Risk and resilience – a booming insurance industry in Latin America
01 May 2014 11:28
by Chris Crowe
Latin America has new frontier status for the insurance sector, but the region’s renowned volatility is always a concern
Bristol-based DAC Beachcroft insurance partner David Pollitt is a regular visitor to Miami. But while tourists may be lured by the tropical climate and art deco architecture, his frequent trips from West Country to East Coast are all about his practice. The emergence of Miami as an operational and service centre for Latin America means its importance to major international insurance players cannot be underestimated.
Miami is fast becoming a gateway to Latin America for the insurance and reinsurance industry, in the same way that Singapore operates as an insurance hub for Asia. Swiss Re established a Miami office in 2011 to service Latin America and the Spanish-speaking Caribbean islands. Back in 2007, Zurich (a key client of DAC Beachcroft) moved its Latin American regional headquarters from Santiago, Chile, to Miami. The trend continues: Hiscox announced the expansion of its Miami branch in January this year.
Randy Bullard, chair of Greenberg Traurig’s Miami corporate and securities practice, has lived in Florida for 17 years and has noticed a significant upswing in business recently. ‘People always talk about Miami as being a business hub for Latin America, but in the last two or three years there have been a stream of new companies locating themselves here. You have the multinationals investing in Latin America and you have the Latin American conglomerates coming to invest in the US. Miami is the natural jumping off point, culturally, linguistically and economically.’
And as the Latin American insurance and reinsurance market becomes increasingly developed in Miami, the same is happening at a more local level throughout the region itself. Mounting demand for infrastructure and an expanding middle class is creating a perfect environment for the international insurance and reinsurance community to flourish in some of the continent’s biggest economies.
Marta Viegas, head of insurance and reinsurance at Brazilian law firm TozziniFreire, says that the insurance sector in Brazil has experienced double-digit growth for many years. ‘As the market becomes more sophisticated, we expect regulations to change and demand for regulatory work to increase,’ she says.
According to the head of Clyde & Co’s Latin America group in London, Peter Hirst, many global insurance companies used to have small presences in the region and dealt with claims back in London or other large offices, but now many are handling the majority of their claims on the ground in Latin America. Zurich is one example: it has offices in Argentina, Brazil, Chile and Mexico; while insurance and reinsurance group ACE now has a significant Latin American operation based in Santiago. Swiss Re established a representative office in the Colombian capital Bogotá in 2013 and earlier this year it acquired a 51% stake in the Colombian surety company Compañía Aseguradora de Fianzas and also a 14.9% stake in Brazilian insurance company SulAmérica from ING Group. Willkie Farr & Gallagher’s New York office advised Swiss Re on the Colombia deal with Freshfields Bruckhaus Deringer’s New York office advising the reinsurance giant on the Brazilian transaction.
The intricacies of the market, coupled with the internationalisation of the sector, have favourable implications for insurance-focused law firms. Leonel Pereznieto Del Prado, a partner at Mexico practice Creel, García-Cuéllar, Aíza y Enríquez, says that the demand for legal services has risen enormously. ‘It is very common for insurance companies to reach out to external counsel to handle different transactions. Before, portfolio transfers were done on a very elementary basis.’
Firms are certainly increasing their focus on the Latin American insurance sector. DAC Beachcroft established a new presence in Colombia in December 2013 by formalising its association with Bogotá insurance boutique De La Torre & Monroy Abogados and Pollitt says the firm now covers the four main markets in Latin America with further offices in Mexico and Chile, and an association with Brazilian insurance and litigation boutique JBO Advocacia. ‘It requires investment,’ he says. ‘We are putting our money where our mouth is.’
Kennedys is also talking up its Latin American practice. It currently runs its business out of its Miami office but Alex Guillamont, head of the firm’s Latin America practice, says the firm has strong associations with local firms in Brazil, Chile, Colombia and Mexico and is ‘constantly assessing’ other markets to establish whether it should have a presence there: ‘If our clients need a new office in one specific country, we will open it for sure.’ Last year it entered an association with Bogotá insurance boutique Botero Salazar Tobón & Abogados.
