Balanced View on ProAssurance - Analyst Blog

On May 29, 2014, we issued an updated research report on ProAssurance Corporation PRA. We believe that business expansion strategies, premiums growth and efficient capital deployment should help the company mitigate the adverse effects of weak investment portfolio and lower retention in the physician business.

ProAssurance had reported first-quarter 2014 earnings that exceeded the Zacks Consensus Estimate. However, results compared unfavorably with the year-ago quarter earnings due to losses from competitive pressure in the Worker's Compensation as well as Specialty Property and Casualty segments, along with higher expenses.

The company's core business has witnessed substantial improvement over the past few quarters, despite low rates and challenges in writing new business. The addition of new business has been contributing positively in this respect. ProAssurance is faring well in integrating Eastern Insurance.

The deal is driving cross-selling interest among those agents and insurers who were involved with either ProAssurance's Healthcare Professional Liability line or Eastern Insurance's Workers' Compensation line. As a result, the Eastern deal significantly boosted top-line results.

ProAssurance's track record, solid competitive market position, prudent operating and financial leverage, responsible pricing, loss reserve practice and conservative investments in assets will likely generate fundamental growth in the long run. The launch of a liability protection product, CaPAssurance, in California, helped the company to write its first California hospital policy in this program in Jan 2014 and boosted premiums in the first quarter of 2014.

Further, the company's efficient capital deployment was evident from the 20% dividend hike implemented in Dec 2013 and $100 million increase to the share repurchase authorization in May 2014.  

On the flip side, this Zacks Rank #3 (Hold) has been facing volatility in premium retention in its physician business for quite some time mainly due to increased competition. Another major risk is associated with ProAssurance's investment portfolio, which primarily consists of fixed income securities. The declining interest rate compels the company to reinvest its matured investments at comparatively lower interest rates, which leads to declining investment income.

Moreover, ProAssurance has been persistently suffering from rise in underwriting, policy acquisition and operating expenses. As a result, underwriting expense ratio has also been deteriorating.

Additionally, ProAssurance's operating cash flow is adversely affected by timing of payments. Although operating cash flow increased in the first quarter of 2014, it is not sustainable as it resulted from an absence in the tax-related payments in the quarter that were realized in the year ago quarter.

Other Stock to Consider

Better-ranked players in the property and casualty insurance space, which look attractive at current levels, include Allied World Assurance Co. Holdings, AG AWH, AmTrust Financial Services, Inc. AFSI and Endurance Specialty Holdings Ltd. ENH. All these stocks sport a Zacks Rank #1 (Strong Buy).