Fitch Special Report: Positive Trends in Central America Insurance Sector

According to a Fitch Ratings special report released today, entitled ‘Central America Insurance Sector,’ the sector shows positive trends in premiums and operating expenses leading to rising profitability, healthy growth in premiums in Central America led by Costa Rica and Honduras, a stable loss ratio, and adequate liquidity and leverage ratios.

“Fitch believes that the Central American insurance sector will be undergoing significant changes over the next few years,” said Director Eduardo Recinos of Fitch Central America. “The restructuring process carried out in Costa Rica, the significant increase expected in foreign investment, regulatory improvements and the development of new distribution channels and products all support Fitch’s view,” he adds.

The Central American insurance industry recorded a 44% increase in net profits during the first half of 2007, to US$100.1 million, resulting in an average return on equity (ROE) of 26.9% for that period. The significant growth in profitability was attributable to a substantial expansion in net premiums combined with a decline in operating expenses (mostly in Costa Rica) and a relatively stable loss ratio (59.7%).

Due to the region’s strong economic growth, total premiums written amounted to US$770.1 million during the first half of 2007 (1H07), a 16.5% increase compared with the same period last year. The largest growth rates were recorded by Costa Rica (29.9%) and Honduras (22.8%), followed by Guatemala and Nicaragua at 12.5% and 10.3%, respectively. In El Salvador, on the other hand, total premiums grew by only 5%, reflecting the country’s relatively slower economic growth, as well as the current price war observed in its property & casualty (P&C, including auto insurance) segment.

In terms of total premiums in the region, Costa Rica had the largest share, with US$226.4 million written during 1H07, followed by Guatemala (US$195.6 million), El Salvador (US$184.8 million), Honduras (US$115.2 million) and Nicaragua (US$48 million).

Liquidity and leverage ratios remain at adequate levels, with overall liquid assets-to-reserves of 1.3 times (x) and net equity-to-total assets of 3.4x during 1H07.

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