Study of Brazil`s Top 20 Insurance Companies

Transcription

Top 20 Brazilian Insurance Companies
Table of Contents
Introduction
Study of Brazil's Top 20 Insurance Companies
Brazilian Insurance Industry Expected to Capitalize on Growth Opportunities
What to expect from the opening of the Brazilian reinsurance market?
Top 20 Brazilian Companies Ranking Criteria
5
6
8
14
16
Summaries
Bradesco Seguros S.A.
Sul América Seguros S.A.
Itaú Seguros S.A.
Unibanco AIG Seguros S.A.
Porto Seguro Cia de Seguros Gerais
Companhia de Seguros Aliança do Brasil
Mapfre Vera Cruz Seguradora S.A.
Tokio Marine Brasil Seguradora S.A.
Caixa Seguradora S.A.
AGF Brasil Seguros S.A.
Santander Seguros S.A.
HSBC Seguros S.A.
Marítima Seguros S.A.
HDI Seguros
Liberty Seguros S.A.
Chubb Seguros S.A.
ACE Seguradora S.A.
Metropolitan Life Seguros e Previdência Privada S.A.
Icatu Hartford Seguros S.A.
IRB Brasil Resseguros S.A.
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37
38
Insurance Ratings Methodology
40
Insurance Ratings Definitions.
43
Contact List
45
Top 20 Brazilian Insurance Companies - 2007 3
Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York,
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Introduction
Welcome to Standard & Poor's Ratings Services' first publication of
Brazil's Top 20 Insurance Companies. We see 2007 as a turning point
for the insurance industry in Brazil, as it marks the transition to an
open reinsurance environment and to stronger, more prudent solvency
rules. Under the new environment for the reinsurance business, we
expect new investments, new products, more competition, and further
consolidation in the insurance market--all leading to an increase in the
insurance business in Brazil. Such great opportunities will not come
without significant challenges, such as the need for higher financial
transparency by local insurers, development of relationships with
reinsurers, and higher capitalization.
At the same time, the insurance industry is striving to keep pace with
the opening of the Brazilian economy and the consequent
developments that are taking place in other segments such as
industrial companies and financial institutions. This should translate
into increased participation of insurance premiums in the Brazilian
GDP. Companies are also adjusting to operate in an environment of
declining interest rates. Brazilian insurance companies have been
improving underwriting practices and loss management, while
searching for cost efficiency. These efforts will be important for the
achievement of sustainable profitability that should help build capital.
We take pride in our reputation as the world's leading credit rating
service, with a global network of 20 countries and more than 140
years of experience providing independent ratings services to the
global financial economy. With the opening of the Brazil office in
1998, our local business grew significantly, indicating that ratings
activity became an integral decision-making tool for investors.
We are confident that this publication will be a good source of
information for those who are interested in the present and future of
the insurance industry in Brazil.
Study of Brazil's Top 20
Insurance Companies
Brazil's Top 20 Insurance Companies includes an analysis of the
insurance industry risk with our views on the characteristics of the
industry, recent developments, and trends for the sector. It considers
the positive evolution of the regulatory framework and highlights the
influence of sovereign risk, if for nothing else than the high proportion
of government securities backing reserves. The study also offers our
view of the opening of the reinsurance market and what changes we
expect to result from this less-protected environment. We also provide
comments on the credit profiles on the 20 largest insurance groups by
premiums written in 2006 (according to SUSEP - Superintendência de
Seguros Privados), with a summary analysis of the three insurers we
currently rate and short commentaries on the credit profiles of the
remaining 17 nonrated insurers. We also include an analysis of the
Brazilian government-owned reinsurer IRB-Brasil Resseguro S.A.
The 20 largest Insurance groups represent an important 91% of the
entire system's premiums in 2006. Looking at the top 20 insurance
groups, we explore their business profiles by analyzing their
competitive position, diversification, and financial flexibility, which
includes our view of potential parent support. In terms of financial
profile, we evaluated their operating performance, investments,
liquidity, reinsurance, and capitalization. The maintenance of high
profitability is important to help build stronger capital, and crucial to
cover the risks associated with the insurance operation. The quality of
the investment portfolio should provide liquidity and resources for the
insurers to pay down their obligations--mainly claims. Reinsurance is
becoming more important as the property and casualty business gains
weight in the industry, large risks increase their share in the industry,
and the local economy grows and becomes more sophisticated.
The business and financial profiles of the selected insurers were
compared to the industry average for the segments in which they
operate and measured into five categories: well above average, above
average, average, below average, and well below average. These
categories are used for comparison of insurers inside Brazil only; they
do not apply for global comparisons. The result of this exercise can be
seen in our scatter diagram on page 7 for a better comparison of the
top 20 insurance groups.
(1) Business Profile
Business profile evaluates the consolidated market position of the
insurance companies in the industry and in the insurers' major
segments, diversification, and financial flexibility. The insurers seen to
have a business profile of well above average and above average
usually show a strong and sustainable market position, as well as
regional and segment diversification. They also benefit from a
distinguished distribution and financial flexibility deriving from the
position as strategic subsidiaries of strong international insurer groups
or important product lines for strong local financial groups. These
features have allowed them to maintain a distinct position in
achieving more stable premiums and managing the impact of
economic changes in the behavior of a specific segment. As a
consequence, we expect them to show good results that will help
6 Top 20 Brazilian Insurance Companies - 2007
them achieve a stronger capital position. We expect monoline insurers
to have a distinct market position with strong product and distribution
capacities to overcome the concentration risk and to show well above
average and above average business profile.
Average and below average business profiles were granted to
companies that have a small share in most of the insurance segments
and in the insurance industry with very low diversification. Even if the
company benefits in terms of financial flexibility for being a strategic
subsidiary of a foreign group, we expect it to benefit from the
knowledge and experience of the group to present a strong and
increasing market position to have well above average and above
average business profiles. Competition is very intense and we expect
the companies' strong business profile to translate to good business
origination, which is important for the generation of strong
profitability and capital.
(2) Financial Profile
The insurance companies with well above average and above average
financial profiles show strong profitability with good underwriting
results, adequate investment portfolios to their risks, and strong
liquidity of investments to support their claims. They are also expected
to show a strong capitalization with excess capital to support their
underlying risks, including underwriting, asset, credit, and reserve, and
to show strong reinsurance relationships to support their expansion in
low-retention policies.
The insurers with average had below average financial profiles in
general have lower operating performance and underwriting results,
or capitalization.
Operating Performance
Most of the Brazilian insurance companies have maintained good
profitability. Nevertheless, this profitability is helped by the strong
financial results generated mostly by their investment in fixed-income
securities. In 2006, the Brazilian insurance and pension industry
reported ROA of 5.2% compared to 4% in 2003; however, the industry
only showed positive underwriting results in 2006. Profitability should
continue to be a positive for the industry and we expect insurers to
maintain strong underwriting results through active loss and
underwriting management, and attention to efficiency. We expect
financial results to decline in light of the drop in interest rates.
Investment and Liquidity
Liquidity and investments in the insurance industry have been good,
but still rely on government securities. Government bonds have been
the industry's major investment instrument (more than 80%) given
their strong liquidity and lower risk. Equity investments represent a
low 8% of the total and even with the reduction in interest rates are
not expected to increase significantly. We expect investments to cover
more than 100% of the reserves and to be maintained in liquid
instruments with good risk profiles.
Capitalization
We expect the new Solvency rules established by the regulator to
reinforce the industry's capitalization. Although the industry is not
undercapitalized by the current solvency requirement, we expect some
insurers to reinforce their capital to support their underlying risks
under new solvency rules and remain competitive in the industry. We
expect the stricter capital rules to bring changes in the industry, with
additional consolidation and higher use of reinsurance.
Reinsurance
Until now, IRB has enjoyed the monopoly of the reinsurance industry
in Brazil. However, with the opening of the market, insurance
companies should look into establishing strong reinsurance contracts
and diversifying their reinsurer relationships to present a competitive
position in the industry and sustain a strong operation.
Scatter Chart
The following chart shows the relative business and financial profiles
of the top 20 insurance groups covered in this survey. The business
and financial profiles were determined in relation to their local peers
and the insurance industry average.
Brazilian Insurance Industry Expected to Capitalize
On Growth Opportunities
Primary Credit Analyst: Tamara Berenholc, Sao Paulo, (55) 11 3039-9732; [email protected]
Secondary analyst: Milena Zaniboni, São Paulo (55) 11 3039-9739, [email protected]
The Brazilian insurance industry has significant potential for growth.
Standard & Poor's Ratings Services expects the industry to take
advantage of the changes in the market, including the expected
opening of the reinsurance industry and improved regulation in line
with international standards. Although it only represented 2.6% of the
Brazilian GDP in 2006, we expect the insurance industry to double its
size in the medium-to-long term. We expect low use of insurance and
the improved economic conditions with higher prospects for income
per capita to enhance demand for protection products, boosting the
insurance market.
Industry concentration is high and should remain that way, driven by
the competitive environment, lower interest rate, and stricter
regulatory rules for solvency. We expect financial conglomerates'
participation in the insurance markets to remain strong. Foreign
insurers will also become increasingly important players, given their
interest in tapping a large potential market.
Market Overview: Good Outlook For Growth
There have been good growth rates in the insurance industry's
premiums during recent years, with the Brazilian insurance sector
correlating to the overall economic cycle and growing at multiples of
5x-6x the annual GDP growth in the past decade. However, this still
seems to be well below the insurance market's potential. The
Brazilian insurance industry represented a low 2.6% of the Brazilian
GDP in 2006, which is below that of other countries. Among the main
factors contributing to low insurance dissemination in Brazil are the
relatively low income per capita, which limits the consumption of
insurance products; poor income distribution; and the still-closed
reinsurance market.
The industry's improved operating performance is largely a result of a
better loss management, stricter underwriting practices, and greater
efficiency, as Brazilian insurers have to adjust to lower interest rates
and financial results. In 2006, the Brazilian insurance and pension
industry reported a net income of Brazilian reais (R$) 8.6 billion and
positive underwriting results.
The asset quality and liquidity of insurers' investment portfolios
remain satisfactory, and the companies' risk management is adequate.
At year-end 2006, fixed-income investments including government
securities represented 92% of invested assets, with stocks accounting
for only 8%.
Brazilian insurers' capitalization remains adequate as per the existing
solvency rules; however, the move toward a new solvency model with
capital requirements for underwriting, credit, market, legal, and
operational risks will require additional capital for the industry. Such a
model should also lead to changes in the marketplace, including
consolidation, higher reinsurance penetration, and changes in some
players' business mix.
The Brazilian insurance industry is characterized by the following
positive credit factors:
Long-term growth prospects;
Limited exposure to catastrophic risk;
Conservative investment policy;
Improved underwriting discipline; and
Changes in regulatory rules in line with international standards.
Negative credit factors in the industry include:
Small portion of GDP as compared to other countries;
Low use of insurance products;
Strong competition; and
Need for additional capital to cope with new solvency rules and
future growth.
Source: Fenaseg: Federação Nacional de Empresas de Seguros
Privados e de Capitalização
Improvement in Brazilian income per capita and income distribution
depends on deep changes in the country's social structure,
implementation of major reforms at all levels, and constant and higher
economic growth. Brazil's diverse economic structure compares well
with that of its peers, but the economy has a track record of low
growth of between 3% and 4%. Brazil's economic structure and
growth prospects are also constrained by income inequality and
poverty. Almost 50% of the nation's income is concentrated in 10% of
the population, and more than 20% of the population lives below the
poverty line.
