PRESS RELEASE

Moody's: Aserta wins approval to turn its sureties into insurance firms, a credit positive

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Tuesday, August 14, 2018

By Moody's Investors Service

August 13, 2018

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On Wednesday, Mexico's leading surety group, Grupo Financiero Aserta, S.A. de C.V., which owns Aseguradora Aserta, S.A. de C.V. Grupo (Baa2/Aa2.mx stable) and Aseguradora Insurgentes, S.A. de C.V., Grupo (Baa2/Aa2.mx stable), won approval to turn its surety businesses into insurance companies. The transition will be credit positive for Grupo Aserta's surety companies and will help them prepare for changes in Mexico's surety industry, which will improve the group's growth prospects and diversify its business model.

The approval, which is the first of its kind for any insurance company in Mexico, will convert the group into Mexico's first surety and credit insurer, giving it a competitive advantage just as the industry is about to undergo significant change. Grupo Aserta's surety insurance companies will now be able to pay surety claims much faster than those paid by traditional surety firms. Indeed, by law, Aserta's surety insurance companies will have to automatically pay claims within 30 days. In contrast, traditional sureties take many months to pay claims because they must first pass through a lengthy legal process in Mexico's courts. The quicker claims-paying timeframe should make surety insurance products more appealing to customers and beneficiaries than those previously offered by traditional sureties.

Until now, Mexico has prevented insurers from underwriting sureties and banned surety companies from involvement in the insurance business. This impeded business diversification and limited surety companies' growth. Grupo Aserta expects its surety insurance to rise to about 15% of gross premiums over the next three years, which we believe is a reasonable expectation.

One potential risk for Grupo Aserta is the new product's risk, which cannot be fully known when the product is first introduced and can adversely affect earnings. Even so, we expect Aserta to use its large size and its purchase of reinsurance contracts to offset any related costs.

Mexico has 17 surety companies. As of March, six of them (accounting for 60% of total industry premiums) had applied to become insurance companies. Aserta's main competitor,

ACE Fianzas Monterrey S.A. (Baa2/Aa2.mx stable), Mexico's second-largest surety company with 20.3% of industry premiums, has also sought approval. If it is approved, as we expect, ACE will become an insurance company and change its name to Chubb Fianzas Monterrey, Aseguradora de Caución, S.A.

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We expect the insurance regulator, the Comisión Nacional de Seguros y Fianzas, to approve most requests within the next six to 12 months, indicating that ultimately the industry will benefit from this development. Surety companies that fail to obtain approval will become less competitive and likely lose market share.

Mexico's surety industry is highly sensitive to changes in public spending because its premiums are highly concentrated in publicly funded infrastructure projects, where public works contractors buy surety policies that pay out to local and federal government if the projects are not completed. About 41% of Mexico's surety industry premiums are specifically tied to infrastructure projects. Between 2015 and 2016, when the government cut public spending, the surety industry struggled as annual premium growth fell to 1.2% in 2016, from 3.3% in 2015 from a previous five-year compound growth rate of 10%. We expect that next year's entrance of President-elect Andrés Manuel López Obrador's administration will revitalize the agenda for infrastructure projects and with it, the surety industry.