IRB Brasil Resseguros SA

BOVESPA:IRBR3

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and welcome to IRB Brasil RE's 2019 Second Quarter Earnings Conference Call. Here with me today are José Carlos Cardoso, CEO; and Fernando Passos, Deputy CEO, CFO and IRO. This conference call is being recorded. [Operator Instructions]

This presentation was prepared by IRB Brasil RE and shall not be considered a source of data for investments. This presentation may contain certain forward-looking statements and information related to the company reflecting current views and/or expectations of the company and its management concerning its performance, business and future events. Forward-looking statements include, without limitation, any statements containing forecast, indication or estimates and projections on the future results, performance or objectives as well as words like believe, anticipate, expect, estimate, project and other similar expressions. Such forward-looking statements are subject to risks, uncertainties and future events. Investors are cautioned that several relevant factors may cause actual results to significantly differ from these plans, objects, expectations, projections and intentions expressed at [indiscernible]. Under no circumstances, neither the company nor its subsidiaries, Board members, officers, agents or employees shall be held liable before third parties, including investors, for any investment decision made based on the information and statements contained here, or in related or specific damage resulting information and statements contained. Therefore, market and competitive position information, including market projections mentioned here were obtained from in-house service market researchers, public information and business publications. Mr. José Carlos Cardoso, CEO of IRB Brazil RE, will now begin the presentation.

[José Cardoso, executive]

Thank you all for participating in our earnings conference call for the second quarter and first half of 2019. I'll begin the presentation with the highlights of the first half of 2019. On July 31, 2019, we celebrated our second year as a publicly held company. We are very happy with our achievements during this period. This first half of 2018 was another big step for IRB. In 2 years as a publicly held company, our market cap went up from BRL 8.5 billion in July 2017 to over BRL 30 billion in June 2019, with our shares appreciating 267% in the period. Even our stocks and liquidity and traded volume, we have been listed in the capital markets major index, both Ibovespa and IBrx 100, [ NSI and suits ].

Our first big achievement, the first to our ownership structure. We are now a full corporation. This increased the liquidity of our stock, driving governance improvements and efficiency and agility in our decision-making process and approvals. These changes derived from 2 successful follow-ons offerings. First, in February, the FGEDUC Fund managed by cash raised BRL 2.5 billion. Now in July, the federal enrollments and BB Seguros raised a further BRL 7.4 billion, bringing larger shareholders to our base of which 71% is allocated in foreign investors. The federal government and BB Seguros were able to sell their interest because the change in the Brazilian products, insurance board and [ Suzette ] that allowed for a publicly held companies in the insurance in the reinsurance industry, which is our case.

To become a corporation with diluted controlling stock. In other words, we have became a corporation which should make our decision process faster. However, without a controlling shareholder or block, we have to improve our governance such as by having committees made up of more senior members and extend the term of mandates of both the Board of Directors and the executive office to 2 years and beyond adopt a succession plan to prepare our new future leaders. Another highlight was the upgrade by specialized rating agents AM Best, which raised our rating from A minus to A in a global scale. The upgrade by AM Best, which is the largest and oldest global rating agents in the insurance market, will enable us to do business with more international insurers since some of them requires an A rating from trade partners. We are also proud of the institutional investors' recognition, including best CEO, best CFO, best Investor Relations professionals, best IR team and best IR program in the financial institution category. The awards came in a year when we've dedicated our best efforts to the market with 2 follow-ons offerings. Our listing in Ibovespa and our intense participation in national and international conference. We also ranked the secondly, the website Analysis Inc. and best governance practice categories. IRB was also the winner of the best list of the companies ranked in the re-evaluation category created by [indiscernible] in partnership with [ Itomac ] and Economatica. The award, we view that the companies that went public in the last 3 years based all 3 criterias; profitability, stock performances and corporate governance process. Our results show we have been on a continuous growth track. In the first half of 2019, written premiums rose 24% compared to the first half of 2018 to BRL 4.1 billion. Another highlight was the international written premium, which grew 40% reaching BRL 1.8 billion. And now, our net income of BRL 738.9 million represents an increase of 37%. In terms of return on average equity, ROAE, there was an increase of 8 percentage points from 30% in the first half of 2018 to 38% in the first half of 2019.

Our CFO, Fernando Passos will now continue the presentation to discuss in further detail our results for the second quarter and the first half of 2019. Fernando, please?

