Over the past few months, IRB-Brasil Resseguros S.A. (“IRB”) has once again been in the spotlight of the insurance market, this time because the state-controlled company, created in 1939 with the strategic role of being the sole reinsurer authorized to underwrite reinsurance in Brazil, is finally to be privatized.
Although the privatization of the largest reinsurance company in Latin America is worthy of our attention, this news was not a great surprise to the market as there has been pressure for IRB’s privatization since 1998.
At the end of the 1990s, when Brazil was going through a wave of privatizations, the President of the time, Fernando Henrique Cardoso, attempted to privatize IRB but was ultimately unsuccessful for several reasons, including: (i) a lawsuit filed with the Brazilian Supreme Court to frustrate the privatization of IRB; and (ii) a failure to pass the legislation required to end IRB’s reinsurance monopoly.
The first step in recommencing the privatization process for IRB was taken in January 2007, when Complementary Law 126/2007 was enacted, which brought significant changes to the Brazilian insurance framework and has affected the entire sector since that date.
Among the main changes brought in by the new regulation were: (i) the end of the reinsurance monopoly, with the opening of the market to other accredited players, including foreign companies; and (ii) the transfer of the regulatory authority for the reinsurance market from IRB to the Brazilian Superintendence of Private Insurance (Superintendência de Seguros Privados – “SUSEP”), which oversees, regulates and licenses the Brazilian reinsurance market.
As a direct effect of opening the market to other reinsurers, fifteen years after the previous attempts the Brazilian market will finally see the privatization of IRB. A bid invitation containing key information was published on 23 January 2013, which established that the process will be conducted by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social).
According to the bid invitation, the privatization will occur by means of an increase of up to 15% in the corporate capital of IRB by the issue of new common shares which cannot be purchased by the Brazilian Federal Government. The price for each share has been set at BRL 2,577.00.1 Current private preferred shareholders, which are almost entirely local insurance companies due to a requirement imposed by the old regulation, will have preferred rights to subscribe for the new common shares.
The bid invitation indicates that all preferred shares will be converted into common shares, and a new type of shares called “Golden Shares” will be issued to the Government. The Golden Shares will have specific veto powers in relation to the following matters:
- change of IRB’s corporate name or purpose;
- transfer of corporate control;
- changes to IRB’s trademark;
- definition of underwriting and retrocession general policies;
- corporate transactions such as mergers, transformations, amalgamations, spinoffs, etc. that might result in a loss of rights for the Golden Shares; and
- any changes to the Golden Shares’ rights.
Notwithstanding the above, the bid invitation also states that 50,000 shares currently owned by the Government will be offered to IRB’s employees at a price of BRL 2,319.30, which is 10% less than the subscription price for the new shares mentioned above. The remaining shares belonging to the Government are to be transferred to BB Seguros Participações S.A., the insurance arm of Banco de Brasil, a financial institution which is also owned by the Government.
A condition for the privatization is that the new controlling group must commit to making its best efforts to achieve an initial public offering of IRB’s stock within five years of the privatization.
Such conditions demonstrate the Government’s desire to make IRB more competitive. Although IRB remains the largest reinsurer in Brazil2 six years after the opening of the market, during which 11 players have enrolled with the same status as local reinsurers, the Brazilian Government believes that the entire market will benefit and grow as a result of the privatization of IRB, which will result in an increase in retention capacity and a decrease in insurance and reinsurance prices.