FPIC Insurance Group
, deep value and the possibility of a suitor may offer investors some insurance against losses.
This niche insurer has had its share of challenges, especially in a tough medical-malpractice environment. Nevertheless, the company may now be a solid liability insurance play for more aggressive investors.
"As the market becomes more comfortable with FPIC's reserve position and its ability to weather the difficult medical-malpractice liability market, we expect stock price appreciation from the current depressed valuation of 69% of book value," says SunTrust Robinson Humphrey insurance analyst David Lewis in a recent report to clients. He rates the stock an outperform, and his firm has not provided investment-banking business for the company.
As a turnaround play, FPIC offers value. Its stock trades at less than 70% of its book value, just above 13 times this year's earnings and less than 9.5 times 2002 earnings estimates. Over the next five years, earnings are expected to grow 10% annually.
Plus, marriage might be in its future. "We also expect FPIC will pursue a merger of equals or sale if the economics are favorable for shareholders, which could develop within the next 12 months at a price of $18 to $24," Lewis says.
Putting FPIC on the Map
Unlike many large medical-malpractice insurers, FPIC focuses its underwriting on medical specialties, which appears to have insulated it from many expensive claims. It has developed a sophisticated pricing model, setting premiums based on specialty-claim experience.
Lewis' report cites this as a strength, too: "We also believe that FPIC's focus on profitable medical specialties and pricing based on specific specialty claims experience proves a major competitive advantage."
In addition, the company peddles its underwriting to two primary areas, Florida and Missouri, where FPIC writes more than 90% of its business. That allows FPIC to adapt products and pricing to the market and gain scale without excessive expense. While it continues to examine other states to provide coverage, most of its geographic growth has been through mergers, which enables FPIC to take advantage of existing management and claims personnel who understand the market.
FPIC has always been one of the more pricey malpractice insurers in Florida. In fact, while the number of professional liability policies has increased in each of the last three quarters, the company lost nearly 10% of its medical-malpractice business in 2000 by not reducing prices to "predatory pricing" levels set by competitors looking to eat away at FPIC's 25% share of Florida's professional malpractice market.
As many of its competitors found this pricing model to be a losing proposition, premiums are again on the rise. "As competitors have put in rate increases far in excess of FPIC's, FPIC's prices are now fairly close to competitors in Florida, which should allow the company to gain profitable market share," Lewis wrote.
Yet premium creep for FPIC is strong. In Florida, the company pushed an 11.2% rate increase in January, on top of a 9.1% hike in June 2000. It's also filed for a 19.5% increase that should take effect in December.
With claims moderating, the company is well-positioned to shore up its balance sheet. "Given these rate increases and claim trends, without a change in reserving practices, we believe FPIC is again beginning to build redundant reserves, adding conservatism to its balance sheet," Lewis noted.
Confidence and Caution
While some investors have questioned FPIC's management expertise, the company appears to be regaining Wall Street's confidence.
For example, the company has begun to use more conservative reserving practices, including not taking into account price increases in its reserving policies and using a higher loss ratio in calculating overall reserves. While such conservative measures can understate financial health, they also allow FPIC to withstand a sudden increase in size and number of claims in a very unpredictable market.
The company is leaving the group accident and health insurance business, a grossly unprofitable area. The unit will be gone by the end of this year, along with the approximately 18-cent drain on earnings per share that came with it.
FPIC also has a small third-party administration business -- qualified plan accounting and record keeping -- that it's consolidating this year. If it does, that should save between 2 cents and 3 cents in per-share earnings next year.
The insurance business, especially in medical malpractice, has risks. FPIC's size could also make it less able to weather a prolonged period of soaring claims. Add to that its low average volume, and it might be a recipe for volatility.
Yet, I like what I can see of FPIC's business: its core focus, its more conservative accounting practices and its discipline in closing down unprofitable business lines. Combined with the possibility of a merger, this higher-risk name deserves a look. I give it two barrels.
For an explanation of our barrel rating system, see our recent description.
Rolling With the Barrels
My weekly review of previous picks shows that
remains the big dog. The small-town sporting-goods retailer is down 10% from
when it was profiled, although I did like the stock better in the high $20s than the $30 price tag it was sporting at the time. That said, fundamentals are on track, and I like its holiday prospects.
I'll continue to review their progress here each week.
Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies and your full name and hometown. If we profile your suggestion, we'll send you a TSC gift to commemorate your pick.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to