MEXICO CITY–(BUSINESS WIRE)–A.M. Best has affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of Instituto Nacional de Seguros (INS) (San Jose, Costa Rica). The outlook for both ratings is stable.
The ratings reflect INS’ favorable operating performance in conjunction with strong capitalization, sound reinsurance program and its position as the main insurer in Costa Rica. The ratings also consider the explicit support INS receives from the Government of Costa Rica, as mandated in the Insurance Law of 2008. This support, however, only guarantees insurance operations in the country. Despite recent improvements in INS’ expense ratio, the ratings are limited by the company’s reliance on financial income as a key factor for its profitability and the increasingly competitive environment in Costa Rica.
INS is the largest insurer in Costa Rica with a market share of 85% as of December 2014 and has exclusivity on underwriting compulsory workers’ compensation premiums and mandatory auto insurance, and since the latter market opened, INS remains the sole competitor. These segments represent 30.8% of the total premiums written in the industry and have reported loss ratios of 52% and 61%, respectively and represent 38% of INS’ portfolio. The competitive environment of the Costa Rican market has become more dynamic, specifically in the individual auto segment and in life/health products where INS has lost market share.
At year-end 2013, INS’ net income diminished 20.6% as a result of large administrative expenses. In 2014, management reduced administrative expenses significantly, achieving a growth in net income of 18.2%.
This improvement in profitability goes hand in hand with a steady flow of financial income and consistent underwriting performance. A.M. Best expects INS to maintain strong capitalization as measured by Best’s Capital Adequacy Ratio, due to its good profitability and conservative earning retention policy, as well as comprehensive reinsurance with highly rated international reinsurers, which provides adequate protection to variations in claim severity and catastrophic events.
Looking forward, A.M. Best expects INS to maintain recent improvements in its administrative expenses and adjust its underwriting practices on non-compulsory lines like individual auto, fire and life in order to face the increasingly competitive landscape.
The current outlook for the ratings is stable; however, if INS is able to keep improving its efficiency, diminish its dependence on financial income and shows a positive and improving trend overall in technical and bottom line results, the ratings could be upgraded or the outlook revised upward. On the contrary, if deterioration in technical results or reduction in net income, given any kind of loss, significantly affects the profitability and capital generation of the company or if capitalization gets to levels non-supportive of the rating, negative rating actions could ensue.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
Catastrophe Analysis in A.M. Best Ratings
Evaluating Country Risk
Rating Members of Insurance Groups
Risk Management and the Rating Process for Insurance Companies
Understanding Universal BCAR