An investigation into Arab Insurance Group (Arig), a Bahrain-domiciled treaty and facultative reinsurance provider, by the Central Bank of Bahrain has uncovered “glaring deficiencies” in the company’s governance framework.
The regulator conducted an onsite examination of the reinsurer after A.M. Best downgraded and withdrew its credit ratings for Arig last month to reflect its ‘marginal’ operating performance.
The rating agency revised Arig’s long-term credit rating to bbb from bbb+, affirmed its financial strength rating of B++ (Good), and reduced its outlook to negative from stable.
Concurrently, these credit ratings were withdrawn as Arig requested to no longer participate in A.M. Best’s interactive rating process.
The Central Bank of Bahrain has now formally directed Arig to implement a number of actions to address the lack of strategic direction that it identified in the company.
Actions include the appointment of a permanent CEO, the suspension of all decisions relating to the lay off and closure of overseas offices, and the fulfilment of all vacant core and critical business functions.
Arig has also been directed to strengthen its corporate governance framework and seek a rating from the rating agency, as it is currently operating with an unrated status.
The reinsurer stated that its Board of Directors is currently in the process of reviewing the formal direction of the Central Bank.
A.M. Best said that its rating downgrades reflected a revision in its assessment of Arig’s operating performance to marginal from adequate, following a net loss of $52 million in 2018.
Although Arig’s own reinsurance and investment operations reported positive earnings, these were offset by significant underwriting losses from its Lloyds participation, amounting to $28.3 million, and a $21.5 million provision for fraud uncovered in one of its subsidiaries.
As a result of these losses, Arigs five-year (2014-2018) average return on equity stands at -2.2%, and the company has reported underwriting losses in four of the past five years, with a five-year (2014-2018) average non-life combined ratio of 106%.
The reinsurer also suffered a material deterioration in its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), stemming from a reduced level of capital and surplus, which diminished from $257 million in 2017 to $196 million at year-end 2018.
A.M. Best explained that the negative outlook reflects the potential for further deterioration in the balance sheet strength in the medium-term, as well as ongoing concerns with the company’s enterprise risk management strategy.
Additionally, the rating agency noted the possible execution risk that could emanate from any change in business strategy implemented under the leadership of a new CEO, following the departure of the previous CEO in June 2018.
Arig continues to benefit from a strong brand in the Middle Eastern and North African reinsurance markets, analysts said, but the company faces heightened reputational risk with regard to the events that occurred in the past year.
