Arabia Insurance Company (AIC) has a track record of profitable, albeit volatile, operating performance, with positive results reported in four of the past five years (2020-2024). However, results in 2023 and 2024 have been lacklustre, with the company reporting return-on-equity (ROE) ratios of 1.4% and 3.9%, respectively, AM Best noted.
Overall earnings have been negatively impacted by a deterioration in non-life underwriting performance, as illustrated by net/net combined ratios of 108.2% and 110.1% in 2024 and 2023, respectively. The primary driver of underwriting losses is AIC’s elevated expense ratio, which has been inflated in recent years due to the decentralisation of its operations and relocation costs of staff outside of Lebanon. While the management team continues to take steps to address profitability concerns, AM Best expects AIC’s underwriting performance to remain pressured over the near term, given the company’s modest scale and the highly competitive nature of its core operating markets.
Ratings
The global credit rating agency has revised AIC’s rating outlook to ‘Negative’ from ‘Stable’, to reflect the decline in AIC’s operating performance in recent years, which is placing additional pressure on the company’s balance sheet strength assessment, as the rate of internal capital generation has not kept pace with the growth in key risk exposures.
However, AM Best affirmed the company’s Financial Strength Rating of ‘B+’ (Good) and its Long-Term Issuer Credit Rating of ‘bbb-’ (Good).
AM Best added that the credit ratings reflect AIC’s balance sheet strength, which was assessed as strong. The ratings also take into account AIC’s adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).
AIC’s balance sheet is supported by strong risk-adjusted capitalisation, which remained at a very strong level at the end of 2024 based on Best’s Capital Adequacy Ratio (BCAR). Capital usage is mainly driven by investment risk, due to exposure to equities and real estate, with some holdings attracting higher concentration charges under BCAR. The assessment also reflects AIC’s geographically diversified operations across the Middle East, which partly reduce its exposure to Lebanon’s high political, economic and financial risks. These strengths are partly offset by limited capital flexibility, due to strict regulatory capital requirements in the countries where AIC operates and its debt-servicing obligations.
Challenges
AIC’s market profile benefits from a long-standing reputation and diversification of operations across the Middle East, said AM Best. However, the company’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 the credit rating agency’s expectation that AIC will continue to develop its risk management framework and capabilities proactively to adapt to the evolving nature of its operating markets in a controlled way.