ProAssurance placed on rating watch negative by Fitch post NORCAL acquisition
Fitch Ratings has placed US P&C insurer ProAssurance Corporation's (PRA) on 'rating watch negative' following the company's announcement to purchase NORCAL Group for approximately $450 million.
NORCAL is a mutual medical professional liability insurance (MPLI) specialist that actively writes in 39 US states, including the District of Columbia. The proposed NORCAL acquisition will increase ProAssurance's concentration to MPLI from approximately 60 percent up to 80 percent of written premiums.
Fitch has expressed concerns about growth in the MPLI market at a time when the industry is experiencing further deterioration in profitability and reserve strength in this segment. It also noted that NORCAL's underwriting performance and overall profitability have deteriorated sharply recently driven by significant adverse reserve development.
The agency said that even though ProAssurance has very strong capital, low financial leverage, and market expertise in the MPLI market, offsetting these positives are significant recent declines in profitability and diminished reserve strength and the company's concentration to the MPLI market.
"MPLI competitive fundamentals have restricted a shift in market pricing and underwriting conditions despite several years of weaker performance," it said. "Pricing has trended positively more recently, but there is considerable uncertainty whether premium rate increases are exceeding recent claims severity trends."
ProAssurance is said to have taken considerable underwriting action to improve performance in the specialty property & casualty segment after it pre-announced a 4Q19 $37 million adverse reserve development charge primarily driven by a large MPLI national healthcare account written since 2016. The company also significantly raised the loss ratio estimate for full year 2019 in the specialty property & casualty segment tied to recent MPLI claims experience. These actions contributed towards a pro forma GAAP calendar year combined ratio for 2019 moving towards 115-120 percent range compared to prior periods 102 percent. Pretax operating income was $14 million as of Sept. 30, 2019 down 79 percent from prior period and 93 percent from full year 2014 on an annualized basis.
Fitch expects profitability to be further challenged for the next 12-36 months following the acquisition as ProAssurance's management takes underwriting and claims actions to bring NORCAL's book of business in line with ProAssurance's standards.
On a consolidated basis, Fitch believes reserves will develop slightly favorably for calendar year YE 2019, however, considerably below the company's previous history of strongly favorable annual reserve development.
Fitch said that it will update the Rating Watch Negative status upon closing or financing of the transaction. If the transaction fails to materialise, ratings would likely move to a negative outlook based on uncertainty regarding near- term improvement potential for ProAssurance's reserve and operating performance.
