The affirmation reflects THRE's 'Favourable' company profile, 'Strong' capitalisation, and 'Good' investment and liquidity risk. It also takes into consideration THRE's temporarily weak underwriting performance in 2022 due to the Covid-19 pandemic and our expectation of recovering earnings from 2023 onwards.
KEY RATING DRIVERS
Solid Capital Strength: THRE's risk-based capital (RBC) ratio has recovered to 334% at end-September 2022 from 275% at end-2021, which is well above the 140% local regulatory minimum. We estimate its Fitch's Prism Model score to be in the 'Extremely Strong' category in 2022, despite the weak earnings from high claims in Covid-related health policies due to an unexpected major outbreak in early 2022. Its net premiums written to capital were around 1x at end-September 2022, within the range for its rating category.
Recovering Earnings in 2023: Fitch expects THRE's performance to stabilise in 2023, supported by lapsed Covid-19 policies and a hardening market. We forecast that its "combined ratio" will improve to 97%-102% in 2023, from 112% in 9M22 (average 2019-2021: 107%).
We expect the reinsurer to tighten underwriting terms and conditions to become more selective and review its retrocession arrangement to ensure adequate risk protection, which will help to improve profitability and limit losses. We also expect return on equity to recover to mid-single-digit levels, excluding the benefits of its subsidiary's IPO in 2023, which should support its current ratings level.
'Favourable' Company Profile: Fitch ranks THRE's company profile as 'Favourable' as a result of a 'Favourable' business profile and 'Moderate/Favourable' corporate governance compared with that of all other Thai non-life insurance companies. Its business profile is supported by its competitive position as the sole local non-life reinsurer with a consistent market share of 30%-40% of locally ceded premiums, and well-diversified business lines with the capacity to serve non-conventional businesses.
The business profile is balanced by its 'Least Favourable' operating scale as a reinsurance company and its volatile earnings performance. Fitch has therefore scored THRE's company profile at 'a-' under our credit-factor scoring guidelines.
Prudent, Liquid Investments: THRE adopts a conservative asset management strategy. More than 75% of its portfolio consists of cash, deposits and fixed-income instruments. The Fitch-calculated risky-asset ratio was 41% by end-September 2022, within the range for the 'A' to 'AA' rating category.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Weakening profitability, indicated by a combined ratio of higher than 103% for a prolonged period
- A persistent drop in capitalisation, measured by a decline in THRE's RBC ratio to below 280% and deterioration in the Fitch Prism score to below well into the 'Strong' level for an extended period
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- Consistent strengthening in profitability, indicated by a combined ratio of below 96%, with return on equity of above 10% for a sustained period
- Improvement in capitalisation, with the Prism score maintained at well into the 'Extremely Strong' level
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