Table of Contents. Insurance Ratings Methodology 40. Insurance Ratings Definitions. 43. Contact List 45. Top 20 Brazilian Insurance Companies

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3 Table of Contents Introduction 5 Study of Brazil's Top 20 Insurance Companies 6 Brazilian Insurance Industry Expected to Capitalize on Growth Opportunities 8 What to expect from the opening of the Brazilian reinsurance market? 14 Top 20 Brazilian Companies Ranking Criteria 16 Summaries Bradesco Seguros S.A. 18 Sul América Seguros S.A. 19 Itaú Seguros S.A. 21 Unibanco AIG Seguros S.A. 22 Porto Seguro Cia de Seguros Gerais 23 Companhia de Seguros Aliança do Brasil 24 Mapfre Vera Cruz Seguradora S.A. 25 Tokio Marine Brasil Seguradora S.A. 26 Caixa Seguradora S.A. 27 AGF Brasil Seguros S.A. 28 Santander Seguros S.A. 29 HSBC Seguros S.A. 30 Marítima Seguros S.A. 31 HDI Seguros 32 Liberty Seguros S.A. 33 Chubb Seguros S.A. 34 ACE Seguradora S.A. 35 Metropolitan Life Seguros e Previdência Privada S.A. 36 Icatu Hartford Seguros S.A. 37 IRB Brasil Resseguros S.A. 38 Insurance Ratings Methodology 40 Insurance Ratings Definitions. 43 Contact List 45 Top 20 Brazilian Insurance Companies

4 Published by Standard & Poor's, a Division of The McGraw-Hill Companies, Inc. Executive offices: 1221 Avenue of the Americas, New York, NY Editorial offices: 55 Water Street, New York, NY Subscriber services: (1) Copyright 2007 by The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Information has been obtained by Standard & Poor's from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Standard & Poor's or others, Standard & Poor's does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Standard & Poor's uses billing and contact data collected from subscribers for billing and order fulfillment purposes, and occasionally to inform subscribers about products or services from Standard & Poor's, our parent, The McGraw-Hill Companies, and reputable third parties that may be of interest to them. All subscriber billing and contact data collected is stored in a secure database in the U.S. and access is limited to authorized persons. If you would prefer not to have your information used as outlined in this notice, if you wish to review your information for accuracy, or for more information on our privacy practices, please call us at (1) or write us at: privacy@standardandpoors.com. For more information about The McGraw-Hill Companies Privacy Policy please visit Analytic services provided by Standard & Poor's Ratings Services ("Ratings Services") are the result of separate activities designed to preserve the independence and objectivity of ratings opinions. Credit ratings issued by Ratings Services are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Accordingly, any user of credit ratings issued by Ratings Services should not rely on any such ratings or other opinion issued by Ratings Services in making any investment decision. Ratings are based on information received by Ratings Services. Other divisions of Standard & Poor's may have information that is not available to Ratings Services. Standard & Poor's has established policies and procedures to maintain the confidentiality of non-public information received during the ratings process. Ratings Services receives compensation for its ratings. Such compensation is normally paid either by the issuers of such securities or third parties participating in marketing the securities. While Standard & Poor's reserves the right to disseminate the rating, it receives no payment for doing so, except for subscriptions to its publications.

5 Introduction Welcome to Standard & Poor's Ratings Services' first publication of Brazil's Top 20 Insurance Companies. We see 2007 as a turning point for the insurance industry in Brazil, as it marks the transition to an open reinsurance environment and to stronger, more prudent solvency rules. Under the new environment for the reinsurance business, we expect new investments, new products, more competition, and further consolidation in the insurance market--all leading to an increase in the insurance business in Brazil. Such great opportunities will not come without significant challenges, such as the need for higher financial transparency by local insurers, development of relationships with reinsurers, and higher capitalization. At the same time, the insurance industry is striving to keep pace with the opening of the Brazilian economy and the consequent developments that are taking place in other segments such as industrial companies and financial institutions. This should translate into increased participation of insurance premiums in the Brazilian GDP. Companies are also adjusting to operate in an environment of declining interest rates. Brazilian insurance companies have been improving underwriting practices and loss management, while searching for cost efficiency. These efforts will be important for the achievement of sustainable profitability that should help build capital. We take pride in our reputation as the world's leading credit rating service, with a global network of 20 countries and more than 140 years of experience providing independent ratings services to the global financial economy. With the opening of the Brazil office in 1998, our local business grew significantly, indicating that ratings activity became an integral decision-making tool for investors. We are confident that this publication will be a good source of information for those who are interested in the present and future of the insurance industry in Brazil. Top 20 Brazilian Insurance Companies