Brazil Economic Indicators
--Year ended Dec. 31-(%, unless otherwise
indicated)
2006
GDP per capita (US$)
5,538
Real GDP (% change)
3.7
Unemployment rate
10.0
Interest rate
(year-end Selic rate)
13.25
CPI, average annual
rate (% change)
4.1
Domestic credit to private
sector and NFPEs (% change)
20.7
2005
4,674
2.9
9.8
2004
3,860
5.7
10.0
2003
2,664
(0.2)
12.2
2002
2,631
1.9
11.7
2001
2,946
1.5
6.8
2000
3.537
4.5
7.9
1999
3,220
0.8
8.3
1998
4,869
0.2
8.4
1997
5,050
3.3
6.1
18.00
17.75
23.0
19.2
17.3
17.4
25.6
29.5
25.0
6.7
8.2
14.0
8.5
6.9
7.0
N.A.
N.A.
N.A.
21.7
19.2
8.0
14.1
6.8
5.7
6.6
19.1
6.3
Source: Full Analysis of Federal Republic of Brazil by Standard & Poor's
Interest Rates
Although insurance companies have improved their underwriting
results, the Brazilian insurance market is sensitive to interest-rate
trends. Brazilian insurers' investment portfolio have been concentrated
in fixed-income and government securities. These represented 92% of
the investment portfolio in 2006, with low exposure to the equity
markets of 8%. While we expect a smooth interest rate reduction, it
will generate lower investment yields in the market and lead to a
move toward better loss/underwriting management and search for
efficiency. Insurance risk management is good, and we do not expect
a significant change in the companies' risk profiles to compensate for
lower yields.
Stock Markets And Real Estate
Equity investments represent only 8% of the investment portfolio of
the insurers' reserves; therefore, the volatility of share prices has not
affected insurers' results significantly. The reduction in interest rates
and the strong liquidity in the market lead to an increased attraction
to the Brazilian stock market. From 2004-2007, the Brazilian Stock
Index (Ibovespa) gained more than 80%. We do not expect the
insurance industry's investment in the equity market to increase
substantially given its higher volatility and the Brazilian insurers'
conservative asset and liability management.
Due to its inferior liquidity, the real estate sector continues to be
underdeveloped and unattractive as an investment alternative to the
insurance industry. Even though there has been an increase in the
mortgage industry in recent years with some benefits from lower
interest rates, we do not expect insurers to be highly exposed to the
real estate market in Brazil.
Industry Risk
Brazilian market dynamics
The Brazilian insurance industry's total premium volume reached
R$59.2 billion ($25.2 billion, at an exchange rate of R$2.92 per $1) at
year-end 2006, having grown by an average of 15% per year in the
past 10 years. Nevertheless, this growth pattern was not enough to
produce a significant increase in the industry's participation in the
GDP, which remains below that of more developed countries. It
reached 2.6% of GDP in 2006, compared to 6% in Spain, 8% in
Germany and the U.S., and 13% in the U.K. Excluding the
commercialization of Vida Garantidor de Benefícios Livres (VGBL; a
pension-plan product with life coverage for death and disability),
which has been the major driver for growth in the industry, the
insurance market participation has been stable at 2% of GDP.
Source: Brazilian Stock Exchange
The Brazilian insurance market is only the 20th largest in the world in
total premiums as of 2005 and represents a small 1% of total global
premiums. Still, it remains the largest insurance industry in Latin
American, representing 41% of the total premiums in the region in
2005. The Brazilian life business accounts for 45% of the life
premiums in Latin America, while nonlife business accounts for a
relevant 38% of the nonlife premiums in Latin America. We believe
the industry has good growth prospects. Among the main factors
contributing to this potential growth are the continued low penetration
of insurance products in the market, pending pension and workers'
compensation reform, upcoming opening of the reinsurance market,
and improving economic conditions with better income distribution.
Major untapped markets such as large risks, bond sureties, and
agricultural risks can potentially sustain stronger growth in the future.
These segments are highly correlated to the overall development of
the local economy.
Product mix
In contrast to other markets, most Brazilian insurance companies are
multiline companies offering pension-plan products and health, life,
and property & casualty insurance. The distribution of premiums per
line of business has changed significantly during the past five years,
shifting toward life insurance products, mainly VGBL (free benefits life
grantor). Leading lines of insurance are life and VGBL, representing
42% of total premiums in 2006; followed by auto, including personal
damage caused by auto vehicle, 27.3%; and health, 15.4%. The
participation of the auto segment has declined during recent years,
while life insurance accounted for an increasing portion of total
premium production.
the Brazilian pension fund reform should help to boost segment
growth. Important growth potential in life insurance should cause
these lines to participate even more in total industry production and to
lead the industry growth in coming years. Insurers already offer
voluntary, complementary, private pension plans, but the workers'
compensation market remains a government monopoly. Given the
profile of life insurance as a quasi-savings product, insurance
companies associated with financial conglomerates dominate this
market. They not only benefit from the large distribution network, but
also provide cross-selling opportunities.
The lower participation of the auto insurance segment in total
premiums in Brazil results from the high growth of the life segment
and the still-low GDP per capita and income distribution in Brazil.
These factors affect the sale of auto policies and the number of
vehicles insured (only 30% of the national vehicles have any
coverage). Health insurance also reduced its share of the market.
Health-care providers (such as medical groups) are controlled by
Brazilian health insurance regulators and ultimately report to the
Ministry of Health (as opposed to the remaining insurance segments,
which are regulated by the Superintendencia de Seguros Privados
[SUSEP] and ultimately by the Ministry of Finance). Legislation in this
area has changed significantly and since 1999, health-care companies
must comply with broader coverage requirements and standardized
policies. Constant changes in medical coverage and limitations on
policy price increases have made insurance companies operating in
this area present negative results and have driven their focus toward
group policies as a way to have more flexibility and improve their
technical results with the segment.
Geographic spread
The geographic spread of insurance premiums generally follows the
concentration of the country's population and production force, with
Sao Paulo state--which accounts for about 31% of gross domestic
product and 22% of the country's population as per IBGE--representing
51% of insurance premiums in 2006. Together with the states of Rio
de Janeiro and Minas Gerais, Brazil's southeastern region accounted
for 71% of total premium production.
The insurers are trying to expand operations in other regions of
Brazilin such as the South and Northeast. In 2006, these states
represented about 21.7% of total premium production, compared to
19.5% in 2003.
Structure and concentration
Life insurance has been the fastest growing segment in the industry,
also benefiting from the introduction of some differentiated products,
such as VGBL. While the deregulation of rates and policy terms
allowed insurers to create customized products at lower prices, lower
inflation rates brought about by the economic stability have created
conditions favorable for longer term investing, which is crucial for the
development of the life insurance market. In addition, the evolution of
With total premiums of R$59.3 billion in 2006, the Brazilian insurance
industry is concentrated, with the top-10 insurers and their affiliated
companies controlling about 79% of premium production.
The significant influence of banks and foreign capital in the Brazilian
insurance industry can be observed in the concentration of premiums
in the hands of these investors. At year-end 2006 there were around
70 insurance groups or around 120 insurance companies. About 54%
of the premiums belong to financial conglomerates (domestic and
international), another 33% are foreign subsidiaries or joint-ventures
with foreign companies, and the balance consists of independent
domestic insurers. We expect financial conglomerates' participation in
insurance activities to remain strong, in light of the competitive
advantage offered by access to the banking distribution channel.
Foreign insurers will also become increasingly important players,
given the global strategy of business and regional diversification and
the fact that Brazil is an attractive market with good developments in
the industry.
companies are also making big efforts to keep their operating costs
under control. The ratio of administrative and tax expenses to earned
premiums for the insurance industry reduced to 18.6% in 2006 from
20.1% in 2003, but is still higher than in other countries.
Key future competitive elements will include high solvency levels,
adequate subscriptions, efficient distribution, and the development of
new products. In the future, sustained profitability levels and
underwriting results in particular will enhance insurers' credit quality
and reinforce capital. The companies able to adjust faster to this
scenario and show strong underwriting and bottom-line results should
present the better creditworthiness.
Competition
We expect the industry to consolidate even further as a result of the
competitive environment, the expected reduction in interest rates, the
stricter regulatory rules for solvency, and consolidation in the banking
sector. Smaller players that can no longer survive under the new
competitive landscape are expected to be acquired.
Distribution
Under current legislation, insurance policies can only be sold through
insurance brokers, a practice that has significantly contributed to the
market's high distribution costs. Commission rates have averaged
roughly 15% during the past three years. With the change in the
insurance environment, including the opening of the reinsurance
market and higher competition, brokers with the ability to offer valueadded products will survive. Brazil has around 60,000 insurance
brokers and we expect this segment to consolidate, given increasing
competition and insurers' efforts to increase efficiency.
Improved Operating Performance
Most Brazilian insurance companies have maintained good
profitability. Nevertheless, this profitability is helped by the strong
financial results generated mostly by the investment in fixed-income
securities. Brazilian interest rates are the major driver of this strong
financial result, as a large part of the remuneration of technical
provisions is linked to the country's interest rates. In 2006, according
to SUSEP data, the Brazilian insurance and pension industry reported
net income of R$8.6 billion compared with R$4.3 billion in 2004;
however, only in 2006 did the industry show positive underwriting
results--insurance and pension results to total premium and pension
benefits evolved to 2% in 2006 from negative 6% in 2004.
Brazilian insurance companies have worked to improve their
underwriting results to anticipate the changes in the economic
environment and the drop in interest rates. Insurance companies
started to improve their underwriting policies by enhancing client
selection and revaluating insurance contracts based on profitability,
while working to reinforce claims and fraud control. The industry loss
ratio reduced to a good level of 61% in 2006 from 69% in 2003. The
companies' efforts to improve profitability and underwriting policies
have catalyzed a reduction in the loss ratio to the lowest level in the
past 10 years. We expect this trend to continue.
Source: Superintendência de Seguros Privados (Susep) and Agência
Nacional de Seguros Suplementar (ANS)
Combined Ratio: (Claims + Commercialization Expenses +
Administrative Expenses + Tax Expenses) to Earned Premiums
Adjusted Combined: (Claims + Commercialization Expenses +
Administrative Expenses + Tax Expenses) to (Earned Premiums +
Financial Result)
Investment and Asset-Liability Management
Brazilian insurers' balance sheet management is conservative, with a
prudent approach in terms of investments. Brazilian insurance
companies place good emphasis on investment, aiming to provide
good liquidity and manage credit risk. At year-end 2006, fixed-income
investments including government securities represented 92% of
invested assets, stocks only 8%, and real estate a very low 0.3% (see
chart 6). The bond portfolios are related to Brazil risk and provide good
liquidity as the majority is invested in government bonds, either
directly or through funds.
Insurance commercialization costs are higher than in other countries,
given the regulation that certified insurance brokers must be used for
commercialization of insurance products. Brazilian insurance
market. By that measure, insurers' adjusted equity must be equal to or
more than the higher of the following: 20% of the average net
premiums per year; or 33% of the average net claims incurred and
reported in a three-year period. The coverage of Brazilian insurers'
solvency margin is adequate.
Source: Susep and ANS
Exposure to the equity markets is low, but we expect the prospects for
the capital market and a reduction in Brazilian interest rates to drive
more investments to the equity market. Nevertheless, we expect
insurance companies to maintain the bulk of their investments in fixedincome instruments given their liquidity and lower volatility.
We expect an increasing use of asset-liability management models in
Brazil, encouraged by regulators' approach to solvency.
Capital Adequacy To Be Reinforced
As per the regulation in place, Brazilian insurance companies are
adequately capitalized, but capitalization varies among individual
companies. As a result of efforts to improve profitability, the industry's
net worth increased 58% from 2004 to 2006 to R$27 billion (insurance
and pension) through earnings retention. We do not expect
capitalization to lessen, as the companies should continue to be able
to generate better underwriting results. In addition, we expect capital
injections with the changes in regulation for minimum capital and
solvency.
