Mexico industry capital strong despite credit quality downswing: AM Best

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.

The downswing is being driven by action on the country’s sovereign debt rating and issues at its heavily indebted oil company, the rating agency noted.

However, on 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 are expected to remain under pressure.

Further compounding performance in the sector is the low interest rate environment, which continues to challenge life insurers’ asset-liability management capabilities, pressuring their financial products.

But in AM Best’s view, the capital levels of Mexico’s insurance companies remain sound despite the exposure to the deteriorating government obligations

And according to Best’s Capital Adequacy Ratio (BCAR), 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.

Additionally, local insurers’ current fixed-income allocations highlight a growing diversification toward corporates, inflation-pegged securities and dollarized instruments.

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