PT TUGU PRATAMA INDONESIA Jakarta 12920, Indonesia A- Operating Company Non-Life Ultimate Parent: PT Pertamina (Persero) PT TUGU PRATAMA INDONESIA Wisma Tugu I, Jl. HR Rasuna Said Kav. C 8-9, Jakarta 12920, Indonesia Web: www.tugu.com Tel.: 62-21-529-61-777 Fax: 62-21-529-61-555 AMB#: 086732 AIIN#: AA-5360002 Ultimate Parent#: 055828 BEST S CREDIT RATING Best s Financial Strength Rating: A- Outlook: Stable Best s Financial Size Category: IX RATING RATIONALE Rating Rationale: The ratings reflect PT Tugu Pratama Indonesia s (TPI) favorable operating performance and very strong risk-adjusted capitalization, which is supported by low net and gross underwriting leverage measures. TPI s capital position strengthened to USD 423 million as of June 2017 from USD 232 million in 2015 primarily due to a property revaluation gain. In March 2017, TPI increased its ownership in its reinsurance affiliate, PT Tugu Reasuransi Indonesia (TRE), to 50.27% from 37.66%. As a result, TPI s consolidated catastrophe exposure and underwriting leverage are expected to increase. However, based on TPI s business plan and its strengthened capital position, A.M. Best expects that TPI s risk-adjusted capitalization will remain supportive of its ratings. TPI s operating performance has been favorable, with both underwriting and investments contributing to capital generation. The Printed October 31, 2017 www.ambest.com Page 1 of 6
company s combined ratio and return on premium ratio stood at 83% and 61%, respectively, in the five years ending in 2016. Offsetting rating factors include declining business volumes from TPI s parent, PT Pertamina (Persero), which generates the majority of TPI s underwriting profits, and the low profitability of non-pertamina business, which could weaken TPI s future profit margins. In the past year, TPI also experienced expense ratio pressure, partly due to spending on strategic initiatives such as an initial public offering and insurance system upgrades. TRE s consolidation also presents execution risk for TPI, as TRE will represent a significant portion of TPI s consolidated premiums and results going forward. While positive rating actions are unlikely, negative rating pressure could result from a material decline in TPI s risk-adjusted capitalization due to higher-than-anticipated catastrophe exposure or lower-than-expected reinsurance asset quality. A weakening trend in profitability also could result in negative rating pressure. FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 09/21/17 A- 09/23/16 A- BUSINESS PROFILE PT Tugu Pratama Indonesia (TPI) was established in 1981 and benefits from its affiliation with PT Pertamina (Persero) (Pertamina), which owns 65% of TPI. Pertamina is a state-owned integrated energy company in Indonesia, with USD 47 billion in total assets and USD 22 billion in capital as of 31 December 2016. In 2013, it was the largest non-financial state-owned company in Indonesia. An initial public offering of TPI is planned for the first half of 2018, but Pertamina intends to retain a controlling share of the company. The funds will partly be used to fund the consolidation of PT Tugu Reasuransi (TRE), which has recently been consolidated into TPI, and to provide TPI s minority shareholders with liquidity for their investment in TPI. Priority access to Pertamina s business, which is characterized by good risk management, provides TPI with a steady stream of profitable business, although volumes are trending down due to low energy prices. To fulfill its role for Pertamina, TPI is also increasingly expected to provide insurance cover for its parent group s overseas assets, as Pertamina is acquiring assets outside Indonesia. Pertamina s business accounted for about 30% of TPI s gross premiums in 2016, which is down from 34% the year before, and it has been an important source of underwriting profits. Going forward, the combination of low energy prices and the consolidation of TRE could precipitate a further decline in the share of gross premiums sourced from Pertamina. Much of TPI s business from Pertamina is accessed directly, which helps to reduce acquisition costs. TPI is involved in Pertamina s risk management through TPI s fully owned subsidiary, PT Synergy Risk Management Consultants. In addition to insuring its parent s group assets, TPI also underwrites unrelated, third-party businesses in the Indonesian non-life market. While TPI has a strong market shares in