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Edited Transcript of IRBR3.SA earnings conference call or presentation 7-Nov-19 2:00pm GMT

Q3 2019 IRB Brasil Resseguros SA Earnings Call

RIO DE JANEIRO Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of IRB Brasil Resseguros SA earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fernando Passos

IRB-Brasil Resseguros S.A. - Deputy CEO, CFO, IR Officer & VP

* José Carlos Cardoso

IRB-Brasil Resseguros S.A. - CEO, President, Chief Reinsurance Officer & VP of Reinsurance

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Conference Call Participants

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* Henrique Navarro

Santander Investment Securities Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to IRB Brasil RE's 2019 Third 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 statement containing forecast, indication or estimates and projections on 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, objectives, expectations, projections and intentions expressed herein. Under no circumstance, 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 in the statements contained herein or any related or specific damage result therefrom.

Market and competitive position information, including market projections mentioned herein, were obtained from in-house surveys, market researches, public information and business publications.

Mr. José Carlos Cardoso, CEO of IRB RE will now begin the presentation.

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José Carlos Cardoso, IRB-Brasil Resseguros S.A. - CEO, President, Chief Reinsurance Officer & VP of Reinsurance [2]

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Good morning, and thank you all for participating in our earnings conference call for the third quarter and 9 months of 2019. I'll begin the presentation with the highlights of the period.

Actually, we are very happy with our achievements during this year. Our performance was recognized with the first place in the Prêmio Broadcast Empresas award, which assessed 190 publicly held companies that trade shares on B3, the São Paulo stock exchange. In the same award, we were highlight of Novo Mercado, has tripled our market value since we went public on July 31, 2017.

As of September 30, IRB Brasil's market capitalization was BRL 35.2 billion compared to BRL 8.5 billion on the IPO date, placing us among the world's 10 largest reinsurers in the market capitalization. Regarding the performance of our shares, we can see they have performed very well, with a 39% appreciation in the first 9 months of 2019 compared to a 19% rise in the BOVESPA. And an important decision made by our shareholders was to approve the stock split effective at September 26, when each share was split into 3 with no change in the capital stock. In September, we had 33,000 shareholders, a significant increase from the 17,000 shareholders we had in December 2018.

In October 2019, we renewed our retrocession contracts for 2020. During the negotiations, we managed to maintain essentially the same financial conditions as in 2019 and better general conditions. As a result, we expect the total retrocession cost to post a material reduction compared to 2018. This reduction in costs and the maintenance of the coverage of reinsured amount was possible due to our good loss ratio history over the last 4 years and also by the upgrading of our rating by AM Best from A minus to A on a global scale as well as improved governance after we became a corporation.

Our results show we have been on a continuous growth track. In the first 9 months of 2019, the written premium rose 22% compared to the same period in 2018, totaling BRL 6.4 billion. The written premium abroad rose 36% to BRL 2.8 billion. Our income rose 34% to BRL 1.1 billion. Our return on average equity, ROAE, rose by 6 percentage points from 31% in the first 9 months of 2018 to 37% in the first 9 months of 2019.

Finally, on November 6, 2019, the Board of Directors of IRB-Brasil Resseguros S.A. approved the payment of interest on capital, IOC, for the total gross amount of BRL 198 million in gross value per share of BRL 0.21 to be paid on December 5.

Now our CFO, Fernando Passos, will continue the presentation, discussing in further details our results for the third quarter and the first 9 months of 2019. Fernando, please.

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Fernando Passos, IRB-Brasil Resseguros S.A. - Deputy CEO, CFO, IR Officer & VP [3]

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Thank you, Cardoso. Good morning, everybody. I will begin on Slide #3.

Here you can see our net income and the return on average equity. The green graph to the left shows our net income increased by 29% from BRL 305 million in the third quarter of 2018 to BRL 393 million in the third quarter of 2019. This result was driven by an increase of written premium, increase of earned premium, better efficiency due to the reduction in the administrative expense ratio and the financial results. The return on average equity rose by 4 percentage points from 33% in the third quarter of 2018 to 37% in the third quarter of 2019.

