Fitch Ratings Indonesia has assigned PT Kookmin Best Insurance Indonesia (KB Insurance Indonesia) a National Insurer Financial Strength (IFS) Rating of 'AA-(idn)'.

The Outlook is Stable.

The rating reflects a 'Less Favourable' company profile and satisfactory capitalisation, which are offset by a volatile operating performance and low premium retention compared with major domestic peers.

'AA' National IFS ratings denote a very strong capacity to meet policyholder obligations relative to all other obligations or issuers in the same country or monetary union, across all industries and obligation types.

Key Rating Drivers

Operating Synergies with KB Group: Fitch regards KB Insurance Indonesia as an 'Important' subsidiary of its parent, South Korea-based KB Insurance Co., Ltd., despite its small business scale, because of the support from and synergy with KB affiliates in Indonesia. KB Insurance Indonesia capitalises on its parent's brand and draws on the group's expertise and resources, including in risk management.

Less Favourable Company Profile: Fitch ranks KB Insurance Indonesia's company profile as 'Less Favourable' based on a 'Less Favourable' business profile and 'Moderate/Favourable' corporate governance compared with that of other domestic insurers. KB Insurance Indonesia has a limited business franchise within the sector, a risk appetite that is somewhat higher than the sector's and somewhat diversified business lines.

The company was established in 1997 as PT LG Simas Insurance Indonesia and changed its name to PT Kookmin Best Insurance Indonesia after it was acquired by the KB Financial Group in 2015.

Small Business Scale: KB Insurance Indonesia's market share is small, with 0.3% of gross premiums in the Indonesian non-life industry in 2021. The main businesses of the company are property (64%) and motor vehicle insurance (18%), with 63% of premiums sourced from Korean corporates, 15% from KB group interests in Indonesia and the remaining 22% from local corporates through brokers.

Satisfactory Capitalisation: KB Insurance Indonesia's capitalisation, measured by its regulatory risk-based capital (RBC) ratio, remained well above the minimum regulatory requirement of 120% over the past five years. However, the ratio declined in the past two years to 472% by end-2021 and 554% in 2020 from 712% in 2019 due to catastrophe losses. Its absolute amount of capital is also smaller than that of Fitch-rated peers.

Large Use of Reinsurance: The company cedes a large share of its premiums to reinsurers as its business is exposed to catastrophe risk due to the high proportion of property insurance in the catastrophe-prone Indonesian market. Its premium retention ratio, the proportion of net premiums written to gross premiums written, averaged 20% over 2017-2021. However, its premium retention ratio increased to 24% by end-2021 (2020: 16%) as its business shifted to motor vehicle insurance, which has had a lower loss ratio compared with the property business.

Fitch believes the premium retention ratio will increase gradually due to the move towards the motor vehicle business as a result of its synergies with the KB group in Indonesia.

Volatile Operating Performance: KB Insurance Indonesia's operating performance has been volatile due to the catastrophe losses. The company recorded underwriting losses in 2020 and 2018 as a result of the Jabodetabek floods and Palu earthquake, respectively. The combined ratio improved to 75% in 2021 from 129% in 2020 and averaged 98% in the last three years. It had a return on equity of 6% at end-2021 (2020: 1%) with a three-year average of 4% in 2019-2021, supported by investment income.

Business Expansion through KB Group: KB Insurance Indonesia has started to expand its motor vehicle business through strengthening its synergies with KB group interests in Indonesia such as PT. KB Finansia Multi Finance (AA+(idn)/Positive) and PT Sunindo KB Finance, both of which focus on motor vehicle financing. This has raised the proportion of the motor vehicle business in the company's portfolio to 18% by end-2021 (2020: 11%), with the company expecting an increase in business in the medium term.

Conservative Investment Portfolio: The company's investment portfolio is conservative and liquid, with 98% of total invested assets in cash and equivalents and fixed-income securities during 2019-2021. Its exposure to risky assets is kept at a manageable level relative to its equity.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improvement in the company profile in terms of market franchise and further synergies with the KB group.

An increase in the premium retention ratio above 40% for a prolonged period.

Sustained improvement in operating performance, with a combined ratio below 95%, with return on equity above 5%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A perceived weakening in the support from its parent company.

Significant deterioration in the company profile, including a shrinking market franchise and weakening synergies with the group.

Deterioration in the premium retention ratio over a prolonged period.

Deterioration in financial performance with a combined ratio persistently above 105%, with return on equity below 1%.

Weakening capitalisation, with the regulatory capital ratio persistently below 300%.

Date of Relevant Committee

15 July 2022

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

RATING ACTIONS

Entity / Debt

Rating

PT Kookmin Best Insurance Indonesia

Natl Ins Fin Str

AA-(idn)

New Rating

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