6 Study of Brazil's Top 20 Insurance Companies Brazil's Top 20 Insurance Companies includes an analysis of the insurance industry risk with our views on the characteristics of the industry, recent developments, and trends for the sector. It considers the positive evolution of the regulatory framework and highlights the influence of sovereign risk, if for nothing else than the high proportion of government securities backing reserves. The study also offers our view of the opening of the reinsurance market and what changes we expect to result from this less-protected environment. We also provide comments on the credit profiles on the 20 largest insurance groups by premiums written in 2006 (according to SUSEP - Superintendência de Seguros Privados), with a summary analysis of the three insurers we currently rate and short commentaries on the credit profiles of the remaining 17 nonrated insurers. We also include an analysis of the Brazilian government-owned reinsurer IRB-Brasil Resseguro S.A. The 20 largest Insurance groups represent an important 91% of the entire system's premiums in Looking at the top 20 insurance groups, we explore their business profiles by analyzing their competitive position, diversification, and financial flexibility, which includes our view of potential parent support. In terms of financial profile, we evaluated their operating performance, investments, liquidity, reinsurance, and capitalization. The maintenance of high profitability is important to help build stronger capital, and crucial to cover the risks associated with the insurance operation. The quality of the investment portfolio should provide liquidity and resources for the insurers to pay down their obligations--mainly claims. Reinsurance is becoming more important as the property and casualty business gains weight in the industry, large risks increase their share in the industry, and the local economy grows and becomes more sophisticated. The business and financial profiles of the selected insurers were compared to the industry average for the segments in which they operate and measured into five categories: well above average, above average, average, below average, and well below average. These categories are used for comparison of insurers inside Brazil only; they do not apply for global comparisons. The result of this exercise can be seen in our scatter diagram on page 7 for a better comparison of the top 20 insurance groups. (1) Business Profile Business profile evaluates the consolidated market position of the insurance companies in the industry and in the insurers' major segments, diversification, and financial flexibility. The insurers seen to have a business profile of well above average and above average usually show a strong and sustainable market position, as well as regional and segment diversification. They also benefit from a distinguished distribution and financial flexibility deriving from the position as strategic subsidiaries of strong international insurer groups or important product lines for strong local financial groups. These features have allowed them to maintain a distinct position in achieving more stable premiums and managing the impact of economic changes in the behavior of a specific segment. As a consequence, we expect them to show good results that will help them achieve a stronger capital position. We expect monoline insurers to have a distinct market position with strong product and distribution capacities to overcome the concentration risk and to show well above average and above average business profile. Average and below average business profiles were granted to companies that have a small share in most of the insurance segments and in the insurance industry with very low diversification. Even if the company benefits in terms of financial flexibility for being a strategic subsidiary of a foreign group, we expect it to benefit from the knowledge and experience of the group to present a strong and increasing market position to have well above average and above average business profiles. Competition is very intense and we expect the companies' strong business profile to translate to good business origination, which is important for the generation of strong profitability and capital. (2) Financial Profile The insurance companies with well above average and above average financial profiles show strong profitability with good underwriting results, adequate investment portfolios to their risks, and strong liquidity of investments to support their claims. They are also expected to show a strong capitalization with excess capital to support their underlying risks, including underwriting, asset, credit, and reserve, and to show strong reinsurance relationships to support their expansion in low-retention policies. The insurers with average had below average financial profiles in general have lower operating performance and underwriting results, or capitalization. Operating Performance Most of the Brazilian insurance companies have maintained good profitability. Nevertheless, this profitability is helped by the strong financial results generated mostly by their investment in fixed-income securities. In 2006, the Brazilian insurance and pension industry reported ROA of 5.2% compared to 4% in 2003; however, the industry only showed positive underwriting results in Profitability should continue to be a positive for the industry and we expect insurers to maintain strong underwriting results through active loss and underwriting management, and attention to efficiency. We expect financial results to decline in light of the drop in interest rates. Investment and Liquidity Liquidity and investments in the insurance industry have been good, but still rely on government securities. Government bonds have been the industry's major investment instrument (more than 80%) given their strong liquidity and lower risk. Equity investments represent a low 8% of the total and even with the reduction in interest rates are not expected to increase significantly. We expect investments to cover more than 100% of the reserves and to be maintained in liquid instruments with good risk profiles. 6 Top 20 Brazilian Insurance Companies

7 Capitalization We expect the new Solvency rules established by the regulator to reinforce the industry's capitalization. Although the industry is not undercapitalized by the current solvency requirement, we expect some insurers to reinforce their capital to support their underlying risks under new solvency rules and remain competitive in the industry. We expect the stricter capital rules to bring changes in the industry, with additional consolidation and higher use of reinsurance. Reinsurance Until now, IRB has enjoyed the monopoly of the reinsurance industry in Brazil. However, with the opening of the market, insurance companies should look into establishing strong reinsurance contracts and diversifying their reinsurer relationships to present a competitive position in the industry and sustain a strong operation. Scatter Chart The following chart shows the relative business and financial profiles of the top 20 insurance groups covered in this survey. The business and financial profiles were determined in relation to their local peers and the insurance industry average. Top 20 Brazilian Insurance Companies

8 Brazilian Insurance Industry Expected to Capitalize On Growth Opportunities Primary Credit Analyst: Tamara Berenholc, Sao Paulo, (55) ; Secondary analyst: Milena Zaniboni, São Paulo (55) , The Brazilian insurance industry has significant potential for growth. Standard & Poor's Ratings Services expects the industry to take advantage of the changes in the market, including the expected opening of the reinsurance industry and improved regulation in line with international standards. Although it only represented 2.6% of the Brazilian GDP in 2006, we expect the insurance industry to double its size in the medium-to-long term. We expect low use of insurance and the improved economic conditions with higher prospects for income per capita to enhance demand for protection products, boosting the insurance market. Industry concentration is high and should remain that way, driven by the competitive environment, lower interest rate, and stricter regulatory rules for solvency. We expect financial conglomerates' participation in the insurance markets to remain strong. Foreign insurers will also become increasingly important players, given their interest in tapping a large potential market. Market Overview: Good Outlook For Growth There have been good growth rates in the insurance industry's premiums during recent years, with the Brazilian insurance sector correlating to the overall economic cycle and growing at multiples of 5x-6x the annual GDP growth in the past decade. However, this still seems to be well below the insurance market's potential. The Brazilian insurance industry represented a low 2.6% of the Brazilian GDP in 2006, which is below that of other countries. Among the main factors contributing to low insurance dissemination in Brazil are the relatively low income per capita, which limits the consumption of insurance products; poor income distribution; and the still-closed reinsurance market. The industry's improved operating performance is largely a result of a better loss management, stricter underwriting practices, and greater efficiency, as Brazilian insurers have to adjust to lower interest rates and financial results. In 2006, the Brazilian insurance and pension industry reported a net income of Brazilian reais (R$) 8.6 billion and positive underwriting results. The asset quality and liquidity of insurers' investment portfolios remain satisfactory, and the companies' risk management is adequate. At year-end 2006, fixed-income investments including government securities represented 92% of invested assets, with stocks accounting for only 8%. Brazilian insurers' capitalization remains adequate as per the existing solvency rules; however, the move toward a new solvency model with capital requirements for underwriting, credit, market, legal, and operational risks will require additional capital for the industry. Such a model should also lead to changes in the marketplace, including consolidation, higher reinsurance penetration, and changes in some players' business mix. The Brazilian insurance industry is characterized by the following positive credit factors: Long-term growth prospects; Limited exposure to catastrophic risk; Conservative investment policy; Improved underwriting discipline; and Changes in regulatory rules in line with international standards. Source: Fenaseg: Federação Nacional de Empresas de Seguros Privados e de Capitalização Improvement in Brazilian income per capita and income distribution depends on deep changes in the country's social structure, implementation of major reforms at all levels, and constant and higher economic growth. Brazil's diverse economic structure compares well with that of its peers, but the economy has a track record of low growth of between 3% and 4%. Brazil's economic structure and growth prospects are also constrained by income inequality and poverty. Almost 50% of the nation's income is concentrated in 10% of the population, and more than 20% of the population lives below the poverty line. Negative credit factors in the industry include: Small portion of GDP as compared to other countries; Low use of insurance products; Strong competition; and Need for additional capital to cope with new solvency rules and future growth. 8 Top 20 Brazilian Insurance Companies

