Mexico: A developing market growth story

Transcription

1 Mexico: A developing market growth story By LII Editorial 19 December 2011 By most standards, Mexico s life insurance market has enjoyed robust growth over the past decade, driven to a large extent by solid economic growth and a fast-growing middle class. Despite this, Mexico s life market has fallen far behind Latin America s biggest life market, Brazil. Robin Arnfield reports. Mexico has a strong economy, youthful population, expanding middle-class and low levels of insurance penetration, factors that add up to making the country an attractive market for life insurance companies. According to the US Central Intelligence Agency, only 18.2% of Mexico s population is below the poverty line while two-thirds (62.5%) of the population is between 15 and 64 years of age, with only 6.6% being 65 years old or over. Life insurance penetration, according to Swiss Re, was only 0.9% of GDP in Mexico also weathered the global financial crisis of fairly well. Although the country s economy was harshly punished in 2009 with its GDP contracting by a significant 5.4%, it rebounded rapidly in 2010, recording GDP growth of 5.4%. Spanish bank BBVA Bancomer predicts that Mexico s GDP will grow by 4.1% in 2011 and 3.8% in This predicted growth, according to BBVA Bancomer, will see per capita GDP in US dollar terms rise from $8,680 in 2010 to $10,158 in 2011 and $10,502 in 2012.

2 Adding further attraction, individual life insurance, which accounts for two thirds of Mexican life insurance policy sales, attracts significant tax breaks from the Mexican government. Mexico s life insurance industry, which is dominated by foreign players, is also highly regulated and its financial health is sound. Pension funds Also of significance to life insurers in Mexico is the country s pension fund system in which they play an indirect role. In 1997, the Mexican government reformed the social security system by creating private companies known as Afores (Administradoras de Fondos para el Retiro or retirement fund managers) to manage mandatory workers pension contributions. Afores, which are not insurance companies, pass on a portion of these contributions in the form of risk premiums to a life insurer which provides death and disability coverage. Annuities (rentas vitalicias) are provided by life insurers. In October 2011, total pension assets under management in Mexico amounted to MXN1.57trn ($115.7bn), distributed across 14 Afores, says Juan Mazzini, a senior analyst at US-based consultancy Celent. Contributions are deducted directly from employees salaries, with employers making contributions as well. "In Mexico, the Afores invest in five different pension funds which have different degrees of risk," says Mazzini. "Investment in these funds is governed by the age of the contributor. As contributors age, they are forced to invest in less risky funds." Each of the five pension funds is only allowed to invest up to 20% of its assets in foreign securities, according to Mexico s pension industry regulator, Consar (Comisión Nacional del Sistema de Ahorro para el Retiro or the National Commission for the Retirement Savings System). Citing data from the Mexican government s Instituto Mexicano del Seguro Social (IMSS Mexican Social Security Institute), Mazzini says that in November 2010, 14.7m people 31% of Mexico s 47m economically active population were contributing to pension funds. "Only 1.25% of pension fund contributions come from voluntary contributions," he says. "Foreign players dominate the pension fund industry." According to Consar, Citigroup s Banamex Mexican banking subsidiary had 16.8% of pension assets under management in October 2011, followed by BBVA Bancomer with 15% and ING with 13.7%. Notably, Mexico s pension market has seen considerable corporate action in recent months. In August 2011, UK banking group HSBC sold its Mexican Afore to US insurer Principal Financial Group for $198m. As part of the deal, HSBC will sell Principal s retirement products through its Mexican branch network.

3 Also in August 2011, Dutch group ING agreed to sell its mandatory pension and voluntary savings businesses in Mexico, Chile, Colombia and Uruguay, as well as life insurance businesses in Chile and Peru to Colombianbased Gruposura (Grupo de Inversiones Suramericana). The deal includes the local investment management capabilities in these five countries. In September 2011, US insurer Prudential Financial sold its 50% stake in Mexican Afore XXI to Banorte. Staterun social security institute IMSS, which also owns 50% of XXI, agreed to merge XXI with Banorte s own Afore, Afore Banorte. As part of the deal, the IMSS will buy the 49% stake which Italian insurer Assicurazioni Generali holds in Afore Banorte. Low penetration Mexico s financial services sector remains very much in a developmental phase. This is reflected in a low personal borrowing ratio to GDP, says Franklin Santarelli, MD of Latin American Financial Institutions at Fitch Ratings. "This mean there is a large portion of the Mexican population that is unbanked, and very likely has no insurance coverage," he adds. Santarelli continues that around a third of Mexican workers belong to the informal labour force and therefore do not contribute to the private pension funds operated by the Afores. "Because pension plans contain a life insurance element, this means that these informal workers are unlikely to have any life insurance," Santarelli says.

