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."
- 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)