Good morning, ladies and gentlemen, and welcome to the earnings call for the second quarter of 2022 for IRB Brasil RE. We have with us today Mr. Raphael de Carvalho, the company's CEO, Mr. Willy Jordan, CFO and investor relations officer, Mr. Wilson Toneto, COO, Mr. Carlos André Guerra Barreiros, CRO, compliance officer and legal VP, Mr. Daniel Veiga, P&C and specialties VP, and Mr. Ronald Affat, director of life and health. We would like to inform you that this conference call is being recorded, and all participants will be in listen-only mode during this presentation.
Right after the presentation, we will begin the questions- and- answer session. Should you need any support during the conference call, please dial star zero. This presentation was created by IRB Brasil RE and should not be taken as a source of investment data. This presentation may contain certain forward-looking statements and information relating to the company that reflect the current views and/or expectations of the company and its management with regards to its performance, business, and future events.
Forward-looking statements include, without any limitations, any statements that may contain forecasts, indication or estimates and projections about future results, performance or objectives, as well as words such as we believe, anticipate, expect, estimate, forecast, among other words with similar meanings. These forward-looking statements are subject to risks, uncertainties and future events. We advise investors that several important factors may cause the actual results to differ materially from the plans, from objectives, expectations, projections and intentions expressed in this presentation.
Under no circumstances, neither the company nor its subsidiaries, directors, board members, officers, agents or employees shall be liable to third parties, including investors, for any investment decisions that were based on the information and statements contained in this presentation, or for any specific or general damages arising therefrom. Market and competitive position information, including market forecasts that were alluded to throughout this presentation, were obtained through internal surveys, market research, public domain information and corporate publications. Mr. Raphael de Carvalho, CEO of IRB Brasil RE, will start his presentation.
Good morning, and once again, welcome to our conference call. We will begin on slide two. I think the title of this slide summarizes what we experienced. It was a quarter that was drastically impacted by an atypical event, a severe drought that affected the south of Brazil that concentrates the major volume of agriculture insurance in Brazil. Since IRB is a leader in this market, we took a heavy loss from this effect, and this quarter we posted a loss of BRL 273 million. We will go into details about this during the presentation.
Our loss ratio was the main detracting factor leading to this loss. It reached 124% during this quarter versus 96% in the second quarter of 2021. This variation can be seen in the graph on the lower right-hand side. It is important to consider what our loss ratio would have been disregarding this atypical effect if we had normalized our loss ratio. The specific case of agricultural insurance, if we consider a more typical loss ratio for this portfolio, for example, what we had last year, we can see that our loss ratio for the second quarter would have been 89%, far below 124% that we posted.
Therefore, we can see in the first part of the slide that our loss ratio was increased by 35 percentage points due to these atypical weather-related events. Further on in the presentation when we talk about claims, if we consider the first quarter, normalized claims were under 80%. Still on claims, during this quarter, we saw a moderate effect within the expected range for claims related to the subscription period prior to the second half of 2020. Why are we mentioning the second half of 2020?
That was the time in which we started adopting a more prudent subscription policy, interrupting that vicious cycle that caused the losses that we already know. But it's also important to highlight that these improvements in subscription were intensified in the last 10 months. Now to speak a bit about our premium. We saw that premium issued grew nearly 5% in the first half of 2020 in Brazil, and the next slides will show that the reduction in premiums was due to our premiums issued abroad due to our broadly publicized strategy of increasing our position in Brazil.
Since we're talking about strategy, Brazil represents about two-thirds of the premiums written in the six first months of 2022. If we look specifically at the second quarter, this percentage is 68%, as we can see on the upper right-hand graph on this slide. Concluding the first comments for this first page, as you can see in the last paragraph, our indicators for SG&A are better than in the same period last year, which is an important initiative to recover our operational margins. Continuing with the next slide.
Here, we always disclose this information about what our renewal was during the last quarter. We can see that 87% of the contracts we wanted to renew were actually renewed, which is slightly lower than what we had in the second quarter of 2021. This is in line with our better subscription strategy, but we're still counting on our clients' confidence. To discuss our strategy, the lower graph on this slide shows our continuous dilution, reducing our exposure in our businesses, and of course, trying to be present in more businesses.
The orange line on top shows domestic participation in contracts, and the bars below show how our dilution is going on contracts abroad, reaching 70% in the first months of 2022. We'll continue discussing premiums.
