Brazilian Insurance Sector

Transcription

1 Equity Research Brazilian Insurance Sector Brazil Insurance, Full Line SectorNote 30 October 2013 Getting to know Life Insurance Investors have been asking us about life insurance growth and profitability Since BB Seguridade s (BBSE) IPO, we ve been receiving questions on Brazil s life insurance segment, mainly from investors impressed with its rapid growth and profitability. Prior to the IPO, life insurance was underrepresented on the Bovespa: only ~4% of premiums of Porto Seguro and SulAmerica (previously the only listed insurers) came from life insurance. But BBSE s listing gives investors exposure to a much broader array of products such as life, home, mortgages, pension and capitalization bonds. In this thematic report, we focus on life insurance and briefly run the ruler over some of the local industry s features and why it s so profitable. Eduardo Rosman Brazil Banco BTG Pactual S.A. eduardo.rosman@btgpactual.com Gustavo Lobo Brazil Banco BTG Pactual S.A. gustavo.lobo@btgpactual.com SH1 (BBSE s and Mapfre s life insurance-focused JV) has a ~25% ROE We flag the strong profitability of SH1, one of BBSE s main and most profitable subsidiaries. A JV between BBSE and Mapfre, SH1 leads the way in Brazilian life insurance, with ~20% market share. As of 2Q13, 40% of SH1 s earned premiums came from pure life insurance, and the company posted an impressive 25% ROE in 1H13. Ultimately, we believe the strong profitability of Brazil s life insurance business reflects the distribution network and how the product is sold. Distribution channel + product offering = main profitability drivers A quick look at the top 5 players share reveals a market dominated by large retail banks, who also control (no coincidence here) the market s main sales channels. And the fact that banks, via their insurance companies, sell to their own clients gives them major pricing power. Brazilian life insurance mainly features 1-year term life policies (vs. whole life and 10- to 30-year terms in the US), strongly reducing tail risks for insurers whilst mitigating mispricing risks and/or risks of estimating a mortality table. How long can the market keep growing? We don t see major changes in the ST The obvious questions are: (i) how fast can the life insurance segment grow in the years ahead, and (ii) can insurers maintain their strong profitability? We don t see any reason to expect significant changes in profitability in the near future. Life insurance is still hugely underpenetrated (there s plenty of room for everyone to grow) so competition should remain rational. But over time, a more mature market will eventually demand more sophisticated products, and product differentiation/ intelligence could become as (or even more) important as (than) distribution. But until strong competition materializes, there's still a lot of market opportunities out there. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 13 Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 30 October 2013 page 2 Back to basics: a bit more about life insurance Since BB Seguridade s (BBSE) IPO, we have been fielding a lot of questions about the life insurance segment in Brazil, mainly from investors impressed with its rapid growth and profitability. Before the IPO, life insurance was somewhat underrepresented in Brazil s stock market the two listed insurers, Porto Seguro and SulAmerica, have only ~4% of their total premiums in life. We ve been fielding a lot of questions about the life insurance segment in Brazil, mainly on its rapid growth and profitability With BBSE now listed, investors can gain exposure to a much broader array of products, such as life, home, mortgages, pension, capitalization bonds, etc. In this thematic report, we focus on life insurance and offer a brief analysis of some of the particulars of the industry in Brazil and why it is so profitable. Take, for example, the robust profitability of SH1, one of BBSE s most important and profitable subsidiaries. SH1, a JV between BBSE and Mapfre, is a market leader in the life insurance segment in Brazil, with a market share of ~20%. As of 2Q13, 40% of SH1 s earned premiums came from pure life insurance, and the company posted an impressive 25% ROE in 1H13. We believe the main reason for the high profitability of Brazil s life insurance business is the distribution network and the way the product is sold. Indeed, a quick look at the market share of the top 5 players reveals that the market is concentrated in the hands of the large retail banks, which by no coincidence also control the market s main sales channels. We believe the main reason for the high profitability is the distribution network and the way the product is sold Since the banks, through their insurance companies, are selling to their own clients, we believe they enjoy substantial pricing power. What s more, Brazil s market is basically comprised of 1-year term life policies (as opposed to whole life and 10- to 30-year terms in the US), which strongly reduces the tail risks for insurance companies, mitigating the risks of estimating a mortality table and/or mispricing. The obvious next questions are: (i) how fast can the life insurance segment grow in the years to come, and (ii) will insurers be able to sustain their currently high profitability? The obvious next questions are: (i) how fast can it grow in the years to come, and (ii) will insurers be able to sustain their currently high profitability? Putting this into numbers, Swiss Re estimates that the mortality protection gap (protection needed less protection in place) in Brazil is now at US$2.5tn (yes, trillion) the widest (by far) and second-fastest-growing gap in Latin America (CAGR of 15%, behind Argentina s 17%). This also bodes well for growth in pension plans, another major source of earnings for BBSE. We don t see any reason to expect significant changes in the segment s profitability in the near future. The life insurance market is still highly underpenetrated (there is a lot of room for everybody to grow), and competition should thus remain rational. However, in time, we believe that a more mature market will eventually demand more sophisticated products, and product differentiation/ intelligence could become as (or even more) important as (than) distribution. But until strong competition materializes, there's still a lot of market opportunities out there. We don t see any reason to expect significant changes in the segment s profitability in the near future

