Fitch Report’s on El Salvador Insurance

A special report from Fitch Ratings – “Insurance Industry in El Salvador: Financial Profile Continues to Improve” – concludes that the country’s “insurance industry will continue to improve in 2008, after showing a stronger financial profile in 2007, in terms of solvency and liquidity ratios and operating profitability.”

Eduardo Recinos, Director in Fitch’s Latin America Insurance Group, explained that Fitch “expects the overall quality of insurance companies to improve in the short term through better underwriting practices and risk control mechanisms, due to the acquisition of local companies by multinationals and new players entering the market in 2008. The industry’s improved financial performance in 2007 was primarily the result of the past few years’ acquisitions of large insurance companies by international conglomerates, which have provided local players with valuable technical and financial support, as well as more liquidity.”

Additionally, solvency margins improved due to both capital contributions and earnings retention, capital sufficiency ratios for the industry as a whole were higher in 2007, with net equity representing 42 percent of total assets (versus 40.5 percent in 2006) and operating leverage reaching 1.4 times (x), versus 1.5x in 2006.

Fitch’s report notes: “Although net premiums grew at a slower rate last year than in 2006 (6.3 percent versus 12.2 percent), the insurance industry is now better positioned than in 2006. The sector’s operating expense ratio declined from 29.2 percent in 2006 to 28.7 percent in 2007, while its loss ratio fell by as much as 4 percentage points (to 51.2 percent) during the same period. The implementation of improved claims control processes, a restructuring program that led to greater operating efficiencies, a decline in car theft ratios and price hikes in certain segments all resulted in improved financial metrics. For example, the industry reported its highest operating margin (6.4 percent of premiums) of the decade. In addition, ROE reached 25.5 percent in 2007, versus 23.3 percent in 2006. Net financial income remained at 7 percent-8 percent of premiums, as a reduction in financial expenses (due to lower provisions) compensated for a decline in financial income (due to falling interest rates).”

Fitch also indicates, however, that along with the financial improvements it “expects to see an artificially high volume of claims written. The participation of more than one insurance company in the underwriting of the same pension funds’ disability and survivor plans, combined with various reinsurance agreements existing between local insurance companies, should lead to the double counting of these premiums and hence to the overestimation of the total market size.”

The full report is available on the Fitch Ratings web site at: www.fitchratings.com.

Source: Fitch Ratings