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AMB Country Risk Report August 24, 2016 Our Insight, Your Advantage. Country Risk Tier CRT-4 Costa Rica • The Country Risk Tier (CRT) reflects A.M. Best’s assessment of three categories of risk: Economic, Political and Financial System Risk. • Costa Rica, a CRT-4 country, has high levels of economic and financial system risk with moderate levels of political risk. Gross domestic product (GDP) growth is forecasted at 4.25% for 2016 and 2017 while inflation is expected to remain well contained, averaging 3% from 2017 onward. Very High Very High Very High High High High Moderate Moderate Moderate Low Low Low • The map below depicts the countries A.M. Best evaluates in Central America, South America and the Caribbean. Regional growth will rely, in part, upon U.S. and European growth rates as well as domestic demand growth and improved economic policies. As various factors will affect each country differently, the economic expansion process will not be homogenous within the group. Mexico Bahamas Dominican Republic Cuba Puerto Rico Haiti Cayman Islands Belize Jamaica British Virgin Anguilla Islands St. Maarten St Kitts & Nevis Honduras Very Low Very Low Very Low Guatemala El Salvador St Vincent & the Grenadines Curacao Grenada Costa Rica Panama Political Risk Financial System Risk Cape Verde St Lucia Barbados Trinidad & Tobago Venezuela Guyana Colombia Economic Risk Antigua & Barbuda Dominica Nicaragua Suriname French Guiana Ecuador Peru Brazil Bolivia Country Risk Tier 5 (CRT-5) Very High Level of Country Risk Country Risk Tier 4 (CRT-4) High Level of Country Risk Chile Paraguay Argentina Uruguay Country Risk Tier 3 (CRT-3) Moderate Level of Country Risk Country Risk Tier 2 (CRT-2) Low Level of Country Risk Country Risk Tier 1 (CRT-1) Very Low Level of Country Risk Falkland Islands South Georgia Tierra Del Fuego Copyright © 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of A.M. Best. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms. AMB Country Risk Report Costa Rica Regional Summary: Latin America Vital Statistics 2015 Nominal GDP Population GDP Per Capita Real GDP Growth Inflation Rate Literacy Rate Urbanization Dependency Ratio Life Expectancy Median Age USD bn mil USD % % % % % Years Years 52.90 4.8 10,936 3.7 0.8 97.8 76.8 45.4 78.4 30.4 Insurance Statistics General Superintendency of Insurance Insurance Regulator Premiums Written (Life) Premiums Written (Non-Life) Premiums Growth (2014 - 2015) USD mil USD mil % 135 921 -10.3 Regional Comparison Country Risk Tier CRT-4 CRT-4 CRT-4 CRT-5 CRT-5 CRT-4 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama • The weak economic outlook for commodity exporters is exacerbating ongoing political tensions for some countries in the region including Brazil and Venezuela. • Consumer and business confidence remains subdued in the region due to slowing economic growth and political uncertainties. Improved transparency and reduced levels of corruption could boost growth long-term. Economic Risk: High Economic Growth • Costa Rica’s economy is diversified, with a developed manufacturing and service sectors. An increase in exports have provided a boost to the economy in 2016. 16 CPI Inflation 14 12 • Inflationary pressure are low largely due to continued low commodity prices. As a result, the Central Bank of Costa Rica has been able implement accommodative monetary policy in the form of low interest rates. The base lending rate currently is 1.75%. 10 % • Macroeconomic challenges affecting the region include a slowdown in external demand, exchange rate volatility, currency depreciation, high levels of inflation, rising income inequality, tightening financial conditions and the need to address structural problems in order to raise investment and jobs creation. • Several countries (i.e. Mexico and Peru) have been able to mitigate the economic downturn by implementing credible fiscal and monetary policies. External shocks to these economies have been somewhat reduced by countercyclical policies. Source: IMF, World Bank, Swiss Re, Axco and A.M. Best Real GDP • Economic growth is expected to remain subdued over the medium term, particularly for countries that are commodity exporters and those countries that are experiencing weak investment. 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -2 Source: IMF World Economic Outlook and A.M. Best 2 2020 2021 • Low oil prices will help stimulate domestic demand by increasing consumer purchasing power. Private consumption accounts for approximately 65% of GDP. AMB Country Risk Report Costa Rica Political Risk Summary Political Risk: Moderate Score 1 (best) to 5 (worst) Costa Rica World Average • President Solis, a member of the PAC party, was elected in 2014 on a platform of improving public governance, ousting the opposition party (the PLN) who held the presidency for eight years. Elections were peaceful and transparent. International Transactions Policy 5 4 Legal System Monetary Policy 3 2 1 Regional Stability Fiscal Policy • The president’s party, the PAC, only has 13 of the 57 seats in Congress. The lack of a coalition government will likely continue to curtail the legislative agenda. Business Environment • Environmental activism is prominent, particularly in the extractive sectors. This will likely curtail foreign direct investment. 