Ratings Recap: ARABIA Co-op, ARABIA Insurance (Jordan)

April 12, 2012

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to Saudi Arabia-based ARABIA Insurance Cooperative Company (AICC), both with stable outlooks. The ratings reflect AICC’s “improving underwriting performance, good overall financial results and sound position within the Kingdom of Saudi Arabia market,” said Best. As an offsetting factor Best singled out the “company’s moderate, albeit supportive, level of risk-adjusted capitalization. AICC’s capital position is supportive of its current ratings despite a significant decrease in 2010, which was driven by its high growth of 111 percent that year, relative to its capital and surplus of SR 161.5 million ($43 million). However, in 2011, AICC’s capital position was partially restored, benefiting from good earnings retention. Additionally, the company demonstrated an improved operating performance, with profit before tax increasing by 51 percent to SR 17.3 million ($4.6 million). It is important for the company to manage capital prudently, with prospective levels of risk-adjusted capitalization likely to be dependent on the level of growth and earnings retention.” In addition Best pointed out that “AICC has demonstrated improved underwriting performance in 2011, recording a 94 percent combined ratio. Underwriting profitability increased by 82 percent to SR 17.6 million ($4.7 million). Stable although modest investment return from AICC’s conservative investment profile also has contributed to its good overall performance in 2011.” Best said it expects AICC’s premium revenue “to grow 8 percent to 10 percent in 2012 and 2013. Although AICC is a relatively new company, it is the result of a combined portfolio of business (assets and liabilities) of two other insurance companies: ARABIA Insurance Company and Jordan Insurance Company Plc, both in the market since the 1950s [See following]. AICC started its operation in 2009 with losses brought forward of almost SR 30 million ($8 million), and it incurred an operating loss of SR 14 million ($3.8 million) in its first year of operation. As a result, the company’s current capital level is below the required level imposed by the regulator. This has been factored into the current ratings.”Best said it would “monitor any developments made by AICC to restore its capital levels. AICC also has demonstrated a sound business profile, growing rapidly in its second year of operation and becoming the sixth-largest insurance company in the market by gross written premiums. Upward rating movement could be driven by an improvement in AICC’s risk-adjusted capitalization, the development of its business lines—in line with its business plan—and the expected improvements in its enterprise risk management program. Negative rating actions could occur if the company’s risk-adjusted capitalization reduces or its operating performance were to deteriorate.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B++’ (Good) and an issuer credit rating of “bbb” to Saudi Arabia-based ARABIA Insurance Cooperative Company (AICC), both with stable outlooks. The ratings reflect AICC’s “improving underwriting performance, good overall financial results and sound position within the Kingdom of Saudi Arabia market,” said Best. As an offsetting factor Best singled out the “company’s moderate, albeit supportive, level of risk-adjusted capitalization. AICC’s capital position is supportive of its current ratings despite a significant decrease in 2010, which was driven by its high growth of 111 percent that year, relative to its capital and surplus of SR 161.5 million ($43 million). However, in 2011, AICC’s capital position was partially restored, benefiting from good earnings retention. Additionally, the company demonstrated an improved operating performance, with profit before tax increasing by 51 percent to SR 17.3 million ($4.6 million). It is important for the company to manage capital prudently, with prospective levels of risk-adjusted capitalization likely to be dependent on the level of growth and earnings retention.” In addition Best pointed out that “AICC has demonstrated improved underwriting performance in 2011, recording a 94 percent combined ratio. Underwriting profitability increased by 82 percent to SR 17.6 million ($4.7 million). Stable although modest investment return from AICC’s conservative investment profile also has contributed to its good overall performance in 2011.” Best said it expects AICC’s premium revenue “to grow 8 percent to 10 percent in 2012 and 2013. Although AICC is a relatively new company, it is the result of a combined portfolio of business (assets and liabilities) of two other insurance companies: ARABIA Insurance Company and Jordan Insurance Company Plc, both in the market since the 1950s [See following]. AICC started its operation in 2009 with losses brought forward of almost SR 30 million ($8 million), and it incurred an operating loss of SR 14 million ($3.8 million) in its first year of operation. As a result, the company’s current capital level is below the required level imposed by the regulator. This has been factored into the current ratings.”Best said it would “monitor any developments made by AICC to restore its capital levels. AICC also has demonstrated a sound business profile, growing rapidly in its second year of operation and becoming the sixth-largest insurance company in the market by gross written premiums. Upward rating movement could be driven by an improvement in AICC’s risk-adjusted capitalization, the development of its business lines—in line with its business plan—and the expected improvements in its enterprise risk management program. Negative rating actions could occur if the company’s risk-adjusted capitalization reduces or its operating performance were to deteriorate.”

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B+’ (Good) and an issuer credit rating of “bbb-” to General ARABIA Insurance Company Limited (GAIC), which is based in Jordan. The outlook assigned to both ratings is stable. The ratings reflect GAIC’s “good risk-adjusted capitalization and rating enhancement from implicit support of the parent company, ARABIA Insurance Company S.A.L. (AIC).” As offsetting factors Best cited the company’s “marginal underwriting performance and modest business profile in the Jordanian market. GAIC receives rating enhancement from AIC, which provides support on corporate governance, risk management and its reinsurance program. GAIC is viewed as an integral and important part of ARABIA Group. GAIC’s risk-adjusted capitalization is good, benefitting from a low level of underwriting risk relative to its capital base of JD 8 million ($11.37 million), despite its exposure to equities and high credit risk arising from unrated reinsurance receivables from the local market.” Best also observed that “GAIC’s capital position is likely to remain supportive to the company’s expected growth of 10 percent-15 percent in each of the next couple of years. After a difficult year in 2009 when GAIC lost some key accounts and consequently had a poor underwriting return of JD -171,000 [$241,015] (including unallocated management expenses), the company demonstrated resilience in 2010, improving its underwriting result to JD 19,000 [$26,779] through a better risk selection criteria and higher retention. However, in 2011, claims experience worsened, and as a consequence, income before tax decreased 90 percent to JD 23,055 [$32,494]. In addition Best noted that “given GAIC’s relatively risky investment portfolio, investment returns are volatile due to the subsequent impairment losses offsetting low investment yield. Upward rating movement could be driven by an improved track record of operating performance (both underwriting and investments) and an improved franchise in the local market. Negative rating actions could occur if there were a material deterioration of the company’s risk-adjusted capitalization or operating performance.”

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