AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to "bbb" from "bbb+" and the Mexico National Scale Rating (NSR) to "aa.MX" from "aa+.MX", and affirmed the Financial Strength Rating (FSR) of B++ (Good) of CESCE Fianzas México, S.A. de C.V. (CESCEF). At the same time, AM Best has affirmed the FSR of B++ (Good), the Long-Term ICR of "bbb" and the NSR of "aa.MX" of CESCE México, S.A. de C.V. (CESCEM). The outlook of these 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 categorizes 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 categorizes as very strong, as well as its adequate operating performance, limited business profile and appropriate ERM.
The downgrade of CESCEF’s Long-Term ICR and NSR ratings reflect its struggle in a highly concentrated and competitive market, which, in addition to the currently volatile economic environment, could further pressure the company’s operating performance.
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. In the case of CESCEF, the previously mentioned 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 June 2019, the company ranked fourth in Mexico’s credit insurance segment.
CESCEF began operations in 2011 and is wholly owned by CIAC. CESCEF, which underwrites mainly administrative surety, ranked 15th among the 16 companies in Mexico’s surety segment (as of June 2019), with a market share of less than 1%.
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. Additionally, CESCE historically has maintained well-capitalized operations in both companies.
The risk-adjusted capitalization of both companies stands at strongest level. Their ERM practices are well-established and limit risk exposures substantially through a conservative underwriting and investment policy, comprehensive reinsurance program mainly placed with its parent and affiliates, and the remainder with counterparties that have a good security level.
CESCEM’s ratings recognize its lack of success in meeting its profitability targets, in addition to a highly concentrated and competitive market. Nevertheless, the company surpassed its business projections in 2018 and 2019, which could improve its performance in the medium term and mitigate expenses. CESCEM has sustained this risk-adjusted capitalization level despite posting negative results during the past years. In 2019, CESCEM posted a positive bottom-line result for the first time, generating MXN 4.9 million in net income. The 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).
For CESCEF, its risk-adjusted capitalization remains at the strongest level and has been sustained through capital injections in 2012, 2013 and 2019. The last capital injection offset the net loss presented during last year, which was driven mainly by a large claim. Historically, the company has posted positive bottom line results since 2014, 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 uncertainty about Mexico’s public infrastructure, and the effect of economic cycles on market behavior. 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 AM Best’s views on parental support or strategic importance to its group for both subsidiaries deteriorate.
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 more 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 any 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 the 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 rating levels.
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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