AM Best has affirmed the Financial Strength Rating (FSR) of B++ (Good), the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" and the Mexico National Scale Rating (NSR) of "aa.MX" of CESCE México, S.A. de C.V. (CESCEM), and its affiliate, CESCE Fianzas México, S.A. de C.V. (CESCEF). The outlook of the Credit Ratings (ratings) is stable. Both companies are domiciled in Mexico City, Mexico.
The ratings of CESCEM reflect the company’s balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).
The ratings of CESCEF reflect the company’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate ERM.
The ratings of CESCEM and CESCEF also reflect their affiliation with Compañía Española de Seguros de Crédito a la Exportación, S.A. Compañía de Seguros y Reaseguros (CESCE), excellent risk-adjusted capitalization and well-structured reinsurance program. Partially offsetting these positive rating factors are CESCEM’s historically negative bottom-line results and the intense competition in Mexico’s credit insurance segment. With regard to CESCEF, the aforementioned positive rating factors are offset partially by the intense competition in Mexico’s surety segment.
CESCEM is 51% owned by CESCE’s subsidiary, Consorcio Internacional de Aseguradores de Credito, S.A. (CIAC), and 49% owned by Banco Nacional de Comercio Exterior, a Mexican development bank. CESCEM specializes exclusively in credit insurance. As of September 2020, the company ranked No. 4 in Mexico’s credit insurance segment.
CESCEF began operations in 2011 and is wholly owned by CIAC. CESCEF predominantly underwrites administrative surety, and as of December 2020, has a small share of Mexico’s surety market. The company’s business portfolio is almost completely concentrated in administrative surety, consistent with the rest of the participants.
CESCEM and CESCEF leverage their operations through the underwriting and business expertise of their parent company, CESCE, adhering to its policies and procedures, as well as receiving reinsurance support from CESCE and its affiliates, which is supportive of the financial strength of its Mexican subsidiaries. AM Best considers the risk-adjusted capitalization of each company to be at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Their ERM practices are well-established and limit risk exposures substantially through a conservative underwriting and investment policy, as well as a comprehensive reinsurance program mainly placed with its parent and affiliates, with the remainder placed with high quality counterparties.
CESCEM’s ratings factor in its inability to meet its profitability targets, in addition to a highly concentrated and competitive market. Nevertheless, the company has consistently surpassed its business projections, and has started to improve its performance and mitigate expenses. In 2019, CESCEM posted a positive bottom-line result for the first time, generating MXN 4.9 million in net income. Claims decreased significantly, allowing the company to produce a loss ratio of 54.8%, compared with its prior five-year weighted average of 145.6% (as calculated by AM Best). In 2020, the company saw gross written premium growth of 27.8% and a marginally negative bottom-line result. Nevertheless, the company’s operating performance continues to show an improvement when compared with historical trends.
CESCEF’s risk-adjusted capitalization remains at the strongest level and has been sustained through capital injections in the past years. A capital injection in 2019 offset a net loss that was driven mainly by a large claim. The company posted positive bottom-line results from 2014 to 2018, as a result of an adequate premium volume, low loss ratios and strong underwriting practices. However, surety companies are facing a challenging growth environment, given low volume of public works tenders and the effects of the pandemic. These factors, in conjunction with CESCEF’s small market share, increase the vulnerability of the company’s business model.
Negative rating actions will occur if the strategic importance of both subsidiaries to its group deteriorates.
Positive rating factors that could result in an upgrade of CESCEM’s ratings include substantial improvement in its profitability measures as a result of higher efficiency, improvements in underwriting and the successful strategy implementation for healthier premium growth, in line with risk-adjusted capitalization levels that are supportive of the ratings. Additional factors that could result in a rating downgrade for CESCEM include continued deterioration of operating performance, or if the company fails to meet its commercial or underwriting quality targets to levels that affect its capital base and render its risk-adjusted capitalization to levels that do not support current rating levels.
Positive factors that could lead to an upgrade of CESCEF’s ratings are consistently positive operating performance metrics while maintaining the strongest level of risk-adjusted capitalization. An additional factor that could result in a rating downgrade for CESCEF ratings is negative operating performance that significantly erodes its capital base to levels that are no longer supportive of the current ratings.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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Olga Rubo, FRM
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Manager, Public Relations
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