Reinsurers / Indonesia Full Rating Report Rating National Insurer Financial Strength BBB+(idn) Sovereign Risk Long-Term Foreign-Currency IDR BBB Long-Term Local-Currency IDR BBB Outlooks National Insurer Financial Strength Stable Rating Sovereign Long-Term Foreign- Stable Currency IDR Sovereign Long-Term Local- Stable Currency IDR Financial Data 31 Dec 13 Gross premiums written (IDRbn) 191.4 Total assets (IDRbn) 334.5 Pre-tax return on assets (%) 17.8 ROAE (%) 21.2 NPW/equity (%) 64.0 Combined ratio (%) 56.8 Key Rating Drivers Niche Business Focus: s (Maipark) business in the reinsurance of earthquake risk means that it is highly exposed to catastrophe risk. Indonesia, which is more prone to natural disasters than other regional markets such as Singapore and Malaysia, accounts for almost all of Maipark s gross premiums. Strong Risk-Based Capitalisation: Maipark has maintained its strong capitalisation as measured by the company s local solvency ratio. At end-2013, its risk-based capitalisation (RBC) amounted to 833.1% well above the minimum regulatory requirement of 120%. Fitch Ratings believes that it is important for Maipark to maintain solid capitalisation to support its business growth and provide an adequate buffer against unprecedented shocks because of its specialist nature in earthquake insurance. Favourable Underwriting Results: Maipark has consistently shown positive underwriting results since its inception, supported by stable investment yields and steady premiums. The company s retrocession coverage has also shielded it from underwriting volatility caused by several earthquake losses. Maipark s profitability for 2013 remained strong, due to the absence of major earthquakes in Indonesia. Manageable Net PML: Maipark s net probable maximum loss (PML) is at a manageable level relative to its capitalisation. The company has arranged an excess-of-loss (XOL) retrocessionaires treaty to mitigate potential losses from major catastrophe perils. Maipark will continue to monitor and evaluate its risks and retrocessionaires programme to ensure adequate protection relative to its business portfolio. This is in light of the potential increase in risks exposure driven by the change in mandatory cessions in 2014. Liquid Investment Portfolio: Fitch believes Maipark s investment mix is very liquid, with more than 85% of investments in cash and deposits at end-2013. The company has minimal exposure to risky assets such as property and stocks relative to its capitalisation. Its investment funds adhered strictly to its investment guidelines, which are reviewed periodically and monitored closely. Change in Mandatory Cessions: The mandatory cession of earthquake risks received from all local general insurers and reinsurers, as stipulated by regulation, was changed to 15% of the total sum insured (TSI) with a maximum of USD3.5m on any one risk for all locations in Indonesia in January 2014 (previously between 5%-25% of TSI, maximum of USD2.5m). This will be likely to lead to a growth in Maipark s premium income; and Fitch expects the reinsurer to continue to benefit from the mandatory cessions arrangement. Related Research 2014 Outlook: Indonesian Insurance (November 2013) Analyst Cheryl Evangeline +62 21 2988 6814 cheryl.evangeline@fitchratings.com Rating Sensitivities Maintain Underwriting Margin: Key rating triggers for an upgrade include the company s ability to sustain its operating profitability, with a pre-tax ROA consistently above 20%, and further enhance its risk management capabilities such as reserving techniques and catastrophe modelling. Deterioration in Financial Fundamentals: Key rating triggers for a downgrade include significant deterioration in the reinsurer s premium sustainability, operating performance, and capital, relative to its business portfolio (i.e. statutory risk-based capital below 250% for a sustained period) due to excessive growth or claims from catastrophe losses. www.fitchratings.com 10