9 Brazil Economic Indicators --Year ended Dec (%, unless otherwise indicated) GDP per capita (US$) 5,538 4,674 3,860 2,664 2,631 2, ,220 4,869 5,050 Real GDP (% change) (0.2) Unemployment rate Interest rate (year-end Selic rate) CPI, average annual rate (% change) N.A. N.A. N.A. Domestic credit to private sector and NFPEs (% change) Source: Full Analysis of Federal Republic of Brazil by Standard & Poor's Interest Rates Although insurance companies have improved their underwriting results, the Brazilian insurance market is sensitive to interest-rate trends. Brazilian insurers' investment portfolio have been concentrated in fixed-income and government securities. These represented 92% of the investment portfolio in 2006, with low exposure to the equity markets of 8%. While we expect a smooth interest rate reduction, it will generate lower investment yields in the market and lead to a move toward better loss/underwriting management and search for efficiency. Insurance risk management is good, and we do not expect a significant change in the companies' risk profiles to compensate for lower yields. Stock Markets And Real Estate Equity investments represent only 8% of the investment portfolio of the insurers' reserves; therefore, the volatility of share prices has not affected insurers' results significantly. The reduction in interest rates and the strong liquidity in the market lead to an increased attraction to the Brazilian stock market. From , the Brazilian Stock Index (Ibovespa) gained more than 80%. We do not expect the insurance industry's investment in the equity market to increase substantially given its higher volatility and the Brazilian insurers' conservative asset and liability management. Due to its inferior liquidity, the real estate sector continues to be underdeveloped and unattractive as an investment alternative to the insurance industry. Even though there has been an increase in the mortgage industry in recent years with some benefits from lower interest rates, we do not expect insurers to be highly exposed to the real estate market in Brazil. Industry Risk Brazilian market dynamics The Brazilian insurance industry's total premium volume reached R$59.2 billion ($25.2 billion, at an exchange rate of R$2.92 per $1) at year-end 2006, having grown by an average of 15% per year in the past 10 years. Nevertheless, this growth pattern was not enough to produce a significant increase in the industry's participation in the GDP, which remains below that of more developed countries. It reached 2.6% of GDP in 2006, compared to 6% in Spain, 8% in Germany and the U.S., and 13% in the U.K. Excluding the commercialization of Vida Garantidor de Benefícios Livres (VGBL; a pension-plan product with life coverage for death and disability), which has been the major driver for growth in the industry, the insurance market participation has been stable at 2% of GDP. Source: Fenaseg: Federação Nacional de Empresas de Seguros Privados e de Capitalização Source: Brazilian Stock Exchange Top 20 Brazilian Insurance Companies

10 The Brazilian insurance market is only the 20th largest in the world in total premiums as of 2005 and represents a small 1% of total global premiums. Still, it remains the largest insurance industry in Latin American, representing 41% of the total premiums in the region in The Brazilian life business accounts for 45% of the life premiums in Latin America, while nonlife business accounts for a relevant 38% of the nonlife premiums in Latin America. We believe the industry has good growth prospects. Among the main factors contributing to this potential growth are the continued low penetration of insurance products in the market, pending pension and workers' compensation reform, upcoming opening of the reinsurance market, and improving economic conditions with better income distribution. Major untapped markets such as large risks, bond sureties, and agricultural risks can potentially sustain stronger growth in the future. These segments are highly correlated to the overall development of the local economy. Product mix In contrast to other markets, most Brazilian insurance companies are multiline companies offering pension-plan products and health, life, and property & casualty insurance. The distribution of premiums per line of business has changed significantly during the past five years, shifting toward life insurance products, mainly VGBL (free benefits life grantor). Leading lines of insurance are life and VGBL, representing 42% of total premiums in 2006; followed by auto, including personal damage caused by auto vehicle, 27.3%; and health, 15.4%. The participation of the auto segment has declined during recent years, while life insurance accounted for an increasing portion of total premium production. the Brazilian pension fund reform should help to boost segment growth. Important growth potential in life insurance should cause these lines to participate even more in total industry production and to lead the industry growth in coming years. Insurers already offer voluntary, complementary, private pension plans, but the workers' compensation market remains a government monopoly. Given the profile of life insurance as a quasi-savings product, insurance companies associated with financial conglomerates dominate this market. They not only benefit from the large distribution network, but also provide cross-selling opportunities. The lower participation of the auto insurance segment in total premiums in Brazil results from the high growth of the life segment and the still-low GDP per capita and income distribution in Brazil. These factors affect the sale of auto policies and the number of vehicles insured (only 30% of the national vehicles have any coverage). Health insurance also reduced its share of the market. Health-care providers (such as medical groups) are controlled by Brazilian health insurance regulators and ultimately report to the Ministry of Health (as opposed to the remaining insurance segments, which are regulated by the Superintendencia de Seguros Privados [SUSEP] and ultimately by the Ministry of Finance). Legislation in this area has changed significantly and since 1999, health-care companies must comply with broader coverage requirements and standardized policies. Constant changes in medical coverage and limitations on policy price increases have made insurance companies operating in this area present negative results and have driven their focus toward group policies as a way to have more flexibility and improve their technical results with the segment. Geographic spread The geographic spread of insurance premiums generally follows the concentration of the country's population and production force, with Sao Paulo state--which accounts for about 31% of gross domestic product and 22% of the country's population as per IBGE--representing 51% of insurance premiums in Together with the states of Rio de Janeiro and Minas Gerais, Brazil's southeastern region accounted for 71% of total premium production. The insurers are trying to expand operations in other regions of Brazilin such as the South and Northeast. In 2006, these states represented about 21.7% of total premium production, compared to 19.5% in Source: Fenaseg: Federação Nacional de Empresas de Seguros Privados e de Capitalização Structure and concentration With total premiums of R$59.3 billion in 2006, the Brazilian insurance industry is concentrated, with the top-10 insurers and their affiliated companies controlling about 79% of premium production. Life insurance has been the fastest growing segment in the industry, also benefiting from the introduction of some differentiated products, such as VGBL. While the deregulation of rates and policy terms allowed insurers to create customized products at lower prices, lower inflation rates brought about by the economic stability have created conditions favorable for longer term investing, which is crucial for the development of the life insurance market. In addition, the evolution of 10 Top 20 Brazilian Insurance Companies

