OREANDA-NEWS. Fitch Ratings' rating outlook for the Brazilian insurance industry is negative, while the sector outlook remains stable, according to a new Fitch ratings report released today.

The Negative rating outlook for the Brazilian insurance sector mirrors the outlook on Brazil's sovereign ratings (long-term foreign and local currency Issuer Default Ratings 'BBB-'/Outlook Negative). Currently, the rating outlook of 40% of Fitch rated Brazilian insurers is negative, reflecting the country-related constraints under Fitch's Insurance Rating Methodology. In contrast, Fitch's outlook for the Brazilian insurance sector remains stable, despite the very weak economic environment. This reflects Fitch's view that the sector will maintain good key credit metrics in 2016 with good profitability and adequate capitalization, despite expectations for lower premium growth.

Fitch expects total sector premium growth to remain under pressure in 2016, albeit at varying levels across segments. As of September 2015, premium growth (all segments except health) increased to 12% year-on-year (yoy) from 10% in 2014 but remained below the 2010-2013 average of 17%. Growth was mainly driven by Vida Gerador de Beneficios Livres (VGBLs), which grew 26% yoy.

Fitch expects insurance sector profitability to remain solid in 2016, as a result of strong investment income that will continue to offset the negative mark-to-market valuations of fixed income securities. The high correlation between profitability and interest rates creates a natural hedge for the sector, as interest rates tend to rise in periods when premium growth slows, largely neutralizing the negative effect of lower business generation.

Brazilian insurers' security portfolios are exposed mainly to liquid Brazilian government bonds or securities constrained by sovereign ratings. In case of another sovereign downgrade, the credit risk of these portfolios would rise further. Meanwhile, insurance sector capitalization should remain adequate in 2016, although the upward trend in leverage will persist due to subdued security revaluation reserves and capital optimization efforts by banking groups that own insurance companies.

Fitch expects the local reinsurance market to remain under pressure in 2016 from slower primary insurance market growth and high competition. However, similar to the insurance market, solid investment income will support the profitability of the segment and largely offset the negative effect of the slowdown. The changes in the regulatory framework that reduce the barriers faced by foreign reinsurers to operate in Brazil will affect local reinsurers when they start taking effect in 2017.