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Domestic Credit Insurance Grows in Argentina

With more insureds and a larger business volume, the challenge facing Credit Insurance in Argentina is to entice small and medium companies to protect their portfolios. In the domestic market, rates are subject to a strong downward pressure, and the loss ratio is controlled.

Credit insurance premium production grew by 41.44% (above the inflation rate) in the period 2012-2013. This may be concluded from the information published in Argentine Insurance Department (SSN, as per its Spanish acronym) Circular Letter EST 867. Turnover for this line of business climbed from ARS 59,308,011 as at September 2012 (1st quarter of sales) to ARS 83,886,387 as at September 2013.
Total credit insurance turnover consists of the following lines of business:
-Home Credit: 72%.
-Export Credit: 20%.
-Other Credit: 8%.
In relation to the evolution of this line of business in Argentina, Germán Fliess, CEO of Coface Argentina, noted that: “The number of insureds and the business volume grew in 2013. We have noticed SMEs still find it difficult to include this cover in their programmes. Therefore, the portfolio is still rather concentrated in medium to large companies. Rates, which were on the downward path, remained unchanged last year. The high inflation scenario definitely impacts our covers, since commercial credit is now granted under shorter repayment terms and the risk exposure volumes per “customer” have therefore remained limited. This is the way companies have found to self-protect and simultaneously manage the revaluation of their [credit] stock vis-à-vis their portfolio of receivables for goods which have already been delivered.
Sebastián Zaurdo, Country Manager of Solunion Servicios de Crédito S.A., confirmed this upward trend: “Credit Insurance has maintained its growth trend at 25% p/a on average, and it is increasing its market penetration rate. This could be higher, however, if it were not for the heavy competition and the reduction in rates in response to a loss ratio that is still below the average for Latin America.
Growth is still led by domestic sales, which are increasing in terms of the number of sectors covered and the sales volumes as measured in Argentine pesos. In turn, given the current economic situation, foreign sales have been decreasing for some years now, as a result of the loss of competitiveness".
Along these same lines, Juan Martín Devoto, CEO of Compañía de Seguros Insur, noted that: “Domestic credit insurance continues to experience sustained development in the country. Insureds and prospective policyholders are aware of the overriding need to have this kind of tool if they are to grow. They understand that the increase in sales comes hand in hand with an increase in the number of risks being undertaken, and that this may be done by a partner (Insur). Moreover, it enables them to further strengthen long term strategies, which must be accompanied by financial covers that allow them to continue operating fully, unafraid of any large default limiting their growth or definitely taking them out of the market.
We have often noted that the domestic market has clear opportunities for growth, both in Argentina and in the rest of Latin America, and facts have proven us right. Our economies are growing at high rates on average, so the world’s eyes are set on this continent, which has attracted many investments. Domestic credit insurance is expected to experience sustained growth over the next 5 years”.
According to this executive, the factors which have facilitated the development of this cover in Argentina are manifold. “One of them has been the substitution of imports over the past few years. The development of regional economies is yet another contributing factor, together with the investments in other countries in the region (such as Brazil, Colombia, Peru and Chile), which encourage us to think this evolution will continue. We trust in the medium term these same investments will once again set foot in Argentina - we are already witnessing some signs of this. That is why Atradius, the second largest Credit insurance group in Latin America and in the world, is still betting on Argentina and on these markets”.

Credit Insurance Loss Ratio Around the World
In Fliess’ opinion, credit insurance loss ratios have remained at yet acceptable levels throughout the world, but, as he goes on to add: “They should go downwards, not as much thanks to the recovery of certain economies around the world, but to the ongoing risk monitoring by our analysts. Insured companies give great importance to our analysts’ decisions, and only few of them have sales volumes in excess of our recommendations”. He nonetheless forecasts “2014 will still be marked by a relatively high loss ratio”.
According to Zaurdo, loss ratios have become stabilized with a downward trend throughout the world since the 2008-2009 financial crisis, but it is still high on average compared to prior levels.
“In 2013, the global insolvency index prepared by Euler Hermes grew by 2% after a three-year drop as a result of global economic slowdown, but with contrasting performance: ratios decreased by -4% and -11%, respectively in Asia and North America, but increased in Latin America (+10%) and in Eastern/Central/Western Europe (+6% and +9%, respectively).
Though a review of ratios shows a 1% decrease in insolvencies for 2014, this would be only marginal, and a consequence of the trends in 2013 becoming offset as a result of the expected slowdown in emerging markets and a recovery of central economies in 2014”, asserted Zaurdo.
For Devoto, credit insurance loss ratios have stabilized vis-à-vis last year at a global level. He noted that they are still high, however and that they need be brought back to pre-crisis levels. “Naturally, this is a circumstance that both customers and insureds notice, and which has translated into a larger number of queries and a greater need for insurance protection. Along these lines, we have noticed a large number of insolvency proceedings and petitions in bankruptcy, but not to the point of constituting a serious source of concern”, he said.
All in all, the expert considered that the 2014 loss ratios will remain at 2013 levels, though on a downward path. According to Devoto, this may be attributed to the following reasons: Globally, problems have not yet been solved, and there will still be restructuring processes under way. Europe still fails to put its economy back on track, as discussions over the continuity of the euro continue. The US has continued showing signs of recovery, but it is largely dependent on the situation in China, which is experiencing more modest growth and some problems that are specific to it. Latin America has a major role to play in this game, and it has real economies that are of the essence when it comes to engaging in any future growth path.
The country risk indicator is active and under watch, so countries are adjusting their ratings more frequently than in the past. Lastly, and most importantly, no country is risk-free. This paradigm blew away in the last few years”.
Zaurdo then referred to the loss ratio in the domestic market: “It has been impacted by insolvencies in the agricultural sector over the past two years, following 2 drought seasons, with the ensuing interruption in the payment chain. Excluding this, the loss ratio has been in the range of 30% for the past triennium (or less, depending on the company), i.e. below that for other markets (rest of Latin America, USA, Asia and Europe). Notwithstanding this, the trend starting in 2H 2013 has been one of increasing arrears in payment, and of insolvencies".

