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TMCNet:  Fitch Affirms ProAssurance's Ratings; Outlook Stable

[July 08, 2014]

Fitch Affirms ProAssurance's Ratings; Outlook Stable

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed ProAssurance Corporation's (PRA) Issuer Default Rating (IDR) at 'A-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of PRA's primary insurance operating companies at 'A'. A complete list of ratings is provided at the end of this release. The Rating Outlook for all ratings is Stable.

Fitch has also extended its group IFS rating of 'A' to the operating subsidiaries of Eastern Insurance Holdings, Inc. (Eastern). PRA purchased Eastern, a workers' compensation specialist, in January 2014 for $205 million.

KEY RATING DRIVERS

The rating affirmation considers 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.

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.

PRA reported a calendar year GAAP combined ratio of 82.7% for first three months of 2014 up from 70.6% for full year 2013. 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 110.7% combined ratio for first three months of 2014, a modest improvement relative to the 112.8% for full year 2013. Fitch believes that current loss ratio estimates incorporate a reasonable but conservative view for future claims reserves.

The MPLI market's underwriting results outperformed other major commercial lines segments on a calendar year basis. However, more recently, MPLI accident year combined ratios have risen significantly.

The broader commercial lines market has experienced premium rate improvements for the last three 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.

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 $223 million of favorable reserve development reported for full year 2013 primarily related to accident years 2006 through 2010, but Fitch notes all 10 accident years showed favorable development.

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 nvironment 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 March 31, 2014, the company had a very strong debt-to-total capital ratio of 10% and as a result, extremely strong earnings based interest coverage of 17.4 times (x). PRA's IDR is based rating is based on PRA maintaining financial leverage below 15% and maintaining strong interest coverage and holding company liquidity.

The purchase of Eastern is the second recent purchase that diversifies PRA's product mix. Eastern is a workers' compensation insurer that focuses primarily on low to middle hazard classes of business and has 20% of its book in health care related risks.

While workers' compensation is outside of the traditional MPLI scope of PRA's business, the modest size of Eastern relative to PRA, coupled with the company's successful track record of integration of past mergers and retention of key management figures reduces the overall risk of the acquisition. As of March 31, 2014, workers' compensation premiums accounted for 30% of PRA's total written premiums. Fitch will monitor the growth in these product levels as excessive growth rates can be a leading indicator of potential reserve and profitability problems.

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 of the debt rating and IDR:

--A sustained increase in financial leverage above 15%.

--A reduction in statutory maximum dividends to interest coverage below 10 times (x), noting that excess holding company cash could modestly reduce the 10x target.

The following is a list of triggers that could lead to a downgrade of all ratings:

--An increase in financial leverage above 25% or decline in operating earnings-based coverage below 7x.

--Material adverse reserve development.

--An increase in the company's GAAP operating leverage of 1.0x or higher.

--A Prism capital model score below 'Strong' (currently 'Extremely Strong').

Fitch has affirmed the following ratings with a Stable Outlook:

ProAssurance Corporation

--IDR at 'A-'.

--$250 million 5.3% senior unsecured debt due 2023 '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.;

--Medmarc Casualty Insurance Company;

--Noetic Specialty Insurance Company.

Fitch has assigned an 'A' IFS rating to the following companies with a Stable Outlook:

--Allied Eastern Indemnity Company;

--Eastern Alliance Insurance Company;

--Eastern Advantage Assurance Company.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838541

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) 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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