SAN SALVADOR, El Salvador & SAN JOSE, Costa Rica--(BUSINESS WIRE)--The slow recovery of most economies in Central America after the turmoil in 2008 and 2009 is still affecting the insurance industry. With annual combined growth of only 5% (in dollar terms), the six countries that form Central America (El Salvador, Costa Rica, Guatemala, Honduras, Nicaragua and Panama) have not yet managed to regain the strong growth they witnessed before 2008. Fitch believes, however, that growth could remain moderate for 2011, in line with expectations of an economic recovery as projected by the agency for most countries, although less pronounced in El Salvador. Fitch will monitor the impact of economic developments in the financial profile of the rated insurance companies in the region, in order to take actions that it deems appropriate.
At the end of September 2010, El Salvador, Costa Rica and Nicaragua showed a decline in performance due to a deterioration of operational efficiency, while maintaining relative stability in the claims ratio, while other countries saw improvements in the latter index, including Guatemala, which nevertheless still has the highest level and a combined ratio of about 100%, as in Nicaragua. Financial income remains an important contributing factor in the insurance industry in the region, particularly in Costa Rica and Honduras; in the former, registering a wide investor base, while in Honduras, this is attributed to the relatively high yield of the investment portfolios. Meanwhile, the leverage situation has remained similar to previous years, with Guatemala and Nicaragua posting higher than average liabilities-to-equity ratios, given the average lower capitalization of their companies to date. The liquidity position is adequate in all countries, although tighter in Guatemala and Nicaragua.
In addition, Fitch welcomes the trend in the countries of the region to modernize the legal framework of the insurance sector, as was the case in Costa Rica and Guatemala, while in Panama major changes to insurance law are being reviewed. Fitch expects to continue seeing a gradual strengthening in the financial profile of insurance companies in the region and greater standardization in the conditions of competition as a result of the adequacy of the regulatory frameworks to financial practices and international standards of operation, which may promote the entry of new competitors and contribute to the reduction in concentrations of risk. As of Sept. 10, 2010, industry concentration remains high, with the five largest companies in each country controlling an average of 65% of collected premiums, while foreign capital participations remain asymmetrical in the region. El Salvador is the market with greatest foreign investment participation (78% of collected premium), and Guatemala, Costa Rica and Nicaragua the lowest ratios; although recent acquisitions have resulted in a significant increase in Panama due a strategic partnership between Spain's Mapfre and Grupo Assa in Panama.
The Panamanian insurance industry continues to excel with the highest penetration in GDP (3.4%), followed by Costa Rica (2.3%), in both cases associated with the high purchasing power of its population, with the most elevated levels of GDP per capita; however, Guatemala is the country that shows the lowest penetration (1.2%), while the penetration in other countries varies between those limits, but is in general below the average for Latin America as a region.
Fitch believes that only to the extent that the insurance industry exploits increasingly more non-traditional marketing channels, innovates in terms of insurance products, and expands options for cost and ease, will it foster further expansion and penetration of insurance in the region. Also, sustained economic growth and increased banking penetration are necessary conditions in order to achieve the expansion of the insurance industry.
Additional information available on Fitch's website at 'www.fitchratings.com'
Applicable criteria and Relevant Research:
'Insurance Rating Methodology', dated 16 Aug. 2010.
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766
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