The rating upgrades reflect Arig's ability to take strategic decisions to eliminate underperforming business segments and optimise its business profile to generate stronger prospective earnings. The measures taken by management have resulted in improved technical performance, with Arig delivering a 90% combined ratio in the first three quarters of 2016. The ratings also consider Arig's solid balance sheet strength and sound risk management framework.
Arig maintains a strong brand name in the Middle East and North African reinsurance market, built upon the company's excellent reputation and its long-standing relationships with cedants. In addition, the company benefits from its exposure to the Lloyd's market via its investment in Arig Capital Limited (a corporate member at Lloyd's). Participation in Lloyd's syndicates that focus on specialty lines represents just over one-third of the company's gross written premium. The majority of Arig's reinsurance portfolio is written on a treaty basis and is not heavily exposed to natural catastrophes. Going forward, the composition of Arig's underwriting portfolio is not expected to change materially; however, moderate increases in facultative business are anticipated as the company looks to target higher margin products. Additionally, following a shareholder decision, Takaful Re Limited (Takaful Re), a subsidiary of the company, ceased underwriting from the fourth quarter of 2015, and its insurance portfolio has been put into runoff. A.M. Best believes this decision will allow Arig to focus its strategy on its core segments and higher margin business lines, improving underwriting profitability.
Arig's risk-adjusted capitalisation remained strong in 2016, despite capital and surplus decreasing to USD 244 million at year-end 2015 (2014: USD 265 million). Arig's risk-adjusted capitalisation is supported by modest underwriting leverage, conservative asset allocation and prudent reserving. A.M. Best expects Arig's prospective risk-adjusted capitalisation to remain strong and sufficient to absorb the company's strategic initiatives.
Whilst Arig has a history of generating good operating profits, with a good five-year average loss ratio of 65%, the company reported a net loss of USD 8 million in 2015, with a number of non-recurring transactions compounding the company's poor technical performance. The weak underwriting results in 2015 were driven by Takaful Re's continued technical losses and large losses from Arig's 'core' non-life portfolio, which were partially softened by continued profitability emanating from the company's life insurance operations. Additionally, timing differences related to inception of certain Lloyd's treaties temporarily reduced premium revenue resulting in an increase in the company's expense ratio. As a result, the company's non-life underwriting operations returned a combined ratio of 109% in 2015. Non-technical non-recurring items included restructuring provisions related to Takaful Re being put in runoff and the closure of the company's Far East branches. In recent years, Takaful Re has added approximately 3-6% to Arig's combined ratio. Following the decision to put Takaful Re's insurance portfolio into runoff along with the implementation of a number of strategic initiatives, A.M. Best anticipates Arig's prospective performance to return to technical and operating profitability.