AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-” (Good) of Abarca – Companhia de Seguros S.A. (Abarca) (Portugal).
The ratings reflect Abarca’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management.
The revision of the outlooks to negative reflects pressure on Abarca’s balance sheet strength assessment due to concerns about the appropriateness of its reinsurance arrangements and management of net exposures relative to available capital.
The balance sheet strength assessment of strong reflects the company’s strongest risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), and conservative and liquid investment portfolio. Offsetting factors include Abarca’s high dependence on reinsurance and uncertainty surrounding the sufficiency of loss reserves in the absence of loss history, as well as the company’s small capital base, which has the potential to exacerbate the sensitivity of its solvency position.
The adequate operating performance assessment is based on AM Best’s expectation of Abarca’s stable prospective earnings. In 2019, the company reported a net profit of EUR 1 million, benefiting from the release of an unexpired risk reserve built up during its first years of operation. For 2020, the company reported a net profit of EUR 0.43 million, despite an increase in loss ratio reflecting two large claims reported (both under litigation). AM Best notes that the company has the flexibility to actively manage its portfolio and take mitigating actions should the creditworthiness of a policyholder diminish.
Abarca’s limited business profile assessment reflects its position as a small monoline insurer, focusing entirely on surety insurance in Spain and Portugal. The company has a small albeit growing market profile in Spain, where it generates most of its revenue, and a leading position in the smaller Portuguese market. Offsetting rating factors include the company’s geographic and product concentrations, amplified by the highly competitive nature of Spain’s surety market.
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