Short Seller Makes His Case, Triggering a Rare Feud in Brazil

(Bloomberg) — For three years, reinsurer IRB Brasil Resseguros SA has been a darling of analysts and a boon for investors. Then came the short seller.

Asset manager Squadra Investments said Feb. 2 in a 150-page report that it holds a short position in IRB, triggering a 24% stock plunge and setting into motion a heated public feud that’s the talk of Latin American investment circles. Squadra’s campaign lopped off about 10 billion reais ($2.3 billion) in IRB’s market value.

While fairly common in other parts of the world, with high profile bearish cases made by the likes of Muddy Waters and Spruce Point Capital, it’s rare in Brazil for short sellers to publicly point the finger at a specific company and lay out their rationale so thoroughly.

IRB clapped back by filing a claim with Brazil’s CVM securities regulator, accusing Squadra of stock price manipulation and insider trading, a person with direct knowledge of the matter said. The CVM confirmed that administrative processes are open, without disclosing the content.

Squadra, founded by Brazilian investor Guilherme Ache and with 3.7 billion reais in assets under management, said IRB included one-offs in its recurring pre-tax income figures. IRB pushed back and plans to hire third-party firms to vet the numbers. It has declared itself the most profitable company in the global reinsurance sector and, over the past 12 days, has called up banks including Morgan Stanley (NYSE:) and Santander (MC:) Brasil to explain how its higher-than-average return on equity is sustainable.

Clashing Over the Numbers

The difference in calculations is stark: Whereas IRB reported a pre-tax profit of 1.39 billion reais for the first nine months of 2019, Squadra says it actually had a loss of 112 million reais.

“The recurring profitability of IRB’s business is much smaller than what the market believes,” wrote Rio de Janeiro-based Squadra. “There’s a huge discrepancy between the price and value of IRB’s shares.”

The public disparaging marks a change in tack — and in fortunes — for Squadra. While the firm previously said it had shorted a company in the insurance sector, it never disclosed the name. But with the release of the report this month, Squadra revealed that it started betting against IRB in May 2018, adding to the position until the reinsurer became the biggest short wager in its $330 million Squadra Master Long Biased Fund. Until now, the bet backfired as the stock nearly tripled since mid-2018 through the end of last month.

At an impromptu press conference on Tuesday, IRB Chief Executive Officer Jose Carlos Cardoso said he was “shocked” by the recent events and promised to disclose more information in its earnings release scheduled for Feb. 19. The company, which declined to comment because it’s in a quiet period, says Squadra’s report includes technical errors. Squadra didn’t reply to requests for comment. Valor newspaper was first to report IRB’s securities claim against Squadra.

Split Opinion

Analysts are divided. Citigroup (NYSE:) and Morgan Stanley have reiterated their buy ratings, but XP Investimentos placed the stock under review, citing a lack of visibility. IRB has 13 buy ratings and four holds, according to data compiled by Bloomberg. It’s never had a sell rating since its initial public offering in 2017.

“What we heard suggests a buying opportunity,” Morgan Stanley analysts led by Jorge Kuri wrote in a note last week after reaching out to IRB management about the accusations.

Squadra is sticking to its call. In a second letter to investors, it said new data provided by the company to refute its claims haven’t altered its view.

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