One of the world's most dynamic emerging economies, Brazil is attracting investors and insurers.
Brazil has been in the headlines of the world media for some time. The reason for this is simple, as the Economist summarized in its November 14, 2009 Brazil survey "Brazil takes off". Of all the BRIC (Brazil, Russia, India and China) countries, Brazil’s popularity among investors is a result of the adoption of winning social economical policies which have put it among the top of many macroeconomic indexes of the last few years. It is little wonder that Allianz Global Corporate & Specialty announced a new Brazilian office in 2009 and has expanded it this year.
Not even the financial crisis had a major effect on the biggest economy in Latin America. While the big industrial economies struggle to boost sales, job creation, industrial production and investments, policy makers at Brazil’s Ministry of Finance have been doing everything they can to slow down growth and improve the stock market in order to attract long-term resources to finance a sustainable evolution of the Brazilian economy.
At the beginning of 2010, projections indicated GDP growth of 4.5 percent. At the beginning of the second half of the year, this was adjusted to 7.5 percent, according to reports released by several financial institutions. Conservative estimates by the International Monetary Fund (IMF) show that the Brazilian economy is expanding by 7.1 percent in 2010 and may advance by 4.2 percent in the following year. The United States by comparison may expand by 3.3 percent in 2010, while the Euro Zone ought to see a more modest increase of one percent this year.
Secrets of their success
There are several factors in Brazil's favor. The rising economic links with China, demonstrated by the increase of trade to $36 billion in 2010, make the Brazilian market even more attractive to investors. Another advantage mentioned by investors comes from President Luiz Inácio Lula da Silva’s social policies.
According to research by Cetelem, in the last five years 30 million consumers entered the middle class. A July report by Brazil’s Institute of Applied Economic Research states that extreme poverty, defined as families with an income per capita below one quarter of the monthly minimum wage of BRL 510 (approx. €225), will be eliminated from the country by 2016.
These new consumers are demanding everything from mobile phone to new homes. The State Bank Caixa Econômica Federal registered an increase of 95 percent in the volume of real estate financing. Brazilian banks, which are strongly capitalized, estimate an increase of up to 25 percent in the volume of credit in Brazil in 2010.
Another important factor in the sustainable growth of Brazil is the projection of the rate of investment, which could reach 21.5 percent of GDP in the next four years, according to the estimate of the National Bank of Social and Economic Development (BNDES). Indeed, one of the main challenges Brazil faces is to expand the sources of funding for infrastructure work. Today, finances are concentrated in the BNDES. There are bottlenecks in important areas such as energy, airports, railways and roads – which have had little investment for the last three decades – along with sanitation, logistics and security.
BNDES statistics show investments in infrastructure of BRL 311 billion (€137billion) for the four-year period of 2010-2013. A similar survey in 2008 – before the credit crunch but also before Brazil was chosen to host the 2014 soccer World Cup – indicated investments of BRL 273 billion for the same period. The difference represents an increase of some €10 billion despite shortcomings in the regulatory framework in important areas such as railways, ports and sanitation.
President Luiz Inácio Lula da Silva ("Lula") reiterated the government’s commitment to Brazil’s preparation for the World Cup 2014. "I find it inappropriate for anybody to be concerned about the World Cup 2014," Lula said at a news conference. "The government has secured an investment of BRL 1.1 trillion ($624 billion) in the [Program to Accelerate Growth], and by 2014, it will have invested more in infrastructure than it has invested in the past 30 years."
Other senior ministers have also put forward ways to develop domestic sources of savings on a larger scale, such as the investment of corporate profits in Brazil, the increase of social welfare savings, the development of the capital market and the issuing of papers with longer terms. In mid-July, the Ministry of Finance announced regulatory changes to make long-term financing more attractive and thus stimulate investment in large infrastructure projects such as the hydroelectric dam of Belo Monte and Rio Madeira.
