Although most insurance carriers in Puerto Rico maintain sufficient capital to support lower bond ratings given their adequate capital positions and manageable exposures to the Puerto Rico municipal bond market, there will be circumstances where rating actions may have to be taken, ratings agency A.M. Best said.
With that in mind, it has issued a briefing that has closely monitored the ongoing credit troubles in Puerto Rico and the resulting impact on insurers domiciled on the island.
The briefing, titled, “Puerto Rico’s Debt Crisis Continues to Deteriorate —Credit Negative for Domestic Insurers,” notes that the value of Puerto Rico’s public bond holdings has declined considerably given its ongoing budget constraints and the concern that the Commonwealth may default given its lack of liquidity.
In late June, Gov. Alejandro García-Padilla announced that the island was unable to repay its existing ongoing debt obligations, estimated at about $72 billion, as currently structured, due to limited restructuring options on the existing debt, as bankruptcy protection is currently prohibited under federal law for U.S. territories and commonwealths.
The Puerto Rico Chapter 9 Uniformity Act of 2015 (known as HR 870) was introduced into Congress and its provisions would provide the Commonwealth the protection afforded states under U.S. bankruptcy laws; however, it remains unclear how much support this bill may receive.
“Whereas the market for property/casualty insurers remains highly competitive given the number of [companies] operating within a defined market competing for business, carriers for the most part have maintained underwriting discipline while maintaining balance sheet strength, resulting in generally solid earnings produced by Puerto Rico-domiciled companies,” A.M. Best said.
“However, the competitive operating environment and inability of the Commonwealth to grow the economy will hinder carriers’ ability to grow over the foreseeable future,” it added.
With respect to life/health writers in Puerto Rico, the market remains highly competitive with net premiums written, declining modestly in recent years. Given the ongoing budget challenges and persistently high unemployment rates, companies will face ongoing challenges to increase revenues.
Despite the premium decline, total capital (including the asset valuation reserve) has increased at a compounded rate of nearly 10 percent over the past five years, A.M. Best said.
“Companies have stated an ability and intent to hold Puerto Rico bonds through maturity; nevertheless, those forced to sell Puerto Rico bonds at current depressed values will incur capital losses,” it concluded.