The IRB (IRBR3) suffers a quarter "significantly affected" by the historical drought and is developing a solvency restructuring plan

The IRB (IRBR3) suffers a quarter “significantly affected” by the historical drought and is developing a solvency restructuring plan

Chief Executive Officer Rafael de Carvalho, in an earnings conference call on Tuesday (16), said the IRB’s second-quarter result (IRBR3) was “significantly impacted” by the historic drought that affected the southern region.

According to him, the loss ratio of 124% was the main factor that led to the loss in the second quarter of 22. If the loss ratio was normalized without this anomalous effect, the rate would have been 89%.

We are witnessing a negative historical moment for the insurance and reinsurance sector. We have never had an agricultural loss rate greater than 108%,” explained Wilson Tonito, Vice President Technical and Operations. The IRB stated that the drought in Paraná was the largest in the past 90 years and that Rio Grande do Sul had not experienced such a major drought in more than 75 years. In these two cases, there is a significant focus of the insured crop by the Immigration and Refugee Board.

The Q2 22 result was also significantly affected by the loss of summer crops and bypassed the IRB’s protection measures, according to Tonito. Approximately R$1.5 billion has been paid or saved for the winter 2021 and summer 2021/22 crops. For now, the company says it has funds to cover that amount, but the full impact will not be known until the end of August.

It can be frustrating in the midst of the recovery process to have to deal with such atypical events hurting results, but the IRB has noted that it’s important not to lose sight of the quarter’s recovery while ignoring the effects of the weather.

Thus, in the conference call, comparative data were presented, removing the effect of the historical drought. The loss ratio, which was 124% in the second quarter of ’22, would be the 89% mentioned above without the influence of weather, a figure that would be better than the 95% recorded in the second quarter of ’21. “This shows that the IRB strategies have been successful,” Toneto points out.

Indicators of sales and administrative expenses were better in the second quarter of ’22 compared to the same period of the previous year. This point was important to help restore operating margin, according to CEO Rafael de Carvalho.

Currently, the IRB Board of Directors is prioritizing three initiatives to strengthen its financial position. According to Rafael de Carvalho, the ongoing actions include evaluation of the realization of the stock offering (follow-up), the sale of property and assets, and structured buybacks.

recovery plan

On Monday (15), the same day the results were published, the IRB sent the Private Insurance Supervisory Authority (Susep), which regulates the sector, a plan to recover the solvency of the company’s reclassification. According to Tonito, the plan should be implemented within three months. This means that by the end of October, the issue of solvency for the Immigration and Refugee Board must be settled.

The company recorded insufficient equity adjusted with respect to the minimum required capital of R$614 million, reaching only 64% of the minimum required capital. There was also no classification to cover technical provisions and regulatory liquidity of R$730 million.

It is worth noting that, the day before, the actions IRB decreased by about 10% Amid concerns about the possible terms of the potential share offering, the reinsurance company said it was in the process of evaluating it to raise funds.

Carvalho noted that the company had already obtained a pre-approval for a capital increase of 1.2 billion Brazilian riyals. According to the CEO, the amount of the capital increase, which may include an initial offering of shares, which is still under consideration – as was informed the day before – and the sale of real estate held by the company, has not yet been determined. According to the latest balance sheet, at the end of June, the company had R$91 million of rental properties.

The IRB ended the second quarter of the year 22 with a solvency of 194% and has assets of R$8 billion to meet its obligations to clients, according to the CEO. It highlights that it is necessary to maintain discipline and perseverance with what the new administration has already proposed.

In other words, the focus of the IRB remains on: increasing the percentage of business in Brazil, decreasing focus by contract and sector, optimizing administrative and commercial expenses, and constantly adjusting prices against risk.

Covid-19 continues to affect operations

Another factor that continues to have negative effects on IRB indicators is the impact of Covid-19, which continues to affect the insurance industry.

Since the start of the Covid-19 pandemic, the outcome has been directly affected by R$ 240 million in withheld claims, mostly in the people sector, which accounts for 82% of this amount. According to Daniel Vega, Vice President of Compensation, there was an 116% increase in claims related to Covid in the first half of 2017 compared to the first half of 2017.

Analysis of the results

After the Q2 balance sheet of ’22, Citi maintained a sell recommendation for IRB shares, with a target price of R$2.40, still 15% higher than the previous day’s close. Analysts point out that with the company’s insufficient capital, a potential capital increase appears to be the “only way out”.

As the quarter’s results continue to decline, stocks continue to suffer and investors continue to lose interest in the IRB, the bank’s valuation.

Eleven Financial, whose independent Migration Board recommendation is under review, indicated that the loss ratio in rural insurance was the main factor undermining performance, but it was not a single effect.

“Looking at the underwriting result by business line, only the private risk segment recorded a positive result. This means that even after all the adjustments, the new premium crops continue to take losses, and at this point in the championship we had already expected a healthy level of claims, which didn’t happen,” he points out.

According to analyst Carlos Daltoso, the positive news was the financial result, which in the first half of 2022 recorded gains of 363.9 million Brazilian riyals, and still does not compensate for the weak operating result, while the biggest concern was related to regulatory indicators.

“The cash burn recorded in the past three quarters has resulted in insufficient regulatory capital for the company (…) [Assembleia Geral Extraordinária] 10, 2022, brings strong selling pressure on the stock in the short term,” the analysts point out.

The bigger question now is whether the company will actually be able to raise this capital in the market, since the funding of up to R$1.2 billion approved, added to the R$2.1 billion raised in 2020, is already higher than The market value of the company. Stream analyst notes that “the challenge of the new administration to reframe the IRB in the minimum regulatory capital is significant.”

JPMorgan notes that the combination of lackluster profitability and a potential capital appreciation will likely continue to negatively impact stocks. Additionally, he sees the company trading at multiples that he didn’t consider low. The recommendation is low (exposure is below the market average), with no specific target price.

In the Tuesday session (16), at 12:50 pm (Brazilian time), the shares rose 1.44%, to R$2.11. In the year the cumulative decrease was 48% (until the previous session).

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