11 The significant influence of banks and foreign capital in the Brazilian insurance industry can be observed in the concentration of premiums in the hands of these investors. At year-end 2006 there were around 70 insurance groups or around 120 insurance companies. About 54% of the premiums belong to financial conglomerates (domestic and international), another 33% are foreign subsidiaries or joint-ventures with foreign companies, and the balance consists of independent domestic insurers. We expect financial conglomerates' participation in insurance activities to remain strong, in light of the competitive advantage offered by access to the banking distribution channel. Foreign insurers will also become increasingly important players, given the global strategy of business and regional diversification and the fact that Brazil is an attractive market with good developments in the industry. companies are also making big efforts to keep their operating costs under control. The ratio of administrative and tax expenses to earned premiums for the insurance industry reduced to 18.6% in 2006 from 20.1% in 2003, but is still higher than in other countries. Key future competitive elements will include high solvency levels, adequate subscriptions, efficient distribution, and the development of new products. In the future, sustained profitability levels and underwriting results in particular will enhance insurers' credit quality and reinforce capital. The companies able to adjust faster to this scenario and show strong underwriting and bottom-line results should present the better creditworthiness. Competition We expect the industry to consolidate even further as a result of the competitive environment, the expected reduction in interest rates, the stricter regulatory rules for solvency, and consolidation in the banking sector. Smaller players that can no longer survive under the new competitive landscape are expected to be acquired. Distribution Under current legislation, insurance policies can only be sold through insurance brokers, a practice that has significantly contributed to the market's high distribution costs. Commission rates have averaged roughly 15% during the past three years. With the change in the insurance environment, including the opening of the reinsurance market and higher competition, brokers with the ability to offer valueadded products will survive. Brazil has around 60,000 insurance brokers and we expect this segment to consolidate, given increasing competition and insurers' efforts to increase efficiency. Improved Operating Performance Most Brazilian insurance companies have maintained good profitability. Nevertheless, this profitability is helped by the strong financial results generated mostly by the investment in fixed-income securities. Brazilian interest rates are the major driver of this strong financial result, as a large part of the remuneration of technical provisions is linked to the country's interest rates. In 2006, according to SUSEP data, the Brazilian insurance and pension industry reported net income of R$8.6 billion compared with R$4.3 billion in 2004; however, only in 2006 did the industry show positive underwriting results--insurance and pension results to total premium and pension benefits evolved to 2% in 2006 from negative 6% in Brazilian insurance companies have worked to improve their underwriting results to anticipate the changes in the economic environment and the drop in interest rates. Insurance companies started to improve their underwriting policies by enhancing client selection and revaluating insurance contracts based on profitability, while working to reinforce claims and fraud control. The industry loss ratio reduced to a good level of 61% in 2006 from 69% in The companies' efforts to improve profitability and underwriting policies have catalyzed a reduction in the loss ratio to the lowest level in the past 10 years. We expect this trend to continue. Source: Superintendência de Seguros Privados (Susep) and Agência Nacional de Seguros Suplementar (ANS) Combined Ratio: (Claims + Commercialization Expenses + Administrative Expenses + Tax Expenses) to Earned Premiums Adjusted Combined: (Claims + Commercialization Expenses + Administrative Expenses + Tax Expenses) to (Earned Premiums + Financial Result) Investment and Asset-Liability Management Brazilian insurers' balance sheet management is conservative, with a prudent approach in terms of investments. Brazilian insurance companies place good emphasis on investment, aiming to provide good liquidity and manage credit risk. At year-end 2006, fixed-income investments including government securities represented 92% of invested assets, stocks only 8%, and real estate a very low 0.3% (see chart 6). The bond portfolios are related to Brazil risk and provide good liquidity as the majority is invested in government bonds, either directly or through funds. Insurance commercialization costs are higher than in other countries, given the regulation that certified insurance brokers must be used for commercialization of insurance products. Brazilian insurance Top 20 Brazilian Insurance Companies