Market Position and Size/Scale Specialist Catastrophe Risk Reinsurer in Indonesia Change in mandatory cessions likely to drive premiums growth Reinsurer business license Focus on catastrophe risks Change in Mandatory Cessions Likely to Drive Premiums Growth Fitch expects Maipark to continue to benefit from the mandatory cessions arrangement, which requires Indonesian insurance companies to cede a proportion of every property earthquake risk underwritten by Indonesian insurance companies. From January 2014, the Financial Service Authority (OJK) required all general insurers and reinsurers in Indonesia to cede their earthquake risks to Maipark in the amount of 15% of the TSI, with a maximum of USD3.5m on any one risk for all location in Indonesia. This is in contrast to the previous mandatory cession of between 5% and 25% of TSI, with maximum of USD2.5m on any one risk. Maipark s risk exposure is likely to increase following this change, but the company has indicated it will constantly evaluate its exposure and maintain adequate retrocessionaires coverage to mitigate its catastrophe risks. The company has established a few optional additional layers to its existing XOL arrangement, which will be evaluated and triggered as its portfolio grows. Fitch will continue to monitor Maipark s retrocessionaires protection relative to its risk exposure. Reinsurer Business Licence Maipark has managed to increase its equity to meet new minimum equity requirements for a reinsurance company (by end-2014) of IDR200bn at end-2013, supported by its surplus growth. Subsequently, the Financial Services Authority (OJK) has approved Maipark s licence change from a general insurer to a reinsurance company effective 10 April 2014. Fitch views the change to be positive, as it marks a strengthening of Maipark s capitalisation, which could help provide more of a buffer in times of a catastrophe event. The agency does not expect this change to affect Maipark s rating and operations, as the company has been treated as a specialised catastrophe risks reinsurer and has operated as such since its establishment. Focus on Catastrophe Risks Maipark s business mainly entails providing earthquake insurance to cover property loss or damage and business interruption as a consequence of earthquake shock, fire following an earthquake, and volcanic eruption or tsunami. Maipark s business is more concentrated compared with other international reinsurers; the majority of business is generated from a single core market: Indonesia, which is relatively prone to catastrophes such as earthquakes, floods and forest fires. Around 99% of Maipark s gross premiums came from Indonesia, although the company has actively tried to broaden its premium source. Maipark has launched a mortgage earthquake insurance scheme, which provides protection from bad mortgage debts associated with losses from earthquakes and volcanic eruptions and participated in catastrophe pool managed by Asia Capital Reinsurance which underwrites catastrophe risk in the pan-asian region (excluding Indonesia). The proportion of business from non-compulsory cessions has grown from 3% of Maipark s total gross premiums as of end-2012 to 14% at end-2013. Related Criteria Insurance Rating Methodology (November 2013) 2
Figure 1 Ratings Range Based on Market Position and Size/Scale IFS Rating Category (national scale) Senior Debt Rating (national scale) Large market position and size/scale AAA(idn) AA(idn) AA(idn) A(idn) A(idn) BBB(idn) BBB(idn) <BBB(idn) Medium market position and size/scale Small market position and size/scale Source: Fitch Corporate Governance and Management Corporate governance and management are adequate and neutral for the rating. The board includes one independent commissioner out of six members. Several committees such as audit committee, remuneration committee and investment committee have been set up to assist the board of commissioners in overseeing Maipark s operations. The company s senior management possess extensive experience in the local insurance industry. Ownership is Neutral to Rating Maipark s establishment began with the setting up of a national earthquake insurance pool, known as Pool Reasuransi Gempa Bumi Indonesia (PRGBI) in 2003, with the mandate of ensuring cooperation by insuring special risks through a joint undertaking of all companies. PRGBI became on 1 January 2003. In 2003, all general insurance and reinsurance companies licensed to operate in Indonesia were required to become Maipark s shareholders; the