Fitch Affirms ProAssurance's Ratings; Outlook Stable

Wed May 1, 2013 12:30pm EDT

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(The following statement was released by the rating agency) CHICAGO, May 01 (Fitch) 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. RATING SENSITIVITIES 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: ProAssurance Corporation --IDR at 'BBB+'. Fitch has affirmed the IFS rating of the following companies at 'A' with a Stable Outlook: --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 Stable Outlook: --Medmarc Casualty Insurance Company; --Noetic Specialty Insurance Company. Contact: Primary Analyst Gerald Glombicki, CPA Director +1-312-606-2354 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Jim Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Mark Rouck, CFA, CPA Senior Director +1-312-368-2085 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 — Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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