LONDON–(BUSINESS WIRE)–AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” of ARABIA Insurance Company s.a.l. (AIC) (Lebanon).
These Credit Ratings (ratings) reflect AIC’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
The negative outlooks reflect pressures on AIC’s balance sheet strength assessment stemming from increasing financial leverage and limited fungibility of capital across the group.
AIC’s balance sheet strength is underpinned by risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), at the strongest level, owed primarily to the consolidation of Arabia Falcon Insurance Company SAOG (Falcon) (Oman), of which a majority stake was acquired by AIC in 2017. Offsetting factors include AIC’s financial leverage, which was used to finance the acquisition of Falcon and subsequently increased to fund the company’s solvency requirements in its branches and subsidiaries. This exposes the company to significant refinancing risk, whilst increasing its expense base. The assessment also considers the group’s limited capital fungibility, constrained by increasing regulatory solvency requirements in the jurisdictions that AIC operates in.
Prior to 2017, AIC experienced weak operating performance, driven by poor technical results. In 2017, AIC underwent a strategic shift to enhance profitability through a stricter underwriting approach and cost efficiencies. The remedial actions taken by the company have improved results with AM Best expecting these to stabilise at an adequate level in the medium term.
AIC has one of the most geographically diverse underwriting portfolios in the Middle East, although its position in key markets remains relatively small. In line with the group’s strategy to carve out unprofitable business, consolidated gross written premiums, as reported by AIC, fell by circa -9% in 2018 to LBP 272 billion. Motor remains AIC’s dominant line of business, accounting for over half of total net written premiums, and is one of the most competitive sectors across the region.
AM Best considers regulatory risk as one of AIC’s greatest threats given the group’s operating model. The appropriate ERM assessment takes into account expectations 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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Ghislain Le Cam, CFA, FRM
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