In response to the heightened economic and political risk in Lebanon, Arab Reinsurance Company (Arab Re) has decreased its exposure to domestic securities and increased its proportion of assets held outside Lebanon, notably by redirecting its cash flows to Bahrain and Oman, said AM Best.
However, Arab Re’s business profile is expected to remain under pressure in the short to medium term, constrained by challenging market conditions and a lack of growth opportunities in core markets.
The rating agency has affirmed Arab Re’s Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-”. The outlooks of these credit ratings, however, remain negative.
The ratings reflect the reinsurer’s balance sheet strength, which the rating agency categorises as very strong, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management.
The negative outlooks reflect ongoing pressure on the business profile assessment, stemming from concerns over Arab Re’s ability to navigate the challenging underwriting conditions prevailing in its core markets. In addition, the increased social, political and economic instability in Lebanon, where the company is domiciled and writes approximately 10% of its business, has heightened the pressure on the ratings.
Nevertheless, Arab Re’s balance sheet strength is underpinned by its risk-adjusted capitalisation, which is maintained at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), reflective of low underwriting leverage. The company’s shareholder equity reached $104.6m at end-2018, up 1.7% y-o-y. The capital base is sufficient to absorb the elevated investment risk arising from exposure to Lebanese assets, notably Lebanon sovereign debt and cash deposits in local banks, and credit risk stemming from unrated retrocessionaires. M