Bangkok--29 Apr--Fitch Ratings
Fitch Ratings has affirmed Thai Reinsurance Public Company Limited's (THRE) Insurer Financial Strength (IFS) Rating at 'A-' (Strong). The Outlook is Stable.
KEY RATING DRIVERS
The rating actions noted above are based on Fitch's current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions described below. These assumptions were used by Fitch to develop pro forma financial metrics for THRE that Fitch compared to both ratings guidelines defined in its criteria, and relative to previously established Rating Sensitivities for THRE.
The affirmation takes into account the reinsurer's 'Favourable' business profile compared with all other Thai non-life insurers, 'Strong' capitalisation and 'Good' investment and liquidity risk. THRE's credit profile is balanced by its volatile earning performance, which is affected by legacy unprofitable businesses.
Fitch regards THRE's sound capitalisation as its core rating strength, supported by a robust shareholder equity base relative to its insurance liabilities, but partly offset by pro forma rising coronavirus-related claims and exposure to risky assets due to financial market volatility. We expect THRE's pro forma capitalisation to remain commensurate with its rating. The reinsurer's assumed pro forma Prism Factor-Based Capital Model (FBM) Score of 'Very Strong', after incorporating the coronavirus impact, is beyond the rating sensitivity; its risk-based capital ratio would still be well above the 140% regulatory minimum.
The reinsurer's pro forma earning performance might moderately decline below our ratio guideline for 'A' IFS-rated insurers and below the rating sensitivity. The deterioration in the rating-case pro forma three-year average combined ratio to about 109% and softening return on equity to about 2% reflects a potential hike in coronavirus-related claims, but is partly balanced by lower losses from the motor line. In addition, Fitch expects THRE's combined ratio to decline from an ongoing phase-out of the legacy unprofitable business during 2020-2021. The reinsurer's earning risk should also be curbed by its contained exposure to health-related products of about 20% of total net premiums.
Assumptions for Coronavirus Impact (Rating Case):
Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro forma rating analysis discussed above:
Decline in key stock market indices by 35% relative to January 1, 2020.Increase in two-year cumulative high-yield bond default rate to 16%, applied to current non-investment-grade assets, as well as 12% of 'BBB' assets.Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400 basis points), coupled with notable declines in government rates.Capital market access is limited for issuers with senior debt levels of 'BBB' and below.A COVID-19 infection rate of 5% and a mortality rate (as a percentage of those infected) of 1%.For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5 percentage points, partially offset by a favorable impact from the auto line, averaging 1.5 percentage points.
RATING SENSITIVITIES
The ratings remain sensitive to any material change in Fitch's rating case assumptions with respect the coronavirus pandemic. Periodic updates to our assumptions are possible, given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. An indication of how ratings would be expected to be impacted under a set of stress-case assumptions is included at the end of this section to help frame sensitivities to a severe downside scenario.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material adverse change in Fitch's ratings assumptions with respect to the coronavirus impact.An increase in either Fitch's assumed pro forma or the company's actual combined ratio to above 103% for a prolonged period.A persistent drop in either Fitch's assumed pro forma or the company's actual capitalisation, measured by THRE's risk-based capital ratio to below 280% and deterioration in the Prism FBM score to below well into the 'Strong' level for an extended period.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A material positive change in Fitch's ratings assumptions with respect to the coronavirus impact.A positive rating action is prefaced by Fitch's ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the Thai non-life reinsurance industry and THRE.Consistently strengthening profitability in both Fitch's assumed pro forma and the company's actual performance, as indicated by a combined ratio of below 96%, with return on equity of above 10% on a sustained basis.The improvement of THRE's capitalisation level, with Fitch's Prism FBM score consistently maintained at well into the 'Extremely Strong' level based on both Fitch's assumed pro forma and THRE's actual result.
Stress Case Sensitivity Analysis
Fitch's stress case assumes a 60% stock market decline, a two-year cumulative high-yield bond default rate of 22%, high-yield bond spreads widening by 600 basis points and more prolonged declines in government rates, heightened pressure on capital market access, a COVID-19 infection rate of 15% and mortality rate of 0.75%, an adverse non-life industry-level loss ratio impact of 7 percentage points for COVID-19 claims, partially offset by a favorable 2 points for auto/motor.The implied rating impact under the stress case would be a downgrade of no more than one notch.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions 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.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com