FINANCIAL INSTITUTIONS CREDIT OPINION 25 February 2020 Update RATINGS ProAssurance Corporation Domicile BIRMINGHAM, Alabama, United States Long Term Rating Baa2 , Possible Downgrade Type Senior Unsecured - Dom Curr Outlook Rating(s) Under Review Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Jasper Cooper, CFA +1.212.553.1366 VP-Sr Credit Officer [email protected]Rocio Nunez +1.212.553.2850 Associate Analyst [email protected]Sarah Hibler +1.212.553.4912 Associate Managing Director [email protected]Marc R. Pinto, CFA +1.212.553.4352 MD-Financial Institutions [email protected]» Contacts continued on last page CLIENT SERVICES Americas 1-212-553-1653 Asia Pacific 852-3551-3077 Japan 81-3-5408-4100 EMEA 44-20-7772-5454 ProAssurance Corporation Ratings on review for downgrade following announced NORCAL acquisition Summary In February 2020, we placed the Baa2 senior unsecured 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) on review for downgrade following ProAssurance's announcement that it has entered into an agreement to acquire NORCAL Group (NORCAL), a monoline medical professional liability (MPL) insurer, in an all-cash transaction for $450 million. ProAssurance expects to fund the transaction through a combination of internal resources and borrowings. The review for downgrade will focus on the group's prospective capital adequacy and profitability as well as execution and integration risks. The companies plan to complete the transaction by the end of 2020, subject to regulatory approvals and a decision by NORCAL policyholders to demutualize. The review for downgrade is driven by risks associated with acquiring NORCAL including the group's prospective profitability and reserve adequacy. NORCAL reported a statutory net loss for the first nine months of 2019, and future profitability is likely to be weak given rising loss cost inflation in the MPL market. ProAssurance's balance sheet metrics including operating and financial leverage would likely deteriorate following the transaction as would earnings coverage as ProAssurance re-underwrites NORCAL's book of business. ProAssurance's net income has declined significantly over the past several years (Exhibit 1). 2019 net income was slightly positive following Proassurance announced $37 million of adverse reserve development in its Specialty P&C segment in the fourth quarter of 2019, driven by a large national healthcare account written since 2016. Exhibit 1 Net income and return on capital continue to decline 0% 1% 2% 3% 4% 5% 6% 7% 0 20 40 60 80 100 120 140 160 2015 2016 2017 2018 2019 Return on avg. Capital (1 yr. avg ROC) Net Income Net income (loss) attributable to common shareholders Return on avg. capital (1 yr. avg ROC) Source: Company Filings, Moody's Investors Service DRAFT-CONFIDENTIAL
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FINANCIAL INSTITUTIONS
CREDIT OPINION25 February 2020
Update
RATINGS
ProAssurance CorporationDomicile BIRMINGHAM,
Alabama, United States
Long Term Rating Baa2 , PossibleDowngrade
Type Senior Unsecured -Dom Curr
Outlook Rating(s) Under Review
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
ProAssurance CorporationRatings on review for downgrade following announcedNORCAL acquisition
SummaryIn February 2020, we placed the Baa2 senior unsecured debt rating of ProAssuranceCorporation (ProAssurance, NYSE: PRA), the A2 insurance financial strength (IFS) ratings ofProAssurance Indemnity Company, Inc. and affiliates (PRA Group), and the A3 IFS ratingsof the lead operating companies of Eastern Insurance Holdings, Inc. (Eastern) on review fordowngrade following ProAssurance's announcement that it has entered into an agreement toacquire NORCAL Group (NORCAL), a monoline medical professional liability (MPL) insurer,in an all-cash transaction for $450 million. ProAssurance expects to fund the transactionthrough a combination of internal resources and borrowings. The review for downgradewill focus on the group's prospective capital adequacy and profitability as well as executionand integration risks. The companies plan to complete the transaction by the end of 2020,subject to regulatory approvals and a decision by NORCAL policyholders to demutualize.