The regulation still in place requires a minimum capital level based on
lines of business and states in which insurers operate. If a company
operates in the entire territory and in both the P&C and
life/health/pension sectors, it would need minimum capital of R$7.2
million. Apart from the minimum capital, the solvency margin (SM)
By the end of 2006, SUSEP published new capital requirements for
insurance companies that will have to comply with the new regulation
for the base capital, and additional capital requirements for
underwriting, credit, market, legal, and operational risks, following a
step to Solvency II. As of January 2008, the base capital requirement
will be raised to R$15 million from R$7.2 million for the companies
operating with all major segments and in the whole territory. SUSEP is
regulating additional capital, and the insurance companies will have
to adapt to the new capital requirement within three years (30% of
the required capital for additional risk in the first year, 60% in two
years, and 100% in three years) after SUSEP regulates each risk. The
underwriting risk was regulated by SUSEP at the end of 2006
(Resolution 158) and is based on risk factors for each business line
and territory related to underwriting and reserve risks. The additional
capital requirement for underwriting risks should be of around R$6
billion and insurers were requested to comply with the regulation
starting January 2008. We expect the new regulation to change the
insurance environment with capital injections, acquisitions, joint
ventures, higher reinsurance retention, or changes in business mix.
The other risks have not yet been regulated and are expected to bring
additional capital requirements for Brazilian insurers. However,
underwriting risk will require higher capitalization.
We view the new regulation positively as it is more in line with the
international standard for capital and should align the Brazilian capital
requirement to stricter international practices. To that objective, in our
analysis of insurance companies we have been using a capital model
approach to compare the amount of risk-adjusted capital with the
minimum secure level we believe it should have to face its financial
and operating risks. According to the model, the adjusted capital, less
the charges for asset and credit related risks, should cover
underwriting and reserve risks.
Asset risk evaluates the quality and liquidity of an insurer's
investment portfolio, which are key to its ability to make timely
payments on its obligations. Credit risk reflects the collectability risk
associated with certain assets or receivables on the balance sheet.
Underwriting risk is the risk that the company's present and future
business will be unprofitable and that underwriting losses will need to
be covered by capital. The reserve risk is the risk that past business
will be less profitable than expected, and can add further variability to
claim costs. Standard & Poor's Capital Adequacy Model for Brazil is a
significant part of the analysis of an insurer's capital strength. It is
important to point out that Standard & Poor's Capital Adequacy ratio
is only a reference point for judging a Brazilian insurer's capital
adequacy.
Reserving Levels Being Reinforced
calculation has been the most important supervisory tool in the
Source: SUSEP
The total gross technical reserves-to-gross premiums written ratio
among Brazilian insurers has increased due to the companies' efforts
to reinforce reserves. Reserves are adequate to the risks run by
insurers, and were already reinforced for the health sector (especially
in 2004 and 2005) and for contingencies in recent years--in a way
anticipating the changes in regulation. Higher reserving risk can also
result from business mix shifts toward liability and longer tail lines of
business in general.
Aside from a minimum capital requirement, regulators are in a
transition to introduce a risk-based capital mechanism that factors in
underwriting, market, credit, operational, and legal risks. We consider
the risk-based model a useful tool that will make insurers more risk
conscious. The regulator's focus on the solvency is positive. In
addition, new legislation is designed to regulate the opened
reinsurance market. This legislation will have an effect on how the
Brazilian insurance market operates as a whole.
To emphasize the Brazilian insurance market and generate discussion
on the development of the sector, the Brazilian Insurance Federation,
Fenaseg, is expected to become a confederation in the second half of
2007 with a specific focus on the four major segments: property &
casualty, life and private pension, health, and saving bonds.
Accounting Principles
Source: Fenaseg
Reinsurance use is low
Reinsurance use is low in Brazil, with only 6% of the risk ceded to
reinsures. The low use of reinsurance is a result of the segment mix of
the Brazilian market, where insurers can take the majority of risks for
auto and life segments (the most representative in Brazil). It also
reflects the lack of catastrophic risks.
The insurance market is transitioning to an opened market from a
monopoly under Instituto de Resseguro do Brasil (IRB). Under the new
regulatory framework that opens the market for reinsurance, all
insurers will have to reinsure at least 60% of their reinsurable
business with local reinsurers (IRB and other reinsurance companies
domiciled in Brazil). This requirement will be reviewed three years
after it is established. It is still uncertain whether this will drop to a
lower percentage or to zero after the six years mentioned in the law.
Regulatory Environment
SUSEP is the main regulatory body for insurance in Brazil, responsible
for the supervision of companies operating in this market. Following a
process of industry deregulation initiated in the early 1990s, SUSEP
has experienced a change in its market role, moving from an entity
which previously maintained strict control on all aspects of insurance
(including prices and policy conditions) to an organization placing
greater emphasis on the control and monitoring of insurers' solvency
levels by overseeing reserves, operating limits, and the solvency
margin. In addition to insurance companies, SUSEP is also responsible
for monitoring and controlling private pension companies and
capitalization entities. The control of health insurers was moved to
Associação Nacional de Saúde (ANS) from SUSEP in 2001.
In addition to SUSEP, Conselho Nacional de Seguros Privados (CNSP)
is responsible for establishing rules and regulations in the market.
This entity is closely tied to the economy ministry and holds
representatives from all segments of the insurance industry. Brazil's
monopoly reinsurer, IRB, which previously also exerted substantial
influence over norms controlling the industry, had its role diminished
and its regulation on reinsurance transferred to SUSEP with Law 126.
Roots of the current insurance system lie with Decree-Law 73 of Nov.
21, 1966, which along with subsequent Decrees 60.459 and 61.589 of
1967 effectively created what is known as the Sistema Nacional de
Seguros Privados (or National Private Insurance System). Following
this period, however, legislation of the industry has continuously
changed. Partially reflecting a trend in the country's political and
economic environment at the time, Brazil's insurance industry was
liberalized in the early 1990s with the abolition of tariff controls in
1992 and the opening of the market to 100% foreign capital
ownership around 1996.
All Brazilian insurance companies reported under Brazilian GAAP.
Listed Brazilian insurers or insurers under a listed financial
conglomerate are required to prepare their consolidated financial
statements in accordance with US GAAP. The major characteristics of
Brazilian GAAP for insurers are:
Asset valuation
The accounting for securities held by insurance companies follows
international standards and is divided into three possibilities:
"tradable securities," "available for sale," and "held to maturity," and
portfolios have to be valued according to market prices. Mutual fund
investments may be carried at market. Real estate is kept at cost or at
"market value" as determined through a revaluation performed by
specialized appraisal companies approved by SUSEP.
Investment restrictions
Assets covering reserves must be invested following certain
stipulations. In the case of assets covering technical reserves,
investment restrictions include: maximum of 100% in treasury notes;
up to 80% in specific investments such as CDs, bonds; up to 49% in
stocks; up to 10% in real estate. This regulation applies for general
insurers, capitalization companies, and private pension providers.
Reserves
Similar to other Latin American systems, loss reserves in Brazil are set
by mathematical formula. Starting in 1999, Brazilian insurers were
required to maintain reserves for IBNR. As a country with no natural
catastrophes, Brazilian insurers do not keep catastrophe reserves. In
2006, SUSEP required the insurance companies to record premiums of
effective and nonissued risk as per Circular Susep 314.
Life business
In general, there is no separate reporting for nonlife and life business
and, therefore, multiline insurers' reports are presented on a
consolidated basis. For this reason, our figures include both life and
nonlife business.
Foreign currency transactions
Brazilian insurers are currently not allowed to transact policies and
investments in foreign currency. However, we expect this practice to
change with the opening of the reinsurance market.
What To Expect From An Open Reinsurance
Market In Brazil
Primary Credit Analyst: Daniel Araujo, Sao Paulo, (55) 11 3039-9741; [email protected]
The opening of the reinsurance monopoly in Brazil should speed up
growth in the insurance industry overall. Over time, it should help to
bring the industry further in line with other segments of the Brazilian
economy that have gradually become more open. The open
reinsurance market is likely to usher new investments and technology
into the insurance industry in Brazil, along with sharper product
diversification and stronger incentives to compete. We anticipate
several changes in how the industry will operate, including refinement
of the criteria by which local insurers select the reinsurers they will
work with. Requirements for financial transparency should also
improve. Reinsurers entering the market will closely inspect local
insurers. And insurers will scrutinize the operations of reinsurers,
with a keen interest in reinsurers' solvency.
Years of debate about the opening of the reinsurance market in Brazil
culminated in the approval of Law 126 on Jan. 15, 2007. Although the
state reinsurance monopoly, IRB Brasil Resseguros S.A. (IRB- N.R.),
was not privatized, the opening of the market is good news for the
industry. While the IRB already allows insurers to use foreign
reinsurers for specific contracts, IRB must approve these deals, which
has in practice inhibited the use of international counterparties. Given
the enormous potential of Brazil's insurance industry, several foreign
reinsurers have been anxiously awaiting the opening of the market
through the long delay.
The breakup of Brazil's reinsurance monopoly was in fact voted into
law in 1996. Unfortunately, the de facto opening of the market has
been delayed by the lack of enabling legislation determining the form
the newly opened market should take. Brazil is among the last
countries in the region to end its reinsurance monopoly. This puts it far
behind other important Latin American insurance markets, such as
Chile's or Mexico's, which opened their reinsurance markets in the
past 30 years. There are a handful of holdouts in the region, with
monopolies still standing in Costa Rica and Cuba, for example.
The New Brazilian Reinsurance Segment
IRB has been the reinsurance monopoly since the company was
founded in 1939. Despite unceasing debate over the past three
decades about opening the market, the government-controlled
company is still the sole provider of reinsurance in Brazil, at least until
July 2007. At that time, the Brazilian National Insurance Council
(Conselho Nacional de Seguros Privados, or CNSP) is slated to issue
new rules that establish the framework for reinsurance operations in
Brazil.
Law 126 creates a new supervisory framework, taking responsibility
for oversight of reinsurance away from IRB. The law will have farreaching effects on the reinsurance segment. To begin with, IRB's
historical role as regulator of the reinsurance market will be
transferred to the current insurance industry regulator, the
Superintendence of Private Insurance (SUSEP).
Both SUSEP and IRB will have to adapt to the new environment.
SUSEP has not had jurisdiction over the reinsurance segment to date,
and will have to grow into the role. Perhaps the greater challenge falls
to IRB, however. The former monopoly will gradually come to resemble
its new foreign competitors, and will have to focus on relationship
management, internal systems, risk management, human resources,
and competitive pricing.
Law 126 states that three categories of reinsurer will be recognized by
the new regulatory body:
Local reinsurer: A reinsurer domiciled in Brazil and exclusively
carrying reinsurance and retrocession;
Admitted reinsurer: A reinsurer domiciled in a foreign country, with
a representative office in Brazil; and
Occasional reinsurer: A reinsurer domiciled in a foreign country,
with no representative office in Brazil.
Under the law, IRB and other local reinsurance companies will have
preference over foreign-domiciled companies. All Brazilian insurers
will be required to reinsure at least 60% of their reinsurable business
with local reinsurers, at first. Three years after the law goes into
effect, this limit will decrease to 40%. After another three years, the
limit will come up for review. At present, it is uncertain whether the
requirement will be lowered further, or perhaps eliminated, upon
review in the sixth year.
The newly expanded regulatory body, SUSEP, will apply strict rules
regarding the acceptance of reinsurance business with foreigndomiciled reinsurers. Occasional reinsurers cannot be domiciled in tax
havens, in countries where the income tax is below 20%, or in
countries that restrict access to the names of shareholders or of
company owners. The law also provides that only local reinsurers can
reinsure endowment insurances and supplementary pension plans.
