ProAssurance: A Strong Sell - Analyst Blog

On Mar 18, Zacks Investment Research downgraded ProAssurance Corporation PRA to a Zacks Rank #5 (Strong Sell) as estimates have been going down ever since it reported weak fourth-quarter 2013 results.

Why the Downgrade?

ProAssurance witnessed downward estimate revisions following weak fourth-quarter results reported on Feb 20, 2014. The results clocked a negative surprise of 3.9%. Moreover, shares of this property and casualty insurer lost nearly 7.9% since the company reported disappointing fourth-quarter results. Given its current quarter Earnings ESP of -4.1%, we feel the company is slated for difficult times going ahead.

ProAssurance reported fourth-quarter operating earnings per share of 99 cents, which missed the Zacks Consensus Estimate of $1.03 by 3.9%. Earnings also decreased 36.5% year over year.

The underperformance by ProAssurance was largely due to surging expenses coupled with lower revenues. During the last reported quarter, net losses and loss adjustment expenses also rose significantly higher. Additionally, ProAssurance has been consistently suffering from higher underwriting, policy acquisition and operating expenses driven by higher acquisition expenses and compensation costs. This escalation is also deteriorating the underwriting ratio.

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.

Moreover, ProAssurance has been facing volatility in premium retention in its physician business for quite some time now mainly due to increased competition. If the company continues to lose its insured clients to competitors or to self-insurance mechanisms and risk retention groups, this might weigh largely on premiums, thereby hurting top line growth going forward.

Over the last 30 days, the Zacks Consensus Estimate for 2014 slid by 5.7% to $3.13 per share as 3 of 5 estimates were revised downward.

Other Insurers Worth a Look

We prefer to avoid ProAssurance for the time being. However, investors interested in the property and casualty insurance space may consider better-ranked stocks like AmTrust Financial Services, Inc. AFSI, Alleghany Corporation Y and Fidelity National Financial, Inc. FNF. All these stocks sport a Zacks Rank #1 (Strong Buy).