Here's something you don't see every day. Medical malpractice insurance specialist ProAssurance (NYSE:PRA) has surpassed analyst estimates by double-digit percentages, yet the estimates have been heading steadily downward. Strange, no?
Be that as it may, profits improved nicely this quarter. Earnings from continuing operations more than doubled, and the company also improved its combined ratio from 101.5 to 91.5. Although ProAssurance benefited from more favorable reserve developments than in the year-ago period, the improvement in loss ratio was still significant, and this was the first full year of underwriting profitability since 1999.
That six-year underwriting loss streak may sound bad, but there's a little more to it than that. Medical malpractice insurance is a type of insurance known as "long tail" -- there are years between the collection of premiums and the payouts for losses. As a result, that gives the company a number of years to invest the money it collects, and the resulting investment income is an important part of the company's profitability (though it isn't captured by the combined ratio).
Premium trends also looked reasonable this quarter. Net premiums written were down 9%, but the company reported an 85% retention rate and an average rate increase of about 11% for those who did renew their policies.
The company is also still active on the merger and acquisition front. ProAssurance decided to sell its personal lines business for $400 million to GMAC (part of General Motors (NYSE:GM)), and it's also announced its intention to buy Physicians Insurance Company of Wisconsin.
As you might imagine, medical malpractice insurance is a tough business; so tough, in fact, that many larger companies have fled the space. That's not to say that it can't be profitable, though, and I think it's worth noting that Warren Buffett recently added a medical malpractice insurance company to Berkshire Hathaway (NYSE:BRK-A). Even with that, ProAssurance remains one of the larger companies in the space -- a space that includes others like Markel (NYSE:MKL), CNA (NYSE:CNA), and American Physicians Capital (NASDAQ:ACAP).
Even though tort reform seems to be going nowhere fast, these shares trade at a pretty rich valuation relative to past levels. (It's only fair to point out that return on equity is higher as well.) Although I think this is a well-run and conservatively managed company, I'd rather try to find some strong insurance companies trading at a discount for my own portfolio.
For more Foolish thoughts on insurance:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
