Fitch Ratings has assigned Turk P ve I Sigorta A.S. (Turk P&I) a 'BB-' Insurer Financial Strength (IFS) Rating. The Rating Outlook is Stable. A full list of rating actions is below.

KEY RATING DRIVERS

The ratings incorporate Fitch's current assessment of the impact of the COVID-19 pandemic, including that on the company's business environment, asset risks, capitalization and earnings prospects. The Stable Outlook reflects our view that the company's credit fundamentals will remain resilient despite some negative pressures from the pandemic.

The IFS Rating reflects Turk P&I's weak business profile compared with other Turkish insurers', investment risks that are skewed towards the Turkish banking sector. It also factors in a strong liquidity profile, strong but potentially volatile earnings, and adequate capitalization. We rate Turk P&I based on its own standalone credit profile, but also take into consideration its ownership structure, equally divided between public and private interests, and strategic role in the Turkish economy, which we view positively.

Fitch ranks Turk P&I's business profile as 'moderate' compared with other Turkish insurers', despite its small size, limited history and less established business lines. This is because we believe its ownership and its strategic role in Turkey are positive for its business profile. Given the 'moderate' ranking, we score Turk P&I's business profile at 'b' under our scoring guidelines. Turk P&I was established in 2014 by the state as a marine insurance specialist and Turkey's first local protection and indemnity (P&I) insurance provider. The company also underwrites hull and machinery (H&M) insurance, which accounted for over half of its premiums in 2019.

Turk P&I's investments are concentrated in deposits in a single state-owned bank. Investment risks could be heightened by deterioration in the credit quality of Turkish banks amid the pandemic. Liquidity is strong for the rating, since all its investments are in bank deposits.

Turk P&I has delivered very strong earnings in the past three years, which we view as a rating strength. However, premium levels and profitability are closely tied to global and local trade conditions, which have been affected by the pandemic. Moreover, its earnings have been reliant on rapid growth and foreign-exchange (FX) and investment gains, implying potential earnings volatility.

Capitalization supports the rating, with a score of 'Strong' under Fitch's Prism factor-based model and a regulatory solvency ratio comfortably above 100% at end-2019. We expect the pandemic to put pressure on organic capital generation. FX risk is manageable, as foreign-currency (FC) assets exceed FC liabilities.

We regard Turk P&I's reinsurance protection program as adequate, with strong credit quality of reinsurers and coverage for both 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)' with a Stable Outlook, largely reflects Turk P&I's regulatory solvency level being in line with that of higher-rated peers on the National scale, and very strong but potentially volatile earnings. However, the rating is constrained by the company's weak business profile versus other Turkish insurers'.


RATING SENSITIVITIES

The ratings remain sensitive to a material change in Fitch's rating-case assumptions with respect to the COVID-19 pandemic. Periodic updates to our assumptions are possible given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is made available on the medical aspects of the outbreak.

Factors that could, individually or collectively, lead to positive rating action/upgrade on the IFS Rating:

• A material positive change in Fitch's rating assumptions with respect to the COVID-19 impact.
• Material improvements in the Turkish economy or the company's investment quality, as reflected in an upgrade of Turkey's Local-Currency Issuer Default Rating (IDR).
• Sustained profitable growth while its regulatory solvency ratio remains comfortably above 100%.

Factors that could, individually or collectively, lead to negative rating action/downgrade on the IFS Rating:

• A material adverse change in Fitch's rating assumptions with respect to the COVID-19 impact.
• Material deteriorations in the Turkish economy or the company's investment quality, as reflected in a downgrade of Turkey's Local-Currency IDR.
• Deterioration in the company's business risk profile, due to for example further deterioration in the maritime trade environment.

Factors that could, individually or collectively, lead to positive rating action/upgrade on the National IFS Rating:

• Seasoning of Turk P&I's business model over time, through sustained profitable growth while its regulatory solvency ratio remains comfortably above 100%. An upgrade is unlikely in the near term given the company's current business profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade on the National IFS Rating:

• Deterioration in the company's business profile, due to for example inability to meet its growth targets and maintain return on equity above inflation levels.
• Regulatory solvency ratio below 100% for a sustained period.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions 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.