[Fernando Passos, executive]

Thank you, Cardoso. Good morning. I will begin on Slide #3. Here, you can see our net income and return on average equity. The orange graph to the left show that our net income increased by 35% from BRL 287 million in the second quarter of 2018 to BRL 388 million in the second quarter of 2019. Return on average equity rose by 6 percentage points from 33% in the second quarter of 2018 to 39% this year. We had some relevant drivers that were important for us to achieve this 35% increase in net income during the second quarter of this year. First, a 22% growth in written premium, an 18% growth in earned premium, a 19% growth in underwriting results and more efficiency with the reduction in administrative expenses ratio of the company as percentage of earned premium. On the following slides, we will discuss in detail these figures. Here on Slide #4, we show the history of our overall written premium by quarter. In the second quarter, our written premium increased by 22% compared to the second quarter of 2018, achieving BRL 2.4 billion. Written premium in Brazil increased by 14% in the second quarter of 2019 compared to the second quarter of 2018, achieving BRL 1.4 billion due to the growth of domestic market itself. This improvement was mainly due to the new contracts executed in the period, mainly in the oil and gas, property and life segments following the economies revolved. On the other hand, written premium abroad increased by 35% in the second quarter of 2019 compared to the same period of last year, achieving BRL 975 million in the second quarter of 2019. This growth was sustained by our increased share in existing contracts and the weighted average appreciation of 6% of the dollar exchange rate in the second quarter of 2019 compared to the second quarter of 2018. Our expertise in the international market is just take business opportunities, mostly in South America, focusing on business lines we still have eyes on, such as aviation, life and agribusiness. On Slide #5, we will talk about the dynamics of our retrocession cost. Our retrocession ratio remained stable at 28% in the second quarter of 2019 compared to the 27% ratio reported in the same period last year, even with the premium reimbursement to the retrocession errors due to the use of retrocession perfection in the period. As long as the premium effectively written during the year of 2019, again, a greater proportion as a percentage of the company's total written premium when compared to the premiums written in previous underwriting years, the company's retrocession cost will show a greater reduction since the retrocession contracts applicable to the year of 2019 have proportionally lower retrocession cost when compared to the previous years. Slide 6 shows our retained premium in the second quarter of this year, which increased by 20% when compared to the same period last year, achieving BRL 1.7 billion in the second quarter of 2019. This growth was driven by the rise in the written premium in the period. On Slide #7, the graph show the historical figures of the constitutions and the reversal of technical provisions relative to written premium. You can see that in 2015, 2016, 2017 and 2018, the provisions were formed in the first 3 quarters of the year, followed by an average reversal according to the historical numbers presented here. It is important to remember that the technical provision is used to retain values that are the result of an increase in our retained premium in order to present all the values from being taken prematurely to earned premium and consequently to our underwriting results. Over the policies coverage term, depending on the performance of the business and the term for the risk to expire, this provision may be taken to earned premium and consequently to the underwriting result. Now on Slide #8, we can see that our earned premium in the second quarter of 2019 increased by 18% when compared to the second quarter of 2018, achieving BRL 1.4 billion in the second quarter of this year. This growth was driven by higher premium written in the period. On Slide #9, we show our loss ratio performance. Our loss ratio went from 57% in the second quarter of 2018 to 53% in the second quarter of 2019. However, the loss rate measured by OCR, outstanding claims reserves, went from 53% in the second quarter of 2018 to 65% in the second quarter of 2019. This growth was mainly driven by claims report in the agribusiness segment, both in Brazil and abroad. So in nominal terms, the OCR, outstanding claims reserve, went from a net constitution of BRL 622 million in the second quarter of 2018 to a net constitution of BRL 900 million in the second quarter of 2019.

As we had largely mentioned during the fourth quarter of 2018 and the first quarter of 2019 is likely rise in claim reports would be materialized in the second quarter of 2019. Being antiquated and previously captured by the company by using the IBNR company they incurred but not reported losses. Therefore, the IBNR recorded a net constitution of BRL 196 million in the fourth quarter of 2018. And a further net constitution of BRL 67 million in the first quarter of 2019, achieving a total net constitution of BRL 263 million in these 6 months. Therefore, now in the second quarter of 2019, IBNR recorded a reversal of BRL 158 million due to the claim reports received by the company in the second quarter of this year and that were adequately registered as OCR in the second quarter of this year. We generated both the reversal of the correspondent IBNR previously constituted at the time given the development of the contract.

