Overview -- ACUITY's underwriting and operating performance has improved, primarily because of premium rate increases. -- We are revising our outlook on the company to stable from negative and affirming our 'A+' rating on ACUITY. -- We believe ACUITY will be able to sustain its rate increases and return to historical operating performance during the next 12-24 months. Rating Action On Aug. 7, 2012, Standard & Poor's Ratings Services revised its outlook on ACUITY a Mutual Insurance Co. to stable from negative. At the same time, we affirmed our 'A+' financial strength rating on ACUITY. Rationale The outlook revision reflects our expectations that the pricing increases in 2011 and 2012, in both the commercial and personal lines, will improve the company's underwriting profitability throughout 2012 and 2013 to a historically better-than-peers performance level. ACUITY's underwriting and operating performance deteriorated from 2008 to 2011 primarily due to the weakening of commercial-lines pricing and unusually severe storm activity. However, the company has been able to drive rate increases, particularly in its workers' compensation line, in 2011 and 2012. The company's year-to-date June 2012 combined ratio had improved by 9.2 points to 86.2% from the same period in the previous year. With the continued rate and exposure increase, we expect the company's combined ratio to improve to 94%-96% in 2012, from 99.6% in 2011. The ratings on ACUITY reflect the company's strong operating performance, strong liquidity due to its positive underwriting and operating cash flows, and very strong capital. We consider the company's enterprise risk management as adequate with strong risk controls, which also supports the rating. Offsetting these positive factors is the company's concentration as a Midwest regional insurer, as Wisconsin and Illinois generate half of ACUITY's direct premiums written. Due to its narrow and concentrated regional focus, the company is more susceptible to economic and competitive conditions and localized storm losses in the Midwest region, without the same ability to diversify as its larger peers. The company's homeowners' business is also unprofitable, primarily because of the heavy storm losses in 2010 and 2011. In addition, ACUITY's mutual status may somewhat limit its financial flexibility. Outlook The outlook is stable. With the company maintaining high retention rates (about 85% as of June 30, 2012) and continued rate increases in workers' compensation, personal auto, and homeowners' lines, we believe that the company may be able to sustain the rate increases through the rest of 2012, and improve earnings in 2012 and 2013. We expect the combination of rate increases and new policy holders to increase the company's gross written premiums by about 12%. We also expect that the improving premium rates and premium growth will result in an overall combined ratio of 94%-96% (including prior years' favorable reserve development) for full-year 2012 (assuming a normal level of storm activity for the remainder of 2012). We also expect the company not to have as much favorable reserve development as in 2010 and 2011, which was substantially higher than in prior years. The company's competitive position is strong, but limits any increase in our ratings due to its limited scale outside of a few key states. Because of this, we won't likely raise the ratings during the next 24 months. However, we may lower the rating if the company fails to meet our expectations for the combined ratio, or fails to outperform the industry given its competitive position. We may also lower the rating if the company has a significant adverse reserve development that hurts its very strong capital position, which currently mitigates ACUITY's limited business profile. Related Criteria And Research -- Evaluating Insurers' Competitive Positions, April 22, 2009 -- Analysis Of NonLife Insurance Operating Performance, April 22, 2009 Ratings List Ratings Affirmed; Outlook Action To From ACUITY a Mutual Insurance Co. Counterparty Credit Rating Local Currency A+/Stable/-- A+/Negative/-- Financial Strength Rating Local Currency A+/Stable/-- A+/Negative/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.