MEXICO CITY--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of B++ (Good), the Long-Term Issuer Credit Ratings of “bbb” (Good) and the Mexico National Scale Rating of “aa.MX” (Superior) of CESCE México, S.A. de C.V. (CESCEM) and its affiliate, CESCE Fianzas México, S.A. de C.V. (CESCEF). 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 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 Mexico-based development bank. CESCEM specializes exclusively in credit insurance and ranks within the top five in Mexico’s credit insurance segment.
CESCEF began operations in 2011 and is wholly owned by CIAC. CESCEF predominantly underwrites administrative surety and currently has a small share of Mexico’s surety market. The company’s business portfolio is concentrated almost completely in administrative surety, which is consistent with the portfolios of other market 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 Mexico-based 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). The companies’ 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 the company’s historical profitability targets, in addition to a highly concentrated and competitive market. In 2019, CESCEM resumed positive bottom-line results, generating MXN 4.9 million in net income. In 2021, top line grew by 30% and profitability, as reflected by MXN 3.59 million in net income, was driven by a high percentage of renewals, new business, reserve releases, claims recoveries and financial product. In 2022, CESCEM profitability of MXN 19 million reflected a historic high, resulting from contained claims, constant inflow of reinsurance commissions and improved investment income due to high interest rates. The company generated a combined ratio of 85% compared with its prior five-year weighted average of 152%. Looking forward, AM Best expects the company to sustain an improvement trend in operating performance.
CESCEF’s risk-adjusted capitalization remains at the strongest level, as measured by BCAR, and has been sustained through capital injections in the past years. The company historically has posted positive bottom-line results as a result of an adequate premium volume, low loss ratios and strong underwriting practices. However, a capital injection in 2019 offset a net loss that was driven mainly by a large claim. In 2022, CESCEF sustained profitable results despite business contraction that ultimately impacted reinsurance commissions, reflecting a 1.5% return on equity, driven by financial product. AM Best expects the company’s operating expenses to show an improvement when compared with historical trends. Surety companies continue facing a challenging growth environment, given the low volume of public works tenders. These factors, in conjunction with CESCEF’s small market share, increase the vulnerability of the company’s business model.
Factors that could result in a rating downgrade for CESCEM and CESCEF include the companies failing to meet their commercial or underwriting quality targets at levels that affect their capital base and render their risk-adjusted capitalization to levels that do not support the current ratings.
Negative rating actions also would occur if the strategic importance of both subsidiaries to their group deteriorates.
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