Credit rating agency AM Best has announced that its outlook for Argentina’s insurance sector remains negative due to the country’s ongoing economic challenges.
According to the International Monetary Fund, Argentina’s GDP has grown by 10.4% in 2021, recovering from a three-year recession, with GDP growth expected to reach 4.0% in 2022.
Best stressed that growth is being driven by government spending, rising consumer demand and improving industrial activity, as well as improvements in the budget deficit (from 8.6% of GDP in 2020 to 4.3% in 2021), partly due to higher taxes on export duties, driven by a rise in commodity prices, taxes on family wealth and consistent money printing.
But Best warns that the economy is expected to slow in 2023 due to a slowdown in both domestic and global economic activity.
Inflation also remains a major challenge and a worrying situation that continues to grow, especially after reaching a high of 83% in September, negatively impacting consumer purchasing power.
Best noted that the growth of Argentina’s insurance industry was generally below inflation. In 2021, the sector grew by 3.6% in real terms, led by auto coverage, mainly due to price adjustments due to increasingly expensive cars due to inflation and supply chain disruptions, as well as the government’s mandatory basic auto insurance policy.
The industry is still driven by the non-life segment. According to Argentina’s insurance regulator, the Superintendencia de Seguros de la Nación (SSN), the industry is made up of 191 insurers and 16 local reinsurers, with a premium volume of 3.02% of GDP in 2021.
The general insurance market accounts for 89% of GPW, led by autos at 38% and workers’ compensation at 23%. The two segments accounted for nearly two-thirds of premium volume in 2021.
In addition, Best notes that investment income support of overall profitability has been undermined by the industry’s large exposures to government-backed liabilities, which remain pressured by negative real interest rates, currency volatility and non-investment. grade credit quality.
“The country’s evolving capital markets and few financial instruments approved by the local regulator that can adequately match insurance obligations and regulatory requirements continue to limit market participants’ financial flexibility to withstand the difficult economic environment, which is being impacted by the rising inflation, which ultimately leads to solvency and liquidity problems,” explains Salvador Smith, senior financial analyst at AM Best.
Best concludes that given the large number of ongoing challenges facing the country and industry, they will continue to monitor the decisions of companies seeking inorganic growth through M&A.