AM Best has 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 outlook for these Credit Ratings (ratings) is negative.

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 negative outlooks reflect ongoing pressure on the balance sheet strength assessment following reserve strengthening in 2022, for a large claim first reported in 2020. This claim is reinsured with one counterparty and, due to its size, exposes the company to significant counterparty credit and dispute risk.

Abarca's risk-adjusted capitalisation, as measured by Best's Capital Adequacy Ratio (BCAR), declined to strong for year-end 2022, as a result of the above-mentioned reserve strengthening. The BCAR assessment is expected to improve to strongest for year-end 2023, benefiting from equity credit for a newly issued subordinated loan. The balance sheet strength assessment of strong also reflects the company’s conservative and liquid investment portfolio. Offsetting factors include Abarca’s high dependence on reinsurance and its small capital base, which exacerbates the sensitivity of its solvency position to stressed scenarios and variations in future performance.

Abarca reported net profits (after tax) in 2019-2021, following losses in the previous three years. For year-end 2022, Abarca reported a net loss after tax of EUR 880,000 due to a high loss ratio and net investment losses. AM Best expects Abarca to report solid profits in 2023, and prospective years under IFRS 17.

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 good market position in Spain, where it generates most of its revenue, and in the smaller Portuguese market. Abarca’s distribution channels are mainly direct and through brokers, with a small portion going through its bancassurance channel.

This rating action is the result of an accepted appeal from Abarca.

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