On Mar 11, 2015, we issued an updated research report on ProAssurance Corporation PRA. Last month, the company reported fourth-quarter 2014 earnings that surpassed the Zacks Consensus Estimate and improved year over year on improvement in the Workers’ Compensation segment and enhanced share repurchases.
The company’s capital deployment initiatives and inorganic growth strategies bode well for the long term. However, persistent low interest rate along with reduced retention rates and investment yields remain headwinds.
ProAssurance’s strong financial position enables it to deploy capital efficiently. This is reflected in its regular dividend hikes, declaration of a special dividend, and the increase in share buyback authorization last quarter. Enhanced buybacks should boost earnings per share while dividend hikes are expected to have a positive impact on the share price.
Despite the low rates and challenges in writing new business, ProAssurance’s core business has been witnessing substantial improvement over the past few quarters on strategic acquisitions that have been accretive to premiums. The acquisition of Eastern Insurance Holdings in 2014 enabled the company to strengthen its position in the workers’ compensation market, which in turn boosted revenues.
In the long run, ProAssurance’s inorganic growth strategies, a firmly established track, solid competitive market position, prudent operating and financial leverage, responsible pricing, loss reserve practice and conservative investments in assets will likely generate fundamental growth.
However, the company is facing troubles in premium retention in its physician business mainly due to increased competition. If the company continues to lose its insured clients to competitors or to self-insurance mechanisms and risk retention groups, it might weigh largely on premiums, thereby affecting the top line.
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 its matured investments at comparatively lower interest rates, which leads to declining investment income, thereby weighing on the top line.
ProAssurance has been consistently suffering from higher underwriting, policy acquisition and operating expenses. This has led to deterioration in the underwriting expense ratio. Higher expense ratio is an indicator of lower profitability. ProAssurance needs a strong expense management program as any substantial elevation in operating expenses could weigh heavily on the margins and bottom line.
ProAssurance currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the insurance space at the current levels include Allied World Assurance Company Holdings, AG AWH, AmTrust Financial Services, Inc. AFSI and Arch Capital Group Ltd. ACGL. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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