Last week, The Doctors Company announced the acquisition of ProAssurance, the last remaining publicly traded medical malpractice (medmal) specialist, for $25 per share or $1.3 bn. This acquisition combines the second and fourth largest writers of medical malpractice liability insurance, resulting in a market share of nearly 16%, based on 2024 S&P Capital IQ data.
The deal will bookend ProAssurance's troubled history, which began as the combination of two physician-owned mutuals that went public, made several acquisitions and pivots, and finally saw the cycle get entirely away from management.
This can be a teachable moment for other P&C franchises.
Waiting too long to sell on a favorable cycle risks it turning into an unfavorable cycle over time.
The direction of litigation and social inflation trends can reverse.
There is an always-present risk of “deworsification,” believing that success in one line of business means you have the skillset to replicate results in adjacent lines.
The key lesson here is that if you are trading at a material premium to book in a sub-segment of a challenging class of long-tail business, seek an exit, and bank the returns.
With extensive experience covering the medmal space over the last twenty years, including the rise and fall of several other publicly traded specialists, we have had a ringside view of how these franchises have taken divergent paths but mostly stumbled whichever way they went.
The note below benchmarks the ProAssurance sale against other deals and its past performance provides an update on painful litigation cost trends; and dissects the company’s underwriting performance over time.
Waiting too long can cause deal values to suffer
The Doctors Company paid $25 per share for ProAssurance, which reported a Q4 book value of $23.49 per share for a deal multiple of 1.1x.
The offer price also equates to a premium of nearly 60% over the prior close of $15.74, reflecting just how far below book ProAssurance had been trading pre-sale.
The chart below shows ProAssurance’s’ stock price (left axis) and price to book (right axis) over time.
At its peak, ProAssurance was trading at $65 per share, with a stock multiple of 1.8x book. The deal value equates to only 40% of that number, a stunning discount when considering other sales in this space.
The table below shows past deals, and we would like to specifically highlight the wave of consolidation in public markets from late 2005 to 2012.
We have covered the history of medmal in our prior write-up. Briefly, the smaller publicly traded med-mal insurers benefitted from St Paul’s exit in 2001, which coincided with material rate hardening and country-wide tort reforms.
This shift in market conditions turned the industry profitable from 2005 onwards and resulted in increased consolidation.
The Doctors Company emerged as a material consolidator at that time, with many deals concluded at material premiums to book value. These include companies like American Physicians Capital and FPIC Ins Group, which were viewed as ProAssurance's closest publicly traded peers.
Although ProAssurance was expected to be the next carrier to sell, the company instead embarked on its own acquisition spree, a path we have seen many other carriers take.
Over the next fifteen years, the pricing cycle would reverse, reserve redundancies would disappear, structural changes would occur, and Obamacare would push smaller physician groups towards larger hospitals.
It’s easy to conflate a company’s underwriting success with its internal actions, and to miss the extent to which they are driven by broader external changes in operating conditions.
As such, if you are a company trading at a material premium to book in a sub-segment of a tough, long-tail line, you would be well advised to seek an exit and cash out your chips.
Social inflation has gotten even worse than the industry expected
The past few years have continued to show that the impact of social inflation is accelerating faster than the industry expected. We have covered this impact in our prior notes on other liability as well as medmal.
Historically, medmal providers have been known to be willing to take disputes to court and proceed to trial rather than settle them. However, societal changes have impacted how jury pools view lawyers, corporations, and settlement values, turning the legal system into an “us” vs. “them” mentality.
The chart below shows part of this impact: awards are accelerating faster than anticipated, calling into question the adequacy of past pricing and putting insurers under pressure to secure adequate rate action.
The current tort environment is an important consideration for companies that see themselves as acquirers or sellers. The chart below illustrates these pressures. Note that ProAssurance’s value creation has declined as the time horizon shrinks, while the inverse is valid for the other companies listed. This is reflective of how changing loss costs affected the company’s core book.
Diversification can lead to “deworsification”
Another factor often seen with various insurance carriers is the pressure to diversify, which can often lead to “deworsification”. Many carriers overestimate their inherent capabilities and view favorable results as driven by a competitive edge in underwriting quality that they have over their peers.
This view can cause diversifying insurers to overlook the complex interplay of external and internal forces, including the regulatory environment, competitor behavior, tort climate, and broader market cycles.
Over the years, ProAssurance acquired or built out businesses such as workers' compensation, lawyers' liability, life sciences, podiatry, dental, etc. It also made a foray into the Lloyd’s market via Dale Underwriting Partners (Syndicate 1729), eventually pulling back with a reduced participation due to heavy loss volatility.
The lesson for other carriers is that if you are at a strategic crossroads and the options are to diversify or sell, some management teams might better serve their investors by simply selling to a bigger company.
Underwriting results take a long time to turn around
When one insurer seeks to purchase another, they must contend with the problem of asymmetric information. This means that the seller will always have a better understanding of the book’s real quality compared to its perceived quality in reported numbers.
A view of the potential target’s loss reserves is also critical, particularly when considering longer-tail players, since a slight shift in loss-cost assumptions can have a cascading impact on whether reserves are appropriate.
The chart below shows the combined ratios over time for medical malpractice insurance at ProAssurance, The Doctors Company, and for the whole P&C industry.
Yes, hindsight is 20/20. But it should have been apparent to management that trends were slipping away nearly a decade ago.
The chart below shows ProAssurance's combined ratio swinging from better than the industry to worse than the industry for an extended period of time.
In recent years, ProAssurance has embarked on corrective actions, including re-evaluating prior reserves and rate increases, as well as reunderwriting its book.
Although results have improved, the combined ratio has remained above 100 in recent years.
The lesson for potential sellers is that waiting too long can often result in problems getting worse before they get better.
Historically, buyers and sellers have had to evaluate the quality of reserves and how they are likely to develop. Potential reserve releases from an acquired company, in effect, are an offset against the purchase price, while adverse developments, in theory, effectively increase the purchase price.
The chart below shows favorable and adverse developments over time for medmal lines of business at ProAssurance, The Doctors Company, and the P&C industry.
In the mid-2010s, ProAssurance not only outpaced its future acquirer and the broader industry but also made virtually unheard-of reserve releases of close to 40 to 50 pts in some years.
Over time, as competitive pressures, social inflation, and loss cost trends reversed, the company faced challenges and took its first sizeable adverse development charge with its year-end 2019 results. Since then, the company has moved between modest releases and development.
This has resulted in concerns surrounding the quality of its book and the potential for reserve development, which has resulted in the stock trading at a discount to book since 2019.
For companies looking for potential buyers, this is an important lesson: sometimes trends can move away so much that one can be forced to sell at the bottom of the cycle rather than leveraging a strong franchise and commanding a premium valuation.
In summary, the acquisition of ProAssurance by The Doctors Company has several lessons both for those looking to buy and those looking to sell. In waiting too long, a seller can allow the insurance cycle to get away, eroding a company’s value and advantages. For buyers, looking at reserving trends can help show whether a deal will develop in your favor over time.