American Physicians Capital In ACAP W
November 11, 2002 - 1:07pm EST by
spence774
2002 2003
Price: 15.67 EPS
Shares Out. (in M): 0 P/E
Market Cap (in M): 136 P/FCF
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT

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Description

ACAP is a medical malpractice and workers compensation insurance company that trades for half of tangible book value and should be profitable by the first quarter of next year, at which time I expect it will trade for about book value, as does its competitor PRA.

ACAP is headquartered in Michigan, with operations in 13 states. 62% of revenues come from medical professional liability, 28% from workers compensation, and 10% “other” (mainly the company's Health Lines Business). The company has a strong franchise in the Midwest, so it is focusing on strengthening its position in these areas, and withdrawing from unfavorable states such as Florida.

ACAP de-mutualized in December of 2000 and then one year later had to strengthen reserves. This reflects poorly on management, and they know it. After extensive changes in operations and underwriting during the past year, ACAP is projecting a return to profitability by the end of this year.

The management team is highly focused on underwriting discipline and intelligent capital allocation. Regarding the former, they have re-examined every piece of business they write, lowered the maximum policy limit to $2mm from $10+mm, ceased writing stand-alone policies for hospitals, exited the unprofitable Florida market, ceased writing occurrence policies in most markets, and ceased writing construction policies. They have combined this improved underwriting with significant increases in premiums (30% for med mal and 15% for workers comp). Consequently, this year net earned premiums are up 17%, due almost entirely to rate increases rather than policy count growth.

ACAP has bought back shares aggressively, reducing diluted shares outstanding by 25% since June 2001, from 11.6mm to 8.7mm. With $276.8 mm of tangible book value, ACAP now has $31.84 a share of tangible book value.

Historically, this has been a terrible business. The problems of the industry are due to several factors, including: 1) In the mid 1990's ACAP and many of its competitors expanded beyond their home markets into states that they did not understand well; 2) This simultaneous expansion caused an increase in competition and hurt pricing; 3) Significant increases in claim severity hurt all industry participants; 4) After 9/11, reinsurance rates rose more quickly than primary insurers could raise their rates, hurting margins. These factors combined to cause the entire medical malpractice industry to suffer large underwriting losses that lead to a major industry restructuring.

For example, one of the largest med mal insurers, St. Paul, exited the business, which caused dislocations, pricing improvements, and new regulatory attention. It also added momentum to the tort reform movement that is underway nationally. According to ACAP, there are signs of progress in this area:

--In April, the Pennsylvania senate sent a resolution to the Supreme Court urging the reinstatement of tort reform provisions ruled unconstitutional in 1996. In July, Governor Schweiker signed into law legislation that is designed to save doctors as much as 20% on their malpractice insurance premiums effective immediately, which included a provision eliminating joint and several liability.

--Ohio legislators recently introduced a new bill (SB 281) that would limit non-economic damages to $300,000. The bill also allows juries to hear evidence of collateral source payments and includes a sliding scale for attorneys’ contingent fees.

--Nevada recently passed a bill placing a $350,000 cap on non-economic damages.

An important issue to be aware of is the related party transactions between the company and an insurance agency owned by the CEO. In 2001, 29.9% of the direct premiums written by the agency – equaling $68.9mm - were for ACAP policies. Additionally, the Company purchased the Stratton-Cheeseman Management Co. (SCMC), which was owned by Bill Cheeseman – ACAP’s CEO - in Oct. 1999 for $19.5 million, consisting of $9.5 million in cash and a commitment to pay $10 million in installments over the next 9 years without interest. This transaction took place because SCMC managed ACAP when it was a mutual and had no employees, so in preparation for going public, the company bought the people who had been managing the business via a service relationship.

Another potential risk, which must always be considered with an insurance company, is the potential for increased reserving. Considering the extensive changes that have occurred with their book of business over the past year, I think this is unlikely, and that the current valuation makes the risk worth taking.

In summary, ACAP has the right strategy for fixing the business, is executing superbly on this strategy and is using its strong balance sheet to buy back shares like crazy.

Catalysts
1) Return to profitability.
2) Continued share buybacks.

Catalyst

1) Return to profitability.
2) Continued share buybacks.
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    Description

    ACAP is a medical malpractice and workers compensation insurance company that trades for half of tangible book value and should be profitable by the first quarter of next year, at which time I expect it will trade for about book value, as does its competitor PRA.

    ACAP is headquartered in Michigan, with operations in 13 states. 62% of revenues come from medical professional liability, 28% from workers compensation, and 10% “other” (mainly the company's Health Lines Business). The company has a strong franchise in the Midwest, so it is focusing on strengthening its position in these areas, and withdrawing from unfavorable states such as Florida.

    ACAP de-mutualized in December of 2000 and then one year later had to strengthen reserves. This reflects poorly on management, and they know it. After extensive changes in operations and underwriting during the past year, ACAP is projecting a return to profitability by the end of this year.

    The management team is highly focused on underwriting discipline and intelligent capital allocation. Regarding the former, they have re-examined every piece of business they write, lowered the maximum policy limit to $2mm from $10+mm, ceased writing stand-alone policies for hospitals, exited the unprofitable Florida market, ceased writing occurrence policies in most markets, and ceased writing construction policies. They have combined this improved underwriting with significant increases in premiums (30% for med mal and 15% for workers comp). Consequently, this year net earned premiums are up 17%, due almost entirely to rate increases rather than policy count growth.

    ACAP has bought back shares aggressively, reducing diluted shares outstanding by 25% since June 2001, from 11.6mm to 8.7mm. With $276.8 mm of tangible book value, ACAP now has $31.84 a share of tangible book value.

    Historically, this has been a terrible business. The problems of the industry are due to several factors, including: 1) In the mid 1990's ACAP and many of its competitors expanded beyond their home markets into states that they did not understand well; 2) This simultaneous expansion caused an increase in competition and hurt pricing; 3) Significant increases in claim severity hurt all industry participants; 4) After 9/11, reinsurance rates rose more quickly than primary insurers could raise their rates, hurting margins. These factors combined to cause the entire medical malpractice industry to suffer large underwriting losses that lead to a major industry restructuring.

    For example, one of the largest med mal insurers, St. Paul, exited the business, which caused dislocations, pricing improvements, and new regulatory attention. It also added momentum to the tort reform movement that is underway nationally. According to ACAP, there are signs of progress in this area:

    --In April, the Pennsylvania senate sent a resolution to the Supreme Court urging the reinstatement of tort reform provisions ruled unconstitutional in 1996. In July, Governor Schweiker signed into law legislation that is designed to save doctors as much as 20% on their malpractice insurance premiums effective immediately, which included a provision eliminating joint and several liability.

    --Ohio legislators recently introduced a new bill (SB 281) that would limit non-economic damages to $300,000. The bill also allows juries to hear evidence of collateral source payments and includes a sliding scale for attorneys’ contingent fees.

    --Nevada recently passed a bill placing a $350,000 cap on non-economic damages.

    An important issue to be aware of is the related party transactions between the company and an insurance agency owned by the CEO. In 2001, 29.9% of the direct premiums written by the agency – equaling $68.9mm - were for ACAP policies. Additionally, the Company purchased the Stratton-Cheeseman Management Co. (SCMC), which was owned by Bill Cheeseman – ACAP’s CEO - in Oct. 1999 for $19.5 million, consisting of $9.5 million in cash and a commitment to pay $10 million in installments over the next 9 years without interest. This transaction took place because SCMC managed ACAP when it was a mutual and had no employees, so in preparation for going public, the company bought the people who had been managing the business via a service relationship.

    Another potential risk, which must always be considered with an insurance company, is the potential for increased reserving. Considering the extensive changes that have occurred with their book of business over the past year, I think this is unlikely, and that the current valuation makes the risk worth taking.

    In summary, ACAP has the right strategy for fixing the business, is executing superbly on this strategy and is using its strong balance sheet to buy back shares like crazy.

    Catalysts
    1) Return to profitability.
    2) Continued share buybacks.

    Catalyst

    1) Return to profitability.
    2) Continued share buybacks.

