LONDON – AUGUST 22, 2024 09:39 AM (EDT) AM Best has assigned a Financial Strength Rating of B (Fair) and a Long-Term Issuer Credit Rating of “bb” (Fair) to Ethiopian Reinsurance S.C. (Ethio Re) (Ethiopia). The outlook assigned to these Credit Ratings (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 that is comfortably at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR).
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, benefiting from internal capital generation and capital injections from its shareholders. An offsetting rating factor includes Ethio Re’s exposure to the high levels of economic risk and very high levels of political and financial system risks in Ethiopia, where the vast majority of its business is sourced and all of its invested assets are located.
In AM Best’s opinion, these risks are mitigated partially by the company’s conservative investment portfolio by asset class, with 84% of total investments held in cash and deposits at year-end June 2023, therefore limiting Ethio Re’s exposure to market risks and the ongoing re-structuring of Ethiopian sovereign Eurobonds. Ethio Re has a track record of adequate operating performance, demonstrated by a five-year (2019-2023) weighted average return on equity (ROE) of 16%. AM Best notes that ROE should be viewed in light of Ethiopia’s moderate levels of interest rates, which have averaged approximately 7% over the same period.
Underwriting performance has been solid, albeit somewhat volatile, evidenced by a five-year weighted average combined ratio of 97.3%. Investment income remains the primary driver of overall earnings. Ethio Re is a small reinsurer by global standards, with gross written premium of USD 35 million at year-end June 2023. 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.
