News Middle East10 Sep 2019

Turkey:Asset risk is a drag on insurers' credit profiles

| 10 Sep 2019

The credit quality of the Turkish insurance sector may continue to weaken given the macro-economic pressure on the quality of insurers' assets, Fitch Ratings says in a new report. Asset quality is likely to remain the key rating weakness for Turkish insurers in the medium term.

In its report ,"Turkish Insurance: Asset Risk a Drag on Credit Profiles", Fitch says that about two-thirds of the sector's assets are held as cash deposits in banks whose Local-Currency Issuer Default Ratings (LC IDRs) are mostly 'BB-' following widespread bank downgrades this year. Most of the banks' ratings are on Negative Outlook, signalling a risk of further downgrades, which would cause insurers' asset quality to weaken further.

Insurers' holdings of Turkish sovereign debt are also an important influence on their asset quality. Fitch downgraded the Turkish sovereign's LC IDR to 'BB-'/Negative in July 2019.

Foreign owned

About 70% of Turkish insurers are partly or fully foreign-owned, an increasingly important benefit to their credit profile given the decline in their asset quality, which could lead to capital depletion. Insurers with a strong foreign parent are likely to have greater scope for financial support to reinforce their capital than domestically-owned insurers, whose owners may be constrained by the local economy.

Fitch believes that foreign owners are likely to remain committed to the market as it has long-term growth potential despite the present macro-economic weakness.

Motor third-party liability business

The price cap on compulsory motor third-party liability (MTPL) insurance introduced in 2017 has left Turkey's motor insurance market in flux and is proving credit negative for the sector. The cap has led to underwriting losses, causing several insurers to slow their MTPL growth. Insurers that grow at below-average rates in MTPL business could suffer a weakened overall market position as MTPL is Turkey's largest insurance business line. However, those that maintain their position are at risk of continued underwriting losses and shortfalls in their reserves.

Investment

Turkish non-life insurers rely on investment income to support their profitability, particularly interest on bank deposits. The benchmark interest rate was cut to 19.75% from 24% in July 2019, and while this is still high in nominal terms, it is unlikely to be enough to generate an above-inflation return on equity (ROE) for the non-life sector given weak prospects for MTPL underwriting profitability and high inflation (about 15% in August 2019). Fitch estimates that the sector's ROE was 18% in 2018, compared with inflation of about 20%, and the combined ratio was 106%, significantly worse than breakeven (100%).

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