    Messages


    SubjectYou beat me to it
    Entry11/11/2002 02:37 PM
    Memberkurran363
    I was going to post this myself. It is one of my biggest positions. With next year's rate increases already filed in their states, ACAP should make over $1.50/share next year and could easily make $3.00/share the following. At less than half of book, risk is extremely low and expectations are non-existent.

    I expect ACAP to double in the next 6-12 months.

    SubjectMore
    Entry11/11/2002 05:19 PM
    Memberkurran363
    The timing on this investment is perfect. In a world where no business can raise rates, the Med Mal industry is raising rates 20-80% across the board. Almost every major Med Mal insurer is having problems. Years of terrible underwriting have lead to massive under-reserving.

    St. Paul's exit along with retrenching from every other major player has caused a massive supply/demand mismatch. MHU, SKP, and FPIC, three of the only major public Med Mal insurers, have all had such problems with adverse reserve development that they are not really able to take advantage of the current market opportunities.

    MHU exited the business completely. FPIC and SKP were recently downgraded by Fitch and neither has the capital necessary to take on any new business.

    ACAP on the other hand was much less levered in terms of premium to book or reserves to book. So, although they had the same adverse developments as everyone else, their balance sheet was able to withstand the blow much better. ACAP it appears, has now cleaned up its reserve problems and is focused on taking advantage of the current market opportunity.

    Business is so good that Mr. Cheeseman, Chairman of ACAP, said at a recent conference that these are the best conditions he's ever seen for pricing in his entire life. This is coming from a man who helped form ACAP in the midst of a similar Med Mal crisis in the 70's.

    In theory, every dollar of price increase (ASSUMING no off-setting increase in litigation activity) falls straight to the bottom line. As ACAP earns in the premiums it writes next year, I estimate that the run-rate of earnings by the end of the year could easily approach $3.00/share.

    SubjectIndustry Trends
    Entry11/11/2002 05:37 PM
    Memberspence774
    I agree that a lot of this story is in the Industry Analysis, coupled with the company’s focus on writing profitable business. The industry is a total disaster and public health concerns mandate that a solution be found. I didn't focus too much on this in the write up, but the real upside in this idea materializes if we get some type of national tort reform. With positive developments in this area I think this could be a triple over a few years. Without caps on settlements, I think this idea should still return 50-100%.

    Subjectanother catalyst
    Entry11/11/2002 06:05 PM
    Membermichael99
    A major potential catalyst is tort reform - Bush has specifically targeted malpractice reform. The reasoning here is that doctor supply/distribution is being affected by the availability of malpractice insurance. This is a public health issue as well as a more generic business issue. If malpractice tort reform is passed, the direct positive impact on ACAP would be tremendous for obvious reasons.

    SubjectA Very Tough Business!
    Entry11/11/2002 07:33 PM
    Memberanton613
    Spence,

    As a former insurance company executive, I understand the logic of your recommendation and the need for tort reform. The opportunity here "appears" enticing, but unfortunately this Med Mal area has eaten up and spit out many intelligent people over the past decade. Yes, the rates are much higher and ultimately they will rise enough to compensate underwriters for their losses.

    The $64,000 question is “Are the current rates high enough or will they need to go much higher to provide a good return for the risk assumed?” Actuaries obviously rely on historical performance to set rates, but they have totally gotten it wrong over the past decade. Do they now have sufficient data to properly calculate rates? Even intelligent and disciplined underwriters like St. Paul have been destroyed. Since Med Mal is a very long tailed business (i.e., a business that requires many years to determine what the underwriting losses are.) we will not know for a long time what the actual losses are from the current business. How can we possibly know if the current rates are adequate? Why do you believe that ACAP management is smarter than everyone else? Does St. Paul know something that we do not?


    Anton

    SubjectNice Idea-few questions
    Entry11/11/2002 08:45 PM
    Memberadam15

    SubjectNice Idea-few questions
    Entry11/11/2002 08:54 PM
    Memberadam15
    Why will ACAP deserve to trade at same p/b as PRA with it's spotty history-should there be some type of discount for it's inability to show reasonable ROE?

    Any thoughts of how much it will cost them to exit Fla?Impact on stated book value?

    I was also at meeting in NYC when he said thought would be profitable in Q4-he appears to be backing off on that last week on call,any thoughts?

    Buy Back-they have left about 190K,do you have any insight if they will do another 5%

    Last,sorry-Any look into the liability side of their "book"and if proper reserves have been taken,I'm told they had a reserve review last week.Again great idea.

    SubjectRe tough biz
    Entry11/11/2002 08:56 PM
    Memberduff234
    I agree that this is a tough business, and it is a tough business to analize as an insider or as an outsider of the company. The fact that claims are very long tailed makes it hard to know what the ultimate liabilities are going to be. You have to be a lawyer on the case in the jurisdiction, and you have to know the judge handling the case and the personality of the claimant in order to be able to name a figure with confidence. Anything else is a guess (albeit maybe an educated guess). Even then, the legal climate can change in the years that the case is proceeding, so the ultimate settlement amount is a moving target. Tort reform could move it down but there's no gurantee. It could also move up as people get disgusted with hmo style care.

    In sum, its hard to know what's going to happen in this business in the long term, and I'm not sure there's any margin of safety that would make me comfortable buying a med mal insurer and forgetting about it for 10 yrs.

    SubjectEarnings
    Entry11/11/2002 09:12 PM
    Memberdavid101
    Spence,

    1. What is your 2003 EPS estimate?

    2. What is your thesis for why ACAP should trade at the same P/B multiple as PRA, which has shown consistent profitability?

    3. In terms of med mal pricing, what kind of increases are they getting in their home state of Michigan where they are competing head-to-head with PRA for market share?

    4. In looking at the institutional owners, I see that they have some big chunks owned by Pzena, Fido and Boston Partners, but that Greenlight Capital sold 2/3 of their stake in 2nd Qtr. Not sure what to make of that, and was wondering if you had any thoughts.

    David

    SubjectAnswers
    Entry11/12/2002 11:28 AM
    Memberspence774
    Thanks for the good questions and comments. I separated my answers by questioner:

    Anton:
    I agree that loss cost inflation is a moving target, and that the history of this industry is terrible. Part of that is due to poor management, part to the proliferation of mutual insurance companies that tried to service their members instead of being fiscally prudent, and part to the ridiculous trends in severity across the country. I believe that malpractice insurance is hitting a ceiling in terms of policy costs, and the proof of this is the large number of physicians who are leaving or changing their practices in response to rate increases. Nationally, rates are up anywhere from 20-100% this year. Also, being a successful med mal underwriter may not be possible on a national level, only on a selective local level. Frequency and severity experiences vary widely by geography, even between counties within a state, so as an insurer, you ideally want to be in a state with high approved rates, but write for the specialties and counties with the most favorable trends. ACAP is aware of this and has addressed these issues by doing a profitability analysis on every policy and county they are in. Also, they have significantly changed their terms and conditions which should help protect against future loss development problems.

    All that being said, this is an insurance company and does have some risk, but I believe that the discount to tangible book value coupled with the current pricing and terms and conditions makes it a worthwhile investment on a risk/reward basis.

    Adam:
    Historically ACAP was a mutual, not a stock company, so they have only been thinking about shareholder value for a short time (before that they focused on policy holders). Due to the incredible crisis in the industry, I think ACAP will become profitable and be seen as good niche player that could make an attractive acquisition candidate down the road, this should get them a better than book value valuation. Obviously this scenario is made more probable if tort reform goes through, but even without that, the current industry conditions should get them to profitability and at least a close to book value valuation. And I agree that management is less emphatic about being profitable by year-end, although they do think they will be very close – I personally assumed it would be the first quarter. On the reserving issue, they maintain that they are adequately reserved (what else?), and if they do have to strengthen reserves materially, which I would be surprised by, than I think the company will have to put the book into runoff, or sell it, and liquidate the company. At half tangible book, I think the stock would still be money good in that scenario.