amount of each shareholding had to be at least 0.5% of each company s invested funds as of 31 December 2002. Maipark is owned by 89 local non-life insurers and reinsurers (as of December 2013), with the eight largest 1 together holding a 60.7%. Maipark carries out research, development and innovation on natural disaster risks related to earthquake insurance in Indonesia in addition to its function as a reinsurer of special risks. These are implemented in the form of surveys, publications, seminars, and joint research used in the development of catastrophe models. Maipark received ISO 9001:2008 certification in 2013 for Quality Management System. 1 The eight largest shareholders are: PT Panin Insurance (18.41%), PT Tugu Pratama Indonesia (11.24%), PT Asuransi Astra Buana (6.59%), PT Asuransi Central Asia (6.33%), PT Asuransi Jasa Indonesia (5.62%), PT Asuransi Ekspor Indonesia (5.56%), PT Asuransi Sinar Mas (3.93%) and PT Asuransi Wahana Tata (3.00%) 3
Sovereign and Country-Related Constraints Fitch rates the local-currency sovereign obligations of Indonesia at BBB with a Stable Outlook, and the Country Ceiling is BBB. The local-currency sovereign rating expresses the maximum limit for the local-currency ratings of most, but not all, issuers in a given country. Currently, the ratings of Indonesian insurance organisations and other corporate issuers are not likely to be constrained by sovereign or macroeconomic risks, and in the specific case of Maipark, no constraints are in place. Industry Profile and Operating Environment Indonesian Non-Life Insurance Sector Faces Average Risk Levels Maipark is incorporated in, and operates primarily in, Indonesia. Fitch views the natural ratings range for the Indonesian insurance sector, based strictly on industry profile, as the AA(idn) though A(idn) category for IFS ratings (on a national scale). This reflects a developing, competitive market with a tendency to compete on pricing, offset by increasing product demand driven by an increasingly affluent population; it also reflects the industry s higher awareness of risk management and enhanced levels of regulation. The prospects for premium growth in the insurance sector are good, given the favourable macroeconomic prospects in Indonesia, and its relatively low penetration rate for insurance, compared with its global peers. An enhanced regulatory framework, for instance, in the area of imposing a higher minimum capital requirement on the industry, will gradually improve the industry s risk and capital management. Indonesia is particularly prone to natural catastrophes such as floods, earthquakes, and volcanic eruptions. Therefore, it has become increasingly important for Indonesian insurers to strengthen their risk management capability. This makes reserve practices and catastrophe risk management the focus of many general insurers corporate agenda. Fitch believes that catastrophe perils are likely to cause earnings volatility for Indonesian nonlife insurance companies in view of the increased frequency and severity of natural catastrophes in the past two to three years, especially those with smaller books of insurance business. Figure 2 Ratings Range Based on Industry Profile/Operating Environment IFS Rating Category Senior Debt Rating Category Non-life insurance Source: Fitch AAA(idn) AA(idn) AA(idn) A(idn) A(idn) BBB(idn) BBB(idn) BB(idn) 4
Peer Analysis Sound Profitability with Smaller Operating Scale Maipark has a much smaller operating scale than other local reinsurers and rated peers such as PT Tugu Reasuransi Indonesia (Tugu Re, IFS: A(idn)/Stable) because of its niche business focus as a national catastrophe reinsurer. Maipark s profitability has performed well against some of its rated peers in terms of combined ratio, ROAE, and pre-tax ROA, from the financial year ending December 2010 (FY10) to FY12. Its absolute capital level remains lower than that of many of its rated peers in Indonesia. Figure 3 Peer Comparison Insurer IFS rating Assets GWP GWP Pre-tax Combined Net (IDRbn) (IDRbn) growth a (%) ROAE a (%) ROA a (%) ratio a (%) leverage (x) S/Hs equity/ assets (%) NPW/S/Hs equity (x) PT Asuransi MAIPARK Indonesia BBB+(idn) 287.8 147.9 59.9 23.8 19.4 59.9 1.17 62.2 0.56 PT Asuransi Sinar Mas AA+(idn) 4,761.7 3,920.2 11.0 27.0 8.8 84.4 2.78 37.0 1.07 PT Asuransi Ekspor Indonesia (Persero) BBB / AAA(idn) 1,303.9 847.4 41.2 10.3 7.6 90.6 1.08 59.6 0.40 PT Asuransi Adira Dinamika AA(idn) 3,513.6 1,605.0 26.3 36.7 15.4 74.6 3.80 27.8 1.22 PT Tugu Pratama Indonesia AA(idn) 6,222.8 1,877.0 1.5 6.3 3.0 98.9 2.40 31.4 0.22 PT Tugu Reasuransi Indonesia A(idn) 1,037.2 611.6 18.6 24.9 7.4 96.0 5.71 23.1 2.39 a Three-year average (FY10-FY12). Other figures or calculations are based on 2012 data Source: Companies, Fitch s calculations 5
