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US Property & Casualty - Medical
Malpractice Marketweight
Analyst(s): Amit Kumar Amit.Kumar@fpk.com 212 857 6113
Outperforming In An Underperforming Market. Defying The Cycle?
• Cycling through the Cycle: As commercial rates have continued to soften and competition has worsened,
medical malpractice insurance stocks have remained an outlier. Although rates have continued to decline,
competition has been benign, perhaps due to the somewhat insulated nature of this segment. We expect rate
filings to continue to indicate single-digit declines as we head into 2009. We expect some signs of
stabilization and ultimate reversal by the year-end.
• Watch your assets: Compared to other segments, med-mal stocks have been somewhat less impacted due to
the asset distribution and less reliance on riskier assets. We do not expect meaningful write-downs in 2009.
• Will a change in administration reverse tort-reform? Although a democratic administration could cause
some localized spikes in loss costs, we do not view this as an industry impacting event. There could be up
tick in challenges to tort reform on a state level. We do not expect these challenges to succeed. Additionally, a
universal health-care plan could result in additional transparency vis-à-vis doctors, which could result in some
reduction in loss costs.
• Loss Cost Trends will tick up: As we have seen in the past few quarters, we believe frequency will
continue to tick up. Severity has already witnessed an uptick, although it is still not at a universally worrisome
trend. Booked reserves continue to reflect discipline in the industry.
• Reserves continue to look strong: Reserve releases should continue to meaningfully add to earnings going
forward. Med-mal stocks will likely lead reserve releases vs. other insurers in 2009. We expect our 2008 yearend
reserve analysis to reflect industry leading redundancies.
• What about M&A? We believe that the current state of the financial markets could hinder big ticket M&A in the
near term. Mutuals, which have been a bit more aggressive in their asset distribution, could also be likely
sellers apart from the publicly traded universe. In terms of buyers, over the longer term some buyers could
emerge from non-med-mal space. In our universe we expect PRA ($51.34-Outperform) to continue to
build its franchise through smaller acquisitions, while FPIC ($43.55-In Line) and ACAP ($47.07-In
Line) will be likely sellers.
• Trading at below book (adjusting for reserve redundancies); PRA continues to present attractive
opportunities. FPIC and ACAP would be stocks to focus on if looking for take-out candidates.
TABLE OF CONTENTS
EXECUTIVE SUMMARY .............................................................................................3
2009 TIME LINE: RATE INFLECTION MID TO YEAR-END?.....................................4
VALUATION: OUTPERFORMING ALL FINANCIALS!!!!..............................................5
COVERING YOUR ASSETS:.......................................................................................7
TORT REFORMS: NO RIPPLES…YET. ...................................................................10
RESERVE REDUNDANCIES SHOULD CONTINUE TO BOOST EARNINGS..........12
OVERALL AVERAGE RATE CHANGE DECLINED in 2008......................................14
BUY BUY BUY…..YOUR STOCK..............................................................................16
CONSOLIDATION: AN INVETIBALE REALITY?.......................................................17
MEDICAL MALPRACTICE: ARE WE THERE YET?..................................................21
EARNINGS MODELS ................................................................................................23
Appendix: Reserve Discussion..................................................................................26
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