    Duff:
    I totally agree about the local nature of loss development, which is why I like the fact that management is so focused on staying local. They are not growing, but rather increasing rates in areas they already write, so they have good local knowledge, and they are motivated to be profitable, not big. As for timing, I view this as a special situation due to the confluence of events I mentioned in the write up, and I expect the investment thesis to be proven correct or incorrect within 12 months. I wouldn’t be comfortable owning this and forgetting about it for 10 years either.

    David:
    Over time, ACAP should be able to achieve 10% ROE, although I don’t have an opinion about whether that will be next year or not.

    Neither ACAP nor PRA are trying to increase market share right now, they are both focusing on increasing pricing on existing policies.

    Pricing was up over 20% in MI this year.

    SubjectIndustry Information
    Entry11/12/2002 11:57 AM
    Memberspence774
    The below is from PRA's recent prospectus:

    Industry Trends

    The medical malpractice, or medical professional liability, market
    totaled $7.3 billion in direct premiums written for the year ended
    December 31, 2001, which represented 3.9% of the total commercial premiums
    in the property and casualty industry, according to data published by A.M.
    Best. Since 1999, insurance companies focused on medical professional
    liability coverage have experienced higher claim costs on business written
    in prior years than they had reserved for initially. This has resulted in
    significant losses, reduced capital to support current and future business,
    and higher premium rates to meet expected higher claims costs. In 2001,
    based on publicly available industry information, it is estimated that
    prices for medical professional liability insurance experienced increases
    of approximately 15% to 20% over expiring terms. Price increases have
    varied across the types of insured and geographic region with some states
    experiencing increases as high as 100%. We believe price increases have
    continued in 2002 at levels consistent with, or higher than, those reported
    in 2001, which is consistent with our own experience.

    Reduced profitability, reductions in surplus and capacity constraints
    have led many professional liability carriers focused on medical
    professional liability coverages to withdraw from, or limit new business
    in, one or more markets. In December 2001, The St. Paul Companies, Inc.,
    previously the second largest writer of medical professional liability
    insurance in the United States, announced its immediate intention to exit
    the market due to poor profitability. In February 2002, Pennsylvania-based
    PHICO Insurance Company entered into state-ordered liquidation due to
    financial difficulties. In March 2002, SCPIE Holdings, Inc. announced it
    terminated its strategic relationship with a national broker to write
    professional liability insurance for physicians and dentists, and will
    refocus on its home market of Southern California. In March 2002, The MIIX
    Group, Inc. announced its intention to stop writing business due to
    financial difficulties and has sponsored the formation of a new mutual
    company to write solely in New Jersey. In June 2002, American Physicians
    Capital, Inc. announced its decision to withdraw from the Florida medical
    professional liability market. In June 2002, FPIC Insurance Group, Inc.
    announced that, while it will continue to renew its existing book of
    business, it will not write new business until it can increase capacity.

    Given the continued reduction in capacity and the uncertainty
    surrounding several writers in the medical professional liability market,
    we believe the current favorable market environment will continue at least
    until 2004. The improvements in pricing, however, will be offset to some
    degree by the impact of loss cost trends and the increased cost of
    reinsurance.

    SubjectQuality of Management
    Entry11/12/2002 01:03 PM
    Memberjim77
    Hi Spence, nice idea!


    What's your view of Cheeseman? Does he really understand the power of stock buybacks at these price levels? Or is he just throwing a temporary bone to all the stockholders who have pleaded with him to do it? Will he revert back to form and once again try to grow the empire through expensive acquisitions...or has he really been chastened by last year's results?


    The timing is right for this investment. For those with long memories, med mal has not always been a horrible industry. In both the 70's and 80's, there were similar crises in the medical malpractice industry. The insurers suffered with big increases in frequency and severity...and then the doctors suffered through big increases in rates and less availiblity. Temporary sanity gets restored in the judicial process, producing fat profits for the insurers...and then the cycle starts all over again. I believe it's actually a good time to jump back in the industry but I question if Cheeseman has really found religion. This is close to a no-brainer if you trust this guy to now do the right thing for shareholders. Huge buybacks are the way to go...

    Thanks,
    Jim

    SubjectAssets
    Entry11/12/2002 01:18 PM
    Memberjim77
    spence, one other question.

    Have you taken a good look at the assets of the company? This long-tailed business requires the assets to carry more than their weight (especially with underwriting being so mispriced in the recent past).

    Are you comfortable with what they own and the portfolio's performance? A lot of insurers are announcing blow-ups even in their 'safe' bond portfolios...never mind the equities.

    Jim

    SubjectManagement and Assets
    Entry11/12/2002 01:36 PM
    Memberspence774
    Jim,
    Although I almost never say this, I do think Cheesman has changed (it hurt to type that). He has completely and repeatedly renounced his former ambition to roll up competitors and now repeats at every chance he gets that he cares about profits not growth. He admits that he had the wrong strategy in the past, and now states that he just wants to increase shareholder value, even if that means stopping business. I think that the large share buybacks and withdrawal from Fl and other markets are good evidence to back up his words. I asked about an asset analysis before, and I will get and post the results as soon as they file them with the state insurance commissioner which should be soon. Qualitatively, they claim they are high quality, but I will give more specifics asap.
    Thanks for the questions.
    Spence

    SubjectPricing and Uncertainty
    Entry11/12/2002 06:32 PM
    Memberkurran363
    While Med Mal insurance is a long tailed product and is relatively difficult to accurately project, liabilities are not unknown black-holes.

    Most policies are written on a claims made basis and all have a re-insurance cap. So, at the end of the year, the insurer already knows how many lawsuits they will have for that year. At that point, they should be able to estimate within a relatively narrow range what their risk is. The only uncertainty then is the average severity of the claims. While awards can fluctuate widely, and awards have been going up dramatically, every single award is capped by the reinsurance amount. Thus, using many years of historical data and knowing current claims experience, insurers can quantify their potential exposure within a finite range.

    SubjectLoss Development and Reserves
    Entry11/12/2002 07:05 PM
    Memberspence774
    I agree that combining historical experience, on a per policy and per local geography basis, with current environment knowledge can help reserve properly. The other key factors are controls and motivation. Management has to have excellent controls in order to correctly track loss developements, and has to want to "own up" to any problems quickly rather than hide them and hope future results wash away past sins. ACAP has completely revamped their control procedures in the last year, which should decrease (but not eliminate) the risk of significant reserve problems going forward. Also worth noting is that it takes 24 months for new pricing to be completely "earned in" to their book of business.

    SubjectRE Loss development
    Entry11/12/2002 07:42 PM
    Memberdoobadoo802
    A few questions from some one not too familiar with insurance companies.

    Firstly can you explain a little about reserves and how that affects the balance sheet. Say the company writes a policy, they calculate the average payout, then charge a premium set above that. The premium is recognized as revenue, and the expect payout as the cogs?

    Finally with respect to reserves. Is the $30/share calculation net of reserves. And what type of increase in reserves would cause a disaster? Eg what is the margin of safety based on what the VaR is (that is Value at Risk)? Would it be the 30/share?

    Is the accounting similar to pension accounting? That is the potential liabilities to be paid out over a course of time is offset by the PV of the investable assets, discounted by the E(r) of the investment portfolio. Using this sort of back of the evelop stuff, is $30/share the total amout of "overfundedness" the "pension" has?

    Thanks in advance.

    --
    doob

    SubjectEarnings; Buybacks; ACE; Inves
    Entry11/12/2002 08:47 PM
    Memberdavid101
    Spence,

    I checked around and the averge EPS estimate for 2003 is $0.45, so ACAP is trading at a P/E of 35 or so. PRA ended today $17.43 and 2003 EPS estimate for a 18 P/E. Granted, if ACAP achieves a ROE of 10, that would be over $3/share and would probably represent a peak. What do you expect their sustainable ROE to be?

    Of course, your ROE will be impacted by buybacks. Do they plan on continuing these and do you expect them to be 5-10% per year?

    What do you make of a large insurer like ACE now entering the med mal business?

    I recall that ACAP switched its bond portfolio around conversion time from tax-exempts to corporate. What's the average rating on the bond portfolio?