Thank you, Raphael. Starting with slide four, we can see how premiums issued in Brazil and abroad have evolved as a quarterly comparison and also comparing the first six months. IRB continues redirecting its business, focusing in Brazil, as Raphael mentioned. In the first six months of 2022, issued premiums in Brazil went up 4.8%, reaching nearly 65% of total issued premium. A level that we see as a good balance for now on. On the lower graphs, we see our retroceded premium, a reduction to 25% in the retrocession ratio in the second quarter when there was no LPT operations in line with what we saw in the same quarter last year.
In a comparison between the first six months, which we see on the right, we see that retrocession expenses were 5.7% higher than the first six months of 2021. A total of BRL 1.02 billion, which represents our growth in the patrimonial line, up 37.3%, and others, which went up by 10%. The company's retrocession ratio in the six months of 2022 went up 4.1 percentage points from 23.6% in the first six months of 2021 to 27.7% in the first six months of 2022.
It's important to highlight that in the first quarter of 2022, there was an LPT operation in the international property line, which aggravated the retrocession premium line by BRL 219 million. If we were to remove the effects of LPT, the retrocession ratio for the six months of 2022 would be 21.7% versus 23.6% in the first half of 2021. On the next slide, we see our evolution of the premium earned . This quarter, we saw a stability versus the first quarter of 2021, and a reduction of 23% versus the first quarter of 2021.
In the first six months, we saw stability in Brazil and a reduction of 23% abroad, discounting LPT effects. The lower graph shows the importance of our three main lines of business, property, agriculture, and life. Added together, they correspond to 73% of the BRL 1.7 billion in issued premium during the second quarter. Continuing with slide six, I'll pass that on to Toneto, who's going to talk about our loss ratio.
Thank you, Willy. Good morning, everyone. On this slide, we can see the left-hand side graph showing our claims history for the last few quarters. When we compare the second quarter of 2022 with the second quarter of 2021, we see that the nominal value of claims has remained normalized. Above the bars in the yellow squares, you see our overall loss ratio. In the second quarter of 2022, as Raphael said, it was 124% versus 95.7% in the second quarter of 2021. This variation was impacted by weather effects in the south and agricultural insurance and some other effects we'll see later on.
As Raphael said, when we normalize the claims ratio for the second quarter from these effects, it's 89%. If we exclude the atypical variations, we have improved the observed claim ratios, which clearly demonstrates the results of the strategies we implemented. Comparing six months, we come to a similar conclusion. Although the claims ratio indicator was 104%, if we normalize it excluding the effects of weather effects and COVID, it drops to 79%. That's far lower than what we saw in the first half of 2021.
To complement the data on this slide, the tail effect, considering a contract subscribed before the crisis in 2020, as we saw in the last few presentations, were far lower. In December 2021, you'll remember that they represented 75% of our expenses. In this quarter, this representation dropped to below 20%. Finally, the monetary effects on our results after the normalization of these effects, come to a total of BRL 642 million. This would reverse the results that the company posted from a loss to a positive BRL 63 million result.
If it were not for these catastrophic events, the company would be presenting this quarter a positive effect. Let's continue with the next slide. In slide seven, we will detail here the main detractor of our result in this half year period. As we talked about in the last call for results, adverse and typical weather events affected the contract signed in 2021, what we call underwriting year 2021. The effects reached the winter and su mmer harvest last year, and they were the most significant ones in the last decades.
Data published by SUSEP for the first half of 2022 indicate an average loss ratio of 281% of insurers in the rural sector, compared to 90% in the same period of 2021. Recent publications on the national media indicate the effect that reflected in all reinsurers operating in Brazil, confirming the magnitude of the event. In Europe, for example, a large reinsurer operating in Brazil published in its presentation of results that the severe drought in Brazil was one of the components of the loss ratio deviation.
I would like to recall here the dynamics of hiring and registration of rural insurance in the company. If you look at the diagram, you will see that UY 2021 contracts, as noted in the diagram, have effects that began that year but end in 2022. With this, we have premiums and claims recorded in both fiscal years. As well known, the insurers receive claim notices and analyze, regulate the amounts claimed, and only later do they refer to their reinsurance for recovery of their protections.
Therefore, for the summer harvest claims in 2021, we received a good part of the information until June and made the necessary records. Therefore, the results of the second quarter were strongly impacted by such losses, which have even exceeded the limits of our protections. As you know, we have protections against such events, so we went beyond them, and this has never happened in the history of the company after we opened to the market in 2008. In 2021, the second quarter, the loss ratio reached an index of 259% and 180% in the first half.
