This Monday (08/16), IRB Brasil RE released the company’s results for the second quarter of this year. The reinsurer recorded a net loss of R$206.9 million in the period, which indicates an improvement in relation to the same period in 2020, when it reported a loss of R$656.7 million. In the first six months of 2021, the improvement was even greater and totaled R$465 million, with a net loss of R$156.1 million, compared to losses of R$621.7 million in the previous year.
The 2Q21 result was impacted by the economic situation that affected the reinsurance industry globally, as well as by claims arising from discontinued businesses (run-off), with an effect of R$190.3 million, and by non-recurring events (one-offs) of R$14.4 million. From the exclusion of such effects, run-off and one-off, the IRB would have presented a much lower normalized net loss: R$31 million in 2Q21. In 1H21, with the removal of loss-making contracts and the non-recurring effects of the result, the company would have recorded normalized net income of R$57.1 million.
In 2Q21, the company obtained a underwriting result higher than that verified in 2Q20 by almost R$700 million, reinforcing the curve of improvement in results expected for this year. If we exclude the effects of the run-off in the period evaluated, the improvement in the underwriting result is R$889 million.
Drop in loss ratio
The company’s loss ratio in 2Q21 showed a significant reduction of 39.6 p.p, compared to the same quarter of the previous year, from 135.3% to 95.7%. Excluding claims from discontinued business (run-off), the ratio was 84.7%.
“We continue to evolve towards a leaner, more efficient and customer-oriented operation, improving controls and risk management to ensure our leadership and long-term economic and financial sustainability. If we look at the history of the results of the last year and a half, we see a significant improvement in financial and operating performance, which should increase in the coming quarters, through the capture of new opportunities in the market, the gradual reduction of the effects of loss-making contracts and obtaining better margins with renewed business”, explains the interim CEO and COO of IRB Brasil RE, Wilson Toneto.
Premiums written in Brazil grow
In 2Q21, the total volume of premiums written by IRB decreased by 15.1% when compared to the same period in 2020, totaling R$2.16 billion.
Premiums written in Brazil corresponded to R$1.24 billion in 2Q21, an increase of 6.6% compared to 2Q20, due to the higher volume in Life (+42.9%), Rural (+34%), and others (+34.5%). This increase was partially offset by the 50.6% reduction in the Aviation segment, due to adjustments arising from the discontinuation of contracts, and by the 21.6% drop in the Property segment.
Premiums written abroad totaled R$919.3 million in 2Q21, representing a reduction of 33.3% compared to 2Q20. This decrease, which in constant currency totaled 46%, is in line with the company’s widely publicized re-underwriting strategy and is due to the lower volume of premiums written in Life (-54.2%), Rural (-59, 6%), and others (-29.7%).
Operating cash reaches the highest level
IRB Brasil RE’s Financial and Investor Relations Vice-President, Werner Süffert, also highlights the improvement in cash flow. “The company, for the fourth consecutive quarter, presented a positive operating cash generation. In the semester, it was R$528 million and in the quarter, it was R$352 million, the highest level in the historical series since the beginning of last year”, he explains.
The executive also highlights the reduction in total retrocession expenses in 2Q21, which had a drop of 31.6% compared to 2Q20, from R$833 million in 2Q20 to R$570 million in 2Q21. The retrocession rate decreased from 32.8% in 2Q20 to 26.4% in 2Q21, a decrease of 6.4 p.p.
“It is important to emphasize that there was a significant improvement in all indicators compared to 2020 and that the second quarter of 2021 was still heavily affected by discontinued business as of July last year. This effect, however, begins to weaken, while the premiums on contracts maintained and new ones improve the result. In short, the trend is positive,” says Süffert.
Regulatory strength and solvency
At the end of the second quarter of 2021, the IRB recorded an excess of regulatory capital of R$1.2 billion, which is equivalent to a solvency ratio of 175% (adjusted equity / total venture capital), at the same time the company’s total solvency ratio (generally used in other countries) reaches the level of 273%. Both indicators present better positions than the last quarter of 2020.
The company ended the same period with sufficient regulatory liquidity framework of R$335.5 million, compared to R$167.5 million verified on December 31, 2020. Excluding the additional 20% margin on risk capital, the reinsurer recorded, on June 30 this year, a sufficiency of eligible assets to guarantee the technical provisions of R$644.1 million, compared to R$ 542.6 million, as of December 31, 2020. The indices remained positive in the quarter and showed a reversal of the insufficiency observed over the past year.
Also in the regulatory field, the publication of Circular 634 by SUSEP in July, which regulated CNSP Resolution 412, will open new perspectives for reinsurers in Brazil. Starting this month, the regulator will allow the use of certain assets to reduce technical provisions in guarantees for international operations. In addition, as of December this year, the requirement for a liquidity margin of 20% of venture capital will be eliminated, which is also positive.
IRB Brasil RE’s Risk, Compliance and Legal Vice-President, Carlos Guerra, highlights: “The actions taken during the previous year, as well as greater efficiency in the collection processes, cash flow management, technical results with the effects of the re-underwriting carried out, and advances in sector regulation, will allow us to maintain the company with robust indices, improving our securities and giving our customers a greater level of peace of mind regarding the financial capacity of IRB”.
Considered the main structural action initiated by the company, the process of reviewing the conditions and canceling the main existing loss-making reinsurance contracts, called re-underwriting, began in July 2020 and was completed in July this year. 17 large contracts were cancelled, almost exclusively for business originating abroad, which continue to impact current financial results (discontinued businesses). The work also generated a wide cleanup of contracts of lesser magnitude with the cancellation of more than 160 accounts in this period.
“We have completed an important part of our re-underwriting and we will now start a normal underwriting cycle. It was a complex phase, but we were able to renew more than 85% of the accounts we want to keep in our portfolio, in addition to winning new business, in both cases by adjusting terms and conditions appropriately”, IRB Brasil RE’s Reinsurance Vice-President Isabel Blazquez Solano comments.
“We believe that the company is on the right track. We completed an important business review cycle, reduced claims and retrocession costs, consistently generated operating cash, increased our total financial assets and evolved with our corporate governance and risk control. Added to all this is the prospect of growth in the insurance market and the likely pandemic cooling off. For all these reasons, I can say that we are ready to move forward in a consolidation phase with a focus on our customers and on improving processes. We have a challenging path to pursue, but we are certain that with the review of our completed strategy, the right people and long-term vision drawn, we will deliver greater value to our customers, shareholders and other stakeholders”, concludes Toneto.
The Performance Analysis is available on the company’s Investor Relations website (www.ri.irbre.com).