3 30 October 2013 page 3 Life insurance: a brief overview What do life insurers sell? In general, life insurers sell financial protection against adverse events in a person s life. Death protection products, for example, pay a fixed amount on the death of the policyholder. Living benefit products provide an income stream for retirement to the policyholder, hence covering the risk of living too long and the expenses involved in this eventuality. In general, life insurers sell financial protection against adverse events in a person s life Life insurers also sell savings-type products, which are considered insurance contracts because they either contain triggers tied to a person s life or have a specific duration (depending on specific regulations for each country). Endowments, for example, pay a fixed amount at a certain age of the policyholder, who has paid either single or regular premiums (described below). In contrast, pension plans are intended to stabilize income after retirement. Insurers sell a variety of products, ranging from pure protection to pure savings products. Life insurance is usually purchased with discretionary income Generally, life insurance is a non-compulsory product. Consequently, individuals buy life contracts with discretionary income (= gross income taxes necessities). In short, life insurance spending declines in slower economic periods or recessions and expands in times of economic growth. Life insurance is usually purchased with discretionary income The life insurance market is also correlated to changes in local regulations Individuals are often encouraged to buy insurance products by new fiscal incentives. The main instrument governments use to encourage the purchase of insurance contracts is the introduction of tax savings for certain products. Depending on whether a stimulus is desired for death protection, pension products, or savings-type products, the government can decide to introduce such incentives either temporarily or with no clear expiration. In other cases, some products might be made compulsory, which is sometimes the case for insurance-based pension products. The market is also correlated to changes in local regulations Understanding some of the best-known life products Table 1: Most common life insurance products Source: BTG Pactual Kind of Insurance Description Term insurance Protection against risk of death in a certain timeframe Whole life insurance Protection against risk of early death Critical illness insurance Protection against risk of critical illness Pension plans Savings investment for income after retirement Traditional annuities Savings investment for income after a certain date Variable annuities Savings investment with a minimum guarantee or return, linked to an index or unit of a fund Endowment policy Savings investment Index-linked investments Savings investment with return linked to an index The products insurers sell vary from pure protection to LT savings products, depending on the needs and objectives of the policyholder

