ProAssurance Corporation (PRA) reported its second-quarter operating earnings of $53.7 million or $1.74 per share, which surpassed the Zacks Consensus Estimate of $1.26. This also compares favorably with earnings of $42.3 million or $1.29 per share in the prior-year quarter.
Operating income excludes the after-tax effects of net realized gains or losses and guaranty fund assessments or recoupments. During the reported quarter, the negative effect of the adjustments to net income was 5 cents per share, while it was 6 cents in the year-ago quarter.
Including the adjustment items, net income was $55.1 million or $1.79 per share, compared with $40.4 million or $1.23 per share in the year-ago quarter.
ProAssurance’s strong results were attributable to increased operational efficiency, leading to rising revenues and declining costs.
Total revenue of ProAssurance increased year over year to $174.8 million from $161.5 million, exceeding the Zacks Consensus Estimate of $170.0 million.
Gross written premiums increased 17% to $115 million from $99 million in the year-ago quarter. The acquisition of American Physicians Service Group (“APS”) added $10 million to gross premiums.
ProAssurance’s retention in its consolidated medical professional liability physician book, including APS, was 90% in the reported quarter, as opposed to 89% in the prior-year quarter. Also, the company experienced $50.0 million of net favorable loss reserve development in the reported quarter, which was $38.0 million a year ago.
Net investment income for the quarter was $36 million, down $1 million from the second quarter of 2010, primarily resulting from lower yields in the private investment funds. ProAssurance’s net investment income plus net income from the company’s investment in unconsolidated subsidiaries decreased to $34.0 million from $38.0 million in the prior-year quarter.
Financial Update
ProAssurance generated net cash flow from operating activities of $28.2 million in the reported quarter, showing a slight increase from $28.1 million generated in the prior-year quarter.
Total assets of the company at the end of the quarter were $4.93 million, up from $4.88 million as on December 31, 2010, while shareholders’ equity was $1.97 million, showing an increase from $1.86 million as on December 31, 2010.
Book value per share rose 7% to $64.28 from $60.35 as on December 31, 2010.
Financial Ratios
ProAssurance’s net loss ratio for the reported quarter came in at 47.0%, compared with 54.6% in the prior-year quarter. Expense ratio also declined to 24.0% from 24.5% in the prior-year quarter.
Combined ratio fell to 71.0% from 79.1% in the prior-year quarter, while operating ratio plummeted to 44.5% in the reported quarter as against 49.5% in the prior-year quarter.
However, return on equity improved to 11.4% from 9.1% in the prior-year quarter.
Stock Update
ProAssurance repurchased 258,821 shares of its common stock in the first half of the year for about $15.0 million.
The company has approximately $194 million left under its $200 million authorization granted by the Board of Directors in November 2010. ProAssurance has been purchasing shares in the open market since 2005 and has repurchased 6.0 million shares for $316 million so far.
Our Take
ProAssurance adopts a highly disciplined strategy towards all its businesses, which helps in improving its operational efficiency and strengthening its financial position. The financial ratios of the company have improved and book value of its shares has increased, making it more attractive to shareholders.
However, the net investment income declined during the reported quarter due to low earnings on private investment funds. We believe that the company needs to improve its investment management, while maintaining its current approach towards its operations to further enhance its profitability in the future.
ProAssurance carries a Zacks #3 Rank, implying a short-term Hold rating.
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