Indonesia’s Insurance Crisis Spreads
Major conglomerate enlisted to stabilize controversial bank
The slow-motion train wreck that is Indonesia’s insurance sector has started to pick up speed, raising fears over the entire sector, which suffers from weak regulation and deep corruption, with negative implications for the financial system as a whole as problems bleed into the country’s extensive state-owned enterprise system. The situation is being exacerbated as business activity slows with the onset of the Covid-19 virus.
A Jakarta-based industry source, in fact, likened the spreading scandal to the coronavirus, which is now spreading across the country, saying the extent of the damage is unknown. But, he said, the industry is characterized by “incredibly lousy investment, corruption, lacking oversight, unbelievable product acceptance by even international banks.”
On March 9, as if a signal of the worsening situation, the UK-based insurer Aviva Holding Ltd. announced it would exit the country, selling its shares in its joint venture in the country, PT Astra Aviva Life (Astra Life), to its partner, PT Astra International, with the transaction expected to be completed in the fourth quarter of the year.
A major concern appears to be an attempt by government leaders and the Sinar Mas Group headed by Teguh, Indra and Franky Widjaja, whose Asia Pulp & Paper subsidiary collapsed in Asia’s biggest bankruptcy in 1997 with a loss of USS14 billion, to use the palm oil-to-telecoms conglomerate’s insurance company Asuransi Sinar Mas to prop up the ailing Bank JTrust, a subsidiary of the Tokyo-based financial conglomerate, J Trust Co. Ltd.
Repeated calls and emails by Asia Sentinel to both J Trust and Sinar Mas asking about the situation weren’t answered.
Footnotes in Bank JTrust’s audited three-month financial statement for March 31, 2019 note that loans, credit insurance, fixed assets and other assets of the bank have been insured with approval of management and major shareholders with PT Asuransi Sinar Mas although there is no indication in the records that Bank JTrust has actually paid any premiums. According to the notes, the bank is given a six-year pause and the amortization to begin on a straight-line basis on a subsequent period from June 30, 2019.
That is a striking repeat of the 2014 purchase of the bank from the Indonesian government. As Asia Sentinel reported on July 1, 2017, the equivalent of US$245.2 million was forgiven to J Trust by the Indonesian Bank Insurance Corporation and the central bank, Bank Sentral Indonesia.
It is also not the first time an insurance company was allegedly used to prop up the fortunes of an ailing company with strong if unofficial ties to the government, according to a March 12 article in Tempo, the Jakarta-based magazine. In the 2004-2006 period, the state-backed PT Asuransi Jiwasraya pawned Rp3 trillion (U$202.5 million at current exchange rates) worth of shares from the ailing Bakrie group of companies headed by Aburizal Bakrie, then the Coordinating Minister for the Economy and later Coordinating Minister for People's Welfare as well as a powerhouse in the Golkar political party.
That was followed by later collection of shares from five other defaulting Bakrie companies. The shares have never been redeemed. They were later wrapped in offerings of limited money market products, according to the magazine.
It’s unknown if similar tactics that have been used to stave off disaster for the Bakrie group and J Trust have been used to stave off trouble for other concerns as well. If it does, that spells danger. Some 15 percent of the state-owned banks’ loans are believed to be nonperforming. According to a recent confidential report made available to several global hedge funds, the four SOE banks require a US$19.7 billion top-up in capital reserves immediately. The four biggest SOE banks are Bank Rakyat Indonesia, the country’s biggest by assets as of 2018, the latest ranking, Bank Mandiri, the second biggest, Bank Negara Indonesia, the third, and Bank Tabunganan Indonesia, the fifth.
The SOE sector, which includes 141 companies, spans not only insurance but airlines, agriculture and pharmaceutical industries, hotels, tourism, construction and transportation strategic industries such as oil and coal and financial services among others. For months there has been growing concern the financial soundness of the sector, impelling President Joko Widodo to appoint Erick Thohir, a 49-year-old wunderkind and owner of several international sports franchises, to seek to clean up the sector. With victims of extensive fraud demanding justice, Thohir is proposing to unify all state insurance companies under a state-owned holding company.
There are seven such state-backed insurance companies, with an untold number of subsidiaries. Three have failed, with the state-backed PT Asuransi Jiwasraya at the center, raising additional concerns about the SOEs. The other three, in varying forms of crisis, are PT Asuransi Social Angatan Bersenjata Republik Indonesia, or Asabri, which is 100 percent government-owned and caters to the defense ministry, with 940,000 customers; PT Asuransi Jiwa Adisarna Waartha, or Wana Artha Life; and PT Asuransi Jiwa Kresna. By one estimate, between them, the top five could be liable for losses up to US$11.54 billion on policies that could affect hundreds of thousands of policyholders and savers, creating political problems for the government.