various commercial insurance segments, its presence in other lines is modest. In 2016, TPI was ranked fifth in the overall non-life market with a 5.5% market share. Scope of Operations: In terms of business lines, gross premiums are mainly generated through the underwriting of property risks, aviation risks, marine cargo and hull, and energy. These reflect TPI s leadership in the commercial area and Pertamina s wide-ranging operations as Indonesia s only integrated energy company, whose portfolio does not only include oil, but also gas and geothermal. This could help to reduce the impact of changes in the business cycle in any one of Pertamina s business segments. The miscellaneous class of business has been on an upward trend for TPI and now accounts for 11%, reflecting the company s ambition to grow its corporate retail business. But the profitability of this business lags that of Pertamina. In terms of sources of business, in 2016, Pertamina and SKK Migas provided 29% and 10% of gross premiums, respectively, while other sources of business produced around 61% of TPI s gross premiums in Indonesia. The great majority of net underwriting results are generated from Pertamina s business. TPI s distribution is geared towards reaching commercial customers, reflecting its affiliation with Pertamina and focus on corporate business; the direct channel accounts for over 50% of gross premiums. Business Trends: After high growth in 2013 and 2014, gross premium growth has slowed down significantly. This has been mainly due to declining business volumes from Pertamina and SKK Migas as upstream activities have been reduced in response to energy prices. In addition, TPI has reduced business from some unprofitable corporate accounts. Notwithstanding the downward pressure on gross premiums, net premiums have stabilized in the eight months to August 2017, due to an increase in corporate retail business. Going forward, TRE is expected to account for a significant portion of TPI s consolidated premiums. The quality and availability of information on the business sourced by TRE, however, is likely to be very different from the business sourced from Pertamina. From a consolidated perspective, TPI could face higher execution risk, with a higher risk of deviations with regard to financial projections provided to A.M. Best. In addition, TPI is seeking to strengthen its market profile outside the Pertamina group if profitable opportunities arise. These could include participation in insuring state-led infrastructure projects as the government has started to substantially increase infrastructure spending across the country. However, where these projects are funded jointly with foreign partners/governments, they will also bring along their own affiliated insurance providers. TPI is also looking for corporate-retail opportunities, i.e. in credit and motor insurance, that could arise from existing corporate accounts where TPI already offers aviation or property insurance. Market Share/Market Presence: As previously mentioned, TPI ranked fifth in terms of gross premiums in the overall non-life market in Indonesia with a 5.5% market share in 2016. It is recognized as a domestic leader in commercial lines. Printed October 31, 2017 www.ambest.com Page 2 of 6
RISK MANAGEMENT The company has a risk management framework in place that seeks to identify and manage strategic and operational risks covering all activities and interests of TPI. The framework has defined roles and responsibilities, along with guidelines on the internal communication of risks. For Pertamina-related underwriting risks, the company is assisted by its fully owned subsidiary, PT Synergy Risk Consultants, which provides survey reports and recommendations. With a business model that relies heavily on reinsurance, the company s reinsurance assets and the quality of its reinsurance protection are major concerns. TPI s ability to manage such exposure is constrained by domestic regulations, which mandate minimum cessions to local counterparties. However, at present the residual risk is still deemed to be adequate, due to the combination of TPI s moderate gross PML to capital, its moderate ceded leverage ratio and efforts to minimize exposure to unrated reinsurers. Going forward, exposures facing TPI at an enterprise level will include TRE s exposures. It remains to be seen how effectively these will be managed. Country Risk: TPI is domiciled in Indonesia, a