AM Best has revised the outlooks to stable from negative and affirmed the Financial Strength Rating of B- (Fair) and the Long-Term Issuer Credit Rating of “bb-” (Fair) of Arab Reinsurance Company SAL (Arab Re) (Lebanon).
The Credit Ratings (ratings) reflect Arab Re’s balance sheet strength, which AM Best assesses as strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management.
The revision of the outlooks to stable from negative reflects AM Best’s expectation that Arab Re’s rating fundamentals will remain resilient against the backdrop of the challenging economic and political conditions that persist in Lebanon.
In AM Best’s view, economic, political and financial system risks in Lebanon are very high. Political uncertainty in the country has remained elevated following the 2022 elections that failed to produce a parliamentary majority, a cabinet or a president. Economic conditions remain challenging, with the country having to contend with hyperinflation and a significantly devalued currency. Arab Re has a material exposure to Lebanon, where the company is headquartered and holds a sizeable component of its investments. Despite these challenges over recent years, Arab Re has grown its offshore asset portfolio, which has helped strengthen the company’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), and its liquidity.
The improvement in Arab Re’s BCAR has made its balance sheet more resilient to asset-side stress tests, which gives AM Best greater confidence over the company’s ability to navigate the ongoing challenging domestic operating environment.
Arab Re’s balance sheet strength is underpinned by risk-adjusted capitalisation, as measured by BCAR, which was at the strongest level at year-end 2022, an improvement from the very strong level at year-end 2021. Capital consumption in the company’s BCAR remains driven by investment risk, as Lebanese assets attract significant capital charges to reflect heightened risks stemming from the country. The balance sheet strength assessment also factors in the company’s thin – albeit improving – liquidity, evidenced by a ratio of liquid assets to net technical provisions of 128% at the end of 2022, up from 114% in 2021. Furthermore, claims-paying ability is constrained by capital controls imposed in Lebanon, which makes it difficult for Arab Re to service foreign liabilities with assets held in Lebanon.
Over the years 2019 to 2021, Arab Re’s net income was impacted by a cumulative USD 27.5 million of impairments relating to holdings of Lebanese government bonds and deposits, as well as a USD 2.9 million net loss relating to the Beirut Port explosion. Despite this, Arab Re has recorded profitable operating results in four of the past five years, with a weighted average return on equity of 3% (2018-2022). Positive underwriting results in 2021 and 2022 reflect portfolio remediation actions taken by Arab Re's management, including exiting under-performing risks and the revision of underwriting guidelines.
Arab Re has a niche position in its core markets in the Middle East and North Africa region, built upon its original role as a reinsurer for Arab insurance markets and long-standing relationships with cedants. Despite the company’s geographical reach, its growth potential is limited, as reinsurance markets in the region remain highly competitive.
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