Argentina: Investors Wanted
The country hinders its growth with politically driven policies.
Buenos Aires is the most popular tourist destination in South America. Argentina's capital city attracted 2.6 million visitors last year, according to the 2012 MasterCard Global Destination Cities Index, and brought in more tourist dollars--US$3 billion--than any other Latin American country.
Argentina is not nearly as successful at attracting investors' dollars, however.
While most of Latin America is enjoying the interest--and capital influx--of foreign investors, Argentina is scaring away business and hindering growth with its unpredictable regulatory measures.
"With all the economic and financial restrictions that have been imposed, it's not conducive for any multinational company to invest in there at this time," said Margo Black, head of Latin America South for Swiss Re. "Things are too uncertain and it's unclear what's going to happen. That is very difficult for any multinational to deal with, because it's unpredictable. We like to have a bit more stability and certainty."
Argentina has created a hostile and tumultuous regulatory environment that is based on politics rather than sound economics, experts say.
"It's not protectionist; it doesn't look as though the regulation is meant to protect the local market," said Andrea Keenan, vice president of research, ratings criteria and relations for A.M. Best. "It just looks like it's forcing local market players to support economic development--which is slightly different and much more intrusive."
In the past two years, Argentina has forced insurers to repatriate investments kept abroad, restricted the purchase of reinsurance in international markets and, most recently, forced insurance companies to invest a portion of their holdings into state-run infrastructure projects.
"Argentina has become trickier to do business in in recent years," said Stephen Ixer, an associate at Edwards Wildman Palmer UK. "In addition to the changing regulations in the insurance sectors, companies must also negotiate high inflation and exchange controls. State intervention in the economy is increasing in many sectors."
In addition to its high inflation rates and economic uncertainty, Argentina is noted for its bureaucracy, government nationalization of industries and low interest rates, according to the May 2013 A.M. Best Special Report, Latin America Insurance Regulators Evolve With Growing, Changing Markets. As a result, investors are steering clear.
"When you have that kind of uncertainty there are plenty of other options for foreign investors in Latin America," Keenan said. "There are so many other countries that are growing at a rapid and healthy pace that Argentina's competitive advantage in attracting foreign capital, or the interest of companies that want to do business there, is severely diminished. When you have countries like Colombia that are up and coming, and Mexico and Brazil, which are well established, there's very little incentive to have a short-term Argentine business plan.
"They could very likely lose a generation of industry growth by implementing these regulations," she said.
Regulatory Roundup
Argentina's regulatory shake-up started in 2011, when restrictions were introduced limiting how insurers could transfer risks. Beginning in September of that year, insurance companies were no longer allowed to cede to foreign reinsurers. Unless under exceptional circumstances, Argentine cedents are required to reinsure risks with Argentine reinsurers or with Argentine subsidiaries or branches of foreign companies that have local capital of at least $5 million.
According to the A.M. Best report, insurers previously had been able to cede to admitted foreign reinsurers registered with the Superintendencia de Seguros de la Nación, the country's regulator, or to non-admitted foreign insurers, provided the transaction was facilitated by a broker registered with the SSN.
Two months later, in November 2011, a law was passed requiring insurers to maintain all capital and invested assets in Argentina. Companies were given 50 days to liquidate and transfer international investments back to Argentina.
The investments and capital that reinsurers were allowed to keep abroad was capped at 50% of the company's total capital.
Last October, the government passed legislation requiring property/casualty companies to invest 10% to 20% of available funds, and life insurers 12% to 30% of available funds, into Argentine infrastructure projects that are preselected by a three-person committee consisting of the economic minister, the industry minister and the head of the SSN.
"If you're forcing companies to invest in government infrastructure projects, it means the government has depleted its resources and they're making their private sector players invest in projects that may or may not align with their investment strategy," Keenan said. "These types of policies hamper the private sector and don't necessarily lead to long-term growth."
While Argentina may get a boost from insurance investments, there could be some unintended side effects in the insurance industry.
"Repatriating foreign investments and stipulating where specified portions of investment portfolios should be invested makes investment returns significantly more difficult for insurers," Ixer said. "This will affect balance sheets and may encourage greater risks on the underwriting side in order to compensate for the drag on investments.
"At the same time, the restrictions on accessing international reinsurance markets further distort insurers' risk management programs and may result in over-concentrations of risk that may be laid bare in the event of very large or exceptional loss events," Ixer added.
"The reinsurance restrictions particularly affect companies writing larger risks, which need the support of international markets, although there is an exemption for the portion of risks above $50 million, which allows direct access to international markets."
Companies already operating within Argentina largely have adjusted to the new regulations.
"There is no real shortage of capacity in the Argentinian market," said Black, who also is president of Swiss Re Brasil Resseguros. "They are managing, just as we do in Brazil, to work their way around the regulations and accommodate the rules and regulations they have in place."
Though the restrictions have not caused a mass exodus, they have been a nuisance to current market players and a deterrent to new entrants.
"The imposition of the new regulations has without a doubt made the country less attractive for new entrants to Latin America," Ixer said. "However, for those insurers and reinsurers that were already doing business in Argentina, the regulations are, so far, more of a costly annoyance than an outright deterrent."
Because Argentina's insurance market isn't as competitive as those in countries such as Mexico and Brazil, insurers willing to deal with the challenging regulations in Argentina could reap some benefits.
"Those insurers who are fully committed to Argentina and are prepared to fall in line with the regulatory restrictions may be rewarded with an increased market share, as less committed companies either struggle to adapt to the new rules, scale back their operations or are bought up by competitors," Ixer said.
"However, the operating environment is tougher as a result of the regulations and so returns are unlikely to be as great. Companies must adapt their business models in order to remain profitable while working in accordance with the new regulations."
'Everything is Difficult'
Companies operating in Argentina understand difficulties. It is one of the most difficult places in the world to do business, according to World Bank indicators. Argentina ranks 124th as far as ease of doing business, 171st in dealing with construction permits, 154th in starting a business and 117th in protecting investors. Argentina was downgraded to Country Risk Tier 5 (on a scale from 1 to 5) by A.M. Best on March 1, illustrating the country's extreme level of political, economic and financial system risks.
"Everything is difficult in Argentina," Keenan said. "The systems are inefficient, and companies find it difficult to operate in an environment where the legal system can change whenever the government decides to change course and add new regulations. Usually when a regulator is about to change something as important as where companies can invest their assets, there would be an opportunity for the local industry to participate more in the decision-making process. With such a dramatic move like we saw in Argentina, the government is prioritizing government-supported infrastructure projects over the health of the insurance industry."
Despite all of Argentina's attributes and upside potential, many companies simply are not willing to accept that level of risk. "Argentina is a country that has so much," Black said. "They have an educated workforce and it's a very rich country in natural resources and industries. Unfortunately, the situation in Argentina is not very attractive at this time. One of the difficulties of operating in Argentina is that the regulations change with frequency, which makes it difficult for a company to have a consistent policy. Swiss Re's situation at the moment is that we are looking at Argentina from a distance."
Plenty of other insurers and investors are keeping a distance as well. And they likely will remain there until the country makes some significant changes.
"The longer these regulations and restrictions remain in place, the harder it's going to be for the country to get out of the situation that it's in," Keenan said. "The government has to liberate the economy, open up the capital markets and allow companies to do business as they see fit in order for long-term growth to occur."
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Swiss Re
A.M. Best Company # 085009
Distribution: Direct
For ratings and other financial strength information visit www.ambest.com.
by Kate Smith, senior associate editor, Best's Review
