Anadolu Anonim Turk Sigorta Sirketi's financial performance improved in 2019 and during 1Q2020, with a return on equity (ROE; including equalisation provision) improving to 19% at end-2019 (2018: 17%), above the 2019 average inflation of 12% in Turkey (2018: 20%), and net profit increasing 21% year-on-year at end-1Q2020, notes Fitch Ratings.
The insurer's combined ratio improved to 104% at end-1Q2020 (2019: 111%, 2018: 113%), due largely to decreasing claims in motor insurance amid COVID-19-related lockdown measures.
Fitch Ratings has affirmed Anadolu Sigorta's Insurer Financial Strength (IFS) Rating at 'BB'. The outlook is stable.
Key rating drivers
The rating actions are based on Fitch's current assessment of the impact of the COVID-19 pandemic, including its economic impact, under a set of rating assumptions described below. These assumptions were used by Fitch to develop pro-forma financial metrics for Anadolu Sigorta that are compared with both rating guidelines defined in its criteria, and relative to previously established Rating Sensitivities for Anadolu Sigorta.
Under rating-case assumptions, Anadolu Sigorta's credit fundamentals remain robust and commensurate with current ratings. The affirmation of Anadolu Sigorta's IFS Rating reflects resilient capital levels under the pro-forma analysis, along with some manageable deterioration in asset quality and financial performance.
Anadolu Sigorta's investment portfolio is highly concentrated in cash and deposits in Turkish banks, which represented around 65% of total investments at end-2019. Anadolu Sigorta's credit quality is therefore highly correlated with that of Turkish banks and the sovereign, whose ratings are currently on stable outlook, and which largely drives Fitch's assessment of Anadolu Sigorta's investment and liquidity risks under rating-case assumptions.
Anadolu Sigorta's IFS Rating also reflects adequate capitalisation, as measured by a regulatory Solvency ratio comfortably above 100%, and a Fitch PRISM Factor-Based Model score of 'Adequate' at end-2019, and remaining at that level on a pro-forma basis.
Fitch expects the company's ROE to remain above inflation levels, while movements in the combined ratio should be marginal, because the rating agency believes that a sharp decrease in motor claims would largely mitigate an overall decrease in business volumes and potential increase in health insurance claims. Fitch believes Anadolu Sigorta adequately manages its foreign-exchange (FX) risk, with sufficient levels of foreign-currency-denominated investments and increased hedging since 2018.
The affirmation of Anadolu Sigorta's National IFS Rating largely reflects a robust franchise in Turkey, as the second largest non-life insurer in Turkey by premium income at end-1Q2020, and a regulatory Solvency ratio consistently over 100%.
Fitch views Anadolu Sigorta's overall business profile as 'favourable', against other Turkish market players, which is supported by the company's very strong and robust position in the highly competitive Turkish insurance market.
Assumptions for COVID-19 Impact (Rating case):
Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro-forma ratings analysis discussed above:
- Decline in key stock market indices by 35% relative to 1 January 2020.
- Increase in two-year cumulative high-yield bond default rate to 13%, applied to current non-investment grade assets, as well as 12% of 'BBB' assets.
- Downward pressure on interest rates.