The review for downgrade is driven by risks associated with acquiring NORCAL including thegroup's prospective profitability and reserve adequacy. NORCAL reported a statutory net lossfor the first nine months of 2019, and future profitability is likely to be weak given rising losscost inflation in the MPL market. ProAssurance's balance sheet metrics including operatingand financial leverage would likely deteriorate following the transaction as would earningscoverage as ProAssurance re-underwrites NORCAL's book of business. ProAssurance's netincome has declined significantly over the past several years (Exhibit 1). 2019 net incomewas slightly positive following Proassurance announced $37 million of adverse reservedevelopment in its Specialty P&C segment in the fourth quarter of 2019, driven by a largenational healthcare account written since 2016.
Exhibit 1
Net income and return on capital continue to decline
0%
1%
2%
3%
4%
5%
6%
7%
0
20
40
60
80
100
120
140
160
2015 2016 2017 2018 2019
Retu
rn o
n a
vg. C
apita
l (1 y
r. avg R
OC
)
Net In
com
e
Net income (loss) attributable to common shareholders Return on avg. capital (1 yr. avg ROC)
Source: Company Filings, Moody's Investors Service
» Long-term track record and solid competitive market position as a specialist underwriter of HCPL and workers’ compensationinsurance in the US
» Strong claim-handling capabilities for HCPL and workers’ compensation
» Good asset quality, with relatively modest levels of goodwill and reinsurance recoverables
» Good financial flexibility, reflecting moderate financial leverage
Credit challenges
» High product risk underwriting profile, 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
» Declining pretax operating income reflecting lower reserve strength
» Lack of significant product diversification outside of HCPL and workers' compensation
» Acquisition strategy involves execution and integration risks
OutlookProassurance's ratings are on review for downgrade reflecting risks associated with the planned acquisition of NORCAL includingprospective profitability, reserve adequacy as well as higher operating and financial leverage.
Factors that could return the outlook to stable
» A termination of the planned transaction, with no material change to ProAssurance's current financial profile, would most likelyresult in a confirmation of the current ratings with a negative outlook given the company's low profitability.
In addition, the following factors could lead to a stable outlook:
» A return to favorable reserve development particularly for healthcare professional liability
» Improved pretax operating results for the Specialty P&C segment with continued strong performance for the other major segments
» Consolidated financial leverage below 25% with interest coverage above 6x on sustained basis
» Gross underwriting leverage below 2x
Factors that could lead to a downgrade
» Closing of the planned transaction, with no material favorable changes to ProAssurance's current financial profile
» Significant adverse reserve development particularly for healthcare professional liability
» A sizeable expansion into a product or geographical area outside of the company's core strengths
» Adjusted financial leverage in excess of 25% together with interest and preferred dividend earnings and cash-flow coverage below6x and 5x, respectively
» Gross underwriting leverage above 2.5x
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.
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Key indicators
Exhibit 3
ProAssurance Corporation
