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ProAssurance's Acquisitions, Capital Activity Look Good

On Oct 10, 2014, we issued an updated research report on ProAssurance Corporation (PRA). The company’s inorganic growth strategies, increased premiums and efficient capital deployment position it to generate long-term growth. However, lower retention rates, higher expenses and a weak investment portfolio raise caution.

ProAssurance efficiently deploys capital, mainly through its stock buyback program and dividend payment, thereby signaling financial strength. The company repurchased shares worth $141 million since Jan 2014 through Aug 4, 2014, including $38.6 million deployed in the second quarter of 2014. Given ProAssurance’s stable capital position, we believe that the capital deployment will continue in the coming quarters, thereby retaining shareholders’ confidence in the stock.

Despite the low rates and challenges in writing new business, ProAssurance’s core business has been witnessing substantial improvement over the past few quarters. This has been mainly due to the strategic acquisitions that have been accretive to premiums. Even the rating agencies have recognized ProAssurance as one of the nation’s major publicly traded medical professional liability specialist insurance writers.

Despite a soft cycle in the medical liability business, ProAssurance has increased its geographic footprint significantly through the successful acquisition and integration of companies. The company’s financial size and strength have helped it in this regard. The acquisition of Eastern Insurance Holdings in Jan 2014 enabled the company to strengthen its position in the workers’ compensation market. ProAssurance is faring well in integrating Eastern Insurance, while opening up cross-selling opportunities within both the companies as well. As a result, the Eastern Insurance deal contributed significantly to the financials in the first half of 2014. It is further expected to be accretive to 2014 earnings.

The company is set to receive a combined medical professional liability and workers’ compensation segregated portfolio cell program, likely in 2015. On completion, this deal should enable the company to write more business going forward.

On the flip side, ProAssurance has been facing volatility in premium retention in its physician business for quite some time now mainly due to intensified competition. Retention rates in the first half of 2014 also decreased year over year due to soft economic conditions and competitive pressures. 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.

ProAssurance has been persistently suffering from higher underwriting, policy acquisition and operating expenses. As a result, underwriting expense ratio has also been deteriorating. Higher expense ratio is an indicator of lower profitability. ProAssurance needs a strong expense management program as any substantial increase in operating expenses could weigh heavily on the margins and bottom line going ahead.

ProAssurance’s cash flow from operations is affected by the timing of payments. If the soft cash flow scenario persists, it will likely weigh on the company's capital deployment and deleveraging activities going forward.

Earlier, the company reported second-quarter operating earnings that were in line with the Zacks Consensus Estimate but declined year over year mainly due to a strong competitive environment and higher expenses.

ProAssurance currently carries a Zacks Rank #2 (Buy). Other stocks in the property and casualty insurance space that look attractive at current levels include Alleghany Corp. (Y), Argo Group International Holdings, Ltd. (AGII) and Aspen Insurance Holdings Ltd. (AHL). All these have a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on PRA
Read the Full Research Report on Y
Read the Full Research Report on AGII
Read the Full Research Report on AHL


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