12 market. By that measure, insurers' adjusted equity must be equal to or more than the higher of the following: 20% of the average net premiums per year; or 33% of the average net claims incurred and reported in a three-year period. The coverage of Brazilian insurers' solvency margin is adequate. Source: Susep and ANS Exposure to the equity markets is low, but we expect the prospects for the capital market and a reduction in Brazilian interest rates to drive more investments to the equity market. Nevertheless, we expect insurance companies to maintain the bulk of their investments in fixedincome instruments given their liquidity and lower volatility. We expect an increasing use of asset-liability management models in Brazil, encouraged by regulators' approach to solvency. Capital Adequacy To Be Reinforced As per the regulation in place, Brazilian insurance companies are adequately capitalized, but capitalization varies among individual companies. As a result of efforts to improve profitability, the industry's net worth increased 58% from 2004 to 2006 to R$27 billion (insurance and pension) through earnings retention. We do not expect capitalization to lessen, as the companies should continue to be able to generate better underwriting results. In addition, we expect capital injections with the changes in regulation for minimum capital and solvency. The regulation still in place requires a minimum capital level based on lines of business and states in which insurers operate. If a company operates in the entire territory and in both the P&C and life/health/pension sectors, it would need minimum capital of R$7.2 million. Apart from the minimum capital, the solvency margin (SM) calculation has been the most important supervisory tool in the Source: SUSEP By the end of 2006, SUSEP published new capital requirements for insurance companies that will have to comply with the new regulation for the base capital, and additional capital requirements for underwriting, credit, market, legal, and operational risks, following a step to Solvency II. As of January 2008, the base capital requirement will be raised to R$15 million from R$7.2 million for the companies operating with all major segments and in the whole territory. SUSEP is regulating additional capital, and the insurance companies will have to adapt to the new capital requirement within three years (30% of the required capital for additional risk in the first year, 60% in two years, and 100% in three years) after SUSEP regulates each risk. The underwriting risk was regulated by SUSEP at the end of 2006 (Resolution 158) and is based on risk factors for each business line and territory related to underwriting and reserve risks. The additional capital requirement for underwriting risks should be of around R$6 billion and insurers were requested to comply with the regulation starting January We expect the new regulation to change the insurance environment with capital injections, acquisitions, joint ventures, higher reinsurance retention, or changes in business mix. The other risks have not yet been regulated and are expected to bring additional capital requirements for Brazilian insurers. However, underwriting risk will require higher capitalization. We view the new regulation positively as it is more in line with the international standard for capital and should align the Brazilian capital requirement to stricter international practices. To that objective, in our analysis of insurance companies we have been using a capital model approach to compare the amount of risk-adjusted capital with the minimum secure level we believe it should have to face its financial and operating risks. According to the model, the adjusted capital, less the charges for asset and credit related risks, should cover underwriting and reserve risks. Asset risk evaluates the quality and liquidity of an insurer's investment portfolio, which are key to its ability to make timely payments on its obligations. Credit risk reflects the collectability risk associated with certain assets or receivables on the balance sheet. Underwriting risk is the risk that the company's present and future business will be unprofitable and that underwriting losses will need to be covered by capital. The reserve risk is the risk that past business will be less profitable than expected, and can add further variability to claim costs. Standard & Poor's Capital Adequacy Model for Brazil is a significant part of the analysis of an insurer's capital strength. It is important to point out that Standard & Poor's Capital Adequacy ratio is only a reference point for judging a Brazilian insurer's capital adequacy. Reserving Levels Being Reinforced The total gross technical reserves-to-gross premiums written ratio among Brazilian insurers has increased due to the companies' efforts to reinforce reserves. Reserves are adequate to the risks run by insurers, and were already reinforced for the health sector (especially in 2004 and 2005) and for contingencies in recent years--in a way anticipating the changes in regulation. Higher reserving risk can also result from business mix shifts toward liability and longer tail lines of business in general. 12 Top 20 Brazilian Insurance Companies

13 Aside from a minimum capital requirement, regulators are in a transition to introduce a risk-based capital mechanism that factors in underwriting, market, credit, operational, and legal risks. We consider the risk-based model a useful tool that will make insurers more risk conscious. The regulator's focus on the solvency is positive. In addition, new legislation is designed to regulate the opened reinsurance market. This legislation will have an effect on how the Brazilian insurance market operates as a whole. To emphasize the Brazilian insurance market and generate discussion on the development of the sector, the Brazilian Insurance Federation, Fenaseg, is expected to become a confederation in the second half of 2007 with a specific focus on the four major segments: property & casualty, life and private pension, health, and saving bonds. Source: Fenaseg Reinsurance use is low Reinsurance use is low in Brazil, with only 6% of the risk ceded to reinsures. The low use of reinsurance is a result of the segment mix of the Brazilian market, where insurers can take the majority of risks for auto and life segments (the most representative in Brazil). It also reflects the lack of catastrophic risks. The insurance market is transitioning to an opened market from a monopoly under Instituto de Resseguro do Brasil (IRB). Under the new regulatory framework that opens the market for reinsurance, all insurers will have to reinsure at least 60% of their reinsurable business with local reinsurers (IRB and other reinsurance companies domiciled in Brazil). This requirement will be reviewed three years after it is established. It is still uncertain whether this will drop to a lower percentage or to zero after the six years mentioned in the law. Regulatory Environment SUSEP is the main regulatory body for insurance in Brazil, responsible for the supervision of companies operating in this market. Following a process of industry deregulation initiated in the early 1990s, SUSEP has experienced a change in its market role, moving from an entity which previously maintained strict control on all aspects of insurance (including prices and policy conditions) to an organization placing greater emphasis on the control and monitoring of insurers' solvency levels by overseeing reserves, operating limits, and the solvency margin. In addition to insurance companies, SUSEP is also responsible for monitoring and controlling private pension companies and capitalization entities. The control of health insurers was moved to Associação Nacional de Saúde (ANS) from SUSEP in In addition to SUSEP, Conselho Nacional de Seguros Privados (CNSP) is responsible for establishing rules and regulations in the market. This entity is closely tied to the economy ministry and holds representatives from all segments of the insurance industry. Brazil's monopoly reinsurer, IRB, which previously also exerted substantial influence over norms controlling the industry, had its role diminished and its regulation on reinsurance transferred to SUSEP with Law 126. Roots of the current insurance system lie with Decree-Law 73 of Nov. 21, 1966, which along with subsequent Decrees and of 1967 effectively created what is known as the Sistema Nacional de Seguros Privados (or National Private Insurance System). Following this period, however, legislation of the industry has continuously changed. Partially reflecting a trend in the country's political and economic environment at the time, Brazil's insurance industry was liberalized in the early 1990s with the abolition of tariff controls in 1992 and the opening of the market to 100% foreign capital ownership around Accounting Principles All Brazilian insurance companies reported under Brazilian GAAP. Listed Brazilian insurers or insurers under a listed financial conglomerate are required to prepare their consolidated financial statements in accordance with US GAAP. The major characteristics of Brazilian GAAP for insurers are: Asset valuation The accounting for securities held by insurance companies follows international standards and is divided into three possibilities: "tradable securities," "available for sale," and "held to maturity," and portfolios have to be valued according to market prices. Mutual fund investments may be carried at market. Real estate is kept at cost or at "market value" as determined through a revaluation performed by specialized appraisal companies approved by SUSEP. Investment restrictions Assets covering reserves must be invested following certain stipulations. In the case of assets covering technical reserves, investment restrictions include: maximum of 100% in treasury notes; up to 80% in specific investments such as CDs, bonds; up to 49% in stocks; up to 10% in real estate. This regulation applies for general insurers, capitalization companies, and private pension providers. Reserves Similar to other Latin American systems, loss reserves in Brazil are set by mathematical formula. Starting in 1999, Brazilian insurers were required to maintain reserves for IBNR. As a country with no natural catastrophes, Brazilian insurers do not keep catastrophe reserves. In 2006, SUSEP required the insurance companies to record premiums of effective and nonissued risk as per Circular Susep 314. Life business In general, there is no separate reporting for nonlife and life business and, therefore, multiline insurers' reports are presented on a consolidated basis. For this reason, our figures include both life and nonlife business. Foreign currency transactions Brazilian insurers are currently not allowed to transact policies and investments in foreign currency. However, we expect this practice to change with the opening of the reinsurance market. Top 20 Brazilian Insurance Companies

