Yesterday, Fitch Ratings affirmed the Issuer Default Rating
) 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.
MontpelierRe Holdings Ltd.
), carries a Zacks #2 Rank, implying a short-term Buy rating. We
retain our long-term 'Outperform' recommendation on the
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis
MONTPELIER RE (MRH): Free Stock Analysis Report
PROASSURANCE CP (PRA): Free Stock Analysis
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