IRB Brasil Resseguros SA

BOVESPA:IRBR3

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the earnings review call IRB Brasil RE for the accurate figures of 2021 and Q3 of '21. Today's conference call includes Mr. Raphael De Carvalho, company's CEO; Wilson Toneto, COO; Willy Jordan, CFO and IRO; Mr. Carlos André Barreiros, General Counsel for Risk and Compliance Officer; and Mr. [ Daniel Vega ], VP for Damages, Liabilities and Special Risks. We would like to inform you that this conference call is being recorded [Operator Instructions].

The presentation was put together by IRB Brasil RE and should not be taken as a source of investment data. This presentation may contain certain forward-looking statements and information relating to the company that reflect the current views and/or expectations of the company and its management with regards to its performance, businesses and future events. Forward-looking statements include, without any limitations, any statements that may contain forecast, indication or estimates and projections about future results, performance or objectives, as well as words such as we believe, anticipate, expect, estimate, forecast, among other words with similar meanings.

These forward-looking statements, they are subject to risks, uncertainties and future events. We advise investors that several important factors may cause the actual results to differ materially from the plans, from the objectives, expectations, projections and intentions expressed in this presentation.

Under no circumstances, neither the company nor its subsidiaries, directors, Board members, officers, agents or employees shall be liable to third parties, including investors, for any investment decisions that were based on the information and statements contained in this presentation or for any specific or general damages arising therefrom. Market and competitive position information, including market forecasts that were alluded to throughout this presentation were obtained through internal surveys, market research, public domain information and corporate publications. References to continued operations, one-to-one, one-off operations and runoff effects will be presented in the managerial format. The unaudited businesses are going to be presented here for the best management purposes.

Mr. Raphael de Carvalho, CEO, will start with his presentation.

[Raphael Afonso De Carvalho, executive]

Good morning. Thank you all, and welcome those of you who are attending this conference, and thank you very much for your interest in this follow-up. And despite in the introduction, some of the people have been mentioned here, I'd like to reinforce here that we have some new names in the leadership of this organization.

Just to my side, we have Toneto and Guerra, who are well-known to you from other calls, but we have a couple of new names. Starting by myself, myself, Raphael Carvalho, taking the CEO position since the beginning of October. And we also have our Investor Relations and CFO, Willy Jordan, who's also recently joined our team in mid-October. And I also would like to remind you something that was shared about a couple of weeks ago about a reorganization that we did here in our business area.

We basically split the old structure that was called Reinsurance, VP in 2 business units that reply directly to me. And I will get into the details towards the end of this presentation, but that basically talks a lot about the executive strategy and the leverage advantages. The first one is the Life department that I actually would like to announce that it will be occupied by [ Ronald Ghafat ]. [ Ronald ] is a very experienced businessperson in insurance and reinsurance, life specifically, both in Brazil and Latin America, and he will take this position next Wednesday and he's head of one of the largest life reassurance companies of the world.

And the other structure, as it was mentioned in the beginning of the presentation, is a VP, also reporting to me of Damages, Liabilities and Special Risks. And to this, we elected [ Daniel Vega ], who's got 20 years' career, has been through basically all our business units, is a specialist in underwriting, and even more important than that, he knows our clients' portfolio deeply.

And having said that, now I'd like to invite Willy to share our earnings with you.

[Willy Otto Neto, executive]

Thank you, Raphael. Good morning, everyone. It's a great pleasure for me to take part for the very first time in the earnings results call of the IRB. And starting with Slide #3, we had in the -- for the fifth quarter -- consecutive quarter, a positive cash generation with an accurate amount of BRL 1.5 billion over the last 9 months. And even if we disregard the nonoperating events such as the court settlement that was received from Eletronorte in the first quarter and the payments received from the subsidiaries, we generated positive operating cash of BRL 1.1 billion in 2021. And we should also highlight that the cash generation and results should converge in the long run.

In the past, IRB used to give positive results but was burning cash. And after the restructuring, we paid those -- that with accounting results, which are still negative, but our cash generation follow-up indicates that we are on the right track. Another important information is that from the recurrent figures when we exclude the discontinued businesses and the recurring expenses, we've had a net profit in the first 9 months of 2021, of BRL 670 million higher than last year. And going from a recurrent loss of BRL 568 million in the first 9 months of 2021 for a recurring net income of BRL 102 million in 2021. And this certain extent also demonstrates that if we look at the long run, the remaining contracts and the run-on have already started to show a much better performance, again, showing that we are on the right track.

Now going towards Slide #4, we would like to present you with the net income for the accurate figures of the 2021 showing the impacts of the discontinued -- of the runoff and nonrecurring one-off effects. And as I mentioned, we've had BRL 102 million in the one-off and discontinued business. The effect of the tail of the discontinued contracts was BRL 539 million, partially offset by the one-off discontinued event.

Following slide demonstrates basically the same impacts on the third quarter, where the recurring net profit was BRL 44.5 million. And we've also observed in the third quarter a very important influence of the tail of the discontinued claims. And from the [ BRL 156 million ] losses, the impact was BRL 330 million, precisely because of the additional provisioning of BRL 129 million in the life segment abroad. On the other hand, we had one-off gains referring to PIS/PASEP in August with a very positive effect of BRL 129 million in the net profit of the quarter.