On the following slides, we will discuss in detail the performance in the quarter. Slide #4 shows the history of our overall written premium by quarter. In the third quarter, our written premium increased by 18% year-over-year, achieving BRL 2.3 billion. In the third quarter, written premium in Brazil increased by 10.5% year-over-year, achieving BRL 1.3 billion. Written premium abroad achieved BRL 999 million in the third quarter of 2019, an increase of almost 30% year-over-year. This growth of almost 30% was mainly due to the organic growth in the issue currency, that is dollar, as the weighted average variation of the exchange rate in the third quarter was of only 1% compared to the same quarter in 2018.

On Slide #5, we will talk about the dynamics of our retrocession ratio. Our retrocession ratio remained nearly stable at 22% in the third quarter of 2019 compared to the 21% ratio reported in the same period last year. As previously mentioned by Cardoso, we renewed our retrocession contracts for the full year of 2020 in October of this year. During the negotiations, we managed to maintain essentially the same financial conditions as in 2019 and to achieve improvement in the total cost of retrocession for 2020, with an expected material reduction year-over-year comparing 2020 with 2019.

As long as the premiums effectively written during the year of 2019 gain 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 costs will show a reduction since the retrocession contracts applicable to the year of 2019 have proportionately lower retrocession costs when compared to the previous years. As a result, the company has historically shown a significant reduction in its retrocession ratio. In 2017, the retrocession ratio went from 30% to 27% in 2018, and we believe these trends will be maintained in 2019 and 2020 given the company has already renegotiated its retrocession agreements.

Slide #6 shows our retained premium, achieving BRL 1.8 billion in the third quarter, up 16% year-over-year.

On Slide #7, the graph shows the historical seasonality of the constitution and reversal of technical provisions relative to written premium. In 2015, 2016, 2017 and 2018, the provisions were constituted in the first 3 quarters of the year, followed by an average reversal according to this scenario in the fourth quarter. 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 prevent all their value from being taken prematurely to earned premium and consequently to our underwriting result. Over the policy's coverage term, depending on the performance of the business and the term for the risks to expire, this provision may be taken to earned premium and consequently to the underwriting result.

On Slide #8, you can see that the earned premium achieved BRL 1.4 billion in the third quarter, up 13% year-over-year.

On Slide 9, we show our loss ratio performance in the third quarter. The loss ratio went from 58% in the third quarter of 2018 to 52% in the same period in 2019, a reduction of 6.4 percentage points. However, measured by OCR, outstanding claims reserve, went from 44% in the third quarter of 2018 to 46% in the third quarter of 2019, mainly driven by claim reports in the agribusiness, reported both in Brazil and abroad. In nominal terms, OCR went up from a net addition of BRL 547 million in 2018 to a net addition of BRL 650 million in the third quarter of 2019. The loss ratio measured by IBNR corresponded to 6% of the earned premium in the third quarter of 2019. In nominal terms, IBNR went from a net addition of BRL 184 million in the third quarter of 2018 to a net addition of BRL 87 million in the third quarter of 2019. The net addition to IBNR was lower in the third quarter of 2019 year-over-year because in the third quarter of 2018, there was a higher addition due to the prior research conducted by the company that indicated an increase in our loss ratio.

On Slide 10, you can see our underwriting result rose 24% to BRL 321 million in the third quarter of 2019 compared to BRL 259 million in the third quarter of 2018. This growth was driven by the increase of 18% in written premium in the third quarter of 2019, which was a lot higher than the small rise in retained claims as a whole.

Slide 11 shows our administrative expense as ratio of earned premium fell by 0.6 of a percentage point, down from 4.4% in the third quarter of 2018 to 3.9% in the third quarter of 2019. Our management's commitment to continue increasing our efficiency and improving our profitability continues to be the base for our operations.

On Slide 12, you can see our consolidated financial investments, including the parent company, subsidiaries and branches, achieving BRL 239 million in the third quarter of 2019 versus BRL 178 million in the third quarter of 2018. The consolidated performance of the management of financial assets of the parent company, subsidiaries and branches was 131% of the CDI in the third quarter of 2019.

