AM Best Removes From Under Review with Negative Implications and Affirms Credit Ratings of Mercantil Seguros y Reaseguros, S.A.
AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of "bbb" (Good) of Mercantil Seguros y Reaseguros, S.A. (Mercantil Seguros) (domiciled in Panama). The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings reflect Mercantil Seguros' balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
Mercantil Seguros' ratings were placed under review with negative implications on Sept. 9, 2022, following the announcement that the group's intermediate holding company, Mercantil Holding Financiero Internacional, S.A., had acquired Capital Bank, Inc. and its subsidiaries in Panama, including insurer Optima Compañia de Seguros S.A in order to expand the group´s domestic footprint in Panama's insurance and financial services industries. Mercantil Holding Financiero Internacional, S.A. runs the group's international operations and is controlled by ultimate parent Mercantil Servicios Financieros Internacional, S.A. (MSFI). The under review with negative implications status pertained to the uncertain impact on Mercantil Seguros from MSFI's post-transaction capital structure, as well as integration risk.
The negative outlooks reflect prevailing uncertainty surrounding MSFI's credit profile, which AM Best's expects to remain in line with industry averages to prevent any pressure on its Panama insurance operations.
Mercantil Seguros' balance sheet strength is underpinned by its risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), which is at the strongest level. The ratings also reflect the company's well-structured reinsurance program, sound underwriting practices and conservative investment strategy. Partially offsetting these positive rating factors is Mercantil Seguros' relatively small size within Panama´s insurance industry.
Mercantil Seguros is a Panama-based (re)insurer established in 2013, with gross premiums written mainly composed of health (90%) and auto (4.8%), as of year-end 2022. The company, which is part of Mercantil Group's international companies and controlled by MSFI, operates in Panama through a network of brokers and direct distribution channels. Mercantil Seguros also serves as a retrocessionaire for reinsurance business sourced in Venezuela, driven by reinsurance brokers.
Mercantil Seguros' risk-adjusted capitalization stands at the strongest level and is supportive of its current ratings. The company has increased capital at a 18.5% compound annual growth rate since it began operations, supported by positive bottom-line results and driven by a consistent inflow of underwriting and investment income. A well-balanced reinsurance program placed among counterparties of strong credit quality also reinforces the company's risk-adjusted capitalization.
In AM Best's view, Mercantil Seguros has shown sound underwriting practices, characterized by overall premium sufficiency levels. A combined ratio of 89.5% in 2022 was achieved through well-underwritten risks by group companies. Additionally, consistent reinsurance profits, which offset acquisition costs, continue to support the company´s profitability, evident by a return-on-equity and return-on-assets of 18.9% and 6.9%, respectively, in 2022.
AM Best expects the company's current geographic diversification to further improve through distribution channel synergies provided by the overall organization in the near to midterm, enabling Mercantil Seguros to expand its Panama-sourced business while diminishing dependence on its Venezuela-sourced business.
Factors that could lead to negative rating action include protracted adverse underwriting performance that leads to a significant deterioration in its risk-adjusted capitalization, political turmoil that affects Venezuela-sourced business, or negative influence from its ultimate parent stemming from uncertainty surrounding its credit profile. Factors that could result in positive rating action include improvements in the company's business profile coupled with sustained profitability, while maintaining risk-adjusted capitalization at the strongest level.
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 use of Best's Credit Ratings, Best's Performance Assessments, Best's Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best's Ratings & Assessments.
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