. We have, for example, the annual renewal of contracts.

We continue our high-performance training for a new group of 120 associates. This is under our new guidelines, which have staff development as one of their pillars. We are also going to start the process of budgeting for 2025 in July.

With this, we open the Q&A session.

Thank you very much.

Gabriel Gusan, Citi:

Hello, everyone. Good morning.

I have two questions. The first one is just to clarify. I do not know if you did show the range of impact figures for Rio Grande do Sul, because I was late. I have just seen some of the news, and I am not sure if you have released figures or if these are just estimates made by journalists.

My second question is concerning the coverage for provisions. We have seen a better sufficiency of capital with better figures now. However, we do not see the same for provisions. They are still on the side, even with some improvements. I believe there are more variables, as, for example, if you issue more debt and allocate this to assets, you may have higher coverage.

I would like to understand what we can expect in terms of the development of the coverage for provisions and if it is the most significant obstacle at this moment.

Marcos Falcão:

Hello, Gabriel. Thank you for your question.

In terms of the Rio Grande do Sul's impact, we still lack information because everything is very recent. We do not have any notice of claim. We are very well protected by the retrocessions, and we also have reserves. We have made some scenarios, and we are working internally between net reserves and retro between R$80 million and R$160 million.

I believe we will be updating these figures because this is something that we should expect over time. These claims related to catastrophes usually last for some time, and we will be refining these figures.

Obviously, this rate is still very wide, and we need to narrow it a bit. As we receive information, we will be preparing ourselves to take on our responsibility to pay the claim as quickly as possible. With that intent, we have set up an operation to assess and analyze claims very quickly so that we can enable the insurance chain to work well.

We are also close to our retrocession companies. With the information flow of taking and giving them information, we have this chain of the distribution of risks that makes the market of reinsurance interconnected and work well. In short, that is the first part, Gabriel. I believe that this rate will be updated when we have more precise information about it.

Your second point was on net regulation figures. Of course, it is not as wide. We believe that, with the Company's net income showing the results that we had in the quarter and with this trend in the next quarters, we will be generating more cash and increasing this net income in terms of the regulator.

And there is a reinforcement coming, which is the court-ordered payments, and, coincidentally, it looks like it is coincident with the rates of the loss we presented. The impact of these payments is something that is subsequent, and we have already communicated that to the market.

We paid the debentures for the third issuance at the end of April, and they are not here yet because this was in 2Q24. We received the court-ordered payments on May 2nd, and this accounts for approximately R$180 million. This will go into cash and will be added to the net income rate for the regulators.

This figure is an indicator that does not take into account the ALM, which is a liquidity rate that is not common in several parts of the world, especially not in catastrophic reinsurance. Now, after this catastrophe, we have this market that looks more like a foreign one in Brazil. I believe there will be several takeaways in terms of how to look at the market and new discussions, not only on the correct indicators but other questions of the market as well.

Kaio da Prato, UBS:

Good morning, everyone. Good morning, Falcão. Thank you for the opportunity.

I have two questions. As the other officers are here, in my first question, I would like to address the contract renewal that you have done. In the presentation, you mentioned there was an increase of 10% in the participation on contracts of the largest client in agro. I would like to understand more about this.

What is this result from? Is this because of a change in the risk appetite, or because the player accepted a higher price for the reason that you are now focused on profitability, or maybe because