    David

    SubjectInsurance BS
    Entry11/13/2002 11:01 AM
    Memberspence774
    For simplicity, assume no reinsurance. The reserves are something like "unpaid loss and loss adjustment expense" and are liabilities, so tangible book value is after accounting for how much management THINKS it will pay out for a certain policy. These payouts can take years, so in essence, you are selling your product (the insurance policy) way before your final COGS (ultimate payout) is known. If you are interested in the details of insurance accounting, and the differences between gaap and statutory accounting, the Insurance Information Institute (www.III.org) has useful information and primers.

    Subjectearnings, buybacks, ace, etc
    Entry11/13/2002 11:11 AM
    Memberspence774
    I think 10% normalized ROE is very possible given the state of the industry. Clearly Ace and others are expecting much higher returns since they are moving into the area now when there are so many other great opportunities on the underwritting side. Overall, I am not concerned about big players moving in. I would much rather own a local/regional insurer that has been in its markets for a long time. And this crisis is nowhere near being fixed, so more capital nationally is not at present a threat.

    I don't know what management will do going forward with regard to buybacks. They understand the math, and they are happy to do it at low prices, but I can't give an estimate about buybacks next year because it will be opportunistic based on share price, statutory capital needs, and underwritting opportunities. I can say that they know that buying back shares at half book is more profitable than the insurance business.

    SubjectInvested Assets
    Entry11/13/2002 11:15 AM
    Memberspence774
    Management is filing its state forms in the next few days, and they should include an asset analysis, which I will post. I don't have the last filing with me, but I remember that the IA's were almost all in A or better paper.

    SubjectConcerns
    Entry11/13/2002 11:54 PM
    Memberraf96
    I used to hold this stock and sold into their initial buyback after the first blowup
    My concerns were/are:

    1 -they don't know what they're doing outside of MI - their problems are partially an industry one, but more of their own doing. They wrote a lot of bad business in areas where they were not historically strong.

    a)does this desire for volume have anything to do with the bokerage commissions Mr. Cheeseman is getting.

    2- buyback issues. I feel he's been browbeaten into the buyback by aggressive hedge funds, some of whom were looking for a bid to hit. The horrible operating performance chipped away at his arrogance and dismissive attitude toward share repurchase. It also took some of the heat off. As you mention, stat capital issues will be a factor in the aggressiveness of future buybacks. They implied on the second quarter CC that they would have to be careful.

    Reserves - How can we have confidence that the true book is as stated? Under questioning, they have admitted they haven't taken the most conservative stance on reserve levels within the actuarial ranges they've been given.

    The Board - a bunch of Dr.'s beholden to their profession or Cheeseman.

    Cheeseman - likes to brag about his attendance at Super Bowl games. Never followed through on buying large amounts of stock in open market. How much will a potential buyer knock off the purchase price to buy out his commission racket?

    Having said all that, it's probably time to start looking. If they could shrink down to their Michigan franchise and dump everything else they'd have something to sell to an ACE or Berkley? I just don't know if we've seen the true costs of getting to that point.


    SubjectManagement Concerns
    Entry11/14/2002 08:50 AM
    Memberspence774
    I think that the issues you raised are the key ones to follow going forward - reserving, corporate governance, capital allocation, etc. They do have very vocal shareholders who help keep things moving in the right direction (and they are fairly responsive to us) but historically, when this was a mutual and then a new public company, they did behave badly. The new executives that have joined in the past year are definately motivated to keep make the business profitable and the stock higher, so that should help in terms of careful business practices. And they have completely revamped their underwritting and reserving procedures. All that being said, these are the risks in the idea and need to be monitored. At the current valuation and with the industry where it is, I like the risk/reward.


    SubjectAJC med mal article
    Entry11/15/2002 01:58 PM
    Memberro17
    ACAP has no presence in Georgia, but this article from the November 15 Atlanta Journal-Constitution is indicative of the med mal environment in many states.
    ___________________________________

    http://www.accessatlanta.com/ajc/epaper/editions/today/business_d34d58a2f06210bd0054.html

    Physicians to protest big jumps in insurance
    Andy Miller - Staff
    Friday, November 15, 2002


    Dr. Millard Ross recently stopped practicing medicine. It was a decision he didn't want to make.

    Ross, a longtime Conyers surgeon, quit practicing primarily because of the cost of medical malpractice insurance.

    The former insurer of Ross, 57, and his surgeon partners dropped their coverage this year. Another insurer offered an individual policy that would have cost Ross at least $70,000 for two years, vs. about $35,000 for two years under the now-discontinued policy. And the new policy had provisions that could balloon payments even higher.

    Now he's looking to practice part time in another area or state, as a former partner has done, and have an employer pay his insurance. "It's a shame --- it's not what I planned,'' Ross says.

    Today, Ross will join hundreds of physicians riding buses to the state Capitol, joining a rally to kick off a legislative campaign to curb skyrocketing malpractice premiums. The new political arithmetic here and nationally suggests that liability reform now has a greater change of passage.

    Georgia doctors and hospitals have reported alarming spikes in premiums as insurers have withdrawn from the market.

    Other areas of the nation have also seen sharp increases. The Medical Association of Georgia, sponsoring today's rally, and the Georgia Hospital Association have combined on a draft malpractice proposal for the General Assembly session that begins in January. Among its provisions:

    > Instituting a cap on noneconomic damages of $250,000.

    > Requiring that an expert-witness physician practices in the same area of medicine as the defendant physician.

    > Limiting the number of times a plaintiff can dismiss a case.

    The Georgia Trial Lawyers Association says the Medical Association's proposals won't work.

    "None of the proposals will help doctors and hospitals, and they will harm people who have already been harmed by medical malpractice," says Bill Clark, lobbyist for the Trial Lawyers Association.

    Still, malpractice liability reform received a major shot in the arm last week with elections in Georgia and nationally.

    Reform advocates note Gov. Roy Barnes and outgoing House Speaker Tom Murphy, each a trial attorney, will no longer be in power. Republicans, with new control in Congress, are also expected to push for legislation to cap damage awards in malpractice lawsuits. The House has passed such a bill, which is supported by President Bush.

    Tom Gose, president of MAG Mutual, which insures about 70 percent of Georgia's doctors, says median malpractice jury awards nationally doubled to $1 million in 2000 from $500,000 in 1995.

    "In 1990, MAG Mutual paid one claim for $1 million or more,'' Gose says. "This year so far, we've paid 13 claims of $1 million or more."

    Clark, of the Trial Lawyers Association, argues that insurers have raised premiums because of disappointing investments. He adds that some states with caps on damages have among the most expensive malpractice premiums.

    Faced with the premium surge, some Georgia hospitals have resorted to policies with sharply higher deductibles. Grady Memorial's health system, for example, has a deductible of $15 million for each claim.

    Two rural hospitals are going without malpractice insurance entirely, GHA says. Jimmy Lewis of HomeTown Health, an organization of 28 rural hospitals in Georgia, says that if the malpractice situation isn't resolved, it could eventually force some rural hospitals to close.

    Georgia obstetricians have been hit hard as well. Dr. John Moore of Atlanta Women's Health Group says insurance for each doctor in the practice soared from about $40,000 a year to about $71,000, after their longtime insurer pulled out of the market.

    SubjectAsset Analysis
    Entry11/19/2002 03:48 PM
    Memberspence774
    From the latest state filings, the bond portfolio is 72.2% in NAIC Class 1 investments (S&P AAA through A-) and 26.2% in Class 2 (S&P BBB+ through BBB-). The statutory value of this portfolio is 695.7mm (GAAP value of 682mm). Additionally, there is 655K of equities and 38mm of "other" which is mostly real estate. And ACAP has 66.7mm of cash and cash equivalents.

    So, on a GAAP basis they have 787.5mm of cash and investments on a book value of 290.8mm, for a IA/E ratio of 2.7

    Subjectbond allocation
    Entry11/20/2002 06:52 AM
    Memberpeter315
    Spence,

    I have to say that while that sort of bond allocation isn't uncommon, it doesn't give me a lot more confidence in management - they aren't that flash at running a Med Mal insurer, what confidence do we have with them investing in BBB bonds?

