Fitch Downgrades Argentine Insurers Ratings after Sovereign Downgrade

December 3, 2012

Fitch Ratings has downgraded the long-term National Scale ratings of 12 insurance companies in Argentina, and has also revised the companies’ rating outlooks to negative from stable.

Fitch said it took the rating actions following its Nov. 27 downgrade of the Argentina Foreign Currency and Local Currency Sovereign rating to ‘CC’/'B-’ with a Negative Outlook. Fitch’s downgrade of Argentina’s local currency IDR “reflects the sustained deterioration of its credit fundamentals; the downgrade of the foreign currency IDR reflects the likelihood that Argentina will default,” said the bulletin.

Fitch also indicated that the downgrades reflect its “concerns about continued and growing government intervention on the financial services industries and possible wider constraints on foreign currency access by private sector entities in Argentina.

“As the economy has slowed significantly and the outlook for growth has diminished, Fitch acknowledges that the current strong premium growth and profitability ratios of Argentine insurance companies may be hindered under a scenario of possible sustained lower economic growth, rise of inflation, and macroeconomic volatility.”

Fitch explained that the negative outlooks “reflect uncertainty related to the performance of the industry in a less vigorous economic environment with high inflation (and hence, its impact over claims costs) and the limitations imposed by recent regulatory measures over the industry.

“During the last years but especially in 2012, the government has imposed an array of controls and new regulations that limit the activities of the financial sector (banks and insurance companies specially) that limits the room of maneuver of such entities to deal with changes on the operating environment and/or imposes rigidities on their business model.

“A recent imposition of a compulsory investment rule for all insurance companies added to the previews compulsory repatriation of all the investments abroad and the change of the reinsurance operative framework are some examples of such trend. As of September 2012, the new investment requirement may result in an equity exposure to investments of at least 25 percent of the combined equity of the insurance companies rated by Fitch.

“The rules regarding the eligible investments to comply with the mandate in 2013 suggest that liquidity levels and overall asset and liability management may be affected due to the long-term nature of such investments, although it is not possible to judge the possible credit risk of such investments at this time.”

Fitch added, however, that it nonetheless “recognizes that most of the insurance entities currently exhibit healthy profitability ratios, adequate liquidity indexes, and a good capital level.” But it also indicated that the “aforementioned regulatory changes impose significant challenges in terms of asset and liability management and reinsurance protection, while the deterioration of the operating environment may result in mixed trends in terms of premium growth, claims and administrative costs. Further controls over the sector cannot be ruled out at the moment. The fact that the maximum National Scale Rating for Insurance companies in Argentina stands at ‘AA(arg)’ results in some rating compression among stronger rated entities.

“In the case of Zurich International Life, Fitch has downgraded the company’s long-term National Scale rating to ‘AA(arg)’ from ‘AAA(arg)’. Despite being a branch of a highly rated insurance group, the entity still faces the regulatory risks outlined before referred to the compulsory investment rules and the repatriation of foreign assets, which may result in its parent willingness to provide support tempered by growing intervention. Under the same rationale, the long-term National Scale rating for Zurich Argentina, a subsidiary of the same parent who operates on the P&C segment in Argentina was also downgraded to ‘AA-(arg)’ from ‘AA(arg)’.

“The long-term National Scale rating of Santander Rio Seguros was downgraded to ‘AA(arg)’ from ‘AA+(arg)’, similar to the rating of its related company Banco Santander Rio. Under Fitch’s criteria the rating of this insurance company relies on the benefit provided by its related company Banco Santader Rio, considering the fact the bank is its only distribution channel, they share the same franchise and the interconnected business with the customer base of the bank, hence their ratings are highly correlated with the rating of the bank due the expected support to be received from its parent it should be required.

“BHN Seguros Generales and BHN Vida, wholly owned subsidiaries of Banco Hipotecario (long-term national rating ‘AA(arg)’; Outlook Negative) where affirmed at ‘AA(arg)’. Similar to other insurance companies that are considered ‘Core’ to their financial group parent, the rating of these entities is aligned with the one of its shareholder due to their level of integration, shared franchise and integrated management policies. Both insurance subsidiaries also provide a sizable income diversification to Banco Hipotecario.