ProAssurance Corporation [1][2] 2019 2018 2017 2016 2015As Reported (US Dollar Millions)Total Assets 4,806 4,601 4,929 5,065 4,906Total Shareholders' Equity 1,512 1,523 1,595 1,799 1,958Net income (loss) attributable to common shareholders 1 47 107 151 116Gross Premiums Written 967 957 875 835 812Net Premiums Written 843 835 764 739 709Moody's Adjusted RatiosHigh Risk Assets % Shareholders' Equity 56.3% 67.6% 70.5% 58.0% 48.5%Reinsurance Recoverable % Shareholders' Equity 29.5% 26.0% 24.0% 17.7% 14.9%Goodwill & Intangibles % Shareholders' Equity 22.3% 22.4% 21.6% 19.0% 17.7%Gross Underwriting Leverage 2.4x 2.2x 2.0x 1.7x 1.5xReturn on avg. capital (1 yr. avg ROC) 0.1% 2.4% 5.3% 6.6% 4.9%Sharpe Ratio of ROC (5 yr. avg) 148.2% 270.2% - - -Adv./(Fav.) Loss Dev. % Beg. Reserves (1 yr. avg) -0.7% -5.4% -7.8% -8.2% -8.9%Financial Leverage 16.9% 16.9% 21.6% 20.8% 15.8%Total Leverage 16.9% 16.9% 21.6% 20.8% 15.8%Earnings Coverage (1 yr.) -0.7x 2.7x 8.2x 12.1x 9.4xCash Flow Coverage (1 yr.) 6.3x 8.6x 8.3x 11.6x 11.3x[1]Information based on US GAAP financial statements as of Fiscal YE December 31.[2]Certain items may have been relabeled and/or reclassified for global consistency.Source: Moody’s Investors Service
ProfileProAssurance Corporation, based in Birmingham, Alabama, offers professional liability insurance products in the US, primarily tophysicians, dentists and other health care providers, but also to health care facilities, through its various subsidiaries. The companyalso writes product liability coverage for medical technology and life science companies, and engages in the legal professionalliability business. Furthermore, it offers workers’ compensation insurance and other property and casualty insurance and reinsurance.ProAssurance's insurance operating companies do not participate in any pooling arrangements, except for three Eastern subsidiaries -Eastern Alliance Insurance Company, Allied Eastern Indemnity Company, and Eastern Advantage Assurance Company - which have anintercompany pooling agreement.
ProAssurance is the majority capital provider and quota share reinsurer to Lloyd's Syndicate 1729 (29% for 2020 down from 61% in2019), which provides a range of P&C insurance and reinsurance in both the US and international markets. ProAssurance is also thesole capital provider for Syndicate 6131, which focuses on contingency and specialty property business. In February 2019, ProAssuranceannounced that the company is reviewing its strategic options with regards to its Lloyd’s operation.
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Exhibit 4
Gross premiums by business line, 2019Exhibit 5
Gross premiums by geography, 2018Exhibit 6
Gross premiums by line, 2019
Specialty P&C60%
Worker Comp29%
Segr. Portfolio Cell9%
Lloyd's Syndicates11%
Source: Company GAAP Filings
PA19%
AL7%
IN5%
MI5%
IL5%FL
4%TX4%
TN4%
Other47%
Source: Company P&C Group Statutory Filings
Physicians/Dentists39%
Facilities/ Providers9%
Attorneys3%
Med Tech/ Other4%
Worker Comp26%
Segr. Portfolio Cell8%
Lloyd's Synd.11%
Source: Company GAAP Filings
Detailed credit considerationsMoody's rates ProAssurance's insurance affiliates (including ProAssurance Indemnity Company, Inc., ProAssurance Casualty Company,and Podiatry Insurance Company of America) A2 for insurance financial strength (on review for downgrade), which is in line with theadjusted scorecard-indicated outcome (Exhibit 9). Key factors influencing the ratings are discussed below.
INSURANCE FINANCIAL STRENGTH RATINGMarket position, brand and distribution: Strong market position in a fragmented market, NORCAL acquisition enhances market presenceand scaleProAssurance is the fourth-largest US MPL insurer and following the acquisition of NORCAL would be the third largest, with themajority of its business focused on individual doctors and small doctor groups, which have been historically more profitable forProAssurance than healthcare facilities. In 2018 and 2019, healthcare professional liability insurers are facing rising loss cost trends andreserve uncertainty. ProAssurance's core individual physicians franchise is also impacted by structural changes occurring within thehealthcare industry as doctors move from individual practices and small doctor groups to hospitals and larger physician groups, whichaccount for a smaller share of the company's premium and which are less profitable than the company’s core individual physicians andsmall physician groups business. Following several years of growth for the healthcare facilities book, ProAssurance is taking significantunderwriting actions in 2019 to remediate this business by raising rates and decreasing policy retention.
