FITCH AFFIRMS 'NEGATIVE OUTLOOK' FOR SUNDERLAND MARINE'S IFS RATING

FITCH AFFIRMS 'NEGATIVE OUTLOOK' FOR SUNDERLAND MARINE'S IFS RATING

Ratings Endorsement Policy 31 Jul 2013


Fitch Ratings-London-31 July 2013: Fitch Ratings has affirmed Sunderland Marine Mutual Insurance Company's (SMMI) Insurer Financial Strength (IFS) Rating at 'A-' with a Negative Outlook.

KEY RATING DRIVERS The affirmation reflects Fitch's assessment that SMMI's capital adequacy has remained supportive of the rating despite the company incurring a loss in 2012 of GBP1.4m (2011: loss of GBP8.0m). Fitch expects SMMI's trend of improved underwriting profitability to continue and expects the company to return to underwriting profitability in 2013. The company's low financial leverage, conservative investment strategy, well-established franchise and high customer retention are other factors that support the rating.

The Negative Outlook reflects the agency's concern regarding the company's current weak financial performance, with losses incurred in 2011 and 2012 being driven by unfavourable claims experience. However the 2012 result was a significant improvement on 2011 with the Fitch-calculated combined ratio improving to 107.5% from 119.5%. Fitch believes that the very poor 2011 result was of an exceptional one-off nature.

SMMI's main challenge is to improve its underwriting margins to make up for lower investment income. The company's ability to restore and maintain profitability will be a key rating driver over the near term. The agency will monitor closely the results through the remainder of 2013.

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.

RATING SENSITIVITIES Key rating triggers for a downgrade include a failure to return to profitable underwriting in 2013. If it becomes apparent that Fitch's expectation of a return to underwriting profitability is not being met, the rating could be downgraded.

Reduced use of reinsurance, which could weaken SMMI's Fitch-assessed capital position, could also lead to a downgrade.

Given the company's current financial and strategic profile, the agency does not foresee an upgrade within the medium term.