14 What To Expect From An Open Reinsurance Market In Brazil Primary Credit Analyst: Daniel Araujo, Sao Paulo, (55) ; The opening of the reinsurance monopoly in Brazil should speed up growth in the insurance industry overall. Over time, it should help to bring the industry further in line with other segments of the Brazilian economy that have gradually become more open. The open reinsurance market is likely to usher new investments and technology into the insurance industry in Brazil, along with sharper product diversification and stronger incentives to compete. We anticipate several changes in how the industry will operate, including refinement of the criteria by which local insurers select the reinsurers they will work with. Requirements for financial transparency should also improve. Reinsurers entering the market will closely inspect local insurers. And insurers will scrutinize the operations of reinsurers, with a keen interest in reinsurers' solvency. Years of debate about the opening of the reinsurance market in Brazil culminated in the approval of Law 126 on Jan. 15, Although the state reinsurance monopoly, IRB Brasil Resseguros S.A. (IRB- N.R.), was not privatized, the opening of the market is good news for the industry. While the IRB already allows insurers to use foreign reinsurers for specific contracts, IRB must approve these deals, which has in practice inhibited the use of international counterparties. Given the enormous potential of Brazil's insurance industry, several foreign reinsurers have been anxiously awaiting the opening of the market through the long delay. The breakup of Brazil's reinsurance monopoly was in fact voted into law in Unfortunately, the de facto opening of the market has been delayed by the lack of enabling legislation determining the form the newly opened market should take. Brazil is among the last countries in the region to end its reinsurance monopoly. This puts it far behind other important Latin American insurance markets, such as Chile's or Mexico's, which opened their reinsurance markets in the past 30 years. There are a handful of holdouts in the region, with monopolies still standing in Costa Rica and Cuba, for example. The New Brazilian Reinsurance Segment IRB has been the reinsurance monopoly since the company was founded in Despite unceasing debate over the past three decades about opening the market, the government-controlled company is still the sole provider of reinsurance in Brazil, at least until July At that time, the Brazilian National Insurance Council (Conselho Nacional de Seguros Privados, or CNSP) is slated to issue new rules that establish the framework for reinsurance operations in Brazil. Law 126 creates a new supervisory framework, taking responsibility for oversight of reinsurance away from IRB. The law will have farreaching effects on the reinsurance segment. To begin with, IRB's historical role as regulator of the reinsurance market will be transferred to the current insurance industry regulator, the Superintendence of Private Insurance (SUSEP). Both SUSEP and IRB will have to adapt to the new environment. SUSEP has not had jurisdiction over the reinsurance segment to date, and will have to grow into the role. Perhaps the greater challenge falls to IRB, however. The former monopoly will gradually come to resemble its new foreign competitors, and will have to focus on relationship management, internal systems, risk management, human resources, and competitive pricing. Law 126 states that three categories of reinsurer will be recognized by the new regulatory body: Local reinsurer: A reinsurer domiciled in Brazil and exclusively carrying reinsurance and retrocession; Admitted reinsurer: A reinsurer domiciled in a foreign country, with a representative office in Brazil; and Occasional reinsurer: A reinsurer domiciled in a foreign country, with no representative office in Brazil. Under the law, IRB and other local reinsurance companies will have preference over foreign-domiciled companies. All Brazilian insurers will be required to reinsure at least 60% of their reinsurable business with local reinsurers, at first. Three years after the law goes into effect, this limit will decrease to 40%. After another three years, the limit will come up for review. At present, it is uncertain whether the requirement will be lowered further, or perhaps eliminated, upon review in the sixth year. The newly expanded regulatory body, SUSEP, will apply strict rules regarding the acceptance of reinsurance business with foreigndomiciled reinsurers. Occasional reinsurers cannot be domiciled in tax havens, in countries where the income tax is below 20%, or in countries that restrict access to the names of shareholders or of company owners. The law also provides that only local reinsurers can reinsure endowment insurances and supplementary pension plans. A bevy of details remain to be hammered out before the new rules are published by regulator in July. These include limits and conditions for retrocession, advantages of admitted reinsurers over occasional reinsurers, conditions under which local reinsurers are treated like admitted and occasional reinsurers, and operational rules for reinsurers and reinsurance brokers. Strong Players Will Adapt Brazilian insurers will face significant challenges beginning in the second half of For one thing, they will have to set their own criteria for selecting the reinsurers that best suit their needs. This is a two-way street, however, and insurers will have to adjust to operating under the close scrutiny of the reinsurers entering the market. What's worse (for some), any new reinsurance legislation that is enacted will undoubtedly make it more difficult for weak insurers to remain competitive. Buyers of reinsurance protection have many factors to consider, including pricing, contract language, and policy limits. More insurance managers will begin to realize that in addition to favorable contract terms, the financial health of the reinsurer is a crucial factor. Indeed, a poor choice of reinsurers can jeopardize an insurer's long-term survival. 14 Top 20 Brazilian Insurance Companies

