brazilian insurance industry expected to capitalize on...

Top 20 Brazilian Insurance Companies - 2007 3

Introduction 5Study of Brazil's Top 20 Insurance Companies 6Brazilian Insurance Industry Expected to Capitalize on Growth Opportunities 8What to expect from the opening of the Brazilian reinsurance market? 14Top 20 Brazilian Companies Ranking Criteria 16

SummariesBradesco Seguros S.A. 18Sul América Seguros S.A. 19Itaú Seguros S.A. 21Unibanco AIG Seguros S.A. 22Porto Seguro Cia de Seguros Gerais 23Companhia de Seguros Aliança do Brasil 24Mapfre Vera Cruz Seguradora S.A. 25Tokio Marine Brasil Seguradora S.A. 26Caixa Seguradora S.A. 27AGF Brasil Seguros S.A. 28Santander Seguros S.A. 29HSBC Seguros S.A. 30Marítima Seguros S.A. 31HDI Seguros 32Liberty Seguros S.A. 33Chubb Seguros S.A. 34ACE Seguradora S.A. 35Metropolitan Life Seguros e Previdência Privada S.A. 36Icatu Hartford Seguros S.A. 37IRB Brasil Resseguros S.A. 38

Insurance Ratings Methodology 40

Insurance Ratings Definitions. 43

Contact List 45

Table of Contents

Top 20 Brazilian Insurance Companies

Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY 10020. Editorial offices: 55 Water Street, New York,NY 10041. Subscriber services: (1) 212-438-7280. Copyright 2007 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved.Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's orothers, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use ofsuch information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities.

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Introduction Welcome to Standard & Poor's Ratings Services' first publication ofBrazil's Top 20 Insurance Companies. We see 2007 as a turning pointfor the insurance industry in Brazil, as it marks the transition to anopen reinsurance environment and to stronger, more prudent solvencyrules. Under the new environment for the reinsurance business, weexpect new investments, new products, more competition, and furtherconsolidation in the insurance market--all leading to an increase in theinsurance business in Brazil. Such great opportunities will not comewithout significant challenges, such as the need for higher financialtransparency by local insurers, development of relationships withreinsurers, and higher capitalization.

At the same time, the insurance industry is striving to keep pace withthe opening of the Brazilian economy and the consequentdevelopments that are taking place in other segments such asindustrial companies and financial institutions. This should translateinto increased participation of insurance premiums in the BrazilianGDP. Companies are also adjusting to operate in an environment ofdeclining interest rates. Brazilian insurance companies have beenimproving underwriting practices and loss management, whilesearching for cost efficiency. These efforts will be important for theachievement of sustainable profitability that should help build capital.

We take pride in our reputation as the world's leading credit ratingservice, with a global network of 20 countries and more than 140years of experience providing independent ratings services to theglobal financial economy. With the opening of the Brazil office in1998, our local business grew significantly, indicating that ratingsactivity became an integral decision-making tool for investors.

We are confident that this publication will be a good source ofinformation for those who are interested in the present and future ofthe insurance industry in Brazil.


6 Top 20 Brazilian Insurance Companies - 2007


Study of Brazil's Top 20Insurance Companies

Brazil's Top 20 Insurance Companies includes an analysis of theinsurance industry risk with our views on the characteristics of theindustry, recent developments, and trends for the sector. It considersthe positive evolution of the regulatory framework and highlights theinfluence of sovereign risk, if for nothing else than the high proportionof government securities backing reserves. The study also offers ourview of the opening of the reinsurance market and what changes weexpect to result from this less-protected environment. We also providecomments on the credit profiles on the 20 largest insurance groups bypremiums written in 2006 (according to SUSEP - Superintendência deSeguros Privados), with a summary analysis of the three insurers wecurrently rate and short commentaries on the credit profiles of theremaining 17 nonrated insurers. We also include an analysis of theBrazilian government-owned reinsurer IRB-Brasil Resseguro S.A.

The 20 largest Insurance groups represent an important 91% of theentire system's premiums in 2006. Looking at the top 20 insurancegroups, we explore their business profiles by analyzing theircompetitive position, diversification, and financial flexibility, whichincludes our view of potential parent support. In terms of financialprofile, we evaluated their operating performance, investments,liquidity, reinsurance, and capitalization. The maintenance of highprofitability is important to help build stronger capital, and crucial tocover the risks associated with the insurance operation. The quality ofthe investment portfolio should provide liquidity and resources for theinsurers to pay down their obligations--mainly claims. Reinsurance isbecoming more important as the property and casualty business gainsweight in the industry, large risks increase their share in the industry,and the local economy grows and becomes more sophisticated.

The business and financial profiles of the selected insurers werecompared to the industry average for the segments in which theyoperate and measured into five categories: well above average, aboveaverage, average, below average, and well below average. Thesecategories are used for comparison of insurers inside Brazil only; theydo not apply for global comparisons. The result of this exercise can beseen in our scatter diagram on page 7 for a better comparison of thetop 20 insurance groups.

(1) Business ProfileBusiness profile evaluates the consolidated market position of theinsurance companies in the industry and in the insurers' majorsegments, diversification, and financial flexibility. The insurers seen tohave a business profile of well above average and above averageusually show a strong and sustainable market position, as well asregional and segment diversification. They also benefit from adistinguished distribution and financial flexibility deriving from theposition as strategic subsidiaries of strong international insurer groupsor important product lines for strong local financial groups. Thesefeatures have allowed them to maintain a distinct position inachieving more stable premiums and managing the impact ofeconomic changes in the behavior of a specific segment. As aconsequence, we expect them to show good results that will help

them achieve a stronger capital position. We expect monoline insurersto have a distinct market position with strong product and distributioncapacities to overcome the concentration risk and to show well aboveaverage and above average business profile.

Average and below average business profiles were granted tocompanies that have a small share in most of the insurance segmentsand in the insurance industry with very low diversification. Even if thecompany benefits in terms of financial flexibility for being a strategicsubsidiary of a foreign group, we expect it to benefit from theknowledge and experience of the group to present a strong andincreasing market position to have well above average and aboveaverage business profiles. Competition is very intense and we expectthe companies' strong business profile to translate to good businessorigination, which is important for the generation of strongprofitability and capital.

(2) Financial ProfileThe insurance companies with well above average and above averagefinancial profiles show strong profitability with good underwritingresults, adequate investment portfolios to their risks, and strongliquidity of investments to support their claims. They are also expectedto show a strong capitalization with excess capital to support theirunderlying risks, including underwriting, asset, credit, and reserve, andto show strong reinsurance relationships to support their expansion inlow-retention policies.

The insurers with average had below average financial profiles ingeneral have lower operating performance and underwriting results,or capitalization.

Operating PerformanceMost of the Brazilian insurance companies have maintained goodprofitability. Nevertheless, this profitability is helped by the strongfinancial results generated mostly by their investment in fixed-incomesecurities. In 2006, the Brazilian insurance and pension industryreported ROA of 5.2% compared to 4% in 2003; however, the industryonly showed positive underwriting results in 2006. Profitability shouldcontinue to be a positive for the industry and we expect insurers tomaintain strong underwriting results through active loss andunderwriting management, and attention to efficiency. We expectfinancial results to decline in light of the drop in interest rates.

Investment and LiquidityLiquidity and investments in the insurance industry have been good,but still rely on government securities. Government bonds have beenthe industry's major investment instrument (more than 80%) giventheir strong liquidity and lower risk. Equity investments represent alow 8% of the total and even with the reduction in interest rates arenot expected to increase significantly. We expect investments to covermore than 100% of the reserves and to be maintained in liquidinstruments with good risk profiles.



CapitalizationWe expect the new Solvency rules established by the regulator toreinforce the industry's capitalization. Although the industry is notundercapitalized by the current solvency requirement, we expect someinsurers to reinforce their capital to support their underlying risksunder new solvency rules and remain competitive in the industry. Weexpect the stricter capital rules to bring changes in the industry, withadditional consolidation and higher use of reinsurance. Reinsurance

Until now, IRB has enjoyed the monopoly of the reinsurance industryin Brazil. However, with the opening of the market, insurancecompanies should look into establishing strong reinsurance contractsand diversifying their reinsurer relationships to present a competitiveposition in the industry and sustain a strong operation.

Scatter ChartThe following chart shows the relative business and financial profilesof the top 20 insurance groups covered in this survey. The businessand financial profiles were determined in relation to their local peersand the insurance industry average.


The Brazilian insurance industry has significant potential for growth.Standard & Poor's Ratings Services expects the industry to takeadvantage of the changes in the market, including the expectedopening of the reinsurance industry and improved regulation in linewith international standards. Although it only represented 2.6% of theBrazilian GDP in 2006, we expect the insurance industry to double itssize in the medium-to-long term. We expect low use of insurance andthe improved economic conditions with higher prospects for incomeper capita to enhance demand for protection products, boosting theinsurance market.

Industry concentration is high and should remain that way, driven bythe competitive environment, lower interest rate, and stricterregulatory rules for solvency. We expect financial conglomerates'participation in the insurance markets to remain strong. Foreigninsurers will also become increasingly important players, given theirinterest in tapping a large potential market.

The industry's improved operating performance is largely a result of abetter loss management, stricter underwriting practices, and greaterefficiency, as Brazilian insurers have to adjust to lower interest ratesand financial results. In 2006, the Brazilian insurance and pensionindustry reported a net income of Brazilian reais (R$) 8.6 billion andpositive underwriting results.

The asset quality and liquidity of insurers' investment portfoliosremain satisfactory, and the companies' risk management is adequate.At year-end 2006, fixed-income investments including governmentsecurities represented 92% of invested assets, with stocks accountingfor only 8%.

Brazilian insurers' capitalization remains adequate as per the existingsolvency rules; however, the move toward a new solvency model withcapital requirements for underwriting, credit, market, legal, andoperational risks will require additional capital for the industry. Such amodel should also lead to changes in the marketplace, includingconsolidation, higher reinsurance penetration, and changes in someplayers' business mix.

The Brazilian insurance industry is characterized by the followingpositive credit factors:

Long-term growth prospects;Limited exposure to catastrophic risk;Conservative investment policy;Improved underwriting discipline; andChanges in regulatory rules in line with international standards.

Negative credit factors in the industry include:Small portion of GDP as compared to other countries;Low use of insurance products;Strong competition; andNeed for additional capital to cope with new solvency rules and future growth.

Market Overview: Good Outlook For GrowthThere have been good growth rates in the insurance industry'spremiums during recent years, with the Brazilian insurance sectorcorrelating to the overall economic cycle and growing at multiples of5x-6x the annual GDP growth in the past decade. However, this stillseems to be well below the insurance market's potential. TheBrazilian insurance industry represented a low 2.6% of the BrazilianGDP in 2006, which is below that of other countries. Among the mainfactors contributing to low insurance dissemination in Brazil are therelatively low income per capita, which limits the consumption ofinsurance products; poor income distribution; and the still-closedreinsurance market.

Source: Fenaseg: Federação Nacional de Empresas de SegurosPrivados e de Capitalização

Improvement in Brazilian income per capita and income distributiondepends on deep changes in the country's social structure,implementation of major reforms at all levels, and constant and highereconomic growth. Brazil's diverse economic structure compares wellwith that of its peers, but the economy has a track record of lowgrowth of between 3% and 4%. Brazil's economic structure andgrowth prospects are also constrained by income inequality andpoverty. Almost 50% of the nation's income is concentrated in 10% ofthe population, and more than 20% of the population lives below thepoverty line.


