Global ratings agency AM Best has revised the outlooks to stable from negative, and also affirmed the Financial Strength Rating of C (Weak) and the Long-Term Issuer Credit Rating of “ccc” (Weak) of Milli Reasurans Turk Anonim Sirketi (Milli Re) (Türkiye).
According to Best, the ratings reflect Milli Re’s balance sheet strength, which the agency assesses as very weak.
Best also cited Milli Re’s adequate operating performance, neutral business profile and marginal enterprise risk management, as the other key reasons behind the stable outlook.
It is important to remember that Milli Re has sizeable exposure to Türkiye, where it is headquartered and where the majority of its business and assets are located too.
Moreover, in Best’s view, economic, political and financial system risks in Türkiye are elevated.
Even though political uncertainty has reduced since the May 2023 elections, however, despite actions being taken by the central bank, economic conditions continue to remain challenging across the country.
The country is also grappling with high levels of inflation, as well as rapidly changing interest rates and a significantly de-valued currency.
The agency noted that the revised outlooks reflects Best’s expectation that Milli Re’s rating fundamentals will remain resilient against the backdrop of the challenging economic and political conditions that continue to persist in Türkiye.
In addition, Milli Re’s balance sheet strength is showcased by its consolidated risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), which remained at the very weak level at year-end 2022.
At the same time, the balance sheet strength assessment also considers Milli Re’s unconsolidated BCAR scores, which deteriorated in 2021 and 2022. Milli Re’s solvency—both consolidated and unconsolidated—is substantially impacted by its shareholding in a much larger insurance subsidiary, Anadolu Anonim Turk Sigorta Sirketi (Anadolu).
What we should also remember, is that Milli Re has a track record of adequate earnings generation, which is clearly showcased by consolidated and unconsolidated return on equity which exceeded 20% over the last five years (2018-2022).
Best also points towards underwriting performance, which continues to be a drag on earnings, demonstrated by a consolidated and unconsolidated five-year weighted average combined ratio of 125% and 145%, respectively.
Lastly, the depreciation of the lira has also had a considerable impact on unconsolidated underwriting results given that more than three quarters of Milli Re’s business is underwritten in foreign currency.
