Fitch Ratings reiterated Issuer Default Rating (“IDR”) of ‘BBB+’ of ProAssurance Corporation (PRA). The rating agency concurrently also reiterated Insurer Financial Strength (“IFS”) ratings of ‘A’ for all insurance operating companies of ProAssurance. The outlook for all the ratings remains stable.
The rating affirmations came on the back of the company’s operating subsidiaries continually posting strong operational performance leading to continued profitability and a strong capital position coupled with financial and operating flexibility.
However, the company’s monoline nature of business dwarfs these positives to some extent.
The rating agency noted that ProAssurance’s combined ratio in 2011 has improved by 15.5 percentage points. The debt-to-capital ratio was also below 3.0x while earnings based interest coverage was more than 118x.
Fitch Ratings stated that due to ProAssurance’s restricted product offerings, an upgradation is less likely in near future. Nevertheless, the company will be subject to rating downgrades if its operating leverage increases (1.0x or higher), financial leverage exceeds 25% or operating earnings-based coverage falls below 7.0x, the company reports unfavorable reserve developments or fails to maintain pricing discipline.
ProAssurance posted solid fourth quarter earnings on the back of improved top line. Additionally, operating cash flow and asset position also improved, driving the book value of shares. Higher operating cash flow is also likely to translate into enhanced operating leverage and excess capital generation for share repurchases.
We believe the benefits of geographic diversity, aggressive claims defense, stable ratings, improving return on equity (“ROE”) and strong financial position are likely to have a positive impact on the company over time.
We retain our Outperform recommendation on ProAssurance. The quantitative Zacks #1 Rank (short-term Strong Buy rating) for the company indicates upward pressure on the stock over the near term.
Headquartered in Birmingham, Alabama, ProAssurance Corporation operates as a holding company for property and casualty insurance companies.
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