Best Affirms Arab Re ‘B+’ Ratings

A.M. Best Co. announced that it has affirmed the financial strength rating of “B+” (Very Good) and the issuer credit rating (ICR) of “bbb-” of Lebanon-based Arab Reinsurance Company S.A.L. with a stable outlook

“The ratings reflect Arab Re’s strong prospective risk-adjusted capitalization and improving underwriting performance,” said Best. “An offsetting factor remains the high proportion of investments held in the domestic market. Additionally, the rating is impacted by the economic and legal environment associated with Lebanon.”

Best said it “expects that Arab Re will cease reporting its technical results with a one year delay with effect from year-end 2005, and that it has taken this into consideration in its analysis and believes that the change will improve the transparency of financial reporting.”

Best also said it “believes that Arab Re’s risk-adjusted capitalization is likely to be restored to a strong level in 2006 following a significant expected deterioration in 2005. The weakening in 2005 will primarily be due to impacts resulting from the change in accounting methodology and inadequate outwards catastrophe reinsurance protection, despite the increase in capital by USD 5 million during 2005. The restoration of strong risk-adjusted capitalization in 2006 is expected to result from both an anticipated increase in paid-up capital of USD 10 million to USD 40 million and improved risk management through the purchase of significant additional catastrophe excess of loss cover in the same year.”

The rating agency noted that it “expects Arab Re’s underwriting performance to improve in 2005 and 2006, with the combined ratio likely to be very good and within the range of 95-97 percent. This is expected to be driven by an overall decrease in the expense ratio by approximately 2-4 percent over the period, due to an increase in the proportion of facultative business underwritten where average acquisitions costs are generally lower than for treaty business.

“Arab Re’s investment portfolio is anticipated to remain focused on bonds in the Lebanese government which, in A.M. Best’s opinion, have a high investment risk due to the uncertain economic and legal environment associated with the country. However, A.M. Best views the company’s efforts to diversify abroad as a positive factor.”