Figure 4 Capitalisation and Leverage 2009 2010 2011 2012 2013 Fitch's expectation Shareholders equity/total assets (%) 70.1 68.0 56.8 62.2 64.1 The company will maintain adequate capitalisation to Net leverage (x) 1.14 1.12 1.41 1.17 1.20 support underwritten risks. NPW to equity (x) 0.71 0.65 0.65 0.56 0.64 Adjusted debt/total capital n.a. n.a. n.a. n.a. n.a. Total financing commitment ratio n.a. n.a. n.a. n.a. n.a. Local solvency ratio (%) 428.8 571.8 820.6 790.1 833.1 Line denotes a change in accounting practice to IFRS Source: Company; Fitch s calculation Sound Regulatory Solvency Position Strong RBC ratio with no debt leverage Healthy capital management plan Small absolute capital base continues to restrict capacity Strong RBC Ratio with No Debt Leverage Maipark has gradually strengthened its capitalisation through ongoing surplus growth. The ratio of net written premium to shareholders funds amounted to a sound 0.64x well above the median ratio guideline for its rating category. Its RBC at the end of FY13 (FYE13) was commensurate with its rating category and amounted to a strong 833.1%, much higher than the minimum regulatory requirement of 120%. Capital quality is good, comprising wholly of equity capital and retained earnings. The company has no intention to issue debt in the short to medium term. The company s flexibility in sourcing additional funds may weaken should there be a severe earthquake in Indonesia that affects the financial strength of all local general insurers and reinsurers in view of its existing shareholding structure. Therefore, it is important for Maipark to maintain additional capital buffer to support potential underwriting volatility. Healthy Capital Management Plan Fitch believes that Maipark will continue to adopt a sound approach in managing its capital adequacy; the company s target is to maintain its statutory capital ratio at a level well in excess of the statutory minimum. There is no fixed dividend policy, but a significant proportion of the company s earnings have been retained to achieve surplus growth and maintain an adequate capital buffer. The historical dividend payout ratio is considered reasonable, averaging around 20% of net income over the last five years. Small Absolute Capital Base Continues to Restrict Capacity Maipark s absolute capital base is relatively small compared with some other domestic and international reinsurers in south-east Asia, even though it has more than doubled over the last five years. Maipark s risk-retention ratio has averaged around 71.7% over the past five years, showing that it somehow relies on retrocession coverage to support its underwriting and mitigate excessive catastrophe risk. Maipark s underwriting might be affected by any change in terms and availability of retrocession coverage in the region, in view of the reliance its retrocession coverage. 6
Figure 5 Financial Performance and Earnings 2009 2010 2011 2012 2013 Fitch's expectation Pre-tax return on assets (%) 20.0 21.7 19.8 16.8 17.8 Stable investment yields and retrocession coverage are ROAE (%) 22.6 24.7 25.3 21.5 21.2 expected to support Maipark s ongoing overall profitability Combined ratio (%) 64.9 60.6 56.2 62.8 56.8 and mitigate the company s potential underwriting volatility in Change in GWP (%) 29.4 18.2 15.8 12.7 29.4 view of the inherent nature of Maipark s business. Investment yield (%) 6.8 4.7 5.7 4.5 6.2 Line denotes a change in accounting practice to IFRS Source: Company; Fitch s calculation Sound Operating Profitability Maintenance of favourable underwriting margin Operating results further supported by stable investment yield Maintenance of Favourable Underwriting Margin Maipark has shown