TEXT-Fitch affirms ProAssurance's IFS at 'A'
Sept 6 - 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 actions consider the solid capital position of PRA's operating subsidiaries, as well as their consistent profitability, financial and operating flexibility, and experienced management team. 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 69.8% for the first half of 2012 compared to 75% for first half of 2011 and a 52.5% for full year 2011. Calendar year combined ratios for the past five 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 half 2012 compared to 108.5% for first half 2011 and a 110.9% for full year 2011. Fitch's analysis also considers PRA's June 2012 announcements to buy Medmarc Mutual Insurance Company (Medmarc) for $146.2 million and future policy credits of $7.5 million and Independent Nevada Doctors Insurance Exchange (IND) for an undisclosed amount. IND had approximately $12 million in gross written premiums in 2011. Both acquisitions are subject to customary closing conditions are expected to be completed in fourth quarter 2012 or first quarter 2013. Fitch views these transactions as neutral to the ratings given the respective purchase prices and synergies being modestly offset by the assumption of existing medical professional liability (MPL) insurance reserves which are long tail. Fitch also notes that PRA has a history of successfully acquiring and integrating MPL insurance companies. Fitch views PRA's loss reserve position as adequate and notes that the company has a history of favorable prior accident year reserve development. The $107.5 million of favorable reserve development reported for first half 2012 primarily related to accident years 2004 through 2009. As of June 30, 2012, the company had a conservative debt-to-tangible capital ratio of less than 2.5% and earnings-based interest coverage of greater than 89x for same time period. However, the company recently announced that as of the end of August, all of its outstanding $35 million in debt would be repaid and the company would no longer have any financial leverage. Fitch's longer term rating expectations incorporate a view that PRA will increase financial leverage in the 15%-25% range. 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; --Material adverse reserve development; --Failure to maintain pricing discipline in a softening rate environment. Fitch affirmed the following ratings with a Stable Outlook: ProAssurance Corporation --IDR at 'BBB+'. Fitch has affirmed the 'A' IFS rating of the following companies with a Stable Outlook: --ProAssurance Indemnity Company, Inc. --ProAssurance Casualty Company --ProAssurance Specialty Insurance Company; --Podiatry Insurance Company of America; --PACO Assurance Company, Inc. Fitch has withdrawn the following rating since the entity no longer exists: --ProAssurance National Capital 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. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Sep. 22, 2011). Applicable Criteria and Related Research: Insurance Rating Methodology
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