AM Best Downgrades Credit Ratings of Arabia Insurance Company s.a.l.

LONDON--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating to B+ (Good) from B++ (Good) and the Long-Term Issuer Credit Rating to “bbb-” (Good) from “bbb” (Good) of Arabia Insurance Company s.a.l. (AIC) (Lebanon). The outlook of these Credit Ratings (ratings) is negative.

The ratings reflect AIC’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The rating downgrades reflect a deterioration of AIC’s balance sheet strength following a further weakening of economic, political and financial conditions in Lebanon, where AIC’s head office is located and approximately one-fifth of total investments were held and one-fifth of revenues originated in 2020.

In AM Best’s view, economic, political and financial system risk in Lebanon, which was already elevated, has continued to rise following the devastating explosion in the port of Beirut on Aug. 4, 2020, and the subsequent resignation of the government. Through 2021, political uncertainty in Lebanon has increased and economic and financial conditions have deteriorated, with the country facing hyperinflation. The significant weakening of the local banking sector has amplified capital flow constraints in the economy.

The negative outlooks reflect ongoing country risk pressures, which could lead to further deterioration in the company’s balance sheet strength. The negative outlooks also reflect pressures on AIC’s balance sheet strength due to the company’s high level of financial leverage with a short maturity, which exposes it to significant re-financing risk. Whilst AIC is expected to reduce its financial leverage gradually over the medium term, financing costs continue to impact the group’s operating performance adversely.

Historically, AIC’s operating performance has been impacted by its weak underwriting results. However, the group underwent a strategic shift in 2017 to enhance profitability through a stricter underwriting approach and cost efficiency programme. The 2020 underwriting result was impacted negatively by the August 2020 explosion in the port of Beirut, which contributed approximately three percentage points to the combined ratio of 102% for the year. Life operations continue to bolster the company’s overall underwriting results, with the segment generating profits in each of the past five years (2016-2020).

AIC has a geographically diverse underwriting portfolio across the Middle East, although its position in key markets remains relatively small and concentrated by line of business. The company has a well-recognised brand and good reputation in its core markets.

AM Best considers political and regulatory risks to be among AIC’s greatest threats. The appropriate ERM assessment takes into account AM Best’s expectation that AIC will continue to develop its risk management framework to adapt to the evolving nature of its markets in a sustainable way.

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AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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