A bevy of details remain to be hammered out before the new rules are
published by regulator in July. These include limits and conditions for
retrocession, advantages of admitted reinsurers over occasional
reinsurers, conditions under which local reinsurers are treated like
admitted and occasional reinsurers, and operational rules for
reinsurers and reinsurance brokers.
Strong Players Will Adapt
Brazilian insurers will face significant challenges beginning in the
second half of 2007. For one thing, they will have to set their own
criteria for selecting the reinsurers that best suit their needs. This is a
two-way street, however, and insurers will have to adjust to operating
under the close scrutiny of the reinsurers entering the market. What's
worse (for some), any new reinsurance legislation that is enacted will
undoubtedly make it more difficult for weak insurers to remain
competitive.
Buyers of reinsurance protection have many factors to consider,
including pricing, contract language, and policy limits. More insurance
managers will begin to realize that in addition to favorable contract
terms, the financial health of the reinsurer is a crucial factor. Indeed, a
poor choice of reinsurers can jeopardize an insurer's long-term
survival.
Foreign companies should expect to benefit from the new system.
Following the approval of the new regulations and operational
guidelines, we expect to see a greater share of risks in Brazil being
reinsured by global programs, which could bring on a reduction in
premium rates. A clear picture will only emerge, however, once the
complete regulations are established.
Most Latin American countries have had open reinsurance markets for
several years already, or longer. Given that weak reinsurers can
exploit markets in which there are not well known and recognized, the
issue of reinsurers' solvency takes on even more importance. To
address concerns about the financial health of foreign-domiciled
reinsurers, regulators in other countries, such as Mexico and
Argentina, have established minimum ratings requirements for foreign
reinsurance providers. Legislative proposals currently under
consideration in Brazil favor similar ratings requirements.
Regulations in a number of Latin American countries include minimum
surplus levels for locally domiciled reinsurers. Standard & Poor's
believes that in these cases, financial strength ratings would be a
better way to assess long-term financial solvency from the primary
carriers' point of view. Financial strength ratings consider not only the
reinsurer's current financial standing and capital position, but also its
business profile and underlying risk. The ratings consider other
important factors, such as industry risk, operating performance,
management and corporate strategy, financial flexibility, and
retrocession coverage. Due to their extensive scope, financial strength
ratings provide a more reliable prospective view of a reinsurer's
financial standing.
On the other hand, Brazilian insurers should expect to be closely
scrutinized by reinsurers. High-quality and conservative reinsurance
providers will look for prudent, financially sound primary writers. In
the open reinsurance market, Brazilian insurers who want to establish
long-term relationships with financially secure reinsurance providers
will need to adopt higher underwriting standards. In addition, financial
transparency will be pressured to improve throughout the market.
Although transparency has been improving steadily in the Brazilian
insurance industry, it remains poor relative to more mature markets.
A number of Brazil's large domestic insurers, and certain subsidiaries
of foreign insurers, have already reached preliminary reinsurance
agreements with foreign reinsurers. Many niche players should be
able to adapt to the new environment, despite their small size, due to
their relationships with IRB and with foreign reinsurers. Many
medium- and small-sized locally owned insurers will be challenged,
however, because they are not as well known by the foreign market.
It will take some time for foreign reinsurers to fully understand the
Brazilian market, its risks, and the profiles of its domestic insurers. For
this reason, Standard & Poor's expects the impact on Brazilian
insurers to become more apparent in the medium- and long-term as
the market matures.
The final form of the pending reinsurance legislation will shape the
future of Brazil's insurance market and will have serious
consequences for the long-term survival of current players. The
regulations will most likely require companies to keep minimum
retention levels. This would eliminate the long-standing practice, most
common among small carriers operating mainly as insurance brokers,
of ceding nearly all of their risk to the reinsurer monopoly. With such
practices ruled out of play, the proposed retention requirements could
drive some insurers with weak capitalization and limited financial
flexibility out of the market.
An Open Reinsurance Market Should Boost Growth
Throughout The Industry
The Brazilian insurance industry has good opportunities for growth in
the coming years. Although insurance premiums have climbed steadily
during the past four years, the Brazilian insurance market remains
largely untapped, given its great size and growth potential. As of yearend 2006 the premium's of the insurance industry in Brazil accounted
for just 0.6% of global premiums, and was just 2.6% of GDP.
We believe the industry continues to offer good growth prospects over
the medium and long term. Among the main factors limiting insurance
penetration in Brazil are the country's relatively low income per capita
and its high level of income inequality, which are expected to improve
in light of the economic growth of the country and reduction of
unemployment. The monopoly of the reinsurance market is also
viewed as a limitation to growth in the industry, and the pending de
facto demise of that monopoly is the main reason we expect the
industry to grow during the next several years.
Although Brazil is one of Latin America's largest insurance
market in terms of premiums written, it is one of the least developed
in terms of reinsurance revenues. The reinsurance monopoly has been
a leading factor in keeping reinsurance rate low, as has the
composition of the business portfolio in Brazil, where there is a strong
auto insurance component (normally a full-retention business), and no
significant need for catastrophe insurance.
IRB achieved total gross premiums of Brazilian reais 3.4 billion
(approximately $1.45 billion) for the fiscal year ended December 2006.
Total reinsurance premiums should keep growing as a reflection of
increased insurance business and new reinsurance operations in the
country as the market opens. Some market estimates indicate
reinsurance premiums could reach some $2 billion in the next two to
three years. We expect IRB to adapt to the new rules and market
conditions and remain a significant player in the market. IRB benefits
from its long relationship with local insurance companies and its
knowledge of the domestic market. The company should invest further
in staff development, internal systems, and risk management to
compete with private sector companies.
Top 20 Brazilian
Insurance Companies - Ranking
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5.
6.
7.
8.
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10.
11.
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14.
15.
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20.
Sul América Seguros S.A.
Itaú Seguros S.A.
Porto Seguro Cia de Seguros Gerais
Companhia de Seguros Aliança do Brasil
Tokio Marine Brasil Seguradora S.A.
Caixa Seguradora S.A.
AGF Brasil Seguros S.A.
HSBC Seguros S.A.
Hannover International Seguros S.A.
Chubb Seguros S.A.
ACE Seguradora S.A.
Metropolitan Life Seguros e Previdência
Privada S.A.
IRB Brasil Resseguros S.A.
Summaries
Primary Credit Analyst: Tamara Berenholc, São Paulo (55) 11-3039-9732, [email protected];
Secondary Credit Analyst: Milena Zaniboni, São Paulo (55) 11-3039-9739, [email protected]
Top 20 ranking: 1
Financial Strength Rating: 'brAAA/ Stable/--'
Couterparty Credit Rating: 'brAAA/ Stable /--'
Rationale
Standard & Poor’s Ratings Services’ ratings on Bradesco Seguros S.A.
reflect the credit quality of its controller, Banco Bradesco S.A.
BBB-/Positive/A-3 and brAAA/Estável/--, and the benefits from this
control, including the integration of its operations to that of the bank
mainly in the purchase, capital, and IT areas, as well as the use of the
bank’s ample branch network for the commercialization of insurance
products. In addition, Bradesco Seguros maintains a good business
profile in the competitive Brazilian insurance industry, and presented
improved underwriting results. The ratings are counterbalanced by the
challenging environment for the Brazilian insurance industry and the
company’s exposure to Brazil’s economic risks.
Bradesco Seguros maintains a good business profile, supported by the
strong franchise of the group and its position as the largest insurance
group in Brazil in terms of total premiums. It is the leader in the
health, life, and personal accident segments, besides the largest in
the commercialization of VGBL (Vida Garantidor de Benefício Livre).
Bradesco Seguros offers a wide variety of products, and accounted for
26% of the total market premiums in 2006. In the pension business,
Bradesco Vida e Previdência (wholly owned subsidiary of Bradesco
Seguros) is the market leader, holding 39% of the market revenues in
2006, besides being the second-largest capitalization company
through Bradesco Capitalização, with 20% of the revenues generated
in the market in the same period.
Banco Bradesco’s ownership of Bradesco Seguros brings an important
competitive advantage to the company because of the bank’s access
to the ample distribution channel and the benefits of synergy coming
from the integration of support areas of the companies. The insurance
segment (that comprises insurance, pension and capitalization
operations) accounted for 34% of the results of the Bradesco
conglomerate in 2006, reinforcing its position as a core entity to the
group. We expect Bradesco Seguros will receive financial support
from its controller if necessary.
Bradesco Seguros improved its operating results, including its loss and
combined ratios and its efficiency. The loss ratio reduced to 79.1% in
2006 from 82.3% in 2005, and its combined ratio reduced to 99% in
2006 from 103.4% in 2005. However, the company is challenged to
continuously improve its underwriting results.
Outlook
The stable outlook reflects the outlook on Banco Bradesco. It also
incorporates our expectation that Bradesco Seguros will keep its
market position, competitive advantage, and financial flexibility from
its position as a core entity of Bradesco.
Chart 2
Chart 1
30,000
25,000
20,000
15,000
10,000
5,000
0
Sul America S.A.
Primary Credit Analyst: Tamara Berenholc, Sao Paulo (55) 11-3039-9732; [email protected]
Secondary Credit Analyst: Daniel Araujo, Sao Paulo (55) 11-3032-9741; [email protected]
Top 20 ranking: 2
Credit Rating: B/Stable /—
Rationale
The rating on Sul América S.A. (SASA) reflects its status as a
nonoperational holding company for Sul América insurance group, of
which the main insurance operating entity is Sul America Companhia
Nacional de Seguros (financial strength rating of ‘BB-’), and the
structural subordination of the holding company’s creditors to
policyholders of SASA’s operating entities. It also reflects the holding
company’s leveraged capital structure and relatively weaker operating
track record than that observed for the local insurance industry.
Partially offsetting these negative factors are the group’s strong
competitive position as the second-largest insurance group in Brazil by
total premiums, the good growth prospects for the Brazilian insurance
market, the strong brand recognition and improving cash flow, and
performance of the operating subsidiaries.
Standard & Poor’s Ratings Services applies a two-notch differentiation
between the holding company and the operating subsidiary rated in
speculative-grade categories, reflecting the structural subordination
that exists in the insurance business. Although all policyholders’
obligations and the majority of the group’s investment assets lie at the
operating company, which is subject to potential regulators’ actions to
protect policyholders’ interest by maintaining the financial strength of
the operating company, we do not expect Brazilian regulators to object
to cash dividends being paid upstream to the holding company from
solvent operating subsidiaries, reinforcing the holding company’s
ability to service its debt in a full and timely manner.
We analyze SASA’s consolidated balance sheet. SASA’s debt peaked
at a high level even considering the debt reductions in 2006. With the
repayment of Brazilian reais (R$) 181 million in 2006, SASA’s
consolidated debt leverage declined to approximately 60% by year
end (from 66% in September 2006 and 77% in December 2005). The
improved financial stance reached in 2006, and expected for the
following years, will reinforce the operating subsidiaries’ cash
generation and consequently improve the holding company’s financial
ratios. We expect debt leverage to reduce to 20% in 2009 and around
10% in 2011 with the amortization of part of the company’s debt in
those years. We expect interest coverage to reach an adequate
average of 4x in the next two years.
The financial strength rating on SASA’s operating subsidiary is based
on its adequate business risk profile, its strong franchise, and the
improving operating performance already observed in 2006 that is
expected to consolidate going forward. These factors are tempered by
a fierce competitive environment in the insurance business in Brazil
and the group’s marginal capitalization.
The group is the largest independent insurance company in Brazil and
the second in terms of premiums written, holding a strong position in
number of policies issued. SASA’s main businesses are health and
auto, which maintain a good market position in the industry of 38%
and 16%, respectively, at December 2006. With a change of its
business focus from market share to profitability, improved
underwriting procedures helped increase profitability in most of the
insurance lines.