positive underwriting results since its establishment in 2004. Its combined ratio has averaged around 60.3% over the last five years, supported by a low loss ratio that has been kept below 20%, and effective cost control. Maipark s loss ratio remained low at around 2.2% at end-2013 due to the absence of major earthquakes in Indonesia. It is important for the reinsurer to continue managing its investment portfolio and retrocession coverage prudently in view of its inherent business risks, which could possibly lead to a volatile underwriting result. Operating Results Further Supported by Stable Investment Yield The company s investment yield has relatively remained stable over the last five years because of its conservative investment portfolio, which largely comprises cash and deposits and contains limited investments in the more volatile stocks portfolio. Stable investment returns and sound underwriting results allowed Maipark to achieve a pre-tax ROA and ROAE of 17.8% and 21.2%, respectively, at end-2013. 7
Figure 6 Investments and Asset Risk 2009 2010 2011 2012 2013 Fitch's expectation Total investment assets (IDRm) 101,241 125,594 146,949 165,578 202,862 Fitch does not anticipate the risk profile of Cash and bank deposits/total invested assets (%) 94.4 95.3 96.0 95.4 85.3 Maipark s investments to be altered significantly Fixed-income securities/total invested assets (%) 5.1 4.1 3.4 1.6 0.0 from the current portfolio, in light of the Stocks/total invested assets (%) 0.5 0.6 0.7 0.9 0.9 company s well-defined investment strategy. Stocks/shareholders equity (%) 0.5 0.6 0.7 0.8 0.8 Line denotes a change in accounting practice to IFRS Source: Company; Fitch s calculations Prudent Investment Management Risky assets kept minimal Clearly defined investment strategy Risky Assets Kept Minimal Fitch views Maipark s investment mix as conservative and highly liquid. Cash and bank deposits account for a high 85.3% of its total invested assets. This moderated from the 2012 level due to the company s diversification into more property investments mostly with a buyback guarantee in two years. Nonetheless, the company s exposure to risky assets, such as equities and investment properties, remained low compared with its capitalisation. Investment in stocks amounted to less than 1% of its shareholders equity at end-2013. Maipark said it may gradually decrease the proportion of its cash and bank deposits investments into other fixed-income and mutualfund instruments. However, Fitch does not expect a significant change in Maipark s investment risk appetite in the near term due to its track record and consistently conservative investment policy. Clearly Defined Investment Strategy Maipark s investment funds are managed according to the investment guidelines formulated by the investment committee. These guidelines are reviewed periodically and monitored closely. Each fund s strategic asset allocation is also reviewed annually by the company s investment committee. The president director must approve each investment transaction. 8
Figure 7 Asset/Liability and Liquidity Management Liquid assets/net technical reserves (x) Cash and bank deposits/net technical reserves (x) Line denotes a change in accounting practice to IFRS Source: Company; Fitch s calculations 2009 2010 2011 2012 2013 Fitch's expectation 3.33 3.67 3.64 4.33 3.12 Conservative investment approach will enable Maipark to maintain strong liquidity ratios to support cash outflows from claim liabilities. 3.16 3.51 3.51 4.26 3.12 Excellent Liquidity Position Supports Insurance Liabilities Maipark s investment guidelines emphasise the importance of liquidity and security. The liquidity position of Maipark s investment mix is sound, as more than 85% of its invested assets were allocated in cash and cash equivalents as at end-2013. Liquid assets accounted for more than 3x of the company s net technical reserves at end-2013, well above the median ratio guidelines for its rating category. In addition, Fitch has no major concerns over the management of assets/liabilities duration mismatches in view of the relatively short average duration of its liabilities (mostly earthquake policies that have a settlement period of within a year) in comparison to its liquid investments. 9
