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Fitch Revises Merchants' Outlook to Negative; Affirms IFS Ratings
CHICAGO-(Business Wire)-October 3, 2008 - Fitch Ratings has revised the Rating Outlook to Negative from Stable and affirmed the 'A-' Insurer Financial Strength (IFS) ratings for Merchants Mutual Insurance Company (Merchants) and its subsidiaries as follows:
Merchants Mutual Insurance Company
Merchants Preferred Insurance Company
—IFS 'A-'.
Fitch has also assigned an 'A-' IFS rating to Merchants National Insurance Company.
Fitch's ratings on Merchants reflect its continued conservative reserving practices, adequate underwriting performance and capitalization, which is supported by a Prism score at 106% of 'A-' as of year-end 2007.
The Outlook revision reflects potential capital strain from Merchants' planned growth initiatives, including the expiration of Merchants' pooling agreement with American European Insurance Company at Dec. 31, 2009. The expiration of the pool would increase net written premiums by approximately 33% and could materially increase catastrophe exposure. Given increased pressure on underwriting and investment performance, Fitch anticipates near-term deterioration in operating results, which would be magnified by higher operating leverage. Fitch will evaluate management's efforts to manage this risk over the next 12 - 18 months.
As of Aug. 31, 2008, Merchants held $11.6 million of Fannie Mae and Freddie Mac preferred stock, some of which has been other than temporarily impaired. Fitch believes the after-tax impact of this loss will be offset by earnings and does not impact the rating. Further investment losses could result from Merchants' exposure to residential mortgage backed securities; however, Fitch believes there is less risk associated with older vintages, which makes up the majority of Merchants' portfolio.
Significant deterioration in capital adequacy would cause Fitch to take a negative rating action. Other factors that could lead to a downgrade include investment, underwriting or catastrophe losses that exceed Fitch's expectation.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
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