A.M. best has affirmed Arab Reinsurance Company’s (Arab Re’s) financial strength rating of ‘B+’ (Good) and the issuer credit rating of “bbb-” with a stable outlook.
The ratings reflect Arab Re’s strong risk-adjusted capitalisation, good track record of operating profitability and stable business profile.
Despite large dividend payments in recent years, Arab Re has a risk-adjusted capitalisation which remains at a strong level, reflective of the company’s low underwriting leverage, according to A.M. Best.
Arab Re’s capital and surplus decreased to US$92.6 million in 2014, following a dividend payment of $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, said A.M. Best.
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 $0.6 million, from $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, said A.M. Best.
Arab Re has a stable business profile in its core markets in the MENA region, built upon its 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 the reinsurer’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, said the rating agency.
In a statement, Arab Re said that although the ratings awarded by A.M. Best were negatively affected by the sovereign rating of Lebanon, they reflect Arab Re’s strong risk-adjusted capitalisation, continuous fulfilment of its commitments, good track record of operating profitability and stable business profile.
“It is clear to everyone that the Arab insurance market is facing daunting challenges as a result of the political volatility experienced in a number of regional countries, the fierce competition and the shifting global concepts pertaining to the reinsurance business. Yet despite all this, Arab Re is able to sustain its strong market position and is keen on preserving its solid and long-lasting relations with clients, with the ultimate goal of supporting the sound development of the Arab re/insurance industry,” said the statement.