Country Risk Tier 4, (CRT-4) country. OPERATING PERFORMANCE Operating Results: Operating results have been strong over the past five years. TPI s operating ratio averaged 56% in the five years to 31 December 2016 and is stronger than that of its peers in the Indonesian non-life market. Pretax margins were boosted significantly by investment results, which benefitted from TPI s strong capitalization and large investment portfolio (over five times net earned premiums). Return on capital and return on asset measures, however, are more modest compared to its large peers. As a quasi-captive business, TPI is not managed against return on equity measures by its major shareholders. However, its low return on capital measure does suggest that it would take TPI considerable time to replenish its capital from earnings retention if a catastrophe event resulted in a significant hit to its capital. Underwriting Results: Underwriting results are strong in absolute terms and in line with the profitable Indonesian non-life market over the past five years. TPI s five-year average (2012-2016) combined ratio compares well with large peers in its local market but showed greater volatility, reflecting its commercial focus. In 2016, the company experienced an uptick in its combined ratio as its expense ratio increased as a result of one-off expenses and a declining net premium written base. Underwriting results rely strongly on Pertamina. While accounting for about 30% of gross premiums in 2016, Pertamina s business was responsible for the great majority of TPI s underwriting results, which benefit from commission income. Other sources of business are around breakeven after management and net acquisition expenses, with certain lines, such as health and motor, having profitability ratios that are weaker than the industry average. Going forward, TRE is expected to represent a significant source of TPI s consolidated net premiums and net underwriting results. Investment Results: TPI s investment portfolio amounted to over five times net earned premiums in 2016 and has played a major role in boosting TPI s strong overall profit margins. BALANCE SHEET STRENGTH Capitalization: TPI s capital position stood at USD 404 million in December 2016 and USD 423 million as at June 2017. With its low gross to net premium ratio, the primary sources of TPI s risk-adjusted capital requirements, as measured by Best s Capital Adequacy Ratio (BCAR), are reinsurance asset risk and gross catastrophe exposure. Due to one-off investment property revaluation gains, TPI s capital increased to USD 404 million in 2016 from USD 233 million in 2015; ceded leverage has decreased significantly as a result. Pre-catastrophe ceded leverage is expected to remain low going forward as TRE uses mainly excess of loss reinsurance. Consolidated net premium leverage, while it is expected to be higher going forward, is anticipated to remain below 1.0 times according to TPI s projections. TPI s consolidated gross probable maximum loss (PML) for 2017 is expected to increase significantly with the consolidation of TRE. Based on third party PML estimates; it is expected that TPI s consolidated catastrophe scenario BCAR level will remain supportive of TPI s rating level due to TPI s increased capital. However, detailed modelling for TPI s consolidated gross PML (including TRE) is still in process and TRE has experienced high exposure growth in recent years. Reinsurance assets represent the largest asset class on TPI s balance sheet, accounting for 22% of total assets in 2016 (down from 40% in 2015). While the company is subject to mandatory domestic cessions, management information shows that nearly 82% of reinsurance assets had internationally recognized security ratings mostly rated B++ or above in 2016. This figure is expected to increase with the consolidation of TRE, which is not subject to mandatory domestic cessions. Financial Leverage: As of December 2016, TPI s consolidated financial statements carried borrowings and consumer finance lease payables of USD 6.9 million equivalent to 4% of capital. These were mostly for it s a subsidiary s property and motor vehicle rental business. Printed October 31, 2017 www.ambest.com Page 3 of 6
