AM Best updates credit ratings and outlook for Arab Re to stable

Global credit ratings agency AM Best has updated the outlook of Lebanon-domiciled Arab Reinsurance Company SAL (Arab Re) to stable reflecting the firm’s strong balance sheet strength, adequate operating performance, limited business profile, and marginal enterprise risk management.

The ratings agency has also upgraded the Financial Strength Rating to B (Fair) from B- (Fair) and the Long-Term Issuer Credit Rating to “bb” (Fair) from “bb-” (Fair).

According to Best’s Capital Adequacy Ratio (BCAR), the rating upgrades reflect the strengthening of Arab Re’s balance sheet fundamentals, especially through increased risk-adjusted capitalisation, which has become more resilient to stresses at year-end 2023.

Arab Re’s risk-adjusted capitalisation improvement has been underpinned by good internal capital generation and growth of its offshore asset portfolio, thus, improving its liquidity position and ability to service non-domestic policyholder obligations.

AM Best added: “Economic, political and financial system risks in Lebanon are very high, with the country having to contend with hyperinflation and a significantly devalued currency. While Arab Re maintains a material exposure to Lebanon through its operations and part of its investment portfolio, the company has successfully diversified its asset base outside the country in recent years.

“At year-end 2023, Arab Re held over 65% of its investments outside Lebanon. This has made its balance sheet more resilient to asset-side stress tests, including full impairment of Lebanon-based assets.”

Between 2019 and 2021, Arab Re’s net income was impacted by a cumulative $27.5 million of impairments concerning Lebanese government bonds holdings and deposits, and a $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 ratio of 3%, as calculated by AM Best.

The reinsurer has reported positive annual underwriting results since 2021, due to the portfolio remediation actions taken by its management, including exiting underperforming risks and revision of underwriting guidelines.

AM Best notes that 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 geographic reach, its growth potential is limited, as reinsurance markets in the region remain highly competitive, warns AM Best.

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