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8º Encontro de Resseguro do Rio de Janeiro

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8º Encontro de Resseguro do Rio de Janeiro

  1. 1. Outlooks: Brazil, LatAm & Global Guilherme Simões, Senior Financial Analyst, AM Best 8° Encontro de Resseguro do Rio de Janeiro
  2. 2. AM Best Overview AM Best Headquarters, Oldwick, NJ, USA. 2
  3. 3. AM Best Overview Founded in 1899, AM Best is recognized by the financial industry as the only global credit ratings organization with a uniquely dedicated focus on the insurance industry and insurance-linked capital markets transactions. Best’s Credit Ratings are an essential benchmark to help the financial industry and consumers assess an insurer's financial strength, creditworthiness, and the ability to honor obligations to policyholders worldwide. Our perspective is powered by strong analytic expertise, research and insight to help insurers, financial professionals, and consumers make more confident decisions. With over 3,400 ratings in more than 90 countries, AM Best is located in the United States, Mexico, London, Dubai, Singapore, and Hong Kong 3
  4. 4. Market Coverage • Property/Casualty (non-life) • Life and Annuity • Health • Reinsurance • Mutual Insurers and Protection & Indemnity (P&I) Clubs • Surety Companies • Title Insurance • Takaful, Retakaful and Co-operative Insurers • Start-up Reinsurers • Lloyd’s and Its Syndicates • Alternative Risk Transfer (ART) Vehicles – Captives, Pools and Risk Retention Groups • Debt: Corporate Debt, Preferred Stock and Hybrid Securities, Commercial Paper, Insurance-based Liability or Asset-backed Securitizations, Closed-block Monetizations 4
  5. 5. Best’s Credit Rating Scales FSR Long-Term ICR A++ Aaa, aa+ A+ Aa, aa- A a+, a A- a- B++ bbb+, bbb B+ bbb- B bb+, bb B- bb- C++ b+, b C+ b- C ccc+, ccc C- ccc-, cc D c E e/d F f/d Note: e/E, f/F and d are non-rating designation status. e/E and f/F are used for insurers, while d is used for non-insurers and securities. 5
  6. 6. Overall Assessment Balance Sheet Strength Baseline Balance Sheet Strength Baseline Operating Performance (+2/-3) Business Profile (+2/-2) Enterprise Risk Management (+1/-4) Comprehensive Adjustment (+1/-1) Rating Lift/Drag Published Issuer Credit Rating Country Risk Maximum + 2 Very strong “a” Adequate “0” Limited “-1” Appropriate “0” None None “0” “0” “a-” 6
  7. 7. Country Risk in Latin America Country Country Risk Tier Chile 2 Mexico 3 Brazil 4 Colombia 4 Costa Rica 4 Panama 4 Peru 4 Dominican Republic 4 Argentina 5 Bolivia 5 Ecuador 2 Honduras 5 Venezuela 5 7
  8. 8. Market Segment Outlook – Brazil Reinsurance View from Alto da Boa Vista, in Rio de Janeiro. 8
  9. 9. Market Segment Outlook – Brazil Reinsurance Headwinds Tailwinds Persistent macroeconomic and political uncertainty There is a clear path of reforms to resume growth Declining lower interest rate environment Lower interest rates facilitate economic growth, and increase in underwriting Currency volatility increases risk of doing business in Brazil Volatility decreases in periods of stable growth Competition in the property & casualty segment is intense There is still growth potential in surety, agriculture, and specialty lines Regulatory environment is evolving Much was done to provide market economy features to the (re)insurance industry, which has been gradually opened AM Best has assigned the outlook on the Brazilian Reinsurance market as Negative 9
  10. 10. • Insurance penetration still has a long way to go in Brazil • Reinsurance usually follows • Economic development to increase demand for (re)insurance • Infrastructure improvements, together with regulatory framework have potential for positively impacting the (re)insurance industry Insurance Penetration in Brazil Source: OECD. 10
  11. 11. Market Segment Outlook – Brazil Reinsurance Growth in the (re)insurance market can positively impact companies balance sheet strength, operating performance and business profile • After presidential elections, part of the uncertainty disappeared • Needed pension system reform is key to put country back on track • Everything else will follow • Infrastructure is a key topic for the current government and (re)insurance should follow suit • There is a lag until reinsurance captures primary insurance market growth 11
