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Rating Action:

MOODY'S INVESTORS SERVICE RATES ITAÚ INSURANCE GROUP A3 / Aaa.br FOR INSURANCE FINANCIAL STRENGTH; MOODY'S AMÉRICA LATINA RATES SUBORDINATED DEBT OF ITAUSEG PARTICIPAÇÕES S.A. Baa2 / Aaa.br

 The document has been translated in other languages

22 Dec 2005
MOODY'S INVESTORS SERVICE RATES ITAÚ INSURANCE GROUP A3 / Aaa.br FOR INSURANCE FINANCIAL STRENGTH; MOODY'S AMÉRICA LATINA RATES SUBORDINATED DEBT OF ITAUSEG PARTICIPAÇÕES S.A. Baa2 / Aaa.br

Leading Brazilian Insurer and Unit of Banco Itaú Group Rated. First-time Insurance ratings in Brazil.

New York, December 22, 2005 -- Moody's America Latina Ltda. has assigned a Baa2 (Global Local Currency Scale) rating, and a Aaa.br (Brazilian National Scale) rating to BRL1.5 billion of subordinated debentures due 2007 to be issued by Itauseg Participacoes, an insurance holding company subsidiary of Banco Itaú S.A. (Banco Itaú). Additionally, Moody's Investors Service has assigned ratings to the two principal insurance subsidiaries of Banco Itaú and Itauseg Participacoes. Itaú Seguros S.A. and Itaú Vida e Previdência S.A. have both been assigned A3 (Global Local Currency Scale), and Aaa.br (Brazilian National Scale) insurance financial strength ratings. The outlook for all of the ratings is stable.

Itauseg Participacoes:A New Insurance Holding Company Subsidiary of Banco Itaú

Itauseg Participacoes is a newly-established holding company subsidiary of Banco Itaú that has been created to hold Itaú's insurance subsidiaries, which until now have been owned directly by Banco Itau Holding Financeira S.A. (BIHF) and Banco Itaú. Proceeds from the insurance holding company's subordinated debt offering are expected to be used to acquire Banco Itaú's 50% ownership interest in Itaú Seguros S.A. Itaú Seguros S.A., in turn, owns the remainder of Itaú's insurance operations, including Itaú Seguros, Itaú Vida e Previdência,

Companhia Itaú de Capitalizacão, and Itaú Saúde, a health insurer that remains in run-off.

It is anticipated that soon following the completion of the debt offering and share purchase from Banco Itaú, and in accordance with a resolution issued in December 2005 by the Executive Committee of BIHF, that BIHF will transfer in the first quarter of 2006 its ownership of the remaining 50% of Itaú Seguros to Itauseg Participacoes in exchange for newly-issued shares of the new insurance holding company, giving Itauseg Participacoes 99.99% ownership of Itaú's insurance operations.

Rationale -- Insurance Financial Strength Ratings:

According to Moody's, the A3 (Global Local Scale) and Aaa.br (Brazilian National Scale) insurance financial strength ratings of Itaú Seguros and Itaú Vida e Previdência consider several factors in common, including i) the insurers' status as wholly-owned subsidiaries of Banco Itaú and BIHF; ii) the common branding of the insurance subsidiaries with the well-established Itaú name; and iii) their strong historical operating performance, internal capital generation, and financial fundamentals, including a strong investment, liquidity and reserve profile.

Itaú Seguros S.A.:

Expanding on its rating rationale for each of the insurance subsidiaries, Moody's noted that Itaú Seguros maintains a strong competitive position in the Brazilian general insurance sector as the third largest insurer, based on written premiums. Itaú Seguros is active in all major product markets, including personal insurance (primarily automobile and homeowners), commercial insurance for small and medium-sized business (comprising mostly property, transport and liability coverages), and a particularly strong position in specialty lines and commercial insurance for large national and international firms in Brazil. In its personal and small and medium-sized commercial insurance operations, Itaú Seguros distributes its products primarily via independent agents throughout Brazil, and in its large commercial insurance unit, the company distributes its products and services primarily through national and international insurance brokerage firms, a channel in which the group also maintains a particularly strong competitive position.

Moody's noted that Itaú Seguros has continued to generate better-than average underwriting profitability in recent years, as compared with its Brazilian general insurance peers, with combined underwriting ratios slightly below 100%. Furthermore, the rating agency noted that the insurers' emphasis on operational efficiency, and its strong commitment to investing in systems technology to streamline product distribution, underwriting, claims handling and data collection and analysis position it well in a growing and increasingly competitive general insurance marketplace. Moody's added that Itaú Seguros, like its Brazilian industry peers, benefits from a relatively mild exposure to catastrophe losses, given the general absence of significant seismic and severe windstorm exposures. Furthermore, Itaú Seguros' large capital base -- which also includes its ownership of Itaú Vida e Previdência and other insurance-related subsidiaries -- supports the insurer's better-than-average operating leverage profile.

