LatinFinance - November/December 2013 - 38

interest rates, especially Selic, in Brazil have
led us to consider other types of investment
so that we can achieve a higher yield. as
a non-life insurer, the average term of our
policy contracts is quite low, so we tend to
invest over a fairly short-term horizon and
want to ensure that we are hedged against
inflation."
Porto Seguro has kept 16% of its assets
in corporate bonds over the first half of the
year, a two point increase from the end
of 2012.
in the second quarter it increased its
exposure to inflation-linked bonds to 11%
from 9% in the first; it also increased its
weighting in fixed-income investments to
24% from 17%; and it significantly reduced
its exposure to floating rate notes to 48%
from 57%.
most commentators believe insurers
will continue to become more important
institutional investors in latin america.
capital markets throughout the region are
becoming more sophisticated and offer
investors a broader range of assets. they are
also becoming more regional, with projects

Fadi attia, Barclays

"Peruvian and
Colombian insurers and Pension
funds have beCome
muCh more meaningful investors
in latin ameriCa's
regional CaPital
markets. they are
now able to make
and drive a trade
in other Parts of
latin ameriCa"

like mila, the integrated latin american
market, which is bringing together the
chilean, Peruvian and colombian stock
markets.
at the same time, regulators are
introducing new rules that prevent insurers
from investing in certain types of more
risky or exotic assets and are being stricter
about insurers' solvency levels and capital
requirements (see box).
"even in mexico where insurers
have greater flexibility in investing
internationally, they cannot freely invest,"
says andres onzarra, a director in latin
american investment banking at Bank of
america merrill lynch. "compared to the
pension funds, insurers in the region are
still not real big players in latin american
capital markets. However, over time, that
could well change as the middle class grows
and purchases more insurance products.
life insurance is not seen as a basic
necessity but researchers say that when
people start to earn $10,000 to $15,000 a
year, they are much more likely to purchase
that product." LF

United we stand
the introduction of new global standards for insurance companies will have a disproportionate effect on small firms
- and could drive consolidation in mexico's highly fragmented system
With a large number of very small firms, mexico's insurance
industry could be on the cusp of a wave of regulatory-driven
mergers and acquisitions, says fitch analyst franklin Santarelli.
as mexico advances new insurance regulations, in line with
revised global standards, the costs of compliance are set to stack
up for the companies under review. it will take a particular toll
on the smaller ones - of which there are many. there are slightly
more than 100 insurance companies operating in mexico, of
which just nine have more than 4% market share.
"there is a group of companies that may manage $48 million
[of premiums] in a year, or even less," says Santarelli. "for those
companies there's going to be a significant burden in cost for
moving towards Solvency ii."
the rules, due to come into effect in april 2015, are unlikely
to demand mexico's insurers hold vastly greater amounts of
capital. But simply working out if that is the case or not implies a
significant cost in itself.
Based on the european Solvency ii rules, insurers must take a
much more sophisticated approach to calculating the risks that
they are exposed to.
"What really makes me wonder is if you're a company that only
issued $20 million a year in premiums, can you afford to have a
chief risk officer," says Santarelli.
the regulator is surveying insurance companies to better
understand the impact of the new rules - and to help firms get

38 l atinfina nce.com - November/December 2013

used to the more complex reporting that will be required in future.
Until those studies are complete, it is tough to know exactly how
much capital the firms will require under the new rules.
"Generally speaking, insurance companies in mexico are
starting out with a decent capital base," says Santarelli, adding that
few will need to radically bulk up their capital base.
"But the costs associated with running the model are going to be
significant. it's fair to say some of the companies won't even have
the data to populate some of those models."
Some firms may look for merger opportunities as a result, he
says.
"the logical assumption would be that m&a should happen in
mexico. How fast that will happen, i don't know."
Yet bringing in the tough new rules is, ultimately, the right
thing to do, he says. Despite being latin america's second biggest
insurance market - after Brazil - its penetration rate is low:
premiums come to around 2.1% of GDP, below the 4% seen in
Brazil and chile.
Still, mexico's insurance industry is growing quickly. Premiums
rose 10.7%, to 178 billion pesos ($13.9 billion) in the year to June
according to regulatory data.
"it is a very good step," says Santarelli. "it's better to regulate
when they're small and the problems are small, than waiting until
it becomes a huge problem that could have a contingency to the
sovereign. i think now is the right time to do it." LF

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