Brazilian Insurance Industry Expected to CapitalizeOn Growth Opportunities Primary Credit Analyst: Tamara Berenholc, Sao Paulo, (55) 11 3039-9732; [email protected] Secondary analyst: Milena Zaniboni, São Paulo (55) 11 3039-9739, [email protected]


Due to its inferior liquidity, the real estate sector continues to beunderdeveloped and unattractive as an investment alternative to theinsurance industry. Even though there has been an increase in themortgage industry in recent years with some benefits from lowerinterest rates, we do not expect insurers to be highly exposed to thereal estate market in Brazil.

Industry RiskBrazilian market dynamicsThe Brazilian insurance industry's total premium volume reachedR$59.2 billion ($25.2 billion, at an exchange rate of R$2.92 per $1) atyear-end 2006, having grown by an average of 15% per year in thepast 10 years. Nevertheless, this growth pattern was not enough toproduce a significant increase in the industry's participation in theGDP, which remains below that of more developed countries. Itreached 2.6% of GDP in 2006, compared to 6% in Spain, 8% inGermany and the U.S., and 13% in the U.K. Excluding thecommercialization of Vida Garantidor de Benefícios Livres (VGBL; apension-plan product with life coverage for death and disability),which has been the major driver for growth in the industry, theinsurance market participation has been stable at 2% of GDP.



Interest RatesAlthough insurance companies have improved their underwritingresults, the Brazilian insurance market is sensitive to interest-ratetrends. Brazilian insurers' investment portfolio have been concentratedin fixed-income and government securities. These represented 92% ofthe investment portfolio in 2006, with low exposure to the equitymarkets of 8%. While we expect a smooth interest rate reduction, itwill generate lower investment yields in the market and lead to amove toward better loss/underwriting management and search forefficiency. Insurance risk management is good, and we do not expecta significant change in the companies' risk profiles to compensate forlower yields.

Stock Markets And Real Estate Equity investments represent only 8% of the investment portfolio ofthe insurers' reserves; therefore, the volatility of share prices has notaffected insurers' results significantly. The reduction in interest ratesand the strong liquidity in the market lead to an increased attractionto the Brazilian stock market. From 2004-2007, the Brazilian StockIndex (Ibovespa) gained more than 80%. We do not expect theinsurance industry's investment in the equity market to increasesubstantially given its higher volatility and the Brazilian insurers'conservative asset and liability management.

Source: Brazilian Stock Exchange

Brazil Economic Indicators --Year ended Dec. 31--

(%, unless otherwise indicated) 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997GDP per capita (US$) 5,538 4,674 3,860 2,664 2,631 2,946 3.537 3,220 4,869 5,050Real GDP (% change) 3.7 2.9 5.7 (0.2) 1.9 1.5 4.5 0.8 0.2 3.3Unemployment rate 10.0 9.8 10.0 12.2 11.7 6.8 7.9 8.3 8.4 6.1Interest rate (year-end Selic rate) 13.25 18.00 17.75 23.0 19.2 17.3 17.4 25.6 29.5 25.0CPI, average annual rate (% change) 4.1 6.7 8.2 14.0 8.5 6.9 7.0 N.A. N.A. N.A.Domestic credit to private sector and NFPEs (% change) 20.7 21.7 19.2 8.0 14.1 6.8 5.7 6.6 19.1 6.3

Source: Full Analysis of Federal Republic of Brazil by Standard & Poor's


The Brazilian insurance market is only the 20th largest in the world intotal premiums as of 2005 and represents a small 1% of total globalpremiums. Still, it remains the largest insurance industry in LatinAmerican, representing 41% of the total premiums in the region in2005. The Brazilian life business accounts for 45% of the lifepremiums in Latin America, while nonlife business accounts for arelevant 38% of the nonlife premiums in Latin America. We believethe industry has good growth prospects. Among the main factorscontributing to this potential growth are the continued low penetrationof insurance products in the market, pending pension and workers'compensation reform, upcoming opening of the reinsurance market,and improving economic conditions with better income distribution.Major untapped markets such as large risks, bond sureties, andagricultural risks can potentially sustain stronger growth in the future.These segments are highly correlated to the overall development ofthe local economy.

Product mixIn contrast to other markets, most Brazilian insurance companies aremultiline companies offering pension-plan products and health, life,and property & casualty insurance. The distribution of premiums perline of business has changed significantly during the past five years,shifting toward life insurance products, mainly VGBL (free benefits lifegrantor). Leading lines of insurance are life and VGBL, representing42% of total premiums in 2006; followed by auto, including personaldamage caused by auto vehicle, 27.3%; and health, 15.4%. Theparticipation of the auto segment has declined during recent years,while life insurance accounted for an increasing portion of totalpremium production.


Life insurance has been the fastest growing segment in the industry,also benefiting from the introduction of some differentiated products,such as VGBL. While the deregulation of rates and policy termsallowed insurers to create customized products at lower prices, lowerinflation rates brought about by the economic stability have createdconditions favorable for longer term investing, which is crucial for thedevelopment of the life insurance market. In addition, the evolution of

the Brazilian pension fund reform should help to boost segmentgrowth. Important growth potential in life insurance should causethese lines to participate even more in total industry production and tolead the industry growth in coming years. Insurers already offervoluntary, complementary, private pension plans, but the workers'compensation market remains a government monopoly. Given theprofile of life insurance as a quasi-savings product, insurancecompanies associated with financial conglomerates dominate thismarket. They not only benefit from the large distribution network, butalso provide cross-selling opportunities.

The lower participation of the auto insurance segment in totalpremiums in Brazil results from the high growth of the life segmentand the still-low GDP per capita and income distribution in Brazil.These factors affect the sale of auto policies and the number ofvehicles insured (only 30% of the national vehicles have anycoverage). Health insurance also reduced its share of the market.Health-care providers (such as medical groups) are controlled byBrazilian health insurance regulators and ultimately report to theMinistry of Health (as opposed to the remaining insurance segments,which are regulated by the Superintendencia de Seguros Privados[SUSEP] and ultimately by the Ministry of Finance). Legislation in thisarea has changed significantly and since 1999, health-care companiesmust comply with broader coverage requirements and standardizedpolicies. Constant changes in medical coverage and limitations onpolicy price increases have made insurance companies operating inthis area present negative results and have driven their focus towardgroup policies as a way to have more flexibility and improve theirtechnical results with the segment.

Geographic spreadThe geographic spread of insurance premiums generally follows theconcentration of the country's population and production force, withSao Paulo state--which accounts for about 31% of gross domesticproduct and 22% of the country's population as per IBGE--representing51% of insurance premiums in 2006. Together with the states of Riode Janeiro and Minas Gerais, Brazil's southeastern region accountedfor 71% of total premium production.The insurers are trying to expand operations in other regions ofBrazilin such as the South and Northeast. In 2006, these statesrepresented about 21.7% of total premium production, compared to19.5% in 2003.

Structure and concentrationWith total premiums of R$59.3 billion in 2006, the Brazilian insuranceindustry is concentrated, with the top-10 insurers and their affiliatedcompanies controlling about 79% of premium production.



companies are also making big efforts to keep their operating costsunder control. The ratio of administrative and tax expenses to earnedpremiums for the insurance industry reduced to 18.6% in 2006 from20.1% in 2003, but is still higher than in other countries.

Key future competitive elements will include high solvency levels,adequate subscriptions, efficient distribution, and the development ofnew products. In the future, sustained profitability levels andunderwriting results in particular will enhance insurers' credit qualityand reinforce capital. The companies able to adjust faster to thisscenario and show strong underwriting and bottom-line results shouldpresent the better creditworthiness.

Source: Superintendência de Seguros Privados (Susep) and AgênciaNacional de Seguros Suplementar (ANS)Combined Ratio: (Claims + Commercialization Expenses +Administrative Expenses + Tax Expenses) to Earned PremiumsAdjusted Combined: (Claims + Commercialization Expenses +Administrative Expenses + Tax Expenses) to (Earned Premiums +Financial Result)

Investment and Asset-Liability Management Brazilian insurers' balance sheet management is conservative, with aprudent approach in terms of investments. Brazilian insurancecompanies place good emphasis on investment, aiming to providegood liquidity and manage credit risk. At year-end 2006, fixed-incomeinvestments including government securities represented 92% ofinvested assets, stocks only 8%, and real estate a very low 0.3% (seechart 6). The bond portfolios are related to Brazil risk and provide goodliquidity as the majority is invested in government bonds, eitherdirectly or through funds.


The significant influence of banks and foreign capital in the Brazilianinsurance industry can be observed in the concentration of premiumsin the hands of these investors. At year-end 2006 there were around70 insurance groups or around 120 insurance companies. About 54%of the premiums belong to financial conglomerates (domestic andinternational), another 33% are foreign subsidiaries or joint-ventureswith foreign companies, and the balance consists of independentdomestic insurers. We expect financial conglomerates' participation ininsurance activities to remain strong, in light of the competitiveadvantage offered by access to the banking distribution channel.Foreign insurers will also become increasingly important players,given the global strategy of business and regional diversification andthe fact that Brazil is an attractive market with good developments inthe industry.

CompetitionWe expect the industry to consolidate even further as a result of thecompetitive environment, the expected reduction in interest rates, thestricter regulatory rules for solvency, and consolidation in the bankingsector. Smaller players that can no longer survive under the newcompetitive landscape are expected to be acquired.

DistributionUnder current legislation, insurance policies can only be sold throughinsurance brokers, a practice that has significantly contributed to themarket's high distribution costs. Commission rates have averagedroughly 15% during the past three years. With the change in theinsurance environment, including the opening of the reinsurancemarket and higher competition, brokers with the ability to offer value-added products will survive. Brazil has around 60,000 insurancebrokers and we expect this segment to consolidate, given increasingcompetition and insurers' efforts to increase efficiency.

Improved Operating Performance Most Brazilian insurance companies have maintained goodprofitability. Nevertheless, this profitability is helped by the strongfinancial results generated mostly by the investment in fixed-incomesecurities. Brazilian interest rates are the major driver of this strongfinancial result, as a large part of the remuneration of technicalprovisions is linked to the country's interest rates. In 2006, accordingto SUSEP data, the Brazilian insurance and pension industry reportednet income of R$8.6 billion compared with R$4.3 billion in 2004;however, only in 2006 did the industry show positive underwritingresults--insurance and pension results to total premium and pensionbenefits evolved to 2% in 2006 from negative 6% in 2004.

Brazilian insurance companies have worked to improve theirunderwriting results to anticipate the changes in the economicenvironment and the drop in interest rates. Insurance companiesstarted to improve their underwriting policies by enhancing clientselection and revaluating insurance contracts based on profitability,while working to reinforce claims and fraud control. The industry lossratio reduced to a good level of 61% in 2006 from 69% in 2003. Thecompanies' efforts to improve profitability and underwriting policieshave catalyzed a reduction in the loss ratio to the lowest level in thepast 10 years. We expect this trend to continue.

Insurance commercialization costs are higher than in other countries,given the regulation that certified insurance brokers must be used forcommercialization of insurance products. Brazilian insurance


Source: Susep and ANS

Exposure to the equity markets is low, but we expect the prospects forthe capital market and a reduction in Brazilian interest rates to drivemore investments to the equity market. Nevertheless, we expectinsurance companies to maintain the bulk of their investments in fixed-income instruments given their liquidity and lower volatility.We expect an increasing use of asset-liability management models inBrazil, encouraged by regulators' approach to solvency.

Capital Adequacy To Be ReinforcedAs per the regulation in place, Brazilian insurance companies areadequately capitalized, but capitalization varies among individualcompanies. As a result of efforts to improve profitability, the industry'snet worth increased 58% from 2004 to 2006 to R$27 billion (insuranceand pension) through earnings retention. We do not expectcapitalization to lessen, as the companies should continue to be ableto generate better underwriting results. In addition, we expect capitalinjections with the changes in regulation for minimum capital andsolvency.The regulation still in place requires a minimum capital level based onlines of business and states in which insurers operate. If a companyoperates in the entire territory and in both the P&C andlife/health/pension sectors, it would need minimum capital of R$7.2million. Apart from the minimum capital, the solvency margin (SM)

calculation has been the most important supervisory tool in theSource: SUSEP

market. By that measure, insurers' adjusted equity must be equal to ormore than the higher of the following: 20% of the average netpremiums per year; or 33% of the average net claims incurred andreported in a three-year period. The coverage of Brazilian insurers'solvency margin is adequate.