Itaú Vida e Previdência S.A.:

Expanding on its rating rationale for Itaú Vida e Previdência, Moody's noted that the company ranks as the second largest life insurer in Brazil, with strong positions in both the life insurance and annuity segments, and that its market position has benefited in recent years from its affiliation and integrated product distribution with Banco Itaú, and from the rapid growth in life-contingent tax-deferred annuities (VGBL) in recent years. Unlike Itaú Seguros, which relies primarily on non-affiliated distribution channels, Itaú Vida e Previdência's products are distributed almost entirely through Banco Itaú's vast branch network. This arrangement enables the insurer to maintain a very competitive expense structure, as compared with many of its life insurance peers, and enabled it to capitalize on growth opportunities in savings-based annuity products, an area in which bancassurers have dominated in Brazil.

Moody's added that Itaú Vida e Previdência's credit profile is further supported by its systems integration with Banco Itaú and from its strong investment and asset-liability liquidity profile. The company's earnings and capital generation have benefited from its efficient expense structure, and from improving mortality trends in Brazil, as well as from growth and strong persistency to date in the annuity segment. Although annuity liabilities are exposed to contractholder surrenders during periods of rising interest rates, Itaú's persistency has remained strong, and the company has relatively modest earnings exposure to investment value fluctuations, given that most of investment-related gains and losses are passed on directly to policyholders.

Rationale -- Itauseg Participacões Subordinated Debt Rating:

Commenting on its rating of Itauseg Participacões' subordinated debt, Moody's noted that the Baa2 Global Local Currency rating is based on a combination of factors, including i) the underlying credit quality and ratings of its principal operating subsidiaries (Itaú Seguros and Itaú Vida e Previdência; both rated A3/Aaa.br); ii) Itaú Seguros' strong capitalization and dividend-paying capacity, relative to its minimum solvency requirements; iii) the expectation that Itauseg Participacões' acquisition of the shares in Itaú Seguros held by Banco Itaú and Banco Itaú Holdings Financeira will occur promptly following the completion of the debt offering, in accordance with BIHF's Executive Committee resolutions; and iv) Moody's view that Itauseg Participacões, together with the group's insurance subsidiary operations, enjoy a high degree of implied support from Banco Itaú and BIHF and from the group's executive management.

Moody's emphasized that the rating also considers Itauseg Participacões' high debt leverage profile which, at 50% -- pro forma for the exchange of shares in Itaú Seguros with Banco Itaú and BIHF -- is considered to be very high. At this leverage level, Moody's noted that, absent its parental affiliation with Banco Itaú, Itauseg Participacões' subordinated debt ratings would be lower on a Global Local Currency, and possibly also on a National Scale, basis. This concern is partly mitigated, however, by Itaú Seguros' strong dividend-paying capacity as a result of its sizeable retained earnings position, its very modest regulatory minimum capital and solvency requirements, and the absence of meaningful legal restrictions on its ability to pay dividends to its controlling shareholder, Itauseg Participacões.

Finally, the rating agency said that a failure to complete the share exchanges in a timely basis (e.g. with Banco Itaú immediately following the completion of the debt offering, and with BIHF during the first quarter of 2006), could lead to a downgrade of Itauseg Participacões' subordinated debt rating. With respect to parental support, Moody's noted that although Brazilian banking laws prohibit Banco Itaú or BIHF from providing guarantees, loans, or other explicit binding financial support to Itauseg Participacões, the rating agency believes that the executive management and Board of Directors of BIHF, the ultimate parent, are committed to supporting the growth and capital needs of the insurance business, which accounts for approximately one-fourth of Itaú's consolidated shareholders' equity, and to maintaining the group's ownership of the insurance subsidiaries indefinitely in the future.

Relationship Between Insurance Financial Strength and Subordinated Debt Ratings:

Moody's noted that the 2-notch differential between its A3 Global Local Currency insurance financial strength ratings of Itaú Seguros and Itaú Vida e Previdência and Itauseg Participacões' Baa2 Global Local Currency subordinated debt rating reflect a combination of several factors. The rating agency explained that its "standard" notching between these ratings in Brazil is expected to be 3 notches, given i) the subordinated status of the notes relative to the insurers' policyholder obligations under Brazilian insurance regulations (and relative to any possible future senior debt obligations that Itauseg Participacões may incur); ii) relatively modest regulatory/legal restrictions on insurers' capacity to pay dividends to shareholders with capital in excess of minimum solvency requirements; and iii) modest minimum capital or solvency margin requirements for Brazilian insurers, compared to companies' actual capital levels. In contrast, Moody's noted that in the USA and other highly regulated jurisdictions, standard notching between an insurer's financial strength rating and its holding company's subordinated debt rating would normally be 4 notches on the global rating scale.

