Fitch Ratings has downgraded Anadolu Anonim Turk Sigorta Sirketi's (Anadolu Sigorta) Insurer Financial Strength (IFS) rating to 'B+' from 'BB-'.

The Outlook remains Negative.

Key Rating Drivers

The downgrade follows Fitch's similar action on Turkiye's Long-Term Local-Currency Issuer Default Rating (IDR) on 8 July 2022, and the subsequent downgrades of Turkish banks' ratings. The rating action on Anadolu Sigorta reflects the insurer's substantial exposure to Turkish financial assets and to the wider Turkish economy.

The downgrade of Turkiye's sovereign rating reflects Turkiye's spiralling inflation and economic policies leading to increased macroeconomic risks. As a result, Fitch has revised its assessment of the local insurance sector's industry profile and operating environment (IPOE). This in turn results in a weaker company profile for Anadolu Sigorta. Fitch tethers insurers' company profiles to the assigned IPOE range.

The IFS rating reflects Anadolu Sigorta's 'most favourable' company profile in Turkiye, substantial exposure to Turkish assets - notably government bonds and local-bank deposits - and adequate capitalisation. The rating also reflects adequate but pressured profitability and reinsurance protection.

Fitch views Anadolu Sigorta's overall company profile as 'most favourable' compared with other Turkish insurers, supported by the company's very strong position in the highly competitive Turkish insurance market. Anadolu Sigorta was the second-largest non-life insurer in Turkiye by premium income at end-3M22, with a market share of 11%.

Most of Anadolu Sigorta's investment portfolio comprised Turkish government and local banks' bonds and deposits in Turkish banks at end-3M22. The company's credit quality is therefore highly correlated with that of the sovereign and of Turkish banks. We estimate that Anadolu Sigorta's risky assets made up approximately 301% of capital at end-3M22.

Fitch estimates that Anadolu Sigorta's capitalisation, as measured by Fitch's Prism Factor-Based Capital Model, deteriorated to below 'Adequate' at end-2021, mainly due to a weakening of the credit quality of investments to the 'B' from 'BB' category. The company's regulatory solvency ratio was comfortably above 100% at end-2021.

Anadolu Sigorta's overall financial performance remained adequate, with net income of TRY197 million in 3M22 (3M21: TRY166 million). As in prior years, profitability was driven by the insurer's investment result, while its underwriting result significantly deteriorated, as measured by a reported combined ratio of 123% (3M21: 115%). This was driven by worsening performance across most lines of business, especially the motor third-party liability and motor damage businesses amid surging inflation and lira depreciation affecting the cost of spare parts, and the minimum wage increase that affects the calculation of the bodily injury claims.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A material deterioration in the company's investment quality and business-profile prospects, which could stem from a downgrade of Turkiye's Long-Term Local-Currency IDR or major Turkish banks' ratings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The Outlook could be revised to Stable if the Outlook on Turkiye's Long-Term Local-Currency IDR, or that on major Turkish banks' ratings, is revised to Stable.

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

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

(C) 2022 Electronic News Publishing, source ENP Newswire