Liquidity: Liquid assets to net technical liabilities and total liabilities amounted to 502% and 36%, respectively, as at December 2016. Investments: The company s investment allocations are conservative, consisting mainly of cash and bonds (48%). Mutual funds, listed equities and investment properties accounted for around 15% of investments. TPI s investment policy and strategy are aligned with regulations. Investments require diversification at a per issuer (including deposit-taking banks and excluding the Government of the Republic of Indonesia) and fund manager level as well as minimum investments in cash. Summarized Accounts as of December 31, 2016 Data reflected within all tables of this report has been compiled from the financial statements of this company (Source: Company Financial Statement). An independent audit of the company s affairs through December 31, 2016, was conducted by Purwantono, Sungkoro & Surja. STATEMENT OF INCOME 12/31/2015 Technical account: Gross premiums written 256,482 233,886 Reinsurance ceded 216,118 194,302 Net premiums written 40,364 39,584 Increase/(decrease) in gross unearned premiums -764 917 Net premiums earned 41,128 38,667 Total underwriting income 41,128 38,667 Net claims paid 24,018 12,963 Net increase/(decrease) in claims provision -1,240 7,291 Net claims incurred 22,778 20,254 Management expenses 23,546 17,742 Acquisition expenses -8,727-9,890 Net operating expenses 14,819 7,852 Total underwriting expenses 37,597 28,106 Balance on technical account 3,531 10,561 12/31/2015 Combined technical account: Gross premiums written 256,482 233,886 Reinsurance ceded 216,118 194,302 Net premiums written 40,364 39,584 Increase/(decrease) in gross unearned premiums -764 917 Net premiums earned 41,128 38,667 Total revenue 41,128 38,667 Net claims paid 24,018 12,963 Net increase/(decrease) in claims provision -1,240 7,291 Net claims incurred 22,778 20,254 Management expenses 23,546 17,742 Acquisition expenses -8,727-9,890 Net operating expenses 14,819 7,852 Total underwriting expenses 37,597 28,106 Balance on combined technical account 3,531 10,561 Non-technical account: Net investment income 12,517 12,694 Other income/(expense) -466-9,431 Profit/(loss) before tax 15,582 13,824 Taxation 3,110 2,265 Profit/(loss) after tax 12,472 11,559 Dividend to shareholders 3,012 8,207 Exceptional income/(expense) -663 858 Retained profit/(loss) for the financial year 8,797 4,210 Retained profit/(loss) brought forward 165,944 161,734 Retained profit/(loss) carried forward 174,741 165,944 MOVEMENT IN CAPITAL & SURPLUS 12/31/2015 Capital & surplus brought forward 239,887 239,310 Profit or loss for the year 12,472 11,559 Capital gains or (losses) 3,901-3,633 Dividend to shareholders -3,011-8,207 Other changes -664 858 Total change in capital & surplus 12,698 577 Capital & surplus carried forward 252,585 239,887 Printed October 31, 2017 www.ambest.com Page 4 of 6
ASSETS % of total 12/31/2015 Cash & deposits with credit institutions 54,346 8.1 64,462 Bonds & other fixed interest securities 106,204 15.9 99,599 Shares & other variable interest instruments 28,546 4.3 19,511 Liquid assets 189,096 28.3 183,572 Inter-company investments 107,165 16.1 107,710 Total investments 296,261 44.4 291,282 Reinsurers share of technical reserves - other 206,438 30.9 256,280 Total reinsurers share of technical reserves 206,438 30.9 256,280 Insurance/reinsurance debtors 141,251 21.2 124,807 Other debtors 8,474 1.3 4,692 Total debtors 149,725 22.4 129,499 Fixed assets 1,053 0.2 718 Prepayments & accrued income 9,204 1.4 7,639 Other assets 4,397 0.7-26,399 Total assets 667,078 100.0 659,019 LIABILITIES % of total 12/31/2015 Capital 78,148 11.7 78,148 Paid-up capital 78,148 11.7 78,148 Non-distributable reserves -304 0.0-4,205 Retained earnings 174,741 26.2 165,944 Capital & surplus 252,585 37.9 239,887 Gross provision for unearned premiums 117,003 17.5 106,393 Gross provision for outstanding claims 128,405 19.2 190,001 Total gross technical reserves 245,408 36.8 296,394 Insurance/reinsurance creditors 137,318 20.6 94,688 Other creditors 9,903 1.5 12,544 Total creditors 147,221 22.1 107,232 Accruals & deferred income 6,050 0.9 7,086 Other liabilities 15,814 2.4 8,420 Total liabilities & surplus 667,078 100.0 659,019 ANALYSIS OF GROSS PREMIUMS WRITTEN IDR IDR (000) (000) Aviation 475,785,918 312,842,393 Engineering 86,116,203 95,401,710 Fire 706,242,940 500,536,631 Marine 364,999,744 275,929,543 Other classes 506,295,222 353,006,035 Total non-life 27 2,139,440,0 1,537,716,3 12 REINSURANCE TPI s reinsurance consists of facultative and treaty (i.e., surplus, quota share, marine and aviation excess of loss and non-marine excess