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Good morning, everyone, and welcome to IRB-Brasil's RE First Quarter 2023 Results Presentation. Present at today's conference call are Mr. Marcos Falcao, 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. [Operator Instructions] 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. Falcao, the CEO of IRB will now begin the presentation.
Hey, 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 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 are working with a base 0 budget, which means that we're 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. This will mean that we will have an enhancement of our return [Audio Gap] Loss ratio reduced from 81% to 77%, commissioning from 25% to 19%. And the expenses rose from 12% to 14%. Because the ratio of expenses is calculated with a view to the premium, the percentage increases. Within 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 BRL 765 million to BRL 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 don't want to keep those businesses, because we were not being appropriately remunerated for the exposure. 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 proceeded premiums and we are -- retained premiums. We are retaining more. As we underwrite more risk of better quality, we are also retain 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 first quarter of '23, 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.
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 from the process of assessing risks as they are presented and of appropriate pricing. Therefore, it is more important to analyze the trend of the index 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 '22 had an impact coming from the catastrophe of agri business in Brazil. When we compare Q1 2022 to '23, we see that the volume of retained claims is flat and is BRL 933 million. Above the bars, you see the loss ratios with and without the effects of LPT. In Q1 2023, the index 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 agri business 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 ratio during this fiscal year. 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 PSL. 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 position -- provision, sorry, in growth values. In Q1 2023, they amounted to BRL 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 PSL. This provision reduced by BRL 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 Q1 2023 was BRL 233 million, a 20.5% reduction relative to Q1 2022. If we exclude the effects of LPT, the commissioning index would be 21% in Q1 2022 and 19% in Q1 2023. The smaller share of this, which is the second biggest cost of the reinsurer is in line with the strategy to improve the combined index and on changes in the mix of segments. On the lower part of the slide, you see SG&A in Q1 2023, which amounted to BRL 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 Q1, and this excludes the -- 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 BRL 8.6 billion in Q1 2023, up BRL 400 million increase relative to Q1 2022 and a reduction by the same amount relative to December 2022. This reduction relative to Q4 2022 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 hasn't affected our regulatory sufficiency index and the coverage for technical provisions. Now looking at the lower part in Q1 2023, the financial result was positive by BRL 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. I now turn the floor over to Castillo.
Thank you, Toneto. I would like to make some comments about the changes in the combined index in Q1 2023 relative to Q1 2022. On Slide 12, in the upper part, you can see the changes in the combined index in Q1 2023 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 relative -- because this rate is calculated relative to the earned premiums. So the combined index 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.
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 guarantee assets. In terms of the first regulatory indicator, it was BRL 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 Q1 2022, 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 Q1 2023. And at the end of the quarter, the sufficiency was of BRL 239 million. The regulatory index considers BRL 7.2 billion in guarantee assets, which is below the financial assets of the company, which were BRL 8.6 billion in the period, a difference by BRL 1.4 billion. The company's projections indicate that those indicators should remain within the regulatory standard requirements.
Thank you, Thais. I'm 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 [ Tungra ] building in front of the Metropolitan Cathedral. Our team is going to work in a more integrated manner and rely on modern devices. We are also going to be dealing with the debentures that mature on October 15. We are discussing alternatives to refinance those debentures and we are very optimistic in the sense that we are going to present a solution very shortly to our shareholders. We will now going to move to the Q&A session.
[Operator Instructions] We have a question from Gabriel Gusan from Citibank.
Well, there has been a great deal of fluctuation and it has been difficult for us to gain a true view of what is happening. Now this seems to be a somewhat lighter quarter in terms of your results in the second and third quarter of year. Is this is what is alluding what happened in previous years? Now are you sufficiently confident in this sufficiency of net worth when you think about the scenario?
This is Toneto, Gabriel. I'm going to answer the first part of your question referring to seasonality in terms of the loss ratio. If we look at this historically, the first quarter tends to be more favorable because of the type of contracts that we have, our communication dynamics and much more. Our expectation, although we may have the seasonality in the first half of the year, is that the activities that are underway in terms of underwriting should reflect higher numbers in the coming quarters, although we do have a very volatile activity, as it is said, with some seasonality, but from the global viewpoint we understand that considering the present day outlooks, we are considerably better vis-a-vis, the previous [ year ] considering the lack of catastrophic events for the time being in agri business as we had last year. I do hope to have answered the first part of the question. I will now go on for the second part of the question with Gabriel. Gabriel, if you could please repeat the second part of your question. Your sound was a bit cut.
