LONDON: AM Best has 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). The outlook of these ratings is negative.

The 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 the increased level of financial leverage with a short maturity, which exposes the group to significant refinancing risk.

AIC’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), which has been supported by solid organic capital generation in recent years.

The assessment factors in the good geographical diversification of AIC’s assets, which to some extent insulates the group from the very high political, economic and financial system risks in Lebanon. An offsetting factor is AIC’s limited capital fungibility, constrained by increasing regulatory solvency requirements in the jurisdictions in which AIC operates.

Operating performance has been impacted by AIC’s historically weak underwriting performance, with a five-year (2015-2019) weighted average non-life combined ratio of 103.0%. However, AIC underwent a strategic shift in 2017 to enhance profitability through a stricter underwriting approach and cost efficiency programme. The remedial actions have resulted in improved results in 2018 and 2019, with AM Best expecting them to stabilise at an adequate level over the medium to long term. Modest investment returns have supported earnings, and in 2019, the company reported an investment yield (including gains) of 5.8%.

AIC has one of the most geographically diverse underwriting portfolios in the Middle East, although its position in key markets remains relatively small and concentrated by line of business.

Following the implementation of the group’s strategy to carve out unprofitable business, which led to a decline in gross written premium (GWP) of 9% in 2018, AIC has focused on the personal lines and small and medium enterprise segments. Consequently, the group’s consolidated GWP grew by 5% in 2019 to LBP 274 billion (USD 181 million).

AM Best considers political and regulatory risks as AIC’s greatest threats given the group’s operating model, being domiciled in Lebanon and operating in a number of markets across the Middle East with increasing regulatory requirements. 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.