Fitch Affirms Bradesco Seguros S. A.'s IFS at 'BB+' and National IFS at 'AAA(bra)'
KEY RATING DRIVERS
Bradesco Seguros' ratings are aligned with those of its parent, Banco Bradesco S. A. (Bradesco, Long-Term Local Currency Issuer Default Rating [IDR] 'BB+'/Outlook Negative). The Negative Outlook for Bradesco Seguros' IFS rating mirrors that of its parent's Long-Term Local Currency IDR, which is constrained by Brazil's sovereign rating (Long-Term Local Currency IDR 'BB'/ Outlook Negative).
Fitch views Bradesco Seguros as a 'core subsidiary' of Bradesco, and therefore its ratings are equalized to those 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 (average 30% from 2011 through June 2016).
The ratings also reflect the company's leading position in the Brazilian insurance market, consistent performance through the cycle, diversified revenue base, strong distribution capacity underpinned by Bradesco's wide agency network and comfortable liquidity and capitalization ratios.
As of June 2016, Bradesco Seguros maintained its leading position and overall market share of approximately 25%, despite a marked slowdown in premium growth to 7% on a year-on-year (y-o-y) basis (15% in 2015). The deceleration was mainly driven by the pension segment, which grew only 1% y-o-y (20% in 2015). Other segments also posted slightly lower growth (health: 17% vs 20%, life: 12% vs 10%, auto and Property/Casualty (P/C): 1% vs -2%, saving bonds: 3% in both periods, respectively). At year-end 2015, life and pension segments remained the largest contributors to net earnings (57%), followed by health (13%), saving bonds (10%) and auto and P/C (20%).
In August 2016, Bradesco's acquisition of HSBC Bank Brasil S. A. (HSBC Brasil) was concluded and Bradesco Seguros incorporated its three insurance subsidiaries, which operate in life, pension and saving bonds segments. As of June 2016, the three companies' premiums were equivalent to 4% of Bradesco Seguros' total premiums. Fitch expects the incorporation to further strengthen Bradesco Seguros' growth and market position.
Bradesco Seguros' leverage ratios are well above the average of Fitch rated insurance entities in Brazil and the region, and have increased further in 2015, before declining slightly in the first half of 2016 as a result of slower growth and high retained earnings. At June 2016, the company's operating leverage (net earned premiums/equity) and leverage (net liabilities/equity) stood at 2.0x and 12.5x, respectively (2.5x and 14.8x, at end-2015).
Bradesco Seguros' dividend payout ratio remains high. In 2015, payout ratio reached 113%, up from 73% in 2014 and 53% in 2013. 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 private pension products that do not constitute reinvestment risk for the company. The technical reserves all pension products corresponded to 81% of the total technical reserves and 77% of liabilities at June 2016.
Fitch believes Bradesco Seguros' profitability will remain solid despite the continued weaknesses in the operating environment. Bradesco Seguros has maintained solid profitability through the cycles, thanks to good technical results and solid financial income. The company's return on average assets (ROAA) averaged 2.5% between 2012 through 2015, but fell to 2.0% in the first half of 2016, mainly as a result of a slight fall in technical results that in turn was due to an increase in claims in the health segment and the increase in income tax rate.
In applying Fitch's insurance criteria when regarding 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' ratings are 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.