July/August 2015

How does Latin America’s politicalclimate affect the way you think about opportunities in the market?

David Battman, Alesco: The political environment country by country does affect the way that one seesopportunities. Plainly you are going to look at what’s happening in a country before committing your own group’s money to it, but if we are talking about insurance opportunities what matters most is how the client sees the political environment impacting on their business and how that affects theirinsurance purchase.

Ingrid Carlou, Patria Re: I think right now we have many countries that are pretty murky economically. The Pacfic Rim is more liberal and includes Mexico, Colombia, Chile and Peru which are pretty liberal. The Atlantic Rim is more protective and includes Venezuela and Brazil. So depending on the country there are many risks and many opportunities.

Andrew Downey, Validus: I don’t think you can disconnect the politics from the operating environment, but if you take a look at the history of the region, it is much more tranquil than it has ever been over the last ten years, even if you do have extreme cases like Venezuela and Argentina. It’s always

operate in, but where there is risk there’s reward.

Rodrigo Botti, Terra Brasis: In any part of the world insurance and reinsurance is a highly regulated business and therefore political analysis and the analysis of policies is important everywhere. Latin Americais no different. To be successful, one must deeply understand and respect each countries characteristics. This is an integral part of business.

Carlos Caputo, Markel: Politics is part of our business and it’s something we have been living with forever. Companies which are not specialised in the region can find greater problems and challenges, but we all have to take it into account. There is a huge impact from the political environment on the economy and in the insurance market. In Argentina everyone is waiting to see what will happen in the next election and that may change the scenario.

Aidan Pope, Guy Carpenter: I think that the most significant change is about political accountability. Whether it is through social media or through the worldwide environments with globalisation. Look at Petrobras for example the biggest issue I think for

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Looking for Latam opportunities

Lionel Sofiia, Chief Executive Officer for LatinAmerica Arthur J. Gallagher International

Aidan Pope, Chief Executive Officer of GuyCarpenter’s Latin America and Caribbean Operations

Ulisses Soares, CEO for Latin America Cooper Gay Swett & Crawford

David Battman, Partner, Head of Strategy & Business Development at Alesco

Andrew Downey, Former CEO, Latin America at Validus

Rodrigo Botti, Chief Financial and OperationalOfficer at Terra Brasis

Sam Kerr, Americas Reporter Reactions

Juan Calvache, Senior Vice President, Latin America at Brit

Carlos Caputo, ChiefExecutive Officer at Markel Latin America

Ingrid Carlou, CEO at Patria Re

Javier Vijil, President &Chief Underwriting Officer for Latin American and the Caribbean at Trans Re

Eduardo Recinos Senior, Director and Co-Head of the Latin American insurance group at Fitch Ratings

Panellists

Reactions in partnership with Alesco got some leaders in the Latin American market around a table to find the most exciting re/insurance opportunities in the region.

Latin America roundtable

been a very difficult environment to

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Petrobras is that they have stocks in the SEC and they’re held accountable. Brazil seems to have calmed down a little bit but a couple of years ago it was pretty worrying. In the Confederations Cup for example we saw how people were motivated all around the country to protest in the millions against what was going on.

Juan Calvache, Brit: Obviously the political environment is a challenge for us and for the industry, but you are always looking for new anddifferent products and different ways to do business and make it profitable. Ultimately it is a challenge that all of these companies have and that’s why most international companies are looking for regional heads like you see at this table. Individuals whounderstand the different dynamics in all these countries and are able to look for new opportunities.

Javier Vijil, Trans Re: The political environment has always been volatile in the area. However, Latin America has moved from being a region with political instability and state-run economies to a region with somewhat political stable and free market policies. So the most worrying change for me is the departure, especially in the largest countries, from free trade economics to return to a state-backed model like in the 1960’s. You’re seeing that in Argentina and somewhat in Brazil and Ecuador. So that is the concern I have with the political stability. However, as people havebeen saying every difficulty or every challenge presents an opportunity, and we have to operate within the wider political and legal framework of each country.

