We are downgrading our recommendation on
) to Neutral based on volatility in its core business and poor
investment income along with higher underwriting, policy
acquisition and operating expenses.
ProAssurance reported second-quarter operating earnings per
share of $1.92, striding ahead of the Zacks Consensus Estimate of
$1.52 and the year-ago quarter's earnings of $1.74. Operating
earnings stood at $59.5 million, compared with $53.7 million in
the prior-year quarter.
ProAssurance's commitment to local market needs and personal
service differentiates it from competitors both in the areas of
organic growth and acquisition opportunities. The company has
significantly expanded its geographic footprint through the
successful acquisition and integration of companies.
The company's financial size and strength have helped it
become an attractive acquirer. The company is also trying to
boost its operating efficiency by merging its subsidiaries in
order to simplify its business structure.
Prudent capital management is another key strength for
ProAssurance, which is reflected in the low-risk balance sheet
and healthy loss reserves. All of the subsidiaries of
ProAssurance exceed the minimum risk-based capital requirements
specified by the National Association of Insurance Commissioners
Given its strong claims-paying ability, ProAssurance enjoys
ratings of "A" from both A.M. Best and Fitch rating agencies as
well as "A3" from Moody's. Moreover, consistent profits by
ProAssurance's subsidiaries, its strong capital position,
operating and financial flexibility, and a veteran management
team prompted Fitch Ratings to affirm the issuer default rating
of the holding company at "BBB+" and the insurer financial
strength ratings of all insurance operating subsidiaries of
ProAssurance at "A" with a stable outlook in September 2012.
However, ProAssurance's core business has been witnessing
substantial volatility over the past several years, which is
reflected in the wide fluctuations in net premiums earned and
written. These fluctuations are expected to continue in the
future, given the inherent threats associated with the medical
professional liability insurance sector related to price
competition, legislative reform, loss cost trends and regulatory
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. This is also
validated by the net investment results (sum of net investment
income and equity in earnings of unconsolidated subsidiaries)
that declined 7.2% in the first half of 2012.
Moreover, ProAssurance has been consistently suffering from
higher underwriting, policy acquisition and operating expenses.
Additionally, the shifting of employees to the new processing
centers opened in June 2012 added to expenses in the second
quarter of 2012 since the company paid relocation bonuses to the
relocating employees and termination benefits to those who could
not relocate. Moreover, unrealized losses and higher loss
reserves have led to declining operating cash flow.
ProAssurance, which competes with
United Fire & Casualty Company
Montpelier Re Holdings Ltd.
), carries a Zacks #2 Rank (short-term Buy).
MONTPELIER RE (MRH): Free Stock Analysis
PROASSURANCE CP (PRA): Free Stock Analysis
UNITED FIRE GRP (UFCS): Free Stock Analysis
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