The second part refers to the sufficiency of capital. And it seems that there has been a somewhat worse seasonality in terms of your loss ratio.
Gabriel, we're quite calm when it comes to our needs for capital in coming quarters, especially as I have noticed, we are already increasing the volume of premiums for concentrating our portfolio in Brazil with more selective contracts and therefore, this reduces our need for capital. We're quite calm. The results are moving forward well. The trends are positive and we don't expect any surprises going forward.
[Operator Instructions]
We have received some questions over the chat. I can review some of them and I will answer them not specifically one by one, but I will give you a bird's eye view of these questions. We do have some questions referring to our debentures, which I think I have answered. We still have 5 months before maturity. We're quite comfortable with the alternatives we are negotiating. We should get to October without further surprises. Now the offices of London and Buenos Aires, regarding the London office, it has been there for 40 years. And the scope of the management is to ensure that we can add these operations without any additional expenses and we're in the process of negotiating. Regarding the office in Buenos Aires everybody is aware of our difficult position. There are elections in October. And that is a very interesting market with highly trained professionals and we foresee that Argentina could become a hub for 15% portfolio we would like to have [ in a flat in ] America, as Castillo mentioned. [ PLS/CRS ], this is another question. This is a new instrument for negotiation that we approved last year. We have a plan in need to change going forward. We have been here for only 6 months. We have a great deal of things for doing this one of them [ BTP ] with all of the costs focused on the second quarter. This ended as we wanted, approximately 10% of the company. All of this worked very smoothly. We treated people as they should be treated, because we believe this is the right forum to deal with this very typical process. We have another cost question, the cost for DOJ that was provisioned in the first quarter, we will have a follow-up of Department of Justice where the coming 3 years in our activities and to make a lemonade for lemons, we're going to strength this area, enabling us to have a truly impeccable company when it comes to that point. Now we have changed offices. We're highly enthusiastic with our new way of working. And Toneto -- regarding the cash for the first quarter, I think Toneto referred to this. There is an important association between the use of the PSL that has been reduced by some millions and the accelerated payment of claims that we have operated with in this first quarter. Now regarding the guidance, of course, it's not our intention to give guidance. It's much too early. We would like to end the second quarter with all of these adjustments. And then we will think about this further ahead. There is a question about nonoperational assets. Evidently, it's very interesting for the balance of a reinsurance company in Brazil to have sufficiency of capital and of course, of the assets for the [Technical Difficulty] that do not, we then help us in capital sufficiency we will not use them. We need to have operational assets. Now we work with nonoperational assets in a very calm way, always seeking the best prices and not doing this desperately, of course. This is what is presently on our agenda. The portfolio for financial investments, once we bring down the mix to Brazil of 80% for Brazil and 15% for Latin America and 5% abroad, well, through time, this portfolio will migrate through Brazil and this will enable us to grow our portfolio. Let me see if we have any additional questions I have not answered so far. The brand. We're working on the brand. And of course, this is important for our customers who have a very strong identity with us and we want something that will be more streamlined, somewhat lighter. Well, I believe that with this I have answered most of the questions that we received with the chat and I would like to return the floor to the operator.
[Operator Instructions] We have a question from Gabriel from Citibank.
In the past, we spoke about retrocession. And I would like to understand if what you attained in this last quarter is the level that you are truly seeking for the rest of the semester?
Gabriel, if I understood correctly, you're speaking about retrocession. Well, what are we doing? We're going through that process of cleaning out our portfolio between January and April. We still have other renewals this year. And the idea is to adjust our retrocessions to our present day portfolio. The intention, of course, is to reduce the purchase of retrocessions. But I would like to underscore that because of the international market, we see that the cost of retrocession is increasing. This began last year -- last week, I'm sorry. And we see that the cost of retrocession is increasing and the available capacity is quite reduced. Our expectation for this year is to reduce the purchase of retrocessions as we have limits in our portfolio that are much below what we had the previous year.
At this point, we would like to end the question-and-answer session. I will return the floor to the company for the final remarks.
I would like to thank all of you for your attendance at the call. And [Technical Difficulty] have been in the company in past 6 months working with very difficult experience work. And this is just the beginning. We hope that you will have patience. We have seen your questions. We're going to address them slowly with focus and devotion and we believe that the year 2023 will be a year of turnover and 2024, we will begin with the company as we want it to be. Thank you very much. Thank you for your attendance and have a good day.
The conference call of IRB-Brasil Reinsurance ends here. We would like to thank all of you for your participation. Have a good day.