Fitch Affirms ProAssurance's Ratings; Outlook Stable
CHICAGO -- May 1, 2013
Fitch Ratings has affirmed ProAssurance Corporation's (PRA) Issuer Default
Rating (IDR) at 'BBB+'. Fitch has also affirmed the Insurer Financial Strength
(IFS) ratings of PRA's primary insurance operating companies (listed below) at
'A'. The Rating Outlook for all ratings is Stable.
KEY RATING DRIVERS
Fitch's rating actions consider the solid capital position of PRA's operating
subsidiaries, as well as their consistent profitability, financial
flexibility, and experienced management team. In addition, PRA has a track
record of prudent use of financial leverage, claims management, and reserve
processes. These characteristics are generally supportive of a higher rating
per Fitch guidelines.
Partially offsetting these positives is the company's status as a largely
monoline company that primarily operates in the volatile medical professional
liability (MPLI) line of business, which limits the upside of PRA's ratings.
While not anticipated by Fitch over the ratings horizon, Fitch believes PRA,
as a specialty largely monoline company, is highly exposed to adverse changes
in the MPLI market conditions or other industry dynamics.
The MPLI market's underwriting results outperformed other major commercial
lines segments on a calendar year basis. However, more recently, MPLI combined
ratios have risen significantly.
The broader commercial lines market has experienced premium rate improvements
for the last two years in response to weaker underwriting losses. The MPLI
segment has lagged in this pricing recovery and is unlikely to show material
near-term rate improvement due to the market presence of many monoline MPLI
writers that experienced strong capital growth in the last hard market but
have limited underwriting opportunities outside of MPLI.
PRA reported a calendar year GAAP combined ratio of 57.1% for full year 2012,
a 4.6 percentage point deterioration over the comparable period in 2011.
Calendar year combined ratios for the past several 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 106.5% combined ratio a
modest improvement relative to the 110.1% same period in 2011. Fitch believes
that current loss ratio estimates incorporate a reasonable but conservative
view for future claims reserves.
Fitch views PRA's loss reserve position as modestly redundant and notes that
the company has a history of favorable prior accident year reserve
development. The $272 million of favorable reserve development reported for
full year 2012 primarily related to accident years 2005 through 2009.
In particular, loss reserves are critically important for a MPLI company as
the liability duration is amongst the highest in the property/casualty
universe, with potential for reserve volatility due to changes in the
litigation environment and inflation over time. After one year approximately
13% of all known claims are closed and after five years approximately 90% of
claims are closed.
As of Dec. 31, 2012 the company had a very strong debt-to- total capital ratio
of 6% and as a result, extremely strong earnings based interest coverage.
Fitch's longer term rating expectations incorporate a view that consistent
with managements longer-term financial strategies, at some point PRA will
increase financial leverage to 20-25% range and fixed charge coverage will
normalize at 7.0 times (x) or greater.
Fitch has extended its group IFS rating to Medmarc Casualty Insurance Company
and Noetic Specialty Insurance Company which were recently acquired. This
acquisition gives PRA a presence in products liability for medical devices and
the life sciences industry in addition to increasing PRA's professional
liability book of business for attorneys. PRA's 2012 pro forma premiums
accounting for this acquisition increase life sciences and attorney's to
approximately 10% of total premiums.
While medical device product liability is outside of the traditional MPLI
scope of PRA's business the risk is somewhat offset by the modest size
relative to PRA in addition to the fact of PRA's successful efforts of
integration of past mergers and retention of key management figures.
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.
While PRA's quantitative metrics are more consistent with a higher rating
category, Fitch's current view of the risk characteristics of the MPLI
industry is constraining PRA's ratings given PRA's largely monoline status.
Fitch believes that a ratings upgrade in the near term is unlikely, barring a
change in Fitch's broad view of the risks inherent in the MPLI industry.
The following is a list of triggers that could lead to a downgrade:
--Material adverse reserve development;
--An increase in the company's operating leverage, as defined by net written
premiums to policyholder surplus, of 1.0x or higher;
--A Prism capital model score below 'Strong' (currently 'Extremely Strong');
--An increase in tangible financial leverage above 25% or decline in operating
earnings-based coverage below 7x.
Fitch affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB+'.
Fitch has affirmed the IFS rating of the following companies at 'A' with a
--ProAssurance Indemnity Company, Inc.
--ProAssurance Casualty Company
--ProAssurance Specialty Insurance Company
--Podiatry Insurance Company of America;
--PACO Assurance Company, Inc.
--Independent Nevada Doctors Insurance Company
Fitch has assigned an IFS rating to the following companies of 'A' with a
--Medmarc Casualty Insurance Company;
--Noetic Specialty Insurance Company.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology ￢ﾀﾔ Amended
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Gerald Glombicki, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Jim Auden, CFA
Mark Rouck, CFA, CPA
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