Meanwhile, at Clyde & Co, Hirst says that the firm is looking to launch a presence in Mexico and Chile within 12 to 18 months. It already has well established offices in Brazil and Venezuela.
Jonathan Bruce, an insurance and reinsurance partner in the London office of Holman Fenwick Willan (HFW), believes his firm’s historical efforts in Latin America are being rewarded. ‘People have been talking about the potential for a long time and we do see it coming to fruition more and more with reinsurers setting up in the region,’ he says. HFW established a São Paulo office in October 2011 with the hire of Jeremy Shebson and his team from Barlow Lyde & Gilbert. Shebson remarks: ‘Latin America has all the key industry sectors – oil and gas, mining, marine and aviation – all of which are underpinned by insurance and the London market.’
Cross-border Chile: a booming market
With its rich natural resources, Chile is currently the darling of South America. It has one of the highest GDPs per capita in the region and Fitch gives it an A+ credit rating, compared to a mere BBB in Brazil. ‘It is the most advanced economy in Latin America,’ Jorge Martín, a partner at Chilean firm Claro & Cia argues.
Chile’s small population, but booming economy, is encouraging major Chilean corporates to expand their businesses into other Latin American jurisdictions. Earlier this year, Claro & Cia and Simpson Thacher & Bartlett advised Chile’s fourth-largest private bank, Banco CorpBanca, on its announced stock-for-stock merger with Banco Itaú Chile and the combination of CorpBanca’s and Itaú Unibanco’s operations in Colombia. Simpson Thacher and Chilean practice Santiago Jaramillo Villamizar & Asociados also represented CorpBanca on its recent tender offer to buy Colombia’s Helm Bank. And in 2013, Simpson Thacher advised Chile’s largest telecoms company, Empresa Nacional de Telecomunicaciones (Entel), on its $400m acquisition of the Peruvian operations of NII Holdings.
Martín acknowledges that Chilean companies are feeling compelled to grow into other markets. ‘We have seen that the strength and experience that certain companies have acquired in the Chilean market have encouraged them to seek opportunities in other markets.’
Chile’s wealth is partially driven by its mining resources: it is the world’s biggest producer and exporter of copper. Yet it doesn’t have the oil and gas wealth of many of its neighbours and there are serious concerns about whether the nation has enough power supply to maintain mining activities and other industrial concerns. Pipelines across the Andes from Argentina have provided an erratic supply, so Chile has sought other sources, such as liquefied natural gas.
David Williams, head of Simpson Thacher’s Latin America practice, says that Chile’s economic success and its demand for reliable energy has created a vibrant environment for cross-border M&A. He also believes that the Chilean business culture accounts for much of the nation’s recent success: ‘There is a near-universal sense of transparency, ethics and professional rigour that is remarkable. It has really world-class standards. What is expected when you do a deal is that you do it right, you do it legally, you do it ethically and you do it on time.’
Insurance runs deep in fast-developing economies that require infrastructure to galvanise growth, and Latin America is a classic example of a region where the environment is primitive compared to the US and western Europe. Many Latin American states are sitting on substantial oil and gas reserves (for example, see box, ‘Down Mexico way’), and they are working hard to enable these to meet requirements for domestic consumption and to export to neighbouring and other jurisdictions. Others, such as Chile, are struggling to generate enough power to fuel their quickly expanding economies.
Paulino Fajardo, a partner in DAC Beachcroft’s Madrid office, says: ‘Latin America is still to develop. It has the natural resources, but the need for infrastructure is massive. The market needs financial stability and you need insurance behind all these operations. Risk is normally where we operate. You can’t open a mine or a power station without building a financial services sector.’ Fajardo points to the Panama Canal extension project, which is one of numerous infrastructure enhancements under way in the region.
Social mobility is another reason why insurance products and the insurance industry are flourishing. ‘People have more income,’ says Marcelo Mansur Haddad, a partner at Brazilian firm Mattos Filho, Veiga Filho, Marrey Jr e Quiroga. ‘There is growth in the purchase capacity of Brazilians and there are many big infrastructure projects still to do. There is a boom in both areas.’ Last year, Mattos Filho advised on the privatisation of IRB Brasil Re and also worked on the $4.25bn IPO of BB Seguridade Participações – Banco do Brasil’s insurance arm.
