Mexico insurance growth potential seen intact after AMLO victory

Mexico's insurance industry looks to press ahead with strong growth in 2018, according to Moody's VP and senior analyst José Montaño, who downplayed the impact of the July 1 presidential election in a phone interview with BNamericas.

President-elect Andrés Manuel López Obrador (AMLO) won a landslide victory on Sunday, which has generated fears - especially among local businessmen - that the veteran lefitist politician could modify Mexico's market-friendly economic model.

"We continue to expect positive evolution with the insurance sector in general. No matter the electoral process, we do not see it as a risk," said Montaño.

"[The insurance sector] has grown at much higher rates than the economy has," said the expert. "This is mainly due to economic stability, but also to the fact that the penetration of the insurance sector in Mexico is very low, it is one of the lowest in Latin America, the growth potential remains an important factor within the insurance sector."

"To give some figures, last year we grew at rates of almost 9% in total premiums, against the economy that grew around 2%, and this will continue to be for 2018 and even in the future. We do not see why the insurance sector will slow its growth rate in the coming years," said Montaño.

Looking at other aspects of the market, Moody's recent analysis of Mexico's insurance sector at the end of 2017 stressed its moderate-to-high market concentration and balanced portfolios, noting impacts from earthquakes and Solvency II on profitability for the year.

INDUSTRY DETAILS

There were 112 active insurance and surety companies operating in Mexico at the end of last year, with total gross premium written (GPW) of 499bn pesos (US$25.3bn) and total net income of 49bn pesos.

The insurance industry has a well-balanced premium distribution, with the life and P&C segments comprising 39% of the industry premiums each, while further diversification is provided by accident and health (16%), pensions (4%), and surety (2%).

Within the P&C segment, auto insurance continues to be the first largest line of business, with more than half of the overall P&C premiums. Moody's sees an attractive growth potential for auto insurance given the fact that penetration remains very low.

The life segment is primarily comprised of policies for individuals and group life coverage, which include products for SMEs and larger corporations.

Other key points in Moody's analysis are:

• Investment portfolios continue to be highly concentrated in sovereign bonds (A3 stable), with government securities representing 62% of total investments. Investment assets are also allocated in common stock (12%), corporate bonds (15%), and other investments (10%), which include real state, loans and foreign bonds.
• After the Solvency II regulatory framework became effective in 2016, the industry increased its concentration in higher-quality investment assets such as Mexican government bonds. This allowed many firms to comply with the minimum admissible funds to maintain adequate liquidity and capital levels as mandated by the framework, strengthening overall balance sheets.
• As a result, gross underwriting leverage remained at 3.1x in 2017. Shareholders equity for the industry as a percentage of total assets remained the same last year as in 2016, at 14%.
• During 2017, the industry benefitted from higher investment returns derived from increased interest rates, given the majority of portfolios being allocated to fixed income instruments. These have largely supported net income for the industry, which reached 49bn pesos during 2017 with an investment income ratio, (as measured by net investment income to net premiums earned) of 26%, higher than the 21% of 2016.
• Net income return on average equity increased to 24% last year from an average of 20% in the last five years.