By the end of 2006, SUSEP published new capital requirements forinsurance companies that will have to comply with the new regulationfor the base capital, and additional capital requirements forunderwriting, credit, market, legal, and operational risks, following astep to Solvency II. As of January 2008, the base capital requirementwill be raised to R$15 million from R$7.2 million for the companiesoperating with all major segments and in the whole territory. SUSEP isregulating additional capital, and the insurance companies will haveto adapt to the new capital requirement within three years (30% ofthe required capital for additional risk in the first year, 60% in twoyears, and 100% in three years) after SUSEP regulates each risk. Theunderwriting risk was regulated by SUSEP at the end of 2006(Resolution 158) and is based on risk factors for each business lineand territory related to underwriting and reserve risks. The additionalcapital requirement for underwriting risks should be of around R$6billion and insurers were requested to comply with the regulationstarting January 2008. We expect the new regulation to change theinsurance environment with capital injections, acquisitions, jointventures, higher reinsurance retention, or changes in business mix.The other risks have not yet been regulated and are expected to bringadditional capital requirements for Brazilian insurers. However,underwriting risk will require higher capitalization.

We view the new regulation positively as it is more in line with theinternational standard for capital and should align the Brazilian capitalrequirement to stricter international practices. To that objective, in ouranalysis of insurance companies we have been using a capital modelapproach to compare the amount of risk-adjusted capital with theminimum secure level we believe it should have to face its financialand operating risks. According to the model, the adjusted capital, lessthe charges for asset and credit related risks, should coverunderwriting and reserve risks.

Asset risk evaluates the quality and liquidity of an insurer'sinvestment portfolio, which are key to its ability to make timelypayments on its obligations. Credit risk reflects the collectability riskassociated with certain assets or receivables on the balance sheet.Underwriting risk is the risk that the company's present and futurebusiness will be unprofitable and that underwriting losses will need tobe covered by capital. The reserve risk is the risk that past businesswill be less profitable than expected, and can add further variability toclaim costs. Standard & Poor's Capital Adequacy Model for Brazil is asignificant part of the analysis of an insurer's capital strength. It isimportant to point out that Standard & Poor's Capital Adequacy ratiois only a reference point for judging a Brazilian insurer's capitaladequacy.

Reserving Levels Being ReinforcedThe total gross technical reserves-to-gross premiums written ratioamong Brazilian insurers has increased due to the companies' effortsto reinforce reserves. Reserves are adequate to the risks run byinsurers, and were already reinforced for the health sector (especiallyin 2004 and 2005) and for contingencies in recent years--in a wayanticipating the changes in regulation. Higher reserving risk can alsoresult from business mix shifts toward liability and longer tail lines ofbusiness in general.



Source: FenasegReinsurance use is lowReinsurance use is low in Brazil, with only 6% of the risk ceded toreinsures. The low use of reinsurance is a result of the segment mix ofthe Brazilian market, where insurers can take the majority of risks forauto and life segments (the most representative in Brazil). It alsoreflects the lack of catastrophic risks.The insurance market is transitioning to an opened market from amonopoly under Instituto de Resseguro do Brasil (IRB). Under the newregulatory framework that opens the market for reinsurance, allinsurers will have to reinsure at least 60% of their reinsurablebusiness with local reinsurers (IRB and other reinsurance companiesdomiciled in Brazil). This requirement will be reviewed three yearsafter it is established. It is still uncertain whether this will drop to alower percentage or to zero after the six years mentioned in the law.

Regulatory Environment SUSEP is the main regulatory body for insurance in Brazil, responsiblefor the supervision of companies operating in this market. Following aprocess of industry deregulation initiated in the early 1990s, SUSEPhas experienced a change in its market role, moving from an entitywhich previously maintained strict control on all aspects of insurance(including prices and policy conditions) to an organization placinggreater emphasis on the control and monitoring of insurers' solvencylevels by overseeing reserves, operating limits, and the solvencymargin. In addition to insurance companies, SUSEP is also responsiblefor monitoring and controlling private pension companies andcapitalization entities. The control of health insurers was moved toAssociação Nacional de Saúde (ANS) from SUSEP in 2001.In addition to SUSEP, Conselho Nacional de Seguros Privados (CNSP)is responsible for establishing rules and regulations in the market.This entity is closely tied to the economy ministry and holdsrepresentatives from all segments of the insurance industry. Brazil'smonopoly reinsurer, IRB, which previously also exerted substantialinfluence over norms controlling the industry, had its role diminishedand its regulation on reinsurance transferred to SUSEP with Law 126.Roots of the current insurance system lie with Decree-Law 73 of Nov.21, 1966, which along with subsequent Decrees 60.459 and 61.589 of1967 effectively created what is known as the Sistema Nacional deSeguros Privados (or National Private Insurance System). Followingthis period, however, legislation of the industry has continuouslychanged. Partially reflecting a trend in the country's political andeconomic environment at the time, Brazil's insurance industry wasliberalized in the early 1990s with the abolition of tariff controls in1992 and the opening of the market to 100% foreign capitalownership around 1996.

Aside from a minimum capital requirement, regulators are in atransition to introduce a risk-based capital mechanism that factors inunderwriting, market, credit, operational, and legal risks. We considerthe risk-based model a useful tool that will make insurers more riskconscious. The regulator's focus on the solvency is positive. Inaddition, new legislation is designed to regulate the openedreinsurance market. This legislation will have an effect on how theBrazilian insurance market operates as a whole.To emphasize the Brazilian insurance market and generate discussionon the development of the sector, the Brazilian Insurance Federation,Fenaseg, is expected to become a confederation in the second half of2007 with a specific focus on the four major segments: property &casualty, life and private pension, health, and saving bonds.

Accounting PrinciplesAll Brazilian insurance companies reported under Brazilian GAAP.Listed Brazilian insurers or insurers under a listed financialconglomerate are required to prepare their consolidated financialstatements in accordance with US GAAP. The major characteristics ofBrazilian GAAP for insurers are:

Asset valuationThe accounting for securities held by insurance companies followsinternational standards and is divided into three possibilities:"tradable securities," "available for sale," and "held to maturity," andportfolios have to be valued according to market prices. Mutual fundinvestments may be carried at market. Real estate is kept at cost or at"market value" as determined through a revaluation performed byspecialized appraisal companies approved by SUSEP.

Investment restrictionsAssets covering reserves must be invested following certainstipulations. In the case of assets covering technical reserves,investment restrictions include: maximum of 100% in treasury notes;up to 80% in specific investments such as CDs, bonds; up to 49% instocks; up to 10% in real estate. This regulation applies for generalinsurers, capitalization companies, and private pension providers.

ReservesSimilar to other Latin American systems, loss reserves in Brazil are setby mathematical formula. Starting in 1999, Brazilian insurers wererequired to maintain reserves for IBNR. As a country with no naturalcatastrophes, Brazilian insurers do not keep catastrophe reserves. In2006, SUSEP required the insurance companies to record premiums ofeffective and nonissued risk as per Circular Susep 314.

Life businessIn general, there is no separate reporting for nonlife and life businessand, therefore, multiline insurers' reports are presented on aconsolidated basis. For this reason, our figures include both life andnonlife business.

Foreign currency transactionsBrazilian insurers are currently not allowed to transact policies andinvestments in foreign currency. However, we expect this practice tochange with the opening of the reinsurance market.



The opening of the reinsurance monopoly in Brazil should speed upgrowth in the insurance industry overall. Over time, it should help tobring the industry further in line with other segments of the Brazilianeconomy that have gradually become more open. The openreinsurance market is likely to usher new investments and technologyinto the insurance industry in Brazil, along with sharper productdiversification and stronger incentives to compete. We anticipateseveral changes in how the industry will operate, including refinementof the criteria by which local insurers select the reinsurers they willwork with. Requirements for financial transparency should alsoimprove. Reinsurers entering the market will closely inspect localinsurers. And insurers will scrutinize the operations of reinsurers, with a keen interest in reinsurers' solvency.

Years of debate about the opening of the reinsurance market in Brazilculminated in the approval of Law 126 on Jan. 15, 2007. Although thestate reinsurance monopoly, IRB Brasil Resseguros S.A. (IRB- N.R.),was not privatized, the opening of the market is good news for theindustry. While the IRB already allows insurers to use foreignreinsurers for specific contracts, IRB must approve these deals, whichhas in practice inhibited the use of international counterparties. Giventhe enormous potential of Brazil's insurance industry, several foreignreinsurers have been anxiously awaiting the opening of the marketthrough the long delay.

The breakup of Brazil's reinsurance monopoly was in fact voted intolaw in 1996. Unfortunately, the de facto opening of the market hasbeen delayed by the lack of enabling legislation determining the formthe newly opened market should take. Brazil is among the lastcountries in the region to end its reinsurance monopoly. This puts it farbehind other important Latin American insurance markets, such asChile's or Mexico's, which opened their reinsurance markets in thepast 30 years. There are a handful of holdouts in the region, withmonopolies still standing in Costa Rica and Cuba, for example.

The New Brazilian Reinsurance SegmentIRB has been the reinsurance monopoly since the company wasfounded in 1939. Despite unceasing debate over the past threedecades about opening the market, the government-controlledcompany is still the sole provider of reinsurance in Brazil, at least untilJuly 2007. At that time, the Brazilian National Insurance Council(Conselho Nacional de Seguros Privados, or CNSP) is slated to issuenew rules that establish the framework for reinsurance operations inBrazil.

Law 126 creates a new supervisory framework, taking responsibilityfor oversight of reinsurance away from IRB. The law will have far-reaching effects on the reinsurance segment. To begin with, IRB'shistorical role as regulator of the reinsurance market will betransferred to the current insurance industry regulator, theSuperintendence of Private Insurance (SUSEP).

Both SUSEP and IRB will have to adapt to the new environment.SUSEP has not had jurisdiction over the reinsurance segment to date,and will have to grow into the role. Perhaps the greater challenge falls

to IRB, however. The former monopoly will gradually come to resembleits new foreign competitors, and will have to focus on relationshipmanagement, internal systems, risk management, human resources,and competitive pricing.

Law 126 states that three categories of reinsurer will be recognized bythe new regulatory body:

Local reinsurer: A reinsurer domiciled in Brazil and exclusivelycarrying reinsurance and retrocession; Admitted reinsurer: A reinsurer domiciled in a foreign country, with

a representative office in Brazil; and Occasional reinsurer: A reinsurer domiciled in a foreign country,

with no representative office in Brazil.

Under the law, IRB and other local reinsurance companies will havepreference over foreign-domiciled companies. All Brazilian insurerswill be required to reinsure at least 60% of their reinsurable businesswith local reinsurers, at first. Three years after the law goes intoeffect, this limit will decrease to 40%. After another three years, thelimit will come up for review. At present, it is uncertain whether therequirement will be lowered further, or perhaps eliminated, uponreview in the sixth year.

The newly expanded regulatory body, SUSEP, will apply strict rulesregarding the acceptance of reinsurance business with foreign-domiciled reinsurers. Occasional reinsurers cannot be domiciled in taxhavens, in countries where the income tax is below 20%, or incountries that restrict access to the names of shareholders or ofcompany owners. The law also provides that only local reinsurers canreinsure endowment insurances and supplementary pension plans.

