ProAssurance Corporation ( PRA - Analyst Report ) reported second-quarter operating earnings per share of $1.92, striding ahead of the Zacks Consensus Estimate of $1.52 and the year-ago quarter’s earnings of $1.74. Operating earnings stood at $59.5 million, compared with $53.7 million in the prior-year quarter.

Operating income excludes the effects of net realized investment gains or losses and guaranty fund assessments or recoupments. The positive adjustment to net income was 3 cents per share compared to a negative adjustment of 5 cents in the year-ago quarter.

Including non-recurring items, net income was reported at $58.5 million or $1.89 per share, compared with $55.1 million or $1.79 per share in the year-ago quarter.

During the quarter under review, total revenue of ProAssurance declined to $163.9 million from $174.8 million in the year-ago quarter. Revenue also lagged the Zacks Consensus Estimate of $179 million.

The decline in revenue was largely attributable to an 11.4% year over year fall in gross premiums written to $102.2 million. Moreover, owing to the lower loss severity, arising from accident years 2004 to 2009, the company garnered $60 million of net favorable loss reserve development in the reported quarter versus $50 million a year ago.

Net investment income in the quarter was $34.5 million, declining 5% from $36.3 million in the prior-year quarter. Net investment result (sum of net investment income and equity in earnings of unconsolidated subsidiaries) amounted to $32.3 million, decreasing 5% from $33.9 million in the year-ago quarter. However, net realized investment loss was $1.5 million in the reported quarter as against net realized investment gains of $2.2 million in the second-quarter of 2011.

Financial Position

ProAssurance generated net cash flow from operating activities of $4.6 million in the reported quarter, declining from $28.2 million in the prior-year quarter. Total assets of the company at the end of the quarter were $5.0 billion, at par with December 31, 2011, while shareholders’ equity was $2.28 billion, reflecting a 2.8% increase from $2.16 billion as of December 31, 2011. Book value per share also hiked 4.9% to $74.30 from $70.84 as on December 31, 2011.

Financial Ratios

ProAssurance’s net loss ratio for the reported quarter came in at 36.6%, compared with 47.0% in the prior-year quarter. Additionally, expense ratio deteriorated to 26.8% from 24.0% in the prior-year quarter.

The combined ratio improved to 63.4% from 71.0% in the comparable quarter last year, while operating ratio contracted 740 basis points to 37.1% from 44.5% in the prior-year quarter. Return on equity (ROE) for the reported quarter was 10.4%, down from 11.4% in the second quarter of 2011.

Debt Repayment Update

In June 2012, ProAssurance decide to repay long-term debt worth $35 million during the third quarter of 2012. Additionally, in July 2012, the company repaid $17 million worth of notes payable and terminated a related interest rate swap, which led to a loss of $2.5 million. This loss will be recognized in the third quarter of 2012.

Share Repurchase Update

ProAssurance did not undertake a share repurchase activity in the reported quarter. 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 to date.

Dividend Update

Consistent with the company’s dividend policy, ProAssurance paid a quarterly cash dividend of 25 cents per share in July 2012.

Peer Comparison

ProAssurance’s rival Greenlight Capital Re, Ltd. ( GLRE - Snapshot Report ) reported its second-quarter operating loss of 98 cents per share, better than the Zacks Consensus Estimate of a loss of $1.05. However, the results compared unfavorably with loss per share of 44 cents in the year-ago quarter.

Zacks Rank

We retain our long term ‘Outperform’ recommendation on ProAssurance. Currently, it carries a Zacks #1 Rank, implying a short-term ‘Strong Buy’ rating.