Many of the problems are systemic in a government infamous for both corruption and inefficiency. Senior officials of the Indonesia Financial Services Agency, which governs the insurance industry, say they have only 18 regulators to oversee more than 140 insurance companies, and the majority of the regulators are under the age of 30, with virtually no training in fraudulent insurance products.
“Is the sky falling?” commented a Jakarta-based source. “It probably should, but it’s too much of an issue for the respective sources not to try everything, to slow down developments and to cover up reality -- at least as much as possible. As you can see, the financial services authority] continues to act as if they are committed to the professional reform job that all along was part of their charter, while there is no sign that they are accepting responsibility -- to the contrary! How can they claim that the risk-based capital ratio is guaranteed, if they dropped the ball so clearly with Jiwasraya? Are they indeed checking, or are they just hiding behind their regulations, without making sure that everybody plays by the rules?”
As Asia Sentinel reported on January 20, the companies were reportedly playing with policyholder funds, investing in so-called “pump-and-dump stocks ramped up by speculators with no underlying assets in a practice since labeled goreng-goreng saham, or "frying stock."
Now, with the Indonesian stock market beginning to feel the weight of a declining economy, falling by 21 percent since January 1, palm oil prices declining by nearly 18 percent over the same period, and a range of other problems exacerbated by the sudden appearance of the Covid-19 coronavirus in the country, the frying pan for stocks has gone cold.
Then there is Bank JTrust. The Indonesian unit of the Tokyo financial concern was fashioned in 2014 from Bank Mutiara, the latest incarnation of the notorious Bank Century, which failed in 2008 amid allegations of spectacular corruption. Bank JTrust has been in trouble virtually since the Tokyo concern took over Bank Mutiara in 2014, at one point in 2018 announcing it was seeking to give up management control and sell 40 percent to anybody who wanted it. A public audit for the year ending December 31 indicates a current net worth of only ¥866 million (US$8.1 million) on Bank JTrust’s balance sheet.
With the bank reportedly in serious trouble according to an exhaustive study of the situation which was made available to Asia Sentinel, it appears that state officials in the autumn of 2018 asked Indra Widjaja, the owner of Asuransi Sinar Mas, a US$2.3 billion Sinar Mas life insurance subsidiary, to design an insurance policy that would guarantee Bank JTrust's NPLs and obfuscate the bank’s true net worth.
According to Bank JTrust and J Trust audits, executives and directors Felix Hartadi and Helmi Arief Hidayat were the architects of the plan, which their auditors at Crowe Horwath signed off on along with the blessing of the state authorities.
The Sinar Mas insurance policy appears to guarantee 100 percent of Bank JTrust's US$480 million loan portfolio, and is carried as an asset on the bank’s balance sheet at US$321 million. However, there is no sign that Bank JTrust has paid anything to Asuransi Sinar Mas, whose own assets appear to be inflated. Insuring NPLs, if indeed this is what has happened, is unheard of.
The insurance company’s unaudited financials indicate that of its assets of US$2.3 billion, US$$1 billion is held in an illiquid equity portfolio allegedly filled with shares of Sinar Mas Multiartha, the finance arm of Sinar Mas Group, while US$1 billion of other assets appear to consist of investments in Sinar Mas's loan principal guarantee mutual fund products, which mainly appear to be Sinar Mas Multiartha and related party stocks and bonds.
The Asuransi Sinar Mas stock portfolio is believed to have mirrored the wider stock exchange selloff of the past two weeks of over 20 percent, potentially making Asuransi Sinar Mas insolvent and its US$2.3 billion of insurance policies uncollectable. That would not be good news for Bank JTrust as it would turn the bank’s year-end US$122.6 million stated net worth into a negative US$200 million.
J Trust Representative Director President and CEO Nobuyoshi Fujisawa abruptly stepped down as CEO in Tokyo on February 26. Nobiru Adachi, the president commissioner, was demoted to director and overseas legal affairs officer at the same time, raising concerns that the Tokyo-based financial conglomerate, with interests in banking, finance and other fields in South Korea, Indonesia, Cambodia, Thailand, Mongolia and Japan, is facing serious headwinds.