Healthcare liability insurer ProAssurance Corp. has agreed to acquire medical professional liability insurer NORCAL Mutual Insurance Co. following NORCAL’s demutualization in a $450 million transaction.

Based on available estimates of premium, the combination of these companies is expected to create the nation’s third-largest specialty writer of liability insurance for healthcare professionals and facilities.

Pennsylvania-based NORCAL writes in 39 states, including the District of Columbia. It reported $342 million in direct written premium in 2018 and $50 million net income. The company’s underwriting performance and overall profitability have “deteriorated sharply recently driven by significant adverse reserve development,” according to Fitch Ratings, which does not rate NORCAL but placed its “A” ratings for ProAssurance on negative watch following the deal announcement.

Fitch Ratings said it placed ProAssurance Corp.’s “A” (Strong) Insurer Financial Strength ratings, “BBB” senior unsecured debt and “BBB+” Issuer Default Rating on Rating Watch Negative, citing concern over “significant recent declines in profitability and diminished reserve strength” as well as the company’s concentration in the MPL insurance market.

A.M. Best revised its outlook from stable to negative while affirming ProAssurance’s “A+” (Superior) Financial Strength Rating and its Long-Term Issuer Credit Ratings of “aa-” last September.

ProAssurance said the transaction will enhance its scale and capabilities, provide “access to the high-quality California physicians market at a time when the healthcare professional liability market is starting to harden,” and deliver $18 million in synergies involving corporate and back-office expenses, staffing, technology and real-estate costs, along with consolidation of reinsurance and investments.

ProAssurance said it anticipates the transaction will be accretive to earnings in the second year of ownership and generate attractive returns to shareholders over the longer term as well.

The boards of directors for both companies have approved the transaction. The companies are hoping to close the transaction by the end of 2020, subject to required approvals. The demutualization and the acquisition agreement are both subject to required regulatory and policyholder approvals.

ProAssurance said it will pay a base consideration of $450 million in cash, with a contingent consideration of up to $150 million should ultimate loss estimates as of the acquisition date develop favorably. In addition, NORCAL will have the opportunity to nominate two individuals to new seats on the ProAssurance board.

Ned Rand, president and CEO of ProAssurance, noted that like ProAssurance’s predecessors, NORCAL was founded by physicians in the 1970’s to serve the professional liability insurance needs of physicians. “NORCAL’s history and physician-focused culture make it a perfect fit for the ProAssurance family,” he said.

Fitch said ProAssurance pre-announced a 4Q19 $37 million adverse reserve development charge related to its Specialty Property & Casualty segment primarily driven by a large MPLI national healthcare account written since 2016. Favorably, the company noted that its workers’ compensation and core physicians, podiatric, chiropractic, legal professional liability and medical technology liability businesses reserve experience will be in line with expectations.

On a consolidated basis, Fitch said it believes reserves will develop slightly favorably for calendar-year 2019, however, considerably below the company’s previous history of strongly favorable annual reserve development.

Fitch said ProAssurance 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 toward a pro forma GAAP calendar-year combined ratio for 2019 moving toward 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 the prior period and 93 percent from full-year 2019 on an annualized basis.

The proposed NORCAL acquisition will increase ProAssurance’s concentration to MPLI from approximately 60 percent up to 80 percent of written premiums. The combined pro forma market share will bring it up to third from fourth with almost 9 percent market share. Specifically, providing additional size and scale to help compete in MPLI space and a meaningful presence in California, according to Fitch.

ProAssurance operates in 50 states and the District of Columbia, with more than 1,000 employees in more than 20 offices.

Fitch said it has 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. Its analysts said MPLI competitive fundamentals have restricted a shift in market pricing and underwriting conditions despite several years of weaker performance and pricing has trended positively more recently, but there is considerable uncertainty whether premium rate increases are exceeding recent claims severity trends.

Fitch acknowledged that ProAssurance has taken “considerable underwriting action to improve performance” in the Specialty Property & Casualty segment. But Fitch said it expects profitability to be further challenged for the next 12-36 months following the acquisition as management takes underwriting and claims actions to bring NORCAL’s book of business in line with ProAssurance’s standards.

Last September, A.M. Best revised the outlooks to negative from stable while affirming the Financial Strength Rating of “A+” (Superior) and the Long-Term Issuer Credit Ratings of “aa-” of certain members of the ProAssurance Group. Concurrently, A.M. Best upgraded the FSR to “A+” (Superior) from “A” (Excellent) and the Long-Term ICR to “aa-” from “a+” of Eastern Alliance Insurance Co. (Lancaster, Pa.) and its affiliates that are now a part of ProAssurance Group. The outlook of these Credit Ratings (ratings) was revised to negative from stable. Additionally, A.M. Best affirmed the FSR of “A-” (Excellent) and the Long-Term ICR of “a-” of PACO Assurance Co., Inc. (PACO) (Springfield, Ill). The outlook of these ratings remained stable.

At that time, A.M. Best said the negative outlooks reflected the negative trend in the ProAssurance Group’s operating performance in recent years, which has “resulted in underwriting and operating metrics falling to a level that, although still solid, is more in-line with its peers in the medical professional liability insurance industry, instead of out-performing them.” While the group continues to report favorable prior period reserve development, A.M. Best said the magnitude of favorable development has declined in recent years and A.M. Best said it expects this trend to continue, especially given concerns with regard to rising loss costs in the medical professional liability industry.

Source: ProAssurance Corp.

*This story ran previously in our sister publication Insurance Journal.