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Profit From Your Doctor's Worst Nightmare

Posted: May 07, 2008 07:41 AM by Will Ashworth

Tickers in this Article: ACAP, PBR, XOM, PRA, CNA

Every day it seems there's a news story about how expensive healthcare is in this country and how many Americans go without benefits at one time or another. While physicians are driving around in fancy cars, you're having a hard time coming up with the yearly healthcare insurance premiums. It hardly seems fair, but now you can do something about it - something that doesn't involve hurling a brick at the next SUV you see with a license plate says: DRCOOL, FOOTDOC or SAY AHH.

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Make Money From The Pain
I'm a big believer of investing in companies that are a part of our everyday life. If you're upset about high gas prices and you don't think they're going down anytime soon, either drive less or figure out a way to make money from the situation. In this example, your best bet would be to invest in a profitable oil company like Petroleo Brasileiro (NYSE:PBR) or Exxon Mobil (NYSE:XOM). In the last year alone, the two stocks are up 150% and 13% respectively. An investment of $5,000 in each, one-year ago, would net you $8,200 before tax. That would pay for a few tanks of gas.

Apply this to the healthcare crisis and several opportunities come to mind. Between your doctor, dentist, chiropractor and pharmacist, the number of companies they deal with is enormous. You could probably build an excellent mutual fund just by cobbling together all of the public companies they interact with on a daily basis; so, I'm going to give you a suggestion that goes beyond the obvious.

What is it that every health care professional fears? Medical malpractice. No doctor wants this on his or her plate. That's why they have medical professional liability insurance. Sometimes professionals do mess up and, if sued, it would be financially devastating without insurance. Quite uncommon until the late 1960s, malpractice lawsuits are more prevalent today hence the need for this specialized product. (For more on how to avoid a financial crisis, see Steering Clear Of Medical Debt.)

APCapital a Regional Powerhouse
One company that has become quite successful in this market is American Physicians Capital (Nasdaq:ACAP), a Michigan-based company founded in 1975 to deal with the state's growing crisis in professional liability insurance. APCapital went public in 2000 and today it markets its liability coverage in Michigan, Illinois, Ohio, New Mexico, Wisconsin, Indiana, and Kentucky.

While APCapital only sells five states, in each one it's a major player. APCapital is ranked first or second, in market share, in three of the five states, according to 2006 direct premiums written. It tends to focus on individual doctors as well as small group practices. In 2007, it wrote $135 million in direct written premiums with about 9,200 policies in force. In the first quarter of 2008, it wrote $33.7 million in direct written premiums, down 7.2% year-over-year. Management attributed this to lower pricing as result of increased competition in Illinois and Ohio, from companies like ProAssurance (NYSE:PRA) and CNA Financial (NYSE:CNA).

Nonetheless, it still produced earnings per share (EPS) of $1.13, a healthy 25.6% increase up from $0.90 a year earlier. A significant portion of this gain was a result of the company repurchasing 404,000 shares at an average price of $42.93 during the quarter. For 2008, it believes EPS will be approximately $4.25, less than the $4.74 a year earlier. However, it feels 2007 was an exceptional year with lower than expected claims and is setting aside greater reserves to cover increased losses in 2008. It's this kind of conservative financial practice that led A.M. Best Co to raise its financial strength rating of American Physicians Assurance Corp. (APCapital's subsidiary), from 'B++' to 'A-' in March of 2008. That's not good, that's excellent.

Bottom Line
APCapital went public December 8, 2000 at $13.50. Investors in the initial public offering who are still holding today would have annualized gains of 19%. On a $5,000 investment, you'd have more than $12,900 in profits to help cover your healthcare premiums. At least the very least you'll feel better making the payments because you're not just a patient, you're an owner.

For another way to make money in the insurance industry, read Do You Want To Sell Stocks Or Insurance?

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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