After dire 1st half, LatAm banks' insurance ops to recoup in coming quarters

Several Latin American banking groups saw their insurance results nosedive in the first half of the year, but analysts say this trend would reverse in the coming quarters as the region catches up with other economies in lowering their COVID-19 cases and intensifying vaccination drives.

Brazilian banks Banco Bradesco SA and Itaú Unibanco Holding SA, Mexico's Grupo Financiero Banorte SAB de CV and Peru's Credicorp Ltd. were some of the financial conglomerates whose insurance businesses weakened in the second quarter.

Bradesco's net income, in particular, was heavily hit by a 58.3% drop in its income from insurance, pension plans and capitalization bonds. The Brazilian bank's move to significantly reduce its guidance for insurance revenue well into negative territory also caused concerns for analysts. Bradesco revised its 2021 forecasts for insurance unit Bradesco Seguros SA to a contraction of between 15% and 20%, from a projected growth of between 2% and 6% as of March.

Bradesco Seguros holds a big portfolio in the life insurance, health insurance and P&C segments, with the first two taking a heavy beating during the pandemic, S&P Global Ratings analyst Henrique Sznirer said. The insurance group's ROE, which was usually around between 15% and 25%, slipped to 8% in the second quarter of this year, according to Sznirer.

The inadequate response of several of the region's governments to the COVID-19 crisis has been the main driver of the poor results within the general insurance industry in the region. "There were a lot of deaths in all Latin American countries and it affected the life insurance policies for most of these banks and insurance companies," according to Carlos Macedo, an analyst for Brazil-based research firm OHMResearch. In Brazil, the peak of debt and COVID-19 cases were seen in April or May.

The second quarter was the worst quarterly period for insurance businesses in Brazil since the third quarter of 2016, with six major insurance and reinsurance groups — with more than half owned by banks — showing a 46.5% drop in their overall operating results from the previous quarter, according to a report from Brazilian publication Valor Econômico.

"The life insurance claims ratio for Itaú and Bradesco was around 30%, and it went all the way up to 60% or 65%," Macedo said. The insurance units are some of the most profitable businesses for these banking groups, and a reversal of those results would have a negative impact on their profitability, Macedo noted.

Another factor behind the spike in insurance claims in the first half was the deluge of hospital visitations after an extended period of people staying home due to fear of the pandemic. "This did not happen last year. People were afraid to go to the doctor when the pandemic first arrived so they were staying home," Sznirer said. "Last year, the results for health insurance was actually better for Bradesco and other health insurers. But this year, it got worse."

In Mexico, rising inflation and interest rate hikes from the central bank has also impacted the annuities and insurance businesses of Banorte, CEO José Marcos Ramírez Miguel said, although the diversified operations of the group helped in tempering some of these adverse results.

Third-quarter turnaround

Bank executives are optimistic that recovery in their insurance results will begin as soon as the third quarter of the year. Credicorp CEO Walter Bayly Llona said the company expects its life insurance business to return to profitability in the third quarter, noting that the effect of the second wave of infections has already declined "in a very relevant way." Although a potential third wave of cases in Peru is being monitored, vaccination efforts in the country have gained pace and would help in reducing deaths.

"Given life insurance is what is mostly hurting the banks, a decline in mortality rate will positively impact the banks' results," Macedo said. "You need to see vaccination go up in order to reduce those mortality rates."

The Southern Hemisphere is also approaching summer, and with COVID-19 being "a cyclical disease," there will be fewer contamination rates and fewer people dying, the analyst said. "I would be more concerned going into the middle of next year when the winter comes around and the case level goes up, as well as on whether they're going to be able to navigate through that with vaccinations and other, hopefully, new means of treatment."

Both Macedo and Sznirer noted that insurance units could still observe liquidity issues given some delayed reporting for incurred claims, which is expected until the first quarter of 2022. However, a gradual recovery starting the third quarter should be supported by the fact that the impact on the insurance businesses is caused by a "one-time" event as opposed to an effect caused by higher competition that could have resulted in the erosion of banks' pricing power, Macedo noted.

Positive prospects hinge on vaccination progress

Several reports indicate that some Latin American countries have been accelerating their vaccination efforts in recent months, even faster than those of developed economies. The high vaccination acceptance among the region's population and a rising supply of vaccines are some of the supporting factors for this development, resulting in fewer infection cases and deaths.

But a problem arises in the uneven vaccination progress among the region's countries. Although Chile has vaccinated more than three-quarters of its population, other major economies such as Mexico and Colombia are still lagging at about 40%. Several Latin American and Caribbean countries are even faring worse. Overall, nearly 44% of the region's population is fully vaccinated against the COVID-19 virus, according to the World Health Organization.

Mexico playing catchup has consequences for its insurance industry. Banorte's recently reported third-quarter results show that revenues of insurance subsidiary Seguros Banorte SA de CV were still down 30% quarterly and dropped 57% year over year. "The insurance business regrettably continues to face a high number of COVID-19-related claims in the life segment," Ramírez said. The weak insurance results continue to drag down the company's net margin and prevent it from hitting normal levels, according to the executive.

"You've got to track which countries are doing better in terms of vaccinations and containing the disease," Macedo said. "Basically [those] treating people so that they don't die because the claims that are coming through and hurting the insurance business in each one of these countries are life insurance claims."

Brazilian banks such as Bradesco and Itaú are yet to report third-quarter earnings, but Sznirer is optimistic about the countries' prospects.

"The expectation is that the results will be better because the vaccination is advancing quickly here in Brazil. We are also at the lowest point of COVID-19 deaths and cases," the analyst said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.