0 Social Stability Government Stability • One of the main concerns of the government is the deterioration in the fiscal account due to growing debt burdens and interest payments. Reform in this area is being tied to the replacement of some proposed tax increases to reduced government spending. These conditions make it more difficult to pass reform measures. Labor Flexibility Source: A.M. Best • Crime is low by regional standards, however there are indicators that violent crime is increasing as there is a growing presence of organized crime. There is also an increasing risk of social protests due to potential government austerity measures. GDP Per Capita and Population for Selected Countries Financial System Risk: High 18 14,000 GDP Per Capita • The supervisor, the General Superintendency of Insurance, was established by law in 2008, concurrent with the abolition of the monopoly of INS, the National Insurance Institute. Population 16 12,000 14 10,000 12 8,000 8 6,000 6 Millions USD 10 • A key vulnerability in the financial sector is the banking sector which is highly concentrated with about 80% market share of the financial system. 4,000 4 2,000 2 0 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Source: IMF and A.M. Best 3 0 • The banking system is also highly dollarized. Public banks hold approximately 20% of deposit in foreign currency. Private banks hold approximately 50% of deposits in foreign currency. AMB Country Risk Report Costa Rica GUIDE TO BEST’S COUnTry rISk TIErS A.M. Best defines country risk as the risk that country-specific factors could adversely affect the claims-paying ability of an insurer. Country risk is evaluated and factored into all Best’s Credit Ratings. Countries are placed into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a stable environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. A.M. Best’s Country Risk Tiers are not credit ratings and are not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Country risk Tiers Country risk Tier Definition CRT-1 Predictable and transparent legal environment, legal system and business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. CRT-2 Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. CRT-3 Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. CRT-4 Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. CRT-5 Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry. Country risk reports A.M. Best Country Risk Reports are designed to provide a brief, high-level explanation of some of the key factors that determine a country’s Country Risk Tier assignment. It is not intended to summarize A.M. Best’s opinion on any particular insurance market or the prospects for that market. Categories of risk Country Risk Reports provide scores for three categories of risk for each country. These scores are (1) Very Low; (2) Low; (3) Moderate; (4) High and (5) Very High. Category of risk Definition Economic Risk The likelihood that fundamental weaknesses in a country’s economy will cause adverse developments for an insurer. A.M. Best’s assessment of economic risk evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. Political Risk The likelihood that government or bureaucratic inefficiencies, societal tensions, inadequate legal system or international tensions will cause adverse developments for an insurer. Political risk comprises the stability of the government and society, the effectiveness of international diplomatic relationships, the reliability and integrity of the legal system and of the business infrastructure, the efficiency of the government bureaucracy, and the appropriateness and effectiveness of the government’s economic policies. Financial System Risk Financial system risk (which includes both insurance and non-insurance financial system risk) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking system or asset markets, and/or poor regulatory structure. In addition, it includes an evaluation of whether the insurance industry’s level of development and public awareness, transparent and effective regulation and reporting standards, and sophisticated regulatory body will contribute to a volatile financial system and compromise the ability of an insurer to pay claims. Political risk Summary To provide additional detail on the political risk in a given domicile the Country Risk Reports include the Political Risk Summary. The Political Risk Summary is a radar chart that displays scores for nine different aspects of political risk scored on a scale of one to five with one being the least amount of risk and five being the highest amount of risk. Category Definition International Transactions Policy Measures the effectiveness of the exchange rate regime and currency management. Monetary Policy Measures the ability of a country to effectively implement monetary policy. Fiscal Policy Measures the ability of a country to effectively implement fiscal policy. Business Environment Measures the overall quality of the business environment and ease of doing business. Labor Flexibility Measures the flexibility of the labor market, including the company’s ability to hire and fire employees. Government Stability Measures the degree of stability in a government. Social Stability Measures the degree of social stability, including human development and political rights. Regional Stability Measures the degree of stability in the region. Legal System Measures the transparency and level of corruption in the legal system. Country risk Tier Disclosure A Country Risk Tier (CRT) is not a credit rating, rather it represents a component of A.M. Best’s Credit Rating Methodology that is applied to all insurers. A CRT is not a recommendation to purchase, hold or terminate any security, insurance policy, contract or any other financial obligation issued by a government, an insurer or other rated issuer, nor does it address the suitability of any particular policy, contract or other financial obligation for a specific purpose or purchaser. Version 091714 Copyright © 2016 by A.M. Best Company, Inc. Copyright © 2016 A.M. Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of A.M. Best. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms. 4