4 30 October 2013 page 4 Below, we describe the most common insurance products, how they work, their most common attributes, and how they generate profits. Table 2: Understanding some of the best-known life products Type of Premium Single Premium Annual or regular premiums One-time payment at the beginning of a contract Payments at a constant or increasing rate, paid at regular intervals Type of return Source: BTG Pactual Traditional Linked Fixed With Profit No guaranteed return is set, and the policyholders fully participate in the profits or losses, as they bear all investments risks The total return is guaranteed, but the policyholder does not benefit from the insurer s excess profits. Therefore, all premiums and benefits are fixed at the beginning of the contract. The fact that all investment risks are borne by the insurer generally means that the guaranteed return is conservative A minimal return is guaranteed, and the policyholders benefit from excess profits, which are distributed to them in the form of socalled bonuses. The insurer sets aside excess profits with the aim of smoothing out returns over time Unit-linked products are linked to an underlying fund, which drives the product s returns Index-linked products are linked to an underlying index, which drives the product s returns How does a life insurer make money? Like most insurance products, life insurance relies on the concept of mutuality wherein a large group of people pool risks and take advantage of the law of large numbers. Actuaries at insurers are responsible for applying mathematical and statistical tools to construct probability tables for mortality and critical illnesses, and for calculating the expected returns on invested assets. This information is then used to price the products correctly, with the objective of making a margin over the costs the insurer expects to incur. Life insurance is not a purely spread-based business: results depend not only on the yield versus the guarantees, but also on the claims related to the insured events and the crediting rates (bonuses) for with-profit investments When the policyholder buys a contract, the insurer uses the money to invest in various asset classes. These investments generate a certain yield, which is used to pay policyholder claims, guarantees, and bonuses, constituting the liabilities of the insurer. Therefore, life insurance is not a purely spread-based business: in fact, results depend not only on the yield versus the guarantees, but also on the claims related to the insured events and the crediting rates (bonuses) for with-profit investments. Life insurance in Brazil Life and Accident Insurance products offered in Brazil today are sold to individuals and to companies. They are mostly limited to basic term life policies. Other more sophisticated products like whole life have very low penetration in the country. Term life and accident policies cover death and impairment. The market is limited to basic term life policies in Brazil

5 30 October 2013 page 5 Policies sold to individuals have usually a one-year term, renewals are usually automatic and insurers annually adjust rates. As such, the product has limited actuarial risk and distribution is largely dominated by banks. Policies offered to companies are used to cover their employees. This is a very competitive line of business and distribution is dominated by brokers. The life insurance market in Brazil has been growing rapidly, but there is still room for further growth before competition gets fiercer Brazil s life insurance market has been growing rapidly in recent years. Data from CNSeg, Brazil s insurance federation, shows that the market has expanded at a 10% CAGR 10-12, and it thinks this rate can be sustained until The industry has expanded at a 10% CAGR 10-12, and this rate can be sustained until 2016 Chart 1: Life insurance (individual + group) has been growing at ~10% p.a., and CNSeg thinks this rate can be maintained until 2016 (premiums issued, in R$bn) E 2014E 2015E 2016E Source: CNSeg and BTG Pactual estimates According to Swiss Re, the mortality protection gap (protection needed less protection in place) in Brazil is currently US$2.5tn the largest (by far) and the second-fastest-growing gap in Latin America (CAGR at 15%, behind Argentina s 17%). The calculation is based on the need to protect dependents in the case of death of the breadwinner, compared to the protection in place measured by net financial assets/savings and relevant life insurance (see table below). The mortality protection gap in Brazil is by far the largest in LatAm That Brazil has the largest gap in Latin America is mostly attributable to its large population; that this gap is one of the fastest-growing in the region means that, though income per worker has been expanding, this expansion has not been accompanied by a commensurate rise in protection. Indeed, the mortality gap per working person with dependents is currently at US$47,239, compared to US$15,301 in 2003.