of loss) reinsurance. Around three-quarters of ceded premiums go towards facultative reinsurance. Treaty gross account property risks are protected by non-marine treaty surplus reinsurance. Under this arrangement, reinsurance protection for Pertamina and/or oil and gas and/or energy business totals USD 75 million (i.e., two lines surplus sections at USD 50 million, and USD 25 million gross retention). Reinsurance protection for non-pertamina and/or non-oil and gas and/or non-energy business totals USD 55 million (i.e., one line sections at USD 25 million, and USD 25 million gross retention and a USD 5 million quota share). Treaty property retentions after these proportional arrangements are protected by excess of loss reinsurance, which absorbs non-marine losses (after proportional reinsurance) between USD 500,000 and USD 65 million. About three-quarters of TPI s treaty reinsurance is provided by counterparties with international security ratings. Over 70% of TPI s facultative reinsurance is provided by counterparties with international security ratings. BALANCE SHEET ITEMS USD USD USD IDR IDR (000) (000) (000) (000) (000) Liquid assets 189,096 183,572 168,503 1,728,123,44 4 1,478,827,43 5 Total investments 296,261 291,282 276,213 2,696,759,13 4 2,287,712,95 0 Total assets 667,078 659,019 633,086 6,393,611,21 3 5,227,365,52 1 Total gross technical reserves 245,408 296,394 280,527 2,946,275,51 8 2,358,631,43 5 Net technical reserves 38,970 40,114 35,099 306,498,954 214,391,330 Total liabilities 414,493 419,132 393,777 4,150,320,32 5 3,270,980,06 2 Capital & surplus 252,585 239,887 239,309 2,243,290,88 8 1,956,385,45 9 Printed October 31, 2017 www.ambest.com Page 5 of 6
INCOME STATEMENT ITEMS USD USD USD IDR IDR (000) (000) (000) (000) (000) Gross premiums written 256,482 233,886 231,089 2,139,440,02 7 1,537,716,31 2 Net premiums written 40,364 39,584 44,483 389,343,421 244,299,775 Balance on technical account(s) 3,531 10,561 19,720 72,390,274 40,262,563 Profit/(loss) before tax 15,582 13,824 29,295 433,883,950 228,139,421 Profit/(loss) after tax 12,472 11,559 22,571 363,118,388 196,356,488 LIQUIDITY RATIOS (%) Total debtors to total assets 22.4 19.7 20.3 15.0 13.6 Liquid assets to net technical reserves 485.2 457.6 480.1 563.8 689.8 Liquid assets to total liabilities 45.6 43.8 42.8 41.6 45.2 Total investments to total liabilities 71.5 69.5 70.1 65.0 69.9 LEVERAGE RATIOS (%) Net premiums written to capital & surplus 16.0 16.5 18.6 17.4 12.5 Net technical reserves to capital & surplus 15.4 16.7 14.7 13.7 11.0 Gross premiums written to capital & surplus 101.5 97.5 96.6 95.4 78.6 Gross technical reserves to capital & surplus 97.2 123.6 117.2 131.3 120.6 Total debtors to capital & surplus 59.3 54.0 53.7 42.7 36.3 Total liabilities to capital & surplus 164.1 174.7 164.5 185.0 167.2 PROFITABILITY RATIOS (%) Loss ratio 55.4 52.4 35.7 43.4 35.8 Operating expense ratio 36.7 19.8 17.9 26.8 44.3 Combined ratio 92.1 72.2 53.7 70.2 80.0 Net investment income ratio 30.4 32.8 25.4 72.0 64.6 Operating ratio 61.7 39.4 28.2-1.8 15.5 Return on net premiums written 30.9 29.2 50.7 93.3 80.4 Return on total assets 1.8 1.9 3.7 6.2 Return on capital & surplus 4.8 5.2 10.2 17.3 Why is this Best s Rating Report important to you? The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of insurance companies since 1899. contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Best's Financial Strength Rating (FSR) is an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer's claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. An FSR is not a recommendation to purchase, hold or terminate any insurance policy, The company information appearing in this pamphlet is an extract from the complete AMB Credit Report. You may obtain the complete report by contacting Customer Service at +1(908)439-2200 or customer_service@ambest.com. Please reference the company's identification number (AMB#) listed on this rating report. For the latest Best's Financial Strength Ratings along with their definitions and A.M. Best's Terms of Use, please visit www.ambest.com. Copyright 2017 A.M. Best Company, Inc. and/or its affiliates. All rights reserved. No part of this report may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written permission of the A.M. Best Company. While the data in this report was obtained from sources believed to be reliable, its accuracy is not guaranteed. Printed October 31, 2017 www.ambest.com Page 6 of 6