We performed a normalization exercise on this claim, considering the loss ratio observed in 2021 as normal. The recalculated indices would be 89% in the second quarter of 2022 and 78% in the first half. When we calculated the total volume provision, plus the amounts paid for the Winter 2021 and Summer 2021, 2022 harvests, reached BRL 1.5 billion. This is the amount that IRB will bear at the end of this cycle to the numerous Brazilian agricultural producers and farmers. So based on the information and data received from the insurance, both IBNR and PSL, to cope with the estimated losses for the portfolio.
However, taking into account the dynamics of our business, it is possible that we have adjustments in these estimates that will only be known after the conclusion of the regulation process by the assigners and receipt of the accountability in July and August. Therefore, ladies and gentlemen, here in Brazil, we had a true catastrophe resulting from the drought that had never been seen. Once again, we played our role to support agribusiness in our country. I would now like to ask Veiga about the actions taken in the agro contract and also about the impact of COVID.
Well, good morning, everyone. I now turn to slide eight, which summarizes the measures that were implemented in the reinsurance contracts accepted by IRB as of 2022. First of all, a broad review was made in the portfolio. We decided to reduce participation in different contracts to seek greater dissemination and lower concentration of risks. We have structurally deficient businesses or some that had not been adjusted.
We defined the parameters to better balance the retention of the insurance and the cessation of part of these risks in reinsurance, requiring minimum percentages of participation of the insurance. The reinsurance commissions negotiated reduced substantially, decreasing pressure on the margins of the business. We also established a dispersion control and review of capacities between cultivation in the main regions and also an extensive review between summer and winter harvests, reducing the weight of regions with greater volatility.
Finally, we reviewed our commercial insurance conditions for farmers. We adjusted the minimum rates, we reduced coverage levels and productivity guaranteed, especially in the areas whose historical results had been poor. I now invite everyone to look at slide nine, where we are going to talk about important aspects, which is the impact of COVID on the company's results. As you know well, the pandemic impacted the insurance market extensively, and its effects continue affecting the insurance and reinsurance segment.
It is no different with us. On the left side, we can see the losses related to COVID for 2020, 2021, and in the first six months of 2022, and the total losses throughout the period. From March 2020 to June 2022, we had an impact of BRL 241 million because of COVID-19. This impact was observed in different areas, in special, in the life segment, representing 82% in the period. If we look at the right side of the slide where we compare the first six months of 2021 to the first 6 of 2022, we can see an increment of 116% of the COVID-related impact.
Once again, we can see that these losses are concentrated in the life segment, mostly. In terms of perspectives, it is important to highlight that we anticipate a stabilization, especially as a result of the vaccine coverage and also because of the reduction of deaths due to COVID. Now I turn back to Willy so he can conclude the presentation.
We are now in slide 10. This graph is recurring in our presentations, but it is very important because it indicates the impact of the largest provisions with claims in lighter blue and also claims that were not informed compared to the premium. In the bars, we have the amounts, and in the lines, we have the representation. Altogether, in face of our premium revenue in 2016, it represented 90%, and in 2019 it reached 60%.
Even with the increase in risks and claims provision, this impact was reduced. We also had changes in our management in 2020, and therefore, we have tried to take into account the risks that are taken, and you can see the impact in the last quarters. Therefore, the conclusion here is that the provision for claims, when duly reinforced, make us less vulnerable to losses from older subscription years. On the right side, we can see the concentration of claims in the second quarter, and here they represent 64% in Brazil.
The rural segment on the lower graph with 45% of the total. They confirm what we've said. Of course, the climate effects of the rural segment were very important for the company. Very well. I now turn back to Willy so that he can move on with the presentation.
Well, thank you, Toneto. Now on slide 11, we show the acquisition cost, which totaled BRL 253 million in the second quarter of 2022, down 35% quarter-over-quarter. When we analyze the relationship between the acquisition cost and the earned premium for the period, the index went from 22.4% to 18.8%, thus contributing to the operating margin in the quarter. When these indices are compared in the semester, we see improvement with a reduction from 22.3% to 21.9%.
At the bottom of the slide, we show the evolution of administrative expenses, which totaled BRL 79 million, a decrease of 25% when compared to the same quarter last year. Therefore, the administrative expense index was 5.9%. In the first six months of 2022, the drop was more significant, from BRL 205 million to BRL 115 million, causing the index to fall from 6.4% to 5.5%. As a result of all the figures we've just mentioned in slide 12, on the upper part, we can see the expanded combined ratio, which demonstrates the final profitability of our business.