A bevy of details remain to be hammered out before the new rules arepublished by regulator in July. These include limits and conditions forretrocession, advantages of admitted reinsurers over occasionalreinsurers, conditions under which local reinsurers are treated likeadmitted and occasional reinsurers, and operational rules forreinsurers and reinsurance brokers.

Strong Players Will Adapt Brazilian insurers will face significant challenges beginning in thesecond half of 2007. For one thing, they will have to set their owncriteria for selecting the reinsurers that best suit their needs. This is atwo-way street, however, and insurers will have to adjust to operatingunder the close scrutiny of the reinsurers entering the market. What'sworse (for some), any new reinsurance legislation that is enacted willundoubtedly make it more difficult for weak insurers to remaincompetitive.

Buyers of reinsurance protection have many factors to consider,including pricing, contract language, and policy limits. More insurancemanagers will begin to realize that in addition to favorable contractterms, the financial health of the reinsurer is a crucial factor. Indeed, apoor choice of reinsurers can jeopardize an insurer's long-termsurvival.


What To Expect From An Open Reinsurance Market In Brazil Primary Credit Analyst: Daniel Araujo, Sao Paulo, (55) 11 3039-9741; [email protected]


Foreign companies should expect to benefit from the new system.Following the approval of the new regulations and operationalguidelines, we expect to see a greater share of risks in Brazil beingreinsured by global programs, which could bring on a reduction inpremium rates. A clear picture will only emerge, however, once thecomplete regulations are established.

Most Latin American countries have had open reinsurance markets forseveral years already, or longer. Given that weak reinsurers canexploit markets in which there are not well known and recognized, theissue of reinsurers' solvency takes on even more importance. Toaddress concerns about the financial health of foreign-domiciledreinsurers, regulators in other countries, such as Mexico andArgentina, have established minimum ratings requirements for foreignreinsurance providers. Legislative proposals currently underconsideration in Brazil favor similar ratings requirements.

Regulations in a number of Latin American countries include minimumsurplus levels for locally domiciled reinsurers. Standard & Poor'sbelieves that in these cases, financial strength ratings would be abetter way to assess long-term financial solvency from the primarycarriers' point of view. Financial strength ratings consider not only thereinsurer's current financial standing and capital position, but also itsbusiness profile and underlying risk. The ratings consider otherimportant factors, such as industry risk, operating performance,management and corporate strategy, financial flexibility, andretrocession coverage. Due to their extensive scope, financial strengthratings provide a more reliable prospective view of a reinsurer'sfinancial standing.

On the other hand, Brazilian insurers should expect to be closelyscrutinized by reinsurers. High-quality and conservative reinsuranceproviders will look for prudent, financially sound primary writers. Inthe open reinsurance market, Brazilian insurers who want to establishlong-term relationships with financially secure reinsurance providerswill need to adopt higher underwriting standards. In addition, financialtransparency will be pressured to improve throughout the market.Although transparency has been improving steadily in the Brazilianinsurance industry, it remains poor relative to more mature markets.

A number of Brazil's large domestic insurers, and certain subsidiariesof foreign insurers, have already reached preliminary reinsuranceagreements with foreign reinsurers. Many niche players should beable to adapt to the new environment, despite their small size, due totheir relationships with IRB and with foreign reinsurers. Manymedium- and small-sized locally owned insurers will be challenged,however, because they are not as well known by the foreign market.

It will take some time for foreign reinsurers to fully understand theBrazilian market, its risks, and the profiles of its domestic insurers. Forthis reason, Standard & Poor's expects the impact on Brazilianinsurers to become more apparent in the medium- and long-term asthe market matures.

The final form of the pending reinsurance legislation will shape thefuture of Brazil's insurance market and will have seriousconsequences for the long-term survival of current players. Theregulations will most likely require companies to keep minimumretention levels. This would eliminate the long-standing practice, mostcommon among small carriers operating mainly as insurance brokers,of ceding nearly all of their risk to the reinsurer monopoly. With suchpractices ruled out of play, the proposed retention requirements coulddrive some insurers with weak capitalization and limited financialflexibility out of the market.

An Open Reinsurance Market Should Boost GrowthThroughout The Industry The Brazilian insurance industry has good opportunities for growth inthe coming years. Although insurance premiums have climbed steadilyduring the past four years, the Brazilian insurance market remainslargely untapped, given its great size and growth potential. As of year-end 2006 the premium's of the insurance industry in Brazil accountedfor just 0.6% of global premiums, and was just 2.6% of GDP.

We believe the industry continues to offer good growth prospects overthe medium and long term. Among the main factors limiting insurancepenetration in Brazil are the country's relatively low income per capitaand its high level of income inequality, which are expected to improvein light of the economic growth of the country and reduction ofunemployment. The monopoly of the reinsurance market is alsoviewed as a limitation to growth in the industry, and the pending defacto demise of that monopoly is the main reason we expect theindustry to grow during the next several years.

Although Brazil is one of Latin America's largest insurancemarket in terms of premiums written, it is one of the least developedin terms of reinsurance revenues. The reinsurance monopoly has beena leading factor in keeping reinsurance rate low, as has thecomposition of the business portfolio in Brazil, where there is a strongauto insurance component (normally a full-retention business), and nosignificant need for catastrophe insurance.

IRB achieved total gross premiums of Brazilian reais 3.4 billion(approximately $1.45 billion) for the fiscal year ended December 2006.Total reinsurance premiums should keep growing as a reflection ofincreased insurance business and new reinsurance operations in thecountry as the market opens. Some market estimates indicatereinsurance premiums could reach some $2 billion in the next two tothree years. We expect IRB to adapt to the new rules and marketconditions and remain a significant player in the market. IRB benefitsfrom its long relationship with local insurance companies and itsknowledge of the domestic market. The company should invest furtherin staff development, internal systems, and risk management tocompete with private sector companies.




Top 20 Brazilian Insurance Companies - Ranking

1. Bradesco Seguros S.A. 2. Sul América Seguros S.A.3. Itaú Seguros S.A.4. Unibanco AIG Seguros S.A.5. Porto Seguro Cia de Seguros Gerais6. Companhia de Seguros Aliança do Brasil7. Mapfre Vera Cruz Seguradora S.A.8. Tokio Marine Brasil Seguradora S.A.9. Caixa Seguradora S.A.10. AGF Brasil Seguros S.A.11. Santander Seguros S.A.12. HSBC Seguros S.A.13. Marítima Seguros S.A.14. Hannover International Seguros S.A.15. Liberty Seguros S.A.16. Chubb Seguros S.A.17. ACE Seguradora S.A.18. Metropolitan Life Seguros e Previdência

Privada S.A.19. Icatu Hartford Seguros S.A.20. IRB Brasil Resseguros S.A.

Summaries



Top 20 ranking: 1Financial Strength Rating: 'brAAA/Couterparty Credit Rating: 'brAAA/

RationaleStandard & Poor’s Ratings Services’ ratings on Bradesco Seguros S.A.reflect the credit quality of its controller, Banco Bradesco S.A. BBB-/Positive/A-3 and brAAA/Estável/--, and the benefits from thiscontrol, including the integration of its operations to that of the bankmainly in the purchase, capital, and IT areas, as well as the use of thebank’s ample branch network for the commercialization of insuranceproducts. In addition, Bradesco Seguros maintains a good businessprofile in the competitive Brazilian insurance industry, and presentedimproved underwriting results. The ratings are counterbalanced by thechallenging environment for the Brazilian insurance industry and thecompany’s exposure to Brazil’s economic risks.

Bradesco Seguros maintains a good business profile, supported by thestrong franchise of the group and its position as the largest insurancegroup in Brazil in terms of total premiums. It is the leader in thehealth, life, and personal accident segments, besides the largest inthe commercialization of VGBL (Vida Garantidor de Benefício Livre).Bradesco Seguros offers a wide variety of products, and accounted for26% of the total market premiums in 2006. In the pension business,Bradesco Vida e Previdência (wholly owned subsidiary of Bradesco

Seguros) is the market leader, holding 39% of the market revenues in2006, besides being the second-largest capitalization companythrough Bradesco Capitalização, with 20% of the revenues generatedin the market in the same period.Banco Bradesco’s ownership of Bradesco Seguros brings an importantcompetitive advantage to the company because of the bank’s accessto the ample distribution channel and the benefits of synergy comingfrom the integration of support areas of the companies. The insurancesegment (that comprises insurance, pension and capitalizationoperations) accounted for 34% of the results of the Bradescoconglomerate in 2006, reinforcing its position as a core entity to thegroup. We expect Bradesco Seguros will receive financial supportfrom its controller if necessary.

Bradesco Seguros improved its operating results, including its loss andcombined ratios and its efficiency. The loss ratio reduced to 79.1% in2006 from 82.3% in 2005, and its combined ratio reduced to 99% in2006 from 103.4% in 2005. However, the company is challenged tocontinuously improve its underwriting results.

OutlookThe stable outlook reflects the outlook on Banco Bradesco. It alsoincorporates our expectation that Bradesco Seguros will keep itsmarket position, competitive advantage, and financial flexibility fromits position as a core entity of Bradesco.

Bradesco Seguros S.A. Primary Credit Analyst: Tamara Berenholc, São Paulo (55) 11-3039-9732, [email protected];Secondary Credit Analyst: Milena Zaniboni, São Paulo (55) 11-3039-9739, [email protected]

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Top 20 ranking: 2Credit Rating: B/ /—

RationaleThe rating on Sul América S.A. (SASA) reflects its status as anonoperational holding company for Sul América insurance group, ofwhich the main insurance operating entity is Sul America CompanhiaNacional de Seguros (financial strength rating of ‘BB-’), and thestructural subordination of the holding company’s creditors topolicyholders of SASA’s operating entities. It also reflects the holdingcompany’s leveraged capital structure and relatively weaker operatingtrack record than that observed for the local insurance industry.Partially offsetting these negative factors are the group’s strongcompetitive position as the second-largest insurance group in Brazil bytotal premiums, the good growth prospects for the Brazilian insurancemarket, the strong brand recognition and improving cash flow, andperformance of the operating subsidiaries.

Standard & Poor’s Ratings Services applies a two-notch differentiationbetween the holding company and the operating subsidiary rated inspeculative-grade categories, reflecting the structural subordinationthat exists in the insurance business. Although all policyholders’obligations and the majority of the group’s investment assets lie at theoperating company, which is subject to potential regulators’ actions toprotect policyholders’ interest by maintaining the financial strength ofthe operating company, we do not expect Brazilian regulators to objectto cash dividends being paid upstream to the holding company fromsolvent operating subsidiaries, reinforcing the holding company’sability to service its debt in a full and timely manner.

We analyze SASA’s consolidated balance sheet. SASA’s debt peakedat a high level even considering the debt reductions in 2006. With therepayment of Brazilian reais (R$) 181 million in 2006, SASA’sconsolidated debt leverage declined to approximately 60% by yearend (from 66% in September 2006 and 77% in December 2005). Theimproved financial stance reached in 2006, and expected for thefollowing years, will reinforce the operating subsidiaries’ cashgeneration and consequently improve the holding company’s financialratios. We expect debt leverage to reduce to 20% in 2009 and around10% in 2011 with the amortization of part of the company’s debt inthose years. We expect interest coverage to reach an adequateaverage of 4x in the next two years.

The financial strength rating on SASA’s operating subsidiary is basedon its adequate business risk profile, its strong franchise, and theimproving operating performance already observed in 2006 that isexpected to consolidate going forward. These factors are tempered bya fierce competitive environment in the insurance business in Braziland the group’s marginal capitalization. The group is the largest independent insurance company in Brazil andthe second in terms of premiums written, holding a strong position innumber of policies issued. SASA’s main businesses are health andauto, which maintain a good market position in the industry of 38%and 16%, respectively, at December 2006. With a change of itsbusiness focus from market share to profitability, improvedunderwriting procedures helped increase profitability in most of theinsurance lines.The company’s capital level is marginal. In absolute terms, the changein judicial reserving policy led to an increase in litigation reserve in2004 and 2005, affecting the group’s bottom line and consequently itsability to reinforce capitalization. With the improvement in profitabilityfrom 2006 on, we expect capital to slightly increase in the followingyears.

