Since its IPO in 1991, ProAssurance (PRA) has identified itself as a "reputation defender" for doctors, trying lawsuits where other medical malpractice companies would typically settle. In 2005, PRA settled about 10% of its cases, whereas the industry norm had been around 20%. This approach has been rewarding. In 2005, PRA delivered a loss ratio of 81.5% in an industry that rarely breaks a ratio of 100%. (For the insurance illiterate, less than 100% is profitable while more than 100% is money-losing.) More telling, PRA spends 70% of its expenses on legal fees and only 30% on loss payments whereas the industry standard is exactly the opposite - about 30% on legal fees and 70% on loss payments. But all that may start changing.
On October 4, 2006, a Florida jury tagged a group of physicians insured by a subsidiary of PRA for $217 million. ($100 million is punitive.) This monster verdict came as a result of poor care that may have allowed a stroke to become severely debilitating. Rather than having doctors attend to the patient, the doctor group allowed an unlicensed physician assistant (PA) to diagnose and treat sinusitus. This PA was unlicensed because he had failed the exam four times. That's the case against the doctors.
In theory, PRA should only be liable to the policy limits of $1 million. However, the plaintiff's attorney claimed that they tried to settle with the insurance company for the policy limits, but were rebuffed by a settlement offer of $300 - $100 for the disabled man, $100 for his wife and $100 for the 10 year-old son. If that is true, PRA may be liable for the entire amount for negotiating in "bad faith." In such a situation, PRA would also be sued by the doctors it had defended. It appears that PRA will have a chance to defend a new reputation - its own.
Astonishingly the price of PRA stock is the same 15 years later as it was when this post was penned. What has caused the severe underperformance? It appears that a confluence of factors have driven the outcome: 1) a product generating large float that has been invested in low return bonds, 2) a decreasing demand for traditionally priced products as doctors groups disappear and 3) unprofitable ventures into other areas. Of course, in the meantime there was plenty of time to sell at higher prices as these factors emerged.
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