The company’s capital level is marginal. In absolute terms, the change
in judicial reserving policy led to an increase in litigation reserve in
2004 and 2005, affecting the group’s bottom line and consequently its
ability to reinforce capitalization. With the improvement in profitability
from 2006 on, we expect capital to slightly increase in the following
years.
Liquidity
We believe that SASA’s overall liquidity is adequate. Prospective cashflow sources are mainly dividends from SASA’s insurance subsidiaries.
SASA’s share in Telemar through Brasilveículos S.A. adds a diverse
source of liquidity to the group.
Outlook
The stable outlook reflects our expectation that SASA will benefit
from a steady stream of dividends and positive cash flows from
operating subsidiaries. We expect financial leverage to decline to less
than 55% until 2009 with further reduction from 2009 to 2011.
The rating may be raised or the outlook revised to positive if the
expected improvement in operating performance of the operating
subsidiaries results in a strengthening of capitalization in the next two
to three years. Conversely, the rating may be lowered or the outlook
changed to negative if there is a deterioration of the financial
condition or performance of operating subsidiaries that would affect
the flow of dividends to SASA.
Chart 1
Chart 2
Itaú Seguros S.A.
Primary Credit Analyst: Tamara Berenholc, São Paulo (55) 11-3039-9732 [email protected],
Secondary Credit Analyst: Milena Zaniboni, São Paulo (55) 11-3039-9739; [email protected]
Top 20 ranking: 3
Financial Strength and Counterparty Credit Ratings
National Scale: brAAA/ Stable /-Rationale
Standard & Poor’s Ratings Services’ ratings assigned to Itaú Seguros
S.A. reflect the creditworthiness of Banco Itaú S.A. (BBB-/Positive/
A-3) in local and foreign currency and (brAAA/Stable/brA-1) in
national scale, given that Itau Seguros is a core subsidiary of Banco
Itaú. Itaú’s strong brand name recognition has helped build a
significant franchise in the insurance segment where Itaú Seguros is
the third-largest insurance company in terms of total premiums. Itaú
Seguros has also improved its operating performance and presented
above-industry loss and combined ratios. These positive aspects are
counterbalanced by operating risk in the Brazilian economic
environment.
Itaú Seguros group has maintained its position as the third-largest
insurance group based on total premiums (Brazilian reais 6.5 billion in
2006, including all insurance segments, health insurance, and Vida
Gerador de Benefícios Livre). The insurance segment is important for
the diversification strategy of Itaú’s conglomerate because it
complements the sale of its banking products and the great potential
Chart 1
of the insurance segment in Brazil. In addition, the insurance and
banking operations are linked because the conglomerate defines
investment policies and the commercial strategy for the
commercialization of insurance products in the banks’ branches. The
results from the insurance, pension, and capitalization businesses
represented around 20% of the consolidated results in 2006.
Itaú Seguros’ strategy has focused on profitability. The company has
been maintaining conservative underwriting policies and good lossmanagement. Itaú Seguros’ health portfolio is in a run-off process, and
the company avoided the natural and normal higher loss ratios of this
segment. As a result, the company showed improved operating
results, including its loss ratio, which fell to 49.2% in 2006 (below the
market average of 55.9% in 2006, excluding health insurance) from
51.2% in 2005 and its combined ratio of 91.6% in 2006, compared
with 98.8% in 2005.
Outlook
The stable outlook mirrors the outlook of its controller, Banco Itaú
S.A. once the company is viewed as a core subsidiary of the
conglomerate due to its good performance and market position and
the fact that it complements the bank’s product and services. It also
incorporates the expectation that the company will keep its
importance under the group and good profitability.
Chart 2
Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected]
Secondary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]
Top 20 ranking: 4
Unibanco AIG Seguros S.A.’s (Unibanco AIG) credit profile reflects the
benefits derived from the joint venture between União de Bancos
Brasileiros S.A. – Unibanco (BB+/Positive/B) and AIG - American
International Group (AA/Stable/A-1), including the underwriting
practice and strong position of AIG worldwide; its position as leader in
Property, Liability, Aviation, Marine, D&O; among others; Unibanco
AIG’s improved operating results and strong distribution capabilities.
The company is still challenged to reduce its concentration in the
property segment and increase its market share in the segments with
higher penetration in Brazil also by taking benefit from the distribution
network of Unibanco. It also incorporates the challenging environment
for the Brazilian insurance industry.
Unibanco AIG has been among the top five insurance companies in
Brazil for the past four years. The company is the fourth-largest
insurance group in Brazil, holding 6.8% of the premiums of the
Brazilian insurance market in 2006. Unibanco AIG has reasonable good
premium breakdown including personal lines (47% of total),
commercial lines (25%), life (10%), GMD (14%) and health (4%). The
company is the largest player in Large Property segment (with 25%
market share), as well as Small and Middle (10%), General Liability
(16%), D&O (50%), Marine (12%), and Aviation (40%), and the second
largest in off-shore Energy and Construction. It has also been
recognized in exclusive P&C products such as Environmental, D&O,
Export Solution and extended warranty. Unibanco AIG is challenged to
increase its market position in the most relevant insurance segments
in Brazil (auto, life, and personal accident) and increase the crossselling of insurance products to the bank’s clientele.
Unibanco AIG benefits from being a partnership between Unibanco
and AIG, which has been in place since 1997. Each of the
shareholders holds 50% of the company’s shares. The benefits include
underwriting practices and loss management given the strong market
position and know-how of AIG in the property and casualty businesses
worldwide. In addition, having Unibanco as its shareholder has helped
in terms of the brand name recognition of the financial conglomerate
in Brazil and distribution of insurance products to the bank’s clientele.
Unibanco AIG has shown consistent improvement in its operating
results including its loss and combined ratios. The loss ratio reduced
to 47% in 2006 from 59% in 2005 and compares well to the industry
average of 61%. Its combined ratio reduced to 94% from 97% in 2005
as a result of its underwriting discipline and lower than industry
operating costs.
Chart 1
Chart 2
Porto Seguro S.A.
Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]
Top 20 ranking: 5
Porto Seguro S.A.’s (Porto Seguro- N.R.) credit profile reflects its
strong market position as leader in the auto segment and its
increasing profitability level, which reflects its improved underwriting
results in most of its segments. The company’s main challenges
include increasing its regional diversification, the strong competition
in the auto segment, and the risk of operating in the Brazilian
environment.
Porto Seguro is an independent insurer with a long tradition in the
Brazilian market. Overall, the company is the third-largest insurer in
Brazil and has grown in market position in recent years (to 8.4% in
2006 from 7.9% in 2004). The company concentrates on the auto
segment where it is the leader with 18.2% of the market in 2006
(from 17% in 2005). Despite its ability to show consistent growth, the
company is challenged to maintain its market differentiation in the
auto segment, with prudent underwriting due to the strong
competitive environment, while increasing its position in promising
insurance segments such as the life segment.
Porto Seguro has maintained good relationships with brokers, which
are the major distribution channel of the company. Its market position
has helped the company to keep its selling expense ratio in the 20%
range. The company’s good underwriting procedures translated into
reduction of the loss ratio in most of its segments and particularly in
the auto segment to 50.8% in 2006 from 59.2% in 2005, below the
industry average of 63.3%. As a consequence, the company showed
positive underwriting results in 2006 and a combined ratio of 95.8%,
compared to 101.7% in 2005.
Porto Seguro, like most of the insurers in Brazil, is exposed to the
economic and industry risks of Brazil due to the strong correlation of
the insurance segment with the economic conditions of the country,
and through its investment portfolio that is mainly invested in
government bonds.
Despite having a strong market share in the auto segment in São
Paulo and Rio de Janeiro (29.8% and 18.5 %, respectively), these are
very competitive markets. We expect the company to maintain its
share of its major regional markets and take advantage of the
increasing premiums in other regions such as the South of Brazil.
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Companhia De Seguros Aliança Do Brasil
Top 20 ranking: 6
Standard & Poor’s Ratings Services’ credit profile on Companhia de
Seguros Aliança do Brasil (Aliança do Brasil) reflects its good market
share in the life insurance and rural insurance segments, the benefits
derived from its ownership structure, and the company’s good financial
profile with improving underwriting results. The company’s main
challenges include increasing its market position in the promising
insurance market by taking advantage of the bank’s large clientele
base and branch network, and the risk of operating in the Brazilian
economic environment.
Banco do Brasil is active in the insurance market through several
investments. Aliança do Brasil is the result of the partnership between
Banco do Brasil S.A. (BB+/Positive/B) and Aliança da Bahia (unrated),
with 70% and 30%, respectively, of the company’s total capital. In
addition, Banco do Brasil owns 49.9% of the pension plan company
Brasilprev Seguro e Previdência and has a partnership with Sul
América S.A. in which it owns 70% of Brasilveículos Companhia de
Seguros and 49.9% of Brasilsaúde Companhia de Seguros. Banco do
Brasil’s consolidated position in the insurance market makes it the
sixth-largest insurance and pension plan group in the country, with
Brazilian reais 2.8 billion of written premiums in 2006. It is also the
third-largest group in the Vida Garantidor de Benefício Livre (long-term
Chart 1
life insurance as a private pension plan) with 7.4% market share, the
fourth-largest in the life segment, and the largest insurance group in
the rural insurance market with a relevant 49.8% market share. In
2006, Banco do Brasil was the leader in the capitalization market
through its subsidiary, Brasilcap Capitalização S.A., with 25% market
share in revenues from certificated savings plans.
Because Banco do Brasil owns Aliança do Brasil, that relationship
allows Alianca do Brasil to leverage on Banco do Brasil’s client base
and distribution capabilities. This helped Alianca do Brasil become the
top insurance company in the rural segment. Still, the company
benefits from its ownership structure to increase its market position in
the insurance segment, while maintaining strong underwriting
principles, given the strong potential offered by the large clientele and
position of Banco do Brasil.
Banco do Brasil’s insurance group improved its financial and
underwriting ratios by focusing on profitability and results from
previous years. The pension and insurance group presented a betterthan-expected market loss ratio of 47%, with strong improvement
from the 58% in 2005. As a result, the combined ratio improved to
95% in 2006 from 99% in 2006, evidencing the company’s efforts on
underwriting and loss management. Aliança do Brasil has followed
the improvement on the group’s underwriting results and presented
low loss and combined ratios of 35.5% and 88%, respectively.
Chart 2
Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]
Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]
Top 20 ranking: 7
Mapfre Vera Cruz Seguradora S.A.'s (Mapfre) credit profile reflects the
benefit of being part of the Spain-based Mapfre insurance group (the
group's holding company, Mapfre S.A., is rated AA-/Stable/--); a good
position as the seventh-largest company in the competitive Brazilian
market, and the potential to further increase its business and results
in Brazil in the coming years. The company's main challenges include
the competitive environment, especially in the auto segment, and the
risks of doing business in Brazil.
Mapfre is a fully owned subsidiary of the Mapfre Group and, together
with the other Latin American operations of the group, seems to be of
strategic interest to the group. This becomes even more relevant
following the opening of the reinsurance business in Brazil and the
prospects for further growth in the insurance market in general and in
reinsurance in particular. The group seems to be committed to the
Brazilian operations. In 2006, for instance, the company received a
capital injection of Brazilian reais 114.5 million, in preparation for
stricter minimum capital rules being adopted by the Brazilian
regulators for the industry as a whole in 2007.
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Mapfre has been consistently improving its market position during the
past several years. The company is one of the top-five insurance
companies in the auto segment (fifth place with 6.7% market share);
life insurance (second with 10.3% market share); transportation
(second with 10.3% market share); credit insurance (third with 12%
market share); and rural insurance (third with 11.2% market share).
