A.M. Best Briefing

Puerto Rico’s Economic Struggles an Ongoing Challenge for Puerto Rico

How the commonwealth is managing $73B in public debt

OLDWICK, N.J., July 7, 2015—In light of the recent economic conditions in Puerto Rico, exacerbated by the significant public debt of approximately USD 73 billion carried by the Commonwealth, A.M. Best has issued a briefing exploring how these continued issues pose challenges to the financial strength of the Commonwealth’s property/casualty and life/health insurance carriers, which currently remains generally solid.

The briefing, “Puerto Rico’s Economic Struggles an Ongoing Challenge for Puerto Rico,” states that Puerto Rico bonds have historically been well-received at issuance as they are triple tax-exempt, offering an alternative to investors that are free from local, state and U.S. federal taxes.

As a result, the Commonwealth has been able to address ongoing budget deficits through repeated bond issuances, although at a cost. While the Commonwealth’s ability to make ongoing coupon payments on existing bond issuances has been hampered by the weak economy, liquidity concerns have increased given the lack of access to available cash.

Public bond holdings declined sharply

In addition, the value of Puerto Rico’s public bond holdings have declined sharply given market concerns for the potential that the Commonwealth could default on its obligations.

For property/casualty insurers, the market remains highly competitive due in part to the number of carriers operating within a limited market space competing for business, balance sheets remain strong and underwriting discipline has been maintained, resulting in generally solid earnings.

However, the competitive operating environment and lack of economic growth will continue to constrain carriers’ ability to grow. With respect to life/health writers, the market is likewise highly competitive. In general, net premiums written have declined modestly in recent years.

Total capital grew significantly

On the positive side, total capital (including the asset valuation reserve) grew at a compound rate of nearly 10% over the past five years. Given the recent pressures stemming from the budget challenges and a high unemployment rate, companies are likely to continue to face challenges with respect to meaningful growth and potential capital losses if forced to sell Puerto Rico bonds at current depressed values.

From a balance sheet perspective, the Puerto Rico domiciled insurance companies have material bond exposure to lowly rated Puerto Rican fixed income securities. However, these carriers generally remain adequately capitalized relative to their ratings, inclusive of stressed scenarios, which consider an increase in risk factors to reflect the potential for further reductions in the credit quality of Puerto Rico-related investments.

A.M. Best will continue to closely monitor events in Puerto Rico and their impact on insurers.

For the full copy of this briefing, please visit ambest.com.