AM Best has revised the outlook to stable from negative for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating (FSR) of B (Fair) and the Long-Term ICR of "bb+" of ARABIA Insurance Company – Jordan (AICJ) (Jordan). The outlook of the FSR is stable.
The 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 rating enhancement from AICJ’s parent, ARABIA Insurance Company s.a.l. (AIC). The revision of the Long-Term ICR outlook to stable follows an improvement in AICJ’s risk-adjusted capitalisation in 2019, as measured by Best’s Capital Adequacy Ratio (BCAR), following management’s corrective actions.
AICJ’s balance sheet strength is underpinned by risk-adjusted capitalisation, which was at the strongest level at year-end 2019, as measured by BCAR. Strengthening of risk-adjusted capitalisation in 2019 was supported by the full retention of 2019 net income, as well as an active reduction in credit and underwriting risks, driven by a reduction in the total sum insured on the property and engineering portfolio, which is heavily reinsured. Moreover, the credit quality of the facultative reinsurance purchased to cover the large property risks has improved, with the use of unrated local participants having declined considerably. The balance sheet strength assessment also factors in the reduced levels of total debtors as a proportion of shareholders’ equity (85.3% at year-end 2019 compared with 97.5% at year-end 2018). Prospective BCAR scores are expected to be supported by good earnings retention, notably with AICJ’s board of directors agreeing not to pay any dividends for the reporting year-end 2020.
AICJ has a track record of generating positive operating earnings, demonstrated by a five-year (2015-2019) weighted average return on equity of 3.6%. Underwriting performance has been stable, albeit marginal, over the underwriting cycle, as demonstrated by a five-year weighted average combined ratio of 99.7%. Earnings have been generally weighted toward investment income, with the company consistently generating an investment yield above 3.0% over the last five years. Over the medium term, operating performance is expected to remain adequate, supported by stable underwriting performance and positive investment returns.
AICJ’s limited business profile assessment reflects its small market share in the overcrowded and fragmented Jordanian 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 decreased by 9% to JOD 21.9 million in 2019, primarily driven by the termination of a distribution agreement with an agent due to premium collection issues, as well as the non-renewal of unprofitable medical accounts.
AICJ’s ERM assessment factors in expected developments that should arise from leveraging on AIC’s risk management capabilities.
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