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Global Credit Research - 16 Nov 2010
First-time ratings of Alabama-based medical professional liability insurer.
New York, November 16, 2010 -- Moody's has assigned provisional ratings to the shelf registration of
ProAssurance Corporation (ProAssurance; NYSE: PRA) --
provisional senior unsecured at (P)Baa3, provisional preferred stock
at (P)Ba2 -- and has also assigned A3 insurance financial strength
ratings to the holding company's four principal insurance subsidiaries.
The outlook for the ratings is stable.
According to Moody's, the ratings are based primarily on the
company's firmly established track record and solid competitive market
position as a specialist underwriter of medical professional liability
(MPL) insurance in the US, as well as its overall strong financial
fundamentals. Additional strengths include the group's strong
operating profitability and claim handling discipline, its modest
underwriting and operational leverage profile and sound reserve position.
Moody's expects that ProAssurance Corporation will maintain good
financial flexibility, including access to the public debt,
preferred stock and common equity capital markets, and that holding
company leverage will be kept at relatively modest levels (e.g.
generally 20% or below).
These strengths are tempered primarily by the company's well above-average
product risk and lack of product diversification, given its mono-line
business profile in a sector of the property-casualty insurance
marketplace that -- despite particularly strong performance in recent
years -- has over time exhibited among the highest level of volatility.
Such volatility reflects underwriting results and liability claim trends,
as well as litigation trends and state-specific considerations.
PRA Group has expanded its operations geographically over the course of
the past decade through a series of mergers and acquisitions, with
the company's two largest states (Alabama and Ohio) comprising approximately
30% of the group's gross premiums, and five largest
states accounting for nearly 50%.
In Moody's view, these risk factors temper the company's
generally very conservative financial profile, which we see as providing
an important buffer to the intrinsically high volatility and risk characteristics
of the sector. Additional consideration includes the group's
active acquisition strategy -- including the pending acquisition
of American Physicians Insurance Group, Inc. (APS) as well
as its active share repurchase program, and pressures relating to
pricing and claim trends in the medical professional liability sector.
The 3-notch spread between ProAssurance Corporation's (P)Baa3
provisional senior debt rating and the A3 insurance financial strength
ratings of its principal operating subsidiaries is consistent with Moody's
typical notching practices for U.S. insurance holding company
Alan Murray, lead analyst for ProAssurance noted: "ProAssurance
has demonstrated very strong operational performance in recent years,
and the company maintains a conservative financial profile, relative
to expectations at the current rating level. Murray continued:
"However, low fixed-income investment returns are likely
to further pressure operating margins, given the relatively longer
duration of MPL liabilities as compared with other property and liability
insurance segments. Further, over the medium to long term,
we view competition for ProAssurance coming not only from other insurers,
but also in the form of physicians moving into hospital captives and large
clinic alternative risk transfer programs."
Factors that could lead to a ratings upgrade include the following:
continued strength of MPL franchise through the underwriting cycle;
sustained modest financial leverage profile (e.g. below
15%), combined with very strong capital adequacy (e.g.
sustained gross underwriting leverage (GUL) at 1.5x or below) and
solid reserve position; sustained interest and shareholder dividend
coverage in excess of 8x; and an absence of adverse reserve development
(i.e. consistently 0% or better) through the underwriting
cycle. Factors that could lead to a ratings downgrade include the
following: material negative developments in the medical professional
liability environment or legislation that could reduce franchise strength
and/or elevate operational risk; combined ratios at 110% or
above; sustained holding company adjusted financial leverage in excess
of 25%, together with sustained interest and preferred dividend
earnings and cash-flow coverage below 6x and 4x, respectively;
annual adverse reserve development in excess of 3% of total reserves;
or gross underwriting leverage at 3x or greater.
The following ratings have been assigned with a stable outlook:
ProAssurance Corporation: provisional senior unsecured debt at (P)Baa3;
provisional preferred stock at (P)Ba2;
ProAssurance Indemnity Company -- insurance financial strength at
ProAssurance Casualty Company -- insurance financial strength at
ProAssurance Wisconsin Insurance Company -- insurance financial strength
Podiatry Insurance Company of America -- insurance financial strength
ProAssurance Corporation, based in Birmingham, Alabama and
founded in 1976, is engaged through its subsidiaries in underwriting
professional liability insurance products primarily to physicians,
dentists, other healthcare providers, and healthcare facilities
in the United States. It also engages in the legal professional
liability business. The company's principal competitors include
both physician owned insurers, as well as diversified national commercial
insurers for whom MPL tends to be a relatively small component of their
total operations. The company distributes its products primarily
through specialty independent agents (approximately two-thirds),
but also on a direct basis (approximately one-third) in certain
states and in the podiatry and chiropractic segments through its Podiatry
Insurance Company of America (PICA) subsidiary, which it acquired
in April 2009 through an all-cash-sponsored demutualization.
ProAssurance Corporation reported consolidated net income of $51.1
million and $129.5 million for the third quarter and first
nine months of 2010, respectively. Shareholders' equity as
of September 30, 2010 amounted to $1.8 billion.
The company repurchased approximately $55 million worth of its
shares in 3Q10, and approximately $104 million year-to-date.
The principal methodology used in this rating was Moody's Global Rating
Methodology for Property and Casualty Insurers, published in May
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay senior policyholder claims and obligations.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
MD - Insurance
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's rates ProAssurance A3 for insurance financial strength, assigns shelf ratings, outlook stable
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