ProAssurance distributes its products primarily through specialty independent agents (approximately 63% in 2019), but also on a directbasis (37%) in certain states and to podiatrists through its PICA subsidiary, while Eastern distributes its products primarily through alimited number of independent agents. The group's underwriting expense profile, in the high 20% range is competitive for the segment,and reflective of its established underwriting franchise. ProAssurance operates a segregated portfolio cell (SPC) segment in whichan agency, group or association writes HCPL or workers' compensation premiums with ProAssurance which then partially cedes thebusiness to the SPC. ProAssurance retains a portion of the underwriting risk, which has been profitable for the company.
Through Eastern, ProAssurance writes workers' compensation insurance for small and middle-sized companies in low or middle-hazardindustries such as clerical office, light manufacturing, healthcare, auto dealers, and other industries. ProAssurance participates in aLloyd's syndicate that underwrites a wide range of P&C insurance and reinsurance lines of business; however, the company is exploringstrategic alternatives for its Lloyd's business. Overall, given ProAssurance's strong market position within the HCPL market and itscompetitive expense profile, we view the group's market position as being in line with Baa-rated insurers rather than the unadjusted Balevel in the scorecard.
Product risk and diversification: Volatile lines of business with low product diversificationMoody's considers ProAssurance's product risk profile to be high, given that HCPL has historically been one of the most volatilesegments of the P&C insurance sector, and subject to significant swings in underwriting profitability, reserve adequacy and claimsfrequency and severity, largely reflecting litigation trends and state-specific considerations. The NORCAL acquisition would significantly
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increase the proportion of HCPL in Proassurance's book of business to about 70% of net premiums written on a pro forma basis fromabout 57%.
Through Eastern, the company writes workers’ compensation, which is also a long tail and historically volatile line, althoughProAssurance has a lower average claim duration compared to most workers' comp insurers given an underwriting strategy focusedon smaller, less risky employers and a claims mitigation strategy focused on quickly returning injured workers to work. AlthoughProAssurance also underwrites a limited amount of medical technology and life sciences product liability coverage (including medicaldevices, biotechnology and pharmaceuticals), lawyers professional liability insurance, and Lloyd’s business, the company lacksmeaningful product diversification beyond HCPL and workers' compensation.
Whereas many of ProAssurance's multiline competitors focus on HCPL coverages for institutional healthcare providers, ProAssurancefocuses on the individual physicians and other professionals, and therefore has a more granular risk profile. ProAssurance’s healthcarefacilities HCPL business accounted for 8% of direct premiums written for 2019. After reporting significant adverse reserve developmentfor this business in 2019, the company has taken steps to execute a new underwriting strategy including raising rates and reducingretentions.
ProAssurance underwrites in all 50 states and the District of Columbia, with the company’s five largest states account for about 39%of total premium volume (including Eastern). It is the leading HCPL underwriter in several states with HCPL market shares in excess of30% (including Alabama, where it has about 43% market share in 2018), and ranks among the top four HCPL underwriters in about adozen other states. ProAssurance's knowledge of local/state-specific territories is a key factor to controlling its product risk and claimsand underwriting performance, given the very different medical/legal liability climate in each state. Overall, given ProAssurance'sconcentration in two historically volatile and long-tail lines of business, we view the group's product risk and diversification as being inline with the Ba-rated insurers rather than the unadjusted Baa level in the scorecard.
Through its participation in Lloyd’s syndicate 1729, ProAssurance writes a range of P&C insurance and reinsurance in both the US andinternational markets. As of January 1, 2018, the company became the sole capital provider for the newly formed Syndicate 6131,focusing on contingency and specialty property business, and will also serve as a quota share reinsurer to Syndicate 1729. For 2020,ProAssurance has decreased its quota share participation in 1729 to 29% from 61% in 2019. In February 2019, ProAssurance announcedthat the company is reviewing its strategic options with regards to its Lloyd’s operation.
