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Brazilian reinsurers benefit from investments and regional expansion: S&P

22nd March 2017 - Author: Luke Gallin

Despite intense competition from international players, economic turmoil and price softening in the Brazilian reinsurance market, domestic firms have maintained adequate profitability driven by high investment yields and the expansion into underserved markets across Latin America, according to Standard & Poor’s (S&P).

Brazil mapBrazil is now in the third year of a recession, but unlike the majority of industries in the country during 2016, its reinsurance sector was able to maintain its business volume and local reinsurers reported profitability.

“The Brazilian reinsurance industry remains fiscally healthy, in our view, because it has been able to maintain a solid market position in Brazil, successfully expand into other Latin American countries, and reap the benefit of high domestic interest rates on Brazilian government securities,” said global rating agency S&P, in a recent report.

Unlike reinsurers in other markets around the world Brazilian players have benefitted from higher investment returns, mainly from high-yielding Brazilian government securities, which has helped to offset declining underwriting profits and competition from international reinsurers looking to increase their participation in the Brazilian marketplace.

In fact, S&P explained that high interest rates in the country “have been key to the reinsurance sector’s profitability,” helping the sector record a return on equity in 2016 of 17%.

“While the rest of the world has seen low investment yields since the 2008 financial crisis, Brazil increased its benchmark interest rates from 2013 to 2015 in an attempt to control inflation, and that benefited local reinsurers, who generally have solid capitalization given their start-up status and limited leverage,” said S&P.

Since 2012 Brazil’s reinsurance industry’s combined ratio has averaged 101.3%, which S&P said is driven by competition in both local and global markets that continues to pressure pricing. However, in 2016 the industry’s combined ratio, on average, improved to 94.62%, just the second time since 2012 it’s been below 100%, and which S&P attributes to improved reserve releases and reduced use of retrocessional protection as gross premiums written (GPW) growth has slowed.

S&P shows that since 2012 the country’s reinsurance sector’s retrocession use has dropped from an average 45.03% to 39.46% in 2016. During the same period, and also supporting profitability, the sector’s net expense ratio has declined from 38.87% in 2012, to 30.16% in 2016, while the net loss ratio has declined from 68.39% in 2012, to 64.45% in 2016, said S&P.

“As we continue to assess the industry’s profitability, we would view it positively if underwriting results continue to improve. We believe this will enhance the quality of earnings and reduce Brazilian reinsurers’ reliance on investment returns, which are more volatile and largely out of management’s control,” warned S&P.

The expansion into other reinsurance markets across Latin America, such as Chile, Colombia, Mexico, Argentina and Peru, has helped Brazilian reinsurers premium growth remain resilient, which has been further supported by increased market share gained from offshore reinsurers.

Regarding expansion into other markets across Latin America, S&P said that at the end of 2016 roughly 14% of Brazilian reinsurers premiums originated abroad, compared with just 5% at year-end 2014.

According to S&P, in 2012 the market share in Brazil of local reinsurers against offshore reinsurers was weighted 60% to 40%, in favour of local players. And in every year since 2012 local players have claimed a larger slice of the market size, with 2016 being 75% local reinsurers and 25% offshore entities.

However, S&P explained that Latin America’s GDP growth is expected to be just 1.7% in 2017, which the rating agency feels will limit the regional growth potential of Brazilian reinsurance companies, a trend that will also be negatively impacted by the ongoing softening, global reinsurance market and subsequent pressure on rates.

“That has generated fierce competition in Brazil (and elsewhere) that will continue to pressure underwriting results. Beyond that, Brazilian reinsurers typically have less underwriting experience with catastrophic risk than the largest global reinsurers, and that could potentially hamper their expansion in some Latin American markets,” said S&P.

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