Fitch Is Bearish On Several Latin American Insurance Carriers

Over the past five weeks, Fitch Ratings has conducted a review of its International ratings in Latin America with respect the impact of the coronavirus and is recapping the results of that review. The review resulted in negative rating outcomes defined as downgrades, Negative Outlooks or Negative Watch for approximately one-third of the cohort. The negative outcomes were heavily influenced by Fitch’s April 2020 downgrade of the Mexico sovereign rating to ‘BBB-‘ from ‘BBB’, in part due to coronavirus pressures, and asset concentrations by insurers in that sovereign’s debt.

The review included 12 insurers for which Fitch maintains a public international scale rating, including seven in Mexico, two in Peru, and one each in Brazil, Chile and Uruguay. Of the 12, three Mexican insurers were downgraded due in part to the noted sovereign pressures, and the remaining nine were affirmed. Of those affirmed, one insurer in Brazil was assigned a Negative Outlook and the remaining eight were Stable. Of those downgraded, one was assigned a Negative Outlook and the other two were Stable. Finally, one of the noted ratings affirmed had an Outlook revision to Stable from Positive.

Although the ultimate implications of the pandemic on Latam insurers’ credit profiles remain unclear, Fitch believes that widespread default risks in below investment-grade bonds in excess of the firm’s rating case assumptions, represent the most significant downside risk. This could have a significant impact on Latam issuers’ profitability and capital position. Furthermore, high concentrations in sovereign-related investment securities coupled with further negative rating actions on Latam country’s sovereign ratings, which are not captured in the firm’s rating case assumptions, would also have a significant influence on Latam issuers’ ratings, given the changes in the country’s industry profile and operating environment’s assessment by Fitch.

The rating actions were based on Fitch’s assessment of the impact of the coronavirus pandemic under a set of ratings assumptions (see “Fitch Ratings Defines Assumptions for Coronavirus Reviews of Insurance Companies”, published on April 7, 2020). These assumptions were used to develop pro forma financial metrics for insurance groups, which Fitch compared with the ratings guidelines defined in its “Insurance Rating Criteria”, published on March 2, 2020, and with previously established rating sensitivities for the respective insurers. The review was also heavily influenced by elements in Fitch’s criteria tied to sovereign investment and country risks.

Ratings Downgraded with Outlook Revised to Negative from Stable:

Seguros Inbursa (Insurer Financial Strength [IFS]: BBB-/Negative).

The downgrade of Mexico’s Seguros Inbursa’s IFS rating mirrors the rating action on Banco Inbursa. Fitch considers Grupo Financiero Inbursa’s (GFI) credit quality aligned to that of its main operating subsidiary, Banco Inbursa. Both Seguros Inbursa and Banco Inbursa’s ratings are based on legal support agreements provided by its holding group GFI, which is legally bound to provide support for its subsidiaries’ losses and obligations.

Ratings Downgraded with Stable Outlooks:

Reaseguradora Patria (IFS: BBB+/Stable)
Pena Verde (Issuer Default Rating [IDR]: BBB-/Stable).

The downgrade of Mexico’s Reaseguradora Patria S.A. (Patria) primarily reflected pressures on the reinsuers’ investment and asset risk driven by Mexico’s sovereign rating downgrade, given the sovereign investment concentration being held at 107% of capital at YE 2019. The sovereign’s downgrade also caused Patria’s Risky Assets Ratio to increase to 80% from 59%. Patria’s coronavirus pro forma was also pressured by the company’s exposure to equity investments at 26% of capital.

The downgrade of the holding company Pena Verde S.A.B.’s (PV) IDR mirrors that of its main operating company, Patria. PV’s rating reflects standard operating to holding company notching as well as a ‘ring fenced’ regulatory environment, per Fitch’s insurance criteria.

Ratings Affirmed with Outlooks Revised to Negative from Stable:

Sul America S.A. (IDR: BB-/Negative).

The revision of Brazil’s Sul America’s Outlook to Negative was driven by its pro forma ROAE breaching the downgrade sensitivity of less than 8% under the firm’s rating-case assumptions. The Negative Outlook also reflects a pro forma financial leverage ratio (FLR) that increased to 27% from 24%, below the previous rating sensitivity of 31%, but at a closer level. This revision also considered the direct influence of the negative outlook on Brazil’s sovereign rating for the insurance industry’s profile and operating environment.

Ratings Affirmed with Outlooks Revised to Stable from Positive:

RIMAC Seguros y Reaseguros (IFS: BBB/Stable).

In Peru, Rimac Seguros y Reaseguros’ (Rimac) rating was affirmed and the Outlook was revised to Stable from Positive, reflecting the significant uncertainties created by the global coronavirus pandemic, the effect that this is having on capital markets and also the companies’ expected net earnings for this year. In general, Fitch believes Positive Outlooks are not appropriate at this time due to such uncertainties.

Ratings Affirmed with Outlooks Maintained at Stable: