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.
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis
Report
MONTPELIER RE (MRH): Free Stock Analysis Report
PROASSURANCE CP (PRA): Free Stock Analysis
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