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Yesterday, ProAssurance Corporation (PRA - Analyst Report) announced that it has completed the acquisition of insurance underwriting company – Medmarc Insurance Group. The acquisition, which has been is effective from January 1, 2013, was structured as an all-cash sponsored demutualization.

Consequently, Medmarc was demutualized and converted to a non-public stock company after obtaining the required approval from eligible members. Thereafter, ProAssurance purchased the entire newly-created stock of the company for $153.7 million in cash.

As per the agreement, Medmarc will distribute this cash to its eligible members in the form of future policy credits worth $7.5 million along with $146.2 million in cash. Eligible member refers to any medical technology or life sciences company holding an in-force policy issued by the company between December 31, 2010 and June 30, 2012.

ProAssurance financed the acquisition through secured loans worth $125 million, borrowed under its existing credit facility. The company had earlier considered liquidating certain securities to fund the acquisition but decided against it and used the same securities as collateral for the secured loans.

This was an extremely prudent step as the securities are projected to yield a higher total return than the total borrowing cost over the loan's projected life. This will lead to net inflows for ProAssurance, which would have been lost had the company sold the securities.

Moreover, the acquisition will help in the diversification of ProAssurance’s portfolio of insurance products. The addition of Medmarc’s legal professional liability business will also increase the size of the acquiring company’s lawyers' professional liability business, which in turn will likely boost premiums.

Prior to the acquisition, Medmarc was among the leading products liability insurance underwriters for the medical technology and life sciences businesses in the U.S. The company will continue operating from Chantilly, Virginia and will retain its key executives in their current roles.

ProAssurance carries a Zacks #3 Rank (Hold). We retain our long-term ‘Neutral’ recommendation on the shares. Another operator in the property and casualty industry – EMC Insurance Group Inc. (EMCI - Snapshot Report) – carries a Zacks #1 Rank (Strong Buy).

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