A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of B++ (Good) and issuer credit rating of ‘bbb+’ to ARABIA Insurance Company s.a.l. (AIC) (Lebanon). The outlook assigned to both ratings is stable.
The ratings reflect AIC’s good level of risk-adjusted capitalization together with a well diversified business profile and solid overall performance.
Although AIC’s level of risk-adjusted capitalization is likely to be eroded marginally as the company grows over the medium term, it is expected to be maintained at a good level. AIC’s reinsurers are generally of a good credit quality, and net premium leverage (net premiums written to capital and surplus) is unlikely to increase above 125% over the next two years. Owing to a reasonably high proportion of equity securities within AIC’s investment portfolio (equity securities are expected to account for almost one third of total investments in 2011), risk-adjusted capitalization is exposed to potential volatility.
AIC operates throughout the Middle East region. Along with its home operations in Lebanon, AIC has subsidiaries in Jordan (General ARABIA Insurance Company Ltd) and Syria (ARABIA Insurance Company – Syria S.A.) as well as branches and agencies in United Arab Emirates, Qatar, Oman, Bahrain and Kuwait. The company has a further affiliate in Saudi Arabia (ARABIA Insurance Cooperative Company), although common ownership is not sufficient to allow consolidation. AIC’s business is well diversified both by line of business and geographical distribution.
AIC has some concentration in the motor business, which accounts for nearly half of the company’s gross premium income, though this is common throughout the region. Although AIC does not hold a leading position in any single market, it is strengthening its position in Lebanon.
Overall earnings are expected to be good over the medium term, with a likely return on equity within the range of 7% to 12% over the next two years. This is in line with the company’s recent experience where it has achieved a similar level of earnings, including a profit before tax of LBP15bn ($10m) in 2010. Although underwriting profits (including unallocated management expenses) dropped from LBP12bn ($8m) in 2008 to LBP4.2bn ($2.8m) in 2010, a stable combined ratio of around 95% was achieved in 2009 and 2010 and also is expected in 2011 and 2012. During the 2010 financial year, underwriting profits from AIC’s general business dropped to a five-year low, and underwriting results were supported by an unusually strong profit from the company’s life business. Furthermore, a significant proportion of equity securities in AIC’s investment portfolio exposes the company’s overall results to potential volatility.
Over time, a greater presence in core markets and development of enterprise-wide risk management, together with a stable underwriting performance and maintenance of a good level of risk-adjusted capitalization could put positive pressure on the ratings. A reduction in risk-adjusted capitalization, deterioration in financial performance or an increase in country risk could add negative pressures to the ratings.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Rating Members of Insurance Groups”; “Assessing Country Risk”; and “Understanding Universal BCAR”.
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