    SubjectBond Allocation
    Entry11/21/2002 11:09 AM
    Memberspence774
    I agree that it would be better if they only had Class I investments, but overall it is still a good portfolio. When I asked about this, they said that the Class II investments had fallen there from Class I, they didn't start out buying Class II. I suggested that they re-balance the portfolio into all I bonds, but they have been advised that this is a safe portfolio and not to mess with it too much.

    I don't think they are reaching for yield, and if they feel that they are at risk on the asset side of the BS they will re-balance. That being said, I do agree that they should re-balance now.

    Subjectworkers' comp and other
    Entry11/26/2002 02:00 PM
    Memberrob30
    Workers comp business is growing by 20% annually. Do you know how much is driven by price increases vs. volume? I know little about workers' comp industry but I'd imagine it is tough to grow profitably in this business. What combined ratio do they need to achieve over time to make money in that business? Does Cheeseman sell workers' comp through his affilliated agency? Also, I think someone on the string said that it takes 24 months for increases in pricing to come through the income statement. Is tht true? Thank you.

    SubjectWorkers' Comp
    Entry11/27/2002 09:25 AM
    Memberspence774
    Revenues are growing because of both price and volume. I don't have the detials about this or the distribution question, but I sent an emial to the company asking these qustions and I will post the info as soon as I get it. This is a long tail business, so theoretically one could write policy at a little over 100 and still be profitable, but currently and going forward ACAP's goal is to write below 100. And yes, it does take 24 months for full pricing to be reflected in the income statement because policies renew throughout the year, and states approve price increases at different times. So the benefit from a policy that is renewed this December 2002 will not be reflected fully until December 2003.

    SubjectInvestment Income & Combined R
    Entry11/27/2002 08:20 PM
    Memberdavid101
    If ACAP could sustain their current level of investment income, they could still be profitable. It's a matter of using some algebra. Spence says that they can achieve 10% ROE. Equity is around $290 million, so 10% ROE implies income of $29 million. Suppose next year ACAP has net earned premium of $250 million (the premium increases are offset by Florida withdrawal) and underwriting expense is 20% or $50 million. Let's suppose that investment income stays at $44 million. Using this formula:

    net income = net earned premiums + investment income - losses - underwriting expense

    we have

    $29 million = $250 million + $44 million - losses - $50 million

    solving for losses, we achieve

    losses = $215 million

    The loss ratio is $215/$250 = 86%. Add 20% for underwriting ratio, and the combined ratio is 106%. If ACAP achieved a combined ratio of 100%, that would result in a 15% ROE.

    Sounds great, but there are two reality checks. One is whether the current level of investment income is sustainable. You have a chunk of reserves out there for running off Florida that is currently contributing investment income, which eventually will be paid out to claimants. The second, and more significant point, is that every P&C insurer says that their goal is a combined ratio of 100% or less; you can count on both hands those who actually achieve it.

    I think ACAP is capable of achieving a combined ratio under 110% by sticking to their current strategy. Getting from 110% to 106% will be a challenge, but it's doable. From 106% to 100%, I'll believe it when they achieve it.

    David

    SubjectWorker's Comp
    Entry12/04/2002 11:27 AM
    Memberspence774
    From the company:

    Most of the premium growth in workers’ compensation this year has been through rate increases; however, we did have some growth in our policy count in Illinois and
    Kentucky. Reminder, we did announce in the third quarter conference call that we are exiting the Kentucky market for workers’ comp.

    Our workers’ comp book is considered profitable with a combined ratio of 100.6% for YTD 9/30/02 and 93.9% for the 2002 third quarter. After allocating investment
    income, a combined ratio of 100% is profitable.

    The SCW Agency, which Bill Cheeseman is a majority owner, does sell workers’ compensation. Most of SCW’s business is generated in Michigan and sold to physicians.
    The percentage of business that is sold through this agency is very profitable, but it is a small percentage of our overall workers’ compensation book of business. SCW primarily sells medical professional liability insurance.

    The length of a workers’ comp policy is 12 months, the same as a medical professional liability policy. It may take up to 24 months to earn in a rate increase depending on when the policy comes up for renewal. For example, if a rate increase is implemented on November 1, but the policy renewed on October 31, then this policy won’t be affected by the rate increase until the following year when it comes up for renewal, at which time it will then take 12 additional months to earn in the higher rate.

    SubjectRaymond James Upgrade
    Entry12/04/2002 12:16 PM
    Memberspence774
    The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716
    Institutional clients may call for additional information:
    Research 800-237-5643 • Trading 800-237-8426
    American Physicians Capital Upgrade
    (ACAP:NASDAQ) Outperform 2

    American Physicians Capital, Inc. (http://acaponline.com) is one of the nation`s
    largest writers of medical malpractice insurance, with assets of $1.1 billion and
    shareholders` equity of $290.9 million. APCapital provides medical malpractice
    insurance in 13 states in the U.S., concentrated in the Midwest. APCapital also
    provides some workers` compensation insurance to small and mid-sized
    businesses in 11 states in the U.S.
    Upgrading ACAP to Outperform
    ♦ We are upgrading our rating of American Physicians Capital
    (APCapital) to Outperform from Market Perform. While some
    lingering issues could hinder the company’s operating performance
    for the next couple of quarters, we believe the company’s underlying
    earnings should begin to demonstrate substantial improvement in
    2003/2004 as past rate increases and changes in policy
    terms/conditions gradually begin to affect the income statement.
    ♦ While APCapital reported substantial operating losses for the last
    five consecutive quarters and is expected to continue reporting
    operating losses for another quarter or two, we believe the worst of
    the medical malpractice pricing/profitability cycle might now be
    behind the company. Moreover, we believe management has
    implemented significant underwriting and price changes in the past
    two years, which should position the company to achieve an
    annualized ROE of 10% or more by the second half of 2004
    (implying EPS of more than $3.00).
    ♦ Some near-term risks include: 1) the potential for adverse
    development of medical malpractice reserves for continuing
    operations; 2) the potential for a clean-up reserve charge as the
    company completes its withdrawal from Florida medical malpractice
    over the next year; 3) a potential recovery problem with a $10 million
    reinsurance recoverable from Gerling; and 4) the potential for an
    erosion of profitability in the company’s workers’ compensation book
    of business. For a more detailed review of recent results, please
    see our comment dated November 11th.
    ♦ We are establishing a target price of $25.00, based on a 75%
    multiple applied to recent book value per share. While we recognize
    that the stock’s valuation could eventually trade to, if not above, the
    company’s recent book value per share, we believe the near-term
    earnings uncertainty supports a more conservative posture.
    EPS Q1 Q2 Q3 Q4 Full
    FY= Dec Mar Jun Sep Dec Year
    2001A $0.37 $0.38 $(3.12) $(1.38) $(3.62)
    Old 2002E (0.33)A (0.28)A (0.19)A (0.25) (1.05)
    New 2002E (0.33)A (0.28)A (0.19)A (0.25) (1.05)
    Old 2003E UR UR UR UR 0.45
    New 2003E UR UR UR UR 0.45

    SubjectThanks for the update-question
    Entry12/20/2002 09:44 PM
    Memberadam15
    Great idea-what do you think the possible hit could be if:
    1)Additional med mal reserves are required
    2)Clean up reserve for Fla
    3)Gerling 10MM recovery
    Also what do you think of the Stillwell agreement in the proxy? I will assume the buyback is done by year end to meet the 15% a year deal,but do you think they have the capital to do another 15% next year if they take 20-30MM hit for the above?

    SubjectReserves, etc.
    Entry12/25/2002 06:20 PM
    Memberspence774
    I don't have any special insight into future potential FL problems. If they need to strengthen reserves b/c existing FL claims develop, it would obviously not be good. Neither would recovery problems. For both of these, the importance to the investment would depend on the magnitude of the problem and the rate that existing profitable business is developing. Even if they have a reserve problem, it should not be of a magnitude that would impair their ability to write current, very profitable policies (of course there is a limit to this…)

    They probably will not buy back a meaningful amount of shares going forward. Surplus capital will probably be kept as a cushion to future problems or a base for premium growth. We should soon know how the end of the year looks and how close they are to profitability – it should either be this quarter or next.