On Slide 6, we'd like to illustrate again the effects of the tail of the large discontinued contracts. The tail of the runoff contracts have had a diluted impact throughout the time. And we will have gradually lower importance in face of the businesses that were renewed and the new businesses, the new deals. And the impacts of the underwriting companies of the runoff businesses were negative in BRL 753 million in 2020, and BRL 538 million in the year-on-year until September 2021.

And as you can see from the image, this impact came from 4 contracts that were terminated in July 2020. And for 2021, this impact of BRL 538 million came after aside to these 4 contracts another 13 contracts that were also terminated in April and July. So when we look at the bottom of the slide, this image illustrates very well the behavior of this tail. So in 2020, the 4 contracts have generated BRL 753 million of impact in the underwriting results. And this impact in the 9 first months of 2021 went down to BRL 316 million, so less than half, and we have BRL 221 million additional that were due to those 13 discontinued contracts in 2021.

Likewise, we can expect that the effect of this tail will still be felt in the coming quarters. However, we hope that they will become less representative over the years of 2022 and 2023. It is also important to highlight that although the impact of the one-off contracts will gradually fall with time, our activities is subject by its own nature to oscillating results.

So in short of observational periods that as we saw in this last quarter, we saw that we might have punctual deviations of this trajectory.

Moving on to the next slide. We see what happened with the premiums in the company. Although the written premium has fallen by 10.9% in the first 9 months of this year as compared with 2020, I would like to highlight that in the domestic market, there was a growth by 5.8%, which reflects our strategy of prioritizing our local market. As a consequence, production in Brazil accounted for 61% of the total relative to half last year.

Many of the discontinued contracts were international, and they were canceled or reduced due to their low profitability. As regards retrocession premium in Q3 2021 and in the 9 months of 2021, there was a reduction in retrocession expenses as compared with 2020. This happened because the basis of comparison of 2020 included an exceptionally high volume of retrocessions because of the reduction of the exposure to foreign risk and also due to the need to adapt the company to regulatory limits.

In Q3 2020, we held LPT operations, loss portfolio transfer operations, which alone increased the retrocession ratio that quarter by 15 percentage points. As a consequence of the lower retrocession, the earned premium has been gradually increasing relative to previous periods in the quarter and the accumulated for the year.

Moving on to Slide 8. The commission ratio fell from 24.7% in Q3 2020 to 19.7% in Q3 '21, reflecting the renegotiation of contracts at more appropriate levels. Administrative expenses, once we exclude the nonrecurring effects of the payment of fines relative to PIS/COFINS provisions for labor lawsuits and payment of indemnification, the administrative expenses remained flat at 5%.

On Slide 9, we see an improvement in the loss ratio during the 9 first months of 2021. The recurring ratio fell 7 percentage points and went from 92.1% in 2020 to 85.6% on the accumulated to September. Also, looking at the recurrences, but looking for Q3, we saw claims, especially in properties, especially risks and aviation, where the loss ratio was in line with the insurance and reinsurance market, which had a lower performance generally speaking.

Also in Q3 2020, we had LPT operations, which contributed further to the reduction of the loss ratio in the period. Our combined ratio also showed an improvement in 9 months. And looking at the graph, the combined ratio on a recurrent basis was 118%, a 2-point percentage points improvement relative to last year. Quarter-on-quarter, the ratio was impacted by the effects mentioned on loss ratio, which is the main component of this indicator.

And looking at Slide 10, we are going to talk about solvency relative to regulatory requirements. The solvency is appropriate at 142%. When we look at regulatory solvency, which considers adjusted net worth, if we look at the total net worth, which is what is used in other markets, our solvency goes to 264% of the minimum required capital. The difference between the 2 indicators has to do with our tax credits, which are excluded in the adjusted net worth calculation. The decrease in the solvency indicators and the sufficiency of coverage implies an increase in technical provisions during the long tail. But as new contracts come onstream, the tail effect is going to be minimized.

On the lower part of the slide, you see how we calculate the minimum capital requirement. We demonstrate its breakdown, its composition, which considers risk capital for subscription, credit operation and market.

On Slide 11, we show the sufficiency of our coverage for technical provisions. On the lower part, you see that at the end of September, technical provisions were BRL 15.8 billion as compared to the volume of eligible assets for collateral, which was BRL 16.2 billion. That is, we have a surplus of BRL 347.4 million.

If we include the safety margin, the regulatory safety margin which is 20% on the risk capital, which is BRL 304 million, we are still sufficient from a regulatory point of view. As we informed last quarter, on July this year, the regulatory agency has established criteria, which will contribute to the increase in our sufficiency, especially the change in the safety margin of 20%, and this is going to be effective in January 2022.

On Slide 12, you have our cash position and investments, and this position is now stronger, having reached BRL 10 billion. The growth in the period has to do with the actions taken in 2020, such as increasing capital stock, debenture issuing, LPT operations and sale of assets, and of course, the greater operating cash generation in the last 5 quarters.