4 Putting figures on this, the Mexican insurance regulator the CNSF (Comisión Nacional de Seguros y Fianzas or National Commission for Insurance and Deposits) reports that there are 4m life insurance policies in issue, well under 10% of the economically active population of 47m. However, like Brazil, Mexico is seeing significant growth in people emerging from the cash-based informal sector into the formal sector. This emerging middle-class segment represents an attractive target, both for banks and life insurers. Shannon O Neil, the Douglas Dillon Fellow for Latin America Studies at non-profit organisation the Council on Foreign Relations, estimates that there are between 35m and 45m Mexican s who now rank as middle class. The emergence of the middle-class over the past 15 years is, she believes, the "big game changer" driving dynamic growth in Mexico s economy. Rise of bancassurance Bancassurance has grown very significantly in Mexico in recent years, with banks either owning their own captive life insurance subsidiaries or selling products from an insurer, says José Angel Montaño, an assistant vicepresident and analyst at Moody s Investor Service. "Banks sell simple insurance products from their branches such as individual life and universal life, not sophisticated products such as index-linked policies," he says. "Currently, bancassurance accounts for a third of total Mexican life insurance premiums," says Celent s Mazzini. "Banks entered the life insurance market because they saw the relationship between the products they sold such as car loans, credit cards and mortgages and life insurance. In Mexico, it is mandatory to get life insurance for any kind of loan. Usually, a bank will have a group life policy with an affiliated insurer which is part of the same holding company." According to Mazzini, Mexico s high level of violent crime and murder explains why so many financial products carry a life insurance element. A September 2011 report by Latin American-focused publication Business News Americas cited MetLife the largest life insurer in Mexico as saying that, due to the ongoing drug violence in Mexico, the cost of life, medical, and car insurance policies rose by 25% in the past year in the country. Drugrelated violence has cost tens of thousands of lives in Mexico in recent years. "Mexico has a lot of insecurity," says Mazzini. "Every time there is increased financial insecurity and risk of death, there is growth in demand for individual life policies. There is a guaranteed return on investment in term life which you can t get in other forms of insurance."

5 According to research carried out by UK-based financial services consultancy Finaccord in 2010, creditor insurance covering death and permanent disability is quite commonly available with credit cards in Mexico. "Out of 210 credit card products analysed, 107 were found to include either packaged or optional creditor cover," says Alan Leach, a director at Finaccord. According to Moody s, in 2009, bank- or diversified financial services-affiliated insurers such as Seguros Inbursa, Banamex, BBVA Bancomer, Banorte-Generali, ING and HSBC accounted for half of the life insurance market and 90% of the annuity markets. However, these insurers collectively accounted for less than 20% of the general and specialty insurance market in 2009, Moody s says. Venturing a prediction on specific players, Montaño says: "I predict that in the bancassurance sector BBVA Bancomer, Banorte-Generali and Grupo Financiero Inbursa will have the strongest growth." A major bancassurance player, Mexico s largest bank, Spanish-owned BBVA Bancomer distributes life insurance products produced by its own life insurance unit through its 1,800 branches. BBVA Bancomer ranked as Mexico s second-largest life insurer in Significantly smaller than BBVA Bancomer, Mexican banking group Grupo Financiero Banorte distributes products produced by Banorte-Generali through its 1,100 branches. Grupo Financiero Banorte is the largest Mexican-owned bank and the fifth-largest bank in the country. Seguros Banorte-Generali is a joint venture with Italian insurer Assicurazioni Generali in which the bank holds a majority stake of 51%. Seguros Banorte-Generali ranked as the country s eighth-largest life insurer in Grupo Financiero Inbursa is financial services group founded and owned by legendary Mexican entrepreneur and multi-billionaire Carlos Slim Helú. The group encompasses, among other subsidiaries, a bank, Banco Inbursa, and a life insurer, Seguros Inbursa. In 2010, Seguros Inbursa ranked as Mexico s sixth-largest life insurer. Life market size Total life insurance premiums in Mexico amounted to $8.95bn, compared to $33.25bn in Brazil, reports Swiss Re. In 2010, life insurance premiums grew by 16.3%, from $7.69bn in 2009, and accounted for 46.6% of the total Mexican insurance market of $19.20bn. Based on data from Swiss Re, Mexico accounted for 16% of the Latin American life insurance market in 2010, compared to Brazil which accounted for 60%. Put in perspective, Brazil s GDP of $2.09trn in 2010 was just over twice the size of Mexico s GDP of $1.04trn.

