American Physicians Service Group Inc. (AMPH)

Q2 2010 Earnings Conference Call

August 3, 2010 9:00 AM ET

Executives

Ken Shifrin – Chairman and CEO

Marc Zimmermann – CFO

Tim LaFrey – President and COO

Analysts

Brian Hare (ph) – Raymond James

Mike Grasher – Piper Jaffray

Ron Bobman – Capital Return

Paul Newsome – Sandler O’Neill

Ray Irregela (ph) – Oppenheimer

Presentation

Operator

Good morning and welcome to the second quarter 2010 American Physicians Service Group Earnings Conference Call. My name is Andrea and I’ll be your coordinator today. This call is being webcast in listen-only format through AMPH’s corporate website at www.amph.com and you can listen to a replay of this of this call which will also be available through their website.

I’d like to reminder to you that during this call, members of AMPH’s management may make forward-looking statements. These forward-looking statements are based on current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially. For example, statements regarding potential developments in the industries in which the Company operates, it’s ability to expand in existing markets and enter into new markets, or grow through acquisitions and to achieve positive operating results are all forward-looking statements.

For a detailed discussion of the risk and uncertainties that could cause the Company’s actual results to differ materially from those described in forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission.

Now I’d like turn to the call over to Ken Shifrin, Chairman and CEO of AMPH.

Ken Shifrin

Thank you and welcome everyone. Also joining me today are Tim LaFrey, our President and Marc Zimmermann, our Chief Financial Officer. We are pleased to announce another successful quarter in which our net income and earnings per share exceeded the estimates of our outside equity analyst. Our core insurance operations again performed very well during the quarter. Our strong underwriting and claims management continues to be reflected in our favorable loss experience. As a result, we recorded favorable development of $8.8 million in the quarter.

Even after this favorable development, we increased our net reserves per open claim over the first quarter level in keeping with our conservative management philosophy. Our book value per share continued its upward trend growing by 2.5% during the quarter, while our trailing 12 months return on equity was 15.4%. I will now turn to Marc Zimmermann, our CFO, to highlight our operating performance.

Marc Zimmermann

Thanks, Ken. Revenues for the quarter were $20.7 million compare to $20.1 million in the same period last year. Revenues for the six months ended June 30, 2010, were $40.8 million compare to $39.4 million in the first six months of 2009. Net earnings for the quarter were $6.2 million or $0.90 per diluted share compare to $4.9 million or $0.70 per diluted share in the same period last year.

Net earnings for the first six months of 2010 were $10.7 million or $1.54 per diluted share compared to $9.7 million or $1.36 per diluted share in the first six months of 2009.

In our insurance services segment, gross written premiums for the quarter were $14.5 million or a decrease of approximately 1.5% as compared to $14.7 million for the same period in 2009. For the quarter we continued to experience excellent policy holders’ retention of approximately 92% and grew new business in each of our markets. We produced new business of approximately 700,000 with approximately 73,000 coming from Oklahoma and Arkansas.

Our rate decreased for the second quarter approximately 3%, the same as the first quarter. Overall, we grew our policy holders’ account to 6,783 at the end of the quarter, an increase of 7% since the beginning of the year and 8% since the second quarter of last year. Financial services revenues were $2.1 million for the quarter, an increase of approximately 14% over the second quarter of last year. Financial services expenses were $2.4 million for the quarter, compared to $1.7 million in the second quarter of 2009.

Increase in expenses is largely attributable to professional fees related to ongoing legal and regulatory disputes and higher commissions on higher sales activity. Net investment income totaled $2.5 million for the quarter, as compared to $2.7 million in the comparable quarter of last year. The proceeds from the sale of approximately $17.2 million of non-agent fees CMOs in 2009, and additional cash generated from operations have been reinvested in high quality, investment-grade fixed income securities with short maturity dates and lower yields.

As previously reported, since the beginning of 2009, we have been shortening the overall maturity of our portfolio to focus on preservation of principal over yield due to market uncertainties. This rebalancing of our fixed income portfolio resulted in a corresponding decrease in investment income even though our investment portfolio continues to grow.

Claims frequency continues to remain favorable as our total number of pending claims to June 30, 2010, was 521, down 3% for the quarter from 537 claims at the end of March, 2010, and down by 8% from the 565 claims at the end of June 30, 2009. We experienced favorable development of approximately $8.8 million during the quarter, of which, $8.4 million was in our retained layer and $400,000 was in our re-insurance layer. This compares to favorable development of approximately $5.5 million during the second quarter of 2009, of which, $4.7 million was in our retain layer and $800,000 was in our re-insurance layer. Even following these adjustments, and with continued historically low reported claims for the quarter of 107, our average net reserve for open claim remains very strong at approximately $156,000 at the end of the quarter, up 9% from $142,000 at the end of the second quarter of last year and up from $153,000 at the end of the first quarter of this year or (ph) at the upper end of the actual range.

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