Asset quality: High quality investment portfolio with modest reinsurance recoverablesProAssurance's asset quality is good overall with a predominant percentage of its investment portfolio in well diversified, high-qualityand liquid fixed income securities. As of December 31, 2019, fixed income and short-term securities account for approximately 79%of the investment portfolio, with approximately 94% investment grade and an effective duration of 2.6 years. ProAssurance reducedits allocation to common equities in 2019, resulting in a ratio of high risk assets to shareholders’ equity declining to 56% at year-end2019 from 68% at year-end 2018. ProAssurance uses reinsurance as an important component of its risk management process, butreinsurance recoverables are moderate at about 29.5% of shareholders' equity as of December 31, 2019. The group has maintained arelatively stable panel of quality international reinsurers. Goodwill and other intangibles also remain modest relative to capital, giventhe company's focus on smaller business acquisitions and the use of portfolio transfer/renewal rights transactions in some of its otherbusiness acquisitions. We do not expect the NORCAL acquisition to generally increase ProAssurance’s goodwill.
Capital adequacy: Solid capital adequacy would be adversely impacted by NORCAL acquisitionProAssurance's solid capital adequacy is reflected in its moderate gross underwriting leverage of 2.4x as of year-end 2019. Moody'sconsiders the group's capital adequacy to be appropriate given the company's high product risk, low product diversification and highunderwriting cyclicality of its businesses. We see this conservative posture as an important component of the group's credit profile.Given NORCAL’s concentration in HCPL, which is a traditionally volatile line of business, we view the announced acquisition as creditnegative to ProAssurance’s capital adequacy.
Profitability: Declining net income; reserve uncertainty remainsProAssurance's net income has declined precipitously in recent years, driven by lower reserve development and higher current-yearcombined ratios for Specialty P&C. In 2019, the company reported net income of just $1 million driven by $37 million of adversereserve development in the fourth quarter of 2019 in its Specialty P&C segment. ProAssurance's underwriting results in its Specialty
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P&C segment (almost 60% of ProAssurance premiums) have deteriorated for several years, reflecting rising loss cost trends and acompetitive pricing environment. The company is responding by raising rates and taking underwriting actions for its Specialty P&Csegment, with rate increases averaging 6% for renewal business in 2019 compared to 3% in 2018. Nevertheless, we believe that reserveuncertainty and profitability pressures will continue for this line of business.
Prior to 2019, ProAssurance's pretax operating income was driven by favorable reserve development, which often exceeded net income(Exhibit 7). Profitability is likely to remain under pressure for the next several years as the company re-underwrites its business andNORCAL's business.
Exhibit 7
Pre-Tax Operating Income & Favorable Reserve Development
-150
-100
-50
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250
2014 2015 2016 2017 2018 2019
in M
illio
ns $
Pre-tax operating income Favorable reserve development
Source: Company Filings
ProAssurance’s workers' compensation business has performed well in recent years, with a combined ratio of 94.7% for 2019 (98.8%excluding favorable prior year reserve development). Workers’ compensation adds to diversification of earnings but also exposesthe company to additional underwriting and reserving risks. In addition, the workers' compensation segment is becoming morecompetitive, which could lead lower profitability over the medium term. Given ProAssurance's significant pricing increases andunderwriting actions for Specialty P&C, Moody's views the company's prosepctive profitability more in line with A-rated insurers ratherthan the unadjusted Baa metric in the scorecard.
Reserve adequacy: Significant uncertainty around Specialty P&C and NORCAL reservesProAssurance's favorable reserve development has declined significantly in recent years (Exhibit 7), driven by rising loss cost trendsand a competitive pricing environment. ProAssurance reported adverse development of $5.7 million for 2019 for the Specialty P&Csegment, compared to $77 million of favorable development for 2018. The 2019 result was driven by $51.5 million of unfavorabledevelopment related to a single national healthcare account underwritten since 2016, partially offset by favorable development forremaining Specialty P&C business. However, the large charge creates significant uncertainty around the company's loss reserves.
ProAssurance has taken steps to execute a new underwriting strategy for its healthcare professional liability excess and surplus linesof business, which includes the large national healthcare account as well as custom physicians, healthcare facilities, correctionalhealthcare, and long-term care professional liability policies. ProAssurance disclosed that NORCAL would report significant adversereserve development in the fourth quarter of 2019, resulting in a decline in NORCAL’s statutory surplus of 23% to about $575 millionat December 31, 2019 from $746 million at September 30, 2019. We believe that significant uncertainty remains around NORCAL’sreserve adequacy despite the substantial reserve charge.
