LONDON--(BUSINESS WIRE)--A.M. Best has affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating (ICR) of “bbb-” of Arab Reinsurance Company S.A.L. (Arab Re) (Lebanon). The outlook of these Credit Ratings (ratings) remains stable.
The ratings reflect Arab Re’s strong risk-adjusted capitalisation, good track record of operating profitability and stable business profile. Partially offsetting rating factors include the company’s weak technical performance and the elevated economic and political risks associated with operating in Lebanon.
Arab Re’s risk-adjusted capitalisation remains strong, reflective of the company’s low underwriting leverage. After having decreased for several years, chiefly as a result of an onerous dividend policy and the purchase of treasury shares, risk-adjusted capitalisation improved in 2015, strengthened by increased retained earnings following the shareholders’ decision to forgo a dividend payment for one year.
With shareholders’ equity increased to USD 97.8 million in 2015, from USD 92.6 million in 2014, Arab Re’s capital base is sufficiently solid to absorb the asset and credit risks associated with elevated exposure to Lebanese investments (notably Lebanese sovereign debt, although this exposure has been reduced substantially over the past two years), and unrated reinsurance counterparties.
Arab Re has a stable business profile in its core markets in the Middle East and North Africa (MENA) region, which is built upon the company’s original role as a reinsurer for the Arab insurance market and its long-standing strong relationships with cedants, retrocessionaires and shareholders.
Whilst the company’s profile remains underpinned by its wide coverage and access to business throughout the MENA region, it was impacted by the decision to withdraw from Asia and reduce its share in specific accounts in Lebanon and Turkey, in an effort to focus on technical profitability.
In A.M. Best’s opinion, these factors, combined with a lack of growth opportunities in the company’s core markets, is expected to lead to a 17% decrease in gross written premium to approximately USD 65 million in 2016, following a 3% decline in 2015.
Arab Re has a track record of operating profitability, with a five-year (2011 to 2015) average return on equity marginally below 5%. While operating profit continues to be supported by robust investment returns, the company has experienced weak technical performance in recent years, with difficult underwriting conditions in its core markets resulting in a five-year average combined ratio of 103%.
Arab Re’s net income improved from USD 0.6 million in 2014 to USD 5.3 million in 2015, following a more favourable claim reserve development than in the prior year. The cancellation of loss making accounts is expected to eventually improve the company’s technical performance; however, combined ratios are likely to remain high in the next two years, with decreasing premium income putting greater strain on its expense ratios. For the first nine months of 2016, Arab Re posted a net income of USD 2.7 million.
An additional offsetting rating factor is the continued risk from regional political instability and social unrest, which has the potential to seriously disrupt the economic conditions in Lebanon. Despite Arab Re’s geographically diverse underwriting portfolio, track record of operating performance in challenging economic conditions and developing enterprise risk management framework, the potential for significant business disruption remains elevated.
A.M. Best will continue to monitor developments in Lebanon and assess any impact on the company, and on its strategic development plans.
This press release relates to Credit Ratings that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.
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