Measures such as this aim to overcome obstacles in growth opportunities for investors attracted by attractive Brazilian interest rates and the maturing Brazilian stock market BM & FBovespa. It is already one of the largest stock markets in the world and lists of some of the world’s largest companies, such as Santander Brasil and Banco do Brasil. In July, the BM & FBovespa announced an ambitious plan to attract 200 companies which are to be opened in the next five years, an increase of nearly 50 percent from the 450 companies currently listed.
"The equities industry has a great opportunity to capture the resources required for the country to host the world sports championships whilst enjoying sustainable growth," says Demosthenes Pinho Neto, vice- president of Anbima, the Brazilian Association of the Entities of Financial and Capital Markets. According to Anbima, the Brazilian financial sector is already the sixth largest in the world, with assets of nearly one trillion dollars and 10.1 million shareholders.
Effects on the insurance industry
This scenario creates a large market for the insurance industry. The twelve cities hosting the 2014 World Cup, for example, are insuring themselves for billions of dollars, covering everything from the conclusion of huge energy projects to the indemnity of tourists visiting the country during the games.
Despite the delay in works for the 2014 World Cup, the behind-the-scenes rush in the government is intense, as they strive to have everything ready within the deadline agreed with FIFA. The Sports Minister, Orlando Silva, repeats daily that one of the aims of the federal government at the moment is to invest in infrastructure.
There are more than 50 priority projects for the promotion of the World Cup 2014. The main investments are in football stadiums and logistics. There is BRL 5.5 billion available for 13 airports in the twelve cities. Official statistics project 600,000 visitors and three million Brazilians traveling in connection with the games.
Attracted by this growth scenario in a country with a relatively low natural catastrophe rate, foreign investment in the insurance industry has seen unprecedented growth. In 2009, despite the financial crisis, SUSEP – the Superintendence of Private Insurers, which regulates the sector – registered more than 50 operations of capital injection, exceeding BRL 15 billion. The net proceeds of companies grew by 14 percent, to BRL 8.6 billion, accord ing to a study by Siscorp consultancy.
Meeting the demand
In 2009, the insurance sector in Brazil registered sales of BRL 110 billion and with an average return on capital of 19 percent, according to Siscorp (see chart). Practically all segments show growth, starting with those involving financial risks for large projects, coveted by the insurers without banking ties, up to retirement plan products, which focus on insurance companies controlled by banks.
"Brazilian subsidiaries have gained prominence within the world’s organogram for submitting increasing results even during the crisis", says Roberto Westenberger, director of PricewaterhouseCoopers. Allianz is an example of the interest that Brazil has awakened.
Axel Theis, CEO of AGCS, agrees. "The World Cup is accelerating infrastructure investment in the country in a variety of ways," he recently said in an interview with Germany’s Frankfurter Allgemeine Zeitung. "By 2014, we are expecting premiums in South America of €150 – 200 million." This year, AGCS expects premiums of some €60 million.
A technical partner for development
The country shows the admittance of almost 100 reinsurers, which opened offices in Brazil in the past two years to the benefit of a market which has been growing at two-figure rates in the last decade, and foresees a 20 percent increase in 2010. "We are interested in 'pre-salt' oil businesses, in the construction of stadiums for the World Cup 2014, in hydroelectric power plants and also in highspeed trains," said Hans Pöttker, AGCS global head of engineering underwriting, when visiting the country in 2009.
Since 2009, when AGCS received a reinsurance license in Brazil, it has been organizing local operations and cooperating closely with the Allianz Brazil subsidiary. It already has a team of 17 experts in various areas, the main ones being engineering, liability, aviation, transport and financial lines. "This first year we structured operations with the creation of innovative products brought from the head office and adapted to the Brazilian reality," explains Angelo Colombo, head of AGCS Brazil unit. "We are ready to meet the great demand from local companies that are internationalizing, and also from multinationals that are expanding its operations in Brazil."
According to Enrico Cucchiani, member of the Board of Management at Allianz SE, Brazil was about to start advancing for a long time, but the frustrated attempts to do so had not yet translated into business opportunities. "Now things are different. We have a good platform in the country, which has been growing yearly at a rate of 20 %. This is impressive. In addition to this rate, Brazil has both natural and human resources. It is a great example to other countries and this is why we have given the local company opportunities to develop."