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 capitalization.
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 capitalization supports the rating, and we expect sustained capital levels in 2021 and 2022.
We regard Turk P&I's reinsurance protection program 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'.