As regards to the financial results, the growth in the quarter ended the 9 first months of 2021 has to do with a greater balance of investments, the increase in the Selic basic rate and also the monetary updating of the recovered PIS/PASEP tax. Quarter-on-quarter, the drop in financial results is explained because of the interests paid on debentures in Q3 2021, which did not exist in 2020.

I'll now turn the floor over to Raphael for his final remarks.

[Raphael Afonso De Carvalho, executive]

Thank you, Willy. In the beginning, I said that I have been in the company for 40 days, I would like to share with you how I used these 40 days. I concentrated most of my energy in reviewing the strategic planning and focusing on the future. Obviously, without putting a lot of energy in getting to know the organization and thinking also about the short term, if I had to summarize our vision for the future, I would say that we have to resume growth with profitability. This is our motto, our objective, and this is our mandate, the mandate of the company's management.

How do we intend to do that? First of all, we are going to explore and tap the competitive advantages of our company. Our main competitive advantages are: first, IRB has a deep knowledge of the local market. One of our board members likes to say that nothing relevant happened in Brazil in the last 80 years that required protection and that could do out -- could do away with [ IBR RE ], with [ I-B-R RE ]. So this is with us. We see that in the data, in the statistics in the actuarial experience that we have, we are uniquely positioned to make all of this available to our clients.

A second point, and that's where I'm going to stop. We believe that our ability to serve our clients in Brazil is unique. Our ability because of the size of our balance sheet, of our book in the country and the size of the team, the degree of specialism and the volume of business that we make available to our customers and commercial partners. IBR is a Brazilian company. We make decisions here, and we are able to serve and understand better the needs of our clients.

In order to do that, we have implemented initiatives under our strategic plan. And we have 3 major strengths. We are going to focus on greater efficiency in business, has to do with underwriting, process improvement, especially when claims happen. And when clients exchange data with us, and we have efficiency in capital where we allocate capital, and we can focus on those areas where we can make a difference and less energy in those areas where we don't make so much of a difference.

And then we are going to focus on cultural transformation, and this is going to happen on 2 pillars: the first one is a total focus and decision-making, thinking primarily of our clients; and then, innovation, that's the second pillar.

We know the local market, and we have the ability to craft solutions that our competitors don't have. So speaking of our initiatives, our competitive advantages makes clear where we are going to focus our energies to resume growth with profitability. We are going to focus on Brazil. And just to give you some numbers, Brazil has to account for 2/3 of our operation -- from 2/3 to 3/4 of our operations. We have been doing work to that end, and we are going to do even more to acquire new clients and to sell more to current clients.

And to extend, this area of differentiation of IBR, we are going to focus on Latin America, focusing on some countries and especially on those areas where we are strong in Brazil. This means that we are not going to leave other geographies, but we are going to be more selective. And we are going to get in those areas where our tax structure and our cost structure can be used to our advantage, and especially when we can earn business that is complementary to what we do in Brazil and in Latin America.

So this is how I summarize our vision for the future. Again, this is where I focused most of my energy in these 40 days, and this is where the organization is going.

And now I would like to open for the analysts to ask their questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Daniel Vaz from Credit Suisse.

[Daniel Vaz, analyst]

My question has to do with the announcement you made relating to the division, the new Vice President for Reinsurance. You will have Life, Damage and Special Risks and Liabilities. You have announced Mr. [ Ronald Ghafat ] to head Life and [ Daniel Vega ] to head Damages, Liabilities and Special Risks. So what is your idea in terms of having this new structure in place? Can you give us some more color about the objective of having these 2 executives who are very experienced working in the company in this way? What value is going to be added? And what contribution can they make?

[Raphael Afonso De Carvalho, executive]

This is Raphael speaking. So the very first reason really for us, I hope you got it right. I mean really 2 units, one for Life and the other one for Damages, Liability and Special Risks. So both of them are reporting to me. So yes, you did get right. I mean what is the precipitous reason for why would I split the business like this, so that we could be more customer-centric with the specific knowledge for each one of those units. Those are units where we have different weights and different relevances within our organization. And the Damage was considerably larger than the Life today. However, we firmly believe that the Life market has a huge growth potential, not only in the country but throughout Latin America as a whole. So one of the reasons for us to do this breakdown was to better embrace this opportunity. It also reflects how our clients are organized. A major part of our clients are organized like this. So that basically improves our remediation capacity to what our clients are used to.

And last but not least, it also allows us to get closer to our underwriters, to our business units and to our clients, ultimately. So when we split this into 2 units, the level of expertise and specialization -- and it is also very important, and this is something that we can simply forego when thinking of the business as a whole.

[Operator]

[Operator Instructions] We now would like to close our Q&A session, and I would like to hand the floor over to the company for the final remarks.

[Raphael Afonso De Carvalho, executive]

Well, thank you very much for the questions and for the interest. And I would like to reinforce our future vision, which is to resume growth with profitability and we have to be as profitable as robust and looking ahead very optimistically towards the future of this organization. Thank you very much once again.

[Operator]

We would now like to close this IRB Brasil RE call. Thank you for your participation. Have a nice day.

[Statements in English on this transcript were

spoken by an interpreter present on the live call.]