Citi downgraded its recommendations for shares of BB Seguridade (BBSE3) from buy to neutral and Caixa Seguridade (CXSE3) from neutral to sell, after both shares had solid performances over the last 2 years. As a result, BBSE3 shares closed this Thursday’s session (8) with a drop of 3.74% (R$ 34.50), while CXSE3 fell 6.23% (R$ 13.84).
Analysts explain that the simultaneous improvement in financial results and operational trends (acceleration in premiums and reduction in loss rates) made the insurance sector a good option during a period of higher interest rates and volatility. But now, Citi sees little room for positive surprises in revenue and costs, while pressure on financial income is a reality due to interest rate cuts.
Additionally, while dividend yields will still benefit equity holders, the bank believes that at this point in the cycle, the insurance sector could become a source of financing for other higher beta assets.
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On the operational front, according to the report, there may no longer be a “perfect match” as premiums slow and claims rise.
Regarding BB Seguridade, analysts see earnings revisions as less likely, as operating results already seem priced in. Citi currently sees the stock as well priced with a Price (P)/Earnings (E) of 9.1 times for 2024, with little room for positive surprises on the operational side, while the financial results are expected to be pressured by interest rates lower. The bank updated its estimates after a solid 4Q23, with a view of stable net profit for 2024, but updated its macro assumptions and the calculation of the cost of equity, which leads to a decrease in the target price to R$38 from R$38 to R$38. R$36, practically stable compared to the previous day’s closing of R$35.84.
As for Caixa Seguridade, Citi comments that a year ago, the valuation was cheap (around 7 times P/E when BBSE was at 9 times) and the growth potential was attractive.
Although revenue disappointed, the loss ratio and financial results were slightly better, but not enough to justify the substantial revaluation seen since then. Caixa Seguridade currently operates with a P/E of 11.6 times.
Citi believes this is a result of flows from those seeking dividend yield and chasing strong price performance, as it still sees institutional investors moving away from the case. Although the bank raised its estimates based on 4Q23 data presented to SUSEP and raised the target price from R$11.30 to R$12.40, this implies a potential downside (of 16% compared to the previous day’s close) and therefore reinforces the sell rating for CXSE3.