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 Afianzadora Sofimex, S.A. (Sofimex) (Mexico City, Mexico). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Sofimexs balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.
The ratings also reflect Sofimexs strong operating performance in terms of profitability and competitiveness within Mexicos surety bond market, as well as very strong risk-adjusted capitalization. These positive rating factors are limited by AM Bests view of the highly competitive market in which the company operates.
Sofimex is a Mexico-domiciled surety and bond company that was established in 1940. The company offers surety and fidelity coverages ranging from low limit judicial bonds to high limit contract bonds. As of September 2018, Sofimexs business portfolio was composed of administrative sureties (87%), judicial (5%), fidelity (4%) and credit (4%).
Sofimex projects a 13.4% gross written premium growth rate for 2018 while maintaining its recent profitability metrics. AM Best believes that, as Mexicos fourth largest surety writer, and with a good distribution network and disciplined underwriting, Sofimex has sufficient resources to maintain a stable stream of net income amid current market conditions.
Sofimex continued to post good loss ratios during 2017 and up to September 2018. The expense ratio remained consistent with previous years levels; the increase in administration costs was mitigated by a decrease in the acquisition cost ratio, which was due to a change in the commercial strategy, in which tariffs and preferential commissions were modified with the purpose of attracting agents with high output amounts. Overall, the company has been able to maintain a combined ratio below 70% over the last four years.
Sofimexs capitalization has remained strong and supportive of its ratings, even when stressed by possible losses from contingent claims. Furthermore, Sofimex has a solid reinsurance program with highly rated reinsurers and long-term business relationships.
Positive rating actions could occur if the company is able to maintain its current level of acquisition costs and improve its level of claims loss payments, increase profitability and, as a consequence, further strengthen its capital base. Negative rating actions could occur if underwriting performance deteriorates, if there is a significant increase in business risk or net premium risk, or as a result of uncertainty with regard to the governments spending in infrastructure, which could impact the growth of the surety sector.
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