OREANDA-NEWS. November 30, 2015. PT Fitch Ratings Indonesia has affirmed Indonesia-based PT Reasuransi Internasional Indonesia's (Reindo) National Insurer Financial Strength (IFS) Rating at 'AA(idn)' with Stable Outlook.

'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
Reindo's ratings are supported by its state ownership, solid domestic market profile and sufficient capital buffer to support ongoing business growth. The rating also factors in the reinsurer's investment profile and high business concentration risk in the catastrophe-prone Indonesian market.

Reindo is ultimately owned by the Indonesian government and remains the largest domestic reinsurer by total asset size in 2014. It captured an overall domestic market share of 34% by gross reinsurance premiums in 2014. Its overall market scale is considered small when compared with regional reinsurance peers as the majority of the reinsurance premiums in Indonesia are ceded to offshore reinsurers.

Reindo's capitalisation, measured by regulatory risk-based capital (RBC) ratio, improved significantly to 339% at end-2014, following the issuance of IDR900bn of mandatory convertible bonds (MCB). The MCB offer was fully taken up by three state-owned enterprises. The bonds must be converted into new shares within three years, and Fitch treats them as 100% equity in the calculation of consolidated financial leverage, which is estimated to be 20.8% at end-September 2015. In view of the regulatory changes to encourage greater optimisation of domestic reinsurance capacity, Fitch will continue to monitor the sustainability of the company's improvement in capitalisation to support ongoing business growth. Reindo's RBC ratio declined slightly to 306% at end-September 2015.

The reinsurer adopts a liquid and prudent investment mix, with more than 70% of its invested assets placed in cash and equivalents, and fixed-income securities at end-September 2015. Some of the cash holdings are placed in banks that are rated below investment grade or unrated by Fitch. Reindo's exposure to risky assets, such as stocks and below-investment-grade bonds, is minimal relative to its capitalisation.

The company's underwriting performance was healthy as the combined ratio (aggregate of non-life loss ratio and expense ratio) has remained below 95% over the last three years. This is underpinned by its selective underwriting practices, steady premium growth and manageable claims. Stable investment returns have also contributed favourably to Reindo's bottom-line profitability over the years.

Reindo's holding company, PT Reasuransi Umum Indonesia (RUI), is currently merging with PT Reasuransi Indonesia Utama, following the issuance of a presidential bill. Reindo said that the merger currently does not have any impact on its operational and business activities.

RATING SENSITIVITIES
Key rating triggers for an upgrade include a sustainable improvement in Reindo's capitalisation with RBC ratio above 180% consistently and consolidated financial leverage below 40%, and improvement in market positioning while maintaining its profitability with combined ratio below 100% consistently.

Key rating triggers for a downgrade include a significant deterioration in the company's credit profile in terms of market franchise, operating performance or capitalisation relative to its business profile, with a combined ratio above 105% or RBC ratio below 140% persistently. A perceived weakening of government support or a downgrade of Indonesia's sovereign rating (BBB-/Stable) could also lead to a downgrade.