  12. 12. Interest Rates Driving Return on Equity • Higher interest rates usually favor higher returns in the reinsurance industry • Correlations between interest rates and return on equity have increased over the years • Underwriting discipline and scale are key to improve profitability in the future10y Correlation 7y Correlation 5y Correlation 3Y Correlation 0.45 0.51 0.49 0.72 -10,00% -5,00% 0,00% 5,00% 10,00% 15,00% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Local Brazilian Reinsurance Market ROAE vs. Interest Rates (excluding IRB) ROAE (excl IRB) Target Interest Rates (average) Source: SUSEP, Banco Central do Brasil. 12
  13. 13. Surety Octavio Frias de Oliveira bridge, in Sao Paulo. 13
  14. 14. Evolving Reinsurance Market - Surety: Still an Opportunity • The regulatory framework change in 2013 kicked-off the segment • Losses are relatively low compared with other lines -40% -20% 0% 20% 40% 60% 80% - 200 400 600 800 1.000 1.200 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Milhões Surety Reinsurance Gross Premiums Surety (Reinsurance Premiums) Growth (Y/Y) 0% 10% 20% 30% 40% 50% 60% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Surety as a % of the (Re)insurance Industry Gross Premiums % of Total Reinsurance Premiums Reinsurance/Insurance % of Total Insurance Premiums Source: SUSEP 14
  15. 15. Oil & Gas Brazil’s Pre-Salt 6th tender offer round. Source: ANP Brazil 15
  16. 16. Evolving Reinsurance Market – Oil & Gas: Recovery -100% -50% 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% - 100 200 300 400 500 600 700 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Milhões Oil & Gas Reinsurance Gross Premiums Oil & Gas (Reinsurance Premiums) Growth (Y/Y) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Oil & Gas as a % of the (Re)insurance Industry Gross Premiums % of Total Reinsurance Premiums Reinsurance/Insurance % of Total Insurance Premiums • With the stabilization of oil prices, resumption of oilfields tender offers and Petrobras clean-up, demand for (re)insurance in the Oil & Gas increased, however it has been very volatile in recent years • The opening of the Oil & Gas market in Brazil has attracted global companies Source: SUSEP 16
  17. 17. Agriculture/Crop Map of Worldwide Croplands. Source: NASA, Nov. 2017. 17
  18. 18. Evolving Reinsurance Market – Crop/Agro: A Lot of Room -60% -40% -20% 0% 20% 40% 60% - 200 400 600 800 1.000 1.200 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Milhões Agro Reinsurance Gross Premiums Rural (Reinsurance Premiums) Growth (Y/Y) 0% 10% 20% 30% 40% 50% 60% 70% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Agro as a % of the (Re)insurance Industry Gross Premiums % of Total Reinsurance Premiums Reinsurance/Insurance % of Total Insurance Premiums • While percentage insured vs. planted area is significantly below other countries (~15% in Brazil vs. ~90% in U.S.), current government intends to foster agriculture sector growth • Primary market is somewhat concentrated by insurer and by activity/crop Source: SUSEP, Ministério da Agricultura 18
  19. 19. Competitive Landscape • (Re)insurance management in Brazil is seen as resilient, and have faced innumerous economic and political crisis in the past few decades • Hyper-inflationary periods, currency volatility, regulatory uncertainty, high taxation environment were weathered by many of (re)insurance managers • However, fierce competition establishes in Brazil each time the country gets in the spotlight as an attractive emerging opportunity 19
  20. 20. LatAm: Mexico and Panama Outlooks 20
  21. 21. Market Segment Outlook – Mexico Insurance • Less dependency on investment income as insurers gained efficiency through a reduction in expenses • Primary premiums are expected to decline due to a reduction in government spending and a reduction in GDP growth forecast (1.8% in 2019) • Interest rates at 8.25% likely to stay near this level as economic activity slows down • Mexico has lower insurance penetration than Brazil and other countries with similar country risk • Regulatory environment favors competition reducing market share concentration • Reinsurance capacity availability is fostering competition in the P/C lines other than life, accident & health and auto segments, with lower retentions Outlook for Mexico’s insurance industry is stable, with strong risk-adjusted capitalization metrics 21
