Yesterday, Fitch Ratings affirmed the Issuer Default Rating (IDR) of ProAssurance Corporation (PRA - Analyst Report) at “BBB+” and the Insurer Financial Strength rating (IFS) of its primary insurance subsidiaries at “A”. The rating agency currently holds a stable outlook on these ratings.
The rating affirmation is based on regular profits by ProAssurance’s subsidiaries, its strong capital position, operating flexibility, lack of rigidity in financial matters and a veteran management team. Moreover, the rating agency believes that the company has sufficient loss reserves and its past trend of favorable prior accident year reserve development is a positive. However, ProAssurance’s undiversified business structure with only one line of business poses substantial threat to earnings stability due to the unpredictable nature of the business.
The ratings also include the impact of the impending acquisition of Medmarc Insurance Group and the Independent Nevada Doctors Insurance Exchange (“INDIE”), announced in June this year. However, Fitch anticipates no significant impact of the acquisitions on the ratings since the combined effect of the fund outflow for and synergies from the acquisition are more or less offset by the effect of the existing medical professional liability insurance reserves of the companies. Moreover, as ProAssurance regularly acquires medical professional liability insurance companies, it is unlikely to face any integration problems.
Further, Fitch expects the financial leverage of ProAssurance to increase to 15–20% in the long term. The company repaid its entire outstanding debt at the end of August.
While Fitch holds a stable outlook on the ratings, which indicates low expectation of a rating change in the near future, a substantial and persistent change in any rating trigger could lead to a rating change. However, the rating agency believes that an upward revision in ratings is improbable, considering the lack of product diversity and presence of volatility in the business.
On the other hand, a downward revision is possible in case ProAssurance’s operating leverage increases to 1.0x or more, tangible financial leverage rises beyond 25%, operating earnings-based coverage falls below 7x or the company faces substantial adverse reserve development. Additionally, if the company fails to maintain discipline in pricing, it can suffer a downgrade, considering the soft pricing environment.
ProAssurance, which primarily competes with Berkshire Hathaway Inc. (BRK.A - Snapshot Report) and MontpelierRe Holdings Ltd. (MRH - Analyst Report), carries a Zacks #2 Rank, implying a short-term Buy rating. We retain our long-term ‘Outperform’ recommendation on the company.