Best’s Commentary: Mexico Insurance Industry’s Capitalization Remains Sound Amid Changes in Investment Credit Quality

AM Best expects Mexico’s insurance companies to remain able to meet regulatory capital requirements despite a downswing in the credit quality of its fixed-income investments, which is being driven by action on the country’s sovereign debt rating and issues at its heavily indebted oil company.

A new Best’s Commentary, “Mexico Insurance Industry’s Capitalization Remains Sound amid Changes in Investment Credit Quality,” notes that AM Best periodically reviews and monitors the capitalization of Mexico’s insurance industry as a whole. In view of the unprecedented events of 2020 and the prospect of a challenging year ahead owing to pandemic-driven uncertainty, the credit profiles of state-owned companies will likely remain under pressure. In AM Best’s opinion, the capital levels of Mexico’s insurance companies remain sound despite the exposure to the deteriorating quasi-government obligations, led by Petróleos Mexicanos (PEMEX), which posted a loss of USD 23 billion in 2020, and the state-run utility, Comisión Federal de Electricidad, which is one notch away from non-investment grade. Moreover, the low interest rate environment continues to challenge life insurers’ asset-liability management capabilities, pressuring their financial products.

Further stress-testing of the industry’s assumed exposure to state-run companies at non-investment grade levels still shows overall risk-adjusted capitalization at the strongest levels, according to Best’s Capital Adequacy Ratio (BCAR). Additionally, local insurers’ current fixed-income allocations highlight a growing diversification toward corporates, inflation-pegged securities and dollarized instruments.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=306720.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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