(The following statement was released by the rating agency)
Jan 15 - Fitch Ratings has affirmed PT Tugu Reasuransi Indonesia's (Tugu Re) National Insurer Financial Strength (IFS) Rating at 'A(idn)' with Stable Outlook.
The rating reflects Tugu Re's steady business growth, healthy operating profitability and conservative investment mix relative to peers. The company's weak capital position and lack of geographical diversification remain key rating constraints.
Tugu Re recorded around 10.2% annualised gross premiums growth in the first half of 2012, according to unaudited accounts. Its return on average equity and pre-tax return on assets improved to 23.6% and 8.8%, respectively, at end-H112 from 20% and 6.5% at end-2011. This improvement was driven by a combination of stable investment return, a lower expense ratio and an absence of major catastrophes in Indonesia during the period.
Fitch believes Tugu Re's growth would be sustained by steady premium growth in a lowly penetrated Indonesian market and by favourable government regulation requiring insurers in the direct market to obtain automatic reinsurance support from domestic reinsurers.
Tugu Re's conservative investment portfolio comprises over 90% fixed income instruments and cash deposits. Fitch views positively the company's move to reduce its equity exposure to 4.2% at end-June 2012 from 13.2% at end-2011. While Fitch views Tugu Re's investment strategies to be conservative, the agency remains cautious over any material shift in its investment strategy leading to a significant increase in equity exposure.
Compared with its regional reinsurance peers, Tugu Re has limited geographical diversification with about 96% of gross written premiums sourced from the catastrophe-prone Indonesian market. Tugu Re's rating is also constrained by its weak capitalisation relative to its risk underwriting and operating profile. Its regulatory risk-based capital (RBC) ratio was 135% at end-November 2012 compared with the regulatory minimum of 120%.
Key rating triggers for an upgrade include sustained improvement in Tugu Re's profitability with a combined ratio consistently lower than 95% (end-June 2012: 89.28%), and strengthening capitalisation with RBC consistently above 220%. The rating may also be upgraded on account of enhanced risk management practice such as reserving techniques and business underwriting. Key rating triggers for a downgrade include a failure to maintain a statutory RBC ratio of above 130% on a sustained basis and a significant deterioration in profitability which may be brought about by worsening claims experience as reflected by its combined ratio being consistently above 110%.
Tugu Re is one of the four national reinsurance companies in Indonesia with an operating history of more than 20 years.