RPT-Fitch Upgrades Tugu Pratama Indonesia to IFS 'AA(idn)'

Tue May 13, 2014 4:07am EDT

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May 13 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded Indonesia-based PT Tugu Pratama Indonesia's (Tugu Pratama) National Insurer Financial Strength (IFS) Rating to 'AA(idn)' from 'AA-(idn)'. The Outlook is Stable.

'AA' National IFS Ratings denote a very strong capacity to meet policyholder obligations relative to all other obligations or issuers in the same country, across all industries and obligation types. The risk of ceased or interrupted payments differs only slightly from the country's highest rated obligations or issuers.

KEY RATING DRIVERS

The upgrade reflects Tugu Pratama's continued favourable underwriting results and improving capitalisation.

Its pre-tax return on assets and return on adjusted equity have improved consistently to 5.8% and 16.5% respectively at end-2013 from 2.2% and 1.6% respectively at end-2010 (For the pre-tax return on assets, total assets was calculated using Bank Indonesia's year-end currency translation rates). The company's combined ratio has remained favourable and improved to 86.0% at end-2013 from 90.7% at end-2012 due to better expense management and stable flow of commission income.

Tugu Pratama's capitalisation is solid as measured by its risk-based capitalisation (RBC) ratio, which improved to 533.0% at end-2013 from 350.0% at end-2012. The ratio remained at above 500% at end-March 2014. Tugu Pratama is wholly financed by equity, with no debt issuance.

The company's rating also benefits from major state-owned oil and gas company PT Pertamina's (BBB-/Stable) ownership of a 65% stake in it. Fitch believes that Pertamina would likely provide capital support to Tugu Pratama should the need arise.

Tugu Pratama's premium sustainability and business portfolio continues to be challenged in view of its exposure to corporate and oil and energy insurance risks, which accounted for 46% of its premium income at end-March 2014. Its management says the company intends to create a more balanced business portfolio by expanding its distribution network, enhancing its product development and increasing its business partnerships.

The Stable Outlook reflects Fitch's expectation that Tugu Pratama will continue to maintain sufficient capital buffer relative to its operating portfolio and prudent reinsurance management to protect itself from potential catastrophe losses.

RATING SENSITIVITIES

Key rating triggers for further upgrades include the company's ability to maintain its current favourable underwriting margin (that is, a combined ratio that is consistently lower than 90%), and its successful diversification away from the energy business while maintaining a solid capital position and improving its premium sustainability management.

Key rating triggers for a downgrade include a significant drop in Tugu Pratama's capital over a sustained period (that is, an RBC ratio that is consistently below 300%), which adversely affects its operating profile and/or its ability to support its underwriting risks. Weakening risk management and a sharp rise in Tugu Pratama's after-reinsurance underwriting risks relative to its equity would also be negative for its ratings.

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