15 Foreign companies should expect to benefit from the new system. Following the approval of the new regulations and operational guidelines, we expect to see a greater share of risks in Brazil being reinsured by global programs, which could bring on a reduction in premium rates. A clear picture will only emerge, however, once the complete regulations are established. Most Latin American countries have had open reinsurance markets for several years already, or longer. Given that weak reinsurers can exploit markets in which there are not well known and recognized, the issue of reinsurers' solvency takes on even more importance. To address concerns about the financial health of foreign-domiciled reinsurers, regulators in other countries, such as Mexico and Argentina, have established minimum ratings requirements for foreign reinsurance providers. Legislative proposals currently under consideration in Brazil favor similar ratings requirements. Regulations in a number of Latin American countries include minimum surplus levels for locally domiciled reinsurers. Standard & Poor's believes that in these cases, financial strength ratings would be a better way to assess long-term financial solvency from the primary carriers' point of view. Financial strength ratings consider not only the reinsurer's current financial standing and capital position, but also its business profile and underlying risk. The ratings consider other important factors, such as industry risk, operating performance, management and corporate strategy, financial flexibility, and retrocession coverage. Due to their extensive scope, financial strength ratings provide a more reliable prospective view of a reinsurer's financial standing. On the other hand, Brazilian insurers should expect to be closely scrutinized by reinsurers. High-quality and conservative reinsurance providers will look for prudent, financially sound primary writers. In the open reinsurance market, Brazilian insurers who want to establish long-term relationships with financially secure reinsurance providers will need to adopt higher underwriting standards. In addition, financial transparency will be pressured to improve throughout the market. Although transparency has been improving steadily in the Brazilian insurance industry, it remains poor relative to more mature markets. A number of Brazil's large domestic insurers, and certain subsidiaries of foreign insurers, have already reached preliminary reinsurance agreements with foreign reinsurers. Many niche players should be able to adapt to the new environment, despite their small size, due to their relationships with IRB and with foreign reinsurers. Many medium- and small-sized locally owned insurers will be challenged, however, because they are not as well known by the foreign market. It will take some time for foreign reinsurers to fully understand the Brazilian market, its risks, and the profiles of its domestic insurers. For this reason, Standard & Poor's expects the impact on Brazilian insurers to become more apparent in the medium- and long-term as the market matures. The final form of the pending reinsurance legislation will shape the future of Brazil's insurance market and will have serious consequences for the long-term survival of current players. The regulations will most likely require companies to keep minimum retention levels. This would eliminate the long-standing practice, most common among small carriers operating mainly as insurance brokers, of ceding nearly all of their risk to the reinsurer monopoly. With such practices ruled out of play, the proposed retention requirements could drive some insurers with weak capitalization and limited financial flexibility out of the market. An Open Reinsurance Market Should Boost Growth Throughout The Industry The Brazilian insurance industry has good opportunities for growth in the coming years. Although insurance premiums have climbed steadily during the past four years, the Brazilian insurance market remains largely untapped, given its great size and growth potential. As of yearend 2006 the premium's of the insurance industry in Brazil accounted for just 0.6% of global premiums, and was just 2.6% of GDP. We believe the industry continues to offer good growth prospects over the medium and long term. Among the main factors limiting insurance penetration in Brazil are the country's relatively low income per capita and its high level of income inequality, which are expected to improve in light of the economic growth of the country and reduction of unemployment. The monopoly of the reinsurance market is also viewed as a limitation to growth in the industry, and the pending de facto demise of that monopoly is the main reason we expect the industry to grow during the next several years. Although Brazil is one of Latin America's largest insurance market in terms of premiums written, it is one of the least developed in terms of reinsurance revenues. The reinsurance monopoly has been a leading factor in keeping reinsurance rate low, as has the composition of the business portfolio in Brazil, where there is a strong auto insurance component (normally a full-retention business), and no significant need for catastrophe insurance. IRB achieved total gross premiums of Brazilian reais 3.4 billion (approximately $1.45 billion) for the fiscal year ended December Total reinsurance premiums should keep growing as a reflection of increased insurance business and new reinsurance operations in the country as the market opens. Some market estimates indicate reinsurance premiums could reach some $2 billion in the next two to three years. We expect IRB to adapt to the new rules and market conditions and remain a significant player in the market. IRB benefits from its long relationship with local insurance companies and its knowledge of the domestic market. The company should invest further in staff development, internal systems, and risk management to compete with private sector companies. Top 20 Brazilian Insurance Companies

16 Top 20 Brazilian Insurance Companies - Ranking 1. Bradesco Seguros S.A. 2. Sul América Seguros S.A. 3. Itaú Seguros S.A. 4. Unibanco AIG Seguros S.A. 5. Porto Seguro Cia de Seguros Gerais 6. Companhia de Seguros Aliança do Brasil 7. Mapfre Vera Cruz Seguradora S.A. 8. Tokio Marine Brasil Seguradora S.A. 9. Caixa Seguradora S.A. 10. AGF Brasil Seguros S.A. 11. Santander Seguros S.A. 12. HSBC Seguros S.A. 13. Marítima Seguros S.A. 14. Hannover International Seguros S.A. 15. Liberty Seguros S.A. 16. Chubb Seguros S.A. 17. ACE Seguradora S.A. 18. Metropolitan Life Seguros e Previdência Privada S.A. 19. Icatu Hartford Seguros S.A. 20. IRB Brasil Resseguros S.A. 16 Top 20 Brazilian Insurance Companies

