At the same time, the agency affirmed its 'B' long-term issuer credit and insurer financial strength ratings on Milli Re, and also raised its Turkiye national scale rating on Milli Re to 'trA' from 'trBBB+', according to the S&P’s report.
According to the rating agency, over the past 12 months, Milli Re has significantly improved its shareholder's equity while maintaining its market position and improved operating performance. The positive outlook reflects S&P’s expectation that Milli Re will continue to improve its competitive position and capital adequacy over the next two years.
The rating agency believes the company has adequate retrocession protection, backed by highly rated international reinsurers to cover its high natural catastrophe exposure. S&P therefore expects that, over 2025-2027, Milli Re's capital adequacy will remain above the 99.50% level, according to the risk-based capital model.
Milli Re's net combined (loss and expense) ratio (on a consolidated level) has also improved significantly to 115% in 2024 from 135% in 2023. Historically, high inflation and the weakening Turkish lira have kept Milli Re's underwriting performance highly volatile, such that net combined ratios often exceed 100%. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) The underwriting loss is offset by the company's high investment income, supported by high interest rates and the revaluation of invested assets and affiliates. Therefore, on a net income basis, Milli Re has consistently reported positive net income over the past five years, and the agency expects this to continue for the next two years.
According to S&P, Milli Re's concentration of investments in Turkiye heightens its risk exposure. The company holds most of its investments in local financial institutions, the credit quality of which is predominantly speculative grade. As a result, the average asset quality of its portfolio is low. In addition, while Milli Re's management aims to manage foreign-exchange-volatility risk by holding some long positions in foreign-currency-denominated assets that match its liabilities, the rampant depreciation of the lira in recent years continues to affect underwriting performance.
“We consider Milli Re to be moderately strategically important to its parent IsBank, one of the largest commercial banks in Turkiye, which owns an 87.6% stake in Milli Re. We think IsBank has capacity to provide financial support to Milli Re, if needed. That said, our ratings on Milli Re are based on its stand-alone credit profile of 'b'”, the report says.
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