In the third quarter of 2019, the exclusive investment fund, IRB Multimercado had total assets of almost BRL 1 billion in the period. The fund's profitability was 348% of the CDI. This fund concentrated the company's investment in foreign exchange equities and also invested sovereign bonds, prefixed and pegged to inflation plus coupon and other investments. The company's other financial reserves were mainly invested in assets with profitability close to [this league.] Our investment portfolio was reduced at September of this year compared to December of last year mainly due to the payment of dividends in April of this year and the material volume of payment of claims with immediate cash effect but [post] recover from reinsurers drought does not occur simultaneously, following a specific base of the retrocession agreement.

Furthermore, it is important to mention that with the Selic rate at its lowest historical level, we have prioritized the negotiation of contractual conditions that provide us better conditions on payment of claims by accelerating such payments, benefiting the claims interest line. It should be noted that during the third quarter of 2019, we completed the transfer of the management of exclusive funds previously managed by IRB to IRB Asset Management.

Now I will ask Cardoso to proceed to his closing remarks.

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José Carlos Cardoso, IRB-Brasil Resseguros S.A. - CEO, President, Chief Reinsurance Officer & VP of Reinsurance [4]

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Thank you, Fernando. Before I close this presentation, on the Slide 13, I want to discuss our expectations for the fiscal year of 2019 and what we have achieved so far. Relative to the guidance disclosed by the company on August 5, I'd like to point out the following aspects.

The written premium rose 21.5% in the first 9 months of 2019, in line with the estimate of 20% to 27% for the year. The amplified combined ratio for the first 9 months of 2019 achieved 70.5%, which is within the range of 69% to 73% for 2019. And the administrative expense ratio, although slightly better than we forecast of 4.6% to 5.2%, is in line with the company's expectations for the fiscal year of 2019.

The company's outlook remains positive. We have already recorded an improvement in our operations in the oil and gas sector. And large construction works are expected to be resumed, along with the privatizations and approval of the new regulatory framework for bids in Brazil, increased the guarantee for public works and the momentum of the larger risk portfolio. A new opportunity has just opened with a new Private Insurance Superintendence, SUSEP, a standard that determines annual policies are no longer mandatory, making room for other offer of products that can last months, days, hours, minutes or even with no determined term. Such flexibility should create innovative businesses that we are ready for.

We now close our presentation and open the question-and-answer session. Thank you all.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Henrique Navarro, Santander.

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Henrique Navarro, Santander Investment Securities Inc., Research Division - Analyst [2]

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Well, if I read the guidance, and you have been in line so far with the guidance, within the guidance range, and if I translate this guidance to net income for the year, I would reach -- my number is BRL 1.6 billion for the year. And this number is pretty much the same number that you can find in Bloomberg consensus. But the problem with this number is that after the third quarter, we might need a sizable increase in the net income for the fourth quarter in order to reach this number.

So my question to you is, is there any risk of you missing the guidance for the full year of 2019?

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Fernando Passos, IRB-Brasil Resseguros S.A. - Deputy CEO, CFO, IR Officer & VP [3]

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Thank you, Navarro. Thank you for the question. We are completely committed and absolutely comfortable that we will deliver the guidance that we reported. So no risk from our point of view.

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José Carlos Cardoso, IRB-Brasil Resseguros S.A. - CEO, President, Chief Reinsurance Officer & VP of Reinsurance [4]

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Henrique, listen, every time that we see an opportunity to look at our guidance, we voluntary -- did it. At this time, we see, again, absolutely comfortable with the numbers that we published last quarter, and we see no reasons for any changes to -- to change this situation. Therefore, the administration of the company remains fully committed to deliver the guidance that we provided last quarter without any concern about it.

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Operator [5]

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

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José Carlos Cardoso, IRB-Brasil Resseguros S.A. - CEO, President, Chief Reinsurance Officer & VP of Reinsurance [6]

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Thank you all for participating and for your interest in learning more and discussing our results and vision of the future. I invite you all to participate in our investors meeting on November 26 in São Paulo, when we'll talk about business perspectives. Thank you very much, and have a great day.

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Operator [7]

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