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
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,
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
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
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
No material change in Itaú Seguros' dividend paying
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
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
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,
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
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
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Vice President - Senior Analyst
Financial Institutions Group