S&P Global Ratings assesses the industry and country risk of Brazil's (BB-/Stable/B) life insurance sector as intermediate, the same assessment as Italy, Spain, and China's life sectors.
Country Risk: Moderately High
Brazil's country risk reflects the challenging political and economic scenario in the country, in light of its sluggish economic prospects and the longstanding challenges of advancing difficult structural fiscal measures.
Although the market reacted positively after the election of Jair Bolsonaro last year, the first semester of 2019 has highlighted how the new administration has struggled to pass controversial pieces of legislation in a fragmented Congress in order to correct structural fiscal slippage and an increasing debt burden, as well as to bolster economic growth. The recent approval of the basic text of pension reform has been the first step in Brazil regaining business optimism and reverting the current weakening expectation of economic growth.
In terms of business conditions, all Brazil's insurance industries have suffered to varying degrees from the recession that has hit the country in the past few years. The life industry was the least affected, although premiums growth has slowed in the last few years due to the lower interest rates that have reduced the attractiveness of private pension products, the largest product in this segment. Nonetheless, the lower growth hasn't hurt the sector's strong profitability.
|Brazil Sovereign Risk Indicators -- Economic Data|
Industry Risk: Low
Our view of the life insurance sector considers the segment's strong profitability metrics, supported by the sector's high barriers to new entrants given the industry dynamics and product characteristics that support the strong earnings of companies operating in this segment.
Moreover, we believe the regulatory environment stimulates the industry's development. Additionally, the slower expected growth prospects for the industry's premiums shouldn't impair the sector's profitability--we expect the average return on equity to be about 38% over the next three years.
Factors supporting profitability
- We believe the Brazilian life insurance industry benefits from high operational barriers to new entries, given that bancassurers dominate the sector and have very effective and difficult to match distribution channels. The five largest life insurers in Brazil represent about 75% of the total market as of June 2019, and are part of the largest banking groups in the country, benefiting from established brands and reputations. Therefore, the high sector concentration and low-cost structure of these large groups make it challenging for new competitors to change the overall industry dynamic.
- We believe that the industry doesn't face significant product risks, which helps boost its profitability. We base our view on the importance of private pension plans for the life insurance segment in Brazil, given on the product's low risk and its fee-based revenue characteristic. Private pension funds represent an average of 70% of total sector premiums, and generate a major portion of insurers' income without additional risk because the policyholder bears the profitability risk of pension assets. Although the attractiveness of this product to policyholders has been reduced, we continue to believe it will continue to make up a large portion of life premiums. At the same time, traditional life insurance policies in Brazil are short term, so we believe the risk of asset liability mismatch is manageable, which also supports industry profitability.
- In our view, Brazil's regulator--Private Insurance Superintendent (SUSEP for its Portuguese acronym)--monitors the insurance industry frequently. SUSEP was established in 1988, and has successfully reduced risks in the insurance market by requiring better governance standards for the insurance companies while seeking to implement international standards of solvency in the domestic market. In our view, SUSEP currently has an adequate level of sophistication and has established rules for investments, capital adequacy, solvency, corporate governance, money laundering controls, and fraud prevention. We see no deficiency in corporate governance and transparency among Brazilian life insurers, and wide information about the industry is available on a monthly basis.
- The Brazilian life insurance sector's premiums contracted 2.1% last year because of the decreasing attractiveness of pension products, given the lower interest rates in the country and investors' shift to more sophisticated and profitable investment products. Nonetheless, during the first semester of 2019, pension premiums grew about 8% compared to June 2018. Therefore, we expect premiums from private pensions to recover and grow above inflation level during 2019 and 2020. At the same time, the growth of life products unrelated to pensions have grown more quickly, with premiums increasing 17% last year and 14% from June 2018 to June 2019. Despite slower growth prospects, the industry hasn't faced weakening returns. Therefore, we believe its growth prospects don't limit the industry's profitability.
- Insurers Rating Methodology, July 1, 2019
- Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- Insurance Industry And Country Risk Assessments Under Our Revised Criteria, July 5, 2019
This report does not constitute a rating action.
|Primary Credit Analyst:||Mariana Gomes, CFA, Sao Paulo (55)-11-3039-9728;|
|Secondary Contact:||Pedro Breviglieri, Sao Paulo +55 (11) 3039-9725;|
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