MEXICO CITY--(BUSINESS WIRE)--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 Reaseguradora Internacional, S.A. (Mercantil Re) (domiciled in Panama). The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings reflect Mercantil Re’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
Mercantil Re’s 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 Re from MSFI 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 Re is the wholly owned reinsurer of Mercantil Seguros y Reaseguros, S.A., part of Mercantil group’s international companies controlled by the ultimate parent MSFI, which provides synergies and operating efficiencies. The company was established in 2019 in Panama with the main purpose of supporting group’s regional expansion throughout Latin America.
Mercantil Re’s balance sheet strength is underpinned by its very strong risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and also is supported by a well-structured reinsurance program placed with highly rated retrocessionaries, and a conservative investment strategy aimed at providing liquidity and maintaining appropriate asset-liability management. Additionally, the company’s ERM framework is considered appropriate, as it benefits from the group’s guidelines and expertise.
In AM Best’s view, Mercantil Re’s historic operating performance reflected expenses and dependence upon investment income, given the company’s startup nature. However, breakeven was achieved in 2020, driven by management’s track record in underwriting practices, a diversified reinsurance structure and new business origination. AM Best expects the company to maintain a profitable operating performance above the 9.7% return-on-equity reported in 2022.
Factors that may lead to negative rating actions include adverse financial performance that leads to significant deterioration in risk-adjusted capitalization, in addition to negative influence from its ultimate parent stemming from uncertainty surrounding its credit profile.
Positive factors that could improve Mercantil Re’s rating levels or outlooks include a sustained and successful improvement in business profile with good quality underwriting, which supports profitability and a very strong balance sheet assessment.
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