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Financial District Insurance

A.M. Best: P.R.’s economic woes challenge for insurers

1am_best_logoDespite the current economic challenges facing Puerto Rico, the financial strength of the Commonwealth’s insurance carriers remains generally solid, according to a new A.M. Best briefing.

The briefing titled “Puerto Rico’s Economic Woes Remain a Challenge for Puerto Rico Insurers,” said the combined effect of weak economic conditions, a declining population base (with many choosing to relocate to the U.S. mainland) and the high unemployment rate have negatively affected the government’s taxable revenue base.

“Exacerbating the economic issues is the existing significant public debt of approximately $73 billion carried by the Commonwealth, which restricts further access to external debt markets,” the agency said.

“With no possibility to restructure its debt through bankruptcy protection, which is prohibited under federal law for territories and commonwealths, Puerto Rico faces significant hurdles to reduce this burden,” the agency further noted.

The government has attempted to get its finances in order in recent years through new legislation, but so far, has not been successful. In particular, a debt-restructuring law passed in 2014, intended to permit financially distressed state-owned agencies to seek bankruptcy protection, was ruled unconstitutional in February 2015.

While the property/casualty and life/health markets remain highly competitive, balance sheets remain strong and underwriting discipline has been maintained, resulting in generally solid earnings for Puerto Rico-domiciled companies.

“Over the near term, the economic growth outlook for Puerto Rico remains weak, and given the economic environment and limitations to restructure its debt, Puerto Rico’s creditworthiness remains challenged,” the agency said.

Based on its most recent quarterly filing, the possibility exists that the government and the Government Development Bank may run out of available cash by Sept. 30, 2015, it said, citing published reports.

From a balance sheet perspective, the Puerto Rican-domiciled insurance companies have some bond exposure to low-rated Puerto Rican fixed income securities.

“However, these carriers generally remain well capitalized relative to their ratings, inclusive of stressed scenarios, which consider an increase in risk factors to reflect the potential for further reductions in the credit quality of Puerto Rico-related investments,” A.M. Best said.

The bond rating downgrades translate to higher required charges to the National Association of Insurance Commissioners’ Risk-Based Capital Ratio and Best’s Capital Adequacy Ratio.

“Although most carriers maintain sufficient capital to support lower bond ratings, given the adequate capital positions and manageable exposures to the Puerto Rico municipal bond market, A. M. Best notes there may be limited circumstances where rating actions may have to be taken,” it said.

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This story was written by our staff based on a press release.

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