AM Best has revised the outlooks to stable from negative and affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-” (Good) of Arabia Insurance Company s.a.l. (AIC) (Lebanon).
These Credit Ratings (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 revision of the outlooks to stable from negative follows reduction in AIC’s exposure to Lebanon and reflects AM Best’s expectation that the company’s rating fundamentals will remain resilient to the challenging economic and political conditions prevalent in the country. The revision also considers the reduction in AIC’s debt levels in recent periods, with further repayments expected over the near-term.
AIC’s balance sheet strength is underpinned by risk-adjusted capitalisation that was at the strongest level at year-end 2022, as measured by Best’s Capital Adequacy Ratio (BCAR). Capital consumption is largely driven by investment risk, reflecting the group’s exposure to equity and real estate investments, with certain holdings attracting additional concentration charges in BCAR. The assessment factors in the geographically diversified operations of AIC, with asset and underwriting exposures across the Middle East, providing to some extent insulation against the very high political, economic and financial system risks in Lebanon. Capital fungibility is constrained by regulatory capital requirements in the jurisdictions in which AIC operates, which remains an offsetting rating factor.
AIC has a track record of adequate operating performance, demonstrated by a five-year (2018-2022) weighted average return-on-equity ratio (ROE) of 1.7%. Over this period, the group’s results have been volatile, having been negatively impacted by challenging conditions in its domestic economy, particularly in 2021 and 2020 during which AIC reported ROEs of 0.0% and -6.4%, respectively. Prospective earnings are expected to improve in line with the results in 2022, when the group reported an improved ROE of 5.5% following a strong turn-around in underwriting performance. In addition, AM Best expects future earnings to continue benefitting from actions taken by management to rationalise the underwriting portfolio.
AIC’s market profile benefits from a long-standing reputation and diversification of operations across the Middle East. However, the group’s modest footprint across most of its core markets limits its competitive position.
AM Best considers political and regulatory risks to be among AIC’s greatest challenges. The appropriate ERM assessment takes into consideration AM Best’s expectation that AIC will continue to proactively develop its risk management framework and risk management capabilities to adapt to the evolving nature of its operating markets in a controlled way.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
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