Best Affirms Arab Re’s Ratings; Outlook Revised to Stable

November 18, 2011

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from positive and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Arab Reinsurance Company S.A.L., which is based in Lebanon.

Best explained that the ratings of Arab Re continue to “reflect its strong risk-adjusted capitalization, steady investment income and the continued development of the company’s risk management framework.” As offsetting factors Best cited the reinsurer’s “mixed technical profitability and modest business profile relative to regional reinsurers.”

Best also noted that the “outlook for both ratings was revised to positive in November 2009 given the company’s resilient technical performance that had been achieved whilst growing its business profile, in addition to the enhancements that were being made by management with regard to Arab Re’s enterprise risk management (ERM).”

However, Best said it has now revised the outlook to stable due to the company’s failure to meet its previous expectations “with regard to the development of its business profile and technical performance.” Best did acknowledge that the organization “continues to move forward in a positive direction, particularly in relation to its ERM.”

Best added that in its opinion Arab Re’s “prospective risk-adjusted capitalization is strong with sufficient capacity to absorb management’s ambitious expansionary plans. Having benefitted from a $10 million capital injection in 2010, Arab Re completed a further $15 million capital increase in 2011.”

In addition its management has now informed Best that “a further injection of $25 million is likely in coming years, which will increase Arab Re’s paid-up capital to $100 million. Arab Re has made significant improvements in its risk management framework in recent years and has recently hired a qualified actuary as the Head of Risk. Currently, Arab Re still lacks capital modeling capabilities—which it expects to develop by year-end 2012—however, this is partially mitigated by the company’s strong capital position.”

The report described Arab Re’s technical performance as having “deteriorated in recent years. The company’s insurance portfolio is skewed towards property and engineering, which has traditionally generated volatile results driving a combined ratio of 113 percent in 2009.” But Best also said it recognized that “management have made significant efforts to improve the performance of these businesses, its ability to do so is hindered by the fact that property dominates the bouquet treaties that Arab Re writes.

“However, 2010 showed a marked improvement with borderline technical profits after adjusting for non-technical expenses.” Given the losses recorded to date, Best said it expects a small technical loss for 2011.

In addition Best observed that “Arab Re has generated consistent investment returns in recent years given that its investment strategy is highly focused on fixed income securities and deposits, which accounts for more than 90 percent of the organization’s investment portfolio.”

However, ” the company’s exposure to Lebanese government bonds—which is equivalent to 40 percent of the company’s capital and surplus—poses a significant concentration and credit risk,” in Best’s analysis. The rating agency said it has “applied vigorous stress tests to Arab Re’s risk-adjusted capital, which shows that its Best’s Capital Adequacy Ratio score remains strong, even when such debt is subjected to a 50 percent haircut.

“Arab Re remains a relatively small reinsurer in the region, something borne out by its premium income ($53.7 million) when compared to global reinsurers operating within the same increasingly competitive markets.”

However, Best said that in its opinion, “Arab Re has a good reputation in the egion, and continues to improve its visibility in its main markets. Going forward, the difficult environment in the region (as a result of the political unrest in many of the countries that Arab Re operates in) adds some uncertainty to the organization’s ability to achieve its objectives.”

Source: A.M. Best

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