Key Insights and Key Risks

At first glance, the newsflow from Argentina's insurance sector through late 2012 and early 2013 looks good. There has been strong growth in premiums in both the non-life and the life segments. Several companies have highlighted that their Argentine businesses are contributing meaningfully to the development of their regional operations. Some players have confirmed that profitability has been improving. Unlike in other parts of the world in 2011, or Chile in 2010, there have not been major catastrophe losses. In the non-life segment, both RSA and Australia's QBE have made acquisitions that have given them leadership positions. Overall, we would not be surprised if the process of consolidation continued through 2013 and 2014. Meanwhile, many of the leading local groups continue to benefit from their associations with government-backed financial institutions, from the support of policy-holders who see their own interests as being closely aligned with mutual insurers, and/or strong brand names.

In both of the major segments, premiums have in the recent past been distorted by the high inflation in Argentina (officially 10-11% but widely recognised as being between two and three times as high). However, it appears that many of the companies in the non-life segment have pricing power. Partly for this reason, they have been - and will remain - largely immune to the downturn in sales of autos in Argentina. Sales of cars and other vehicles matter: auto-related lines generate nearly half of all premiums written in the non-life segment. Comments from the companies themselves suggest to us that, for most of them, growth in the recent past has been profitable. We expect that this will continue to be the case.

We think that the apparent size and importance of the life segment has been expanded by inflation in wages and salaries. This is because Argentina's life segment is dominated by group life products, for which premiums/contributions are generally linked to nominal wages. We see no sign of an imminent resolution to the main challenge facing life insurance companies in Argentina: people lack the essential trust and confidence in long-term savings solutions. Past financial crises and investor-unfriendly (but politically expedient) decisions by governments, including the current administration, have constrained the development of financial services generally. For the time being, we remain of the view that this problem will persist through the forecast period.

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