The market share figures have been growing in almost all segments in
the past three years as a reflection of the investments in people,
processes, and relationship management. The auto insurance segment
is the most relevant for the company, representing approximately twothirds of total premiums.
The company's challenges for the coming years include improving
profitability levels in an environment of increasing competition and
declining interest rates. Standard & Poor's Ratings Services expects
the company to increase scale while maintaining loss ratios (52% in
2006, better than the industry average) so as to compensate for the
natural reduction in financial revenues, an issue for the industry in
general.
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Tokio Marine Seguradora S.A.
Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732: [email protected]
Top 20 ranking: 8
The credit profile of Tokio Marine Seguradora S.A. (Tokio Marine)
reflects the benefits of ownership by Tokio Marine & Nichido Fire
Insurance Co. Ltd. (‘AA’), its reasonably good market share in the
Brazilian market, and improving business profile. Among the
challenges facing Tokio Marine in Brazil are the need to keep
increasing scale and profitability and the risks of operating in the
historically volatile economic environment.
Ownership by Tokio Marine & Nichido Fire, Japan’s largest nonlife
insurance company, is a positive feature. As is the case with other
multinational operations, Tokio Marine enjoys access to technical
support and rotation of employees. The company has built a good
name in the Brazilian market in general and, in particular, in the
Japanese community located mostly in São Paulo. The company
operates all lines of business in Brazil, except for health insurance and
“capitalization” (annuity associated with lottery). It focuses mostly on
automobile, group life and corporate insurance.
In July 2005, Tokio Marine acquired 100% of Real Seguros and 50%
of Real Vida e Previdência, part of the financial conglomerate ABN
Amro Real. In addition, Tokio Marine celebrated an agreement with
Banco ABN Amro Real S.A. to use the bank’s branches to distribute
Tokio Marine’s products.
One of the challenges facing the company in the near future is to
translate the benefits of the acquisition of Real Seguros and
improvement in its business profile into increased profitability ratios.
In 2006, the company achieved a loss ratio of 57% as compared to the
industry average of 61%.
Tokio Marine’s consolidated insurance operations were the eighthlargest insurance groups in Brazil, based on total premiums, with a
market share of approximately 4% in 2006.
Caixa Seguros S.A.
Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected]
Top 20 ranking: 9
Standard & Poor’s Ratings Services’ credit profile on Caixa Seguros
S.A. incorporates the benefits of its ownership by France-based CNP
Assurance S.A. (AA/Stable/—) and Caixa Economica Federal (not
rated), Brazil’s third-largest bank and public policy agent of the federal
government for the real estate mortgage segment. The company’s
main challenges include increasing its scale in the insurance market,
the increasing competition in the market, and the risk of operating in
the Brazilian economic environment.
CNP Assurance acquired Caixa Seguros in 2001. The partnership with
Caixa Economica Federal (with 48.21% of the company’s capital)
provides the company with an ample branch network to distribute its
products throughout the country. The remaining shares are with
Instituto Nacional de Seguridade Social (Brazil’s social security
institute).
Caixa Seguros is the ninth-largest insurance group in Brazil. It is by far
the largest insurance company in the residential insurance segment
with 16% market share. Caixa Seguros is the leading company within
a conglomerate that also consists of a private pension and
capitalization (annuity associated with lottery) company. Businesses
are in residential insurance, life insurance, auto, large risks, pension,
and ‘capitalization’ segments. The partnership with Caixa Economica
Federal allows the company to offer specific products to guarantee
credit transactions.
One of Caixa Seguros’ main challenges in the near future will be
furthering leverage on its distribution capabilities. In 2006, the
company’s profitability indicators were very good, with a combined
ratio of 75%.
AGF Seguros S.A.
Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-5501-8939 ; [email protected]
Top 20 ranking: 10
AGF Seguros S.A.’s credit profile reflects the benefits of its ownership
by German-based Allianz SE (AA-/Positive/—) and a long history of
operations in the Brazilian insurance market. The company’s main
challenges include increasing its scale and technical results within an
environment of increasing competition in the market.
AGF Seguros’ presence in Brazil dates back 100 years. The company
has been among the top 10 insurance companies, with emphasis on
the large risks, property and casualty, and health insurance segments.
The auto segment represents approximately 40% of total net
premiums.
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AGF Seguros benefits from being part of the Allianz Group both in
terms of expertise from the group and potential financial support to
cope with the opportunities that should continue in the Brazilian
market. The benefits from ownership should be even more evident
following the opening of the reinsurance market in Brazil.
Standard & Poor’s Ratings Services views the company’s profitability
as acceptable in comparison with industry averages. As is the case
with other companies operating in Brazil, AGF Seguros faces the
challenge of further improving its technical results. The combined ratio
already improved to 99% in 2006 from 103% in the previous year. As
with all insurance companies in Brazil, we expect financial results to
continue to decline during 2007, which reinforces the need for focus
on operational results.
Chart 2
Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected]
Top 20 ranking: 11
The credit profile on Santander Seguros S.A. reflects the role played
by the company within the financial conglomerate Santander Banespa
in Brazil in which the insurance segment complements primary
business lines to serve clients’ insurance needs. The main challenges
facing the company include managing the risks of the Brazilian
economic environment and increasing insurance penetration in the
client base.
Santander Seguros is a wholly-owned subsidiary of Banco Santander
Central Hispano S.A. (AA/Stable/A-1), which operates in Brazil on an
integrated basis in the financial market through its subsidiaries
reported as Santander Banespa Combined information. The company
has a market share of about 2% of total insurance industry premiums.
Its main business segments are life insurance and installment
insurance (lender insurance), in accordance with Santander Group
focus and policy for insurance business around the world, and
‘capitalization’ (annuity associated with a lottery) through its
subsidiary Santander Capitalização S.A.,. Installment insurance grew a
substantial 59% during 2006, reaching an estimated market share of
approximately 7% in December of that year. This is an impressive
performance for a business segment that began operating in late
2004. Santander Seguros’ operations are concentrated in the
southeast and southern regions of the country, which generate the
majority of GDP.
Santander Seguros is less diversified than some of its peers, but the
company has been achieving good profitability levels. Consolidated
net profit for Santander Seguros reached R$121 million in fiscal year
2006, which represents a high 40% return on average equity for the
period. Net profit is strongly influenced by the capitalization business,
which contributed R$48 million (roughly 40% of net profit). Net results
for 2007 are expected to evolve significantly in 2006 given that
Santander Seguros will have exclusive access to Santander Banespa
distribution network for life, credit, residential and accident insurance.
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HSBC Seguros S.A.
Top 20 ranking: 12
The credit profile on HSBC Seguros S.A. incorporates the benefits of
being part of the banking conglomerate led by HSBC Bank Brasil S.A.,
including a relatively large branch network for product distribution.
The company’s main challenges include the increasing competition in
the market and the risk of operating in the Brazilian economic
environment.
HSBC revised the focus of its insurance business in 2005 and sold the
nonlife operations of HSBC Seguros de Automóveis e Bens (Brasil)
S.A. to HDI Seguros S.A. As a complement to this sale, HSBC Bank
Brasil and HDI Seguros entered an agreement allowing HDI Seguros to
sell its products through the branch network of HSBC.
HSBC Seguros’s main interest is in the segments of life insurance,
private pension, and capitalization (annuity associated with a lottery).
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In these areas, the group benefits from the distribution of products
through a branch network spanning over 2,000 points of sale. HSBC
Seguros counts on one of the largest consumer finance operations in
the market (Losango) through which it can distribute popular insurance
products such as credit installment insurance and ‘capitalization’. The
insurance related operations of HSBC Seguros are executed through
HSBC Vida e Previdência Brasil S.A., HSBC Empresa de Capitalização
(Brasil) S.A., and HSBC Capitalização (Brasil) S.A. These operations,
currently ranked 12th in the Brazilian insurance market, are fully
integrated into the financial services group.
As a result, HSBC Seguros shows less diversification than some of its
peers. However, the company has been presenting good profitability
indicators, with a combined ratio of 89% in 2006, versus 94% in the
previous year. In addition, the company presents loss ratios among the
lowest in the market.
Chart 2
Top 20 ranking: 13
Marítima Seguros S.A.'s credit profile reflects good name recognition
in the market place, especially in the auto and health insurance
segments. The company's main challenges include the need to gain
scale and increase diversification in its operations, which have been
gradually under way. As is the case with other insurance companies in
Brazil, Marítima Seguros is also expected to face increasing
competition in the market.
Marítima Seguros concentrates on three groups of products: auto with
45% of total premium, health insurance (30%) and special risks (25%).
The company has a high geographic concentration, with approximately
80% of its operations in the São Paulo state. Marítima Seguros is the
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13th largest insurance group in Brazil. Based on total premium
revenues, the company has an average 1.5% market share in the
highly concentrated Brazilian insurance market.
Marítima Seguros competes against large insurance companies, some
of which are part of large banking conglomerates or belong to large
foreign insurance groups. This poses a significant challenge for the
company in the near future considering that it has concentrated
operations and a relatively small participation in the market.
Profitability has been acceptable. In 2006, for instance, Marítima
Seguros achieved a combined ratio of 99% and loss ratio of 59%,
which are reasonably good ratios in comparison with industry
averages.
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HDI Seguros S.A.
Top 20 ranking: 14
HDI Seguros S.A.’s credit profile incorporates the benefits of its
ownership by the German-based HDI Group (the group’s holding
company Talanx AG is rated A-/Stable/—) and expected gradual
improvement in its business position in the coming years in line with
the expected growth in the insurance business activities in Brazil. The
company’s main challenges include increasing its scale in the
insurance market; the increasing competition in the market; improving
its technical results; and the risk of operating in the Brazilian
economic environment.
its business on midsize cities in the south of the country, mostly in
auto insurance. In 2005, the company acquired HSBC Seguros de
Automóveis e Bens (Brasil) S.A. and entered into an agreement with
HSBC in which HDI Seguros makes use of HSBC’s branch network to
distribute its products. The acquired company was incorporated into
HDI Seguros in April 2006. The acquisition allowed HDI Seguros to
expand its presence to a broader area in Brazil, keeping its emphasis
on automobile and property insurance.
HDI Seguros has concentration both in terms of product and
geography, which is explained by its strategic decision to stay out of
the two main cities of São Paulo and Rio de Janeiro. The company has
been operating in Brazil for the past 20 years and has been focusing
HDI Seguros has improved its loss ratio substantially to 58% from
70% in the past three years, and its combined ratio evolved positively
to 101% in 2006 from 106% three years before. Nonetheless, the
company still counts a relevant portion of financial results in its final
profitability. Because of the expected decline in interest rates during
2007, the company is challenged to keep improving its technical
results in an increasingly competitive scenario.
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Top 20 ranking: 15
Liberty Seguros S.A.’s credit profile incorporates its ownership by
Liberty Mutual Insurance Group (A/Stable/—). The company’s main
challenge is to recover profitability levels after the net losses in
previous years. The company seems to be underway in this process,
having generated positive net income in 2006. A challenge for next
years is to keep improving technical results within a scenario of
increasing competition and declining interest rates.
Liberty Seguros went through a major restructuring of its operations
since 2002, which seems to have started paying off. The company
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invested in the relationship with brokers and in technology systems to
allow operations in new segments. In 2006, the company had a 15%
increase in premium revenues and reduced the loss ratio to 62% from
70% in the period. Net income reached Brazilian reais (R$) 52 million
in 2006 against net losses of R$33 million in both 2005 and 2004.
The automobile segment continues to be Liberty Seguros’ main
business, accounting for approximately 80% of total revenues. More
recently, the company has been adding other products in
transportation, life, group, and property and casualty, with a focus on
small and midsize companies.
