TERRA BRASIS RESSEGUROS Sao Paulo, SP 04543-000, Brazil Operating Company Composite TERRA BRASIS RESSEGUROS Av. Juscelino Kubitcheck, 1700, 12 Andar, Itaim Bibi, Sao Paulo, SP 04543-000, Brazil Web: www.terrabrasis.com.br Tel.: 55 11 3320-5000 Fax: 55 11 3320-5001 AMB#: 092722 BEST S CREDIT RATING Best s Financial Strength Rating: B++ Outlook: Stable Best s Financial Size Category: VI RATING RATIONALE Rating Rationale: The ratings reflect Terra Brasis sound business plan and solid risk-adjusted capital. Terra Brasis is licensed as a local reinsurance company in Brazil and continues to focus on the growing Brazilian B++ (re)insurance market writing a broad mix of property/casualty and life business. Partially offsetting these positive rating attributes are Terra Brasis limited market profile, the potential for regulatory changes that could negatively impact the company and the inherent risk associated with a start-up company executing its business plans. The Brazilian (re)insurance market is a highly competitive market dominated by significantly larger companies, some supported by major global (re)insurance organizations possessing substantial financial flexibility and operational resources against which Terra Brasis must compete. In recent years, the Brazilian reinsurance market has transitioned to a more open market. In Latin America, Brazil is the largest (re)insurance market with approximately 50% of the premiums in the region. The country is currently facing some challenges in terms of economic growth and inflation; however, the reinsurance market is expected to continue to grow in the high single-, low double-digit range. As the (re)insurance market has grown, competition has moved in swiftly and is expected to remain in Brazil making it important for the company to remain disciplined and conservative. Given that Terra Brasis has a limited operating history, A.M. Best will continue to closely monitor its performance and the overall execution of its 2015 A.M. Best Company, Oldwick, NJ 08858 Printed July 7, 2015 www.ambest.com Page 1 of 5
business plan. Rating factors that could lead to an upgrading of the ratings would be sustained and stable profitability, strong risk-adjusted capital and indications that the company has built a solid profile in the market. Factors that could lead to a downgrading of the ratings and/or a negative outlook include weakened risk-adjusted capital, volatile underwriting results or the inability of the company to meet its profitability targets as outlined in its business plan. Other factors that could negatively impact Terra Brasis ratings would be the departure of key executives, indications that the company is not gaining market acceptance and/or enterprise risk management is not developing in line with its risk profile. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 05/13/15 B++ 05/09/13 B++ 05/15/14 B++ BUSINESS PROFILE Terra Brasis is a start-up company with a limited market history and has a modest level of market facing capacity. The company believes that it has a unique market position being that it is dedicated exclusively to reinsurance business as a private sector local reinsurance company that was formed with Brazilian capital. Terra Brasis management has decades of experience in the Brazilian market and has built solid business relationships over that time. In Brazil, reinsurance companies are classified as local, admitted or occasional depending on their degree of participation and financial commitment. Terra Brasis is classified as a local reinsurance company in the Brazilian market and with that the company will have certain competitive advantages that go along with that classification. In Latin America, Brazil is the largest (re)insurance market. Brazil has the largest population in South America and is amongst the 10th largest economies in the world ranked by GDP. Currently, Brazil has low insurance penetration and a favorable economic environment which represents significant growth potential; making Brazil an attractive place for (re)insurance companies. Up until 2007 the Brazilian reinsurance market was controlled by a government owned monopoly. Since the market has opened up the competition has moved in quickly to access Brazilian business. RISK MANAGEMENT Terra Brasis continues to develop its enterprise risk management. The company has a Chief Risk