6 30 October 2013 page 6 Table 3: Brazil has by far the largest mortality protection gap in Latin America, which likely means strong future growth in life insurance and pension plans Mortality Protection Gap (US$bn) CAGR Argentina 337 1, % Brazil 685 2, % Chile % Colombia % Mexico 1,090 1, % Peru % Puerto Rico % Venezuela % Total 3,106 7, % Source: Swiss Re The market is large and growing, and is highly profitable Brazil s life insurance industry seems to be more profitable than its counterpart in the US. Naturally, comparing insurance markets from different countries can be a challenge, since products may not be exactly comparable, but we believe ROEs are a good indicator of profitability for insurers, regardless of the market. BBSE s SH1 ROE in 1H13 was 26%, compared to an average of 14% for the Life & Health (L&H) segment in the US, according to Swiss Re. Even adjusting for different costs of capital, the difference is considerable. Brazil s life insurance industry seems to be more profitable than its counterpart in the US When looking at loss ratios (or benefits ratios, in the US), the difference is even greater: SH1 s life segment reported a 44% loss ratio in 2Q13, compared to an average of 53% for group life in Brazil and 86% for L&H in the US. Chart 2: Loss ratios for life insurance is lower in Brazil (data for 1H13) Chart 3: leading to higher ROEs (2Q13) 90% 80% 70% 84% 30.0% 25.0% 26.2% 60% 50% 53% 44% 20.0% 15.0% 13.9% 40% 30% 10.0% 20% 5.0% 10% 0% L&H in US - Benefits ratio Group Life in Brazil - Industry Loss Ratio SH1 - Life Loss Ratio 0.0% L&H in US L&H in US SH1 SH1 Source: Swiss Re, SUSEP, Company reports and BTG Pactual estimates Source: Swiss Re and Company reports

7 30 October 2013 page 7 We see two main reasons for the difference in profitability: distribution channels and products offered. 1) Retail banks control the distribution channel, which gives them considerable pricing power Regarding distribution, the life insurance market is controlled by large retail banks. Measured by YTD premiums in the group life segment (the largest of the life segments, excluding VGBL, and larger than credit life prestamista ), insurance companies linked to large retail banks control roughly two thirds of the market. Retail banks control the distribution channel, which gives them considerable pricing power Distribution is key because, since the bank is offering the product inside its branch, it enjoys substantial pricing power: the main goal is to increase penetration within its client base, rather than to compete with other companies. Accordingly, it essentially has a captive market. Chart 4: Insurance companies linked to large retail banks control the life insurance segment (8M13 market share in group life segment) 34% 19% 14% 8% 10% 15% SH1 Bradesco Group Itau + Porto Seguro Zurich Santander Caixa Others Source: SUSEP and BTG Pactual estimates The effect of this pricing power can be seen by comparing the price of similar products in Brazil and in the US. We obtained online quotes from a Brazilian insurer and an American insurer for similar products: term life policies for individuals aged 30, 45 and 60 years, with monthly payments and a coverage amount of R$100,000 and R$1mn for the Brazilian company and US$100,000 and US$1mn for the American one. For the American insurer, we created two client profiles, both male: (i) (ii) a non-smoker with Excellent health (which ought to be the cheapest profile) looking for a 10-year term policy, and a smoker with Fair health (which ought to be a more expensive profile) looking for a 30-year term policy. The results are included in the table below.