The workers' compensation business also exposes the company to reserve risk given historic industry reserve volatility for the line ofbusiness. Given the significant reserve charge for fourth quarter 2019, Moody's views the company's reserve adequacy more in line withA-rated insurers rather than the unadjusted Aa metric in the scorecard.
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Financial flexibility: Moderate financial leverage consistent with primary focus in two volatile market segments, leverage would increasewith NORCAL acquisitionProAssurance's use of debt in its capital structure has historically been low, and Moody's expects that adjusted leverage will remain inthe low to mid 20% range, a level that we consider to be appropriate for an insurer primarily focused in two highly volatility segments.The company's adjusted debt to capital was 16.9% as of December 31, 2019. As a publicly traded holding company, ProAssurancehas demonstrated access to both equity and debt capital markets, which we view positively. However, we note that the company'sspecialty focus and relatively small profile in capital markets could reduce its ability to raise additional capital quickly in a stressscenario, and, as a result, somewhat tempers its financial flexibility. ProAssurance expects financial leverage to increase to about 25%as it borrows to help fund the NORCAL acquisition.
The company did not repurchase common stock in 2019 or 2018. Following years of special dividends, often significant in size, thecompany did not declare a special dividend in 2019 given rising combined ratios and declining operating profitability. Shareholderdividends, including special dividends, have significantly exceeded net income since 2017. As of December 31, 2019, the boardauthorization of share repurchases or debt retirement totaled $110 million. We expect that future special dividend and repurchaseactivity will not be executed until the NORCAL transaction has closed and profitability has increased significantly from 2019 levels.
Exhibit 8
Financial Flexibility
0x
2x
4x
6x
8x
10x
12x
14x
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5%
10%
15%
20%
25%
2015 2016 2017 2018 2019
Ea
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gs C
overa
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(1 Y
r.)L
eve
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Financial Leverage Total Leverage Earnings Coverage (1 yr.)
Source: Company Filings, Moody's Investors Service
Liquidity analysisAs of December 31, 2019, the holding company's cash and short-term investments totaled approximately $280 million, which coversinterest expense and common stock dividends totaling about $110 million per year. We expect ProAssurance to use a significant shareof the holding company funds plus operating company dividends for the NORCAL acquisition. For 2020, ProAssurance's insuranceoperating companies can dividend up $88 million to the holding company without prior regulatory approval. The company also hasaccess to a $250 million revolving credit facility (undrawn as of December 31, 2019), which also has an available $50 million accordionfeature. The facility is matures in November 2024. The company has $250 million of senior notes due in 2023. Given the company'swell above-average product risk and limited product diversification, we view the company's financial flexibility in line with A-ratedinsurers rather than the unadjusted Aa metric in the scorecard.
Other ConsiderationsEastern Alliance Insurance Company and Allied Eastern Indemnity Company, the lead operating companies of Eastern, are rated A3 forfinancial strength which reflects its market position as a monoline workers' compensation writer, a high quality investment portfolio,a strong reinsurance program, and implicit support from ProAssurance. The company generally focuses on lower hazard classes ofbusiness and has good record of profitability. These strengths are tempered by Eastern's modest size compared to competitors, its
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concentrated product risk in a historically volatile line of business, and low geographic diversification with more than half of its businessin Pennsylvania. This business concentration accentuates the company's exposure to changes in the legal environment, competitionand regulation. Eastern has a weaker standalone credit profile but benefits from implicit support from ProAssurance.
Factors that could result in a downgrade include: a downgrade of PRA Group's IFS ratings; a reduction in implicit support fromProAssurance; gross underwriting leverage above 4.5x; erosion of capital and surplus in excess of 10%; or combined ratios consistentlyabove 105%. Factors that could result in a ratings upgrade of Eastern include: an upgrade of PRA Group's IFS ratings; gross underwritingleverage below 2.5x; and, stronger explicit support from ProAssurance.
