S&P Raises ProAssurance Rating One Notch to ‘BBB’; Outlook Stable

Standard & Poor’s Ratings Services has raised its counterparty credit rating on ProAssurance Corp. to ‘BBB’ from ‘BBB-‘ with a stable outlook.

S&P said the upgrade “reflects our view of PRA’s financial profile, supported by its strong operating performance, capital adequacy, investments, and financial flexibility. The company’s performance continues to meet our expectations, with net income of $78.5 million in the first half of 2010 and $82 million in 2009.

“The company also continues to benefit from favorable reserve developments related to prior accident years while maintaining adequate reserves. In addition, its financial leverage and coverage charges ratios remain strong for the rating.

“Further supporting the rating is the company’s strong competitive position, which the acquisitions of Mid-Continent General Agency Inc. (now operating as ProAssurance Mid-Continent General Underwriters), PICA Group, and Georgia Lawyers Insurance Co. (since merged into ProAssurance Casualty Co.). in 2009 have bolstered.”

S&P added that the “planned acquisition of American Physicians Service Group, which should close in early December 2010, will moderately enhance PRA’s market position, diversify its revenue stream geographically, and provide it with meaningful footprints in Texas and incremental business in Oklahoma and Arkansas in the long term.”

As partial offsetting factors, S&P cited the company’s “modest geographic concentration by state, though PRA is nationally diversified. In addition, PRA has a business concentration in the medical malpractice niche (though it is slowly diversifying). This concentration subjects the company to systemic risks as a result of regulatory reform and changing industry trends, which have had a significant impact on the company’s underwriting results. PRA also has some integration and inherent business risks, such as potential inadequate reserves and capital related to recent acquisitions.”

Credit analyst Neil Stein explained that the stable outlook is “based on our view that PRA has demonstrated a sustainable and strong financial profile while maintaining its strong financial leverage metrics, strong operating performance, and adequate reserves. The company also has enhanced its competitive position and diversified its geographic and specialty coverage through selective acquisitions.

S&P said it expects that PRA will “maintain its strong competitive position, further diversify its business through the acquisition of AMPH, and maintain strong operating performance and capitalization and low financial leverage ratios. PRA’s top line will likely increase by about 10 percent in 2011 as a result of the acquisition of AMPH, assuming PRA doesn’t experience any further rate reductions.”

The rating agency added that it’s likely that PRA “will perform better than its medical professional liability insurance peers because of its disciplined underwriting and claims management as well as its strong competitive position. Although PRA might increase its use of debt opportunistically in light of favorable interest rates, we do not expect that the company’s debt-to-capital ratio will increase to more than 20 percent or that its interest coverage will fall to less than 6x.

Stein observed that the rating “could be pressured negatively if the integration with AMPH does not proceed smoothly and the acquisition detracts from PRA’s operating performance or if PRA were unable to maintain a strong competitive position, underwriting discipline, strong earnings, or adequate reserves. We do not expect to raise the rating again within the next two years because of the company’s line-of-business concentration.”

Source: Standard & Poor’s