S&P Report Paints Bleak Picture for Argentine Insurance Industry

March 12, 2002

Standard & Poor’s recently released study of the Argentine insurance industry paints a grim picture for the country’s insurers, calling the situation, caused by the country’s economic crisis, “Back to the Bad Old Times.”

“The gravity of Argentina’s economic and political crisis curbed the hopes of finding a timely solution to its insurance industry’s chronic struggle toward efficiency and stability,” said the report. Carina Lopez Espino, an associate director with Standard & Poor’s financial services ratings group in Buenos Aires, stated that, “After a decade of struggle to amend past errors, the Argentine insurance sector had managed to improve its solvency and transparency, turning itself into a more consolidated market on the verge of showing a profit for the first time in years”

The economic crisis has apparently put a end to those hopes. S&P indicated that it has “hurt the levels of underwritten premiums and collections.” It also noted that, “during the past year insurers suffered rapid credit quality deterioration of their investment portfolios, additional pressure on liquidity as a result of the distressed debt exchange and the banking crisis, and, more recently, a complete change in the operational insurance framework derived from the devaluation of the currency and the ‘pesification’ (the conversion of dollar assets and liabilities to pesos) of the Argentine economy.”

The report foresees the disappearance of a number of insurers selling asset accumulation products, as Argentineans move their funds out of the country, despite prohibitions against doing so, repeating the capital flight of the 80’s and early 90’s. S&P is equally pessimistic about the prospects that foreign insurers will decide to recapitalize Argentine companies any time soon, if ever.

S&P’s announcement concludes that, “In any case, some of the probable scenarios start to resemble the business model entrenched in the 80s insurance industry: a monopoly local reinsurer to replace the lack of international credibility, indexation clauses to protect balance sheets from escalating inflation, and increased ‘negotiation’ of claims’ amounts and dates of payment to match available liquid resources.”

A copy of the full report is available at www.ratingsdirect.com, or www.standardandpoors.com/Forum/RatingsCommentaries/ FinancialInstitutions.

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