LONDON--(BUSINESS WIRE)--A.M. Best has affirmed the financial strength rating of B+ (Good) and the issuer credit rating of “bbb-” of Arab Reinsurance Company S.A.L. (Arab Re) (Lebanon). The outlook for both 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 Arab Re’s continued weak technical performance and the elevated economic and political risks associated with operating in Lebanon.
Whilst Arab Re’s risk-adjusted capitalisation has gradually decreased in recent years as a result of onerous dividend payments, it remains at a strong level, reflective of the company’s low underwriting leverage. Arab Re’s capital and surplus decreased to USD 92.6 million in 2014, following a dividend payment of USD 4.1 million; however, this level is considered sufficient to absorb asset and credit risks associated with the company’s exposure to the local financial market and unrated reinsurance counterparties.
Arab Re has a good track record of operating profitability, as demonstrated by its five-year average return on equity of 5%. The earnings, however, are heavily reliant upon investment income, as the company has continued to experience weak technical performance in recent years, with a five-year average combined ratio of 104%, resulting from difficult underwriting conditions and significant adverse reserve developments. In line with this trend, Arab Re recorded a notable technical loss in 2014, which translated into a combined ratio of 113%, and served to reduce net profit after tax to USD 0.6 million, from USD 4.9 million in 2013. Although Arab Re has implemented mitigating actions over 2015 to improve its loss ratio, it is expected that the technical account will remain under pressure.
Arab Re has a stable business profile in its core markets in the Middle East and North Africa region, 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.
An offsetting rating factor is Arab Re’s continued exposure to the regional political instability, which has the potential to seriously disrupt the economic environment in Lebanon. Despite Arab Re’s geographically diverse underwriting portfolio and track record of resilient operating performance in challenging economic conditions, 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.
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