ProAssurance Corporation (PRA - Analyst Report) reported third-quarter operating earnings per share of $1.71, striding ahead of the Zacks Consensus Estimate of $1.61 and the year-ago quarter’s earnings of $1.57. Operating earnings stood at $52.9 million, compared with $48.4 million in the prior-year quarter.

Operating income excludes the effects of net realized investment gains or losses, guaranty fund assessments or recoupments, confidential settlements and debt retirement gains or losses. These items led to a positive adjustment of 23 cents per share to net income in the reported quarter against a negative adjustment of 15 cents in the year-ago quarter.

Including non-recurring items, net income was reported at $60.1 million or $1.94 per share, surging from $43.7 million or $1.42 per share in the year-ago quarter.

During the quarter under review, total revenue of ProAssurance increased 8.6% to $176 million from $162 million in the year-ago quarter. Revenue also surpassed the Zacks Consensus Estimate of $173 million.

Gross premiums written declined 10.4% year over year to $156.5 million. The year-over-year fall was largely attributable to high competition, improved loss trends in the previous years and the normal renewal pattern of ProAssurance’s two-year policies.

Moreover, owing to the lower loss severity, arising from accident years 2004 to 2010, the company garnered $50 million of net favorable loss reserve development in the reported quarter versus $52 million a year ago. Total expenses amounted to $92.4 million, declining from $99.1 million in the prior-year quarter.

Net investment income in the quarter was $33.9 million, skidding 0.6% from $34.1 million in the prior-year quarter. Net investment result (sum of net investment income and equity in earnings of unconsolidated subsidiaries) amounted to $34.1 million, climbing 6.9% from $31.9 million in the year-ago quarter. However, net realized investment gains stood at $13.2 million in the reported quarter as against net realized investment losses of $12.0 million in the third-quarter of 2011.

Financial Position

In the reported quarter, ProAssurance generated net cash flow from operating activities of $28.7 million, which plummeted from $53.4 million in the prior-year quarter. Total assets of the company at the end of the quarter were $4.97 billion, slightly dropping from $5.0 billion as of December 31, 2011, while shareholders’ equity was $2.35 billion, reflecting an 8.8% increase from $2.16 billion as of December 31, 2011. Book value per share also hiked 7.95% to $76.47 from $70.84 as on December 31, 2011.

Financial Ratios

ProAssurance’s net loss ratio for the reported quarter came in at 44.5%, compared with 46.9% in the prior-year quarter. Additionally, expense ratio deteriorated slightly to 26.0% from 25.8% in the previous-year quarter.

The combined ratio improved to 70.5% from 72.7% in the comparable quarter last year, while operating ratio contracted 360 basis points to 43.8% from 47.4% in the prior-year quarter. Return on equity (ROE) for the reported quarter was 10.4%, improving from 8.8% in the third quarter of 2011.

Debt Repayment Update

During the reported quarter, ProAssurance repaid its entire outstanding long-term debt. Additionally, the company recognized a loss of $22 million related to the debt retirement in the third quarter of 2012.

Dividend Update

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

Peer Comparison

ProAssurance’s peer Montpelier Re Holdings Ltd. (MRH - Analyst Report) reported its third quarter 2012 operating income of 85 cents per share, surpassing the Zacks Consensus Estimate by 20 cents. Earnings strongly rebounded from a loss of 40 cents incurred in the prior-year quarter. Operating income of $48.5 million, compared favorably with loss of $24.9 million in third quarter 2011.

Zacks Rank

We retain our long term ‘Neutral’ recommendation on ProAssurance. Currently, it carries a Zacks #2 Rank, implying a short-term Buy rating.