LONDON--(BUSINESS WIRE)--A.M. Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from “bbb+” and affirmed the Financial Strength Rating (FSR) of B++ (Good) of ARABIA Insurance Company s.a.l. (AIC) (Lebanon). The Long-Term ICR outlook has been revised to stable from negative. The FSR outlook remains stable.
The rating downgrade reflects AIC’s weak underwriting performance over recent years, which, together with volatile investment results, has eroded the company’s capital base. The ratings are supported by the company’s adequate level of risk-adjusted capitalisation and its well-diversified business profile across the Middle East. Offsetting rating factors remain AIC’s concentrated investment portfolio and the high level of economic and political risk associated with operating in Lebanon.
Whilst AIC has historically generated good operating profits, reporting a profit before tax of LBP 2.6 billion (USD 0.7 million) in 2015, its underwriting performance has been a strain on overall profitability since 2013, with combined ratios averaging 107% for the period 2013-2015. Performance has been driven by adverse results on two of AIC’s key business lines, motor and medical. A.M. Best views positively the actions taken since 2016 by AIC’s recently appointed management team to improve technical performance and contain expenses. However, A.M. Best expects that these steps will take time to translate into stronger underwriting profitability for the company, with AIC anticipated to report an underwriting loss for 2016.
Although it has trended downward, AIC’s risk-adjusted capitalisation is considered supportive of the ratings. The reduction in capital adequacy has chiefly been driven by an erosion of the company’s capital base since 2012, which has been significantly impacted by fair value losses from the company’s affiliate, ARABIA Insurance Cooperative Company (AICC). In addition, AIC’s weak operating performance has limited the company’s ability to generate capital internally. Consequently, AIC’s shareholders’ equity position has declined to LBP 138 billion at year-end 2015, from LBP 227 billion at year-end 2012.
AIC has one of the most diverse underwriting portfolios in the Middle East, although its position in individual markets remains relatively small. Gross written premium was flat in 2015 at LBP 262 billion (USD 176 million), and growth is expected to be limited in the short term as the company focuses on improving profitability.
AIC is headquartered in Lebanon, exposing its operations to heightened levels of economic, political and financial system risk. These risks are partially mitigated by the company’s diverse revenue stream and investment base.
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