Investment income is expected to remain the primary contributor toward overall earnings for Ethiopian Reinsurance (Ethio Re), says AM Best. This reflects Ethio Re's low net underwriting leverage and the favourable interest rates offered by domestic issuers in the country.
The local reinsurer has a track record of adequate operating performance, generating a return on equity ratio (ROE) of 17.1% for year ended 30 June 2024, AM Best notes.
The global credit rating agency added that ROE should be viewed in the context of Ethiopia’s high National Bank Rate, which has stood at 15% since August 2024.
Non-life underwriting performance has been robust, albeit subject to volatility, with the company generating a net/net combined ratio of 96.4% in 2024.
AM Best has affirmed Ethio Re’s Financial Strength Rating of ‘B’ (Fair) and the Long-Term Issuer Credit Rating of ‘bb’ (Fair). The outlook of these credit ratings is stable.
The ratings reflect Ethio Re’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management.
Ethio Re’s balance sheet strength is underpinned by its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), which was comfortably at the strongest level at fiscal year-end June 2024.
AM Best expects Ethio Re to maintain healthy capital buffers in excess of the strongest threshold as it continues to execute its strategic growth plans, benefitting from internal capital generation and capital injections from its shareholders.
Risks
An offsetting rating factor is Ethio Re’s exposure to high levels of economic risk and very high levels of political and financial system risks in Ethiopia, where the majority of its business is sourced and all of its invested assets are located.
In AM Best’s view, these risks are mitigated partially by the company’s conservative investment portfolio by asset class, which is weighted towards cash and deposits, therefore limiting Ethio Re’s exposure to market risks and the ongoing restructuring of Ethiopian sovereign bonds.
Business profile
Ethio Re is a small reinsurer by global standards, with insurance service revenue of $38m for the fiscal year ended June 2024. The company was established in 2016, and writes a portfolio of composite reinsurance business in Ethiopia and a select number of other African markets. The company benefits from privileged market access in Ethiopia, where over 95% of its revenue is generated, which includes mandatory cessions from local cedants and the first right of refusal on domestic business ceded.
The company has diverse shareholders, which currently comprise 17 insurance companies, seven banks, 80 individuals from different walks of life and one trade union. Insurers and banks hold more than 95% of the reinsurer.