    I don’t know what to make of the Stillwell situation specifically, but overall, I think he is good for shareholder value.

    Sorry I couldn’t give more specific help.

    Subjectmed mal crisis wsj editorial
    Entry01/02/2003 07:53 AM
    Memberspence774
    From WSJ editorial:
    ------------------
    Lawyers vs. Patients -- III

    Now that the GOP holds the Senate, maybe we'll finally get tort reform, including a desperately needed limit on punitive-damage awards in medical malpractice suits. Let's hope it's not too late for the good folks of Pennsylvania.

    A crisis was narrowly averted there on New Year's Eve, when hundreds of doctors who had been threatening to close their practices or stop performing certain high-risk procedures agreed to stay on the job after Governor-elect Ed Rendell pledged to help them with the high cost of malpractice-insurance premiums. Patients weren't so lucky in West Virginia, where surgeons at four hospitals started a 30-day strike yesterday to protest out-of-control malpractice-insurance premiums.

    In Pennsylvania, the last-minute deal was especially good news for the citizens of Scranton, where the planned closure of one practice, Delta Medix, would have taken 40% of the county's general surgeons out of commission. Scranton's Community Medical Center agreed to postpone the planned shutdown of its trauma center. At least for now, trauma victims won't have to travel to Allentown or Danville, a 70-mile trip through the mountains at a time when every second counts.

    According to the Pennsylvania Medical Society Alliance, since January 1, 2001, at least 900 physicians across the state are in the same fix as the Scranton docs -- closing up shop, moving out of state or refusing to do high-risk procedures. This for a state in which the federal government already designates 729 boroughs and townships as "medically underserved."

    There are only two insurers left in Pennsylvania ready to write medical malpractice policies, down from 10 five years ago. Those two are refusing many new subscribers, limiting coverage, dropping doctors and hiking rates. According to the Pennsylvania Medical Society, 1,100 policies covering up to 3,000 doctors have not been renewed this year.

    BYE, BYE DOCTORS



    States where patients can't get some medical services because doctors can't afford malpractice insurance.

    Florida New Jersey Pennsylvania
    Georgia New York Texas
    Mississippi Ohio Washington
    Nevada Oregon West Virginia

    Source: American Medical Association



    As the nearby table shows, Pennsylvania is one of 12 states where patients are being denied care because doctors are being driven out by the high cost of malpractice insurance. The American Medical Association puts an additional 31 states on the brink of crisis.

    Across the country, OB-GYNs are refusing to deliver babies, neurosurgeons won't see trauma patients, radiologists won't read mammograms and orthopedists are staying out of the operating room. Doctors of all types won't see new patients. Other doctors are moving, retiring or leaving medicine.

    In Las Vegas, a pregnant woman can call 50 obstetricians before finding one willing to accept a new patient. In Arizona, a baby was born on the side of the road after her mother had passed her community hospital, where the insurance crisis had closed the maternity ward. As in West Virginia, trauma centers in Nevada, Mississippi and other states are in danger of being downgraded or closed because doctors steer clear of high-risk practices.

    The bottom line is that patients are being denied medical treatment because of an out-of-control tort system. Juries willing to award sky-high payouts to plaintiffs poison the well for patients everywhere. The House passes medical malpractice reform every two years, but it always dies in the Senate. This sounds like a task for the new Majority Leader, Dr. Bill Frist.

    Subjectdec quarter
    Entry01/08/2003 01:46 PM
    Memberhack731
    I noticed that consensus EPS estimate for Dec quarter is a loss of 0.15. The company has missed consensus estimates for the last five quarters. So, I was wondering if you really think there's a chance that this company shows a profit in the Dec quarter. Looks like the Street expects a profit of 0.04 in the March quarter (only two estimates though).

    SubjectProfitability
    Entry01/09/2003 02:06 PM
    Memberspence774
    My guess is that they will have a small loss this quarter and be profitable next quarter. Business and pricing remain strong, with new business expected to be very profitable, so the story remains the same. And the med mal industry continues to be in a severe crisis, which could result in some type of tort reform. The main risk is a material reserve strengthening.

    SubjectPresident's Proposal
    Entry01/16/2003 07:48 PM
    Memberadam15
    What do you think of possible implications to ACAP biz if malpractice limit's of some sort are inacted?Will it help with the limits on the loss side or will rate's go down as well?

    Subjectprez proposal
    Entry01/17/2003 03:02 AM
    Membermichael99
    IMO, this is huge. If reform goes through, then ACAP will mint money. Mean rate reduction, which will occur gradually, will lag the risk reduction, which will occur nearly immediately. This will open up a tremendous opportunity for profit and BS improvement at ACAP. Given recent and current pricing of policies, the stock could ride gains in book value to double or triple recent valuations.

    SubjectPrez Proposal
    Entry01/17/2003 11:27 PM
    Memberspence774
    I agree with Michael - this would be huge for ACAP.

    SubjectDouble or triple NAV?
    Entry01/20/2003 05:22 PM
    Memberdoobadoo802
    I was under the impression that acap buys reinsurance policies to take care of the huge payouts. Therefore a cap of 250k non-economic damages would help the medium to large payouts, and only contribute a little for the huge ones. i don't know the distributions of the payouts, but how do you guys figure a 2x or tripling of the book value? If that is indeed what you are implying...

    Also, those reinsurance rates would drop slowly as well, not instantly. True that it would be an instant B/S and therefore NAV improvement, but I think there would be a lag until profitability really goes up in a meaningfulway. Don't get me wrong, this is great for acap. Probably more like home run to take the lead in the bottom of the 7th, but not a game winning grand-slam.

    --
    doob

    SubjectTort Reform
    Entry01/20/2003 08:18 PM
    Memberdavid101
    Doob,

    I'm glad someone else asked that question. Maybe Michael would be willing to share how much he has been buying at these levels. I, too, would like to hear more about Michael's exurberance.

    If I owned any shares of ACAP now, I would sell the day Bush signs a med mal tort reform bill. This is a short-term positive and long-term negative.

    Let's start with the ACAP specifics. First, 35% of their business is work comp, which is not impacted. Another 12% represents Michigan med mal, and that state is already capped. At best, half of ACAP's book will benefit from tort reform. But how much? Another question is whether the big Cheese will decide to expand again.

    As you noted, the fact that ACAP reinsures for large losses, and they would only be capping for pain and suffering, means ACAP will still absorb about the same amount of losses. Hopefully, their reinsurance will be cheaper. Keep in mind that the average med mal settlement is around $27,000.

    My biggest concern however is competition. The reason that there is a med mal "crisis" is largely because insurers haven't been charging enough for the past ten years. Why did the largest writer, St. Paul, leave the market? Because they couldn't properly price their product. Translation: the other med mal insurers were undercutting them. In a perverse way, the lack of tort reform served as a barrier to entry into med mal insurance. Removing that barrier will only encourage competition.

    My apologies to Spense. I'm not trying to bash ACAP and I am not short the stock either. Guess you can label me "burnt once, twice shy" and definitely leery.

    David

    SubjectUnderlying Thesis
    Entry01/21/2003 01:43 AM
    Memberdoobadoo802
    I am glad you agree about the idea that this idea isn't a home run just when tort reform gets passed for the reason we both outlined. However, I think the underlying thesis was for it to trade at or slightly above book when they report profitability. I believe this thesis is credible, esp considering how many shares have been taken off the table by the company (I believe its 15% of float over the past year or so..) This could create some leverage if people start buying in when and if this company gets back to profitability

    And looking at the recent volume, it does not look like any one is buying in volume at these prices. I don't have institutional coverage, so i can't tell if there is supply at these levels, but my quick look at what resources i do have tells me there is not much supply at these levels.... i'm interested in how you see the supply/demand equation at these levels, as i'm guessing you have a better picture of this than I.

