Arab Reinsurance Company (Arab Re) held over 65% of its investments outside Lebanon at the end of 2023. This has made its balance sheet more resilient to asset-side stress tests, including full impairment of Lebanon-based assets, says AM Best.
In the global credit rating agency’s view, 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.
Ratings upgraded
AM Best has upgraded Arab Re’s Financial Strength Rating to ‘B’ (Fair) from ‘B-’ (Fair) and Long-Term Issuer Credit Rating to ‘bb’ (Fair) from ‘bb-’ (Fair). The outlook of these credit ratings is ‘Stable’.
The 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 rating upgrades reflect the strengthening of Arab Re’s balance sheet strength fundamentals, notably through increased risk-adjusted capitalisation that has become more resilient to stresses at year-end 2023, as measured by Best’s Capital Adequacy Ratio (BCAR).
Improvement in the company’s risk-adjusted capitalisation has been underpinned by good internal capital generation and growth of its offshore asset portfolio, which has improved the company’s liquidity position and its ability to service non-domestic policyholder obligations.
Positive underwriting results
Between 2019 and 2021, Arab Re’s net income was impacted by a cumulative $27.5m of impairments relating to holdings of Lebanese government bonds and deposits, as well as a $2.9m net loss relating to the 2020 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% (2019-2023), as calculated by AM Best. The company has reported positive annual underwriting results since 2021, which reflect portfolio remediation actions taken by Arab Re’s management, including exiting under-performing risks and revision of underwriting guidelines.
Business profile
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.