OREANDA-NEWS. The Central American and Dominican Republic insurance sector's outlook remains stable for 2016, according to Fitch Ratings in a newly published report. The stable outlook is based on favorable growth rates for insurance markets in the region, along with the projected positive economic growth in those countries. In addition, the outlook considers the strengths that the insurance markets continue to show in terms of capitalization and liquidity. However, a higher frequency of catastrophic events, along with higher inflation rates and currency devaluation in some countries, still pose challenges for the region.

As we expect performance, capitalization, and liquidity to remain supportive of the existing ratings in 2016, the rating outlook remains Stable, which indicates that there is a limited probability of rating changes over the next 12-18 months. However, significant changes in company risk profiles or level of support assumed could lead to changes in the credit ratings in some cases.

In Fitch's opinion, the Central American insurance industry maintained an adequate financial profile as of September 2015. This is based on the region's relatively low combined ratio, which remained less than 100% (95.6%). In addition, the region maintained a low operating leverage ratio of 1.1x, and a high liquidity coverage ratio (152% of reserves and 105% of liabilities).

Fitch estimates nominal growth (in U.S. dollars) of 4.8% in premium underwriting for Central America and the Dominican Republic at the end of 2015, comparing unfavorably to the 8.2% registered in 2014. This is due to an accounting adjustment in the financial statements of Costa Rica's largest insurer, which underwrites 82% of total premiums. This market is the second largest in the region with 25% of total premiums. For 2016, Fitch estimates growth of 3.5%, based on more aggressive competition and devaluation of currency in some of the markets.

Fitch also believes that profitability in property and casualty insurance lines will be challenged by highly competitive rates promoted by favorable conditions in the international reinsurance market. In the medium term, this may affect sector performance, although growth and profitability in personal insurance lines could mitigate a possible deterioration in the profitability of these markets.

We also believe that the region will be able to maintain adequate capitalization and leverage ratios, based on more efficient generation and reinvestment of revenues in most companies, and on the extensive reinsurance capacity available in the markets. Fitch believes solvency levels could show further improvement as Solvency II type regulations are adopted in some markets within the region.

The full report, '2016 Outlook: Central America and Dominican Republic Insurance Sector' is available at www.fitchratings.com.