LiquidityWe believe that SASA’s overall liquidity is adequate. Prospective cash-flow sources are mainly dividends from SASA’s insurance subsidiaries.SASA’s share in Telemar through Brasilveículos S.A. adds a diversesource of liquidity to the group.

OutlookThe stable outlook reflects our expectation that SASA will benefitfrom a steady stream of dividends and positive cash flows fromoperating subsidiaries. We expect financial leverage to decline to lessthan 55% until 2009 with further reduction from 2009 to 2011.

The rating may be raised or the outlook revised to positive if theexpected improvement in operating performance of the operatingsubsidiaries results in a strengthening of capitalization in the next twoto three years. Conversely, the rating may be lowered or the outlookchanged to negative if there is a deterioration of the financialcondition or performance of operating subsidiaries that would affectthe flow of dividends to SASA.

Sul America S.A.Primary Credit Analyst: Tamara Berenholc, Sao Paulo (55) 11-3039-9732; [email protected] Secondary Credit Analyst: Daniel Araujo, Sao Paulo (55) 11-3032-9741; [email protected]

Stable



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Top 20 ranking: 3Financial Strength and Counterparty Credit RatingsNational Scale: brAAA/ /--

RationaleStandard & Poor’s Ratings Services’ ratings assigned to Itaú SegurosS.A. reflect the creditworthiness of Banco Itaú S.A. (BBB-/Positive/A-3) in local and foreign currency and (brAAA/Stable/brA-1) innational scale, given that Itau Seguros is a core subsidiary of BancoItaú. Itaú’s strong brand name recognition has helped build asignificant franchise in the insurance segment where Itaú Seguros isthe third-largest insurance company in terms of total premiums. ItaúSeguros has also improved its operating performance and presentedabove-industry loss and combined ratios. These positive aspects arecounterbalanced by operating risk in the Brazilian economicenvironment.

Itaú Seguros group has maintained its position as the third-largestinsurance group based on total premiums (Brazilian reais 6.5 billion in2006, including all insurance segments, health insurance, and VidaGerador de Benefícios Livre). The insurance segment is important forthe diversification strategy of Itaú’s conglomerate because itcomplements the sale of its banking products and the great potential

of the insurance segment in Brazil. In addition, the insurance andbanking operations are linked because the conglomerate definesinvestment policies and the commercial strategy for thecommercialization of insurance products in the banks’ branches. Theresults from the insurance, pension, and capitalization businessesrepresented around 20% of the consolidated results in 2006.

Itaú Seguros’ strategy has focused on profitability. The company hasbeen maintaining conservative underwriting policies and good loss-management. Itaú Seguros’ health portfolio is in a run-off process, andthe company avoided the natural and normal higher loss ratios of thissegment. As a result, the company showed improved operatingresults, including its loss ratio, which fell to 49.2% in 2006 (below themarket average of 55.9% in 2006, excluding health insurance) from51.2% in 2005 and its combined ratio of 91.6% in 2006, comparedwith 98.8% in 2005.

OutlookThe stable outlook mirrors the outlook of its controller, Banco ItaúS.A. once the company is viewed as a core subsidiary of theconglomerate due to its good performance and market position andthe fact that it complements the bank’s product and services. It alsoincorporates the expectation that the company will keep itsimportance under the group and good profitability.

Itaú Seguros S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo (55) 11-3039-9732 [email protected],Secondary Credit Analyst: Milena Zaniboni, São Paulo (55) 11-3039-9739; [email protected]

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Stable



Top 20 ranking: 4

Unibanco AIG Seguros S.A.’s (Unibanco AIG) credit profile reflects thebenefits derived from the joint venture between União de BancosBrasileiros S.A. – Unibanco (BB+/Positive/B) and AIG - AmericanInternational Group (AA/Stable/A-1), including the underwritingpractice and strong position of AIG worldwide; its position as leader inProperty, Liability, Aviation, Marine, D&O; among others; UnibancoAIG’s improved operating results and strong distribution capabilities.The company is still challenged to reduce its concentration in theproperty segment and increase its market share in the segments withhigher penetration in Brazil also by taking benefit from the distributionnetwork of Unibanco. It also incorporates the challenging environmentfor the Brazilian insurance industry.

Unibanco AIG benefits from being a partnership between Unibancoand AIG, which has been in place since 1997. Each of theshareholders holds 50% of the company’s shares. The benefits includeunderwriting practices and loss management given the strong marketposition and know-how of AIG in the property and casualty businessesworldwide. In addition, having Unibanco as its shareholder has helpedin terms of the brand name recognition of the financial conglomeratein Brazil and distribution of insurance products to the bank’s clientele.

Unibanco AIG has been among the top five insurance companies inBrazil for the past four years. The company is the fourth-largestinsurance group in Brazil, holding 6.8% of the premiums of theBrazilian insurance market in 2006. Unibanco AIG has reasonable goodpremium breakdown including personal lines (47% of total),commercial lines (25%), life (10%), GMD (14%) and health (4%). Thecompany is the largest player in Large Property segment (with 25%market share), as well as Small and Middle (10%), General Liability(16%), D&O (50%), Marine (12%), and Aviation (40%), and the secondlargest in off-shore Energy and Construction. It has also beenrecognized in exclusive P&C products such as Environmental, D&O,Export Solution and extended warranty. Unibanco AIG is challenged toincrease its market position in the most relevant insurance segmentsin Brazil (auto, life, and personal accident) and increase the cross-selling of insurance products to the bank’s clientele.

Unibanco AIG has shown consistent improvement in its operatingresults including its loss and combined ratios. The loss ratio reducedto 47% in 2006 from 59% in 2005 and compares well to the industryaverage of 61%. Its combined ratio reduced to 94% from 97% in 2005as a result of its underwriting discipline and lower than industryoperating costs.

Unibanco AIG Seguros S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]

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Top 20 ranking: 5

Porto Seguro S.A.’s (Porto Seguro- N.R.) credit profile reflects itsstrong market position as leader in the auto segment and itsincreasing profitability level, which reflects its improved underwritingresults in most of its segments. The company’s main challengesinclude increasing its regional diversification, the strong competitionin the auto segment, and the risk of operating in the Brazilianenvironment.

Porto Seguro is an independent insurer with a long tradition in theBrazilian market. Overall, the company is the third-largest insurer inBrazil and has grown in market position in recent years (to 8.4% in2006 from 7.9% in 2004). The company concentrates on the autosegment where it is the leader with 18.2% of the market in 2006(from 17% in 2005). Despite its ability to show consistent growth, thecompany is challenged to maintain its market differentiation in theauto segment, with prudent underwriting due to the strongcompetitive environment, while increasing its position in promisinginsurance segments such as the life segment.

Despite having a strong market share in the auto segment in SãoPaulo and Rio de Janeiro (29.8% and 18.5 %, respectively), these arevery competitive markets. We expect the company to maintain itsshare of its major regional markets and take advantage of theincreasing premiums in other regions such as the South of Brazil.

Porto Seguro has maintained good relationships with brokers, whichare the major distribution channel of the company. Its market positionhas helped the company to keep its selling expense ratio in the 20%range. The company’s good underwriting procedures translated intoreduction of the loss ratio in most of its segments and particularly inthe auto segment to 50.8% in 2006 from 59.2% in 2005, below theindustry average of 63.3%. As a consequence, the company showedpositive underwriting results in 2006 and a combined ratio of 95.8%,compared to 101.7% in 2005.

Porto Seguro, like most of the insurers in Brazil, is exposed to theeconomic and industry risks of Brazil due to the strong correlation ofthe insurance segment with the economic conditions of the country,and through its investment portfolio that is mainly invested ingovernment bonds.

Porto Seguro S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]

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Top 20 ranking: 6

Standard & Poor’s Ratings Services’ credit profile on Companhia deSeguros Aliança do Brasil (Aliança do Brasil) reflects its good marketshare in the life insurance and rural insurance segments, the benefitsderived from its ownership structure, and the company’s good financialprofile with improving underwriting results. The company’s mainchallenges include increasing its market position in the promisinginsurance market by taking advantage of the bank’s large clientelebase and branch network, and the risk of operating in the Brazilianeconomic environment.

Banco do Brasil is active in the insurance market through severalinvestments. Aliança do Brasil is the result of the partnership betweenBanco do Brasil S.A. (BB+/Positive/B) and Aliança da Bahia (unrated),with 70% and 30%, respectively, of the company’s total capital. Inaddition, Banco do Brasil owns 49.9% of the pension plan companyBrasilprev Seguro e Previdência and has a partnership with SulAmérica S.A. in which it owns 70% of Brasilveículos Companhia deSeguros and 49.9% of Brasilsaúde Companhia de Seguros. Banco doBrasil’s consolidated position in the insurance market makes it thesixth-largest insurance and pension plan group in the country, withBrazilian reais 2.8 billion of written premiums in 2006. It is also thethird-largest group in the Vida Garantidor de Benefício Livre (long-term

life insurance as a private pension plan) with 7.4% market share, thefourth-largest in the life segment, and the largest insurance group inthe rural insurance market with a relevant 49.8% market share. In2006, Banco do Brasil was the leader in the capitalization marketthrough its subsidiary, Brasilcap Capitalização S.A., with 25% marketshare in revenues from certificated savings plans.

Because Banco do Brasil owns Aliança do Brasil, that relationshipallows Alianca do Brasil to leverage on Banco do Brasil’s client baseand distribution capabilities. This helped Alianca do Brasil become thetop insurance company in the rural segment. Still, the companybenefits from its ownership structure to increase its market position inthe insurance segment, while maintaining strong underwritingprinciples, given the strong potential offered by the large clientele andposition of Banco do Brasil.

Banco do Brasil’s insurance group improved its financial andunderwriting ratios by focusing on profitability and results fromprevious years. The pension and insurance group presented a better-than-expected market loss ratio of 47%, with strong improvementfrom the 58% in 2005. As a result, the combined ratio improved to95% in 2006 from 99% in 2006, evidencing the company’s efforts onunderwriting and loss management. Aliança do Brasil has followedthe improvement on the group’s underwriting results and presentedlow loss and combined ratios of 35.5% and 88%, respectively.

Companhia De Seguros Aliança Do BrasilPrimary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]

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Top 20 ranking: 7

Mapfre Vera Cruz Seguradora S.A.'s (Mapfre) credit profile reflects thebenefit of being part of the Spain-based Mapfre insurance group (thegroup's holding company, Mapfre S.A., is rated AA-/Stable/--); a goodposition as the seventh-largest company in the competitive Brazilianmarket, and the potential to further increase its business and resultsin Brazil in the coming years. The company's main challenges includethe competitive environment, especially in the auto segment, and therisks of doing business in Brazil.

Mapfre is a fully owned subsidiary of the Mapfre Group and, togetherwith the other Latin American operations of the group, seems to be ofstrategic interest to the group. This becomes even more relevantfollowing the opening of the reinsurance business in Brazil and theprospects for further growth in the insurance market in general and inreinsurance in particular. The group seems to be committed to theBrazilian operations. In 2006, for instance, the company received acapital injection of Brazilian reais 114.5 million, in preparation forstricter minimum capital rules being adopted by the Brazilianregulators for the industry as a whole in 2007.

Mapfre has been consistently improving its market position during thepast several years. The company is one of the top-five insurancecompanies in the auto segment (fifth place with 6.7% market share);life insurance (second with 10.3% market share); transportation(second with 10.3% market share); credit insurance (third with 12%market share); and rural insurance (third with 11.2% market share).The market share figures have been growing in almost all segments inthe past three years as a reflection of the investments in people,processes, and relationship management. The auto insurance segmentis the most relevant for the company, representing approximately two-thirds of total premiums.