Ulisses Soares, CGSC: I agree that there is a certain political instability right now and I am concerned about further potentially adverse changes throughout Latin America, especially in Brazil that might negativelyaffect investments there. There’s an increasing degree of political polarisation going on in Brazil and in other countries. This is creating some uncertainty and risk for several investors in the region. This uncertainty has led to, especially in 2014, huge decreases in foreign direct investment in the region resulting from a combination of an increasingly unstable political environment andthe effect of the price of commodities

on the economy. The situation in Argentina and Ecuador, where some direct interventions in the economy are occurring, is an example of how investors perceive the region, leading to an inevitable decreased on investments in Latin America. These conditions bring direct impact to the insurance and reinsurance industries. Despite of this scenario, CGSC is still seeing good opportunities to keep investing and growing in the region.

Eduardo Recinos, Fitch Ratings: Our main concerns are more economic than political, long ago we had all these political troubles in Latin America and it was conceived as a troubled region with dictatorships, civil wars and political turmoil, but those days are long gone now. There are some countries that still have some extreme governments and there is a threat in those countries of maybe expropriation of private company’s assets; fortunately, these type of governments are the exception in the region.

J Gallagher: I’m a little more optimistic about the political situation but I think the question is very broad. We mentioned that some of the countrieshave clear difficulties and that is bad news for the region. But there is more good news then bad news for the region. If you group together the countries which are growing I think there are more of those that are going the right way than those that are going wrong way. There were some noises last year because commodities dropped so heavily that this could stop investment coming in from the outside. But you see now that commodities have stabilised a little, they have not gone to where they were before but we see they have improved.

What impact do big infrastructure projects, such as for last year’s World Cup in Brazil and the upcoming Rio Olympics, have on the market?

Aidan Pope, Guy Carpenter: I think The World Cup was a bit of a distraction and a bit of a cliche, I feel that there is a much bigger picture than that. I read yesterday that China had committed to investing $250bn in the region in the next ten years and that makes those other things pale into insignificance.

Andrew Downey, Validus: The wildcard right now is China and what they are doing in the region. It’s incredible. Where is the money coming from for a lot of these projects since commodity prices are so depressed? I think a

lot of it is going to come from China. The difficult part

there is that it’s Chinese money and Chinese contractors. I think there is a question of how insurers give policies to these unknown companies.

J Gallagher: Some countries have good legislation regarding new investors. The Chinese clearly are there and they are putting in a lot of money but the countries have to be prepared to put in the right lines about how they accept that money and how they deal with that

and I think that’s the challenge.

Javier Vijil, Trans Re: We have had important developments in infrastructure in Latin America, I mean there has been an array of instruments and public/private investment conversations while Latin America was having a great time with commodities and selling them at an excellent price. However the rules are changing. Slowly but surely if you take a look at each of the countries, each of them are changing the rules for foreign investment. It’s not as open as it used to be. On the other side, the Chinese model of tying aid together with construction contacts (and they have made three big such investments in Latin America already) means those risks and exposures do not enter the local insurance market.

Latin America roundtable

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“ I think there are some big geopolitical shifts as well and what’s really important now is that you have this Atlantic/Pacific link. ”Aidan Pope, Guy Carpenter

Lionel Soffia, Arthur

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Aidan Pope, Guy Carpenter: I don’t think it’s just about how they do it and the regulations. I think there are some big geopolitical shifts as well and what’s really important now is that you have this Atlantic/Pacificlink. One big project they are talking about is the Trans-Amazon railway which gives Brazil access to the Pacific Alliance which I really think is going to be driving trade for the next fifty years. I think we all accept that China is going to be the biggest economy in the world but that whole Pacific area is important.

Gallagher: The same thing applies with the tunnel that they are building below the Andes which connects the Atlantic with the Pacific through Argentina. That’s a project that has been tendered and also will connect the ports from the Atlantic with the Pacific, so I think those sort of projects really are the ones that are making thedifference.

