Outlooks: Brazil, LatAm & Global

Guilherme Simões, Senior Financial Analyst, AM Best

8° Encontro de Resseguro do Rio de Janeiro

AM Best Overview

AM Best Headquarters, Oldwick, NJ, USA.

2

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

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

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

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

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

Market Segment Outlook – Brazil Reinsurance

View from Alto da Boa Vista, in Rio de Janeiro.

8

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

• 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

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

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 future 10y 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

Surety

Octavio Frias de Oliveira bridge, in Sao Paulo.

13

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

Milh

ões

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 PremiumsReinsurance/Insurance% of Total Insurance Premiums

Source: SUSEP

14

Oil & Gas

Brazil’s Pre-Salt 6th tender offer round. Source: ANP Brazil

15

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

Milh

ões

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

Agriculture/Crop

Map of Worldwide Croplands. Source: NASA, Nov. 2017.

17

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

Milh

ões

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

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

LatAm: Mexico and Panama Outlooks

20

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

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

Market Segment Outlook – Global Reinsurance

23

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

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 Equity Combined 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

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

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

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

Pri

ce/B

oo

k V

alu

e

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

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

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

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

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

© 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.