The company's challenges for the coming years include improvingprofitability levels in an environment of increasing competition anddeclining interest rates. Standard & Poor's Ratings Services expectsthe company to increase scale while maintaining loss ratios (52% in2006, better than the industry average) so as to compensate for thenatural reduction in financial revenues, an issue for the industry ingeneral.

Mapfre Vera Cruz Seguradora S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 8

The credit profile of Tokio Marine Seguradora S.A. (Tokio Marine)reflects the benefits of ownership by Tokio Marine & Nichido FireInsurance Co. Ltd. (‘AA’), its reasonably good market share in theBrazilian market, and improving business profile. Among thechallenges facing Tokio Marine in Brazil are the need to keepincreasing scale and profitability and the risks of operating in thehistorically volatile economic environment.

Ownership by Tokio Marine & Nichido Fire, Japan’s largest nonlifeinsurance company, is a positive feature. As is the case with othermultinational operations, Tokio Marine enjoys access to technicalsupport and rotation of employees. The company has built a goodname in the Brazilian market in general and, in particular, in theJapanese community located mostly in São Paulo. The companyoperates all lines of business in Brazil, except for health insurance and

“capitalization” (annuity associated with lottery). It focuses mostly onautomobile, group life and corporate insurance.

In July 2005, Tokio Marine acquired 100% of Real Seguros and 50%of Real Vida e Previdência, part of the financial conglomerate ABNAmro Real. In addition, Tokio Marine celebrated an agreement withBanco ABN Amro Real S.A. to use the bank’s branches to distributeTokio Marine’s products.

One of the challenges facing the company in the near future is totranslate the benefits of the acquisition of Real Seguros andimprovement in its business profile into increased profitability ratios.In 2006, the company achieved a loss ratio of 57% as compared to theindustry average of 61%.

Tokio Marine’s consolidated insurance operations were the eighth-largest insurance groups in Brazil, based on total premiums, with amarket share of approximately 4% in 2006.

Tokio Marine Seguradora S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732: [email protected]



Top 20 ranking: 9

Standard & Poor’s Ratings Services’ credit profile on Caixa SegurosS.A. incorporates the benefits of its ownership by France-based CNPAssurance S.A. (AA/Stable/—) and Caixa Economica Federal (notrated), Brazil’s third-largest bank and public policy agent of the federalgovernment for the real estate mortgage segment. The company’smain challenges include increasing its scale in the insurance market,the increasing competition in the market, and the risk of operating inthe Brazilian economic environment.

CNP Assurance acquired Caixa Seguros in 2001. The partnership withCaixa Economica Federal (with 48.21% of the company’s capital)provides the company with an ample branch network to distribute itsproducts throughout the country. The remaining shares are withInstituto Nacional de Seguridade Social (Brazil’s social securityinstitute).

Caixa Seguros is the ninth-largest insurance group in Brazil. It is by farthe largest insurance company in the residential insurance segmentwith 16% market share. Caixa Seguros is the leading company withina conglomerate that also consists of a private pension andcapitalization (annuity associated with lottery) company. Businessesare in residential insurance, life insurance, auto, large risks, pension,and ‘capitalization’ segments. The partnership with Caixa EconomicaFederal allows the company to offer specific products to guaranteecredit transactions.

One of Caixa Seguros’ main challenges in the near future will befurthering leverage on its distribution capabilities. In 2006, thecompany’s profitability indicators were very good, with a combinedratio of 75%.

Caixa Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected]



Top 20 ranking: 10

AGF Seguros S.A.’s credit profile reflects the benefits of its ownershipby German-based Allianz SE (AA-/Positive/—) and a long history ofoperations in the Brazilian insurance market. The company’s mainchallenges include increasing its scale and technical results within anenvironment of increasing competition in the market.

AGF Seguros’ presence in Brazil dates back 100 years. The companyhas been among the top 10 insurance companies, with emphasis onthe large risks, property and casualty, and health insurance segments.The auto segment represents approximately 40% of total netpremiums.

AGF Seguros benefits from being part of the Allianz Group both interms of expertise from the group and potential financial support tocope with the opportunities that should continue in the Brazilianmarket. The benefits from ownership should be even more evidentfollowing the opening of the reinsurance market in Brazil.

Standard & Poor’s Ratings Services views the company’s profitabilityas acceptable in comparison with industry averages. As is the casewith other companies operating in Brazil, AGF Seguros faces thechallenge of further improving its technical results. The combined ratioalready improved to 99% in 2006 from 103% in the previous year. Aswith all insurance companies in Brazil, we expect financial results tocontinue to decline during 2007, which reinforces the need for focuson operational results.

AGF Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-5501-8939 ; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-5501-8950 [email protected]

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Top 20 ranking: 11

The credit profile on Santander Seguros S.A. reflects the role playedby the company within the financial conglomerate Santander Banespain Brazil in which the insurance segment complements primarybusiness lines to serve clients’ insurance needs. The main challengesfacing the company include managing the risks of the Brazilianeconomic environment and increasing insurance penetration in theclient base.

Santander Seguros is a wholly-owned subsidiary of Banco SantanderCentral Hispano S.A. (AA/Stable/A-1), which operates in Brazil on anintegrated basis in the financial market through its subsidiariesreported as Santander Banespa Combined information. The companyhas a market share of about 2% of total insurance industry premiums.Its main business segments are life insurance and installmentinsurance (lender insurance), in accordance with Santander Groupfocus and policy for insurance business around the world, and

‘capitalization’ (annuity associated with a lottery) through itssubsidiary Santander Capitalização S.A.,. Installment insurance grew asubstantial 59% during 2006, reaching an estimated market share ofapproximately 7% in December of that year. This is an impressiveperformance for a business segment that began operating in late2004. Santander Seguros’ operations are concentrated in thesoutheast and southern regions of the country, which generate themajority of GDP.

Santander Seguros is less diversified than some of its peers, but thecompany has been achieving good profitability levels. Consolidatednet profit for Santander Seguros reached R$121 million in fiscal year2006, which represents a high 40% return on average equity for theperiod. Net profit is strongly influenced by the capitalization business,which contributed R$48 million (roughly 40% of net profit). Net resultsfor 2007 are expected to evolve significantly in 2006 given thatSantander Seguros will have exclusive access to Santander Banespadistribution network for life, credit, residential and accident insurance.

Santander Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 12

The credit profile on HSBC Seguros S.A. incorporates the benefits ofbeing part of the banking conglomerate led by HSBC Bank Brasil S.A.,including a relatively large branch network for product distribution.The company’s main challenges include the increasing competition inthe market and the risk of operating in the Brazilian economicenvironment.

HSBC revised the focus of its insurance business in 2005 and sold thenonlife operations of HSBC Seguros de Automóveis e Bens (Brasil)S.A. to HDI Seguros S.A. As a complement to this sale, HSBC BankBrasil and HDI Seguros entered an agreement allowing HDI Seguros tosell its products through the branch network of HSBC.

HSBC Seguros’s main interest is in the segments of life insurance,private pension, and capitalization (annuity associated with a lottery).

In these areas, the group benefits from the distribution of productsthrough a branch network spanning over 2,000 points of sale. HSBCSeguros counts on one of the largest consumer finance operations inthe market (Losango) through which it can distribute popular insuranceproducts such as credit installment insurance and ‘capitalization’. Theinsurance related operations of HSBC Seguros are executed throughHSBC Vida e Previdência Brasil S.A., HSBC Empresa de Capitalização(Brasil) S.A., and HSBC Capitalização (Brasil) S.A. These operations,currently ranked 12th in the Brazilian insurance market, are fullyintegrated into the financial services group.

As a result, HSBC Seguros shows less diversification than some of itspeers. However, the company has been presenting good profitabilityindicators, with a combined ratio of 89% in 2006, versus 94% in theprevious year. In addition, the company presents loss ratios among thelowest in the market.

HSBC Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 13

Marítima Seguros S.A.'s credit profile reflects good name recognitionin the market place, especially in the auto and health insurancesegments. The company's main challenges include the need to gainscale and increase diversification in its operations, which have beengradually under way. As is the case with other insurance companies inBrazil, Marítima Seguros is also expected to face increasingcompetition in the market.

Marítima Seguros concentrates on three groups of products: auto with45% of total premium, health insurance (30%) and special risks (25%).The company has a high geographic concentration, with approximately80% of its operations in the São Paulo state. Marítima Seguros is the

13th largest insurance group in Brazil. Based on total premiumrevenues, the company has an average 1.5% market share in thehighly concentrated Brazilian insurance market.

Marítima Seguros competes against large insurance companies, someof which are part of large banking conglomerates or belong to largeforeign insurance groups. This poses a significant challenge for thecompany in the near future considering that it has concentratedoperations and a relatively small participation in the market.

Profitability has been acceptable. In 2006, for instance, MarítimaSeguros achieved a combined ratio of 99% and loss ratio of 59%,which are reasonably good ratios in comparison with industryaverages.

Marítima Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 14

HDI Seguros S.A.’s credit profile incorporates the benefits of itsownership by the German-based HDI Group (the group’s holdingcompany Talanx AG is rated A-/Stable/—) and expected gradualimprovement in its business position in the coming years in line withthe expected growth in the insurance business activities in Brazil. Thecompany’s main challenges include increasing its scale in theinsurance market; the increasing competition in the market; improvingits technical results; and the risk of operating in the Brazilianeconomic environment.

HDI Seguros has concentration both in terms of product andgeography, which is explained by its strategic decision to stay out ofthe two main cities of São Paulo and Rio de Janeiro. The company hasbeen operating in Brazil for the past 20 years and has been focusing

its business on midsize cities in the south of the country, mostly inauto insurance. In 2005, the company acquired HSBC Seguros deAutomóveis e Bens (Brasil) S.A. and entered into an agreement withHSBC in which HDI Seguros makes use of HSBC’s branch network todistribute its products. The acquired company was incorporated intoHDI Seguros in April 2006. The acquisition allowed HDI Seguros toexpand its presence to a broader area in Brazil, keeping its emphasison automobile and property insurance.

HDI Seguros has improved its loss ratio substantially to 58% from70% in the past three years, and its combined ratio evolved positivelyto 101% in 2006 from 106% three years before. Nonetheless, thecompany still counts a relevant portion of financial results in its finalprofitability. Because of the expected decline in interest rates during2007, the company is challenged to keep improving its technicalresults in an increasingly competitive scenario.

HDI Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 15

Liberty Seguros S.A.’s credit profile incorporates its ownership byLiberty Mutual Insurance Group (A/Stable/—). The company’s mainchallenge is to recover profitability levels after the net losses inprevious years. The company seems to be underway in this process,having generated positive net income in 2006. A challenge for nextyears is to keep improving technical results within a scenario ofincreasing competition and declining interest rates.

Liberty Seguros went through a major restructuring of its operationssince 2002, which seems to have started paying off. The company

invested in the relationship with brokers and in technology systems toallow operations in new segments. In 2006, the company had a 15%increase in premium revenues and reduced the loss ratio to 62% from70% in the period. Net income reached Brazilian reais (R$) 52 millionin 2006 against net losses of R$33 million in both 2005 and 2004.

The automobile segment continues to be Liberty Seguros’ mainbusiness, accounting for approximately 80% of total revenues. Morerecently, the company has been adding other products intransportation, life, group, and property and casualty, with a focus onsmall and midsize companies.

Liberty Seguros S.A.Primary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected]

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Top 20 ranking: 16

The credit profile on Chubb do Brasil Companhia de Seguros (Chubbdo Brasil) reflects the benefits of being part of the Chubb group(Chubb’s largest operating unit, Federal Insurance Co. is ratedAA/Stable) as well as adequate operating performance relative toother insurance companies in Brazil. The main challenges for Chubb doBrasil include the need to improve technical results under increasingcompetition and to adjust to declining interest rates.

