An 82% rise in Mexican insurers' profit during 2016 was heavily driven by new Solvency II standards adopted by the sector, and is expected to be a one-time gain only, Moody's said in a sector comment report.
Mexican insurance firms ended 2016 with an accumulated profit totaling 38.68 billion Mexican pesos, up sharply from 21.21 billion pesos earned in 2015, with direct written premiums growing 9.3%. The results were significantly impacted by the Solvency II standards adopted by the sector Jan. 1, 2016, specifically by the adoption of new accounting standards for the valuation of investments, Moody's said.
"This change aligned Mexican regulations with International Financial Reporting Standards (IFRS) and the Solvency II framework by requiring that firms report the fair value of their investments, rather than reporting their valuation at amortized cost, which had been the practice prior to the regulatory change," the rating agency noted.
The usage of fair value enables insurers to provide a more accurate measure of their solvency risks in real time, Moody's added.
These regulatory changes are expected to have a more muted impact on insurers' net income in 2017, the rating agency said. "While the fair value approach to valuing investments means that changes in market prices for financial assets may lead to some degree of increased earnings volatility, we don't expect insurers will record such large, one-time gains again."
However, Moody's recommends the continued observation of the effect of the regulatory changes and adopting adjustments when comparing earnings to prior to the Solvency II adoption, since it believes that the new rules had a measurable impact on aggregate ratios such as return on equity and on insurers' combined and loss ratios.
As of March 31, US$1 was equivalent to 18.84 Mexican pesos.