Fitch Upgrades Turk P&I's IFS to 'BB-'; Outlook Stable

Tue 17 Sep, 2024 - 12:01 PM ET

Fitch Ratings - Madrid - 17 Sep 2024: Fitch Ratings has upgraded Turk P ve I Sigorta A.S.'s (Turk P&I) Insurer Financial Strength (IFS) rating to 'BB-' from 'B+'. The Outlook is Stable.

The upgrade follows a recent similar action on Turkiye's sovereign ratings and Country Ceiling. The sovereign's ratings and Outlook are factors in our assessment of the insurer's industry profile and operating environment, company profile and investment risks.

The IFS rating reflects Turk P&I's 'Moderate' company profile compared with other Turkish insurers, investment risks skewed towards the Turkish banking sector and exposure to the Turkish economy, in line with the rest of the market. The rating also reflects Turk P&I's adequate earnings and weak, but improving, capitalisation.

Key Rating Drivers

Turkish Marine Specialist: Fitch assesses Turk P&I on its standalone credit quality, but also considers the ownership structure, which is equally divided between public and private interests. We believe the company's ownership and its strategic role in the Turkish economy are supportive of its credit profile. Turk P&I, Turkiye's first protection and indemnity (P&I) insurance provider, also underwrites hull and machinery (H&M) insurance, which accounted for around 70% of net premiums in 2023.

'Moderate' Business Profile: Turk P&I's 'Moderate' business profile is underpinned by increasing international diversification, in addition to its ownership and strategic role in Turkiye, despite its small size, limited history and less established business lines. Its business volumes grew strongly in 2023, supported by local laws, with a higher contribution from its international business.

Weak but Improving Capitalisation: The insurer's regulatory solvency ratio weakened to 65% at end-2023 from 90% at end-2022. This was driven by large claims due to storms in Marmara and the Black Sea regions, which significantly lowered prior-year profit and equity, as well as a strong rise in net premiums. Turk P&I implemented an increase in paid-in capital of TRY200 million in September 2024 and expects to restore the regulatory solvency ratio to over 100% by end-2024.

High Exposure to Banking System: Turk P&I's balance sheet comprises deposits in Turkish banks, with some concentration on a single state-owned bank as well as bonds issued by the government and domestic banks. This indicates a high exposure to the domestic banking sector, in line with the rest of the Turkish insurance market.

Adequate but Volatile Earnings: The insurer's earnings have been strong over the past five years and Fitch views its financial performance and earnings as a rating strength. However, earnings were reduced in 2H23 by large storm claims. In 1H24, Turk P&I reported a net income of TRY30 million (1H23: TRY70 million). Its profitability was strongly influenced by higher investment income due to sharply higher interest rates in 1H24 and foreign-exchange (FX) gains. Turk P&I receives most of its premium income and pays most of its claims in foreign currencies.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-- Business risk profile deterioration, for example, due to a sharp deterioration in the maritime trade environment.

-- Downgrade of Turkiye's sovereign rating.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

-- An improvement in the company profile assessment, for example, due to sustained profitable growth while maintaining its regulatory solvency ratio comfortably above 100%.

-- An upgrade of Turkiye's sovereign rating.

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

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

Rating Actions

ENTITY/DEBT	RATING	PRIOR
Turk P ve I Sigorta A.S.	LT IFS BB- Upgrade	LT IFS B+ Rating Outlook Positive Upgrade