Being part of the Chubb group brings advantages to Chubb do Brasil,such as integration with the parent company and financial support forgrowing operations in Brazil. In addition, the parent contributes to the

company’s operations in the open reinsurance market in terms ofexpertise and relationships.

With total premium of R$605 million in 2006, Chubb do Brasil rankedas the 16th largest insurance company in Brazil. The companyachieved adequate results, with net income of R$27 million, a lossratio of 48%, and a combined ratio of 99%. The company had acapital injection of R$42 million at the end of 2006, to supportanticipated growth in operations.

The main business segments of Chubb do Brasil include automobile(accounting for 38% of total premium revenues), life and personalaccidents (20%), and transportation (15%). The company is a nicheplayer, focusing on the higher end of the automobile market, namelyvehicles priced above R$100,000.

Chubb do Brasil Companhia de SegurosPrimary Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected] Secondary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 ; [email protected]



ACEPrimary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 ;[email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741 [email protected]

Top 20 ranking: 17

Ace Seguradora S.A.'s (Ace Seguradora) credit profile reflects itsincreasing market share in its major segments, with premium growthat a higher pace than the market; its improved loss ratios; and thebenefits of being a subsidiary of Ace (A+/Stable/--). The company'smain challenges include continuing to increase its market position inthe competitive insurance segment; managing operating costs andimproving efficiency; and continuing to improve its profitability.

Ace Seguradora has been growing its total premium at a higher pacethan the market and presented a higher share in the competitiveinsurance industry in Brazil. The company is the 17th largest insurancecompany in the market, with a 0.95% share in the market, up from0.86% in 2004. In its major segments, Ace Seguradora was among thetop three: It was the third-largest insurance company in thetransportation and civil responsibility segments in 2006, having grownits market share in the transportation sector to 8.7% in 2006 from7.8% in 2003 and to 12.7% from 6.2% in the civil responsibilitymarket. Still, the company is challenged to keep growing its marketshare in the competitive environment and to benefit from the goodprospects of the Brazilian insurance segment.

As a subsidiary of Ace Group, Ace Seguradora benefits from theknow-how and expertise of its parent in the insurance marketincluding its position in liability coverage for corporates and directors,product liability, and underwriting practices. Standard & Poor's RatingsServices expects the company to continue benefiting from itsownership structure, and to increase its market position in theinsurance segment while maintaining strong underwriting principles.

Ace Seguradora has shown improvement in its loss ratio, whichreduced to 36.5% in 2006 from 39.1% in 2003. Although the companypresented a good combined ratio of 96.5% in 2006, it increased fromthe 95% in 2004 due to higher operating expenses. The company islikely to continue searching for efficiency while growing itsprofitability, which should help to reinforce its capitalization.

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Seguradora S.A.



Top 20 ranking: 18

Metropolitan Life Seguro e Previdência S.A.’s (Metlife - N.R.) creditprofile reflects its increasing position in the life segment and theadvantage of being a subsidiary of Metropolitan Life Insurance Co(AA/Stable/—) in terms of product development and underwritingpractices. The company’s main challenges include improving itsunderwriting results and the net income of its Brazilian subsidiary, andincreasing its market position and premiums in the life segment toabsorb the cost of its operations.

Metlife is the seventh-largest insurance company in the life segmentwith 5.1% market share in 2006. The company’s position in Brazil wasthe result of several acquisitions (Seasul, Soma Seguradora, andCitiInsurance in 2005) that reinforced its position in the market. Still,with the strong competition, we expect the company to continueincreasing its premiums to compensate for the investments in the

country. As a subsidiary of Metlife Insurance, the largest life insurer inthe U.S., Metlife benefits in terms of product development andunderwriting experience. We expect this relationship to help developthe business.

The company presented a negative underwriting and net income in2006 due to higher-than-market loss ratios in the life segment(specifically due to losses with credit life to payroll lending businessfor retirees), and higher administrative expenses. Its loss ratio of 66%in 2006 is higher than the 52% in 2005 and the average 46% for thelife segment. During 2006 a new focus was implemented and requireda restructuring that impacted also the expenses at the company. Thenew focuses are Brokers (targeting mainly corporate business forsmall, medium and large cases) and Banks (targeting mainlyindividuals and small business). The company is challenged toimprove its operations with good loss management while managingits operating costs efficiently to present positive operating results.

Metropolitan Life Seguro e Previdência S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9741; [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9732, [email protected]

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Top 20 ranking: 19

Icatu Hartford Seguros S.A.’s (Icatu Hartford- N.R.) credit profilereflects its adequate market position in the life and pension segmentsand the benefits it receives as part of Grupo Icatu (NR) and TheHartford (AA-/Stable). The company’s main challenges includeincreasing its market share of its major segment in light of thecompetitive environment, improving its underwriting results with goodmanagement of its loss ratio and expenses, and the risk of operatingin the Brazilian environment.

Icatu Hartford benefits from being the result of the partnership ofGrupo Icatu and The Hartford, which has provided the insurer withimproved actuarial and technical knowledge of life and pensionproducts. The company is also the exclusive representative of SwissLife in selling life insurance in Brazil. Icatu Hartford’s major focuses

are on the life and pension markets in Brazil, where the company isthe tenth largest in these markets. The competitive environmentchallenges the company to continue growing its business with goodunderwriting and loss management, while reinforcing its position inthese segments.

Despite its higher net income from Brazilian reais (R$) 48.5 million in2005 to R$66.7 million in 2006, its results are still supported by goodfinancial results—financial results represented 42% of theconsolidated company’s earned premiums. The company is stillchallenged to increase its underwriting results and improve itscombined ratio of 107% in 2006. The company improved its loss ratioand expense ratio to 49.8% and 22.8% in 2006 from 54.7% and 25.2%in 2005, respectively.

Icatu Hartford, like all insurers operating in Brazil, is exposed to theeconomic and industry risks of Brazil.

Icatu Hartford Seguros S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732 [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]


Top 20 ranking: 20

IRB-Brasil Resseguros S.A.’s (IRB) credit profile primarily reflects itscurrent position as the reinsurer monopoly in Brazil with accumulatedknowledge of the market and insurance industry; the benefit fromdirect relationships with clients for several decades; its good liquidityposition; and earnings. The company is challenged to improve itsefficiency and be competitive in the open market environment and tomaintain good underwriting and cost control to show increasingprofitability levels.

IRB to date has been the monopoly reinsurer for domestic Brazilianrisk, with accumulated knowledge of the market and its players. IRB’srole has been to accumulate local risk from each primary insurer andthen share it back among the private sector insurers and overseasreinsurers. As the sole insurer, it has indirectly managed the premiumpricing in the market, and been seen as the major final bearer of anyserious losses. In the context of an opening reinsurance marketexpected for 2008, although IRB will retain a large part of thereinsured risks in the first three years, the company is challenged toimprove its efficiency and be competitive in light of the entrance ofstrong reinsurers in the competitive and promising Brazilian insuranceindustry. IRB’s profitability reduced in 2006 and its underwriting performancewas affected by higher loss ratios and administrative expenses. Theloss ratio increased to 49.2% in 2006 from 37% in 2005, reflectingsome high losses in the market in 2006. In addition, the company hasmade several investments to be prepared for the opening of themarket and consequently showed an increase in its operatingexpenses. The company’s net income reduced to Brazilian reais (R$)299 million from R$370 million in 2005. Still, IRB presented goodearnings and a high ROA of 6% and ROE of 20% in 2006.

IRB- Brasil Resseguros S.A.Primary Credit Analyst: Tamara Berenholc, São Paulo, 55-11-3039-9732; [email protected] Credit Analyst: Daniel Araujo, São Paulo, 55-11-3039-9741; [email protected]

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Top 20 Insurance Companies

Methodology



Standard & Poor’s rating methodology effectively measures andcompares the financial risks of entities that undertake a wide range ofinsurance business activities. Because of the wide array of insurancecompany types, a variety of quantitative techniques may be applied tothe rating analysis. These analytical techniques evaluate financialrisks associated not only with historical business activity, but withnew business initiatives as well. The analytical approach is tailored tothe uniqueness of each of the major insurance sectors. Reinsurancecompanies are categorized by the direct insurance market theyreinsure, then analyzed using methods similar to those applied to thatmarket. Similarly, international insurers are categorized primarily bythe nature of the insurance they write and secondly by factors uniqueto their national market.

While the quantitative form of analysis differs for each majorinsurance sector, there is a common analytical methodology. There isalso a common set of qualitative principles applied to each companyregardless of the nature of its business or country of origin. Aconsistent rating methodology is used for all insurance rating analysisand is uniform across all types of insurance companies.

Through discussion with management, Standard & Poor’s can betterunderstand how an organization’s business, operating and financialstrategies affect its financial strength. Standard & Poor’s usesprojections in assigning its ratings after extensive discussions withmanagement to understand the underlying assumptions.

Standard & Poor’s rating methodology profile is used for all insurancerating analyses and is uniform across all types of insurancecompanies. The profile covers industry risk, business review,management and corporate strategy, operational analysis,investments, capitalization, liquidity and financial flexibility.

Industry RiskAnalyzes the competition and the inherent risk of marketplacedynamics, and considers: Lines of Business Geographic Profile Regulatory, Legal and Accounting Framework

Industry risk is the environmental framework in which an insurancecompany operates. Standard & Poor’s evaluates industry risk based onthe types of insurance written (line of business or sector) andgeographic profile. Also considered is how a national or local factorcould affect the insurer’s operations. For insurance companies that arepart of a larger, more diversified group, Standard & Poor’s also looksat noninsurance-related activities to assess how favorable orunfavorable these industry conditions may be, and the potential effecton the group’s overall operations. Broadly speaking, the lower theindustry risk, the higher the potential rating of companies in thatsector or line of business.

Business ReviewAnalyzes the overall health and standing of the company in the areas of: Competitive Strengths/Weaknesses Organization Structure

Diversification Growth Rates Market Share Distribution Channels Products Offered in Relation to Market Demand

In assessing future financial strength, it is critical to identify aninsurer’s fundamental characteristics and its source of competitiveadvantage or disadvantage. Business review can prove to be one ofthe decisive factors underlying a final rating decision, as the analystdefines the key characteristics of organizational structure and activitythat constitute competitive strengths and weaknesses. Thesestrengths and weaknesses are intricately tied to the insurer’s strategyand operational effectiveness and will strongly influence its financialprofile. It is through its review of a company’s business position thatStandard & Poor’s determines whether a company has sustainablecompetitive advantages.

Management And Corporate StrategyThe effect of past, present and future strategies involving: Strategic Positioning Operational Skill Financial Risk Tolerance

Standard & Poor’s considers management and corporate strategy a keyelement of the criteria that forms the foundation of the financialstrength rating process. An organization’s strategy, operationaleffectiveness, and financial risk tolerance will shape itscompetitiveness in the marketplace and strength of its financialprofile. The analysis of management and corporate strategy is subjectto a consistent process that is applicable \to all rated insurance andreinsurance companies. Although the element of subjectivity cannotbe avoided entirely due to the qualitative nature of this variable, it isprecisely the analyst’s opinion of the human element that gives furthervaluable insights not provided by quantitative measures alone.

