LONDON--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb+” from “bbb-” of ARABIA Insurance Company - Jordan (AICJ) (Jordan). The outlook of the FSR has been revised to stable from negative while the outlook of the Long-Term ICR has been maintained as negative.
These Credit Ratings (ratings) reflect AICJ’s balance sheet strength, which AM Best categorises as adequate, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM). The ratings also factor in the rating enhancement from AICJ’s parent, ARABIA Insurance s.a.l. (AIC) (Lebanon). The negative outlook on the Long-Term ICR reflects continued pressures on the company’s balance sheet strength assessment that stem from a declining view of risk-adjusted capitalisation and significant exposure to credit risk.
AICJ’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), has declined over recent years, chiefly as a result of an onerous dividend policy. The BCAR assessment is considered adequate, after factoring in the company’s weak catastrophe stressed BCAR scores driven by significant credit risk associated with the large property exposures that are heavily reinsured. Standard BCAR results remain supported by a relatively low level of underwriting leverage. The balance sheet strength assessment also factors in increasing levels of total debtors as a proportion of shareholders’ equity (97.5% at year-end 2018, against 83.8% at year-end 2017). AM Best expects prospective capital adequacy to be driven by the company’s ability to generate and retain sufficient earnings to support its strategic initiatives, and notes that no dividends are expected to be paid in 2019.
AICJ has a track record of generating positive operating earnings and over the past five years (2014-2018) has generated a weighted average return on equity of 4.3% (3.0% in 2018). Underwriting profits have been marginal over the cycle, as demonstrated by a five-year (2014-2018) weighted average combined ratio of 99.7%, and are expected to remain modest due to stiff competition in Jordan’s insurance market that directly impacts AICJ due to its marginal market position. AM Best anticipates that earnings will remain weighted toward investment income, which has been a consistent source of revenue historically.
AICJ’s limited business profile stems from its small market share in an overcrowded and fragmented market. The company’s underwriting portfolio is dominated by motor business on a net written premium basis, as the remaining lines of business are heavily reinsured. Gross written premium increased by 8.2% to JD 24.0 million in 2018, driven by growth of the motor comprehensive and medical books.
AICJ’s ERM assessment factors in developments that should arise from the recent appointment of a dedicated risk manager.
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