Fitch: Mexican Insurance and Surety Sectors Still Challenged by New Regulatory Framework

MONTERREY, Mexico--()--The implementation of new regulatory requirements continues to challenge the Mexican insurance and surety industry, according to Fitch Ratings.

As of August 2016, public information is still scarce and preliminary. Companies in the market have had to perform accountability adjustments in order to comply with the National Insurance and Surety Commission (CNSF), which has resulted in delays in the disclosure of information to the general public. However, despite the lack of public information, Fitch has observed performance trends in its rated entities which have impacted the sector as a whole.

The economic environment in Mexico continues to pose challenges owing to low oil prices, reduced oil output, international financial volatility and a sluggish U.S. industrial sector (Mexico's main commercial partner). Despite this, the Mexican economy has been relatively resilient to external events and authorities are tightening economic policies to adapt to the new environment. Fitch expects economic growth to reach 2.4% in 2016, accelerating to 3% on average from 2017 - 2019, given a competitive peso, improved external conditions, and a boost from the implementation of structural reforms introduced a few years ago.

Despite modest economic growth, preliminary results published as of March 2016 by CNSF show 14.5% growth in premiums for the insurance sector and 4.6% growth for the surety market, compared to 7.7% and 2.8% as of March 2015, respectively. Premium dynamics benefited from a regulatory requirement for annually account premiums, specifically in life insurance products, which represents 45.4% of the total portfolio; this product has shown an increase of 25.7%. Removing this effect, real growth of the industry should be around 7% and 9%.

Annuity products shrank 21.1% due to larger participation by public health institutes in underwriting annuities. The Property and Casualty branch grew 10% due to an increase in auto insurance production, which expanded 13.7% following an increase of 13.4% in auto sales. The surety sector grew 4.6%.

Performance indicators remain stable for the first quarter 2016. The combined ratio for the insurance sector decrease to 91.0% from 92.9%; however, net result by written premium reached 11% compared to 6% at 2015, due technical reserve release which is related to the first impacts of methodological changes. However, Fitch expects that, in terms of the financial profile of the companies, the lowest reserve base will be balanced through higher equity due the introduction of new risks in solvency calculations.

The agency has also noted various entity's increased appetite to diversify reinsurance programs with high credit quality reinsurers, which benefits capital requirements for counterparty and concentration risks.

For year-end 2016, Fitch expects the sector's earnings to benefit from higher technical reserves release and also by the effect of annualizing premiums. Better 2016 results will allow a strengthening of the company's equity; however, solvency ultimately will depend on the dividend distribution and reinvestment of earnings policies for each company. While the indicator of technical reserve by premiums will decrease, capitalization level should improve. Fitch will continue to analyse information as it becomes available and will provide additional commentary as it affects individual companies or the market as a whole.

Additional information is available on www.fitchratings.com

Related Research:

--December 2015 Financial Ratios (Challenging Economic and Regulatory Environment) (April 18, 2016);

--Mexican Insurance Outlook Stable for 2016 (Jan. 7, 2016);

--Major Regulatory Changes Face Mexican Insurance Sector (May 10, 2016).

Related Research

2016 Outlook: Mexican Insurance (Strong Finances, Regulatory Changes and Economic Challenges)

https://www.fitchratings.com/site/re/876177

Mexican Insurers: December 2015 Financial Ratios (Challenging Economic and Regulatory Environment)

https://www.fitchratings.com/site/re/879911

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Contacts

Fitch Ratings
Eugenia Martinez
Associate Director
+52 (81) 8399 9100 ext 1155
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
or
Rosa Elena Turrubiartes
Analyst
+52 (81) 8399 9100 ext 1516
or
Milena Carrizosa
Director
+571 307 5180 ext 1090
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Eugenia Martinez
Associate Director
+52 (81) 8399 9100 ext 1155
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612,
Monterrey, N.L. Mexico
or
Rosa Elena Turrubiartes
Analyst
+52 (81) 8399 9100 ext 1516
or
Milena Carrizosa
Director
+571 307 5180 ext 1090
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com