The Risk posed by Argentina's Trading Partners
When asked by “Mercado Asegurador” , analysts pointed at the risk of default by Argentina’s major trading partners. This viewpoint turns out to be very useful to analyze trade in the Southern Cone.
In this regard, Zaurdo said that, generally speaking, Argentina’s major trading partners enjoy very good ratings (Brazil, rest of Latin America, USA, Europe and Asia in general). He noted, however, that companies' default is not as directly tied to the country risk, as they are often more sensitive to the policies applied to certain sectors or industries. He therefore noted: “A close look at insolvency ratios shows some uneven behaviour that varies depending on the region, the country, and also on the sectors within each country".
Fliess then argued that the situation in Brazil “started deteriorating by the end of last year, and this has continued to this date”. He also noted that: “The US appears to be gradually recovering, while the European Community is finding it hard to strike a balance in order to re-launch its economies, with Germany being the exception to the rule.” Added to this there is analysts’ ability to identify customers’ strengths or weaknesses in each country, rather than the situation in the country of destination, as difficult times may also be a source of opportunities for some players in different activity sectors”.
Next, Devoto shared the conclusions of the analysis carried out by Insur: “Brazil, our main trading partner, has shown some signs of slowdown as a result of adjustments intended to curb inflation (which is under control, by the way) but which may in turn undermine its sustained growth path. Chile, Colombia and Peru, on the other hand, appear strong and with no signs of weakening. Quite to the contrary: The recently executed economic cooperation agreement bears witness to the integration among countries making up the Andean community. This is undoubtedly beneficial for Argentina and it allows our GDP rate to remain on the growth track, but also forces us to rethink the strategies that are being undertaken in order not to broaden the gap with the rest of the world and sometimes with some of our trading partners”.

Increase Premium Production
Later on along the interview, the executives disclosed their plans to increase credit insurance premium production in 2014.
“We are undertaking an innovation plan for both policy management tools and for products and services”, said Fliess. “We want to reach out (eventually, and in partnership with banks or P&C insurance carriers) to small and medium companies in the provinces, where there is significant ignorance about the benefits offered by these covers. The alliance with another player in the banking or insurance sector would be highly favourable, since normally these customers already enjoy a level of confidence that is important to both “believe” in the product and to offer “sensitive” information to Coface.
Insurance brokers, who are well aware of companies and of their vulnerability when a receivable suffers a loss, should also play a major multiplying role in this segment. We therefore count on their support, and have a training program for them”, he noted.
As to Insur plans, Devoto announced: “We keep on working with all economic sectors and expanding our business contacts in the provinces. We believe it is essential to continue developing our IT and systems tools to achieve a thorough commercial service structure, as the fundamental axis for insureds to feel supported, cared after, and fully in control of their policies. Indeed, we have perfected an automatic credit line approval system (SAAL, as per its Spanish acronym) which allows us to offer fast, prompt covers to our customers, especially in the medium-sized businesses sector, which needs swift responses”.
In turn, Zaurdo said: “Following the integration and start-up of Solunion in Spain and Argentina in 2013 (the rest of LATAM will do so in 1Q 2014), our goal is clearly to focus on sustained and profitable growth over the next 3 years”. In this regard, he has a positive outlook for the future of this line of business: “This is still a time of opportunities for Credit insurance in Argentina to keep growing, especially in those sectors where product penetration is not high. However, a more cautious underwriting approach will be required in 2014, since some sectors are already experiencing an increase in the number of insolvencies triggered by several events (such as the drop in demand, difficulties to access imported supplies for marketing or production purposes, or in production)”.
Finally, Fliess concluded: “Argentina is regarded as a medium/high risk country with high inflation rates and (until recently) lagging variables (such as the exchange rate); this “uncertainty” among economic operators should lead them to cover their sales through the insurance protection we offer. But the reality is different, however: We still find it hard to convince small and medium-sized businesses about the merits of our services. The question therefore is: Are these companies willing to face at their own expense the risk of default of their receivables? Are they not concerned with the loss of their short term assets and working capital? In response to this, the natural reaction is to shorten loan repayment periods and to deliver smaller quantities in order to reduce their exposure.
Even though we believe there is huge potential, the inflationary environment clearly does not favour growth in our business. That is why we keep engaging in communication efforts, in the hope that this situation will settle at more reasonable levels as loan repayment periods are extended”.

Country Risk
On April 24th Coface will host in Argentina the 11th edition of the Coface Global Country Risk Conference. The venue will be the Plaza Hotel Buenos Aires, between 9 am and 2.30 pm.
The conference will discuss the following topics:
Argentine Foreign Trade Prospects.
Credit Insurance in Argentina and in Latin America.
Global Country Risk Outlook.
Current Political and Economic Scenario in Argentina.
Speakers will be Germán Fliess, CEO of Coface Argentina; Bart A. Pattyn, President and CEO of Coface Holding América Latina and Patricia Krause, Coface Economist.
Other participants will be Enrique Mantilla, President of C.E.R.A., and Diego Pérez Santisteban, President of C.I.R.A. The economist Javier González Fraga and political analyst Sergio Berensztein will participate of the panel on the current political and economic scenario.
Free admission.

Translation: Adriana Caminiti

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