KEY RATING DRIVERS
The rating of Turk P&I reflects a less established business profile compared with other Turkish insurers, its investment risks that are skewed towards the Turkish banking sector, and substantial exposure to the Turkish economy. The rating also reflects Turk P&I's strong liquidity profile, very strong but potentially volatile earnings, and adequate capitalisation.
Fitch ranks Turk P&I's business profile as 'moderate' compared with other Turkish insurers', despite the company's small size, limited history and less established business lines. This is because we believe its ownership structure, equally divided between public and private interests, and its strategic role in Turkey, are positive for its business profile. The company's increasing international diversification also benefits the business profile.
Investments on Turk P&I's balance sheet mostly comprise deposits in Turkish banks, with some concentration on a single state-owned bank. This indicates a high exposure to the banking sector in Turkey, although the company started to diversify its investment portfolio since 2020 towards bonds. Liquidity is very strong for the rating.
The pandemic impact on Turk P&I's earnings was manageable in 2020, despite a higher cost of claims and lower premiums due to lockdown measures; and lower maritime trade volumes worldwide. Its 2020 results were mostly impaired by non-pandemic-related claims, including some hull and machinery (H&M) engine failure claims, leading to a worsened combined ratio of 99% (2019: 74%), and a lower return on equity (ROE) of 46% (2019: 59%). However, these results remain very strong for the rating, and we expect they will continue to support the company's very strong expected growth in 2021 and 2022.
Turk P&I scored 'Adequate' under Fitch's Prism Factor-Based Capital Model (FBM), compared with 'Strong' at end-2019, and its solvency ratio decreased to 103% at end-2020 from 124% at end-2019, mostly because of higher claims. Despite these deteriorations, we believe capitalisation supports the rating, and we expect sustained capital levels in 2021 and 2022.
We regard Turk P&I's reinsurance protection programme as adequate, with strong credit quality of reinsurers and coverage for both protection and indemnity (P&I) and H&M risks, and we believe the company's retained catastrophe exposure is manageable. Its limited history on the performance of its reinsurance coverage somewhat constrains our assessment of reinsurance-and-risk mitigation.
The National IFS Rating of 'A+(tur)' largely reflects Turk P&I's regulatory solvency level being consistently over 100%, and very strong earnings. However, the rating is constrained by the company's weak business profile versus other Turkish insurers'.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade of the IFS Rating:
--Material improvements in the Turkish economy or the company's investment quality, as reflected in an upgrade of Turkey's Long-Term Local-Currency Issuer Default Rating (IDR).
-- Sustained profitable growth, with a regulatory solvency ratio comfortably above 100%, along with a sustained business development in high-quality international markets.
Factors that could, individually or collectively, lead to negative rating action/downgrade of the IFS Rating:
--Material deterioration in the Turkish economy or the company's investment quality, as reflected in a downgrade of Turkey's Long-Term Local-Currency IDR.
-- Business-risk profile deterioration, due to, for example, sharp deterioration in the maritime trade environment.
Factors that could, individually or collectively, lead to positive rating action on/upgrade of the National IFS Rating:
-- Sustained profitable growth with a regulatory solvency ratio comfortably above 100%.
Factors that could, individually or collectively, lead to negative rating action on/downgrade of the National IFS Rating:
-- Business-risk profile deterioration, due to, for example, inability to meet its growth targets and maintain ROE above inflation.
--Regulatory solvency ratio below 100% for a sustained period.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
| ENTITY/DEBT | RATING | PRIOR |
| Turk P ve I Sigorta A.S. | Ins Fin Str | BB- | Affirmed | BB- |
| | Natl Ins Fin Str | A+(tur) | Affirmed | A+(tur) |
Additional information is available on www.fitchratings.com