Our retrocession program proved to be effective this quarter because it minimized more severe impacts on our retained loss ratio. As you can see, we recovered BRL 515 million in claims from our retrocession related to the quarter compared to the recovery of BRL 156 million in the second quarter of 2018. According to those number, 25.4% to our financial statement as of June 30. It is worth noting that in the second quarter of 2019, there was a specific reimbursement of a significant amount in the aviation segment according to the new number, 25.2% to our financial statements as of June 3 this year. This specific reimbursement derived from an accident with a Brazilian airline company in 2007, but the amount retained by IRB in this case was of less than 1% of the total claim amount paid at that time. So the same movement that caused us reimbursement revenue also generated an expense. The payment of the reimbursement, the retrocession [indiscernible] according to the new 25.4% to our financial statement. So the effect on our result is basically almost 0. In the Slide 10, in order to illustrate better about the IBNR provisions, we prepared this graph in which we demonstrate the dynamic of the constitution and reversal of the IBNR component over the last 3 quarters in the year-on-year comparison with their corresponding quarters. These graphs shows exactly what we said in the previous slide, that is, in the second quarter of 2019, IBNR recorded a reversal of BRL 158 million due to the claim reports we received in the second quarter, and that were recorded by OCR in the period that generated a reversal of the corresponding IBNR previously constituted at the time even the development of the contract. As you can see, the loss ratio measured by IBNR for the last 3 quarters is a recurring 3% when we consider the total net IBNR constitution for the last 3 quarters compared to the overall premium earned in the period. On Slide 11, we will talk about our underwriting results. The underwriting results achieved to be BRL 154 million in the second quarter of 2019, an increase of 19% when compared to BRL 296 million achieved in the second quarter of 2018. This growth was driven by the increase of 22% in written premium, which was higher than the rise in retained claims. Slide 12 shows our administrative expense as percentage of earned premium, which remained stable at 5% in the second quarter of 2019. Such performance confirms our commitment to increase the efficiency and to improve profitability. On Slide 13, you can see our consolidated financial investment, including the parent company subsidiaries and branches achieving BRL 184 million in the second quarter of 2019 compared to BRL 177 million in the second quarter of 2018. The consolidated performance of the management of financial assets of the parent company, subsidiaries and branches was 121% of the CDI in the second quarter of 2019. In the second quarter of 2019, the exclusive fixed income investment fund IRB Absoluto had total assets, [ covering bonds ] of almost BRL 3 billion, a period the fund's profitability was of 1.71% or 112% of the CDI. IRB's [indiscernible] portfolio had assets of BRL 2.8 billion as of June 30 of this year. And the most important asset group was cost fixed serving bond. The average daily balance of the financial investment portfolio, except for the real estate portfolio, was almost BRL 6 billion in the second quarter of 2019. Now I will ask Cardoso to proceed to his closing remarks.

[José Cardoso, executive]

Thank you, Fernando. Before I close my presentation on the Slide 14, we want to discuss our guidance for the full year of 2019. Just to remind you, given the last 2 follow-on offers, one in February and the other one in July 2019, our Board of Directors decided at an extraordinary meeting to discontinue the disclosure of the guidance for 2019. At the same time, the Board of Directors also delegated to the executive officers the decision of analyzing the possibility of resuming the guidance disclosure. Therefore, from August 5, the executive officers decided to resume the disclosure of our guidance in the material facts filled in the CBM yesterday. [indiscernible] increased its estimated related to written premium growth compared to the year of 2018. The previous estimate was a growth of 17% to 24% in written premium compared to the year of 2018. And now, the estimate is a growth of 20% to 27% in written premiums compared to 2018, confirming our expectation of a premium growth of 2019. The other indicators remain at the same, or in other words, an amplified combined ratio ranging from 69% to 73%. And our administrative expense as a ratio of earned premiums ranging from 4.6% to 5.2%.

I also highlight 2 other events that we consider significant for the company's growth in the coming years, which we announced yesterday night. The partnership with C6 Bank, a digital bank, and the sign up subscription for -- with B3i in which IRB will be partnering with major global insurers and reinsurance to develop Insurtech project. The operating reinsurance agreements with C6 Bank and its affiliates provided that IRB will be the leading reinsurer on the credit and life insurance business generated on C6 platform for a period of 10 years, proportionately with IRB reinsurer with 85% of the business generated and the insurer with a 15% retention. The agreement also satellites for IRB on a similar base to the credit life insurance segment for other business lines, except for health, auto and dental lines. This yield does not include payments by IRB beyond the reinsurance commission on a market base. These yields is part of IRB Brazil RE's wider strategy to sign partnerships with Brazilian and South America fintechs with valued proposition similar to the company.