ESG considerationEnvironmentalP&C (re)insurers are exposed to the risk of natural catastrophes primarily through property insurance they provide. Climate change isexpected to cause an increase in frequency and severity of certain natural hazards (e.g. wildfires) and more broadly increase the level ofunpredictability in modeling expected losses from these events. ProAssurance has relatively low exposure to climate change given itsbusiness mix. However, its Lloyd's segment does write property catastrophe coverage. The company and industry's ability to reprice thisrisk annually somewhat moderates their exposure.
SocialP&C (re)insurers have moderate overall exposure to social risks as they are highly regulated and the majority of products are distributedthrough intermediaries. P&C insurers also have exposure to various social risks through the underwriting of certain insurance products,where claims can arise from industrial accidents, health and safety related incidents, product recalls and a wide range of liability claimsagainst corporations. While these risks are factored into the price of insurance policies, the ultimate level of claims arising under suchpolicies is often not known for many years. ProAssurance is affected by claims inflation (e.g. rising medical and litigation costs), whichcan impact reserve adequacy particularly in long tail casualty lines including HCPL and workers' compensation.
GovernanceLike all other corporate credits, the credit quality of P&C insurers can be influenced by a wide range of governance-related issues suchas aggressive financial or risk policies or unsuitable board and/or ownership structures. Weakness in corporate governance can beexacerbated by regulatory oversight and intervention, which can lead to reputational damage, fines or license suspensions
ProAssurance has had significant changeover in executives in the last two years including a new CEO, CFO, president of ProAssuranceSpecialty P&C, and president of Eastern. Most of the senior management team has worked for ProAssurance or Eastern for many years.In addition, the previous CEO, William Stancil Starnes, remains as executive chairman. ProAssurance maintains a code of ethics andconduct and which applies to all directors, officers and other employees of the company and its subsidiaries.
Support and structural considerationsThe three notch spread between ProAssurance's Baa2 senior debt rating and the A2 IFS ratings of its subsidiaries is consistent withMoody's typical notching practices for US insurance holding company structures.
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Rating methodology and scorecard factors
Exhibit 9
ProAssurance Corporation
Financial Strength Rating Scorecard [1][2] Aaa Aa A Baa Ba B Caa ScoreAdj ScoreBusiness Profile Ba BaaMarket Position and Brand (25%) Ba Baa
- Relative Market Share Ratio X- Underwriting Expense Ratio % Net Premiums Written 29.9%
Product Focus and Diversification (10%) Baa Ba- Product Risk X- P&C Insurance Product Diversification X- Geographic Diversification X
Operating Environment Aaa - A Aaa - APreliminary Standalone Outcome A2 A2[1]Information based on US GAAP financial statements as of Fiscal YE December 31.[2]The Scorecard rating is an important component of the company's published rating, reflecting the stand-alone financial strength before other considerations (discussed above) areincorporated into the analysis.Source: Moody’s Investors Service
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Ratings
Exhibit 10
Category Moody's RatingPROASSURANCE CORPORATION
Rating Outlook RURSenior Unsecured Baa2
PROASSURANCE CASUALTY COMPANY
Rating Outlook RURInsurance Financial Strength A2
PROASSURANCE INDEMNITY COMPANY, INC.
Rating Outlook RURInsurance Financial Strength A2
PODIATRY INSURANCE COMPANY OF AMERICA
Rating Outlook RURInsurance Financial Strength A2
EASTERN ALLIANCE INSURANCE COMPANY
Rating Outlook RURInsurance Financial Strength A3
ALLIED EASTERN INDEMNITY COMPANY
Rating Outlook RURInsurance Financial Strength A3
Source: Moody's Investors Service
10 25 February 2020 ProAssurance Corporation: Ratings on review for downgrade following announced NORCAL acquisition
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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1216129
11 25 February 2020 ProAssurance Corporation: Ratings on review for downgrade following announced NORCAL acquisition
