A first of its kind for Ethiopian insurance firms, Ethio Re received AA for financial strength on a national rating scale and a B- on international rating scale. A South African based rating agency, GCR Ratings, released its evaluation report on Ethiopian Re-insurance S.C’s soundness on December 9, 2021.
Ethio Re fetched a relatively lower rating on the international rating scale mainly due to the company’s lack of operations outside the Ethiopian market and its limited geographical diversification. However, its country risk score and sector risk scores are sound and in terms of premium diversification, competitive position and management and governance, it remains strong.
“The financial profile is characterized by a very strong capitalization, strong liquidity, and sound earnings. The reinsurer anchors strong local competitive position, despite limited presence in other target markets,” the rating index report reads.
“We are very excited about the results, which are better than our elder Reinsurers in Africa,” Fikru Tsegaye, executive officer (EO) for strategy and business development at Ethio Re said.
The reinsurer’s capital stood at 1.2 billion birr before the company discloses its last year financial statement to shareholders. According to the report, the capital is ‘strong’ for GCR Capital Adequacy Ratio (CAR) and risk adjusted capitalization; and catering for low-level aggregate risk exposure, enabled Ethio Re to underpin large and strong capital base.
“Ethio-Re has a strong capital relative to its risk profile. Moreover, its capital is expected to grow as it is owned by financial institutions with deep pockets. This means in the situation of increasing claims, Ethio-Re has adequate capital to absorb the losses,” said Abdulmenan Mohammed, a financial expert with almost two decades of experience.
When it comes to liquidity, Ethio-Re not only has significant resources but also used a conservative strategy, according to the expert. This means its investments are mainly in safe assets i.e. cash and cash equivalents, enabling Ethio-Re settle its debts when they are due, he said.
The first Reinsurer for Ethiopia also enjoys 25 percent compulsory cession on treaty placements and five percent per-policy cession from insurers since its commencement in 2016.
“It is compulsory for most national reinsurance companies to get legal support. There is no need to become independent from compulsory supports,” said Fikru adding that the company will not back track from covering PVT (Political violence and Terrorism) especially after claims surged following the political conflict in Ethiopia.
“There is a growingly strong demand for PVT. We are working to increase more clients seeking to buy the product,” said Fikru.
Ethio Re had an average underwriting margin of eight percent over the past three years. Net profit was strengthened by investment income, which amounted to 155 million birr in 2021, resulting in a net profit after tax of 193 million birr and an operating margin of 30 percent.
Nevertheless, the rating might improve if Ethio Re achieves at least 10 percent geographic business diversification outside Ethiopia, or improve its sophistication of capital management. To the contrary, the rating might also dwindle, owing to material reduction in earnings, and liquidity dropping below the expected level.
In a bid to improve its weakness weighted on the report, Ethio Re has rolled out a new strategy dubbed ‘Vision 2030.’ The company envisages consolidating its Ethiopian market in the first two years, and will embark to new markets in east Africa and Sub-Saharan Africa, in the next three years. In the last four years of 2030, the company plans to hold a strong market share in Africa, becoming among the top ten Reinsurers in Africa.