12 January 2014

Ethiopia: Berhan Insurance Faces Tough Challenge to Satisfy Paid-Up Capital Directive

The insurance company revealed healthy profits, but a drop in the liquidity level signals a tough road ahead

Berhan Insurance S.C - a late entrant into the insurance industry - has reported a net annual profit of 2.18 million Br.This comes after suffering a loss of 4.2 million Br in its first year.

The Company has earned an underwriting surplus of 10.58 million Br, which is an increase of 301pc when compared to last year. It also earned 1.81 million Br in investment income - an increase of 308pc.

Berhan managed to collect 53.42 million Br from premiums, which is a 46 pc increase. Out of this, 33.3pc has been ceded from reinsurers, which is higher than last year.

The Insurers' total assets have also moved up to 57.33 million Br, out of which 31.13 million Br is invested in interest bearing accounts and 7.1 million Br is invested in shares. These investments account for 66.8pc of the total assets of the Company.

But it was not all smooth running for Berhan, according to its annual audited report. The Company, for instance, paid and provided for claims to the sum of 19.6 millionBr.This accounts for 64.9pc of the underwriting surplus earned before claims.

"With a premium retention rate far lower than other insurance companies, the size of the claims is disappointing," says Abdulmena Mohamed, an account manager at the Portbello Group.

For Hailemichael Kumsa, the managing director of Berhan, the Company cannot control cars and there is nothing it could do about it.

"Most of our insurance, the overwhelming majority, comes from cars, which for us are uncontrollable," he says.

He also cites the stiff completion among the insurance companies as another reason.

"That pushes Berhan to offer a lower premium to its customers," he said. "This will increase the amount we pay in claims."

Liquidity analysis shows that the liquidity level of Berhan has gone down considerably. Cash and bank balances have declined to 2.21 million Br from 4.29 million Br; liquid assets to total assets ratio has gone down to 3.85pc from 11.6pc and liquid assets to current liabilities has decreased to 10.43pc from 33.7 pc.

"The liquid resources at Berhan are lower than other insurance companies," says Abdulmena. "Maintaining sufficient liquid resources for the smooth running of operations should be given appropriate attention as investment activities."

Nevertheless, Hailemichael begs to differ from Abdulmena. He says this was done purposely by placing the Company's money in a time deposit, rather than a current deposit, in order to earn larger interest from the saving.

"Another reason is that we have increased our investment in Berhan International Bank," Hailemichael told Fortune.

Berhan has increased its paid up capital by 11.4pc to 17.4 millionBr.The capital and reserves to total assets of Berhan have gone down to 28.1pc from 32.9pc of total assets.

Still, Berhan has strong capital for its current level of operation. As there is a directive that compels general insurance companies to have paid up capital of 60 million Br by 2015. Berhan needs to increase its paid up capital by 185pc every year.

"This reveals that Berhan has a tough task in raising capital ahead," cautions Abdulmena. "Decent returns for shareholders may take a couple of years."

Primarily, for this to be realised, the loss brought forward should be covered first. Secondly, the capital increase required is huge, explains Abdulmena.

The Company was established in October 2010 and starting operations in June 2011. In June 2013, Berhan had a subscribed and paid up capital of 31.1 million Br and 17.4 million Br, respectively.

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