8 30 October 2013 page 8 Table 4: Comparing prices of Brazilian and American insurance policies Age Coverage Amount (Local currency) Monthly Payment (Lcl crncy) Brazilian Insurer (1-year term) pmt / cvrg amount (bps) Foreign Insurer (Smoker / 30-year term) Monthly Payment (Lcl crncy) pmt / cvrg amount (bps) Source: Bradesco Seguros, MetLife and BTG Pactual estimates, *20-year term policy instead of 30, which is not available for a 60-year-old Foreign Insurer (Non-Smoker / 10-year term) Monthly Payment (Lcl crncy) pmt / cvrg amount (bps) , , * 100, ,000, ,000, , * 1,000,000 2, , Since 10 years is the minimum term for the American company s policy (vis-à-vis one year for the Brazilian one), we would expect it to be relatively more expensive (to the coverage amount), due to the greater tail risks (more on that below). However, that is not the case. One could argue that, since Brazil is a developing country and has lower life expectancy, life insurance should be more expensive. Indeed, Brazil s life expectancy is less than that of the US (73 years vs. 79 years, according to the World Bank), but when looking at death likelihood according to age, the difference is not that large, especially for middle-aged individuals. Table 5: Differences in death likelihood in Brazil and the US don t explain the difference in prices for life insurance Age US - Death Rate Brazil - Death Likelihood Between 25 and % 0.28% Between 35 and % 0.40% Between 45 and % 0.76% Between 55 and % 1.51% Source: CDC, IBGE and BTG Pactual estimates 2) Products offered basically 1-year term life also reduce tail risks and give the companies flexibility With respect to the products offered, the main difference is that in Brazil, the market essentially consists of 1-year term life policies, as opposed to whole life and 10- to 30-year terms in the US. Aside from age restrictions (there are very few products for those older than 65), insurance companies in Brazil can cancel a policy (or refuse to renew it) if they realize that the client has become riskier or simply if they made a mistake in defining the correct mortality table. Products offered basically 1-year term life also reduce tail risks and give the companies flexibility The product profile therefore sharply reduces the tail risks of Brazilian insurance companies. For their long-term products, companies may take years to realize that a certain product was mispriced; and even if they realize it, they may already have engaged with a client for several years. But with a 1-year term, the company is always tracking the profitability of its contracts and can make adjustments every year.

9 30 October 2013 page 9 This combination of a strong distribution channel and a more favorable product explains the higher profitability for the Brazilian life segment, in our view. BB Seguridade is our top pick in the insurance sector Our top pick in the insurance sector is BBSE, which operates in less competitive segments, boasts solid growth prospects, and is exposed to the (in our view, excellent) insurance brokerage business (besides being by far the most liquid stock in the industry). Very profitable, with great growth prospects: after a credit boom, an insurance boom Most of BB Seguridade s business comes from life insurance and retirement/pension plans, but the % of Brazil s GDP represented by life insurance premiums (1.7%) is low versus more developed countries such as Taiwan (13.9%), Japan (8.8%), the UK (8.7%), France (6.2%) and the US (3.6%), suggesting that Brazil s insurance market has plenty of room to grow. Premiums for all insurance products represented 3.2% of GDP in 2012 (5.1% including health plans). Comparisons with developed markets are naturally flawed, since different GDP per capita levels mean varying abilities to purchase insurance. Welfare programs can also distort apples-to-apples comparisons: countries with stronger social welfare programs and/or social security/retirement plans typically have a lower penetration of insurance products, while the opposite is true in countries with a highly sophisticated private sector and where, for instance, government spending on public pensions is often low. After credit boom, insurance boom The insurance market has expanded at a ~15% CAGR since 2002 (with a structural growth story reminiscent of banks) on a winning combination of increased penetration of financial services and improving social and financial conditions. We believe sustained premium growth of x nominal GDP growth is achievable, allowing insurance penetration to catch up to developed-market benchmarks (8-10% in advanced economies vs. only 3-4% in Brazil). Such growth would support Munich Re s statement in a recent report that Brazil is set to become the 8 th largest global insurance market by 2020 (in 2010, Brazil was 15 th globally). Nevertheless, current penetration in Brazil is far below that of other developed or emerging markets. Brazil should become the 8th largest global insurance market by 2020

