OREANDA-NEWS. Fitch Ratings has affirmed Turkey-based Mapfre Genel Sigorta's (MGS) National Insurer Financial Strength (IFS) rating at 'AA(tur)'. The Outlook is Stable.

The rating reflects the strong position of MGS in the Turkish non-life insurance market, solid underwriting performance, a prudent investment policy, and Fitch's view of its importance to its ultimate parent, Mapfre SA (Issuer Default Rating BBB+/Stable). Offsetting these factors are MGS's somewhat weakened capitalisation, the competitive pricing environment of the Turkish non-life insurance market and risks associated with MGS's rapid growth over the past five years relative to peers.

KEY RATING DRIVERS

MGS's rating benefits from a single-notch uplift for Mapfre SA's ownership and for the parent's expertise in corporate governance, operational support and risk management. Fitch believes that capital support would also be provided to MGS by the parent, should it be required.

MGS's regulatory solvency has declined in recent years following rapid premium growth. It temporarily dipped below the required minimum 100% in 1H15 before recovering to 102% at end-2015. Under the Turkish solvency regime, which uses a prudent risk-based capital measure, Fitch views MGS's capital as adequate for its rating.

MGS maintained its profitability in 2015 and reported net income of TRY33m. Its underwriting performance was healthy in 2015 with a Fitch-calculated combined ratio of 97%, despite market-wide deterioration in underwriting profitability driven by rising claims inflation and legislative changes.

Fitch expects that the new legislation introduced in 2016 will curb motor third party liability (MTPL) claims costs while substantial premium increases throughout 2015 will support overall profitability in 2016. However, profitability is likely to come under pressure from additional incurred but not reported (IBNR) reserves that the sector will need to book by 2019.

Changes in regulation on the calculation of outstanding claims reserves in January 2015 and an increase in the minimum wage by 30% in January 2016 resulted in a significant reserve gap in the Turkish non-life insurance sector. Given the significant amount of additional reserves required, the regulator has allowed insurers to book additional IBNR reserves gradually over a period of five years. MGS estimates that it will need additional TRY93m of IBNR reserves (as at end-2015) to be booked for MTPL by 2019. Fitch also believes that the recently introduced legislation on outstanding claims reserve discounting is likely to help alleviate pressure on the insurer's profitability and capital.

MGS's motor book grew strongly during 2015, driven by increasing market premium rates and the exit of certain international competitors from the Turkish motor market. Fitch remains cautious regarding MGS's recent expansion across motor lines as we believe there may be additional underwriting, pricing and reserving risks associated with rapid growth.

Fitch views MGS's investment policy as prudent, with the majority of assets held in cash and cash equivalents or Turkish treasury bonds.

RATING SENSITIVITIES

Key rating drivers that could lead to a downgrade include a decline in the regulatory solvency ratio to below 100% over a sustained period, deterioration in underwriting profitability (with the combined ratio above 110% for an extended period), or significant deterioration in MGS's competitive positioning in Turkey (decline in market share to below 4%). A decline in MGS's importance to Mapfre SA could also lead to a downgrade.

An upgrade is unlikely in the near term, given MGS's high rating on the Turkish national scale and its small contribution to Mapfre SA precludes an increase in the rating uplift.