ProAssurance Makes Doctors And Shareholders Happy

By Will Ashworth | January 19, 2011 AAA

In November 2010, small cap professional liability insurance provider ProAssurance (NYSE:PRA) completed its $233 million purchase of Texas rival American Physicians Service Group. The move makes it the second largest medical liability insurance provider in Texas and adds to 2011 adjusted earnings. With the stock performance in the doldrums the last two years, I'll look at some of the reasons why now is the perfect time to buy the stock despite the fact it's trading within 5% of its 52-week high.
IN PICTURES: 4 More Can't-Miss Health Deductions

Combined Ratio
One of the ways investors evaluate insurance companies is through the combined ratio, which represents the profitability of the net premiums earned after subtracting claim payments and underwriting expenses. Anything less than 100% tells us a company made money on its actual insurance operations. The key to success is to string together as many profitable years as possible. ProAssurance's combined ratio hasn't been higher than 100% since 2004. That's five straight years of (presumed) profitability.

Company 2009 Combined Ratio
ProAssurance (NYSE:PRA) 69.1%
Platinum Underwriters Holdings (NYSE:PTP) 76.7%
FPIC Insurance Group (Nasdaq:FPIC) 85.0%
Mercury General (NYSE:MCY) 96.9%
Selective Insurance Group (Nasdaq:SIGI) 100.5%

Book Value
While the combined ratio tells us about the insurance operations, book value per share informs us about the entire company. When it's growing, this generally indicates both the insurance and investment portions are doing well. Bruce Berkowitz, manager of the Fairholme Fund, believes that you should look at a company's investments per share. If it can break even on the insurance side of the business and deliver just 5% after-tax returns on the investments, you've potentially got a winner. In the case of ProAssurance, a 5% after-tax return on investments per share in fiscal 2009 would have been $5.91, which based on book value per share of $52.59, is a return on equity of 11.2%. Its actual return on equity was 14.2%. Since 2000, it has grown book value per share 14% annually. In 2009, it grew 23%. This is a company moving in the right direction.

Despite its book value per share growing 36% in the last two years, P/B remains at 1.0 and has for most of this period. In the five years prior to 2008, its average P/B was 1.7, 70% higher than today. If ProAssurance's stock traded at this five-year average, its stock would be $100 or 67% higher than where it sits today. Therefore, despite the fact it's trading near a 52-week high, it should be much higher and eventually the market will recognize this.

Bottom Line
In May 2008, I wrote a positive piece about American Physicians Capital, a Michigan-based provider of professional liability insurance. It was bought out by the Doctors Co. in October. I see the same thing happening to ProAssurance sometime in 2012. You heard it hear first. (To learn more, see Investing In Health Insurance Companies.)

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