Moody's added, however, that in Itauseg Participacões' case, the notching differential is reduced to 2 notches to reflect the following considerations: i) that Itauseg Participacões and its insurance subsidiaries are wholly-owned subsidiaries of Banco Itaú, ii) that the insurance holding company and its insurance subsidiaries share the Itaú brand name and bank-related distribution channels and are therefore considered a core operation of the consolidated Itaú group, and iii) that Moody's expects Banco Itaú Financeira will continue to own -- indirectly via Banco Itaú -- the insurance operations, and will provide capital support, as needed, to the insurance group's growth and solvency requirements. The rating agency further noted that it views the introduction of debt into the insurance group's capital structure as primarily driven by internal capital management and efficiency initiatives, rather than to a change in Banco Itaú's fundamental strategy with respect to its insurance operations.

Key Rating Expectations

Key rating expectations at the current rating levels are as follows:

• No change in ownership of insurance operations or in strategic commitment to its insurance subsidiaries on the part of Banco Itaú or BIHF;

• Insurance Operations: combined underwriting ratios at Itaú Seguros in line with historical trends (e.g. in the 95%-105% range); no decline in total capitalization;

• Financial leverage at Itauseg Participacões declining from 50% on pro forma basis to 30%-35% by 2007; earnings coverage of interest greater than 2.5x; dividend capacity from insurance subsidiaries remaining in excess of 1.5x total debt;

• No material change in Itaú Seguros' dividend paying capacity.

What Could Change the Ratings Up

• Absent a raising of Moody's Global Local Currency Guideline for Brazil (currently A3), an upgrade of Itaú's insurance financial strength ratings or of Itauseg Participacões' debt rating is unlikely.

What Could Change the Ratings Down

• A downgrade of Banco Itaú's/BIHF's global bank deposit or debt ratings;

• A decision by Banco Itaú/BIHF to divest all or a part of Itauseg Participacões;

• Financial leverage at Itauseg Participacões in excess of 50%, following the completion of its share exchanges with Banco Itaú and BIHF;

• Significant deterioration in operating performance at the insurance operations (e.g. general insurance combined ratios significantly in excess of 105%, or a decline in life insurance and annuity persistency in excess of 10% of reserve balances);

• Significant reduction in total capitalization of the insurance operations (e.g. by more than 15% over a 12-month period) resulting from underwriting or investment-related losses, or from a significant dividend payment to shareholders;

• A lowering of Moody's Global Local Currency Guideline for Brazil could result in a downgrade of the Global Local Currency ratings, as the guideline generally represents an upper-bound for local currency ratings.

A change in the mapping between Global Local Currency and National Scale Ratings for Brazil could also lead to a change in Itaú's National Scale Ratings.

The following ratings have been assigned:

Itauseg Participacões S.A. -- global local currency subordinated debt rating at Baa2; Brazilian national scale subordinated debt rating at Aaa.br;

Itaú Seguros S.A. -- global local currency insurance financial strength rating at A3; Brazilian national scale insurance financial strength rating at Aaa.br;

Itaú Vida e Previdência S.A. -- global local currency insurance financial strength rating at A3; Brazilian national scale insurance financial strength rating at Aaa.br.

Summary Financial Information

Banco Itaú Holdings Financeira, S.A., based in Sao Paulo, Brazil, is a licensed bank and is the ultimate parent company of the Itaú financial group of companies, which comprises primarily the operations of Banco Itaú, and the insurance operations under Itauseg Participacões of Itaú Seguros S.A., Itaú Vida e Previdência S.A., and Cia. Itaú de Capitalizacão. For the nine months ended September 30, 2005, Itaú Group reported total revenues of BRL 8,520 million and net income of BRL 3,827, and as of September 30, 2005, the group reported consolidated shareholders' equity of BRL 15,229 million . For the nine months ended September 30, 2005, Itaú Seguros and Itaú Vida e Previdência reported total revenues of BRL 1,605 million and BRL 2,750 million, respectively, and net income of BRL 583 million and BRL 475 million, respectively.

NOTE: Moody´s national scale ratings rank an enterprise's credit risk on a relative basis in comparison with other firms within the same country. Such ratings are designed for use at the local (national) level, and they are not globally comparable. For Brazilian companies, national scale ratings carry the identifier of ".br".

Moody's global local currency ratings indicate the relative credit risk on a globally comparable basis. Taken together, the national scale and global local currency ratings provide a more comprehensive opinion about the credit risk of the company. Moody's insurance financial strength ratings are opinions about the ability of insurance companies to punctually repay senior policyholder claims and obligations.

For more information, please visit our website at www.moodys.com

New York
Alan Murray
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Buenos Aires
Alejandro Pavlov
Vice President - Senior Analyst
Financial Institutions Group

No Related Data.
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