RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed Bradesco Seguros S.A.'s (Bradesco Seguros) Insurer Financial Strength (IFS) rating at 'BBB-'. The Rating Outlook remains Negative.
KEY RATING DRIVERS
The IFS rating of Bradesco Seguros is aligned with that of its parent, Banco Bradesco S.A. (Bradesco, long-term local currency [LT LC] Issuer Default Rating [IDR] 'BBB-'/Outlook Negative). The Negative Outlook for Bradesco Seguros' IFS mirrors that of its parent's LT LC IDR, which, in turn, is constrained by Brazil's sovereign rating (LT LC IDR 'BB+'/ Outlook Negative).
Fitch views Bradesco Seguros as a 'core subsidiary' of Bradesco, and therefore its rating is equalized to that of its parent. This is based on the strategic importance of its insurance operations, which are a key and integral part of the group's business, common branding, and high contribution of Bradesco Seguros to group profits (30% in 2015, 29% in 2014, and 31% in 2013).
The rating also reflects the company's leading position in the Brazilian insurance market, consistent performance through the cycle, diversified revenue base, strong distribution capacity underpinned by the wide agency network of Bradesco, and comfortable liquidity and capitalization ratios.
Fitch expects Bradesco's acquisition of HSBC Bank Brasil S.A. (HSBC Brasil) to entrench Bradesco Seguros' position in the Brazilian insurance market further. Once the regulators approve the transaction, Bradesco Seguros will incorporate HSBC Brasil's three insurance subsidiaries, which mainly focus on private pension plans (Vida Gerador de Beneficios Livres [VGBL] and Plano Gerador de Beneficios Livres [PGBL]) and capitalization segments. In 2015, their premiums were equivalent to 5% of Bradesco Seguros' total premiums.
The Brazilian insurance sector has so far remained resilient to the very weak economic backdrop that is characterized by a severe recession, increasing unemployment and inflation, and worsening fiscal performance. Total sector premium growth (excluding the health segment) was 10% in 2015. Fitch expects sector premium growth to decelerate in 2016 but expects the sector's key credit metrics to remain adequate.
In 2015, Bradesco Seguros' total premiums (including the health segment) grew a strong 15%. Growth was driven by the VGBL and health segments, which both grew 20%. Other segments posted lower growth, reflecting the weak operating environment (life: 10%, saving bonds: 3%, auto and P/C: negative 2%). The insurer maintained its leading position and overall market share unchanged at approximately 25%. In the same period, life and pension segments continued to be the largest contributors to net earnings (57%), followed by health (13%), capitalization plans (which are a type of savings plans with a lottery feature) (10%), and others including auto and property/casualty (20%).
Bradesco Seguros' leverage ratios are well above the average of the insurance entities rated by Fitch in Brazil and the region and have increased further in 2015. At December 2015, the company's operating leverage (net earned premiums/equity) and leverage (net liabilities/equity) stood at 2.5x and 14.8x, respectively (1.9x and 11.3x, at end-2014). The rise in leverage was mainly due to a large dividend payout of BRL5.4 billion (113% of net income) and a fall in the security revaluation reserves under equity by BRL1 billion. Dividend payouts are likely to remain high, as Bradesco's capital optimization efforts continue. This is due to the gradual phase-in of the Basel III regulatory framework, which requires banks to deduct their investments in insurance companies from their regulatory capital.
Potential risks arising from high leverage are mitigated by the fact that leverage is largely driven by its significant technical reserves for the VGBL and PGBL pension products that do not constitute reinvestment risk for the company. The technical reserves of these two products corresponded to 72% of the total technical reserves and 68% of liabilities, at December 2015.
Fitch believes Bradesco Seguros' profitability will remain solid, despite the weak economic environment. At December 2015, the company's ROA and operating ratio remained broadly stable, at 2.6% and 75.5%, respectively (average 2.5% and 75.3% from 2012 through 2014). Meanwhile, combined ratio rose to 96.3% (average 92.1% from 2012 through 2014), mainly as a result of higher claims in the health and life segments. The increase in financial income to 20.8% of net earned premiums at December 2015, from 17.7% at end-2014, offset the decrease in technical results.
In applying Fitch's insurance criteria with respect to the impact of ownership on Bradesco Seguros' ratings, Fitch considered how ratings would theoretically be impacted under Fitch's bank support criteria. Fitch's insurance criteria is principles-based regarding ownership, and the referenced bank criteria was used to help inform Fitch's judgment in applying those principles.
Bradesco Seguros' rating is linked to that of Bradesco. Therefore, any change in the bank's ratings would affect the insurer's ratings, as would a change in its willingness to provide support, which Fitch considers highly unlikely.
Additional information is available on www.fitchratings.com.
Global Bank Rating Criteria (pub. 20 Mar 2015)
Insurance Rating Methodology (pub. 16 Sep 2015)
Dodd-Frank Rating Information Disclosure Form