10 30 October 2013 page 10 Table 6: Global insurance market ranking according to total primary insurance premium volume (in bn of Euros*) Rank 2000 Rank 2010 Rank United States United States United States 1,263 2 Japan Japan Japan UK UK China Germany France UK France Germany France Italy 68 6 China Germany South Korea 63 7 Italy South Korea Canada 47 8 South Korea 88 8 Brazil Australia 42 9 Canada 79 9 India Spain Netherlands Italy Netherlands Australia Canada Switzerland Spain Australia South Africa Taiwan Taiwan Taiwan India Netherlands China Brazil Russia 82 Source: Munich Re Economic Research *Historical figures were influenced by exchange rate effects In addition, according to Munich Re, growth in the life insurance and P&C segments will continue to be significantly more dynamic, which bodes well for BB Seguridade. Table 7: Global ranking of regions according to real growth in primary insurance premiums by 2020 (in %) Rank P&C real CAGR* ( ) Rank Life real CAGR* ( ) 1 Emerging Asia Emerging Asia Eastern Europe Latin America Sub-Saharan Africa Eastern Europe Latin America MENA MENA Sub-Saharan Africa Mature Asia/Pacific Mature Asia / Pacific North America North America Western Europe Western Europe 1.8 Source: Munich Re Economic Research *Real CAGR = real (inflation-adjusted) compound average annual growth rate

11 30 October 2013 page 11 Largest distribution network in Brazil: partnership with BB plus access to 15k brokers and specialty channels BB has a footprint in 94% of Brazil s municipalities and boasts 5.4k branches, ~14k other locations for its own network, 44k ATMs, 20k shared self-service terminals, and 17.9k related locations offering bank services, including Banco Postal. Largest distribution network in Brazil Table 8: BB Seguridade banking channels BB Network Call Center Internet, tablet and cellphone Largest banking franchise, present in 5,433 cities Call center selling products and assisting clients Clients can buy any insurance product over the website 58k POS Source: Company reports 1.5 million calls per month 76.1 million daily visitors As already stated, banks are key distribution channels for insurance, and BB Corretora s exclusive rights to sell its products via Banco do Brasil s extensive distribution network ( bancassurance model) is one of the company s main strengths. With the largest loan and deposit portfolio, Banco do Brasil can create cross-selling opportunities, increase the number of products that BB can offer its client base, and further expand its service network. Accordingly, BB Seguridade s success is largely based on the quality of its products and its sales exclusivity agreement with Banco do Brasil. This model, known as "bancassurance," comprises a partnership or relationship between a bank and an insurance company whereby the bank acts as the insurance company s distributor. BB Seguridade s association with Banco do Brasil enhances the insurance company s brand perception. The bank thus lends its brand awareness to its insurance arm, giving BB Seguridade an advantage in this income group and exposing it to Brazil s rapid social and economic transformation. BB Seguridade s association with BB enhances the insurance company s brand perception In addition to this vast bancassurance network, BB Seguridade also sells insurance (mainly P&C and vehicle insurance) via a network of +15k brokers across Brazil, enabling it to grow its presence in products requiring more specialization and/or where brokers and retailers (off-branch) are the dominant distribution platforms.

12 30 October 2013 page 12 Table 9: BB Seguridade non-banking channels External Brokers (e.g Mapfre brokers) Other Channels Mapfre brokers who sell products of "SH1" and "SH2" subsidiaries Direct sales to individuals through partnerships with other stores, cooperatives and consortia Source: Company reports 15,000 brokers 147 Partnerships and dominant presence in highly profitable business (+30% ROEs) BB Seguridade mainly operates in life, savings bonds and retirement/pension products. With the added presence of BB Corretora, this makes it a unique vehicle to gain exposure to the best and most profitable insurance segments. BB Seguridade mainly operates in life insurance, savings bonds, and retirement/pension products Chart 5: Pension plan market share* (2012) Chart 6: Life insurance market share* (2012) Chart 7: Saving Bonds Market Share* (2012) Zurich; 4,4% Caixa Economica; 5,5% Itau; 25,3% Others; 9,2% Bradesco; 29,6% BB Seguridade; 26,0% Source: SUSEP and company reports. *Market share calculated using total collections Itau; 12,7% Bradesco; 18,0% Icatu; 4,6% Zurich; 11,6% Others; 33,6% BB Seguridade; 19,5% Source: SUSEP and company reports. *Market share calculated using insurance premiums Others; 25,0% Caixa Econômica; 7,4% SulAmérica; 9,0% Itaú; 12,2% Brasil Cap; 23,3% Bradesco; 23,1% Source: SUSEP and Company Reports.*Market Share calculated using total collections We believe BB Seguridade operates a true bancassurance model and a model, unlike any other listed company in Brazil, featuring its own insurance broker. Thanks to this business model, BB Seguridade posted more than 30% ROE in We believe BB Seguridade operates a true bancassurance model Chart 8: BB Seguridade adjusted net income (R$mn) and ROE Chart 9: ROE of BB Seguridade subsidiaries (2012) 4,000 3, % 100% 89% 3,200 2, % 80% 2,400 1, , % 2, % 39.1% 40.9% E 2014E 2015E Adj. Net Income ROE 39.0% 36.0% 33.0% 30.0% 60% 40% 20% 0% 48% 22% 10% SH1 SH2 BRASILPREV BRASILCAP Source: Company reports Source: Company reports

