OLDWICK, N.J.--(BUSINESS WIRE)--With Puerto Rico mired in a debt crisis, A.M. Best in a recent special report has examined other investment classes that have originated in the U.S. territory. Overall, the report finds that a large majority of insurers hold manageable levels of risk to investments originated in Puerto Rico, with just four insurers having holdings that exceed their capital and surplus position.
According to the Best Special Report, titled, “Puerto Rico Investment Exposure Remains Manageable,” the life/annuity (L/A) segment holds 51.8% of the analyzed investments (municipal (muni) bonds, mortgages, real estate and BA assets), while the property/casualty (P/C) segment holds 47.1%, and health and title companies combine for the remaining 1.0%. Most of the L/A exposure comes from investments in mortgage loans, at 56.0%, while muni bonds account for 37.8% of the segment’s exposure. Conversely, the P/C segment’s muni bonds allocation accounts for 84.0% of the Puerto Rico-originated investments, followed by real estate at 13.2%. Overall, the P/C segment holds 65.7% of Puerto Rico muni bonds while the L/A segment accounts for 32.5%.
High unemployment, massive emigration and a near-catastrophic national debt crisis has had its effect on the housing and commercial real estate markets. The island’s economic crisis was fueled by the overall U.S. recession and factors unique to the island, including an end to longstanding Puerto Rican government corporate tax breaks in 2006, which led to business shutdowns and public- and private-sector layoffs. More recently, the downgrading of the island’s debt to junk status has contributed to the struggles.
Puerto Rico-originated mortgages are also experiencing pressure and pricing volatility related to the overall challenges Puerto Rico is facing. As large numbers of the population move from Puerto Rico to the U.S. mainland, there is a material increase in the loan-to-value ratio and an increase in foreclosures. The ratio of the mortgage carrying value-to-property value increased to 65.3% from 54.5% in 2012-2015. At the same time, the overall mortgage portfolio held by the L/A industry segment showed a moderate decrease in the loan-to-value ratio to 44.7% from 47.8%. Underlying the increase in the loan-to-value ratio in Puerto Rico is an overall depreciation in the value of land and buildings of more than 30% from 2012 to 2015.
Puerto Rico-domiciled companies have worked to improve the quality of their investments over the past three years, as many of the carriers have invested in U.S. muni bonds, as well as special revenue and agency bonds. In some cases, the remaining Puerto Rico securities are held as a function of regulatory requirements. Additionally, some of the companies with high losses relative to capital and surplus are part of larger organizations that may provide financial support. A.M. Best will continue to monitor events in the Puerto Rico market and their potential impact on rated entities and the insurance industry as a whole.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=250179.
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