On Sep 24, Zacks Investment Research downgraded ProAssurance Corp. (PRA) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Earnings estimates for ProAssurance have been trending down, owing to dismal second-quarter 2013 results and a reduced cash flow. The company reported second-quarter results with a negative earnings surprise of 20%. Additionally, this specialty insurer underperformed the year-to-date S&P 500 index, which posed a growth of 21.4% against ProAssurance’s return of 9.2%.
On Aug 5, ProAssurance reported second-quarter operating earnings per share of 72 cents, which lagged the Zacks Consensus Estimate and year-ago earnings of 90 cents and 96 cents, respectively.
The downside was due to 47% year-over-year increase in loss and loss adjusted expenses along with 6.2% decline in net investment income and flattish growth in premiums earned. These factors together more than offset the top-line growth of 4.2%. While underwriting and other operating expenses were marginally lower, combined ratio deteriorated to 81.0% from 63.6% in the year-ago period.
Although ProAssurance’s geographic mix of insured risks scores well with the ratings agencies, lack of growth catalysts, sluggish premiums’ growth and higher expenses pose an adverse effect on the company’s fundamentals. This is reflected by weak ROE, operating cash outflow and various operating ratios.
Moreover, low interest rates have taken a toll on the investment income. Intense price and product competition are further limiting the desired upside. All these factors are making investors jittery.
The Zacks Consensus Estimate for 2013 decreased 9.9% to an earnings of $3.53 per share in the last 60 days, 15.1% lower than the 2012 figure. Moreover, the estimate for 2014 is pegged at $3.24 a share, down 7.2% in the last 60 days and 8.2% from the 2013 estimate. Meanwhile, no upward revision in estimates was witnessed for both the years.
Other Stocks to Consider
While we prefer to avoid ProAssurance at present, stocks that are outperforming in the insurance sector include Alleghany Corp. (Y), Global Indemnity Plc (GBLI) and CNA Financial Corp. (CNA). All these stocks carry a Zacks Rank #1 (Strong Buy).