13 30 October 2013 page 13 Required Disclosures This report has been prepared by Banco BTG Pactual S.A. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. BTG Pactual Rating Buy Neutral Sell Definition Coverage *1 IB Services *2 Expected total return 10% above the company s sector average. Expected total return between +10% and -10% the company s sector average. Expected total return 10% below the company s sector average. 51% 51% 45% 44% 4% 11% 1: Percentage of companies under coverage globally within the 12-month rating category. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Absolute return requirements Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 50% must be rated Buy Analyst Certification Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be; (ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein. Research analysts contributing to this report who are employed by a non-us Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A. and/or its affiliates. Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature list. Statement of Risk Latin American banks/financial companies can be affected by changes in both global and local economic conditions and are also subject to political, interest rate, and foreign exchange risks. Our target prices are highly dependent on the level of country risk Company Disclosures Company Name Reuters 12-mo rating Price Price date BB Seguridade 1, 9, 18, 19, 20, 22 BBSE3.SA Buy R$ Brasil Insurance 1, 2, 4, 6, 10, 18, 19 N.A. Buy R$ Porto Seguro 1, 2, 4, 6, 10, 18, 19 N.A. Neutral R$ SulAmerica 1, 2, 4, 6, 10, 18, 19 SULA11.SA Neutral R$ Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. 4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided. 6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity. 9. Banco BTG Pactual S.A. has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates or subsidiaries within the past 12 months. 10. Banco BTG Pactual S.A., its affiliates or subsidiaries makes a market in the securities of this company. 18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities 19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months. 20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published. 22. Banco BTG Pactual S.A. or its affiliates or subsidiaries do not expect to receive or intends to seek compensation for investment banking services from the companies within the next 3 months.

14 30 October 2013 page 14 BB Seguridade 30.0 Stock Price (R$) Price Target (R$) Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-13 Buy Neutral Sell No Rating Source: BTG Pactual and Economatica. Prices as of 29 October 2013 Brasil Insurance 30.0 Stock Price (R$) Price Target (R$) Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-13 Buy Neutral Sell No Rating Source: BTG Pactual and Economatica. Prices as of 29 October 2013 Porto Seguro 40.0 Stock Price (R$) Price Target (R$) Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-13 Buy Neutral Sell No Rating Source: BTG Pactual and Economatica. Prices as of 29 October 2013

15 30 October 2013 page 15 SulAmerica 30.0 Stock Price (R$) Price Target (R$) Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul-13 Buy Neutral Sell No Rating Source: BTG Pactual and Economatica. Prices as of 29 October 2013

16 30 October 2013 page 16 Global Disclaimer This report has been prepared by Banco BTG Pactual S.A. ( BTG Pactual S.A. ), a Brazilian regulated bank. BTG Pactual US Capital LLC ( BTG Pactual US, ), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A.. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. 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