Steven Wevodau - Property & Casualty Insurance

American Physicians: Not Cheap Yet - Steven Wevodau

Holmes Osborne

Wednesday January 14, 2009, 7:50 am EST

Barron’s recently published a story saying American Physicians (ACAP), a medical-malpractice company, was undervalued. Perhaps on 2007 numbers - but on the trailing 3 quarters, it doesn’t look so cheap.

 

Looking at 2007, the company’s free cash flow was $40.9 million. Dividing this number by its market cap of $420 million gives a free-cash-flow yield of 9.7%. Not bad.

 

However, the last 3 quarters for 2008 aren’t so exciting. It looks like 2008 free cash flow might be somewhere in the neighborhood of about $30 million. That would give a free-cash-flow number of about 7.5% or so.

 

The company has about 45% of this in municipal bonds. These bonds have been safe in the past, but may prove to be a problem in the future. The subprime problem is widely expected going to spill over into municipalities and other government entities. It’s hard to manage a portfolio that size and not be affected. And even if the company isn’t affected, it could still get sold off with all other insurers.

 

Another problem: People assume the medical business can weather an economic downturn. I’m not so sure. If unemployment is going up, how are those people going to pay for doctor visits? If everyone is making less money, that means there will be less money to pay doctor bills. Even if this problem only manifests itself into a few percentage points less in sales, it will cause a ripple affect.

 

It might be too early to say about American Physicians. My advice is to hold off. It will probably get cheaper in an economy where there’s no such thing as a defensive stock.

 

Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the firm.

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American Physicians Capital Is in Top Health - Barron’s

posted by Steven Wevodau

People will always need doctors and doctors will always need malpractice insurance. This, writes Barron’s Jay Palmer, makes American Physicians Capital (ACAP) practically recession-proof. APC’s shares could continue their recent climb thanks to solid growth and a conservatively managed investment portfolio.

Doctors have little choice but to buy malpractice insurance, creating a $10B a year industry in the U.S. APC’s focus is on insuring medical groups and individual physicians, not hospitals. With 9,000 clients from groups and doctors, the company accounts for over 70% of the non-hospital markets in its core region of Illinois, Ohio, Kentucky and New Mexico. Even better for investors is the fact that APC’s client base is expanding at a rate of 5% annually.

APC averages one lawsuit a year for every 10 doctors it insures, on par with national numbers, but is has found different ways to cut claims, including giving doctors formal training in how to communicate with patients. CEO Kevin Clinton also notes that the size of settlements has been getting smaller, in part because of reforms that set damage caps and the company’s ‘new hard-line’ approach to fighting cases, but also because juries seem to have realized that billion-dollar awards were ‘quite literally destroying the practice of medicine.’

Any insurance company needs to build up its capital reserves to pay off claims. A conservative investor, APC has a $750M portfolio with just one $15M equity stake (in a malpractice insurer that could be an acquisition target in the future). Roughly 20% of its portfolio is in paper from Fannie Mae, Freddie Mac and Ginnie Mae, around 20% is in investment-grade corporate debt, and the rest is in high-quality municipals.

APC is up around 20% in the last month to $45.50, partly as a result of being added to the S&P 500, but the stock could keep rising as APC takes advantage of its strong competitive position. Earnings are expected to dip this year to $4.24/share as a result of a round of price cutting among local competitors, but EPS should rebound in 2010 to $4.47. With return on equity of 16% and $92M in reserves that are no longer needed, plenty of investors are betting on APC’s long term health.

• Michael Nannizzi, an analyst with Oppenheimer, is bullish on the stock, citing APC’s extensive experience in the field and explaining “it’s difficult to find any company more insulated from economic weakness than this one.”

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• Piper Jaffray downgrades American Physicians Capital to Neutral from Buy with a price target of $48/share. After APC’s recent rise in stock price, shares “now trade in the top decile of historic valuations. As such, we see little upside in the shares.”
• American Physicians Capital (ACAP): Q3 EPS of $1.13 beats by $0.08. Revenue of $39.6M vs. $40.6M. (PR)

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