State owned general insurer Asuransi Jasa Indonesia (Jasindo), the second largest non-life insurance company in Indonesia, has reported deteriorating financial results, driven mainly by a decline in underwriting profitability over recent years, notes AM Best.
The international credit rating agency says that as a consequence, it has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from “bbb+” and affirmed the Financial Strength Rating (FSR) of B++ (Good) for Jasindo.

The outlook of the Long-Term ICR has been revised to stable from negative, whilst the outlook of the FSR remains stable.

The credit ratings reflect Jasindo’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

Operating performance

The downgrade of the Long-Term ICR reflects a revision in AM Best’s assessment of Jasindo’s operating performance to adequate from strong, following a trend of deteriorating financial results.

The company reported combined ratio of 106.5% in 2018 whilst unaudited 2019 results indicated a close to technical breakeven position. At these levels, underwriting performance showed a marked decline as compared with the five-year average combined ratio of 89.0% between 2013 and 2017. The decline was attributable largely to a higher combined ratio in Jasindo’s growing retail portfolio, mainly in the credit insurance class.

In addition, earnings were impacted by large premium reserve increases, which were made in 2018 to better reflect the earnings pattern of the portfolio. The assessment also factored in the minor shortfall in premium liabilities held as of year-end 2019. Prospectively, key lines of business within the retail segment could face continued pressures as a result of an economic slowdown.

AM Best views investment income arising from currency market movements to be volatile, although Jasindo has historically benefited from overall profitability. Following the company’s revised accounting treatment to exclude unrealised gains or losses arising from foreign exchange from the income statement, AM Best expects prospective operating income to show greater stability, albeit at a lower level. Although the company has put in place measures that include improving expense efficiencies and risk selection, in part through a focus on the quality of distribution and other business partners, these actions have not proven sufficient to return the company to its former profitability levels. Overall operating performance remained below prior expectations of the management and AM Best.

Balance sheet

Jasindo’s balance sheet strength assessment is underpinned by its strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best views the low capital requirements arising from Jasindo’s use of underwriting leverage, and exposure to equity investments to be supportive of the assessment. However, AM Best is of the view that the high reinsurance usage subjects the company’s capital position and cash flow to heightened sensitivity as a result of any reinsurance disputes and credit risk of these counterparties.

Whilst not viewed to put immediate pressure on the balance sheet assessment, negative cash flows have been observed over recent periods, and consequently, the company has implemented tighter measures around managing account receivables with its partners to receive faster claim recoveries. In addition, the company’s balance sheet is exposed to significant reinsurance assets that are of lower credit quality based on international standards.

Parent company

AM Best views Jasindo’s business profile as neutral. The company continues to maintain a sizeable share of Indonesia’s non-life insurance market. Jasindo has reduced its product risk exposure gradually by growing retail lines of business. Bahana Business Development Indonesia (BPUI), which is wholly owned by the Government of Indonesia, was approved to become the holding company of a number of Indonesian state-owned insurers, including Jasindo. The upcoming change of intermediate ownership structure, without a change of ultimate parent, is not viewed as material. AM Best views financial weakness or capital extraction at the holding company level to be unlikely over the medium term, with the expectation that the regulator would limit such potential actions to protect policyholders’ security.

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