    --
    doob

    SubjectTort Reform, ACAP, Current Val
    Entry01/21/2003 06:42 AM
    Memberspence774
    Doob and David,
    Great comments. I agree factually with your comments about ACAP and the industry, but, I think tort reform would be a home run for ACAP even though they have R/I. Industry pricing is determined by total industry loss experience, so a cap would help the industry and probably increase the valuations on all industry participants. Importantly, I think a cap would mitigate frequency (in addition to severity) because it would take the incentive off the table for aggressive litigation in the hopes of a lottery ticket (I don't know yet what the experience has been with regard to frequency in capped states, but I'll check). Long-term, it may change the culture of medical malpractice litigation for the better.

    I agree that capital will return to the business, either through new players slowly creating their own books of business, or by acquiring existing players. This always happens when capital sees opportunity in the insurance sector, and it is usually accompanied by valuation expansion of existing players (as long as they are not too badly hurt by whatever caused the opportunity to occur in the first place). Clearly acquisitions could result in valuation expansion beyond 1x bv.

    I think Investing in a turnaround insurance company is generally a bad idea because of the outlier risks - in fact, this is the only such turnaround I have invested in. The strong industry trends and company actions are why I like this investment, but there are always risks (including Cheesman returning to his roll-up ways, but I think this is unlikely).

    And as for valuation, I still think this is a good idea at today's price (I have not sold any and I still think this is around a 50 cent dollar) and I am NOT implying that I would buy this at 1x bv and hope to sell at 2-3x. I will probably (no guarantees) stick with my original sell target of around 1x bv, even though I bet it trades higher. Also, bv should increase over the next few years, so 1x bv may end up being over $40/share.

    Subjectre: Double or Triple NAV
    Entry01/21/2003 10:06 AM
    Membermichael99
    If book value rises signficantly and the multiple assigned to book value approximates one, you have have a double or triple from recent stock prices without requiring a double or triple in NAV.

    Looks like Spence answered most of the other questions. Tort reform changes the driving culture behind the lawsuits, so looking at ACAP's avg claim payout, reinsurance coverage, etc. doesn't go far enough in analyzing the benefits to ACAP. As well, I agree with Spence re: the practical effect on ACAP of new capital entering or wanting to enter the biz.

    Re: the Cheese pursing ill-advised expansion, I have little doubt he would do so if shareholders hadn't taken the capital out of his hands by forcing such significant buybacks. As lower loss ratios increase book value, he'll have more capital to allocate, a not entirely happy problem given the guy in charge. But his recent history has been one of responsiveness to shareholder pressure, and if he were to buy back shares with new capital this would only accelerate value creation and probable realization.

    As for supply at these levels, a lot of supply came online around 18.15 last week when a money manger friend of mine pressed his buy effort. I'm guessing Einhorn is done selling - David, maybe you know?






    SubjectContingency Fees
    Entry01/21/2003 12:54 PM
    Memberdoobadoo802
    I think part of the problem with this industry also has to do with attorney contingency fees, that encourage frivolous suits and fishing expeditions. It would appear the Bush legislation would place limits on fees as well. Perhaps by focusing on the caps we are missing the issue with the fees, and the number of suits filed. Part of that low average payout has to do with many companies trying to settle out of court. Less filings, driven by lower attorney incentives and higher hurdles to making claims may reduce some of these extortion suits. Any thoughts on this issue. It seems to lend some support to the idea that this may change the landscape in a way that transcends our analysis of the fact that caps won't really help acap b/c of R/I (and the delay for rates to drop) and low average payouts.

    Correct me if i'm wrong but MI also has a limit on contigency fees. what about other markets that acap writes?

    That said, the trial lawyer lobby is very powerful, esp in the democratic party, and generally would have better influence at the local level (as if the case with most lobbying).

    --
    doob

    SubjectDavid
    Entry01/21/2003 04:03 PM
    Membermichael99
    David,

    Re: your question of my position in ACAP, I believe I bought my shares mostly from you around $16-17/share. If you have more to go, I'd be happy to help you take care of it.

    Mike

    SubjectMore Thoughts on Tort Reform
    Entry01/21/2003 07:04 PM
    Memberdavid101
    I think it is premature to count on tort reform having a meaningful impact to med mal insurers. As noted, the legislation has passed the House but is bogged down in the Senate. It is really tough to forecast what final, tortured version of the legislation emerges. Even if tort reform were passed tomorrow, there will be 3-4 years before it has a significant impact to losses. It takes about that long to settle med mal claims, and all the existing, open claims will not be subject to the reforms.

    The key still comes down to properly pricing for risk. Most of the crisis has been because insurers are making up in a short time period what they should have been doing all along - raising rates. The problem has been that the price increases have been compressed into a shorter period.

    If you really believe that tort reform will cut severity and frequency, then a company like PRA will benefit more because they already are known for fighting claims. Half of their claim expense is fighting lawsuits. Another aspect is that most med mal abuses have been concentrated in large metropolitan areas like Philadelphia, Miami, New York, New Jersey, etc. Tort reform will benefit those areas the most, and ACAP doesn't write in those areas. [Aside: my father-in-law was hospitalized recently in a suburb of Philadelphia and had to sign a release stating that he would only sue in the hospital's county and not Philadelphia.]

    On a final note to Doob and Mike, David was a fairly common name among boomer kids. I should take it as a compliment that you are confusing me with a certain hedge fund manager also named David, but I have to put a red light to that notion. Oh, the cruel fun I could have had by posting bullish thoughts on Allied....

    David

    Subjectdavid
    Entry01/21/2003 07:14 PM
    Membermichael99
    Re: your name, what the heck - worth a shot!

    SubjectDavid-whats in a name
    Entry01/22/2003 11:51 AM
    Memberdoobadoo802
    I don't know, I am just no following.

    What are these references to David the Hedge, vs David the Poster. And why would bullish comments on allied mean anything? Lastly, spence, what made you think you were buying david's shares (either the hedge guy or the poster), unless you still believe they are one and the same. I dunno, maybe i just need the joke to be spelled out...maybe i'm just that type of guy.

    --
    doob

    SubjectThe name game
    Entry01/22/2003 12:39 PM
    Memberdavid101
    Doob,

    When you wrote: "I'm guessing Einhorn is done selling - David, maybe you know?", someone could interpret that as implying that I am David Einhorn. Mike picked up on it - hence his offer to buy "my" shares - thinking I was Einhorn. Mike's offer was in response to my chiding him about how many shares, given his double/triple valuation assertion, that he was buying. My apologies to Mike; I only wanted to hear your supporting rationale, nothing personal.

    In denying that I am David Einhorn, I tried being clever by saying things like "red light" because Einhorn runs Greenlight Capital and the bullish comments on Allied because of Einhorn's fairly well-known short position in Allied from last May.

    Just to make it perfectly clear, I am NOT David Einhorn. I am just a guy who spent the last 17 years working in the property and casualty insurance business.

    David

    Subjectsorry for the confusion
    Entry01/22/2003 12:58 PM
    Membermichael99
    Doobadoo,

    On the off-chance that David101 might be David Einhorn of Greenlight - which was an early large shareholder of ACAP and recently sold that stake - I made some statements that had an inside color to them. The similarities essentially were that David101 was the orginal booster of ACAP on VIC (original post back in 12/00 after the demutualization) but has since changed his opinion. David101's very rational and intelligent comments were similar to my understanding of the reasons Greenlight sold - and up to par in terms of depth with what I would expect of Greenlight's logic.

    Basically all the innuendo (started by me, not spence or you) just spiraled. My mistake and my apologies.

    Mike


    SubjectOk I get it now...
    Entry01/22/2003 08:18 PM
    Memberdoobadoo802
    Well guys thanks for the clarity. I knew all the time that it was some type of innuendo with no real implications. i just wanted in on the joke sorta speak. Once again thanks mike, dave, spence and others who have taken the time out of your busy days to post here for a hearty discussion of acap.

    The truth is I am David Einhorn, and I was bullish all the time! and I want my acap shares back....Allied to the moon! ;-)

    Since we are sharing, I am not a money manager by trade (short or long), I prefer taking my own poison by managing my own money. Part time of course, I have a day job.... So you'll have to excuse me if I am not hip to all the manager lingo, or humor for that matter...

