Fitch upgrades rating of oil and gas insurance firm Tugu Pratama
Friday, September 30 2011 - 02:05 AM WIB
The upgrade considers the strategic status of Tugu Pratama within its immediate major shareholder, PT Pertamina (long-term foreign-currency issuer default rating 'BB+'/Positive), which has a 65 percent stake in the subsidiary.
Following the assignment of its rating to PT Pertamina in May 2011, Fitch has, using its insurance rating criteria, determined a single-notch uplift to the subsidiary based on its strategic importance to the group.
?The rating reflects Tugu Pratama's strong business profile in Indonesia's oil and gas insurance sector, solid capital position, strong liquidity, and reinsurance coverage to mitigate underwriting risk,? it said.
Tugu Pratama's risk-based capitalization as measured by Fitch is solid, mitigating underwriting risk and asset volatility although slower surplus growth and an increase in non-admitted assets from investments in stocks moderated the company's statutory risk-based capitalization to 282 percent in 2010 from 316 percent in 2009.
The insurer allocates a significant portion of its invested assets in cash and time deposits to support sporadic cash outflows stemming from its insurance liabilities. The ratio of cash and time deposits to net claim reserves was about 3.04 times, based on 2010 fiscal year figures.
Partially offsetting these positive attributes include a volatile underwriting experience and a high expense ratio.
Its underwriting results in 2010 were hit by unfavorable claim experience from the fire and offshore energy business and higher claim reserves of an insurance portfolio underwritten by its fully owned subsidiary, Tugu Insurance Company, in Hong Kong.
Its combined ratio on a consolidated basis increased to 138.3 percent in 2010 from 87.4 percent in 2009. Regardless of stable investment income from its invested assets, the underwriting deficit weakened its overall return on average assets to 0.9 percent in 2010 (2009: 4.5 percent).
Given the volatile nature of its insurance book of business, Fitch expects Tugu Pratama to retain capital buffer above minimum requirements to absorb potential shocks from underwriting.
Dramatic increase in after-reinsurance underwriting risk relative to capital, and/or sharp reduction in statutory risk-based capitalization below 175 percent over a sustained period may lead to a downgrade.
Conversely, Fitch may consider a single-notch upgrade if the company is able to improve its underwriting performance, i.e. a combined ratio consistently lower than 100 percent (roffie).