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Rating Action:

Moody's affirms ProAssurance ratings (A2 IFS) following agreement to acquire Eastern Insurance

24 Sep 2013

NOTE: On October 10, 2013, the press release was revised as follows: Corrected the first sentence of the first paragraph, to include that the (P)Ba1 preferred shelf rating also was affirmed. Revised release follows.

New York, September 24, 2013 -- Moody's Investors Service has affirmed the (P)Baa2 senior unsecured shelf rating and the (P)Ba1 preferred shelf rating of ProAssurance Corporation (NYSE: PRA) and the A2 insurance financial strength (IFS) ratings of the company's property-casualty affiliates following the company's announcement that it has reached an agreement to acquire Eastern Insurance Holdings, Inc. (NYSE: EIHI, Eastern). Eastern will be merged into a newly-formed subsidiary of ProAssurance, in an all-cash transaction which values Eastern at approximately $205 million. The transaction is subject to approval by the insurance departments of Alabama and Pennsylvania and shareholders, and is expected to close January 1, 2014. The outlook for ratings remains stable.

Under the terms of the agreement, ProAssurance's acquisition of Eastern will be funded with cash and short-term investments at the holding company. Eastern primarily offers workers' compensation (WC) insurance and WC specialty reinsurance in the US, with about 65% of its 2012 direct premiums written in Pennsylvania and the remainder mostly split among other midatlantic and southern states.

RATINGS RATIONALE

According to Moody's analyst Jasper Cooper, "The stable outlook reflects ProAssurance's strong financial fundamentals with very good operating performance and capital growth over the past several years which offsets to a degree by the execution and integration risk associated with diversifying outside of the group's traditional medical professional liability business into workers' compensation insurance." Moody's views the acquisition of Eastern as incrementally negative as it increases overall underwriting risk given that workers' compensation is a long-tail, historically volatile line of business with profitability pressures in recent years. However, Moody's notes that the transaction is manageable from a financial perspective as the purchase price which will be funded with cash representing about 9% of ProAssurance's shareholders' equity as of June 30, 2013, while ProAssurance's 2012 net premiums written would increase about 24% on a pro forma basis.

ProAssurance generates the majority of its business from individual physician practices and small doctor groups with a smaller share of premiums written on larger medical facilities. As larger medical facilities have acquired individual physicians and small group practices, ProAssurance and other industry players have seen their market share decline (excluding acquisitions). The acquisition of Eastern represents a significant strategic shift for ProAssurance which would incrementally strengthen the company's product diversification and broaden its capabilities to offer multiple products to these larger medical facilities over time.

According to Moody's, the affirmation of ProAssurance's ratings reflects the group's strong market profile in the medical professional liability (MPL) line of business, its strong operating profitability, conservative operational leverage profile, sound reserve position, and modest financial leverage. These strengths are tempered primarily by the company's well above-average product risk given that MPL has exhibited over time one of the highest levels of volatility in underwriting results and liability claim trends among all insurance lines of business. The MPL market has benefited from strong pricing trends in the early 2000s and from favorable liability claim trends in more recent years, partially offset by increased competition in the last 2-3 years. Profitability for workers' compensation insurers, on the other hand, have been under pressure but have been steadily improving over the last 2-3 years given cumulative rate increases and moderate loss cost trends. Both lines are pressured by continued low interest rates given their long-tail nature.

Moody's noted that factors that could lead to an upgrade for ProAssurance and its principal operating subsidiaries include the following: increased product diversification through measured growth; continued strength of the MPL franchise through the underwriting cycle; sustained modest financial leverage profile (e.g. below 10%), combined with very strong capital adequacy (e.g. gross underwriting leverage at 1.0x or below) and solid reserve position; and sustained interest and shareholder dividend coverage in excess of 8x.

Factors that could lead to a downgrade include the following: material negative developments in the MPL environment or legislation that could reduce franchise strength and/or elevate operational risk; a sizable expansion into a product or geographical area outside of the company's core strengths; sustained adjusted financial leverage in excess of 20%, together with earnings and cash-flow coverage of interest expense below 6x and 5x, respectively; a significant or sustained increase in combined ratios; and gross underwriting leverage at 2x or greater.

The spread between ProAssurance's provisional senior debt rating of (P)Baa2 and the A2 IFS ratings of ProAssurance Indemnity Company and its rated property/casualty affiliates is three notches, which is consistent with Moody's typical notching practices for US insurance holding company structures.

The principal methodology used in this rating was Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

ProAssurance Corporation, based in Birmingham, Alabama and founded in 1976, is engaged through its subsidiaries primarily in underwriting professional liability insurance products to physicians, dentists, other healthcare providers, and healthcare facilities in the United States. For the first half of 2013, ProAssurance reported net premiums earned of $265 million and net income of $163 million. Shareholders' equity was $2.3 billion as of June 30, 2013.

Eastern Insurance Holdings, based in Lancaster Pennsylvania is engaged through its subsidiaries in underwriting workers' compensation insurance and specialty reinsurance, and third-party claims administration. For the first half of 2013, Eastern reported net premiums earned of $88 million and net income of $6 million. Shareholders' equity was $141 million as of June 30, 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jasper Cooper
Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms ProAssurance ratings (A2 IFS) following agreement to acquire Eastern Insurance
No Related Data.
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