The move comes after a failed attempt to persuade the group’s founding shareholders – the Kuwait Investment Authority, the Central Bank of Libya and the Finance Ministry of the UAE, which between them own 49.5 per cent of Arig’s equity – to recapitalise the struggling reinsurance operation.
‘The group board’s decision to transfer Arig Re to the parent company was taken in view of rating actions against Arig Re following the impact of the 11 September events,’ says Arig. ‘With a capital of $150.2 million at the beginning of 2001, Arig Re enjoyed a BBB+ rating from S&P [US credit rating agency Standard & Poor’s] and an A- rating from US-based insurance company rating agency AM Best. These ratings were downgraded to BB+ by S&P and B+ by AM Best following the reduction of the capital base to $104 million on 30 September 2001.’
The erosion of Arig Re’s capital base has been going on for some time, with heavy losses incurred in 2000 and 1999. Attempts to alter the company’s strategy, and its profile in the global reinsurance market, were making good progress before Arig Re found itself exposed to major claims from American Airlines (AA) and United Airlines. Both US carriers had aircraft reinsured by Arig hijacked on 11 September and AA lost another aircraft in New York on 12 November. It is estimated that the worst-case scenario would see Arig losing about $27 million through claims and reinstatement premiums, as a result of these two airline exposures (MEED 7:12:01). The company has been further hit by about $7 million in unrealised investment losses and a further $7 million charge relating to an old, unresolved reinsurance claim.
As the parent company takes on the writing of reinsurance under its own name, the business will benefit from Arig’s stronger capital base. At the end of the third quarter, Arig’s total shareholders’ equity stood at $197.3 million.
Following Arig’s move, S&P has withdrawn its rating of Arig Re. ‘Arig, as parent, undertook to provide a guarantee in favour of Arig Re’s policyholders,’ says S&P. ‘This guarantee gives the policyholders access to Arig’s capital resources and renders Arig’s capital base partly fungible. The group’s consolidated capital adequacy is currently in the BBB category according to S&P’s model.’