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Analyst Blog

On Sep 30, 2013, we downgraded our recommendation on ProAssurance Corporation (PRA - Analyst Report) to Underperform from Neutral following poor second quarter results that was announced on Aug 5, 2013. This property and casualty insurer currently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

ProAssurance’s second-quarter earnings came in at 72 cents per share that missed the Zacks Consensus Estimate of 90 cents per share by 20% as well as year-ago quarter’s earnings of 96 cents per share by 25%.

ProAssurance’s core business has been volatile since the past several years, although it has been more inclined toward a downturn. Given the low rates and challenges in writing new business, fluctuations in net premiums earned/written are expected to persist in the future. Moreover, inherent threats associated with the medical professional liability insurance sector related to price competition, legislative reform, loss cost trends and regulatory challenges are expected to weigh on top line going forward.
    
Premium retention in ProAssurance’s physician business is another factor that is taking a toll on top line growth. If the company continues to lose its insured clients to competitors or to self-insurance mechanisms it might weigh largely on premiums, thereby waning top line growth going forward. Additionally, investment income has been a drag for the past few years as the declining interest rate forces the company to reinvest its matured investments at comparatively lower interest rates.

Furthermore, ProAssurance has consistently suffered from higher underwriting, policy acquisition and operating expenses as exhibited in the first half of the year. Rising expenses and waning premiums earned have together contributed to a deteriorating underwriting expense ratio. This implies lower profitability for the company. Until and unless, ProAssurance undertakes stringent expense management initiatives or measures to improve policy retentions and renewals, the company profitability might be hampered severely resulting in loss of investor confidence.  

Other Stocks to Consider

Among other property and casualty insurers, Global Indemnity Plc (GBLI)), Cincinnati Financial Corp. (CINF - Analyst Report) and Everest Re Group Limited (RE - Analyst Report) carry a favorable Zacks Rank #1 (Strong Buy) and appear impressive.

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