We are upgrading our recommendation on ProAssurance Corp. (PRA) to Outperform, based on the company’s premium growth, stable ratings and improved ROE. The company’s third-quarter earnings surpassed the Zacks Consensus Estimate on the back of higher premiums. Consequently, operating cash flow and assets also improved, driving the book value of shares upward and leading to initiation of a cash dividend.
Higher operating cash flow is also likely to translate into enhanced operating leverage and excess capital generation for share repurchases. We believe the benefits of geographic diversity,
aggressive claims defense and strong financial position are likely to have a positive impact over time.
Our six-month target price of $101.00 per share equates to about 14.8x our earnings estimate for 2011. Combined with the $1.00 per share annual dividend, this target price implies an expected return of 20.1% over that period, which is consistent with our Outperform recommendation.
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