LONDON--(BUSINESS WIRE)--A.M. Best has assigned a Financial Strength Rating of B+ (Good) and a Long-Term Issuer Credit Rating of “bbb-” to Abarca - Companhia de Seguros, SA (Abarca) (Portugal). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect Abarca’s balance sheet strength, which A.M. Best categorises as strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management.
Limiting the ratings is the inherent uncertainty surrounding the execution of Abarca’s business plan as the company is in a start-up phase, having registered with the Portuguese regulator in April 2016; Abarca started writing business in August of the same year.
Abarca has a limited, albeit niche business profile as a monoline insurer, focusing entirely on surety insurance predominantly within Spain and Portugal. Whilst the company has a limited market profile in Spain, where it derives most of its revenue, it holds a leading position in the smaller Portuguese market. Abarca benefits from the expertise and broker relationships of the management team, which has experience in Spain’s surety insurance sector. Offsetting factors include the company’s geographical and product concentrations, amplified by the highly competitive nature of the Spanish market. A.M. Best expects that Abarca will remain a small player in the surety market, servicing small-to-medium sized companies whilst providing superior customer service and surety expertise.
Based on Abarca’s business plan, risk-adjusted capitalisation, as measured by the Best’s Capital Adequacy Ratio (BCAR) model, is projected to remain at the strongest level through the start-up phase, supported by good internal capital generation as regulation prevents the company from declaring any dividends for the first three years of operation. The company’s balance sheet strength is further supported by a conservative investment profile and excellent liquidity position, as all investments are held in cash, and the absence of borrowings. Offsetting rating factors include Abarca’s high dependence on reinsurance, uncertainty surrounding the sufficiency of its loss reserves in the absence of loss history, and the small capital base relative to the high risk surety business underwritten.
The company’s operating performance is considered adequate based on A.M. Best’s expectation of stable prospective earnings. Given the extensive reinsurance arrangements in place, A.M. Best expects future earnings will be less volatile on a net basis by reducing peak exposures through facultative coverage. Furthermore, prospective earnings are expected to be dependent on the economic conditions in Spain and Portugal, which will dictate the claims experience resulting from insolvencies in the market. A.M. Best notes, however, that the company has the flexibility to actively manage its portfolio and take mitigating actions should the creditworthiness of the policyholder diminish.
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