  22. 22. Market Segment Outlook – Panama Insurance • Deceleration caused by the construction sector is impacting this line of business • Panama is one of LatAm’s fastest growing economies • Insurance penetration is among the lowest • Health, Personal, Group Life, Motor and Individual Life are the lines with the highest growth in the last few years • Market is concentrated in the top 5 companies • Operating performance is profitable with combined ratios at 85.6% Outlook is stable for Panama’s insurance industry, with sound capitalization, profitable underwriting, and evolving risk management 22
  23. 23. Market Segment Outlook – Global Reinsurance 23
  24. 24. Market Segment Outlook – Global Reinsurance Headwinds Tailwinds Intense competition Increasing alignment between traditional and third- party capital Excess capacity limits the potential for improvement Improving pricing discipline Potential for increased inflation Rising interest rate environment Rates stabilized, but remain under pressure US economic growth slows, but continues Continued interest from third-party capital, even beyond prop-cat lines Use of third-party capital in retrocession programs reducing earnings volatility AM Best has revised the outlook on the Global Reinsurance sector to Stable 24
  25. 25. Global Reinsurance Market Trends 13,0% 11,6% 9,5% 8,3% 5,0% 0% 2% 4% 6% 8% 10% 12% 14% 2013 2014 2015 2016 2017 2018E Return on Equity Five-Year Average Return on EquityCombined Ratio Source: AM Best data and research. 87,9% 89,7% 90,4% 95,2% 110,1% 99,7% 94,7% 0% 20% 40% 60% 80% 100% 120% 2013 2014 2015 2016 2017 2018E 5yr Avg 25
  26. 26. Global Reinsurance Market Capital 292 320 340 332 345 345 345 19 48 60 68 75 87 95 2012 2013 2014 2015 2016 2017 2018E Third Party Capital Traditional Capital $20bn Trapped? Estimate for Total Dedicated Reinsurance Capital (USD billions) Notes and Sources: Estimates by Guy Carpenter and AM Best. 26
  27. 27. Global Reinsurance Market Capital 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% $0 $50 $100 $150 $200 $250 2012 2013 2014 2015 2016 2017 2018E Capital Utilization $ in billions Capital Depletion Needed To Trigger a Hard Market @ 99.6 Capital Utilization Notes and Sources: Estimates by Guy Carpenter and AM Best. 27
  28. 28. Global Reinsurance Market Trends Global Reinsurance – Price/Book Value (Excluding accumulated other comprehensive income) 40 60 80 100 120 140 160 180 200 220 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Price/BookValue Years Average Current P/BV: 1.17x Average 1994-Present: 1.16x Low Reached March 2009 (0.75x BV) Peak reached February 2002 (1.83x BV) 1.0x P/BV Announced Acquirer Acquiree Price (USD mm) Tangible Price to BV 9-Jan-15 XL Group Catlin Group Ltd $4,100 1.27x¹ 3-Aug-15 EXOR PartnerRe $6,900 1.19x 5-Oct-16 Sompo Endurance $6,304 1.36x 6-Jul-17 AXIS Novae $604 1.50x 22-Jan-18 AIG Validus $5,560 1.53x 4-Mar-18 AXA XL Group $15,300 1.96x Source: Company reports, Bloomberg, AM Best research. 28
  29. 29. Possible Turn in Rates Trajectory Capital Elasticity has flattened the reinsurance market cycle $200 billion in losses over an 18 month period from August 2017 to May 2018 Capacity crunch in retrocession markets Earnings under pressure Increased demand for reinsurance 29
  30. 30. Continued Market Uncertainty MARKET UNCERTAINTY Upward rate pressure Trapped Collateral Loss Uncertainty Loss creep from Hurricanes & Wildfire Uncertainty New Capacity being held on the sidelines Aggregation of losses across ILS Fund Sector 30
  31. 31. What Has Transpired Predominately European renewals that were less effected by the 2017 & 2018 CATs Rates did increase 0-5% for loss effected programs (Lloyd’s and US) Supply & Demand imbalance lead to retro pricing increases of 15-20% Overall Renewal pricing was flat January Renewal negotiations ran late 31
  32. 32. What to Expect? ILS Funds and collaterialized re expect larger rate response for the 4/1 & 6/1 renewals with April renewals indicating +10% and potentially higher for Florida and other US loss effected regions Capital markets continue to be the key to sustained rate increases at the mid-year renewals An abundance of capital waiting on the sideline Evolving interest rate environment is a new variable the pricing equation 32
  33. 33. © AM Best Company, Inc. (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. AMB does not audit or otherwise independently verify the accuracy or reliability of information received or otherwise used and therefore all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. AMB is not an investment advisor and does not offer consulting or advisory services, nor does the company or its rating analysts offer any form of structuring or financial advice. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.