Fitch Affirms ProAssurance's IFS at 'A' on Extraordinary Dividend
CHICAGO -- December 05, 2012
Fitch Ratings has affirmed ProAssurance Corporation's (PRA) Issuer Default
Rating (IDR) at 'BBB+'. Fitch has also affirmed the 'A' Insurer Financial
Strength (IFS) ratings of PRA's primary insurance operating companies (listed
below). The Rating Outlook for all ratings is Stable.
Fitch's rating action is based on a proforma analysis of PRA's capital
following today's announcement of a two-for-one stock split, a special
dividend of approximately $153 million, regular shareholder dividend increase
to approximately $61 million annually, and the close of Independent Nevada
Doctors Insurance Exchange acquisition. PRA's GAAP shareholders' equity was
$2.4 Billion at Sept. 30, 2012, and GAAP operating leverage was 0.23x proforma
operating leverage increases to 0.25x after the dividend.
As of Sept. 30, 2012 the company had no financial leverage as the company
retired its $35 million in outstanding debt back in August 2012. Therefore,
there will be no change in PRA's financial leverage following today's
announcement. Fitch's longer term rating expectations incorporate a view that
PRA will increase financial leverage to the 15 - 25% range.
Fitch's rating actions consider the solid capital position of PRA's operating
subsidiaries, as well as their consistent profitability, along with financial
and operating flexibility. Partially offsetting these positives is the
potential volatility the company is exposed to as a monoline company that
operates in one of the industry's most unpredictable lines of business.
PRA reported a calendar year GAAP combined ratio of 70.1% for the first nine
months of 2012 compared to 74.2% for first nine months of 2011 and a 52.5% for
full year 2011. Calendar year combined ratios for the past 5 years have been
helped by large favorable reserve development. While favorable reserve
development typically indicates reserve strength it can mask deterioration in
current calendar year underwriting results. On an accident year basis the
company reported a 109.9% combined ratio for first nine months 2012 compared
to 109.5% for first nine months 2011 and a 110.9% for full year 2011.
Fitch has also extended the group rating to Independent Nevada Doctors
Insurance Company which was recently acquired. The acquisition strengthens
PRA's presence in Nevada giving the company top market share in the state.
Within Fitch's rating rationale are multiple rating triggers. If PRA were to
materially deviate from any of these items, especially for an extended period,
the ratings could be affected.
Fitch believes that a ratings upgrade in the near term is less likely given
the company's narrow product focus in a highly volatile line of business.
The following is a list of triggers that could lead to a downgrade:
--An increase in the company's operating leverage, as defined by net written
premiums to policyholder surplus, of 1.0x or higher.
--An increase in tangible financial leverage above 25% or decline in operating
earnings-based coverage below 7x.
--Sustained material adverse reserve development such as adverse reserve
development to surplus in excess of 7-10%.
--Failure to maintain pricing discipline in a softening rate environment such
that calendar year combined ratio exceeded 110% for a sustained time.
Fitch affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB+'.
Fitch has affirmed the 'A' IFS rating of the following companies with a Stable
--ProAssurance Indemnity Company, Inc.
--ProAssurance Casualty Company
--ProAssurance Specialty Insurance Company
--Podiatry Insurance Company of America;
--PACO Assurance Company, Inc.
Fitch has assigned the 'A' IFS rating of the following company with a Stable
--Independent Nevada Doctors Insurance Company
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
--'Insurance Rating Methodology' (Oct. 18, 2012)
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
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Gerald Glombicki, CPA, +1-312-606-2354
70 W. Madison Street
Chicago, IL 60602
Jim Auden, CFA, +1-312-368-3146
Mark Rouck, CFA,CPA, +1-312-368-2085
Brian Bertsch, +1-212-908-0549
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