OREANDA-NEWS. Fitch Ratings Indonesia has affirmed PT Tugu Reasuransi Indonesia's (Tugu Re) National Insurer Financial Strength (IFS) Rating at 'A(idn)' with a 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 affirmation reflects Tugu Re's continued business concentration in Indonesia and small overall market share. It also reflects the company's weak but improving capitalisation, liquid investment portfolio, and overall healthy operating performance.

Almost 100% of Tugu Re's underwriting business is sourced from Indonesia and around 95% of the business from the non-life segment. This leaves the company exposed to greater volatility in its underwriting business because Indonesia is designated as a catastrophe-prone market.

The company is still considered small by market size, accounting for around 5% of total reinsurance gross written premium in Indonesia (including overseas cession) at end-2015, compared with around 3% at end-2011. The company is also small compared with its local peers in terms of equity and net premium written size.

The company's shareholders injected additional capital in early 2015, which helped to mitigate increased risks from business growth. The company's risk-based capital ratio at end-2015 was 185.5%, an improvement from 142.5% at end-2014 and in excess of the minimum regulatory requirement of 120%.

The company's investment portfolio remained liquid with fixed-income securities (mostly classified as available for sale), cash, and bank deposits accounting for more than 80% of its invested assets at end-2015. Similar to other Indonesian reinsurers, some of the company's cash holdings are placed in banks that are rated below investment-grade or are unrated. The portion of Tugu Re's stock portfolio increased slightly to around 11% at end-2015. Overall, the company holds substantial risky assets in its portfolio relative to its adjusted equity and its peers' portfolios.

Tugu Re's net income rose to IDR189.93bn in 2015 from IDR70.17bn in 2014 due to positive underwriting results and supported by stable investment income. The company's combined ratio (sum of loss ratio and expense ratio of the non-life business) improved to 97.2% as of end-2015 from 100.8% at end-2014. The company aims to enhance the stability of its underwriting businesses, especially the life segment, which has been contributing to a high loss ratio in the past several years.

The Stable Outlook reflects Fitch's expectation that Tugu Re will make an effort to stabilise and manage the risks of its underwriting businesses, and it will maintain a prudent retrocession programme and sufficient capital buffer to support its operations.

RATING SENSITIVITIES
Key rating triggers for an upgrade include continued improvement in operating performance with the ability to sustain its operating profitability as indicated by combined ratio that is consistently below 95%. The rating may also be upgraded if Tugu Re improves its regulatory risk-based capital (RBC) ratio to above 180% and enhances risk management, including reserving techniques.

Key rating triggers for a downgrade are a sustained drop in Tugu Re's capital (with RBC ratio that is consistently below 130%), which would affect its ability to support underwriting risks. Deterioration in the company's operating performance with a combined ratio of above 110% on a prolonged basis would also be negative for its ratings.