Arig is capital rich and poised to benefit from the misfortune of some of its Western competitors. Mairi Mallon spoke to Arig CEO Yassir Albaharna about the company’s plans for the rest of 2009.

Arab Insurance Group (Arig) may be facing the same challenging times as the rest of the industry, but the Arab reinsurer has managed to sidestep the joint nightmares of investments in failed banks and having AIG exposure, leaving it in a strong position in 2009 to pick up additional business.

Sitting on surplus capital, the company is set to use this to fill the void which is expected to be created by companies withdrawing back to their core business, and take advantage of expected hardening of rates.

“Sure, this provides excellent prospects to fill in the void created by the withdrawal of reinsurers who decide to focus on their core markets outside the Afro-Asian region. This will be a big opportunity for a company like Arig which has its traditional roots in this region and has escaped the misfortunes of many other European or American companies because not having similar exposures over there,” said Yassir Albaharna, the chief executive officer of Arig.

Arig does not have the problems of raising capital that its western rivals have, as it has been capital rich for a while. Albaharna, who joined the company in 1987 when he was just 23, said: “We still have surplus capital to our ongoing business. We aim to utilise in future business opportunities.”

Arig may not yet have seen any double digit firming of prices for renewals only terms and conditions tightening, but it will be there for any opportunities in its core markets of the Middle East and Africa.

“It is a good opportunity for us to shine, rise and prove our worth over here and our commitment to the market,” said Albaharna. “And of course on the micro level there are product specific opportunities where we have to see how we can take advantage of them.”

Albaharna said that the global downturn will “without doubt” affect insurers and reinsurers as a fall in insurer client activities will surely affect their need and demand for insurance.

But he added that to an extent this fall in demand will be offset by an increase in rates through a hardening market. “Insurers and reinsurers are likely to require income to be generated from their underwriting results as investment returns become less reliable,” added Albaharna. “This return to core underwriting insurance discipline will identify the experts in our markets and these companies will flourish even in such difficult times.”

Arig also expects that more adequate product pricing would lead to better risk returns in the mid-term, similar to what Arig experienced during the market crunch following the 9/11 events.

“It will be a difficult year, but it will be one where I expect to see a return to core insurance disciplines,” added Albaharna. “Insurers and reinsurers will need to rely once again on core underwriting returns - and investment returns are likely remain volatile and unpredictable.”

Arig also has no exposure to troubled assets such as sub-prime obligations or failed financial institutions. As of the end of 2008, real estate exposure was minimal and current share of equities in total investments stood at around 10% - in line with Arig’s conservative investment strategy.

“We are not high up on real estate or large equity involvement such as alternative investments or derivatives,” said Albaharna. “So I think that has saved us. This is not something we have just started doing. We have been doing it for years. And I think this has really benefitted us in this scenario.”

The group is also highly liquid, holding 59.4% or $400 million of its investable assets in cash or equivalent instruments, which Albaharna says is ready to be deployed when markets turn around. Arig also recorded a 21% increase in earned premium and reinsurance operations produced a technical profit (premiums less claims less acquisition cost) of $9.6 million, compared to a loss of $3.0 million a year earlier. And added to that Arig’s stock is still trading well within its historical experience, said Albaharna.

“We have had some impact as some of our investments that were worth say $1, are now worth 40, 50 or 60 cents for the same asset - so this is how it is affecting us,” he said. “Of course, we hope that after all of this, and the dust settles down, that we see hardening in the insurance markets. The message - I am sure you are hearing it all over the market - is a return to basics. That is because now you have to rely predominantly on your underwriting performance, not the investment performance. This is what we would sincerely hope will come out of this - an industry in a much safer and better shape. This would be because everyone is paying more and more importance to the fundamentals of insurance – underwriting. And this has taken quite a beating over the past four or five years.”

Re-focused

Arig was set up in 1980 by the governments of Kuwait, Libya and the United Arab Emirates, with a view to having a global reinsurance player which was based in the region.

Arig tried to compete in the West with more established reinsurers, but under the leadership of Albaharna the company re-focused its mission on mainly providing reinsurance to Arab companies.

Under his guidance, Arig is now one of the leading Arab reinsurers with a sound reputation as a dependable partner for the insurance industry in the region and poised for growth.

Ranked among the top 100 global reinsurers with a BBB long-term counterparty credit and insurer financial strength rating by Standard & Poor’s, it also has several very successful subsidiaries including Takaful Re, set up in 2006 as one of the first retakaful providers in the Dubai International Financial Centre. Arig’s also has Gulf Warranties Limited, a Dubai-based extended warranties service provider, as well as ARIMA, the Group’s wholly-owned insurance software company that supports numerous regional reinsurance and insurance clients.

Financials

Arig announced a net loss of $28.6 million for the year 2008, compared to a profit of $23.7 million in 2007, following the global financial turmoil. The company said that as a significant portion of the loss on investments remains unrealised, the company could have reported a lower loss by reclassifying its investments as permitted under the recent amendments to IFRS rules, but said in order to maintain transparency and consistent accounting policies, Arig chose not to reclassify its investments.