Fitch Ratings says that the potential merger between Sunderland Marine Mutual Insurance Company Limited (SMMI; Insurer Financial Strength rating A-/Negative) and The North of England P&I Association could have positive implications over time for SMMI's rating. SMMI announced yesterday that it is in discussions with The North of England P&I Association Limited (North) about a possible merger. The decision to pursue a merger between the two entities follows the success of the strategic alliance which has been in place between the two companies since January 2012. North is the world's second-largest marine mutual liability insurer and Fitch believes that the alliance could provide a good strategic fit with SMMI. Fitch also believes that the merged group could offer synergies and enhance SMMI's capital position. Fitch considers that the combined operations of North and SSMI could give SMMI access to a stronger capital base and enhance its access to distribution. North and SMMI's strategic platforms could well complement each other. SMMI typically insures smaller vessels such as small cargo ships, ferries and barges compared with the larger vessels usually insured by North. Fitch also notes that the strategic alliance between North and SMMI over reinsurance and distribution has proved successful so far. North has total assets of USD1.2bn and a total accumulated surplus of USD312m. SMMI has total assets of GBP169m and a total accumulated surplus of GBP35m. This would mean a combined group with total assets of more than GBP900m and accumulated surplus of approximately GBP230m. North has net written premiums of around USD300m 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. Fitch will determine what implications this change in structure will have for SMMI's future profile as well as any potential risks that may materialise as a result of the merger. Fitch will assess any change in business profile or strategy as part of its on-going evaluation of the insurer's credit quality, and will take appropriate rating action as necessary. SMMI reported an overall loss before tax for 2012 of GBP0.5m (2011: loss of GBP6.9m). Fitch expects the company to return to profitability in 2013. Fitch affirmed SMMI on 31 July. The affirmation and Negative Outlook reflected the losses made in 2011 and 2012 but also took into account SMMI's trend of improved underwriting profitability. The company's low financial leverage, conservative investment strategy, well-established franchise and high customer retention are other factors that support the rating.