Fitch’s rating outlook remains negative and sector outlook remains stable for the Brazilian insurance industry for 2017, according to a new Fitch Ratings report.
The negative Rating Outlook for the Brazilian insurance sector mirrors the outlook on Brazil’s sovereign ratings (Long-Term Foreign and Local Currency Issuer Default Ratings ‘BB’/ Outlook Negative). This reflects the country-related constraints under Fitch’s Insurance Rating Methodology. In contrast, Fitch’s outlook for the Brazilian insurance sector remains stable. The insurance sector has been one of the few that has withstood the significant deterioration in the operating environment in 2015 and 2016. Fitch believes that the Brazilian insurance sector will continue to be resilient and maintain overall adequate key credit metrics in 2017.
Fitch expects premium growth to remain subdued for the second consecutive year in 2017, despite expectations of economic stabilization and return to growth. This is because GDP growth is likely to be modest (Fitch forecast: 1.2%), and unemployment is likely to remain high. As of September 2016, total sector premium growth (all segments except health) grew 7.3% year-over-year (YoY) (10.6% in 2015). This is the lowest growth rate in the past decade and is below the inflation rate of 8.5% for this period.
Fitch expects sector profitability to remain solid in 2017, despite a likely decline in interest rates, which would exert downward pressure on investment income, and modest premium growth. Sector return on average assets (ROAA) excluding the health segment, which fell to 1.7% as of September 2016 due to higher social contribution tax (average of 2.0% in 2012-2015), should remain between 1.5% and 2.0%.
Meanwhile, Fitch expects the upward trend in sector leverage to persist in 2017, as growth of pension products growth should remain solid. Fitch expects all the Brazilian insurers that it rates to meet the increase in minimum required capital in 2017, when insurers have to allocate capital for market risks.
Fitch expects the local reinsurance market’s key credit metrics to remain broadly stable and adequate in 2017. As of June 2016, performance of this segment was solid, with ROAA reaching 3.8% up from an average of 3.0% in 2012-2015.