Expense Woes Persist at ProAssurance - Analyst Blog

On April 3, 2014, we issued an updated research report on ProAssurance Corporation PRA. The stock has been witnessing strong downward estimate revisions over the last 30 days, due to lack of growth catalysts. Moreover, volatility in premium retentions in the physician business, high operating expenses and significant declines in operating cash flow are added woes.  

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 insured clients to competitors or to self-insurance mechanisms and risk retention groups it might weigh largely on premiums, thereby waning top-line growth going forward.

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 matured investments at comparatively lower interest rates, which leads to declining investment income.

Moreover, higher underwriting, policy acquisition and operating expenses has been weighing on underwriting expense ratio, indicating lower profitability. Apart from deteriorating margins, lack of a strong expense management program might pose significant risk to the successful integration of the acquired entities. Also, ProAssurance's cash flow has been declining due to delays between premium collection and payment of losses related to these premiums or between claims payment and reinsurance recoveries collection.

The combination of ProAssurance's Zacks Rank #4 (Sell) and a negative Earnings ESP (Expected Surprise Prediction) of 2.78% makes us skeptical in looking for an earnings improvement in the first quarter of 2014 as well. The Zacks Consensus Estimate for the first quarter of 2014 is pegged at 72 cents representing a year over year decline of 25.57%.
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However, on a brighter note, the core business of ProAssurance has been improving on strategic acquisitions that have been accretive to premiums. Moreover, the financial strength of the company has helped it expand its geographic footprint significantly through successful acquisitions and integrations with companies.

Of its recent endeavors, the acquisition of Eastern Insurance Holdings in Jan 2014 allows ProAssurance to foray into the workers' compensation market and synergies from the same are expected to drive premiums further, thereby being accretive to 2014 earnings.

ProAssurance also remains active in enhancing shareholders' worth through share repurchases and dividend payouts.. In Dec 2013, ProAssurance hiked its dividend by 20% and also approved a $100 million share repurchase program, an extension to its previous program.

In the long run, ProAssurance's firmly established track record, solid market position, prudent operating and financial leverage, responsible pricing, loss reserve practice and conservative investments in assets will likely generate fundamental growth. The long-term growth rate of the stock is 7.50%.

Other Stocks to Consider

Alleghany Corp. Y, AmTrust Financial Services Inc. AFSI and EMC Insurance Group Inc. EMCI are some better-ranked stocks in the property and casualty insurance space, all with a Zacks Rank #1 (Strong Buy).