Ratings Recap: ProAssurance, Lawyers Mutual

November 13, 2009

Standard & Poor’s Ratings Services has revised its outlook on ProAssurance Corp. (PRA) to positive from stable, and has affirmed its ‘BBB-‘ counterparty credit rating on the company.
“The outlook revision reflects our view of PRA’s improved financial leverage and operating performance that have been bolstered by strong fixed-charge and interest coverage metrics and a low leverage ratio,” explained credit analyst Damien Magarelli. S&P said the counterparty credit rating on PRA “reflects the company’s strong competitive position, which has improved further after the acquisitions of PICA Group, Mid-Continent General Agency Inc., and Georgia Lawyers Insurance Co., as well as strong operating performance, though premiums and prices continue to decline. The rating also reflects PRA’s strong financial flexibility and low financial leverage, as the company successfully converted $107.6 million in convertible debentures to equity in 2008 and completed other debt reduction programs in the past two years.” These positive factors, however, are partially “offset by the company’s modest geographic concentration by state, though PRA is nationally diversified,” said S&P. The rating agency also noted that PRA has a “business concentration in the medical malpractice niche (though it is slowly diversifying), which subjects the company to systematic risks as a result of regulatory reform and changing industry trends that may have a significant impact on the company’s underwriting results. The company also faces some inherent business risks, such as potential inadequate reserves and capital related to recent acquisitions.”

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Lawyers Mutual Liability Insurance Company of North Carolina (LML), but has also revised the outlook for both ratings to stable from negative. Best explained that these rating actions were taken “due to the deterioration in LML’s operating performance during its most recent five-year period. The company was negatively impacted by a significant increase in claims frequency from late 2007 into 2009, driven by losses within several areas of legal practice, particularly real estate.” Best also noted that “LML has posted net underwriting losses in four of the past five years. Adverse reserve development coupled with reactive premium rate management has negatively impacted the company’s current operations. Partially offsetting these rating factors has been the company’s favorable investment results helping to generate a cumulative net income of $3.7 million over the last five years.” On a more positive note Best indicated that LML’s ratings are supported by continuing “strong risk-adjusted capitalization for its rating level, a dominant market position in lawyer professional liability in North Carolina and its consistently high policyholder retention rates. These factors are derived from the company’s extensive knowledge of the legal profession and continued dedication to providing superior service to its customers.” Best added that the stable outlook recognizes “LML’s capitalization and management’s commitment to return the company to underwriting profitability through appropriate rating actions.”

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