We consider CIK as a strategically important entity within Chartis Group: CIK contributes over 19% of net premiums written and 11% of statutory surplus to Chartis' Asia-Pacific business (excluding Japan). These significant contributions are partially offset by the company's weaker market position in the local market and earnings track record compared to other Chartis Group core companies. CIK receives support from the group in the form of management oversight, risk management expertise, common infrastructure, and reinsurance protection. Because it is strategically important to Chartis Group, the ratings on CIK benefit from a two-notch uplift from its stand-alone credit profile, reflecting implicit support from the group. However, they are capped one notch below those of the core entities within Chartis Group.
CIK's good capitalization supports the ratings that we have assigned, and we expect the company to maintain strong capitalization in 2012. The company's local regulatory solvency ratio stood at over 240% as of March 2012, while the minimum requirement is 100%. We do not expect the company's capitalization to be affected negatively by the investment market since the company has allocated most of its assets in cash and equivalents. In addition, we expect the company's main business (accident and health insurance, which accounts for around 80% of the company's business) to help to stabilize its loss trend with limited natural catastrophes.
We view CIK's business profile in DM as a support factor for the current ratings. It is the second-largest company in the DM business in Korea with a market share of around 9%. The company has invested a large amount of resources and taken various initiatives to develop the market, and to secure its business profile in DM. We think the competitive advantages that CIK has achieved in DM will remain strong. On the other hand, we also recognize that the company could be vulnerable to severe competition. Due to its limited size, the company lacks economies of scale. It may be challenging for CIK to maintain a competitive product structure in its main business line.
We consider the company's operating performance as satisfactory, reflecting its control over expenses and tightened underwriting. Its historical net losses were mainly driven by high expense ratios caused by heavy investments in developing its DM channel. We expect CIK's operating performance to continue to improve with a combined ratio within 100% over the next one to two years. The company's loss ratios are relatively lower than those of its peers, reflecting its personal line (non-auto)-oriented business portfolio. The company has already exited from unprofitable business lines, such as the long-term travel accident and hospital cash business. In addition, the company has revised its premium rates, streamlined its product mix, and reduced its headcount. As the company's initiatives to improve profitability show good results gradually, we expect the company to post profits in 2012 to 2013.
Enterprise Risk Management: Adequate
We consider CIK's overall enterprise risk management (ERM) as adequate for managing its risk exposure. Our view reflects the characteristics of its ultimate parent AIG. We believe that, relative to its risk nature as well as local standards of risk control, CIK has adequate risk controls over its major risks, such as insurance risk, investment risk, and operational risk.
CIK's main risk is insurance risk. Its exposures to other risks are minimal. The company's investment assets are mostly allocated in cash and deposits. Its organizational structure is also relatively simple. The company is competing in a niche segment, which is personal accident and health insurance through the DM channel. If big players begin to participate in this segment, the company's profitability may be diluted and its insurance risk would increase. CIK plans to launch long-term products in the near future. However, this will not add significant risks (insurance as well as interest), because the company will remain focused on simple coverage with minimal surrender values.
The stable outlook reflects our view that CIK will maintain its strategically important status within Chartis Group. The ratings also reflect its satisfactory stand-alone capitalization and operating performance, supported by its business profile. In addition, the outlook reflects our view that the company's bottom line will improve over the next 12 to 24 months.
We may raise the ratings on CIK if we raise the ratings on Chartis Group's core companies. We could lower the ratings if the company misses our expectation for an earnings recovery and continues to post net losses, due to a high combined ratio in the accident and health insurance business or fierce competition in DM. If we downgrade Chartis Group's core companies, we could also lower the ratings on CIK.