Officer and risk management is discussed at the Board level. It is worth noting though that Brazil has historically not been prone to natural catastrophes such as wind or quake. Flood is likely the largest natural catastrophe exposure. The potential for man-made catastrophes exists, especially with international events such as the World Cup and Olympic Games being hosted by Brazil. Inflation risk is on the forefront of (re)insurance companies risk dashboards given that this has historically been a problem in Brazil. OPERATING PERFORMANCE Operating Results: Terra Brasis has a limited operating history and 2013 represents the company s first full year of operations. The company had a modest loss in 2013 but reported profitable net income in 2014. The assigned rating for Terra Brasis was based on business plans provided by the company that included projections which forecasted 5 years of business. The company continues to work towards writing a diversified book of Brazilian property, casualty and life business with a focus on short tail lines. A.M. Best will closely monitor Terra Brasis against its stated business plans. A.M. Best will focus on the company s ability to continue to gain market acceptance and craft a profitable book of business. BALANCE SHEET STRENGTH Capitalization: Terra Brasis was initially capitalized with approximately $100 million Brazilian reals. Risk-adjusted capital scores, as measured by Best s Capital Adequacy Ratio (BCAR), are very strong at the current rating level although they are expected to decline over time as the company grows its underwriting book of business. Being a start-up entity the risk-adjusted capital scores are subject to higher charges given the inherent execution risk associated with a new company formation. The investment portfolio is relatively conservative with the majority of assets held in Brazilian government and corporate bonds. The investment portfolio duration is short, at roughly 2 years. On the liability side of the balance sheet, the company plans on focusing mostly on short tail lines of business so risks associated with long-tail reserves should be less of an issue. Summarized Accounts as of December 31, 2014 Data reflected within all tables of this report has been compiled from the financial statements of this company (Source: Company Financial Statement). An independent audit of the company s affairs through December 31, 2014, was conducted by Ernst & Young Auditores Independentes S.S. US $ per Local Currency Unit.37308 = 1 Brazilian Real (BRL) STATEMENT OF INCOME Technical account: Reinsurance premiums assumed 77,942 29,079 Gross premiums written 77,942 29,079 Reinsurance ceded 43,595 16,264 Net premiums written 34,347 12,814 Increase/(decrease) in gross unearned premiums 13,119 4,894 Net premiums earned 21,228 7,920 Total underwriting income 21,228 7,920 Net claims incurred 12,123 4,523 Management expenses 10,372 3,870 Acquisition expenses 5,471 2,041 Net operating expenses 15,843 5,911 Total underwriting expenses 27,966 10,434 Balance on technical account -6,738-2,514 2015 A.M. Best Company, Oldwick, NJ 08858 Printed July 7, 2015 www.ambest.com Page 2 of 5
Combined technical account: Reinsurance premiums assumed 77,942 29,079 Gross premiums written 77,942 29,079 Reinsurance ceded 43,595 16,264 Net premiums written 34,347 12,814 Increase/(decrease) in gross unearned premiums 13,119 4,894 Net premiums earned 21,228 7,920 Total revenue 21,228 7,920 Net claims incurred 12,123 4,523 Management expenses 10,372 3,870 Acquisition expenses 5,471 2,041 Net operating expenses 15,843 5,911 Total underwriting expenses 27,966 10,434 Balance on combined technical account -6,738-2,514 Non-technical account: Net investment income 11,153 4,161 Profit/(loss) before tax 4,415 1,647 Taxation 1,735 647 Profit/(loss) after tax 2,680 1,000 Retained profit/(loss) for the financial year 2,680 1,000 Retained profit/(loss) carried forward 2,680 1,000 MOVEMENT IN CAPITAL & SURPLUS Capital & surplus brought forward 96,079 35,845 Change in share capital 494 184 Profit or loss for the year 2,680 1,000 Total change in capital & surplus 3,174 1,184 Capital & surplus carried forward 99,253 37,029 ASSETS % of total Cash & deposits with credit institutions 1,284 0.7 479 Bonds & other fixed interest securities 81,398 43.0 30,368 Shares & other variable interest instruments 30,235 16.0 