Fitch Affirms Tugu Pratama Indonesia at IFS 'AA(idn)'
'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 company's rating reflects Tugu Pratama's strong market presence and capital support, if needed, from its 65% shareholder, PT Pertamina (Persero) (BBB-/Stable), a major state-owned oil and gas company. It also takes into consideration Tugu Pratama's business, which is concentrated in the catastrophe-prone and competitive non-life insurance market in Indonesia, where the regulatory environment is evolving.
Fitch also considers the company's manageable investment risks, healthy operating profitability and sound capital buffer. Uncertainties over Tugu Pratama's premium sustainability and its business portfolio concentration in large corporate and oil and energy insurance risks constrain the rating.
Tugu Pratama is one of the five largest non-life insurers in Indonesia, capturing around 5.1% of market share by total industry gross written premiums as of 1H15. The company maintains a liquid investment portfolio, with around 70% of its invested funds in cash and deposits and fixed-income instruments as of end-November 2015. Tugu Pratama's stock portfolio has increased slightly relative to its total invested assets at end-November 2015 compared with end-2014. Nonetheless, its exposure to risky assets is considered manageable relative to its adjusted equity. As with other Indonesian insurers, some of the company's cash holdings are placed in banks that are rated below investment-grade or are unrated.
The company has continued to report consistent profitability in the last five years, supported by its positive underwriting margin and steady investment returns. Nonetheless, its operating performance, as measured by its combined ratio, has weakened to 92.9% at end-November 2015, from 71.8% at end-2014. This resulted from the company's larger claims relative to its considerably lower premium income, given weakening oil prices and fewer infrastructure projects by Pertamina in 2015.
Tugu Pratama's growth in gross written premiums slowed by around 7% at end-November 2015 compared with that at end-2014 on an annualised basis. The company expects business to pick up in 2016 with more infrastructure projects planned and efforts to expand its corporate retail business.
Tugu Pratama has maintained a sound capital buffer to support its underwriting businesses. Its risk-based capitalisation (RBC) ratio was 405.0% at end-November 2015, much higher than the regulatory minimum capital of 120%.
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
Upgrade rating triggers include the company's ability to maintain its current favourable underwriting margin (that is, a combined ratio that is consistently below 90%), and its successful diversification away from the energy business, while maintaining a solid capital position and improving its premium sustainability management.
Downgrade rating triggers include a significant and sustained drop in Tugu Pratama's capital (with risk-based capitalisation ratio that is consistently below 300%), which adversely affects its operating profile 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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