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Bloomberg.com: Exclusive: "Reinsurers Rush to Brazil as Premiums Climb by 40% (Update2)

By Telma Marotto

Reinsurers Rush to Brazil as Premiums Climb by 40% (Update2)

By Telma Marotto

July 11 (Bloomberg) -- Swiss Reinsurance Co. and Munich Re, the world's two largest reinsurance companies, are leading a rush to Brazil to capitalize on the biggest deregulation of a market since China opened up more than six years ago.

At least 13 companies have been authorized to operate since the government ended its 69-year monopoly in April, said Armando Vergilio dos Santos Junior, head of Brazil's insurance regulator, who estimates the number will reach 40 by December. He expects reinsurance premiums to rise 40 percent to $3.5 billion this year and then double to $7 billion by 2011.

Government investment in infrastructure, a commodities boom and the expansion of companies such as oil producer Petroleo Brasileiro SA and metals miner Cia. Vale do Rio Doce are driving demand. Reinsurers offer coverage to primary insurers, allowing them to diversify risk and sell more policies.

``Being in a country that's growing and hasn't frequently been affected by natural disasters is the perfect combination,'' said Henrique Abreu, head of the Brazilian unit of Swiss Re, the world's largest reinsurer. The potential of the Brazilian market ``is without a doubt the most important good news'' since the development of the Chinese and Indian markets, he said.

China began opening its reinsurance market to overseas competitors after joining the World Trade Organization in 2001, and India dismantled the monopoly of state-owned Life Insurance Corp. of India and its non-life counterparts in 2000.

`Growth Opportunity'

Brazil's economy will expand 4.7 percent this year, compared with 1.4 percent in the U.S., according to a survey of analysts by Bloomberg. The U.S. reinsurance market, which generates about $63 billion of annual premiums, might shrink because of price competition, said Sean Mooney, chief economist at Guy Carpenter & Co., the reinsurance unit of New York-based broker Marsh & McLennan Cos.

Brazil, which accounts for 40 percent of Latin America's insurance premiums, according to Moody's Investors Service, is ``definitely providing growth opportunity for the international reinsurers,'' Mooney said.

Swiss Re, which counts the U.S. as its largest market, aims to be the lead reinsurer in Brazil within five years, earning 10 percent of the country's premiums, Abreu said. The Zurich-based company, which yesterday appointed Stefan Lippe deputy chief executive officer, is entering new markets to cushion against falling North American rates following lower-than-expected hurricane losses in 2006 and 2007.

Munich Re

Munich Re, the No. 2 reinsurer, also is expanding in Brazil. ``We are very optimistic that we can grow our business in the double-digit range over the next few years,'' said Georg Daschner, management board member at Munich Re.

Bermuda's XL Capital Ltd., France's Scor SE, Spain's Mapfre SA and Lloyd's of London are also authorized to offer services, along with Brazilian providers J. Malucelli Resseguradora SA and state-controlled IRB Brasil Resseguros SA. Bermuda-based PartnerRe Ltd. announced today it received approval from the regulator to offer reinsurance.

The IRB, created in 1939, had a monopoly until mid-April. It will probably still control about 90 percent of the market at the end of this year, said Rodolfo Nobrega, an analyst at Moody's in Sao Paulo. IRB's share may fall to about 60 percent to 70 percent during the next two to three years, Nobrega said.

President Luiz Inacio Lula da Silva's plan to invest 504 billion reais ($313.9 billion) through 2010 in roads, ports and energy is increasing demand for insurance in infrastructure projects. Lula also plans to boost loans to farmers this year to 78 billion reais.

Coffee, Minerals

Reinsurers are also attracted by exports, which reached a record $19.3 billion in May, boosted by higher prices of coffee, soy and minerals. Exporters require coverage to protect them against buyer defaults, and insurers typically pass on about 90 percent of the risk to reinsurers, Nobrega said.

The Brazilian opening provides a ``more immediate opportunity'' than China's did, said Michael O'Halleran, executive chairman and founder of the reinsurance business at Aon Corp., the world's largest insurance broker.

The closed market had restricted the size of the industry, Santos Junior said. Insurance represents about 3.5 percent of the country's gross domestic product, while it's closer to 6 percent in countries such as South Korea and Chile, he said.

``The biggest winners of such change are the final clients, mainly the big companies,'' Nobrega said in a phone interview.

With more competition, state-controlled Petrobras may be able to purchase coverage for less, said Luiz Octavio Parente de Mello, insurance manager at the oil company. ``We will also have access to new products faster,'' he said.

Wilson Sons Ltd., the Rio de Janeiro-based marine services company, expects premiums to decline for vessels that support oil platforms, said Arnaldo Calbucci, the director in charge of vessels and shipyard.

Choosing Carefully

Companies will have to be more careful in choosing their coverage, Petrobras's Parente de Mello said. Smaller customers may face rising costs as the state was effectively subsidizing their risk, he said.

``It's not going to be only good news,'' said Marcelo Homburguer, a vice president for Chicago-based Aon in Brazil. ``Companies will have to prepare themselves to get the fair price and the appropriate product for their business. Some companies were relying just too much on IRB.''

To contact the reporters on this story: Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net
Last Updated: July 11, 2008 12:05 EDT