We reiterate our Outperform recommendation on ProAssurance Corporation (PRA) based on the company’s revenue growth, stable ratings and improved return on equity (ROE). Geographic diversity, aggressive claims defense and strong financial position are the other positives for the company.
ProAssurance reported earnings of $4.27 per share in the fourth quarter of 2011, well ahead of the Zacks Consensus Estimate of $2.03 and the year-ago earnings of $3.08. Income from continuing operations amounted to $132 million, compared with $96 million in the prior-year quarter.
ProAssurance has a highly disciplined strategy in place for all its businesses, which helps in improving revenues and reducing total expenses. Moreover, claims loss severity trends continue to remain lower than expected, thereby leading to lower expenses.                                     
Prudent capital management is another key strength for ProAssurance, which is reflected in its low-risk balance sheet and healthy loss reserves. Further, the company deploys capital in an effective manner, mainly through its stock buyback program and dividend payment.
Moreover, ProAssurance enjoys claims paying ratings of “A” from both A.M. Best and Fitch rating agencies as well as “A3” from Moody’s, which reflect its financial strength and ability to meet its debt obligations.
However, ProAssurance has been consistently suffering from higher underwriting, policy acquisition and operating expenses. These expenses surged 16.1% year over year in 2009, 15.8% in 2010 and 1.1% in 2011, thereby also deteriorating the underwriting ratio. Moreover, unrealized losses, acquisition-related expenses and higher loss reserves have limited the growth of operating cash flow.
Declining investment income remains a major risk for ProAssurance’s investment portfolio, which mainly comprises 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.
We believe that the company needs to improve its investment management, while maintaining its current approach toward its operations to further enhance profitability in the future. Currently, the Zacks Consensus Estimate for ProAssurance’s first-quarter 2012 earnings stands at $1.41 per share, down by an estimated 3.3% year over year. For 2012, earnings are pegged at $7.10 per share, a forecasted year-over-year decline of about 21.4%.
ProAssurance carries a Zacks #1 Rank, implying a short-term Strong Buy rating. The company primarily competes with Berkshire Hathaway Inc. (MRH).


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