Figure 8 Reserve Adequacy 2009 2010 2011 2012 2013 Fitch's expectation Net claims reserves/net premiums earned (%) 12.7 14.5 12.1 8.4 7.5 Reserve ratios to remain stable in the near term. Net technical reserves/net premiums earned (%) 46.4 43.4 43.5 36.6 46.4 Cash and bank deposits/net claims reserves (%) 1,152.8 1,053.7 1,265.4 1,856.1 1,920.9 Net technical reserve/shareholders equity (%) 30.3 27.8 26.6 20.7 25.9 Line denotes a change in accounting practice to IFRS Source: Company; Fitch s calculation Reserving According to Regulations Maipark has employed an external actuary to verify its reserving adequacy starting 2013. The company calculates its unearned premium reserve using the daily method for products with duration of more than a year while premium reserves for products with duration of more than a year is calculated using best estimates from future income and expenses with addition of margin for adverse deviation. Maipark s incurred-but-not-reported reserves (IBNR) are estimated using the Claim Ratio Bornhueter and Ferguson method. 10
Reinsurance, Risk Mitigation and Catastrophe Risk Reinsurance Mitigating Exposure to Catastrophe Use of reinsurance to support underwriting capacity Sound credit quality reinsurers Use of Reinsurance to Support Underwriting Capacity Maipark cedes out more than 25% of its gross written premiums to a group of retrocessionaires through its XOL treaties. The company carefully manages its catastrophe risk exposure by monitoring its risk accumulation in each earthquake zone and business sector. Maipark relies on its brokers assistance to conduct catastrophe modelling using the Risk Management Solutions tool. The company s Probable Maximum Loss (PML) after reinsurance coverage is controlled at a manageable level relative to capitalisation. Maipark s exposure is also mitigated by the limit taken on any one risk (capped at USD3.5m), which could reduce any potential loss accumulation effect following an earthquake. Maipark will continue to monitor its risk exposure and increase its retrocessionaires coverage whenever necessary in anticipation of the likely growth of its business premiums with the increased mandatory cession. The company planned to increase its protection limit from IDR850bn in 2013 to become IDR2.4tn in 2014, subject to gradual risk monitoring and evaluation. Sound Credit Quality Reinsurers Maipark s reinsurance programme is mainly backed by panel of retrocessionaires rated A or above, except from ceding a relatively small proportion of the first layer of its excess-of-loss programme to local reinsurers some of which are unrated. Experienced reinsurers such as Swiss Reinsurance Company (IFS: A+/Stable) and Munich Reinsurance Company (IFS: AA /Stable) led the majority of Maipark s retrocession coverage. 11
Appendix A: Additional Financial Exhibits Figure 9 Underwriting Performance of MAIPARK (In terms of combined ratio) (%) 100 Incurred loss ratio Commission ratio Expense ratio 80 60 26.9 38.2 24.1 23.6 38.9 27.8 27.0 21.9 26.8 32.8 40 27.8 22.6 20 34.2 28.3 23.9 28.1 21.5 26.4 29.1 26.8 18.8 0 5.7 2.6 4.4 3.1 0.8 2.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Company; Fitch's calculation Figure 10 Maipark s Investment Mix (%) 2009 2010 2011 2012 2013 Cash and bank deposits 94.4 95.3 96.0 95.4 85.3 Bonds 5.1 4.1 3.4 1.6 0.0 Shares 0.5 0.6 0.7 0.9 0.9 Other invested assets - - - 2.1 13.8 Total 100.0 100.0 100.0 100.0 100.0 Source: Company; Fitch s calculations 12
Appendix B: Other Ratings Considerations Group IFS Rating Approach The group IFS rating approach is not applicable for this company. Notching Maipark is a licensed insurance company in Indonesia. According to Fitch s notching criteria, Indonesia is a moderate regulatory environment with a risk-based capital regime but no priority afforded to policyholders. Figure 11 Notching Summary Holding Company Not applicable IFS Ratings Due to the absence of policyholder s priority, a baseline recovery assumption of average applies to the IFS rating. There is no notching difference between the IDR and IFS. Debt Not applicable Hybrids Not applicable Source: Fitch Exceptions to Criteria/Ratings Limitations None. 13
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