A.M. Best: P.R.’s economic struggles an ongoing challenge

Written by  //  July 6, 2015  //  Financial District, Insurance  //  No comments

1am_best_logoPuerto Rico bonds have historically been well-received at issuance as they are triple tax-exempt, offering an alternative to investors that are free from local, state and U.S. federal taxes. As a result, the Commonwealth has been able to address ongoing budget deficits through repeated bond issuances, although at a cost, said insurance credit ratings agency A.M. Best in a briefing released last week.

The briefing, titled, “Puerto Rico’s Economic Struggles an Ongoing Challenge for Puerto Rico,” explores how these continued issues pose challenges to the financial strength of the Commonwealth’s property/casualty and life/health insurance carriers, which currently remains generally solid.

“While the Commonwealth’s ability to make ongoing coupon payments on existing bond issuances has been hampered by the weak economy, liquidity concerns have increased given the lack of access to available cash,” the agency said.

“In addition, the value of Puerto Rico’s public bond holdings have declined sharply given market concerns for the potential that the Commonwealth could default on its obligations,” A.M. Best noted.

For property/casualty insurers, the market remains highly competitive due in part to the number of carriers operating within a limited market space competing for business, balance sheets remain strong and underwriting discipline has been maintained, resulting in generally solid earnings.

However, the competitive operating environment and lack of economic growth will continue to constrain carriers’ ability to grow.

With respect to life/health writers, the market is likewise highly competitive. In general, net premiums written have declined modestly in recent years. On the positive side, total capital — including the asset valuation reserve — grew at a compound rate of nearly 10 percent over the past five years.

“Given the recent pressures stemming from the budget challenges and a high unemployment rate, companies are likely to continue to face challenges with respect to meaningful growth and potential capital losses if forced to sell Puerto Rico bonds at current depressed values,” the agency said.

From a balance sheet perspective, the Puerto Rico domiciled insurance companies have material bond exposure to lowly rated Puerto Rican fixed income securities.

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