Merger without new capital inflows may strain Indonesian reinsurance market: Fitch

By Navneeta Nandan

Aug 15 - (The Insurer) - The proposed merger of three Indonesian reinsurers – Indonesia Re, Nasional Re and Tugure – could dilute the capital profile of the domestic reinsurance market in the absence of fresh capital inflows, according to Fitch Ratings.

The merged entity is likely to reduce domestic reinsurance capacity due to the dilution, Fitch said. However, if the merger is completed, the industry's competitive intensity will ease.

In June, sovereign wealth fund Danantara announced plans to consolidate the three reinsurers, which are ultimately owned by the Indonesian government, as part of a drive to streamline the number of state-owned entities.

Fitch said that Danantara has not announced the details of the plan.

Two of the three reinsurers have weak capital positions and one is in a negative net asset position. Fitch added that Nasional Re, which is the second-largest of the three reinsurers, had negative equity of 2.1 trillion rupiah ($129.99 million) as at June 30 with a regulatory risk-based capital (RBC) ratio of 156%.

Indonesia Re’s regulatory RBC ratio was 133%, just above the regulatory minimum of 120%, while Tugure’s ratio was a higher 173%.

"We believe Nasional Re’s large negative net asset position will dilute the capital profile of the merged entity. New regulation, announced in December 2023, requires reinsurers to have a higher minimum capital of IDR1 trillion by 2026 before rising to IDR2 trillion by 2028," Fitch said.

Only Indonesia Re meets the requirement with equity capital of 2.6 trillion rupiah. Tugure, with equity capital of 1.6 trillion rupiah, only meets the 2026 requirement.

The merged entity will marginally meet the new thresholds.

"However, we believe the capacity of the merged group will be reduced, with the three reinsurers’ combined net premiums/capital rising to 4.9x on a pro forma basis, from 1.4x and 1.7x in 2024 for Indonesia Re and Tugure, respectively," Fitch added.

Danantara holds 99.9% of Indonesia Re, while the remaining 0.1% is held directly by the state. PT Asuransi Kredit Indonesia, a member of Indonesia Financial Group, a state-owned holding company for insurance and underwriting entities, owns 99.9% of Nasional Re. Tugure is 51% owned by PT Tugu Pratama Interindo, which is ultimately owned by the state through PT Pertamina, a state-owned energy company.

Fitch said that the Indonesian reinsurance market is supported by improved treaty structures and more stable pricing. It expects greater competition from overseas reinsurers to persist as they offer coverage at competitive pricing.