[January 28, 2013]

Fitch Publishes Special Report on the Mexican Insurance Industry

Fitch Ratings has published a special report on the Mexican insurance industry. Fitch maintains a stable rating outlook for the Mexican insurance industry, which indicates the agency believes most insurer ratings will be affirmed as they are reviewed over the next 12 - 24 months.

The Mexican insurance sector experienced recovery in its combined ratio to 101% in September 2012 (an average of 105% in last three years). This was due to solid annual premiums growth (11% in real terms), and a net loss ratio reduction to 69.5% in September 2012 from 72% in September 2011. The net loss ratio reduction was due to tariff increase actions, stabilization of total cost of claims, and the improvement in the claims environment, while catastrophic related losses were mitigated by adequate catastrophic reinsurance and reserves.

Industry technical and mathematical reserve coverage reaches historic high levels, as Total Reserves to Net Retained Premium's ratio stood just below 200% in third-quarter 2012 after having exceeded that level for the first time in 2011, reflecting the solid growth of life and catastrophic lines that require large reserve accumulation.

An ample amount of accumulated reserves provides the sector a broad base of resources available for investment, which translates into an important financial income contribution (an average of 16% of net earned premiums over the last four years). The significant investment income, allows the industry to offset recurring operating losses and large reserve constitution expenses, and achieve significant levels of profitability (ROE: 20% in September 2012).

The industry's solvency is largely explained by the existing measures used by Mexican insurance regulators to evaluate solvency margins, which are based on stringent rules an requirements regarding adequate technical reserve levels, reinsurance protection, and diversified high-quality investments. However, in the Mexican insurance industry, directly held equities make up a large portion of total capital (59% in Sept. 30, 2012), which impacts the sector's liquidity position. Further deterioration of liquidity ratios could negatively impact the industry's outlook.

The new insurance law, which was intended to introduce a risk-based capital approach into the sector and has been under review for many years was recently approved by the senate and is now being submitted to the chamber of deputies to be tentatively implemented in 2014. Fitch expects the new regulatory regime to lead to greater capital resources and risk management, and also improve industry's transparency and supervision. However, a return to aggressive pricing policies would have a negative effect on the sector's profitability and could prompt a revision of the outlook to negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research: 2013 Outlook: Mexican Insurance Industry

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=699054

Insurance Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=698731

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