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Leading specialty insurer, ProAssurance Corporation (PRA - Analyst Report) recently entered into an agreement to acquire a domestic casualty insurance company, Eastern Insurance Holdings Inc. for a cash consideration of $205 million or $24.50 per share.

The deal is expected to culminate by Jan 1, 2014 and is pending regulatory and Eastern shareholder approval. On closing, Eastern Insurance will merge with a newly formed subsidiary of ProAssurance to form an entity that will enhance the medically focused product lines of ProAssurance. Post the merger, Eastern Insurance will become a wholly owned subsidiary of ProAssurance. However, the corporate offices of Eastern Insurance in Lancaster, Pennsylvania, and its existing regional and satellite offices will be retained.

ProAssurance has been taking up strategic initiatives to establish an insurance platform that will help it to cater to prospective clients and shareholders. Thus it seeks to acquire entities that have a promising working team and insurance expertise. Eastern Insurance is known for its unmatchable performance in healthcare workers’ compensation and delivering strong growth and underwriting profit. Thus through the acquisition ProAssurance intends to foray into the workers’ compensation market that provides enough growth opportunities.

Moreover, the acquisition will open doors for product line diversification for the combined entity. Finally, the deal is not expected to materially impact the financial leverage of ProAssurance and is anticipated to be accretive to ProAssurance’s 2014 earnings. We believe the deal is a strategic fit for ProAssurance and will help it expand alternative market opportunities in medical professional liability and workers' compensation.

Additionally, credit rating agency A.M. Best Co. is also backing the company’s decision. Following the announcement of the deal, A.M. Best Co. reiterated the issuer credit rating (ICR) of “bbb” of EIHI and the financial strength rating (FSR) of “A” and ICR of “a” of the property and casualty subsidiaries of Eastern Insurance. A.M. Best Co. also retained the FSR of “A+”, ICR of “a–” and the debt ratings of ProAssurance. Moody’s Investors Service of Moody’s Corporation (MCO - Analyst Report) also affirmed the senior unsecured shelf rating of ProAssurance at “Baa2” and the insurance financial strength rating of ProAssurance’s property-casualty affiliates at “A2”.

Increase in loss and loss adjusted expenses as well as deterioration in combined ratio have been matters of concern for ProAssurance. As a result, currently we have a Zacks Rank #4 (Sell) on the company. Among other insurers that carry a favorable Zacks Rank #1 (Strong Buy), Cincinnati Financial Corp. (CINF - Analyst Report) is worth considering.

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