Published on: 10/09/2022
LONDON--AM Best has 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). The outlook of these Credit Ratings (ratings) is negative.
The 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 negative outlooks reflect ongoing country risk pressures on AIC’s credit profile stemming from its exposure to Lebanon, where its head office is located and approximately 8% of total investments were held and 3% of revenues originated in 2021. The negative outlooks also factor in the company’s use of debt to support its operations, and the significant refinancing risk associated with its exposure to debt with a short maturity.
AIC’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). The assessment factors in the solid geographic diversification of AIC's exposures in terms of operations and assets, which to some extent insulates the group from the very high political, economic and financial system risks in Lebanon. A partially offsetting rating factor is AIC’s limited capital fungibility, constrained by increased regulatory solvency requirements in the jurisdictions in which the group operates.
AIC has a track record of adequate operating performance, demonstrated by a five-year (2017-2021) weighted average return on equity (ROE) of 1.2%. Results have deteriorated in the past two years, negatively impacted by one-off events, including the explosion in the port of Beirut in 2020, and the devaluation of the Lebanese pound in 2021, translating in ROEs of -6.2% and 0.0% for each of these years, respectively. AM Best expects prospective operating performance to improve and support an adequate assessment over the economic cycle, benefiting from actions taken by management to rationalise the underwriting portfolio, and supported by solid investment returns, in line with the 5.6% (including gains) achieved in 2021.
AIC’s underwriting portfolio is well-diversified geographically across the Middle East, where the group benefits from a good reputation and a well-recognised brand through a network of branches and subsidiaries. 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 threats. The appropriate ERM assessment takes into account AM Best’s expectation that AIC will continue to develop its risk management framework and risk management capabilities to adapt to the evolving nature of its markets in a sustainable way.
Source: BUSINESS WIRE