At the bottom of the slide, we show the same normalized index of the typical effects of this period as already widely explained by Toneto. On the bottom here, so that we can understand the business without the distortions caused by the typical events that I had already mentioned. The combined ratio expanded in the first half of 2022 when excluding the effects of agro and COVID would be 99%. In other words, it would already show a profitability where the earned premium added to the financial result cover the costs of commissioning.
In this slide, we can see that the financial result was positive in BRL 104 million, an increase of 17% compared to the same period in 2021. This is a result of the increase in the Selic rate and also in the variable costs. The portfolio of assets had a value of 17% in the second quarter. In the first months, we had BRL +364 million when compared to the first months of 2021, already taking into account the non-recurring effects regarding two legal suits that were won. Here we can see the portfolio assets that represents 44% of our total financial assets.
This is aligned with the strategy of the company also to meet with international operations, and due to its characteristics, it has profitability not linked to the BRL or the CDI. Finally, on slide 14, we see how our regulatory indicators were at the end of second quarter. We can see BRL 614 million. With that, the adjusted net amount corresponded to BRL 548 million. This quarter, we can see the coverage of the technical provisions in the amount of BRL 730 million. With the technical provisions in need of coverage at the end of the quarter. I now turn back to Raphael to close our presentation.
Well, as you've seen, the company. It's important to highlight that the company has posted very good results in about BRL 8 million in assets to face its obligations with its clients. Yesterday, we sent to SUSEP a formal plan or a PRC that describes the ongoing actions in plan to recover the company. Some other initiatives, as was published last morning in our material fact, the company is evaluating several initiatives to reinforce its position, including a share offering, which would, in principle, be a primary offer.
IRB has within its assets, real estate and other relevant assets, and according to regulations, they cannot be used in the coverage of technical provisions. So we're working on selling these assets and participations. There's a third line of action consisting in the use of structured retrocession operations, as was mentioned before, and financing evaluation, which would reduce our capital. When we look at the results for this first half of the year, normalized from the adverse weather effects that we mentioned and COVID, the results were positive thanks to the financial results and operational improvements we posted in comparison to last year.
We know how frustrating it could be in a recovery to have to deal with so atypical and damaging events that harshly get in the way of our results. But we should not lose sight of the recovery we saw during these six months if we disregard the disastrous events. So we believe it's essential to maintain discipline and perseverance in executing our plan. As we said, we had an increase in the business share of Brazil, where we are getting better margins. We had a reduction in concentration by contract and segment, as we saw on the second slide .
Administrative expenses were under control, which improved our margins. As we mentioned, there was a continuous adjustment of the price risk ratio. That concludes my notes. Now we will pass it back on to the operator for our questions- and- answer session.
Thank you. Ladies and gentlemen, we will now begin the questions- and- answer session. If you have any questions, you can dial star one. If at any point your question has been answered, please dial star two. Questions will be answered in the order they come in. Please remember to unhook your phone when you're asking a question so that we can provide optimal sound quality. Please hold while we pull for questions. The first question will be asked by Kaio Prato from UBS.
Good morning, everyone. Thank you for the opportunity to ask this question. I'd like to ask about your regulatory insufficiency indexes. have three questions here, if you might help me. The first one is, why did you make a decision to not have the LPT operation this quarter? I imagine that that would help your indexes. I would just like to understand why that decision was made and why you chose not to have it this quarter.
Secondly, considering the capital increase, as you mentioned in your material fact, I would like to hear some more about this situation and what do you imagine would be the ideal amount through follow-on or through a different capture or structured operation, considering your future loss ratio to leave you at a more comfortable level. The third question is about your premium dynamics. With liquidity, how does that impact you for contract renewals and for new policies? Have you seen any impacts from that? That is all. Thank you.
Thank you, Kaio. This is Raphael. I will start answering your question, and we will pass it over to some of our colleagues. First, about the LPT operation. I would like to remind you of what I said during one of the slides. We have three initiative trails. One of them is connected to capital, the second one is connected to real estate and participations, and the third would be operations in the insurance and reinsurance markets. Our decision to use these operations is connected to two factors. First, the effect that they would cause on the needs we would have then, and secondly, the cost.
During this time, we did not use it because we considered the effects and costs associated would not provide for the best equation. I think that is the best answer to why we did not carry out the LPT operation you mentioned. Considering the capital increase, it is important to remind you that a short while ago, we had an extraordinary general meeting, where not only did we change our bylaws, but we also approved an increase to the authorized capital by BRL 1.2 billion. In a way, shareholders made available to the company the power of increasing our capital up to that amount.
