A.M. Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” from “a-” of Arab Insurance Group (B.S.C.) (Arig) (Bahrain).
The outlook of the Long-Term ICR has been revised to negative from stable. The outlook of the FSR remains stable.
The ratings reflect Arig’s balance sheet strength, which A.M. Best categorises as very strong, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).
The downgrade reflects A.M. Best’s revised view of the company’s ERM following failures in its framework highlighted by a recently discovered incident of fraud. In the first half of 2018, the company took provisions of USD 21 million because of fraud emanating from its fully consolidated subsidiary, Gulf Warranties W.L.L (GW). Whilst detailed internal and external investigations are underway to establish the extent of legal liability of GW, the occurrence of fraud raises significant concerns regarding the control and governance environment at Arig.
Additionally, the incident will likely have a negative impact on overall operating performance for the full-year 2018, due to the materiality of related provisions. The negative outlook reflects the additional concerns surrounding both ERM and reputational damage to business profile if the investigations uncover further fraud.
The outlook also reflects the higher-than-expected volatility reported in Arig’s technical results over the past five years and the potential for deterioration in overall operating performance in the medium-term. A.M. Best notes the possible execution risk that could emanate from any change in business strategy that may be implemented under the leadership of a new CEO, following the departure of the previous CEO in June 2018.
The company has generated a modest five-year (2013-2017) average return on equity of three per cent. However, underwriting losses have been reported in four out of the past five years, and the company has reported a five-year (2013-2017) average non-life combined ratio of 102 per cent. In 2017, a technical loss of $5 million was reported, driven by substantial losses from the company’s Lloyd’s operations, mainly as a result of North American hurricane losses incurred during the second half of that year. In the first half of 2018, Arig reported an elevated non-life combined ratio of 107 per cent.
Arig’s balance sheet strength is underpinned by risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which remained at the strongest level as at year-end 2017. The company benefits from a strong brand in the Middle Eastern and North African reinsurance markets, built upon its excellent reputation and long-standing relationships with cedants. The portfolio is well-diversified by both product and geography.
A.M. Best will closely monitor the impact of the incident of fraud and the associated investigations into the company and take appropriate rating action if necessary.