KEY RATING DRIVERS
The ratings affirmation indicates TLI's 'Favourable' company profile, 'Strong' financial performance and 'Strong' capitalisation. However, the rating strength is offset by the rise of asset and investment risk and challenging operating environments.
Fitch ranks TLI's company profile as 'Favourable' as a result of the 'Favourable' business profile and the 'Moderate/Favourable' corporate governance profile, against that of all other Thai insurers. The insurer has a robust business franchise despite a moderate operating scale relative to regional insurers. TLI maintained the second-largest market share by total premiums written at end-2021. Its products remain comprehensive with robust distribution channels in agency and bancassurance capacity. Therefore, Fitch scores TLI's company profile at 'a-' under its credit-factor scoring guideline.
The 'Strong' capitalisation reflects our belief that TLI will maintain capital adequacy in line with its rating category. Its risk-based capital (RBC) ratio has been higher than 300%. Fitch estimates that RBC at end-2021 would not have changed materially from the 343% at end-3Q21, well above the 140% regulatory requirement. The insurer also scored 'Very Strong' under Fitch's Prism Model at end-2021.
TLI's earnings are robust despite subdued economic activity. TLI's three-year (2019-2021) average return on equity (ROE) was 10%, well above Fitch's expectation for IFS 'A' rated insurers. Earnings have benefited from offering less interest-sensitive products, a repricing strategy that has improved margins, and cost-saving initiatives since 2020.
TLI's risky assets ratio increased to 212% by end-2021 (2020: 189%) on higher allocations in equities and bonds rated below investment grade on the international scale, including the material exposure to sovereign bonds, which are scaled at 15% under Fitch's criteria. The level was much higher than our guideline for an 'A' rated insurer and pressured its ratings. Even so, TLI's investment asset allocation is liquid, in Fitch's view. Fixed-income securities and deposits were 80% of the total portfolio at end-2021.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IFS and National IFS
- A persistent drop in capitalisation, measured by a decline in the RBC ratio below 280% and deterioration in the Fitch Prism Model score below 'Strong' for an extended period;
- A prolonged weakening in profitability, indicated by ROE that is below 8%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IFS
- Maintenance of TLI's capital adequacy well into the 'Strong' level on a sustained basis, as measured by the Fitch Prism Model score; and
- A significant improvement in TLI's operating scale and business diversification; for instance, the insurer participates in many business lines, geographies and distribution sources.
National IFS
- An upgrade for TLI's National IFS is not possible as the 'AAA(tha)' National IFS Rating is already the highest score on the National Rating scale.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond 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.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
Source: Fitch Ratings