Obligation to Invest Technical Reserves of Insurance Companies in Argentine Currency and Consequent Divesting of Dollarized Portfolios

The Argentine Superintendence of Insurance (SSN) issued on October 27, 2015 Resolution No. 39,517, which sets forth that insurance companies must “invest their technical reserves in the  currency in which their obligations must be paid”; that is, mostly in local currency, in order to ensure the currency matching of technical reserves. They must therefore proceed to divest any excess in foreign currency positions between November 3 and December 31, 2015.

The Resolution determines that insurers must hold assets denominated in foreign currency only up to the amount of technical reserves arising from insurance or reinsurance contracts in foreign currency.

The technical reserves arising from obligations in foreign currency, redeemable in Argentine pesos, should be hedged by financial instruments with the same conditions.

Insurers and reinsurers must match their short-term commitments with securities of shorter maturities or higher liquidity, while those long term commitments may be hedged with assets with longer maturities or lesser liquidity. Also, securities with low liquidity, in order to be contemplated within the hedging scheme, should have a duration shorter than the maturity of the liabilities they match. To do so companies must keep their temporary structures of maturing liabilities updated.

The Resolution states that the portfolios must be able to respond to an early unwinding of positions, without impairment of the value of the assets involved.

To comply with the new regulation, insurers must reduce their net exposure to foreign currency to 50% by November 3, 2015, to 70% by November 30, 2015, and to 100% by December 31, 2015.

In order to monitor compliance with the Resolution, insurance companies must submit monthly –as a sworn declaration and within the following 5 business days as of the end of each month- details of the contract liabilities discriminated by denomination by either domestic or foreign currency, and as may be payable in local or foreign currency.

This regulation follows other decisions that forced insurers to reassess their portfolios, such as Resolution SSN No. 38,708 dated November 6, 2014 (as amended by Resolution SSN No. 39,438 dated September 18, 2015) which sets minimum percentages that insurers must allocate to securities which finance productive or infrastructure projects (referred to in paragraph 35.8.1(k) of the General Regulation of Insurance Activity).

Regulations with similar aims have also been adopted with regard to financial institutions through the successive reduction of the allowed percentage of overall net foreign currency positions in respect of their net worth (Communications "A" 5536 and 5627 of the Argentine Central Bank) and to mutual funds through the obligation imposed to value their securities listed abroad at the official exchange rate and not at their local peso market value (General Resolution No. 646 of the Argentine Securities Commission). In practice, all these measures have forced these market participants to divest their foreign currency positions.