AM Best has affirmed the Financial Strength Rating of A- (Excellent), the Long-Term Issuer Credit Rating of "a-" and the Mexico National Scale Rating of "aaa.MX" of Stewart Title Guaranty de México, S.A. de C.V. (STGM) (Mexico). The outlook of these Credit Ratings (ratings) is stable.
STGM is a member of the Stewart Title Group, which on a consolidated basis has a balance sheet strength that AM Best categorizes as very strong, as well as adequate operating performance, a neutral business profile and appropriate enterprise risk management. The ratings also reflect the integration of the local subsidiary to its parent company, Stewart Title Guaranty Company (STGC), and to the group in terms of the business model and operational support. Offsetting these positive rating factors are the company’s small market share in Mexico’s insurance industry and its concentration in a single line of business.
STGM is a subsidiary of STGC, located in Houston, Texas, which, in addition to Mexico, also offers products through its subsidiaries to markets in the United States, the European Union, Australia, Costa Rica and China. Given the specialized nature of the title product and the institutional strategy, STGM’s sales efforts focus on business referred by the parent company on existing customers, which generates a reduced number of policies per year in a Mexican market consisting of just two participants, including STGM, which holds a 35% market share as of December 2019.
STGM’s capitalization stands at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), with an upward trend in capital and surplus growth during the past five years, mainly driven by consistent positive bottom-line results, with underwriting risk being the main component for required capital. Support from STGC in the past has come through capital injections, with the most-recent one in 2012, directed to help strengthen the business when required.
STGM historically has posted combined ratios well-below the 100% threshold and positive bottom-line results, maintained over the years through the optimization of the company’s business strategy. Return metrics improved in 2019: return on assets stood at 15.7% while return on equity was 26.6%, due to of higher commissions on a greater bulk of new business.
Growth in 2020 has been limited by the closing of public registries and notary offices due to COVID-19, preventing investigation on new business, a core process for underwriting. Nevertheless, STGM has partially offset this effect through its flexible costs structure, nil claims and investment income, derived from the company’s long position in dollars. For the rest of the year, STGM expects to regain usual underwriting operations once public offices reopen, supported by its referred business system.
Positive rating actions on the main operating subsidiaries of Stewart Title Group that result from positive underwriting performance trends, accompanied by growth in risk-adjusted capitalization, will prompt the ratings of STGM to move in tandem. Conversely, negative rating actions on Stewart Title Group due to a significant deterioration in operating performance that results in a decline in risk-adjusted capitalization levels, or if the group experiences liquidity issues, or a significant increase in leverage, will also result in a ratings downgrade for the Mexico subsidiary.
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