The other highlights is that partnership with B3i. The B3i is one of the main global technology development initiatives for the insurance and reinsurance segment, including the reillustration of these transactions through a Blockchain platform. The subscription of 8.93% of the B3i shares position putting IRB as the only company in Latin America alongside the leading global company's operations. The interest of -- in B3i share capital. We allow IRB RE to have the right to appoint a member to the company's Board of Directors with a relevant involvement in B3i's strategic guidance. B3i currently has 9 Board members.

In addition to the recent highlights mentioned, the outlook is encouraging, especially due to the following facts: The increase in the subsidy announced by the federal government to help farmers pay the rural reinsurance or an amount that reached BRL 1 billion in 2019-2020 season. The amount available in the last season was BRL 371 million. The second aspect, privatization transactions by the Brazilian government involving airports, highways, railways and ports, which led the acquirers to contract more robust insurance and reinsurance policy than those contracted by state-owned enterprise. And ongoing process to choose partners for the bank assurance business, which could pave the way for new operations for insurance and reinsurance in Brazil. Finally, our nearly 380 employees remain fully committed to the challenge targets, but the ones that can be met or even exceeded even more because all employees participate in our profit sharing program, which is linked to meeting 100% of the targets. We now close our presentation, and open the questions-and-answer session. Thank you, all.

[Operator]

The floor is now open for questions from investors and analysts. [Operator Instructions] Our first question comes from Mario Pierry, Bank of America.

[Mario Pierry, analyst]

Congratulations on the quarter. Let me ask you 2 questions, if I may. The first one, we'd noticed that you've maintained your amplified combined ratio guidance unchanged. But my understanding is that before you were working of a Selic rate of 6% at the end of the year. And now, I think you're working with 5%. So if you can explain to us a little bit why you think that your results are not going to be volatile with the Selic rate? Or maybe, you're seeing better operating trends than you were expecting before? And the second question is related to this upgrade from AM Best that you mentioned at the beginning, if you can be a little bit more specific on how that can help your premium growth in the future?

[Fernando Passos, executive]

I am going to talk about the under 5% combined ratio, and Cardoso will talk about the AM Best upgrade. In fact, when we reported our guidance on February of this year, specifically, the guidance for the amplified combined ratio that considered the underwriting results plus the investment results, we were continuing at Selic at the end of the year of 6%. Now we reported again the same guidance for the amplified combined ratio, but we are considering Selic at the end of the year of 5%. And we are comfortable to keep the same guidance that we were considering before due to the dealers, due to the new expectatives. We have the performance fee of our underwriting side. So in fact, the figures we have now, the expectations we have now to the underwriting results was enough to offset the probable decrease in Selic. And we keep the amplified combined ratio for guidance. As you know, we increased our guidance for written premiums growth from a range of 17% to 24% to a new range of 20% to 27%. And again, we are comfortable to report this new guidance due to the figures we have up until now during this year. Carlos?

[José Cardoso, executive]

Thanks for your question. We're going to have to upgrade in terms of we received from AM Best. It might affect us positively in some aspects that I'm going to try to explain to you. First of all is in respect to the image of the company, become a company rated by AM Best, that is the most important rating agency year we have in the market, allow us to enter in a very selective group of the major reinsurance players in the world. So this is a clear indication of the credibility of our company. And this is something that certainly is going to benefit us in terms of gaining new markets, increasing our share also in existing insurance company. It's important to mention to you that we have some companies that put some cap in terms of length of exposure we have according to the rating of the reinsurers. So in the moment that we -- with regard to this increase in our rate will allow us to increase our shares in those companies that we had that cap presenting us to increase in our lines. Secondly, other important aspect is the fact that being A rated allow us to enter also to do this in insurance companies that have this kind of impairment in their guidelines according to the rating of the trade partners might have. Therefore, especially in respect some multinational insurance companies where this is really looked at as closely -- monitored closely, we expect to be benefit of this upgrade.

[Operator]

This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr. José Carlos Cardoso for any closing remarks.

[José Cardoso, executive]

One more time, thank you all for participating and for your interest in learning more and discussing our results and vision of the future. We will meet again in November for our third quarter earnings conference call. Thank you very much. Have a great day.

[Operator]

Thank you. This concludes today's presentation. You may disconnect your line at this time, and you have a nice day.