The same trend is occurring throughout Latin America. Rafael Corzo de la Colina, partner at Miranda & Amado Abogados in Peru, says that although international insurance companies have a limited presence in the jurisdiction, there are mounting domestic needs: ‘Peruvian economic growth has determined an important growth in the middle class and, as a consequence, in life, health, home and automobile insurance.’
Luis Alfonso Fernández, a Madrid-based insurance partner at Hogan Lovells, believes that all these factors are creating a near-perfect environment in which the insurance industry can prosper: ‘We have seen a growing interest from insurance giants in the region to offer a wide range of traditional products, but also of specialised players, focused on special classes of insurance such as credit and surety.’
With increasing demand for insurance products, the industry is also contending with the gradual liberalisation of domestic markets. Brazil is the major jurisdiction that has opened up its insurance sector in recent years. Until 2007, when the Brazilian reinsurance market was liberalised, IRB Brasil Re had a total monopoly over reinsurance activities in the jurisdiction.
Since then, the reinsurance sector has blossomed and there are now some 80 reinsurance companies active, according to Bruno Balduccini, a partner at Pinheiro Neto. However, ‘the market is still virgin as far as products and services are concerned,’ he comments.
Claudia Freire, the head of the Latin America desk at JLegal London, the recruitment company, says that these sort of reforms are creating additional demand in the legal community. And this is despite restrictions placed on foreign law firms by the Brazilian Bar Association. She points to the recent arrival of Norton Rose Fulbright in Rio de Janeiro and the extension of Hogan Lovells’ presence in Brazil by launching an additional office in São Paulo in January 2014. ‘Despite the restrictions placed on foreign law firms by the Brazilian Bar Association, Brazil has continued maturing as a legal market for international law firms, attracting an ongoing flow of firms wishing to set up offices in 2014 or expand their presence in Brazil,’ she explains.
Even with this optimism, Viegas believes that the rapid evolution of the market poses numerous challenges to the insurance industry specifically. With international players coming in, the industry has been forced to mature very quickly. ‘Insurance companies had to adapt to working in a more complex and sophisticated environment, with many different international reinsurers, as opposed to only dealing with IRB, which was viewed as a “friendly” business partner. In this regard, negotiations have become more complex,’ she says.
By contrast, Chile’s insurance sector is still very much in its infancy, despite its recent economic success, says Jorge Martín, a partner at Chilean firm Claro & Cia. ‘Given that we are still a developing country, the penetration of insurance in Chile still has a long way to go.’
Like Chile, Mexico has a burgeoning economy and has opened up its insurance sector as part of its recent market liberalisation efforts. Previously, foreign companies were limited to a 49% stake in Mexican insurers and reinsurers, although Pereznieto Del Prado says that the deregulation of the market has been largely symbolic as most foreign insurance companies were able to circumvent the restrictions by using European Union (EU) and North American Free Trade Agreement investment treaties.
With its attempts to encourage international investment and participation in the economy, Mexico is also adopting new insurance industry regulations based on the EU’s Solvency II Directive, which seeks to harmonise insurance sector regulation. The Mexican rules are due to come into force in April 2015 and are expected to have a profound effect on the domestic market. ‘It is an interesting time for the insurance market here with Solvency II kicking in in a year’s time. There’s likely to be quite a bit of M&A activity here in Mexico,’ says Pereznieto Del Prado.
Carlos Ramos Miranda, a partner at Barrera, Siqueiros y Torres Landa, is also enthusiastic about the regulatory overhaul. ‘Mexico’s regulations are among the most sophisticated and developed, so that companies are properly capitalised and have proper corporate governance rules. Mexico decided in the best interests of the industry to have stronger institutions. I think we will be a leader in Latin America and worldwide, given the scope of these amendments.’
