Argentina Insurance Report Q1 2009

The successful passage of President Cristina Fernández's pension takeover bill will have a significant impact on Argentine asset markets and the economy. We reiterate our cautious stance on Argentina's credit default swap (CDS) market and our outright bearish outlook for equities and the general economy.

The five-year long economic boom is well and truly over in Argentina, and the government's current attempts to micro-manage the economy and stimulate aggregate demand through fiscal policy will store up trouble for the future, in our view. We believe that economic growth will fall to 0.6% in 2009, from an expected 6.0% in 2008, with growing government consumption and a slight improvement in net exports likely to keep the economy above water, while private consumption and fixed-investment contract. In 2010 we see an economic contraction of 0.9% as the government runs out of fiscal policy options and public consumption stalls, with an improvement in net exports the only silver lining. This would mark a considerable slump in real GDP growth relative to the stellar performance seen since 2003. However, as we have long argued, the benign external factors and expansionary economic policies that facilitated the boom have allowed economic distortions to build up, and these now look like being exposed. On this note, we warn that the government's current policy of using newly seized pension funds to stimulate consumer demand could also lead to a fiscal crisis down the road and keep private investment levels subdued over the medium term.

Since the last quarter, we have made two major changes to the data in this report. First, we have – to the greatest extent possible – incorporated hard figures that have been made available by the regulator(s) and trade association(s) in each country. In some cases, therefore, we have begun to include numbers that pertain to the development of the insurance sector through the early stages of the global financial crisis.

Second, we have extended our forecasts out to 2013. In all cases, we have reviewed the key growth drivers – non-life penetration and life density – which we had incorporated in our forecasts.

The global financial crisis is likely to affect the various segments of the global insurance industry in different ways. In many countries – especially in Europe – the coming recession points to softness in the non-life segment. In many cases, the numbers of policies may fall so there should be downwards pressure on premiums. By contrast, the main problem for the life segment – in almost all countries – is the extreme volatility of financial markets. Over the longer term, though, the fortunes of life insurance will recover – thanks to the secular growth of organised savings in most countries. China, where the larger insurance companies continue to achieve double-digit growth in premium income, is a good example of this. Some particular niches should also do well in the current environment, such as legal liability insurance.

In Latin America, we profile 21 companies. These are AEGON, AGF, AIG, Allianz, AXA, Cardif, CNP, Generali, HDI-Talanx, HSBC Insurance, ING, Liberty Mutual, MAPFRE, MetLife, New York Life, Prudential Financial, QBE, RSA, the Hartford, Principal Financial and Zurich.

We also look at various local firms that are active. In general, they are small to medium-sized operations by world standards. However, several of the leading Brazilian insurers would rank as extremely large even in a major market.

Over the 12 months to the end of June 2008, total premiums in Argentina rose by 25% to ARS23,980mn.

Non-life premiums rose by 25% to ARS17,684mn, while life premiums rose by 25% to ARS6,296mn.

Between now and the end of the forecast period, we expect that annual non-life premiums will grow by ARS28,781mn, while annual life premiums should grow by ARS5,555mn. Growth in non-life premiums should be driven by the general growth of nominal GDP plus a rise in non-life penetration from the current level of 1.62% to 1.65%. Growth in life premiums should be driven by the change in the overall population and a rise in life density from US$46 to US$65 per capital. BMI’s Insurance Business Environment Rating for Argentina is 53.5.