“Fitch has downgraded the long-term National Scale ratings for Cardif, Berkley, Galicia Seguros and Sancor to ‘AA-(arg)’ from ‘AA(arg)’. These companies operate in the life and P&C markets, and their strong profitability, franchise and overall risk management allow them to better withstand the challenges of the aforementioned regulations. However, they are not isolated from or immune to the challenges on the operating and regulatory environment. All these companies show a possible exposure to the mandatory investment rules below the average of the universe of insurance companies rated by Fitch but still represent at least 10 percent of their equity as of September 2012.

“Fitch has downgraded Assurant, CNP Assurances, Prevencion ART and Segurcoop to ‘A+(arg)’ from ‘AA-(arg)’ as a result of their relatively larger challenges due to their niche business orientation and/or some individual weaknesses in their overall financial profile. Although Fitch believes these companies will be able to comply with new regulations without significantly undermining their financial profile, such measures may prove more challenging given their niche orientation. All but Segurcoop show a possible exposure to the new compulsory investment requirement up to a third of their equity as of September of 2012 (at least just 10 percent for Segurcoop), which is slightly above the overall average for the group of insurance companies rated by Fitch.

“Fitch has downgraded Victoria Seguros to ‘A-(arg)’ from ‘A(arg)’. Victoria Seguros is a relatively small P&C insurance company focused on the Auto and ART segments with growing but manageable leverage levels. It shows an above average equity exposure to the compulsory investment rule, and its narrow business niche may result in larger challenges to compensate. However, the payment capacity of its obligations is considered sound.”

In conclusion Fitch said that “due the Negative Outlook assigned to all the ratings of insurance companies in Argentina, Fitch will monitor the effects of the regulatory changes over each company financial profile and also possible effects derived from the more challenging operating environment.”

Fitch summarized its rating actions as follows:

Assurant Argentina Compania de Seguros S.A — Long-term National Scale Rating downgraded to ‘A+(arg)’ from ‘AA-(arg)’; Outlook revised to Negative from Stable.

Berkley Internacional Seguros S.A. — Long-term National Scale Rating downgraded to ‘AA-(arg)’ from ‘AA(arg)’; Outlook revised to Negative from Stable.

BHN Seguros Generales S.A. — Long-term National Scale Rating affirmed at ‘AA(arg)’; Outlook revised to Negative from Stable.

BHN Vida S.A. — Long-term National Scale Rating affirmed at ‘AA(arg)’; Outlook revised to Negative from Stable.

Cardif Compania de Seguros S.A. — Long-term National Scale Rating downgraded to ‘AA-(arg)’ from ‘AA(arg)’; Outlook revised to Negative from Stable.

CNP Assurances Compania de Seguros de Vida S.A. — Long-term National Scale Rating downgraded to ‘A+(arg)’ from ‘AA-(arg)’; Outlook revised to Negative from Positive.

Galicia Seguros S.A. — Long-term National Scale Rating downgraded to ‘AA-(arg)’ from ‘AA(arg)’; Outlook revised to Negative from Stable.

Sancor Cooperativa de Seguros Limitada — Long-term National Scale Rating downgraded to ‘AA-(arg)’ from ‘AA(arg)’; Outlook revised to Negative from Stable.

Santander Rio Seguros S.A. — Long-term National Scale Rating downgraded to ‘AA(arg)’ from ‘AA+(arg)’; Outlook revised to Negative from Stable.

Segurcoop Cooperativa de Seguros Limitada — Long-term National Scale Rating downgraded to ‘A+(arg)’ from ‘AA-(arg)’; Outlook revised to Negative from Stable.

Prevencion Aseguradora de Riesgos del Trabajo S.A. — Long-term National Scale Rating downgraded to ‘A+(arg)’ from ‘AA-(arg)’; Outlook revised to Negative from Stable.

Compania Argentina de Seguros Victoria S.A. — Long-term National Scale Rating downgraded to ‘A-(arg)’ from ‘A(arg)’; Outlook revised to Negative from Stable.

Zurich (International Life) Sucursal Argentina — Long-term National Scale Rating downgraded to ‘AA(arg)’ from ‘AAA(arg)’; Outlook revised to Negative from Stable.

Zurich Argentina Compania de Seguros S.A. — Long-term National Scale Rating downgraded to ‘AA-(arg)’ from ‘AA (arg)’; Outlook revised to Negative from Stable.

For more information about each entity (full rating rationale, rating sensitivities and drivers and updated financial information), please consult the Fitch web site for the Rating Reports on each company.

Source: Fitch Ratings

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