6 Also of particular significance has been the very different growth rates achieved by the life insurance markets in Mexico and Brazil over the past decade. In 2001, total life insurance premium income in Mexico stood at $4.76bn, some 5% higher than in Brazil where life insurance premium income totalled $4.51bn. Life premium income in Brazil went on to achieve a CAGR of 24.85% over the next nine years while in Mexico life premium income grew at a solid but far lower CAGR of 7.29% over the same period. On a positive note, Mazzini says: "Most Latin American countries, including Mexico, are expected to show double-digit growth in life insurance, partly real, partly due to inflation. The only factor that could have a significantly negative impact on growth would be a very deep economic crisis in the US." Montaño says that even though Mexico is Latin America s second largest life insurance market, one of the challenges and opportunities is the very low level of insurance penetration. "In Mexico, total insurance premiums [life and non-life] as a proportion of GDP is 1.8%, compared to 3.5% in Chile and 3.7% in Argentina," he says. "Fitch predicts the overall Mexican insurance market will grow by below 10% in 2012, given the sluggish current global and Mexican economic conditions," Santarelli says. "There is no reason to assume a significant differentiated growth pattern between life and non-life insurance in Mexico." In terms of life insurance density, Mexico has also fallen way behind Brazil, indicates Swiss Re data. In 2010, life premiums per capita in Mexico totalled $80.80, compared with $ in Brazil. Similarly, life insurance penetration in Mexico stood at 0.9% in 2010 compared to 1.6% in Brazil. Notably, penetration in Mexico has made virtually no progress since 2001 when it stood at 0.86%. It stood at 0.36% in Brazil in that year. Not surprisingly, Mazzini says: "There is room to improve penetration in Mexico."

7 Regulations Regulation of insurers in Mexico receives high praise from Santarelli. "Mexico s insurance industry is highly regulated, with the CNSF regularly reviewing insurers credit quality, assets and liability management," he says. "The regulator is on top of the latest developments in the industry." A positive of tight regulatory controls of insurers investments is that it has assured that the insurance industry is in good financial shape. Although insurers are allowed to invest a percentage of their funds outside Mexico, their investments are heavily concentrated in Mexican government securities, says Montaño. In addition to government bonds, insurers can also invest in corporate debt, equities and real estate. "There are clear guidelines for Mexican insurance companies investments," Montaño adds. "The CNSF closely monitors their investments." If not more stringent regulation, regulation in keeping with global regulatory changes is on the way in Mexico. "The Mexican insurance regulator is working closely with the insurers to create a new legal framework based on Solvency II, adapted for Mexican GAAP [generally accepted accounting principles]," says Montaño. "The final document about the new framework is likely to appear in 2012." According to Insurance Outlook 2011, a report on Latin American insurance by Business News America, Solvency II will remain a challenge for Latin American insurers as they will have to "keep striving to adjust their

8 capital, technical reserves and strengthen their corporate governance practices to adapt to the emerging new global standards". Main players The Mexican life insurance market is characterised by a high level of concentration, with the CNSF reporting that in 2010 the top-five life insurers held 76% of the market. "The Mexican life insurance market is concentrated in a small number of players, as it is in other Latin American countries," says Santarelli. Foreign insurers dominate the Mexican life insurance market, with a seemingly unassailable position held by the US largest life insurer MetLife, which entered Mexico in According to the CNSF, MetLife achieved a market share of 31.4% in 2010, while according to MetLife itself one in two of the 11m Mexicans that own life insurance have a MetLife policy. Behind MetLife in second place, BBVA Bancomer achieved a market share of 12% in 2010 while in third place was the largest Mexican-owned composite insurer Grupo Nacional Provincial (GNP), which achieved a market share of 10%. Formed in 1968, GNP is part of a Grupo Bal, a highly diverse Mexican company owned by the Baillères family. Close on GNP s heels was US mutual insurer New York Life s Seguros Monterrey New York Life unit, which achieved a market share of 9.5% in Seguros Monterrey New York Life was formed in 2000 following the US insurer s acquisition of Mexican insurer Seguros Monterrey, which it merged with its existing Mexican operation. According to a release by New York Life in April 2011, Seguros Monterrey New York Life currently ranks as number one in new life insurance sales in Mexico. With a market share of 7.5%, Saguros Banamex, a subsidiary of US bank Citibank, was in fifth place. Citibank acquired Banamex Financial Group in August 2001 for $12.5bn and merged with its existing Mexican operation. A year later, Citibank strengthened its position further in Mexico through the acquisition from Dutch insurer Aegon of its life insurance business Seguros Banamex Aegon and pensions business Afore Banamex Aegon for a total of $1.24bn. Potential Looking to the Mexican life insurance industry s potential, Montaño says Moody s rates it as stable. On its growth prospects, he says: "We predict that life insurance premiums will grow by between 2.5% and 3% a year, roughly in line with the growth in Mexico s GDP."

9 MetLife chairman C Robert Henrikson holds a seemingly more optimistic view. Interviewed by Mexican development body MexicoToday, he stresses that "the opportunity is huge in Mexico". The big driver, he stressed, is the growing middle-class. "They need our products," he notes. Adding to Henrikson s upbeat view, Metlife Mexico CEO Carmina Abad Sanchez says she sees no reason why the number of people with life insurance in Mexico cannot double over the next decade.