Best Assigns Ratings to Arab Re

A.M. Best Co. announced that it has assigned a financial strength rating of “B+” (Very Good) and an issuer credit rating (ICR) of “bbb-” to Lebanon-based Arab Reinsurance Company S.A.L. (Arab Re). The outlook on both ratings is stable.

“The ratings reflect Arab Re’s consistently strong operating performance and an increasingly diversified spread of business despite its limited market position,” Best said. “The ratings also factor a strengthening of prospective risk-adjusted capitalisation, which is partially offset by high credit default and liquidity risk arising from non-rated reinsurers in the region. The ratings are impacted by the economic and legal environment associated with Lebanon.”

Best noted that the company’s risk-adjusted capitalization would be strengthened by an increase in paid-up capital of $5 million and retained earnings of approximately $3 million in 2005 “after factoring the company’s credit exposure to non-rated reinsurers in the region. In addition, capital requirements for investments will be reduced due to the transfer of some invested assets outside Lebanon, likely to be Europe, in 2005.”

Best indicated it “expects Arab Re to generate profits between $3 and $4 million in both 2004 and 2005, largely as a result of continuing strong investment return of approximately 8 percent.

“The company’s underwriting performance is likely to remain unsatisfactory in 2004, with only a minor reduction from the high combined ratio of 105 percent at year-end 2003 as lower expenses are offset by softening premium rates and prudent reserving.”

Best also noted that it “envisages a reduction in the combined ratio by approximately three percentage points in 2005 as the cancellation of unprofitable business undertaken in 2004 is leading to a better claims development, and that the expense ratio will decrease as the company benefits from economies of scale derived from growing premium.

“Arab Re’s business profile is limited with expected gross premium of approximately $24 million in 2004; however, A.M. Best expects Arab Re to broaden its commercial franchise in Arab countries through long-standing client relationships, with premium growth of approximately 20 percent in 2005.