David Battman, Alesco: There are

forms of Chinese investment. If you are in Europe, Chinese investment is markedlydifferent. Here, Chinese investors have tended to acquire companies to learn from them. If you go to the other extreme in Africa it’s often about buying land and resources.Latin America is seen differently, as an infrastructure opportunity for Chinese construction companies. I would see it as a more benign influence. Governments can set the rules for tenders for other projects and the Chinese companies still have to win those tenders. The most recent example is in Panama where they didn’t.

Ingrid Carlou, Patria Re: In Mexico we are still waiting for the investment from the government. They have passed the laws and made the reforms. But they are very late in starting, we

have had all the telecommunications and energy reforms and Mexico is ready to go forward but the government has delayed it because of the oil price and wanting to cut costs. They have a smaller budget so we will have to see what happens.

Juan Calvache, Brit: There is a situation in several countries where the projects have been approved but there is no money now. So this is where it comes down to who is willing to invest. Hopefully countries will deal with those international companies,

whether they be Chinese or otherwise, who genuinely

want to invest in these projects.

Ulisses Soares, CGSC: Most Latin American countries desperately need investments in infrastructure, independently if it is coming from China or wherever. There are some exceptions, such as Chile, which has developed a good infrastructure in the 80’s and 90’s and that has become a model for other countries like Peru and Colombia, who are trying to replicate that. However, right now, there is a

lack of money around, as commodity prices are lower, so the countriesare facing difficulties to finance the projects and need to make budget cuts. Brazil just made a significant one that will impact the plans to invest on the infrastructure there. Obviously, the infrastructure development is an important opportunity for the insurance and reinsurance industry and, hopefully, we will keep seeing more projects being developed in the region.

Rodrigo Botti, Terra Brasis: There is plenty of money out there, be it from China or from quantitative easing monetary policies. We still have a global picture of too much money chasing too few assets. What really is needed is a framework of viableprojects. We need a joint effort of the private sector, the regulators and

government entities in structuring these long-term projects.

Andrew Downey, Validus: When you start thinking about public-private partnerships, you see it’s all interrelated with the political environment. Some governments are going back to a state model and people are going to be very reluctant to put their money into those governments. Take a look at Nicaragua, and in Central America, the government in Guatemala is going very hard left as is El Salvador’s government, so you need a trusted framework.

Carlos Caputo, Markel: I think we don’t want to undermine the World Cup and the Olympics. Because the Olympics, and the recent World Cup, it is the first time that Latin America is at the centre of world’s attention. That’s something that doesn’t have a direct impact on how much money insurers make (exception made on Surety backing up all the infrastructure projects, CAR and EAR, that are associated to these events specially in developing countries) but with all the worldwide press looking at Latin America it’s a huge thing and a lot of publicity that might be reflected in further investment and business appetite.

foreign direct investment (FDI) in Latin America?

Rodrigo Botti, Terra Brasis: Lower oil prices have a large impact in the region, but not necessarily and directly on FDI. A drop in oil price makes investments in the oil sector less attractive, but possibly not with a significant FDI impact. Last year Brazil had $63bn in FDI, with only $4bn directed at oil and gas. For 2015, we expect a drop in FDI to $55bn, but not caused directly by the drop in oil price. The political scenario, the weak economy and weaker currency have a higher impact.

David Battman, Alesco: One immediate impact of the fall in energy prices is on M&A. We’ve seen it recently in Colombia where the second largest E&P company has just been acquired. All round the world the only way that the major energy companies are going to grow meaningfully in the short term and reward shareholders is by

“ Perhaps we should not be so gloomy about Latin America. There are opportunities. There is one market where none of us have done anything before and that is Cuba.”Javier Vijil, Trans Re

Latin America roundtable

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also many different

Lionel Soffia, Arthur

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acquiring other companies. For the humble insurance broker and dare I say it the occasional insurer we have got less people to insure.

Aidan Pope, Guy Carpenter: I think a positive aspect about this prolonged low price of oil that is that it will bring in discipline. All Latin American governments are going to have to look to see how they can tighten their beltsand become more efficient.

