Announcements Insurance Rating Alerts

GCR assigns Ethio Re initial international and national scale financial strength ratings of B- and AA(ET) respectively; Outlooks Stable

Rating action

Johannesburg, 09 December 2021 – GCR Ratings (“GCR”) has assigned Ethiopian Reinsurance Share Company (“Ethio Re”) initial international and national scale financial strength ratings of B- and AA(ET) respectively. Both ratings are on Stable Outlook.

Rated entity Rating class Rating scale Rating Outlook/Watch
Ethiopian Reinsurance Share Company Financial strength International B- Stable Outlook
National AA(ET) Stable Outlook

Rating rationale

The ratings assigned to Ethio Re balance the reinsurer’s strong financial profile with an intermediate business profile. The financial profile is characterised by very strong capitalisation, strong liquidity, and sound earnings. The reinsurer notably benefits from legal cessions in Ethiopia, anchoring a strong local competitive position, despite limited presence in other target markets.

Risk adjusted capitalisation is viewed to be very strong, underpinned by a large capital base catering for a low level of aggregate risk exposures. The reinsurer’s capital amounted to ETB1.2bn at FY21, resulting in a GCR Capital Adequacy Ratio (“CAR”) of 5.6x. Management expects the capital base to continue growing, supported by capital injections and profit retention. Note is taken of the intention to diversify asset allocation into riskier assets (equities and investment property). The effects of portfolio reallocation are likely to moderate the GCR CAR, albeit countered by the expected capital injection. As such, we expect risk adjusted capitalisation to be maintained within a similar range over the outlook horizon.

Liquidity strength was maintained over the review period, supported by a sizeable investment portfolio and conservative asset allocation. Accordingly, cash and stressed financial assets covered net technical obligations by above 2.2x at FY21, while coverage of operational cash requirements exceeded a prudent 12 months. The diversification into riskier assets may dilute liquidity strength although this is expected to be countered by the capital injections over the medium term.

Ethio Re displays sound earnings supported by healthy underwriting profitability and investment returns. The reinsurer recorded a 51% three-year average net incurred loss ratio (FY21: 46%); 9% operating expense ratio (FY21: 13%) and 32% commission ratio (FY21: 32%) over the same period. As such, Ethio Re had an average underwriting margin of 8% over the last three years (FY21: 9%). Going forward, underwriting profitability is expected to register within the same range, with benefits of scale efficiencies possible, should the reinsurer manage to grow as expected. Net profit was strengthened by investment income, which amounted to ETB155m in FY21, resulting in net profit after tax of ETB193m and an operating margin of 30% (three-year average: 28%).

Ethio Re enjoys compulsory treaty cessions and voluntary policy cessions in Ethiopia. The regulator instituted a directive for 25% compulsory cessions on treaty placements and 5% per-policy cessions to Ethio Re to support significant business uptake from the commencement of operations in FY16. The reinsurer also holds a right of first refusal on all facultative placements. We note that per-policy compulsory cessions ceased in FY21 but were reinstated on a voluntary basis through bi-lateral agreements with all market cedants, who are also shareholders, to continue for the next 5 years. Due to the business support arrangements, the reinsurer recorded a 22% compound annual growth rate over the review period (FY21: 30%). As such, Ethio Re evidences strong local competitiveness, compensating for limited presence in other markets, when compared to other regional peers. In addition, the business mix is viewed to be fairly diversified across four lines of business, despite the predominance of motor risks, constituting 27% and 39% of gross and net premiums respectively in FY21. Going forward, the reinsurer’s ability to expand its portfolio in line with strategic targets represents a key rating consideration going forward.

Outlook statement

The Stable Outlook reflects the expectation that current strength in the financial profile will be maintained, with the GCR CAR expected to be sustained well above 2.5x while the liquidity ratio could be maintained above 2.0x. Furthermore, no material changes are expected in the business profile.

Rating triggers

Upward rating movement may follow a sustained improvement in the business profile following significant geographic diversification of at least 10% contribution per country outside Ethiopia. An improvement in sophistication of capital management may also result in positive rating action. Conversely, negative rating pressure may stem from a material reduction in earnings, and liquidity below expected levels.

Analytical contacts

Primary analyst Sylvia Mhlanga Senior Analyst: Insurance Ratings
Johannesburg, ZA SylviaM@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scale, Symbols & Definitions, May 2019
GCR Country Risk Scores, October 2021
GCR Insurance Sector Risk Score, September 2021

Ratings history

Ethiopian Reinsurance Share Company

Rating class Review Rating scale Rating Outlook Date
Financial strength Initial/Last International B- Stable Outlook December 2021
Initial/Last National AA(ET) Stable Outlook December 2021

Risk score summary

Rating components & factors Risk scores
Operating environment 6.00
Country risk score 3.25
Sector risk score 2.75
Business profile (0.25)
Competitive position 0.25
Premium diversification (0.50)
Management and governance 0.00
Financial profile 3.75
Earnings 0.50
Capitalisation 2.00
Liquidity 1.25
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 9.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Receivables Any outstanding debts, current or not, due to be paid to a company in cash.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Current; ordinarily less than one year.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the entity and other reliable third parties to accord the credit ratings included:

• The audited financial statements as at 30 June 2021

• Four years of comparative audited financial statements to 30 June

• Budgeted financial statements to 30 June 2022, and

• Other related documents.



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