GCR has maintained Mercantile Insurance Company Limited’s (“Mercantile”) national scale claims paying ability rating at A-(KE) (single A minus), rating outlook: Stable. The rating signifies a high claims paying ability and above average protection provided to policyholders. Mercantile is 25% owned by LP Holdings, with various Standard Chartered Nominees cumulatively holding the remaining 75%.
The rating was supported by Mercantile’s robust capitalisation measures, as evidenced by international solvency of 192% and statutory solvency of 146% in F11, which are well above its peers. In addition, the actuarial surplus of the life fund amounted to KShs49m (F10: KShs28m), or 9.2% of policyholder liabilities (F10: 6.4%). A further supporting factor to the rating was the fact that Mercantile adopts a conservative investment stance, underpinning a low risk balance sheet and sound liquidity measures, with cash coverage of technical reserves (F11: 2x) reported well above GCR’s minimum level of 1x. Policyholder protection was further provided by adequate reinsurance protection, with maximum net retention on XOL for 2012 amounting to KShs1.5m per risk (0.4% of FYE11 capital) and KShs7.5m per event (1.9% of capital).
An offsetting factor, however, was the fact that the premium mix is heavily weighted towards credit indemnity business (55% of GWP), sourced through a single client. Given this policyholders’ substantial contribution to overall profitability, both the retention of this account and maintenance of claims disciplines are deemed crucial to Mercantile’s future underwriting performance. Furthermore, the insurer exhibits a relatively high cost structure, which impedes underwriting flexibility in higher claiming years, as evidenced from F05 to F09, highlighting the need for enhanced scale economies (for both general and life). Consequently, Mercantile has historically been heavily reliant on investment income to support earnings and capital accumulation, although the turnaround in underwriting performance over the last two years was favorably viewed.
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