17 Summaries

18 Bradesco Seguros S.A. Primary Credit Analyst: Tamara Berenholc, São Paulo (55) , Secondary Credit Analyst: Milena Zaniboni, São Paulo (55) , Top 20 ranking: 1 Financial Strength Rating: 'braaa/ Stable/--' Couterparty Credit Rating: 'braaa/ Stable/--' Rationale Standard & Poor s Ratings Services ratings on Bradesco Seguros S.A. reflect the credit quality of its controller, Banco Bradesco S.A. BBB-/Positive/A-3 and braaa/estável/--, and the benefits from this control, including the integration of its operations to that of the bank mainly in the purchase, capital, and IT areas, as well as the use of the bank s ample branch network for the commercialization of insurance products. In addition, Bradesco Seguros maintains a good business profile in the competitive Brazilian insurance industry, and presented improved underwriting results. The ratings are counterbalanced by the challenging environment for the Brazilian insurance industry and the company s exposure to Brazil s economic risks. Bradesco Seguros maintains a good business profile, supported by the strong franchise of the group and its position as the largest insurance group in Brazil in terms of total premiums. It is the leader in the health, life, and personal accident segments, besides the largest in the commercialization of VGBL (Vida Garantidor de Benefício Livre). Bradesco Seguros offers a wide variety of products, and accounted for 26% of the total market premiums in In the pension business, Bradesco Vida e Previdência (wholly owned subsidiary of Bradesco Seguros) is the market leader, holding 39% of the market revenues in 2006, besides being the second-largest capitalization company through Bradesco Capitalização, with 20% of the revenues generated in the market in the same period. Banco Bradesco s ownership of Bradesco Seguros brings an important competitive advantage to the company because of the bank s access to the ample distribution channel and the benefits of synergy coming from the integration of support areas of the companies. The insurance segment (that comprises insurance, pension and capitalization operations) accounted for 34% of the results of the Bradesco conglomerate in 2006, reinforcing its position as a core entity to the group. We expect Bradesco Seguros will receive financial support from its controller if necessary. Bradesco Seguros improved its operating results, including its loss and combined ratios and its efficiency. The loss ratio reduced to 79.1% in 2006 from 82.3% in 2005, and its combined ratio reduced to 99% in 2006 from 103.4% in However, the company is challenged to continuously improve its underwriting results. Outlook The stable outlook reflects the outlook on Banco Bradesco. It also incorporates our expectation that Bradesco Seguros will keep its market position, competitive advantage, and financial flexibility from its position as a core entity of Bradesco. Chart 1 Chart 2 30,000 25,000 20,000 15,000 10,000 5, Top 20 Brazilian Insurance Companies

19 Sul America S.A. Primary Credit Analyst: Tamara Berenholc, Sao Paulo (55) ; Secondary Credit Analyst: Daniel Araujo, Sao Paulo (55) ; Top 20 ranking: 2 Credit Rating: B/ Stable/ Rationale The rating on Sul América S.A. (SASA) reflects its status as a nonoperational holding company for Sul América insurance group, of which the main insurance operating entity is Sul America Companhia Nacional de Seguros (financial strength rating of BB- ), and the structural subordination of the holding company s creditors to policyholders of SASA s operating entities. It also reflects the holding company s leveraged capital structure and relatively weaker operating track record than that observed for the local insurance industry. Partially offsetting these negative factors are the group s strong competitive position as the second-largest insurance group in Brazil by total premiums, the good growth prospects for the Brazilian insurance market, the strong brand recognition and improving cash flow, and performance of the operating subsidiaries. Standard & Poor s Ratings Services applies a two-notch differentiation between the holding company and the operating subsidiary rated in speculative-grade categories, reflecting the structural subordination that exists in the insurance business. Although all policyholders obligations and the majority of the group s investment assets lie at the operating company, which is subject to potential regulators actions to protect policyholders interest by maintaining the financial strength of the operating company, we do not expect Brazilian regulators to object to cash dividends being paid upstream to the holding company from solvent operating subsidiaries, reinforcing the holding company s ability to service its debt in a full and timely manner. We analyze SASA s consolidated balance sheet. SASA s debt peaked at a high level even considering the debt reductions in With the repayment of Brazilian reais (R$) 181 million in 2006, SASA s consolidated debt leverage declined to approximately 60% by year end (from 66% in September 2006 and 77% in December 2005). The improved financial stance reached in 2006, and expected for the following years, will reinforce the operating subsidiaries cash generation and consequently improve the holding company s financial ratios. We expect debt leverage to reduce to 20% in 2009 and around 10% in 2011 with the amortization of part of the company s debt in those years. We expect interest coverage to reach an adequate average of 4x in the next two years. The financial strength rating on SASA s operating subsidiary is based on its adequate business risk profile, its strong franchise, and the improving operating performance already observed in 2006 that is expected to consolidate going forward. These factors are tempered by a fierce competitive environment in the insurance business in Brazil and the group s marginal capitalization. The group is the largest independent insurance company in Brazil and the second in terms of premiums written, holding a strong position in number of policies issued. SASA s main businesses are health and auto, which maintain a good market position in the industry of 38% and 16%, respectively, at December With a change of its business focus from market share to profitability, improved underwriting procedures helped increase profitability in most of the insurance lines. The company s capital level is marginal. In absolute terms, the change in judicial reserving policy led to an increase in litigation reserve in 2004 and 2005, affecting the group s bottom line and consequently its ability to reinforce capitalization. With the improvement in profitability from 2006 on, we expect capital to slightly increase in the following years. Liquidity We believe that SASA s overall liquidity is adequate. Prospective cashflow sources are mainly dividends from SASA s insurance subsidiaries. SASA s share in Telemar through Brasilveículos S.A. adds a diverse source of liquidity to the group. Outlook The stable outlook reflects our expectation that SASA will benefit from a steady stream of dividends and positive cash flows from operating subsidiaries. We expect financial leverage to decline to less than 55% until 2009 with further reduction from 2009 to The rating may be raised or the outlook revised to positive if the expected improvement in operating performance of the operating subsidiaries results in a strengthening of capitalization in the next two to three years. Conversely, the rating may be lowered or the outlook changed to negative if there is a deterioration of the financial condition or performance of operating subsidiaries that would affect the flow of dividends to SASA. Top 20 Brazilian Insurance Companies

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