That answers the question as to what stage we are in and what values we can consider in the capital increase. The second point on premiums. Can you repeat your question just so that we can make sure that we understood it well?
Yes. My last question about premiums is how this liquidity problem impacts you for contract renewals and also for new policies, if you see any impacts from that due to your capital position.
That is a great question, and we tried to address it by showing the percentage of renewals that we had during the quarter, which was the highest in the last few quarters. From the customer's confidence point of view, we have not seen any changes, and we have been very proactive. We have been in contact with our clients so that no questions are left unanswered. Considering capital needs, they do not affect our capacity to issue premiums, but of course, they are not recommended, so it may happen.
It is important to remind you, and this is something I mentioned in the beginning of my remarks, that our operation is ongoing, and it will solve this situation that we are in right now. Thank you.
Great. Thank you.
The next question was sent through the webcast platform. It was written by Mr. Caio Reis from Banco Inter. This question is about agriculture contracts, how does risk-sharing work with the insurance companies? Were contracts misselected? I will ask Veiga to answer this question.
Thank you. How do these contracts work? In the agricultural segment, we have proportional-based contracts, meaning there is a society, a participation in claims and premiums among the insurance companies and the reinsurance companies. That is how agricultural insurance behaves, especially considering the intrinsic catastrophic factor, which can affect several companies. Insurance companies have a standard, and in most cases, it proportionally distributes risks and claims in contracts.
Let me just add something about that adverse selection. I would just like to highlight that what we saw during this time was a true catastrophe. It was not only an adverse selection, but we went through a historical moment in our country. As was mentioned, IRB has never had a general claims ratio above this amount. We had already placed certain protections, but they were surpassed considering the loss ratio that we foresaw in the market.
Of course, after some losses that the company and the market showed, evidently, we would expect that better conditions would be established, both for insurance companies as well as for reinsurance companies. I think that is it.
Yes. To give you some dimension on what we mean by a historical atypical phenomenon. In Paraná, we have not had a severe drought of this sort for over 90 years, and Rio Grande do Sul over 75 years. These are areas that have a large concentration of the insured crops. These are regions that culturally take out insurance.
As a reminder, if you would like to ask a question, please dial star one. The next question will be asked by Guilherme Grespan from JP Morgan.
Good morning, everyone. Thank you for taking this call. I have a simple question. You mentioned participations in real estate as one of the measures that you can take, but just give us an order of magnitude. When you have an institution of BRL 600 million or BRL 700 million, what are your main assets, and what is the market value that you believe you would be able to get? Just to give us some perspective. Thank you.
I will ask Wilson Toneto to answer that question.
Hi, Guilherme. Actually, there is a negotiation ongoing. We are assessing if these participations can be carried out, so the magnitude would be adequate for this negotiation. But accounting data is reflected in our balance. Although we have had major impacts to our portfolio, we have real estate, buildings, lands, participations in shopping malls, that can be negotiated. I apologize, but the information on the values, right now, we are unable to provide.
Okay, thank you.
We would like to remind you that to ask questions, you should press star one.
Our next question was asked through the webcast platform by Mr. Victor Rodriguez from Interbank. The question is the following: What are the next steps for the formal plan sent to SUSEP? What is the timeline given to SUSEP so that you can resume solvency in provision levels that are greater than the minimum regulatory levels? I would like to ask Guerra to answer. He is our risk specialist.
Good morning, Victor. Thank you for your question. We have two different options. Yesterday at SUSEP, we entered a recovery plan for coverage. SUSEP foresees that this plan must be carried out within three months, and therefore, we have by the end of October to organize the provision coverage. Regarding defaults, we have something for the month of June, and we have to wait for their contact so that we can take the required measures. Once we receive their notice, we will have some time to do it.
According to our understanding, the measures adopted for the coverage recovery plan, the other one will be automatically solved, and therefore, we probably will not have this second step with SUSEP. We understand that our plan is well executed, and if we do it by the end of October, both indices will be okay within this timeline.
We now conclude the Q&A session. I would like to turn over to Mr. Raphael de Carvalho for his final considerations. Please proceed.
Once again, I would like to thank you all for being here and for the questions asked. I reinforce the messages given in the final considerations, the harder or the more frustrating it is to deal with historically atypical events as the ones we had. In the middle of our recovery process, when we remove this cloud away from us, it is easy to see that the company is recovering and that we would have had a first quarter with positive results. I thank you all for your attention, and I am looking forward to seeing you in our next result conference.
IRB conference is now over, and we thank you all for your presence. Have a wonderful day.