ProAssurance Corporation (PRA) reported its third-quarter operating earnings of $48.3 million or $1.57 per share, which surpassed the Zacks Consensus Estimate of $1.29. This also compares favorably with earnings of $41.5 million or $1.30 in the prior-year quarter.
Operating income excludes the after-tax effects of net realized gains or losses, litigation settlement and guaranty fund assessments or recoupments. During the reported quarter, the negative effect of adjustments to net income was 15 cents per share, while there was a positive effect of 29 cents in the year-ago quarter.
Including adjustment items, net income was $43.7 million or $1.42 per share, compared with $51.1 million or $1.59 in the year-ago quarter.
ProAssurance’s improved earnings were attributable to higher premiums, which were offset by high net realized investment loss, leading to a decline in net income.
Total revenue of ProAssurance decreased year over year to $162 million from $181 million.
Gross written premiums increased 10% to $175 million from $159 million in the year-ago quarter. The acquisition of American Physicians Service Group (“APS”) added $17 million to gross premiums, thereby setting off the premium decline in other businesses.
ProAssurance’s retention in its consolidated medical professional liability physician book, was 89% in the reported quarter, as opposed to 90% in the prior-year quarter. Also, the company experienced $52.0 million of net favorable loss reserve development in the reported quarter, which was $33.0 million a year ago.
Net investment income for the quarter was $32 million, down $2 million from the third quarter of 2010, primarily resulting from lower yields in the fixed income portfolio.
However, ProAssurance incurred net realized investment losses of $12 million in the reported quarter, showing substantial deterioration from net realized investment gains of $15 million in the year-ago quarter.
Total expenses declined to $99 million from $13 million in the prior-year quarter.
Financial Update
ProAssurance generated net cash flow from operating activities of $53.4 million in the reported quarter, increasing from $32.7 million generated in the prior-year quarter.
Total assets of the company at the end of the quarter were $4.99 billion, up from $4.88 billion as on December 31, 2010, while shareholders’ equity was $2.02 billion – an increase from $1.86 billion as on December 31, 2010.
Book value per share rose 10% to $66.23 from $60.35 as on December 31, 2010.
Financial Ratios
ProAssurance’s net loss ratio for the reported quarter came in at 46.9%, compared with 61.3% in the prior-year quarter. However, expense ratio increased to 25.8% from 24.0% in the prior-year quarter.
Combined ratio fell to 72.7% from 85.3% in the prior-year quarter, while operating ratio plummeted to 47.4% in the reported quarter, against 57.9% in the prior-year quarter.
Additionally, return on equity (ROE) deteriorated to 8.8% from 11.3% in the prior-year quarter.
Stock Update
ProAssurance repurchased 82,000 shares of its common stock in the reported quarter for about $5.6 million.
The company has approximately $188 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 6.1 million shares for $321 million so far.
Dividend Update
On September 7, 2011, ProAssurance announced the commencement of its cash dividend policy. Accordingly, for the first time since inception, the company paid a quarterly dividend of 25 cents per share on October 13, 2011 to shareholders on record as of September 29, 2011.
Our Take
ProAssurance adopts a highly disciplined strategy towards all its businesses, which helps in improving its premiums and reducing expenses. Operating cash flow and assets of the company have improved and book value of its shares has increased, making it more attractive to shareholders.
However, net investment income declined during the reported quarter due to poor market conditions. We believe that the company needs to improve its investment management, while maintaining its current approach towards its operations to further enhance profitability in the future.
ProAssurance’s rival MontpelierRe Holdings Ltd. (MRH) reported third quarter 2011 operating loss of 40 cents per share, wider than the ZacksConsensus of a loss of 23 cents.
ProAssurance carries a Zacks #3 Rank, implying a short-term Hold rating.
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