Operating PerformanceA look behind the bottom line, including: Risk-Adjusted Earnings Adequacy Underwriting Performance Earnings Yield Expense Efficiency

By analyzing operating results, Standard & Poor’s determines acompany’s ability to capitalize on its strategy and business strengths.The measurement of earnings focuses on a company’s ability toeffectively translate its strategies and competitive strengths intogrowth opportunities and sustainable margins on its revenues andassets. Operating results are analyzed independently of a firm’s capitalstrength, and encompass both historical trend analysis andprospective earnings. In addition, Standard & Poor’s analysts assessthe stability and quality of earnings. Accordingly, the focus for overallperformance is on evaluating earnings based on pretax returns onassets or revenues (as appropriate) as the best measure not distortedby unique leverage considerations. Underwriting performance is animportant component of the overall operating performance and is a

Insurance Rating Methodology



key driver of earnings strength. Assessment of underwritingperformance is based on loss experience, expense performance,combined ratios or policyholder dividend ratios (as applicable), andgrowth trends.

InvestmentsAsset management and its relationship to: Asset Allocation Portfolio Diversification Asset Credit Quality Interest Rate Risk Management Liquidity Market Risk

Asset quality and investment performance are integral to an insurer’soperations and to remaining competitive in today’s environment.Premiums and deposits invested today must provide a yield sufficientto cover tomorrow’s claims. Standard & Poor’s evaluation of theinvestment portfolio considers the competing and often conflictingdemands for higher yields versus safety and liquidity. By far, the keyelement of the analysis is understanding the process by which thecompany allocates cash flows to various asset classes. Once the assetallocation strategy is understood, Standard & Poor’s looks to creditquality and diversification: are there any unusual concentrations, suchas by asset type, industry sector, or individual companies? A review ofthe management of asset duration versus liability duration, the extentof market risk exposures, and the level of liquidity in the assetportfolio, also are important components of the overall investmentanalysis.

Capitalization, Reserving, And ReinsuranceThe management of capital and a risk-adjusted analysis of how itrelates to: Asset Risks Reinsurance Protection/Quality Liability and Reserving Risks Mortality/Morbidity/Underwriting) Interest Rate Risks Pricing Risks General Business Risks Financial Leverage/Interest Coverage

Standard & Poor’s considers capital needs on a risk-adjusted basis,and employs a number of qualitative and quantitative approaches toassess capitalization strength. While cognizant of the need to supportshareholder returns relative to equity, Standard & Poor’s views higherlevels of capitalization strength as more supportive of the needs ofpolicyholders. Besides providing protection against adverse claims,market or other developments that may result in unexpected costs oflosses, a strong level of capital resources also supports the growth ofan insurer on an ongoing basis. The absolute level and quality ofcapital is reviewed, in addition to debt leverage and future capitalmanagement strategies. Complementing the capitalization analysis, athorough review of reserving methodology and procedures enables anassessment of reserve adequacy. Similarly, a detailed study of thestructure and quality of reinsurance arrangements forms a veryimportant component of the analysis of balance sheet protection.

LiquidityThe interrelationship of an insurer’s assets to its liabilities involving: Sources of Liquid Assets Cash Demands and Liabilities Large Contractual Maturities Underwriting/Operating Cash Flows

All insurance organizations need to be highly liquid. Assessment ofthis important area identifies the sources of cash and enables us todetermine those companies with strengths or weaknesses in thisgenerally strong category. Key sources of liquidity investigated inStandard & Poor’s analysis include operating cashflows generated byday-to-day business activities and the investment portfolio. Liquidity inthe investment portfolio is especially important in relation to anysignificant catastrophe exposures that may be present. Finally,Standard & Poor’s also takes in to account any outside sources ofliquidity such as bank lines of credit and established commercial paperprograms.

Financial Flexibility Alternative resources such as: External Sources of Capital or Liquidity

This last element of the analysis is predominantly qualitative, and isbroken down into capital requirements and capital sources. Capitalrequirements refer to factors that may give rise to an exceptionallylarge need for capital; these tend to relate to the company’s strategicobjectives and thus, often involve acquisition or recapitalization plans.Capital sources involve an assessment of a company’s ability toaccess an unusually large amount of short term and long-term capital.Typically, these sources consist of demonstrated access to multipletypes of capital markets; the ability to liquidate significant assetswithout affecting the basic enterprise; and reinsurance.

These eight major rating factors are scored by Standard & Poor’sanalysts. However, the weighting of these factors is subject toanalytical judgment. Ultimately, the rating decision is a synthesis ofimportant issues that are unique to each company and will drivefuture financial performance.

Definitions



Insurer Financial Strength RatingDefinitionsA Standard & Poor’s Insurer Financial Strength Rating is a currentopinion of the financial security characteristics of an insuranceorganization with respect to its ability to pay under its insurancepolicies and contracts in accordance with their terms. Insurer FinancialStrength Ratings are also assigned to health maintenanceorganizations and similar health plans with respect to their ability topay under their policies and contracts in accordance with their terms.

This opinion is not specific to any particular policy or contract, nordoes it address the suitability of a particular policy or contract for aspecific purpose or purchaser. Furthermore, the opinion does not takeinto account deductibles, surrender or cancellation penalties,timeliness of payment, or the likelihood of the use of a defense suchas fraud to deny claims. For organizations with cross-border ormultinational operations, including those conducted by subsidiaries orbranch offices, the ratings do not take into account potential that mayexist for foreign exchange restrictions to prevent financial obligationsfrom being met.

Insurer Financial Strength Ratings are based on information furnishedby rated organizations or obtained by Standard & Poor’s from othersources it considers reliable. Standard & Poor’s does not perform anaudit in connection with any rating and may on occasion rely onunaudited financial information. Ratings may be changed, suspended,or withdrawn as a result of changes in, or unavailability of suchinformation or based on other circumstances.

Insurer Financial Strength Ratings do not refer to an organization’sability to meet nonpolicy (i.e. debt) obligations. Assignment of ratingsto debt issued by insurers or to debt issues that are fully or partiallysupported by insurance policies, contracts, or guarantees is a separateprocess from the determination of Insurer Financial Strength Ratings,and follows procedures consistent with issue credit rating definitionsand practices. Insurer Financial Strength Ratings are not arecommendation to purchase or discontinue any policy or contractissued by an insurer or to buy, hold, or sell any security issued by aninsurer. A rating is not a guaranty of an insurer’s financial strength orsecurity.

Insurer Financial Strength RatingsAn insurer rated ‘BBB’ or higher is regarded as having financialsecurity characteristics that outweigh any vulnerabilities, and is highlylikely to have the ability to meet financial commitments.

AAA An insurer rated ‘AAA’ has EXTREMELY STRONG financialsecurity characteristics. ‘AAA’ is the highest Insurer Financial StrengthRating assigned by Standard & Poor’s.

AA An insurer rated ‘AA’ has VERY STRONG financial securitycharacteristics, differing only slightly from those rated higher.

A An insurer rated ‘A’ has STRONG financial security characteristics,but is somewhat more likely to be affected by adverse businessconditions than are insurers with higher ratings.

BBB An insurer rated ‘BBB’ has GOOD financial securitycharacteristics, but is more likely to be affected by adverse businessconditions than are higher rated insurers.

An insurer rated ‘BB’ or lower is regarded as having vulnerablecharacteristics that may outweigh its strengths. ‘BB’ indicates theleast degree of vulnerability within the range; ‘CC’ the highest.

BB An insurer rated ‘BB’ has MARGINAL financial securitycharacteristics. Positive attributes exist, but adverse businessconditions could lead to insufficient ability to meet financialcommitments.

B An insurer rated ‘B’ has WEAK financial security characteristics.Adverse business conditions will likely impair its ability to meetfinancial commitments.

CCC An insurer rated ‘CCC’ has VERY WEAK financial securitycharacteristics, and is dependent on favorable business conditions tomeet financial commitments.

CC An insurer rated ‘CC’ has EXTREMELY WEAK financial securitycharacteristics and is likely not to meet some of its financialcommitments.

R An insurer rated ‘R’ is under regulatory supervision owing to itsfinancial condition.During the pendency of the regulatory supervision, the regulators mayhave the power to favor one class of obligations over others or paysome obligations and not others. The rating does not apply to insurerssubject only to nonfinancial actions such as market conduct violations.

NR An insurer designated ‘NR’ is NOT RATED, which implies noopinion about the insurer’s financial security.

Plus (+) or minus (-) signs following ratings from ‘AA’ to ‘CCC’ showrelative standing within the major rating categories.

CreditWatch highlights the potential direction of a rating, focusing onidentifiable events and short-term trends that cause ratings to beplaced under special surveillance by Standard & Poor’s. The eventsmay include mergers, recapitalizations, voter referenda, regulatoryactions, or anticipated operating developments. Ratings appear onCreditWatch when such an event or a deviation from an expectedtrend occurs and additional information is needed to evaluate therating. A listing, however, does not mean a rating change is inevitable,and whenever possible, a range of alternative ratings will be shown.CreditWatch is not intended to include all ratings under review, andrating changes may occur without the ratings having first appeared onCreditWatch. The “positive” designation means that a rating may beraised; “negative” means that a rating may be lowered; “developing”means that a rating may be raised, lowered or affirmed.

Public Information Ratings, denoted with a ‘pi’ subscript, are InsurerFinancial Strength Ratings based on an analysis of published financialinformation and additional information in the public domain. They do

Insurance Rating Definitions



not reflect in-depth meetings with an insurer’s management and aretherefore based on less comprehensive information than ratingswithout a ‘pi’ subscript. ‘pi’ ratings are reviewed annually based on anew year’s financial statements, but may be reviewed on an interimbasis if a major event that may affect an insurer’s financial securityoccurs. ‘pi’ ratings are not modified with ‘+’ or ‘-’ designations, nor arethey subject to potential CreditWatch listings.Ratings with a ‘pi’ subscript generally are not modified with ‘+’ or ‘-’designations. However, such designations may be assigned when theinsurer’s financial strength rating is constrained by sovereign risk orthe credit quality of a parent company or affiliated group.

Issuer Credit RatingA Standard & Poor’s Issuer Credit Rating is a current opinion of anobligor’s overall financial capacity (its creditworthiness) to pay itsfinancial obligations. This opinion focuses on the obligor’s capacityand willingness to meet its financial commitments as they come due.It does not apply to any specific financial obligation, as it does nottake into account the nature of and provisions of the obligation, itsstanding in bankruptcy or liquidation, statutory preferences, or thelegality and enforceability of the obligation. In addition, it does nottake into account the creditworthiness of the guarantors, insurers, orother forms of credit enhancement on the obligation. The Issuer CreditRating is not a recommendation to purchase, sell or hold a financialobligation issued by an obligor, as it does not comment on marketprice or suitability for a particular investor.

Rating Outlook DefinitionsA Standard & Poor’s Rating Outlook assesses the potential direction ofa long-term credit rating over the intermediate to longer term. Indetermining a Rating Outlook, consideration is given to any changes inthe economic and/or fundamental business conditions. An Outlook isnot necessarily a precursor of a rating change or future CreditWatchaction.

• Positive means that a rating may be raised.• Negative means that a rating may be lowered.• Stable means that a rating is not likely to change.• Developing means a rating may be raised or lowered.• N.M. means not meaningful.

Top 20 Brazilian Insurance Companies - 2007

Standard & Poor’s - BrazilAv. Brigadeiro Faria Lima, 201

18th floor

Regina NunesPresident

Tel.: +55 11 3039-9737 Fax.: +55 113039-9701

[email protected]

Milena ZaniboniManaging Director

Tel.: +55 11 3039-9739 Fax.: +55 113039-9701

[email protected]

Daniel AraujoDirector

Tel.: +55 11 3039-9741 Fax.: +55 113039-9701

[email protected]

Tamara BerenholcAssociate Director

Tel.: +55 11 3039-9732 Fax.: +55 113039-9701

[email protected]

João Carlos ScuracchioDirector – Origination & Marketing

Tel.: +55 11 3039-9704 Fax.: +55 113039-9701

[email protected]

Marcos ViesiManaging Editor

Tel.: +55 11 3039-9748 Fax.: +55 113039-9701

[email protected]

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