11,280 Liquid assets 112,917 59.7 42,127 Total investments 112,917 59.7 42,127 Reins. sh. of tech. reserves - unearned premiums 17,066 9.0 6,367 Reinsurers share of technical reserves - claims 10,963 5.8 4,090 Reinsurers share of technical reserves - life 538 0.3 201 Total reinsurers share of technical reserves 28,567 15.1 10,658 Insurance/reinsurance debtors 42,565 22.5 15,880 Other debtors 3,328 1.8 1,242 Total debtors 45,893 24.2 17,122 Fixed assets 277 0.1 103 Prepayments & accrued income 1,285 0.7 479 Other assets 313 0.2 117 Total assets 189,252 100.0 70,606 LIABILITIES % of total Capital 100,494 53.1 37,492 Paid-up capital 100,494 53.1 37,492 Non-distributable reserves 1,600 0.8 597 Retained earnings -2,841-1.5-1,060 Capital & surplus 99,253 52.4 37,029 Gross provision for unearned premiums 37,575 19.9 14,018 Gross provision for outstanding claims 24,339 12.9 9,080 Gross provision for outstanding claims - life 732 0.4 273 Total gross technical reserves 62,646 33.1 23,372 Deposits received from reinsurers 1,240 0.7 463 Insurance/reinsurance creditors 25,412 13.4 9,481 Other creditors 338 0.2 126 Total creditors 25,750 13.6 9,607 Other liabilities 363 0.2 135 Total liabilities & surplus 189,252 100.0 70,606 2015 A.M. Best Company, Oldwick, NJ 08858 Printed July 7, 2015 www.ambest.com Page 3 of 5
ANALYSIS OF GROSS PREMIUMS WRITTEN BRL (000) Automobile 18,463 Aviation 538 Homeowners 433 Liability 3,373 Life 2,851 Marine 9,827 Other classes 915 Property 34,337 Surety 7,205 Total non-life 77,942 BALANCE SHEET ITEMS BRL BRL BRL BRL (000) (000) (000) (000) Liquid assets 112,917 98,936 97,348 976 Total investments 112,917 98,936 97,348 976 Total assets 189,252 123,131 105,462 1,246 Total gross technical reserves 62,646 19,161 1,968 Net technical reserves 34,079 11,937-1,164 Total liabilities 89,999 27,052 6,878 213 Capital & surplus 99,253 96,079 98,584 1,033 INCOME STATEMENT ITEMS BRL BRL BRL BRL (000) (000) (000) (000) Gross premiums written 77,942 21,043 2,053 Net premiums written 34,347 13,342-1,820 Balance on technical account(s) -6,738-11,767-5,707-3,394 Profit/(loss) before tax 4,415-4,097-1,570-3,244 Profit/(loss) after tax 2,680-2,505 396-3,244 LIQUIDITY RATIOS (%) Total debtors to total assets 24.2 12.7 3.8 3.7 Liquid assets to net technical reserves 331.3 828.8-99.9 Liquid assets to total liabilities 125.5 365.7 999.9 458.2 Total investments to total liabilities 125.5 365.7 999.9 458.2 LEVERAGE RATIOS (%) Net premiums written to capital & surplus 34.6 13.9-1.8 Net technical reserves to capital & surplus 34.3 12.4-1.2 Gross premiums written to capital & surplus 78.5 21.9 2.1 Gross technical reserves to capital & surplus 63.1 19.9 2.0 Total debtors to capital & surplus 46.2 16.2 4.1 4.5 Total liabilities to capital & surplus 90.7 28.2 7.0 20.6 PROFITABILITY RATIOS (%) Loss ratio 57.1 94.1-2.6 Operating expense ratio 46.1 90.5-99.9 Combined ratio 103.2 184.6-99.9 Net investment income ratio 52.5 147.6-99.9 Operating ratio 50.7 37.0 345.2 Return on net premiums written 7.8-18.8-21.8 Return on total assets 1.7-2.2 0.7 Return on capital & surplus 2.7-2.6 0.8 2015 A.M. Best Company, Oldwick, NJ 08858 Printed July 7, 2015 www.ambest.com Page 4 of 5
Why is this Best s Rating Report important to you? A Best s Rating Report from the A.M. Best Company showcases the opinion from the leading provider of insurer ratings of a company s financial strength and ability to meet its obligations to policyholders, as well as its relative credit risk. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of the insurance companies since 1899. A Best s Financial Strength Rating is an independent opinion of an insurer s financial strength and ability to meet its ongoing insurance policy and contract obligations. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. The rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company or A.M. Best Europe Rating Services Limited. For the latest Best s Financial Strength Ratings along with their definitions and A.M. Best s Terms of Use, visit the A.M. Best website at www.ambest.com. You may also obtain AMB Credit Reports by visiting our site or calling our Customer Service department at +1-908-439-2200, ext. 5472. To expedite your request, please provide the company s identification number (AMB#). 2015 A.M. Best Company, Oldwick, NJ 08858 Printed July 7, 2015 www.ambest.com Page 5 of 5