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July 21 (The following statement was released by the rating agency)
Fitch Ratings has affirmed PT Tugu Reasuransi Indonesia's (Tugu Re) National Insurer Financial Strength (IFS) Rating at 'A(idn)' with Stable Outlook.
'A' National IFS Ratings denote a strong capacity to meet policyholder obligations relative to all other obligations or issuers in the same country, across all industries and obligation types. However, changes in circumstances or economic conditions may affect the capacity for payment of policyholder obligations to a greater degree than for financial commitments denoted by a higher rated category.
KEY RATING DRIVERS
The rating reflects Tugu Re's healthy operating performance underpinned by strong premium growth, sound investment return and the absence of major catastrophe events in Indonesia in 2013. The company's investment portfolio has remained liquid with cash equivalents and fixed income instruments forming the bulk of its total invested assets. The rating continues to be constrained by the company's weak capitalisation and high business concentration in Indonesia.
Tugu Re's combined ratio has consistently remained below 100% over the last five years and slightly improved to 96.4% at end-2013 from 98.4% at end-2012 due to manageable claims and stable operating expense management. The company's premium growth has remained sound at an average of more than 20% per year, supported by the growth of direct insurance premiums in Indonesia and regulations that require direct insurers to obtain reinsurance support from domestic reinsurance companies.
The company faces potential volatility in its underwriting business in view of the concentration of risk exposure to catastrophe-prone Indonesia. Indonesian risks represented almost 100% of Tugu Re's business at end-2013. Tugu Re can mitigate its catastrophe exposure by careful management of its underwriting and maintenance of a prudent retrocessionaires programme.
Tugu Re's capitalisation is considered weak relative to the company's business operations. Its risk-based capitalisation (RBC) ratio amounted to 126.7% at end-2013 (end-2012: 135.1%). The company plans to raise additional capital in 2014 and is making efforts to optimise its investment portfolio and enhance its claim settlement period to improve its capitalisation. Tugu Re has targeted its RBC ratio to be above 130% by the end of 2014.
The Stable Outlook reflects Fitch's expectation that Tugu Re will maintain sufficient capital buffer to support its operations and business expansion.
Key rating triggers for an upgrade include improvement in operating performance with the ability to sustain its operating profitability (with a combined ratio consistently below 95%). The rating may also be upgraded if Tugu Re improves its regulatory RBC to above 180% and enhances risk management, including reserving techniques. Key rating triggers for a downgrade are a failure to maintain a statutory RBC ratio above 130% on a sustained basis that would affect its ability to support underwriting risks, and deterioration in its operating performance with a combined ratio of above 110% on a prolonged basis.