Ramos believes that insurance companies are faced with a significant but surmountable challenge to stay attuned to the existing regulations while making provisions for the new environment in 2015. He suggests that many Mexican companies will struggle to find the resources to commit to the new regulations. ‘Many companies, including smaller companies, will face a big challenge in getting up to speed and being fully compliant,’ he explains. ‘They’ll need to invest resources that they simply may not have. The situation is ripe for acquisitions of smaller companies and consolidation of mid-sized and big companies. And there is room for new players in the market.’
Mexico itself represents a particularly dynamic environment for the insurance industry given the government’s recent efforts to liberalise the economy (see ‘Down Mexico Way’). Yves Hayaux-du-Tilly, a London-based partner at Mexican firm Nadar, Hayaux & Goebel, says that the government’s proposals to allow international oil majors into Mexico’s energy industry and to end the monopoly held by Petróleos Mexicanos (Pemex), will be a monumental development for the insurance industry: ‘The energy reform that will now permit private companies to compete with Pemex, will continue increasing the demand for insurance. We are experiencing a demand for the development of new insurance products, the growth of non-traditional distribution channels and to a certain extent more demand for opinions on coverage related issues and for advice on claims and alternative resolution methods.’
Down Mexico way: the burgeoning oil and gas sector
In 1938, Mexican president Lázaro Cárdenas became a national hero by declaring that all oil and mineral reserves within the jurisdiction belonged to the state. For nearly 80 years, the state-owned Petróleos Mexicanos (Pemex) has been responsible for oil exploration and production, right through to running every single gasoline station in Mexico.
Today Pemex accounts for about a third of the federal government’s tax revenue, but while investment into exploration and production has increased dramatically in recent years, production has actually dipped to 2.5 million barrels a day, compared to its peak of 3.5 million barrels a decade ago.
Much of the more easily accessible oil reserves are depleting, so Mexico is looking to deep-water reserves and other energy sources, such as the shale gas opportunities around the border with Texas.
The economic reforms initiated by the current president Enrique Peña Nieto are expected to reinvigorate the oil and gas sector. In December, Mexico’s congress approved a bill to end Pemex’s monopoly and open the market for foreign investment. Dallas Parker, a Houston partner at Mayer Brown, says this is a historic moment for the oil and gas industry. ‘It is hard to find a precedent for such a dramatic opening of a market that has been so closed. I can’t think of another single event as dramatic as this one in Mexico.’
Carlos Ramos Miranda, a partner at Mexican practice Barrera, Siqueiros y Torres Landa says that the reforms are going to create an assortment of new engagements for the local legal market. ‘It’s going to boost participation in the downstream, midstream and upstream sectors. Clients are going to need assistance with regulatory processes, administrative law, labour law, litigation, tax and corporate strategy. I hope it boosts our practice in many areas.’ Ramos also indicates that Mexico currently does not have the requisite infrastructure to satisfy the demands of major oil companies and so road developments, among other infrastructure enhancements, are going to be essential.
Benjamín Torres-Barrón, head of Baker & McKenzie’s energy, mining and infrastructure practice in Mexico, believes that the reforms are ‘truly a game-changer’ for the nation, because they ‘finally allow private parties to participate in a greater manner in several activities that were previously restricted or exclusively reserved to the Mexican state’.
‘The reforms in Mexico have ended a 75-year-old monopoly and the opportunities now available are significant,’ says Elisabeth Eljuri, Norton Rose Fulbright’s Caracas-based head of Latin America. ‘What is most noteworthy is that, for the first time, Mexico will now allow production and profit-sharing contracts, licences and other contracts in the upstream business. This will invite massive investment in the oil and gas sector from the international oil industry.’
Mexico is technically a new market for the international oil and gas community, but it is different in that much of the oil reserves are already proven. Unlike other new frontier markets, the oil and gas industry is well aware that Mexico has enormous oil wealth. There will not be the same hesitancy and anxiety that oil majors experience when entering new exploration markets.
Pemex will essentially move from being an arm of the government to a productive state enterprise and the government hopes to wean itself from a heavy reliance on taxed revenues from the institution.
