RPT-Fitch revises Sunderland Marine's outlook to stable; affirms IFS rating at 'A-'
Dec 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised Sunderland Marine Mutual Insurance Company's (SMMI) Outlook to Stable from Negative and affirmed its Insurer Financial Strength (IFS) Rating at 'A-'.
KEY RATING DRIVERS
The revision of the Outlook reflects Fitch's expectation that SMMI will return to profitability in 2013, due to a marked improvement in its underwriting result. Capital adequacy has remained supportive of the rating despite the company incurring significant losses in 2011 and 2012 of GBP8.0m and GBP1.4m, respectively.
Fitch expects SMMI's trend of improved underwriting profitability to continue, partly due to the strategic partnership with The North of England Protecting and Indemnity Association Limited (North). North has reinsured the majority of SMMI's liability book. The agreement has also presented new business opportunities as the company gained access to new contacts and locations through North. SMMI's low financial leverage, conservative investment strategy, well-established franchise and high customer retention also support the rating. The Stable Outlook is based on SMMI's standalone financials. However, Fitch also notes that SMMI is currently in negotiations for a possible merger with North.
North is the world's second-largest marine mutual liability insurer and Fitch believes that a merger could provide a good strategic fit with SMMI. North has annual net written premiums of around GBP200m compared with GBP40m for SMMI.
The increased size of the group could lead to growth opportunities for SMMI with greater opportunities to exploit the contacts and regional offices of North.
North and SMMI's strategic platforms could complement each other well as SMMI's portfolio mainly consists of hull and machinery policies whereas North focuses on the liability side. SMMI typically insures smaller vessels such as small cargo ships, ferries and barges compared with the larger vessels usually insured by North.
SMMI's main challenge is to maintain its improved underwriting margins to make up for lower investment income. The company's ability to maintain profitability will continue to be a key rating driver in the near term.
SMMI is a leading insurer in its chosen niche markets, which include marine, liability and aquaculture insurance. It conducts business in over 50 countries and wrote gross premiums in 2012 of GBP95.3m (2011: GBP75.1m). The group's business portfolio includes hull & machinery (60%), protection & indemnity and personal accident (20%) and storm damage and disease risks for aquaculture (20%). It is geographically well diversified and derives 14% of its premiums from the UK, 44% from North America, 13% from Europe, 18% from Australia and New Zealand and 11% from other areas.
Key rating triggers for a downgrade include a return to unprofitable underwriting in the future. In particular, if the combined ratio deteriorates to more than 103% for a sustained period, the rating could be downgraded. Weakening capitalisation, with an increase in the ratio of net premium written to free surplus to more than1.5 times, (which could be caused, for example, by reduced use of reinsurance) could also lead to a downgrade.
Based on the company's current financial and strategic profile (i.e. under the current ownership structure, not taking into account the potential merger with North), an upgrade is unlikely within the medium term.
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