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.
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