PEFINDO Rating Criteria & Methodology

Insurance & Guarantee Industry – Key Success Factors

BUSINESS RISK ASSESSMENT

Market Position
The assessments will include deep reviews on the company's market position or business position that
will also involve some of subjective analysis. The company's strengths and weaknesses in the market
place are very vital to the company's future business performance. The review will also try to measure
the sustainability level of the company's position within the industry as indicated by its market share,
which can be derived from franchise strengths and the overall competitive environment. Being a part of a
long and well-established international insurance group of companies might give some credit points to
the company's franchise strengths. The company's premium growth rates (historical vs. future), number
of policy-holders would also be assessed to measure the company's ability to grab customers and expand
its business going forward.

Distribution Channel and Capability

The assessments will include a diligent review on the company's network coverage to measure the
company's capability to persistently grab market shares in prospective areas. For certain business lines
such as surety bonds, location of branches are important factors to smoothly deal with the project
owners, and local as well as regional government. A big number of brokers working with the companies
should also strengthen the company's distribution channel capability to generate premiums. The
existence of reliable IT system may also provide a quick underwriting and claim process, as well as to
expedite policy issuance at the respective branches. The type of the company's distribution channel is
also examined to see the company's cost effectiveness as well as the impact to the company's revenues.

Diversification
The assessments will include a deep examination on how well the company's diversification on its branch
location, customer base, as well as products that should be able to reduce the concentration risks and
ensure the stability of the company's asset quality and earnings stream. The review on geographical
diversification is also an important factor to be assessed, particularly in reducing risks from any
catastrophe in a specific region.

Management And Corporate Strategy

The qualitative analysis will play a dominant factor in assessing the company's management quality,
experience, credibility and strategy to successfully make the company well-positioned going forward,
especially in insurance industry whereas trust and image are very important. The analysis will cover the
examination on the management's strategic plans, operational controls and skills, financial strategies and
goals, objectives in investment as well as management's tolerance for risks. The assessment will also try
to see how well the management successfully executing their chosen strategies to achieve objectives.
The management's guidelines or directions for maintaining levels of solvency, and gearing up of the
balance sheet with debt are also diligently reviewed.

FINANCIAL RISK ASSESSMENT

Capitalization and Reserves

The assessments will include the examinations of the company's capital composition (equity, revalued
assets, unrealized capital gains and other types of quasi-reorganization), the company's capital position
with respect to the Ministry of Finance regulation, dividend payout ratio, internal growth rate of capital,
ability to get external sources of capital, capital in comparison with assets, as well as management
philosophy and strategy on leveraging of its capital. The company's reserve policy and size are also
carefully examined, as an insurance company has to meet its long term liability in the future. For non-life

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 PEFINDO Rating Criteria & Methodology

segment, the company's reinsurance structure and arrangement will also diligently be assessed, as it is a
critical factor for the company in managing their future claim liabilities.

Asset Quality
The assessments will include the examination of the company's asset allocation strategy to evaluate its
recoverablity. The examination will also try to see whether the company's asset allocation strategy fits
with its future liability profile. Some other important factors to be assessed include allocations on high
risk instruments, compliance with the regulations, sustainability of investment returns, and asset
diversification. The reviews will also include the evaluations of the company's investment guidelines and
management controls over the investment portfolio that might change over time. In addition, the
examination also conduct to assess the recoverability of other assets such as receivables and reinsurance
assets.

Operating Performance
The assessments will cover thorough analysis of the company's financial performance (trends, ability to
grow, as well as sustainability), the company's operation and efficiency (diversity as well as growth
potential), the company's quality of investment earnings, ability to price risks into various products,
operating profits and net income (trend, sustainability and potential growth). It should be noted that
asset quality and investment performance are very important factors for an insurance company, as the
company has to make sure that its current investments should be able to cover the claims in the future.

Liquidity And Financial Flexibility

The assessments will cover a deep review on how liquid the company's investment portfolio is to cover
claims, especially when significant catastrophes happen. The key consideration regarding liquidity include
how much of the portfolio is in long term vs. short term, how much of its portfolio is in fixed assets vs.
money market, how much of its portfolio is in high market risks, and etc. Allocation and diversification on
each asset as well as the credit quality of each asset are also carefully examined. Financial flexibility
analysis will include careful analysis of the company's ability to access various funding from the markets
and raise capital from public or other private sources in stressed financial condition or difficult economic
environment. The company's franchise values as well as the likelihood supports from the government are
also diligently reviewed.

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