Fitch Affirms The Doctors Company Group’s Ratings Following Proposed Transaction

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings on The Doctor's Company, an Intercompany Insurance Exchange (Doctors) and its wholly owned insurance subsidiaries (see list below), collectively referred to as The Doctors Company Group (TDC).

Today's rating action follows the announcement by Doctors to purchase FPIC Insurance Group, Inc. (FPIC) for $362 million, or 1.6 times (x) tangible book value. The purchase price represents a 31% premium over FPIC's closing price on May 23, 2011. FPIC's Board of Directors has approved the proposed transaction and has resolved to recommend that its shareholders approve the merger. The transaction is expected to close in the fourth quarter of 2011 and is subject to customary closing conditions, including the receipt of regulatory approvals, and approval by a majority of FPIC's shareholders.

Fitch has some concerns about the proposed transaction including integration risk, business retention, rate regulations, and the ultimate realization of cost synergies. While time will ultimately reveal management's success in integrating and evaluating FPIC's financial position Fitch notes that some of its concerns are mitigated by the fact that TDC has a successful track record of integrating acquisitions and realizing synergies. TDC recently purchased several companies, including AP Capital for $386 million in 2010, SCPIE for $281 million in 2008, OHIC for $95 million in 2007, and Northwest Physicians Insurance Company for $14 million in 2006.

Favorably, the FPIC acquisition will give TDC an opportunity to better compete in Florida and Texas and, to a lesser extent, in Arkansas and Georgia. Further, the financing of this transaction will come from the sale of invested bonds and thus have minimal impact on financial leverage. Operating leverage will increase modestly but within Fitch's targets for the current rating category. Operating leverage for TDC at year-end 2010 was 0.52x and was anticipated to improve organically in 2010 through profitable operations. Pro forma consolidated TDC and FPIC operating leverage for March 31, 2011 will range from 0.55x-0.65x, which is within recent historical ranges for the company.

TDC's ratings are based on above-average underwriting performance and profitability relative to medical professional liability insurance (MPLI) peers, favorable loss reserve levels, strong statutory capital position, and an experienced management team that employs a conservative operating strategy that is focused on long-term underwriting profitability.

The rating also considers that TDC is a mono-line insurer operating in one of the more volatile segments of the property/casualty insurance industry. Market conditions in recent years were favorably affected by legislative reforms, a drop in claims frequency, and market exits from underperforming competitors. While Fitch does not anticipate a precipitous drop in underwriting results for the MPLI industry, near-term softening of rates will promote downward pressure on profitability.

TDC reported a very strong statutory calendar year combined ratio of 53% for 2010. Adjusting for favorable prior period loss reserve development, the statutory accident year combined ratio was still adequate at 102% for 2010. These figures compare favorably to the 2009 results of 75.8% calendar year combined ratio and a 98.4% accident year combined ratio.

Fitch believes that a ratings upgrade in the near term is unlikely given the company's narrow product focus in a highly volatile line of business. Further, Fitch has concerns that that the medical professional liability insurance market is in the soft phase of the underwriting cycle.

The following is a list of key rating drivers that could lead to a downgrade:

--Failing to successfully integrate FPIC or other recent acquisitions;

--An increase in the company's operating leverage, as defined by net written premiums to policyholder surplus, of 1x or higher;

--Material adverse reserve development;

--Failure to maintain pricing discipline in a softening rate environment.

Fitch has affirmed the 'A' IFS ratings of the following TDC insurance subsidiaries with a Stable Outlook:

--The Doctors' Company an Intercompany Insurance Exchange;

--Professional Underwriters Liability Insurance Company (PULIC);

--Underwriter for the Professions Insurance Company (UPIC);

--Northwest Physicians Insurance Company (NPIC);

--OHIC Insurance Company (OHIC);

--SCPIE Indemnity Company;

--American Physicians Capital Inc.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (March 31, 2011);

--'Non-Life Insurance Rating Criteria (Global)' (March 31, 2011);

--'Fitch's Approach to Rating Insurance Groups' (December 14, 2010);

--'Insurance Industry: Global Notching Methodology' (March 31, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366

Insurance Industry: Global Notching Methodology and Recovery Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614265

Fitch's Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765

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Fitch Ratings
Primary AnalystGerald Glombicki, CPA, +1-312-606-2354
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA, +1-312-368-3146
Managing Director
or
Committee ChairpersonJulie Burke, CFA, CPA, +1-312-368-3158
Managing Director
or
Media Relations:Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings