ProAssurance Corporation (PRA) reported its third-quarter operating earnings of $41.5 million or $1.30 came in line with the Zacks Consensus Estimate. However, this compares unfavorably with earnings of $52.2 million or $1.58 per share in the prior-year quarter.

Net income in the quarter was $51.1 million or $1.59 per share, compared with $55.2 million or $1.67 in the prior-year quarter. Operating income excludes the after-tax effects of net realized gains or losses and guaranty fund assessments or recoupments and debt retirement loss. During the reported quarter, the effect of adjustment to net income was 29 cents per share, compared with 9 cents in the year-ago quarter.

Total revenue of ProAssurance declined slightly by 0.8% year over year to $181.1 million, exceeding the Zacks Consensus Estimate of $165.0 million.

Gross written premiums for the quarter decreased 5.9% year over year to $159 million. ProAssurance's retention in its consolidated medical professional liability physician book was 90% in the reported quarter.

ProAssurance experienced $33.4 million of favorable net loss reserve development in the reported quarter, compared with $42.5 million a year ago.

Net investment income for the quarter dipped 7.8% year over year to $35.6 million. ProAssurance's net investment result for the reported quarter decreased, primarily due to lower reinvestment rates on its fixed income portfolioalong with reduction in equity earnings of unconsolidated subsidiaries during the quarter.

Financial Ratios

ProAssurance's net loss ratio for the reported quarter came in at 61.3%, compared with 52.7% in the prior-year quarter. Expense ratio during the quarter was 24.0%, up from 21.9% in the prior-year quarter. Combined ratio slightly improved to 85.3% from 74.6% in the prior-year quarter.

However, return on equity (ROE) plummeted to 11.3% from 13.9% in the prior-year quarter. Book value of ProAssurance increased to $58.90 per share as of September 30, 2010 compared with $52.59 as of December 31, 2009.

Acquisition Update

Recently in September, ProAssurance agreed to acquire American Physicians Service Group, Inc. (AMPH) in an all-cash transaction. The shareholders of American Physicians will receive $32.50 per share in cash and the transaction is expected to close in the fourth quarter of 2010.

ProAssurance will offer superior quality insurance protection for the policyholders of American Physicians.The company also believes that this will prove to be a strategic expansion that will help grow both the business and top line in 2011.

Share Repurchase Update

During the reported quarter, ProAssurance repurchased approximately 975,000 shares of its common stock for about $55.3 million. As of September 30, 2010, the company had approximately $11.2 million of shares remaining under the existing share repurchase authorization approved in September 2009.

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. However, we anticipate the results of ProAssurance to reflect benefits of acquisitions, geographic diversity and strong financial position.