Eduardo Recinos, Fitch Ratings: Clearly it has had an impact on oil exporters which is clear and that is at the same time when commodity prices have dropped. It is creating a lot of macroeconomic instability in those countries. Latin America is a major producer of commodities and the recent drop in oil prices is impactingthe region’s countries in different ways Some countries are benefiting from lower international prices and others are negatively impacted. Venezuelais the most affected and the IMF forecasts that every $10 decline in oil prices will reduce the trade balance by 3.5% of GDP.

Carlos Caputo, Markel: Although a drop in oil prices has an imminent direct impact in decreasing the FDI in exploration, one thing that is happening now in Brazil with the oil price and all the bad news about Petrobras, is that Brazil is discussing the possibility of opening the country to foreign construction companies due to the inability of the government to perform well. This may be good news at the end of the day: bringing in more FDI in other sectors of the economy and most likely in oil as well if new policies to attract FDI are implemented, with tax benefits, transparency and clearer rules.

Ulisses Soares, CGSC: The FDI investments are related to the projections of the growth in the region. As the region is only expected to grow 2.6% in 2015, that doesn’t favour the flow of investments, independently of oil prices. In any case, the economies in the region are very dependent on the production not only of oil, but of all the other commodities and they have an important impact on the growthof the region, affecting the FDI and, consequently, the insurance industry.

M&A activity is a theme in the global market, what is happening with

re/insurance M&A activity in Latin America?

Ingrid Carlou, Patria Re: In the last ten years 104 insurance carriers were bought and the trend is not only going faster but also prices are getting higher, some of the most recent deals were nine times EBITDA. Companies need to feed their shareholders and a way to feed their shareholders is through growing. If you can’t grow organically you need to buy someone.

Andrew Downey, Validus: Before, capital was king, but the world is now awash with money and this capital needs to be serviced. We are at a moment where there is a watershed change that started about two years ago, and that is about distribution and access to business. I think that’s what it is going to be until capital becomes expensive again. People take over these companies needing that distribution. It’s like when you see Lloyd’s syndicates opening up in Latin America. It’s all about distribution and access to business, so that is the new model.

Javier Vijil, Trans Re: Countries are introducing much more stringent requirements for a highly regulated and fully capitalised industry. So you will see much more amalgamation because companies either don’t have the capital required or the margins that are required. Stronger companies are a good thing, as long as they encourage competition, rather than restrict it.

Eduardo Recinos, Fitch Ratings: I think for many years the global re/insurance market has been seen as a good M&A candidate due to its high level of deployed capital which has been in those industries and the large number of small and mid-size companies in insurance and reinsurance globally. The growth and stability of some

Latin American economies have created interest in global re/insurers. Regionally some companies have found that their own market has become too small and they have reached a point where they have expanded to other neighbouring countries.

Aidan Pope, Guy Carpenter: It’s not clear cut though. Now we are seeing Asia show more growth than Latin America and the US is also beginning to kick on and there are some signs of

improvement in Europe. So some companies could

move away from the region given that some deals are nine times

EBITDA or three or four times revenue.

Rodrigo Botti, Terra Brasis: In Brazil, there should be further consolidation of brokers, a very fragmented sector. Insurers will become less generic and concentrate on core activities. Itau’s and Sul America’s exit of corporate risks to concentrate on personal lines and health insurance are examples. Investment bankers think there is a classic case for consolidation

of local reinsurers, but it’s hard to pinpoint possible matches as the majority of players belong to distinct financial groups.

Javier Vijil, Trans Re: Perhaps we should not be so gloomy about Latin America. There are opportunities. There is one market where none of us have done anything before and that is Cuba. Most likely it is going to be open in the next eighteen to twenty four months and it is a country where a mini-Marshall plan is needed and that will bring opportunity for Cubans and for our industry. There are other opportunities too that come from economic growth, and this one that is very close and that could be big, I might be wrong, but it is something that we can’t forget, Cuba will be a big opportunity for everyone in this business.

“ All round the world the only way that the major energy companies are going to grow meaningfully in the short term and reward shareholders is by acquiring other companies.”David Battman, Alesco