LONDON, 2 April 2015

A.M. Best has affirmed the financial strength rating of B++ (Good) and the issuer credit rating of "bbb+" of ARABIA Insurance Company s.a.l. (AIC) (Lebanon). The outlook for both ratings remains stable.

The ratings of AIC reflect its sound risk-adjusted capitalisation and well-diversified business profile. Offsetting rating factors are the company's weaker underwriting performance in the past two years, its concentrated investment portfolio and the high level of economic and political risk associated with Lebanon.

AIC's risk-adjusted capitalisation has declined in recent years, but remains supportive of the current rating level. The reduction in capital adequacy was caused by a fall in capital and surplus, precipitated by weak underwriting performance of the motor portfolio in the past two years and significant fair value losses from its key strategic affiliate, ARABIA Insurance Cooperative Company (AICC) (Saudi Arabia). Prospective risk-adjusted capitalisation is expected to be dependent on future earnings retention, growth of AIC's market profile and fluctuations in the market value of AICC.

AIC has historically delivered robust earnings across its main markets. However, in 2013 the combined ratio increased to 110%, largely resulting from underwriting losses in the company's motor and medical business lines. Management implemented a remedial program in 2014 to improve underwriting performance, which included non-renewal of loss-making contracts and the introduction of data-driven pricing tools. As a consequence, AIC is expected to see a fall in gross written premium for 2014 year-end, along with a reduction in the combined ratio of approximately 5 percentage points. Whilst AIC's exposure to AICC is limited to a 20% shareholding, the holding has added significant volatility to AIC's capital position. Additionally, AIC may face a reputational risk should AICC's position worsen.

AIC is headquartered in Lebanon, exposing its operations to heightened levels of economic and political risk. This risk is partially offset by AIC's diversification in revenue streams and investment holdings outside of Lebanon.

AIC is well-positioned at its current rating level. Failure to improve underwriting performance or an increase in economic and political risks in its key markets would 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. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilised:

· Understanding Universal BCAR

· Evaluating Country Risk

· Risk Management and the Rating Process for Insurance Companies

· Catastrophe Analysis in A.M. Best Ratings

· Rating Members of Insurance Groups

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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