‘Opportunistic’ M&A to dominate LatAm in 2019, says S&P

Jesus Palacios, director of financial institutions ratings at S&P, told FIDES Today that merger and acquisition (M&A) activity in Latin America this year will be “opportunistic” in most markets or where regional operations are part of the package in larger deals among international players.

However, with some currencies depreciating across the region, Palacios says it would not be a surprise if diversified global players found it attractive to bid for Latin American insurance companies, even though “there doesn’t seem to be a marked trend for M&As through to the end of the year”.

It’s a different story in the Caribbean—insurers based in the region have been active in M&A recently, with some of the largest players buying up smaller ones and consolidating the industry.

“M&As in the Caribbean are being prompted because of international groups, such as Scotiabank, which is selling businesses in the region as a result of a revision of its geographic strategy,” explains Palacios. “We believe the Caribbean markets are very profitable, but underdeveloped regulatory frameworks and highly concentrated economies could introduce volatility in the industry.”

Navigating the downturn

Generally, Latin America’s low insurance penetration makes it difficult to appropriately price certain risks where new offerings are being introduced in a market, says Palacios.

He adds that there’s still high reinsurance capacity globally so setting prices is still a challenge, “even in Latin America where margins used to be more attractive than more developed markets”. For reinsurers, the challenge is to work with insurers to uncover opportunities in new market niches, says the director.

On the other hand, in Brazil, domestic reinsurers continue to build their relevance and implement strategies to expand operations in other countries across the region.

Palacios adds: “They face challenges to compete in the reinsurance market due to their small scale, compared to IRB and large international groups. To gain space, those insurers have bet on providing a better service, with faster responses and customised solutions for their clients.”

Across the Latin American region, a slowdown in economic activity may impact business volumes and delay penetration strategies in underserved segments, warns Palacios.

According to the director, lower private investment will lead to lower premiums written across the board with some segments, such as surety (which is highly dependent on infrastructure investments), suffering the most.

“In general, anti-cyclic measures to boost the economy such as public spending in, for example, infrastructure could be positive for re/insurers. Lower interest rates will impact insurers’ profitability, but we are not expecting a deep recession so insurers, which are well capitalised in the region, are in good shape to navigate the current downturn,” he concludes.

In Mexico, a deceleration in investment and consumption have started to be reflected in lower business volumes but, as of 2018 and the first half of 2019, insurers are experiencing “record high profitability and their balances are still sound with strong capitalisation levels”, he says.

In Brazil, Palacios says, despite challenging economic conditions, the overall performance of the insurance sector has been stable.

“The insurance and reinsurance market have faced a severe decrease in financial results, due to the sharp decrease on the interest rates level in Brazil and the concentration of the investment portfolio of those entities in sovereign bonds.

“Because of this, insurers and reinsurers had to increase their focus on efficiency and strengthening underwriting results, moving to lower risk or more profitable segments,” he explains.

S&P expects stable economy growth in Colombia, adding that the Colombian insurance market has shown resilience in past slowdown scenarios. In particular, the life industry has grown healthily in part because of the low insurance penetration in the country.

Palacios suggests insurers could navigate the downturn while “maintaining prudent underwriting and a low risk profile”, focusing on the medium to longer term in terms of building capabilities (technological above all) in order “to serve their markets more cost-efficiently and introduce product innovations to reach under-penetrated segments”.