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Rating Action:

Moody’s affirms ProAssurance’s ratings, changes outlook to negative

23 January 2020

New York , January 23, 2020 – Moody's Investors Service ("Moody's") has affirmed the Baa2 senior debt rating of ProAssurance Corporation (ProAssurance, NYSE: PRA), the A2 insurance financial strength (IFS) ratings of ProAssurance Indemnity Company, Inc. and affiliates (PRA Group), and the A3 IFS ratings of the lead operating companies of Eastern Insurance Holdings, Inc. (Eastern). In the same action, Moody's has changed the rating outlook to negative from stable following the company's announcement that it reported a preliminary estimate of $37 million of adverse reserve development in its Specialty Property & Casualty segment in the fourth quarter of 2019, driven by a large national healthcare account written since 2016.

RATINGS RATIONALE

According to Moody's, ProAssurance's underwriting results in its Specialty P&C segment have deteriorated for several years, reflecting a competitive pricing environment and rising loss cost trends. ProAssurance has responded by raising rates and reducing policy retentions for its Specialty P&C segment, which accounts for almost 60% of ProAssurance's net premiums earned. The company said that the segment's full-year 2019 net loss ratio will be between 105% and 109% which will place significant pressure on 2019 results.

ProAssurance has taken steps to execute a new underwriting strategy for its healthcare professional liability excess and surplus lines of business, which includes the large national healthcare account driving the adverse development as well as custom physicians, healthcare facilities, correctional healthcare, and long-term care professional liability policies. Despite the current quarter reserve strengthening, we believe reserve uncertainty remains within this segment, which historically has been one of the most volatile lines in the P&C industry. The company says that loss estimates for its core physicians, podiatric, chiropractic, legal professional liability and medical technology liability businesses are not impacted by the announcement.

The rating affirmations reflect the group's long-term track record and solid competitive market position as a specialist underwriter of US healthcare (medical) professional liability insurance along with its strong claim handling capabilities. The group maintains a conservative financial profile including low operational leverage, good asset quality and moderate financial leverage. These strengths are tempered by the group's high product risk given that over half of the company's business is focused on healthcare professional liability, which has over time exhibited among the most significant levels of volatility in underwriting results and liability claim trends. This market segment faces rising loss costs and lower reserve redundancies with steadily rising accident year loss ratios. In addition, ProAssurance's core individual physicians franchise is impacted by structural changes occurring within the healthcare industry as doctors move from individual practices and small doctor groups to hospitals, which account for a smaller share of the company's premium.

The following factors could lead to a stable outlook: 1) a return to favorable reserve development particularly for the healthcare professional liability; 2) improved underwriting results for the Specialty P&C segment with continued strong performance for the other major segments; 3) consolidated financial leverage below 25% with interest coverage above 6x on sustained basis; and, 4) gross underwriting leverage below 2x.

Factors that could lead to a ratings downgrade include: 1) significant adverse reserve development particularly for healthcare professional liability; 2) material negative developments in the healthcare professional liability environment or legislation that could increase loss cost trends or reduce profitability; 3) a sizeable expansion into a product or geographical area outside of the company's core strengths; 4) adjusted financial leverage in excess of 25% together with interest and preferred dividend earnings and cash-flow coverage below 6x and 5x, respectively; 5) gross underwriting leverage above 2.5x.

LIST OF RATINGS

The following ratings have been affirmed:

ProAssurance Corporation -- senior unsecured notes at Baa2; provisional senior unsecured shelf at (P)Baa2; provisional preferred shelf at (P)Ba1;

ProAssurance Casualty Company -- insurance financial strength rating at A2;

ProAssurance Indemnity Company, Inc. -- insurance financial strength rating at A2;

Podiatry Insurance Company of America -- insurance financial strength rating at A2;

Allied Eastern Indemnity Company -- insurance financial strength rating at A3;

Eastern Alliance Insurance Company -- insurance financial strength rating at A3.

Outlook Actions:

ProAssurance Corporation

…Outlook, Changed To Negative From Stable

ProAssurance Casualty Company

…Outlook, Changed To Negative From Stable

ProAssurance Indemnity Company, Inc

…Outlook, Changed To Negative From Stable

Podiatry Insurance Company of America

…Outlook, Changed To Negative From Stable

Allied Eastern Indemnity Company

…Outlook, Changed To Negative From Stable

Eastern Alliance Insurance Company

…Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Property and Casualty Insurers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ProAssurance Corporation is headquartered in Birmingham, Alabama, and through its subsidiaries provides professional liability insurance products primarily to physicians, other healthcare providers, and healthcare facilities in the United States. It also writes medical technology and life sciences product liability, legal professional liability business, as well as workers' compensation through its Eastern subsidiary. The company markets its products through both specialized independent agents and direct marketing. For the first nine months of 2019, ProAssurance reported net earned premiums of $633 million and net income of $60.4 million. As of September 30, 2019, shareholders' equity was $1.6 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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, CFA
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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