Tenfold increase in capital requirements to drive re/insurance M&A in Argentina

Higher capital requirements for insurers and reinsurers in Argentina will accelerate merger & acquisitions activity in Argentina, Carlos Caputo, CEO of Markel Latin America, told Intelligent Insurer.

As the country seeks to strengthen its domestic insurance market, the regulator is increasing capital requirements for both local and foreign re/insurers.

For traditional insurance lines, the minimum capital requirements have been increased threefold, Hernán Cipriotti and Daniel Baron from US law firm Zelle explained in an article named Argentina’s New Leadership and How it Affects Insurance.’ published in September.

For reinsurers, capital requirements will double by the end of the year and increase tenfold in the next 12 months, according to the authors. “This is likely to present a challenge for some local and foreign operators,” they added.

“The new rules to increase capital requirements for insurance and reinsurance companies will probably end up in either mergers of re/insurance companies in Argentina or some international groups taking positions in the Argentine market,” Caputo said.

While capital strengthening can either be done via direct capital injection by their current shareholders or through new shareholders, “international re/insurers are more likely to have the capital strength to invest in Argentina,” Caputo said.

The expected M&A activity may reduce the large number of players operating in the Argentina market.

While Colombia and Argentina are markets of similar sizes, Argentina has around three times more insurance companies than Colombia, Caputo noted.  He expects mergers between small re/insurers or/and a bigger company buying several smaller players to combine them under one brand.

Many local groups will not have the resources to increase their capital so their only solution may be to merge with other small companies in Argentina, Caputo says. But it will also offer an opportunity for large foreign companies to invest in Argentina.

This will both reduce competition and improve the profitability of the sector, Caputo suggests.

There are a few international groups that have insurance and/or reinsurance operations in Argentina such as Mapfre and Zurich, but many are currently operating there as “admitted reinsurers” without having a local subsidiary in the country. “They may see an opportunity to have a more direct presence in the market,” Caputo said.

Argentina is seen as a growth market since Mauricio Macri was elected president in 2015 and started introducing structural reforms to the country.

Macri’s government lifted controls on currency exchange and transfer rules, providing a degree of welcomed certainty by foreign re/insurers involved in Argentina, Cipriotti and Baron wrote.

Difficulties involving currency issues in money transfers relating to reinsurance contracts (premium and/or claims payments), have disappeared due to the new exchange policies in place, the authors explained.

Among immediate fiscal advancements undertaken by the new administration, Argentina paid its “holdout” creditors approximately $9.3 billion — an integral part of a strategy to normalize relations with international markets. This act put an end to a 15-year-old judicial dispute, according to the authors.