ProAssurance Stays at Outperform

Zacks

We reiterate our Outperform recommendation on ProAssurance Corporation (PRA) based on the company’s improved top line, operating cash flows and asset position. Geographic diversity, aggressive claims defense, stable ratings and improving return on equity are the other positives.

ProAssurance will likely release its second-quarter 2012 financial results on August 6. The current Zacks Consensus Estimate for earnings is pegged at $1.52 per share, representing an estimated year-over-year decline of 12.6%.

ProAssurance’s top line is showing gradual improvement while a cut in expenses is also boosting the bottom line and operating dynamics. Moreover, claims loss severity trends continue to remain lower than expected, thereby contributing to the fall in expenses. This is also reflected in total expenses, which declined 16% and 1.4%, respectively, from the prior-year periods in 2011 and the first quarter of 2012.

Additionally, ProAssurance has significantly expanded its geographic footprint through successful acquisition as well as the integration of companies and books of business. The acquisition of Medmarc, announced in June 2012, is expected to substantially boost ProAssurance’s underwriting ability, as Medmarc is one of the leading underwriters of products liability insurance for medical technology and life sciences in the U.S.

Moreover, following the merger with Independent Nevada Doctors Insurance Exchange (:INDIE), also announced in June, ProAssurance is expected to emerge as the leading writer of medical professional liability in Nevada by a huge margin as INDIE is Nevada’s leading medical professional liability insurer based on direct written premiums while ProAssurance currently occupies the fourth position in the state. The company is also trying to boost its operating efficiency by merging its subsidiaries to simplify its business structure.

However, ProAssurance’s core business has been witnessing substantial volatility over the past several years. Net premiums written declined in 2007 and 2008, although some recovery was witnessed in 2009. However, net premiums written continued to decline in 2010, which was followed by a recovery in 2011 and the first quarter of 2012.

Another major risk is associated with ProAssurance’s investment portfolio, which primarily consists of fixed income securities. The declining interest rate forces the company to reinvest its matured investments at comparatively lower interest rates, which leads to declining investment income. Nevertheless, the positives of the company outweigh the negatives in our opinion.

ProAssurance, which competes with Berkshire Hathaway Inc. (BRK.A) and MontpelierRe Holdings Ltd. (MRH), carries a Zacks #2 Rank, implying a short-term Buy rating.

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