AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of "a-" of Instituto Nacional de Seguros (INS) (San Jose, Costa Rica). The outlook of these Credit Ratings (ratings) remains positive.
The ratings reflect INS's balance sheet strength, which AM Best categorizes as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM). The positive outlook was maintained due to the still favorable operating performance metrics posted in 2018.
INS' capitalization level of strongest is supported by a comprehensive and adequate reinsurance program, good operating performance and its position as the leading insurer in Costa Rica. The assessment of its business profile considers INS' market characteristics derived from the country's Insurance Law of 2008, including its robust market share and the guarantee provided by the Costa Rican government to support INS' domestic obligations.
INS is Costa Rica's largest insurer with a market share of 72% as of December 2018, which has decreased due to aggressive growth in voluntary products from specific market participants. The company has exclusivity on underwriting compulsory workers' compensation and mandatory auto insurance. INS' compulsory premium segment represents 34% of its business portfolio and 25% of the industry's total premiums written.
The positive outlooks on INS' ratings reflect the still strong operating performance metrics posted in 2018, despite its deterioration in comparison with 2017 as shown in a larger loss and combined ratio. As of December 2018, INS' business slowed as economic activity grew less than in previous years; this led to a deterioration of the company's underwriting metrics compared with 2017, nevertheless, these results remained strong and produced positive net income. The resolution of the positive outlook will depend on the operating performance results during 2019; if these deteriorate further, the positive outlook could revert to stable.
Investment income, based on a conservative investment portfolio, has remained supportive of the company's performance, favored by interest rates and foreign exchange rates. Net income stood at USD 89.5 million, providing a solid growth for its capital base, despite the compulsory 25% dividend paid to the government and a larger reserve creation derived from the favorable performance of the compulsory workers' compensation segment.
AM Best expects INS to continue improving and consolidating its business guidelines by implementing its geographical diversification strategy progressively, which should offset increased competition in the voluntary segments. The company is in a good position to maintain its strong risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio, due to its good profitability and ERM practices, and adequate reinsurance with highly rated international reinsurers, which provides a buffer for variations in claim severity and catastrophic events.
Positive rating movements could occur if INS is able to improve or maintain its underwriting performance and operating efficiency while continuing to pursue further diversification of its revenue, improving its return metrics and maintaining its strong capitalization. Negative rating actions could occur if technical results deteriorate or there is a reduction in net income, or any loss that significantly affects the company's profitability and capital generation.
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