We view Chartis Insurance HK as a core entity with strong integration with and support from the Chartis group. The company is an indirect subsidiary of Chartis Inc. and is ultimately owned by American International Group Inc. (AIG; A-/Negative/A-2). Chartis Insurance HK benefits from group support in terms of common infrastructure such as systems and underwriting, reinsurance support, actuarial resources, and risk management.
Chartis Insurance HK has a strong business position, in our view. The company's competitive position, as measured by market share, declined from 2007 to 2010 due to strong competition in its core lines of business and its focus on less competitive niches. This trend reversed in 2011, with gross premiums growing 23% and market share improving to 4.9%. While premium rates have generally increased for catastrophe-exposed multinational business and employee compensation, Chartis Insurance HK still faces declining rates in its financial lines and in its marine and domestic property business. We expect the company's business position to remain at the current level over the near term.
Chartis Insurance HK's operating performance is good and supports the ratings. The company's operating performance has, however, fluctuated in recent years due to losses in financial lines. We expect Chartis Insurance HK's continued focus and development of specialty lines such as mergers and acquisitions, its pursuit of construction whole account opportunities, and its continued development of alternative distribution to ultimately improve operating performance.
Chartis Insurance HK is adequately capitalized relative to its risk profile and to peers in Hong Kong. Its conservative investment portfolio and strong reserving support its capital position. The company's investment portfolio consists of 100% cash and deposits. Chartis Insurance HK's very high levels of reinsurance support from the group further sustain its capital position. As part of the group's capital management strategy, risk from global and highly volatile lines of business such as energy, marine, financial lines, and commercial property are ceded to the Chartis group. The local subsidiary retains the risk on less volatile consumer lines of business.
Enterprise risk management
We consider Chartis Insurance HK's enterprise risk management (ERM) as "adequate." Our view reflects the characteristics of its ultimate parent, AIG. The ERM assessment reflects sub-scores of "adequate" for all of the components of our ERM evaluation: risk management culture, risk controls, emerging risk management, risk models, and strategic risk management.
We view Chartis Insurance HK's control over risk factors--such as insurance risk, investment risk, and operational risk--as "adequate" relative to its risks, as well as to local standards.
The stable outlook on Chartis Insurance HK is in line with the outlook on the Chartis group.
The outlook on the Chartis group in turn reflects the stable outlook on its ultimate parent, AIG, with the Chartis group viewed as strategically important to the parent. We could lower our ratings on AIG and Chartis Insurance HK if the group's performance were to fall short of our expectations, particularly with regard to earnings, capitalization (currently strong), liquidity, or leverage. On the other hand, we could raise the ratings if the consolidated group were to improve its operating performance, particularly at the Chartis group level, to above the industry average while continuing to improve AIG's risk profile.
We could upgrade Chartis Insurance HK if we raise the ratings on the Chartis group. We could raise the stand-alone credit profile of Chartis Insurance HK if the company regains its market share and market position, and maintains good operating performance (with a combined ratio of less than 90%).
We could downgrade Chartis Insurance HK if our view of the company's "core" status to the parent changes. We could also lower the rating if the company's underwriting performance weakens or its market position deteriorates further.
Related Criteria And Research
-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
-- Interactive Ratings Methodology, April 22, 2009
-- General: Group Methodology, April 22, 2009
-- Summary Of Standard & Poor's Enterprise Risk Management Evaluation Process For Insurers, Nov. 26, 2007