ProAssurance Corporation (PRA) reported its fourth-quarter operating earnings of $96.1 million or $3.08 per share, surpassing the Zacks Consensus Estimate of $1.35. This also compares favorably with earnings of $79.5 million or $2.42 per share in the prior-year quarter.
In fiscal 2010, ProAssurance also posted strong operating earnings of $219.5 million or $6.82 per share, which exceeded both the Zacks Consensus Estimate of $5.16 and the prior year earnings of $215.2 million or $6.49 per share.
Operating income excludes the after-tax effects of gains or losses on the extinguishment of debt, net realized investment gains or losses and guaranty fund assessments or recoupments.
During the reported quarter, the beneficial effect of adjustment to net income was 20 cents per share, compared with 16 cents in the year-ago quarter. The one-time gain in fiscal 2010 was 38 cents, compared with 21 cents per share.
Including these items, net income in the quarter was $102.1 million or $3.28 per share, compared with $84.6 million or $2.58 in the prior-year quarter. Net income was $231.6 million or $7.20 per share, compared with $222.0 million or $6.70.
ProAssurance’s strong results were attributable to its ability to enhance shareholders’ value and execute strategic transactions such as the acquisition of American Physicians Service Group (APS).
Quarter in Detail
Total revenue of ProAssurance increased slightly by 0.9% year over year to $185.5 million, exceeding the Zacks Consensus Estimate of $157.0 million. Revenue in fiscal 2010 also increased 2.9% year over year to $692.1 million, exceeding the Zacks Consensus Estimate of $647.0 million.
Gross written premiums for the quarter decreased marginally from $119.2 million to $118.5 million in the reported quarter, whereas it plummeted 3.7% year over year to $533.2 million from $553.9 million.
ProAssurance’s retention in its consolidated medical professional liability physician book was 92% in the reported quarter, as opposed to 90% in the prior-year quarter. However, the retention was 90% for the year, unchanged from last year.
ProAssurance experienced $138.0 million of net favorable reserve development in the reported quarter, compared with $109.0 million a year ago. In fiscal 2010, ProAssurance had $234 million of net favorable loss reserve development, compared with $207 million a year ago.
Net investment income for the quarter dipped 5.4% year over year to $36.0 million, while it declined 3.0% year over year to $146.4 million in 2010. ProAssurance’s net investment income plus net income from the company’s investment in unconsolidated subsidiaries resulted in a 3% decrease in 2010 to $147.6 million compared with $152.4 million in 2009, primarily resulting from lower yields in the fixed income portfolio.
Financial Ratios
ProAssurance’s net loss ratio for the reported quarter came in at negative 4.2%, compared with 18.9% in the prior-year quarter. The net loss ratio also declined to 42.6% in 2010 from 46.4% in 2009. Expense ratio, on the other hand, jumped to 28.4% in the fourth quarter from 23.3% in the prior-year quarter.
Expense ratio increased to 25.4% in 2010 from 22.7% in 2009. Combined ratio fell to 24.2% from 42.2% in the prior-year quarter, while it dipped to 68.0% in 2010 from 69.1% in 2009.
However, return on equity (ROE) slightly improved in the quarter to 22.2% from 20.2% in the prior-year quarter. ROE plummeted to 13.0% in 2010 from 14.2% in 2009. Book value of ProAssurance increased to $60.35 per share as of December 31, 2010 compared with $52.59 as of December 31, 2009.
Acquisition Update
ProAssurance completed the acquisition of APS on November 30, which was announced in September in an all-cash transaction. As a result of the merger, APS is now a wholly-owned subsidiary of ProAssurance.
Under the terms of the merger, each share of APS stock was redeemed for $32.50 in cash. Shareholders whose stock is held by a broker or in direct registration will be paid automatically. Those APS shareholders with stock certificates will receive instructions by mail for surrendering their shares in order to receive payment.
Capital Management
During the reported quarter, ProAssurance purchased 205,775 shares of its common stock for about $11.9 million, while it purchased 1.9 million shares on the open market for $106.0 million during the year 2010. In the first quarter of 2011, ProAssurance has purchased 251,849 shares 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 and has fully utilized the share repurchase authorization of September 2009.
ProAssurance has been purchasing shares in the open market since 2005 and has purchased 6.0 million shares for $315 million.
We believe that the strong capital position of ProAssurance has helped in optimizing shareholder value through comprehensive capital management strategies of prudently repurchasing shares, executing appropriate acquisitions and supporting strategic business expansion.
However, there are inherent threats associated with the medical professional liability insurance sector as a whole, stemming from price competition, legislative reform, loss cost trends and regulatory challenges.
Nevertheless, we anticipate the acquisition will offer superior quality insurance protection for the policyholders of APS. ProAssurance also believes that this will prove to be a strategic expansion that will help grow both the business and top line in 2011.
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