Sean Goldstein, a finance partner in White & Case’s Mexico City office, is also incredibly optimistic about the government’s wider economic initiatives. ‘The government has passed a whole slew of reforms beyond the energy sector during the past year and combined with the fundamentals – a young population, natural resources, stable democracy, sound fiscal policy and a great need for investment in infrastructure, energy, oil and gas – we think there is a real opportunity for investors.’
The positive outlook also has favourable implications for Central America and the rest of Latin America. Blake Winburne, global head of McDermott Will & Emery’s energy advisory practice, believes that increases in domestic production will change the dynamics in Central America and even the Caribbean, where he expects Mexico to have a greater influence in those markets. He comments: ‘It is a region where the pendulum is swinging towards lots of international capital being invested. Whether that is a decade-long cycle, who knows, but we plan to be participating in this market.’
With very little political, fiscal, economic and regulatory uniformity across the region, Latin America still represents an enormous challenge to international insurers and reinsurers that wish to target the whole region. Not every country is experiencing healthy growth and volatility is still in evidence. Political instability is a big problem, with Argentina and Venezuela particularly suffering a decline in cross-border trade and investment.
This has implications for the insurance industry as well. Boston-based insurance group Liberty Mutual sold its Argentine insurance business to Kranos Capital in March this year. Liberty had only established its Buenos Aires reinsurance operations in 2012.
Pablo Cereijido, a partner at Argentine firm Marval O’Farrell & Mairal, is understandably circumspect. ‘Things have been difficult. We have not seen big players coming in or big transactions. It was different three or four years ago when there was heavy investment in Latin America and Argentina was part of that wave of investment. We have had to adjust to the new environment.’
Freshfields Bruckhaus Deringer New York corporate partner Doug Bacon says that the fragmented market necessitates more sophisticated and intensive legal assistance. ‘As much as buyers want detailed predictions about risks in a market when doing a transaction, it can be very challenging in some Latin American markets in fields such as tax, litigation and regulatory compliance. We often spend more time on diligence and digging into issues and there is often more partner time involved.’
Clyde & Co’s Hirst also says that most international insurance programmes are common law-based and it is a significant challenge to ‘shoehorn these into civil law states’.
Jeremy Irving, a London-based insurance partner at Eversheds who recently advised IRB Brasil Re on its re-entry into the London market as a live participant, says that Latin America is an intricate landscape. ‘What we have found is that there is a whole mixture of rules around licensing, compulsory types of insurance, and whether a regulatory offence is criminal offence or civil. It is fair to say there is a real mixture and there are hazards in different jurisdictions. It is much easier in Europe with the single market, but you have to be mindful of the patchwork of regulations that make up the rest of the world.’
Fajardo says that international insurance companies need to have a global approach to business, but a local approach to compliance, using experts in each jurisdiction. ‘People can think of Latin America as one big country, but we feel that is a huge mistake.’
Nonetheless, João Marcelo Máximo dos Santos, a partner at Brazil’s Demarest, feels that although there are sizeable differences between the regimes in states such as Brazil, Chile and Venezuela, there are still common characteristics that effective legal counsel can overcome. This requires a keen understanding of each market according to Bruce at HFW. ‘It is recognised by the London market that Latin America is one of those regions where it is quite tricky to have the local contacts, and the knowledge and experience, to navigate all the issues that arise down there. So people really do need our help. The local regulatory scenario changes quite frequently. The markets can open up and then close down.’
Therefore, all this optimism about the prospects for insurance law firms is tempered by a whiff of Latin America’s renowned volatility. Chile’s earthquake in 2010 was foremost a humanitarian disaster, but from a commercial perspective it led to insured losses of over $8bn, according to reports. And just as Latin America is increasingly linking into global markets, the political climate in individual states can change dramatically and lead to recluse-like status, such as with Argentina.
Many recognise that the heat can quickly evaporate from a supercharged market. Pinheiro Neto’s Balduccini even considers the significance of the FIFA World Cup this year and jokes: ‘If Brazil loses, then we close the business.’ LB