“Credit positive” Brazil expects growth

“Credit positive” Brazil expects growth


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Brazil is increasingly attractive to investors but its tightening regulatory regime may put off foreign insurers, despite a recent opening up of the market.

Last Monday, Superintência de Seguros Privados (Susep), Brazil’s insurance regulator published a resolution refining and tightening capital requirements for insurers and reinsurers.

Consequently, Moody’s has branded Brazil “credit positive”. A Moody’s research report says Susep’s effort to risk-adjust the local insurers’ and reinsurers’ capital will bring increased regulatory capital requirements and improved solvency.

Rodrigo Protasio, deputy CEO of JLT Re, Brazil, says Brazil is full of opportunity for insurers and reinsurers, mainly because the economy is growing.

Brazil’s GDP is predicted to increase 3.7% in 2013, according to Fitch Ratings, with an inflation forecast of 6.15% for 2013 (and a target of 4.5%).

The average Brazilian spends less than $350 on insurance a year and the insurance penetration is only 3.5% or just above 50% of the Organisation for Economic Co-operation and Development (OECD) countries’ average, according to the International Monetary Fund.

The recent regulatory initiative is one of many regulatory efforts to boost surveillance and incorporate more prudent capital requirements for insurers and reinsurers in Brazil to meet Solvency II standards.

The biggest changes were to the criteria establishing operational risk capital and market risk capital and to include underwriting risk capital for life and pension operations and capitalização (a unique product combining lottery-based drawings and personal savings features).

The Brazilian regulators also changed calculations for minimum capital requirements to be the maximum between the base capital (fixed amount of capital that considers the business segment and the region of operation) and the risk capital (variable amount of capital that considers companies risk exposures, such as credit risk).

“As a result of the stronger capital requirements, we expect companies to raise additional capital to maintain their capital cushions above the higher capital charges,” says the Moody’s research report.

Celso de Azevedo, Thomas Cooper solicitor advocate, says: “The bank loaning rates means there will always be an interest for foreign investors.

“The Brazilian economy has been stagnant for so many years that the government is learning how to manage growth but I’m cautiously optimistic. The Olympic growth will last about seven to eight years,” he adds.

By the end of 2012 about 100 reinsurers were authorised to operate in Brazil, 12 of which were local, 30 including Lloyd’s were admitted and the rest were “occasional”.

However, De Azevedo says it can take up to a year to get approval to operate in Brazil, although if there are no complications it may only take six months.

Incidents such as the Jirau case may present a threat to foreign reinsurers. Local protestors destroyed Brazil’s Jirau hydroelectric dam and the case was brought before a Brazilian court by the claimant and the insurers commenced arbitration proceedings in an English court, both disagreeing with each other.

Protasio agrees that this complex legal system is adversary for international insurers.

“It’s a difficult ball game here. Every process is a learning curve and we are at the start of the curve but people are here for the long term. AIG, for example, has been in Brazil for years,” he says.
“Previously all premiums were paid in Brazil but now people are paying them to international companies and cases are being taken to foreign courts.

“We have a very difficult legal system. There is less common law and less experience to judge a case and more weight is put on the written contract.

“It is a risk for investors and some of the international companies. Some companies pull out and decide not to stay in the country,” he adds.

However, he believes the market is more than capable of accessing the necessary capital to meet new regulatory requirements.

According to a Susep study, insurers will need capital injections of BRL3bn ($1.5bn) over the next year to comply with the new solvency rules.

The regulator indicated 12 companies accounting for 7% of the licensed Brazilian insurers will need to raise capital to continue operating in the market and remain above the new minimum requirements.

Increasing capital may be challenging for companies with weaker profitability and less capacity to generate internal capital, the Moody’s report says, possibly leading to greater merger and acquisition activity among weaker companies.

For example, since its initial public offering (IPO) two years ago Brasil Insurance has invested R$362m in the acquisition of 19 Brazilian insurance brokers.

However, Protasio argues most Brazilian insurers are owned by very strong financial groups. “There is capital enough.  Like aeroplanes, oil and gas, people will always want insurance.
“Local reinsurers are always very well capitalised. We are seeing large foreign investments and the industry is starting to use IPOs more regularly to access capital,” he says.

Susep has said because of the changes in regulation it expects to see a greater portion of Brazilian risks being reinsured by global programmes.

The combination of heightening competition and mergers allowing companies to be more cost efficient has caused rates to be generally flat.

However, Protasio remains optimistic. He says: “We have all the big boys coming to Brazil, for example XL Re, Ace, Alliance and Generali. At the moment everyone wants a piece of Brazil.”

By Vicky Beckett - vbeckett@euromoneyplc.com

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