    --
    Doob

    SubjectACAP just beat their numbers -
    Entry02/13/2003 05:36 PM
    Memberben111

    SubjectACAP Beats numbers
    Entry02/13/2003 10:32 PM
    Memberadam15
    Based on what?What are charges?Divisional results don't seem that great,what are people/street looking for out of conference call im morning?The Cheese had said at conference a few months ago that he would be profitable in Q4,this dosn't look profitable to me even without the charge off.What about buyback?Why is that not finished,and expanded?Agree stock is cheap,but where are the facts.

    Subjectacap
    Entry03/26/2003 12:31 PM
    Membermichael99
    Positive industry developments apparently helping ACAP stock to higher and higher levels of support. Nice job Spence - you picked very near the bottom. Won't be surprised if you get better than a double from the price at posting.

    SubjectPositive development
    Entry03/27/2003 06:08 PM
    Memberdoobadoo802
    Can you guys be a little more specific as to what this positive industry development was? Are you refering to some specific news item, or just what we've been talking about since this idea was posted.

    --
    doob

    SubjectISMIE
    Entry04/04/2003 02:17 PM
    Membermichael99
    ISMIE in Illinois, the largest provider of med mal in IL, recently was downgraded from A- to B+ by AM Best and has stopped underwriting in the state. This opens up an opportunity for ACAP, although ACAP must make maximal use of its limited truly excess capital. ACAP is pushing through rate increases in the 25-30% range in certain areas.

    Subjectinsider buy
    Entry04/04/2003 03:26 PM
    Membermichael99
    4/2/03 insider buying in the high 21 range was done in the open market; limited but not insignificant at >100K cost for the guy running the workers comp ops; doesn't stand alone but take it with the other signs

    SubjectToday's Price - still a good b
    Entry04/05/2003 07:45 PM
    Memberspence774
    Since I have been asked by a lot of people off-line about what my thoughts are at today's price, I thought I would post my answer.

    With $32.21/share of book value, improving competitive positioning in key markets, and improved underwritting discipline, I still think that the stock of this company is a good investment with over 50% potential price appreciation in the next 18 months and a good margin of safety if things go badly.

    A potential bonus would be national tort reform. I am not placing odds on this, just pointing out that it is possible and would be very good for the company.

    SubjectBarrons
    Entry04/12/2003 08:33 PM
    Memberadam15

    SubjectBarrons
    Entry04/12/2003 08:33 PM
    Memberadam15

    SubjectBarron's Article on PRA
    Entry04/12/2003 08:40 PM
    Memberadam15
    Money Manager recommending PRA feels that PRA will have book of 20 at year end,earn 2.50 p/s or roughly 12% ROE and should trade 2x book,or 40 bucks p/s or 16x eps.If ACAP could trade at 1.5x book it would be 48 bucks,if it could earn 10% ROE we would have roughly 3.25 in eps,at 12x eps it would be worth almost 40,any reason why PRA would not want to buy ACAP??? Would the big cheese be willing to sell this puppy?

    SubjectPRA
    Entry04/15/2003 10:51 AM
    Memberspence774
    I think that the Cheesman would be willing to sell, but based on my conversations with him, he would want a price north of $40/share.

    ACAP is now earning in its price increases from last year, so we should see the loss ratio dropping over the next 12 months, and they could post some really big numbers. That being said, I personally would not capitalize those earnings too highly since it is such a dynamic landscape. However, I continue to believe that the company is worth more than book value, and is theresfore a good risk/reward situation at today's price.

    SubjectBuffet
    Entry05/03/2003 05:19 AM
    Memberdoobadoo802
    Thought this is a relavent quote from Warren Buffets 1977 letter to shareholders concerning Berkshire's insurance business:

    "In 1977 the winds in insurance underwriting were squarely behind us. Very large rate increases were effected throughout the industry in 1976 to offset the disastrous underwriting results of 1974 and 1975. But, because insurance policies typically are written for one-year periods, with pricing mistakes capable of correction only upon renewal, it was 1977 before the full impact was felt upon earnings of those earlier rate
    increases.

    The pendulum now is beginning to swing the other way. We estimate that costs involved in the insurance areas in which we operate rise at close to 1% per month. This is due to continuous monetary inflation affecting the cost of repairing humans and property, as well as “social inflation”, a broadening definition by society and juries of what is covered by insurance policies. Unless rates rise at a comparable 1% per month, underwriting profits must shrink. Recently the pace of rate increases has slowed dramatically, and it is our expectation that underwriting margins generally will be declining by the second half of the year.

    We must again give credit to Phil Liesche, greatly assisted by Roland Miller in Underwriting and Bill Lyons in Claims, for an extraordinary underwriting achievement in National Indemnity’s traditional auto and general liability business during 1977. Large volume gains have been accompanied by excellent underwriting margins following contraction or withdrawal by many competitors in the wake of the 1974-75 crisis period. These conditions will reverse before long. In the meantime, National Indemnity’s underwriting profitability has increased dramatically and, in addition, large sums have been made available for investment. As markets loosen and rates become inadequate, we again will face the challenge of philosophically accepting reduced volume. Unusual managerial discipline will be required, as it runs counter to normal institutional behavior to let the other fellow take away business - even at foolish prices."

    --
    Doob

    SubjectEarnings
    Entry05/11/2003 11:13 PM
    Memberadam15
    Looks like these guy's failed to deliver again.What do you think problem is?Also mentioned on the call the low return on investment portfolio is a problem.I noticed that they never finished the second 15% of the"Stillwell" buyback,with the stock still trading about 70% of book,wouldn't that be a better use of funds,buying back stock,instead of investing in low yield securities?
    Also why dosn't someone like PRA just offer book value and take these guy's out of their misery.

    SubjectEarnings
    Entry05/12/2003 02:16 AM
    Memberspence774
    1. Although it could have been a better quarter, I am heartened by the fact that they had the discipline and honesty to report slightly disappointing numbers (they could have easily pushed things and given much better numbers), and in any case, the trend is moving in the right direction.
    2. They are probably done with buybacks because they want the cushion of surplus capital. At this point, this is appropriate (in my opinion).

    SubjectWarning
    Entry11/06/2003 04:44 PM
    Memberdavid101
    Hate to be the bearer of bad news....

    American Physicians Warns Of Big 3Q Loss, Delays Results
    Thursday November 6, 1:25 pm ET


    EAST LANSING, Mich. -- American Physicians Capital Inc. (NasdaqNM:ACAP - News) forecasted a " substantial" third-quarter loss because of significant adjustments in reserves for policy losses, and said it was delaying the release of results until next week.
    In a prepared statement Thursday, the provider of medical professional liability and workers' compensation insurance said the additional reserves are expected to be about $28 million.

    In addition, as a result of the third-quarter loss, American Physicians said it won't be able to report for the foreseeable future the deferred tax asset that results from its accumulated net operating losses and other timing differences.

    The company said it will incur a non-cash charge of about $50 million to establish a valuation allowance in order to eliminate the deferred tax asset.

    Trading of American Physicians stock was suspended on the Nasdaq Stock Market (News - Websites) Thursday morning and resumed shortly after noon EST. At 1:15 p.m., shares were trading at $17.98, down $9.77, or 35%.

    American Physicians, which had planned to release third-quarter results Thursday afternoon, now plans to release them Nov. 12, after the market closes. A conference call is set for Nov. 13.

    Analysts surveyed by Thomson First Call (News - Websites) were expecting American Physicians to earn 11 cents a share. In the year-earlier third-quarter, the company posted a loss of 19 cents a share, excluding a loss on investments.

    American Physicians said next week's third-quarter results announcement will include news of its exit from the healthcare and workers-compensation businesses. In addition, the board plans to explore options to maximize shareholder value.

    "We are obviously disappointed in this development, and hope to be able to report the specific and significant magnitude of our loss as soon as possible, but at present, we are focused on getting the correct and accurate information and completing actuarial analysis," American Physicians said in the statement.

    SubjectRecent Developments
    Entry11/12/2003 09:28 PM
    Memberbruin821
    Do you think the recent developments have created a buying opportunity?

    SubjectWho Knows?
    Entry11/18/2003 10:20 AM
    Memberspence774
    It may be an opportunity to sell the company or change management, but at this point it is too tough for me to analyze with confidence.
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