On Jul 15, 2013, we downgraded ProAssurance Corp. (PRA) to Neutral from Outperform based on core business volatility, declining investment income, intense price and product competition, and regulatory challenges.
Why the Downgrade?
While ProAssurance has a history of outperforming estimates, we expect the company’s earnings to fall year-over-year in the second quarter of 2013. The Zacks Consensus Estimate for the company’s second quarter earnings stands at 90 cents per share, down 6.5% over the year-ago quarter.
Even the earnings per share of ProAssurance in 2013 are expected to fall 5.8% over 2012.The company’s core business has been witnessing substantial volatility over the past several years. Further, the declining interest rate forces the company to reinvest its matured investments at comparatively lower interest rates, which leads to declining investment income.
ProAssurance has been consistently suffering from higher underwriting, policy acquisition and operating expenses. However, these negatives are dwarfed by the various positives.
ProAssurance has significantly expanded its geographic footprint through successful acquisition and integration of companies.The recent acquisitions added $12 million to premiums in the first quarter of 2013.
Prudent capital management has been another key strength for ProAssurance, which is reflected in the low-risk balance sheet and healthy loss reserves. Further, the company enjoys Insurer Financial Strength rating of “A” from both A.M. Best and Fitch. Moreover, A.M. Best raised the issuer credit rating of ProAssurance to “a-” from “bbb+” in Jun 2013.
Other Stocks to Consider
ProAssurance currently carries a Zacks Rank #1 (Strong Buy). Other property and casualty companies worth considering are HCI Group, Inc. (HCI), Hilltop Holdings Inc. (HTH) and AmTrust Financial Services, Inc. (AFSI). All these companies carry a Zacks Rank #1 (Strong Buy).
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