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Chubb do Brasil Companhia de Seguros
Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 ; [email protected]
Top 20 ranking: 16
The credit profile on Chubb do Brasil Companhia de Seguros (Chubb
do Brasil) reflects the benefits of being part of the Chubb group
(Chubb’s largest operating unit, Federal Insurance Co. is rated
AA/Stable) as well as adequate operating performance relative to
other insurance companies in Brazil. The main challenges for Chubb do
Brasil include the need to improve technical results under increasing
competition and to adjust to declining interest rates.
Being part of the Chubb group brings advantages to Chubb do Brasil,
such as integration with the parent company and financial support for
growing operations in Brazil. In addition, the parent contributes to the
company’s operations in the open reinsurance market in terms of
expertise and relationships.
With total premium of R$605 million in 2006, Chubb do Brasil ranked
as the 16th largest insurance company in Brazil. The company
achieved adequate results, with net income of R$27 million, a loss
ratio of 48%, and a combined ratio of 99%. The company had a
capital injection of R$42 million at the end of 2006, to support
anticipated growth in operations.
The main business segments of Chubb do Brasil include automobile
(accounting for 38% of total premium revenues), life and personal
accidents (20%), and transportation (15%). The company is a niche
player, focusing on the higher end of the automobile market, namely
vehicles priced above R$100,000.
ACE Seguradora S.A.
Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 ;[email protected]
Secondary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected]
Top 20 ranking: 17
Ace Seguradora S.A.'s (Ace Seguradora) credit profile reflects its
increasing market share in its major segments, with premium growth
at a higher pace than the market; its improved loss ratios; and the
benefits of being a subsidiary of Ace (A+/Stable/--). The company's
main challenges include continuing to increase its market position in
the competitive insurance segment; managing operating costs and
improving efficiency; and continuing to improve its profitability.
Ace Seguradora has been growing its total premium at a higher pace
than the market and presented a higher share in the competitive
insurance industry in Brazil. The company is the 17th largest insurance
company in the market, with a 0.95% share in the market, up from
0.86% in 2004. In its major segments, Ace Seguradora was among the
top three: It was the third-largest insurance company in the
transportation and civil responsibility segments in 2006, having grown
its market share in the transportation sector to 8.7% in 2006 from
7.8% in 2003 and to 12.7% from 6.2% in the civil responsibility
market. Still, the company is challenged to keep growing its market
share in the competitive environment and to benefit from the good
prospects of the Brazilian insurance segment.
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As a subsidiary of Ace Group, Ace Seguradora benefits from the
know-how and expertise of its parent in the insurance market
including its position in liability coverage for corporates and directors,
product liability, and underwriting practices. Standard & Poor's Ratings
Services expects the company to continue benefiting from its
ownership structure, and to increase its market position in the
insurance segment while maintaining strong underwriting principles.
Ace Seguradora has shown improvement in its loss ratio, which
reduced to 36.5% in 2006 from 39.1% in 2003. Although the company
presented a good combined ratio of 96.5% in 2006, it increased from
the 95% in 2004 due to higher operating expenses. The company is
likely to continue searching for efficiency while growing its
profitability, which should help to reinforce its capitalization.
Chart 2
Metropolitan Life Seguro e Previdência S.A.
Secondary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9732, [email protected]
Top 20 ranking: 18
Metropolitan Life Seguro e Previdência S.A.’s (Metlife - N.R.) credit
profile reflects its increasing position in the life segment and the
advantage of being a subsidiary of Metropolitan Life Insurance Co
(AA/Stable/—) in terms of product development and underwriting
practices. The company’s main challenges include improving its
underwriting results and the net income of its Brazilian subsidiary, and
increasing its market position and premiums in the life segment to
absorb the cost of its operations.
country. As a subsidiary of Metlife Insurance, the largest life insurer in
the U.S., Metlife benefits in terms of product development and
underwriting experience. We expect this relationship to help develop
the business.
Metlife is the seventh-largest insurance company in the life segment
with 5.1% market share in 2006. The company’s position in Brazil was
the result of several acquisitions (Seasul, Soma Seguradora, and
CitiInsurance in 2005) that reinforced its position in the market. Still,
with the strong competition, we expect the company to continue
increasing its premiums to compensate for the investments in the
The company presented a negative underwriting and net income in
2006 due to higher-than-market loss ratios in the life segment
(specifically due to losses with credit life to payroll lending business
for retirees), and higher administrative expenses. Its loss ratio of 66%
in 2006 is higher than the 52% in 2005 and the average 46% for the
life segment. During 2006 a new focus was implemented and required
a restructuring that impacted also the expenses at the company. The
new focuses are Brokers (targeting mainly corporate business for
small, medium and large cases) and Banks (targeting mainly
individuals and small business). The company is challenged to
improve its operations with good loss management while managing
its operating costs efficiently to present positive operating results.
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Chart 2
Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]
Top 20 ranking: 19
Icatu Hartford Seguros S.A.’s (Icatu Hartford- N.R.) credit profile
reflects its adequate market position in the life and pension segments
and the benefits it receives as part of Grupo Icatu (NR) and The
Hartford (AA-/Stable). The company’s main challenges include
increasing its market share of its major segment in light of the
competitive environment, improving its underwriting results with good
management of its loss ratio and expenses, and the risk of operating
in the Brazilian environment.
Icatu Hartford benefits from being the result of the partnership of
Grupo Icatu and The Hartford, which has provided the insurer with
improved actuarial and technical knowledge of life and pension
products. The company is also the exclusive representative of Swiss
Life in selling life insurance in Brazil. Icatu Hartford’s major focuses
are on the life and pension markets in Brazil, where the company is
the tenth largest in these markets. The competitive environment
challenges the company to continue growing its business with good
underwriting and loss management, while reinforcing its position in
these segments.
Despite its higher net income from Brazilian reais (R$) 48.5 million in
2005 to R$66.7 million in 2006, its results are still supported by good
financial results—financial results represented 42% of the
consolidated company’s earned premiums. The company is still
challenged to increase its underwriting results and improve its
combined ratio of 107% in 2006. The company improved its loss ratio
and expense ratio to 49.8% and 22.8% in 2006 from 54.7% and 25.2%
in 2005, respectively.
Icatu Hartford, like all insurers operating in Brazil, is exposed to the
economic and industry risks of Brazil.
Top 20 Insurance Companies
IRB- Brasil Resseguros S.A.
Top 20 ranking: 20
IRB-Brasil Resseguros S.A.’s (IRB) credit profile primarily reflects its
current position as the reinsurer monopoly in Brazil with accumulated
knowledge of the market and insurance industry; the benefit from
direct relationships with clients for several decades; its good liquidity
position; and earnings. The company is challenged to improve its
efficiency and be competitive in the open market environment and to
maintain good underwriting and cost control to show increasing
profitability levels.
IRB to date has been the monopoly reinsurer for domestic Brazilian
risk, with accumulated knowledge of the market and its players. IRB’s
role has been to accumulate local risk from each primary insurer and
then share it back among the private sector insurers and overseas
reinsurers. As the sole insurer, it has indirectly managed the premium
pricing in the market, and been seen as the major final bearer of any
serious losses. In the context of an opening reinsurance market
expected for 2008, although IRB will retain a large part of the
reinsured risks in the first three years, the company is challenged to
improve its efficiency and be competitive in light of the entrance of
strong reinsurers in the competitive and promising Brazilian insurance
industry.
IRB’s profitability reduced in 2006 and its underwriting performance
was affected by higher loss ratios and administrative expenses. The
loss ratio increased to 49.2% in 2006 from 37% in 2005, reflecting
some high losses in the market in 2006. In addition, the company has
made several investments to be prepared for the opening of the
market and consequently showed an increase in its operating
expenses. The company’s net income reduced to Brazilian reais (R$)
299 million from R$370 million in 2005. Still, IRB presented good
earnings and a high ROA of 6% and ROE of 20% in 2006.
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Methodology
Insurance Rating Methodology
Standard & Poor’s rating methodology effectively measures and
compares the financial risks of entities that undertake a wide range of
insurance business activities. Because of the wide array of insurance
company types, a variety of quantitative techniques may be applied to
the rating analysis. These analytical techniques evaluate financial
risks associated not only with historical business activity, but with
new business initiatives as well. The analytical approach is tailored to
the uniqueness of each of the major insurance sectors. Reinsurance
companies are categorized by the direct insurance market they
reinsure, then analyzed using methods similar to those applied to that
market. Similarly, international insurers are categorized primarily by
the nature of the insurance they write and secondly by factors unique
to their national market.
While the quantitative form of analysis differs for each major
insurance sector, there is a common analytical methodology. There is
also a common set of qualitative principles applied to each company
regardless of the nature of its business or country of origin. A
consistent rating methodology is used for all insurance rating analysis
and is uniform across all types of insurance companies.
Through discussion with management, Standard & Poor’s can better
understand how an organization’s business, operating and financial
strategies affect its financial strength. Standard & Poor’s uses
projections in assigning its ratings after extensive discussions with
management to understand the underlying assumptions.
Standard & Poor’s rating methodology profile is used for all insurance
rating analyses and is uniform across all types of insurance
companies. The profile covers industry risk, business review,
management and corporate strategy, operational analysis,
investments, capitalization, liquidity and financial flexibility.
Industry Risk
Analyzes the competition and the inherent risk of marketplace
dynamics, and considers:
Lines of Business
Geographic Profile
Regulatory, Legal and Accounting Framework
Industry risk is the environmental framework in which an insurance
company operates. Standard & Poor’s evaluates industry risk based on
the types of insurance written (line of business or sector) and
geographic profile. Also considered is how a national or local factor
could affect the insurer’s operations. For insurance companies that are
part of a larger, more diversified group, Standard & Poor’s also looks
at noninsurance-related activities to assess how favorable or
unfavorable these industry conditions may be, and the potential effect
on the group’s overall operations. Broadly speaking, the lower the
industry risk, the higher the potential rating of companies in that
sector or line of business.
Business Review
Analyzes the overall health and standing of the company in the areas of:
Competitive Strengths/Weaknesses
Organization Structure
Diversification
Growth Rates
Market Share
Distribution Channels
Products Offered in Relation to Market Demand
In assessing future financial strength, it is critical to identify an
insurer’s fundamental characteristics and its source of competitive
advantage or disadvantage. Business review can prove to be one of
the decisive factors underlying a final rating decision, as the analyst
defines the key characteristics of organizational structure and activity
that constitute competitive strengths and weaknesses. These
strengths and weaknesses are intricately tied to the insurer’s strategy
and operational effectiveness and will strongly influence its financial
profile. It is through its review of a company’s business position that
Standard & Poor’s determines whether a company has sustainable
competitive advantages.
Management And Corporate Strategy
The effect of past, present and future strategies involving:
Strategic Positioning
Operational Skill
Financial Risk Tolerance
Standard & Poor’s considers management and corporate strategy a key
element of the criteria that forms the foundation of the financial
strength rating process. An organization’s strategy, operational
effectiveness, and financial risk tolerance will shape its
competitiveness in the marketplace and strength of its financial
profile. The analysis of management and corporate strategy is subject
to a consistent process that is applicable \to all rated insurance and
reinsurance companies. Although the element of subjectivity cannot
be avoided entirely due to the qualitative nature of this variable, it is
precisely the analyst’s opinion of the human element that gives further
valuable insights not provided by quantitative measures alone.
Operating Performance
A look behind the bottom line, including:
Risk-Adjusted Earnings Adequacy
Underwriting Performance
Earnings Yield
Expense Efficiency
By analyzing operating results, Standard & Poor’s determines a
company’s ability to capitalize on its strategy and business strengths.
