Best’s News & Research Service - March 02, 2018 02:41 PM (EST)
A.M. Best Downgrades Issuer Credit Rating of Cesce México, S.A. de C.V.
- March 02, 2018 02:41 PM (EST)
Mexico City //BestWire// - A.M. 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 México, S.A. de C.V. (CESCEM). At the same time, A.M. Best has affirmed the FSR of B++ (Good), the Long-Term ICR of “bbb+” and the Mexico NSR of “aa+.MX” of 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 A.M. Best categorizes as very strong, as well as its marginal operating performance, limited business profile and adequate enterprise risk management (ERM).
The ratings of CESCEF reflect the company’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and adequate ERM.
The ratings of CESCEM and CESCEF also reflect their affiliation with Compañía Española de Seguros de Crédito a la Exportación (CESCE), excellent risk-adjusted capitalization and well-structured reinsurance program. Partially offsetting these positive rating factors are CESCEM’s negative operating performance 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 company’s relatively short track record of operations and the intense competition in Mexico’s surety segment.
CESCEM is 51% owned by CESCE’s subsidiary, Consorcio Internacional de Aseguradores de Credito (CIAC), and 49% owned by Banco Nacional de Comercio Exterior, a Mexican development bank. CESCEM specializes exclusively in credit insurance. As of September 2017, the company ranked fifth in Mexico’s credit insurance segment.
CESCEF began operations in 2011 and is wholly owned by CIAC. CESCEF, which underwrites administrative surety, ranked 12th among the 15 companies in Mexico’s surety segment (as of September 2017), 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.
Both companies are capitalized strongly, as 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 within counterparties with a good security level.
CESCEM has sustained this capitalization level despite posting negative results during the past years, with 2017 generating the largest expected losses during a five-year period due to a combination of high claims and non-recurring events. In addition, CESCEM’s capitalization levels have remained strong, as a consequence of a premiums reduction during 2012-2014 and in 2017. CESCEM’s ratings recognize its lack of success in meeting its commercial and profitability targets, in addition to a highly concentrated and competitive market.
For CESCEF, strong capitalization levels have been sustained through capital injections in 2012 and 2013, despite posting negative results during its first three years of operation. The company has been posting positive bottom line results since 2014, and this trend is expected to continue into 2019 based on its strong underwriting practices.
Negative rating actions will occur if A.M. 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 combined ratio as a result of higher efficiency, improvements in underwriting, and the successful strategy implementation for healthier premium growth, in line with strong capitalization levels. Additional factors that could result in a downgrade of CESCEM’s ratings include the 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 ratings.
Positive factors that could lead to an upgrade of CESCEF’s ratings are maintaining positive operational performance while maintaining strong capitalization levels. An additional negative rating factor that could result in a downgrade of CESCEF’s ratings is negative operating performance that significantly erodes its capital base to levels that are no longer supportive of the current ratings.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized for CESCEM:
- Evaluating Country Risk (Version Oct. 13, 2017)
- Understanding Universal BCAR (Version Oct. 13, 2017)
- Available Capital & Holding Company Analysis (Version Oct. 13, 2017)
- A.M. Best’s Ratings On a National Scale (Version Oct. 13, 2017)
Key insurance criteria reports utilized for CESCEF:
- Evaluating Country Risk (Version Oct. 13, 2017)
- Understanding Universal BCAR (Version Oct. 13, 2017)
- Available Capital & Holding Company Analysis (Version Oct. 13, 2017)
- Rating Surety Companies (Version Oct. 13, 2017)
- A.M. Best’s Ratings On a National Scale (Version Oct. 13, 2017)
View a general description of the policies and procedures used to determine credit ratings. For information on the meaning of ratings, structure, voting and the committee process for determining the ratings and monitoring activities, please refer to Understanding Best’s Credit Ratings.
- Previous Rating Date: Previous Rating Date: Feb. 24, 2017 (FSR and Long-Term ICR); Oct. 13, 2017 (NSR)
- Date of Financial Data Used: Sept. 30, 2017
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