ProAssurance Corporation (PRA) reported its fourth-quarter operating earnings per share of $4.27, surpassing the Zacks Consensus Estimate of $2.03 and the year-ago earnings of $3.08. Operating earnings amounted to $132 million, compared with $96 million in the prior-year quarter.
Operating income excludes the effects of confidential settlements, net realized investment gains or losses and guaranty fund assessments or recoupments. The positive effect of adjustments to net income was 29 cents per share, compared with 20 cents in the year-ago quarter.
Including the non-recurring items, net income was $140.6 million or $4.56 per share, compared with $102.1 million or $3.28 per share in the year-ago quarter. ProAssurance’s improved earnings were buoyed by higher revenues, which were partially offset by lower net investment results.
During the quarter under review, total revenue of ProAssurance increased year over year to $206.4 million from $185.5 million, while gross premiums written decreased 3% to $115 million from $119 million in the year-ago quarter. Also, the company experienced $184 million of net favorable reserve development in the reported quarter, which was $138 million a year ago.
Net investment income for the quarter was $34 million, down $2 million from the fourth quarter of 2010. Net investment result (Sum of net investment income and equity in earnings of unconsolidated subsidiaries) amounted to $31 million, down $3 million from the year-ago quarter. However, ProAssurance incurred net realized investment gains of $11.6 million in the reported quarter, showing an uptick from $8.5 million in the year-ago quarter.
Full-Year 2011 Highlights
For full-year 2011, ProAssurance reported operating income of $279 million or $9.03 per share, surging from $219 million or $6.82 per share in 2010. Earnings per share also surpassed the Zacks Consensus Estimate of $6.82. Moreover, gross premiums written during the year came in at $566 million, up 6% year over year from $533 million. The acquisition of American Physicians Service Group (“APS”) added $55 million to gross premiums, while the Certitude program with Ascension Health added $8 million in 2011.
ProAssurance’s total revenue amounted to $717 million in 2011, showing a modest year-over-year increase from $692 million. Additionally, total expenses decreased to $302 million from $359 million. Net income came in at $287 million or $9.31 per share against $232 million or $7.20 per share in 2010.
Financial Position
ProAssurance generated net cash flow from operating activities of $53 million in the reported quarter, increasing from $31 million in the prior-year quarter. Total assets of the company at the end of the quarter were $5.0 billion, up from $4.88 billion as of December 31, 2010, while shareholders’ equity was $2.2 billion, reflecting a 17% increase from $1.9 billion as of December 31, 2010. Book value per share also rose 17% to $70.84 from $60.35 as on December 31, 2010.
Financial Ratios
ProAssurance’s net loss ratio for the reported quarter came in at a negative 22.1%, compared with a negative 4.2% in the prior-year quarter. Additionally, expense ratio decreased to 20.1% from 28.4% in the prior-year quarter.
The combined ratio plummeted to a negative 2.0% from 24.2% in the prior-year quarter, while operating ratio dropped to a negative 23.3% from a negative 1.5% in the prior-year quarter. Additionally, return on equity (ROE) improved to 26.9% from 22.2% in the prior-year quarter.
Share Repurchase Update
ProAssurance repurchased 0.34 million shares in 2011 for approximately $21.0 million. The company has approximately $188 million left under its $200 million authorization granted by the board 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 January 12, 2012, ProAssurance paid a cash dividend of 25 cents per share to shareholders of record as of December 27, 2011. The company announced the commencement of its cash dividend policy in September 2011 and paid the first quarterly dividend in October 2011.
Our Take
ProAssurance adopts a highly disciplined strategy toward all its businesses, which helps in improving its revenues 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 the low interest rate environment. 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.
ProAssurance’s rival MontpelierRe Holdings Ltd. (MRH) reported fourth quarter operating loss of 27 cents per share, narrower than the Zacks Consensus Estimate of a loss of 30 cents. However, results compare unfavorably with earnings per share of 81 cents in the year-ago quarter.
Currently, ProAssurance carries a Zacks #1 Rank, implying a short-term ‘Strong Buy’ rating.
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