The measurement of earnings focuses on a company’s ability to
effectively translate its strategies and competitive strengths into
growth opportunities and sustainable margins on its revenues and
assets. Operating results are analyzed independently of a firm’s capital
strength, and encompass both historical trend analysis and
prospective earnings. In addition, Standard & Poor’s analysts assess
the stability and quality of earnings. Accordingly, the focus for overall
performance is on evaluating earnings based on pretax returns on
assets or revenues (as appropriate) as the best measure not distorted
by unique leverage considerations. Underwriting performance is an
important component of the overall operating performance and is a
key driver of earnings strength. Assessment of underwriting
performance is based on loss experience, expense performance,
combined ratios or policyholder dividend ratios (as applicable), and
growth trends.
Investments
Asset management and its relationship to:
Asset Allocation
Portfolio Diversification
Asset Credit Quality
Interest Rate Risk Management
Liquidity
Market Risk
Asset quality and investment performance are integral to an insurer’s
operations and to remaining competitive in today’s environment.
Premiums and deposits invested today must provide a yield sufficient
to cover tomorrow’s claims. Standard & Poor’s evaluation of the
investment portfolio considers the competing and often conflicting
demands for higher yields versus safety and liquidity. By far, the key
element of the analysis is understanding the process by which the
company allocates cash flows to various asset classes. Once the asset
allocation strategy is understood, Standard & Poor’s looks to credit
quality and diversification: are there any unusual concentrations, such
as by asset type, industry sector, or individual companies? A review of
the management of asset duration versus liability duration, the extent
of market risk exposures, and the level of liquidity in the asset
portfolio, also are important components of the overall investment
analysis.
Capitalization, Reserving, And Reinsurance
The management of capital and a risk-adjusted analysis of how it
relates to:
Asset Risks
Reinsurance Protection/Quality
Liability and Reserving Risks
Mortality/Morbidity/Underwriting)
Interest Rate Risks
Pricing Risks
General Business Risks
Financial Leverage/Interest Coverage
Liquidity
The interrelationship of an insurer’s assets to its liabilities involving:
Sources of Liquid Assets
Cash Demands and Liabilities
Large Contractual Maturities
Underwriting/Operating Cash Flows
All insurance organizations need to be highly liquid. Assessment of
this important area identifies the sources of cash and enables us to
determine those companies with strengths or weaknesses in this
generally strong category. Key sources of liquidity investigated in
Standard & Poor’s analysis include operating cashflows generated by
day-to-day business activities and the investment portfolio. Liquidity in
the investment portfolio is especially important in relation to any
significant catastrophe exposures that may be present. Finally,
Standard & Poor’s also takes in to account any outside sources of
liquidity such as bank lines of credit and established commercial paper
programs.
Financial Flexibility
Alternative resources such as:
External Sources of Capital or Liquidity
This last element of the analysis is predominantly qualitative, and is
broken down into capital requirements and capital sources. Capital
requirements refer to factors that may give rise to an exceptionally
large need for capital; these tend to relate to the company’s strategic
objectives and thus, often involve acquisition or recapitalization plans.
Capital sources involve an assessment of a company’s ability to
access an unusually large amount of short term and long-term capital.
Typically, these sources consist of demonstrated access to multiple
types of capital markets; the ability to liquidate significant assets
without affecting the basic enterprise; and reinsurance.
These eight major rating factors are scored by Standard & Poor’s
analysts. However, the weighting of these factors is subject to
analytical judgment. Ultimately, the rating decision is a synthesis of
important issues that are unique to each company and will drive
future financial performance.
Standard & Poor’s considers capital needs on a risk-adjusted basis,
and employs a number of qualitative and quantitative approaches to
assess capitalization strength. While cognizant of the need to support
shareholder returns relative to equity, Standard & Poor’s views higher
levels of capitalization strength as more supportive of the needs of
policyholders. Besides providing protection against adverse claims,
market or other developments that may result in unexpected costs of
losses, a strong level of capital resources also supports the growth of
an insurer on an ongoing basis. The absolute level and quality of
capital is reviewed, in addition to debt leverage and future capital
management strategies. Complementing the capitalization analysis, a
thorough review of reserving methodology and procedures enables an
assessment of reserve adequacy. Similarly, a detailed study of the
structure and quality of reinsurance arrangements forms a very
important component of the analysis of balance sheet protection.
Definitions
Insurance Rating
Definitions
Insurer Financial Strength Rating
Definitions
A Standard & Poor’s Insurer Financial Strength Rating is a current
opinion of the financial security characteristics of an insurance
organization with respect to its ability to pay under its insurance
policies and contracts in accordance with their terms. Insurer Financial
Strength Ratings are also assigned to health maintenance
organizations and similar health plans with respect to their ability to
pay under their policies and contracts in accordance with their terms.
This opinion is not specific to any particular policy or contract, nor
does it address the suitability of a particular policy or contract for a
specific purpose or purchaser. Furthermore, the opinion does not take
into account deductibles, surrender or cancellation penalties,
timeliness of payment, or the likelihood of the use of a defense such
as fraud to deny claims. For organizations with cross-border or
multinational operations, including those conducted by subsidiaries or
branch offices, the ratings do not take into account potential that may
exist for foreign exchange restrictions to prevent financial obligations
from being met.
Insurer Financial Strength Ratings are based on information furnished
by rated organizations or obtained by Standard & Poor’s from other
sources it considers reliable. Standard & Poor’s does not perform an
audit in connection with any rating and may on occasion rely on
unaudited financial information. Ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of such
information or based on other circumstances.
Insurer Financial Strength Ratings do not refer to an organization’s
ability to meet nonpolicy (i.e. debt) obligations. Assignment of ratings
to debt issued by insurers or to debt issues that are fully or partially
supported by insurance policies, contracts, or guarantees is a separate
process from the determination of Insurer Financial Strength Ratings,
and follows procedures consistent with issue credit rating definitions
and practices. Insurer Financial Strength Ratings are not a
recommendation to purchase or discontinue any policy or contract
issued by an insurer or to buy, hold, or sell any security issued by an
insurer. A rating is not a guaranty of an insurer’s financial strength or
security.
BBB An insurer rated ‘BBB’ has GOOD financial security
characteristics, but is more likely to be affected by adverse business
conditions than are higher rated insurers.
An insurer rated ‘BB’ or lower is regarded as having vulnerable
characteristics that may outweigh its strengths. ‘BB’ indicates the
least degree of vulnerability within the range; ‘CC’ the highest.
BB An insurer rated ‘BB’ has MARGINAL financial security
characteristics. Positive attributes exist, but adverse business
conditions could lead to insufficient ability to meet financial
commitments.
B An insurer rated ‘B’ has WEAK financial security characteristics.
Adverse business conditions will likely impair its ability to meet
financial commitments.
CCC An insurer rated ‘CCC’ has VERY WEAK financial security
characteristics, and is dependent on favorable business conditions to
meet financial commitments.
CC An insurer rated ‘CC’ has EXTREMELY WEAK financial security
characteristics and is likely not to meet some of its financial
commitments.
R An insurer rated ‘R’ is under regulatory supervision owing to its
financial condition.
During the pendency of the regulatory supervision, the regulators may
have the power to favor one class of obligations over others or pay
some obligations and not others. The rating does not apply to insurers
subject only to nonfinancial actions such as market conduct violations.
NR An insurer designated ‘NR’ is NOT RATED, which implies no
opinion about the insurer’s financial security.
Plus (+) or minus (-) signs following ratings from ‘AA’ to ‘CCC’ show
relative standing within the major rating categories.
AA An insurer rated ‘AA’ has VERY STRONG financial security
characteristics, differing only slightly from those rated higher.
CreditWatch highlights the potential direction of a rating, focusing on
identifiable events and short-term trends that cause ratings to be
placed under special surveillance by Standard & Poor’s. The events
may include mergers, recapitalizations, voter referenda, regulatory
actions, or anticipated operating developments. Ratings appear on
CreditWatch when such an event or a deviation from an expected
trend occurs and additional information is needed to evaluate the
rating. A listing, however, does not mean a rating change is inevitable,
and whenever possible, a range of alternative ratings will be shown.
CreditWatch is not intended to include all ratings under review, and
rating changes may occur without the ratings having first appeared on
CreditWatch. The “positive” designation means that a rating may be
raised; “negative” means that a rating may be lowered; “developing”
means that a rating may be raised, lowered or affirmed.
A An insurer rated ‘A’ has STRONG financial security characteristics,
but is somewhat more likely to be affected by adverse business
conditions than are insurers with higher ratings.
Public Information Ratings, denoted with a ‘pi’ subscript, are Insurer
Financial Strength Ratings based on an analysis of published financial
information and additional information in the public domain. They do
Insurer Financial Strength Ratings
An insurer rated ‘BBB’ or higher is regarded as having financial
security characteristics that outweigh any vulnerabilities, and is highly
likely to have the ability to meet financial commitments.
AAA An insurer rated ‘AAA’ has EXTREMELY STRONG financial
security characteristics. ‘AAA’ is the highest Insurer Financial Strength
Rating assigned by Standard & Poor’s.
not reflect in-depth meetings with an insurer’s management and are
therefore based on less comprehensive information than ratings
without a ‘pi’ subscript. ‘pi’ ratings are reviewed annually based on a
new year’s financial statements, but may be reviewed on an interim
basis if a major event that may affect an insurer’s financial security
occurs. ‘pi’ ratings are not modified with ‘+’ or ‘-’ designations, nor are
they subject to potential CreditWatch listings.
Ratings with a ‘pi’ subscript generally are not modified with ‘+’ or ‘-’
designations. However, such designations may be assigned when the
insurer’s financial strength rating is constrained by sovereign risk or
the credit quality of a parent company or affiliated group.
Issuer Credit Rating
A Standard & Poor’s Issuer Credit Rating is a current opinion of an
obligor’s overall financial capacity (its creditworthiness) to pay its
financial obligations. This opinion focuses on the obligor’s capacity
and willingness to meet its financial commitments as they come due.
It does not apply to any specific financial obligation, as it does not
take into account the nature of and provisions of the obligation, its
standing in bankruptcy or liquidation, statutory preferences, or the
legality and enforceability of the obligation. In addition, it does not
take into account the creditworthiness of the guarantors, insurers, or
other forms of credit enhancement on the obligation. The Issuer Credit
Rating is not a recommendation to purchase, sell or hold a financial
obligation issued by an obligor, as it does not comment on market
price or suitability for a particular investor.
Rating Outlook Definitions
A Standard & Poor’s Rating Outlook assesses the potential direction of
a long-term credit rating over the intermediate to longer term. In
determining a Rating Outlook, consideration is given to any changes in
the economic and/or fundamental business conditions. An Outlook is
not necessarily a precursor of a rating change or future CreditWatch
action.
• Positive means that a rating may be raised.
• Negative means that a rating may be lowered.
• Stable means that a rating is not likely to change.
• Developing means a rating may be raised or lowered.
• N.M. means not meaningful.
Contact List
Standard & Poor’s - Brazil
Av. Brigadeiro Faria Lima, 201
18th floor
Regina Nunes
President
Tel.: +55 11 3039-9737
Fax.: +55 113039-9701
[email protected]
Milena Zaniboni
Managing Director
Tel.: +55 11 3039-9739
Fax.: +55 113039-9701
[email protected]
Daniel Araujo
Director
Tel.: +55 11 3039-9741
Fax.: +55 113039-9701
[email protected]
Tamara Berenholc
Associate Director
Tel.: +55 11 3039-9732
Fax.: +55 113039-9701
[email protected]
João Carlos Scuracchio
Director – Origination & Marketing
Tel.: +55 11 3039-9704
Fax.: +55 113039-9701
[email protected]
Marcos Viesi
Managing Editor
Tel.: +55 11 3039-9748
Fax.: +55 113039-9701
[email protected]
Top 20 Brazilian Insurance Companies - 2007

Study of Brazil`s Top 20 Insurance Companies

Transcription

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