Earlier this week, Atlantic Mutual, based in New York, said it has agreed to sell renewal rights for the majority of its commercial lines inland marine and ocean cargo businesses to Travelers Property Casualty Corp. in Hartford, Conn. Under the deal, Travelers will acquire up to some $110 million in new net written premium and the related unearned premium reserve portfolio currently on Atlantic Mutual's balance sheet.

Atlantic Mutual said the transaction is part of the company's ongoing strategy to focus on its commercial market segments and affluent personal lines, and sell off its non-core marine division.

But the ratings firm argued that proceeds from the announced deal, which also concludes Atlantic Mutual's previously announced capital raising initiative, likely "will not be sufficient to replenish the capital that would be lost if Atlantic Mutual were to strengthen reserves to the required level indicated by Fitch's modeling."

Fitch had previously stated it would lower its Atlantic Mutual ratings if the amount of capital raised was lower than levels expected by the ratings firm to cover any estimated reserve deficiencies.

Fitch said there has been progress in the insurer's capital-raising efforts as well as improvements in the quality of capital. Fitch pointed out that in addition to proceeds from the renewal rights sale, the company raised $15 million from surplus notes sales earlier this year. Further, Atlantic Mutual also had realized gains of some $50 million from its investment portfolio.

"Atlantic Mutual has used proceeds of these efforts to substantially reduce the level of soft capital that had been generated by previous reinsurance transactions," the ratings agency observed. Atlantic Mutual has also implemented expense improvements and reduced its interest burden by lowering its finite-risk reinsurance balances, Fitch said.

The ratings firm also said it had examined results of Atlantic Mutual's recently completed asbestos study, which shows a reserve-deficiency range somewhat less than Fitch's own estimate. "Fitch has incorporated its expectations of the reserve strengthening needed into its analysis and, therefore, is assigning a 'Stable Rating Outlook'," the ratings firm said.