Rating agency, S&P Global Ratings has commented on Latin America’s 2020 recession, claiming its likely weak recovery will pressure regional insurers’ operating conditions.
They expect a contraction in gross written premiums (GWP) in 2020 and moderate growth in 2021, whilst also expecting net profits to reach the 2019 levels only in 2022.
However, the insurers’ overall adequate underwriting, conservative investment policies, and sound capital and liquidity offer a cushion against the tough conditions.
Due to COVID-19 and the shock in oil prices exacerbating pre-existing economic weaknesses, S&P has taken negative rating actions on 40% of their Latin Insurers .
Insurers in Latin America have an average strength rating of ‘BBB’ with a negative bias, given that 75% of these ratings have a negative outlook, reflecting sovereign risk.
Before the region’s exposure to the COVID-19 pandemic, economic growth had already slowed due to the underwhelming levels of investment, resulting from political uncertainties and rising social protests.
This happened to spill into the insurance sector, leading S&P to move ratings on Latin American insurers that had already reflected a negative bias, since 38% of the global scale long-term ratings had a negative outlook.
The coronavirus pandemic and the collapse in oil prices prompted S&P to take 11 negative rating actions on global scale on the sector, representing around 24% of the total rating actions on the global insurance sector.
The industry has remained relatively resistant to the twin shocks compared to other sectors, given that rating actions occurred among 9% of rated insurers compared with around 40% across all sectors. However, the number of such actions among Latin America rated insurers was the highest.
According to S&P, Mexican insurers have been the hardest hit since the start of the pandemic, because negative rating actions among them accounted for 73% of total in the region, with those among Colombian insurers accounting for the remainder.
Given that more than 90% of FSRs in the region are either at or above the level of credit ratings on the respective sovereigns, the recent rating actions reflect the weakening economic conditions and increasing challenges ahead for these countries.
As of August 24, 2020, 25% of S&P’s FSRs on Latin American insurers have a stable outlook, and 75% have a negative outlook.
S&P considers the economic shock from COVID-19 to have been uneven in the region; therefore, the recovery is expected to occur in the same manner.
According to S&P estimates, the pandemic will have the deepest impact on Argentina and Mexico given the likely contractions of 5.6% and 5.5%, respectively, for both years. The rating agency also expects Brazil’s economy to contract by 3.5% and Colombia’s by just 0.5%.
