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Executives

Ann Storberg – VP of IR

Kevin Clinton – President and CEO

Frank Freund – EVP, Treasurer and CFO

Jim Lucey – President of Alpha Advisors

Analysts

David Lewis – Raymond James

Mike Rasher – Piper Jaffray

Beth Malone – KeyBanc Capital Markets

Michael Nannizzi – Oppenheimer

Mark Aden – KeyBanc Capital Markets

American Physicians Capital (ACAP) Q3 2008 Earnings Call October 31, 2008 10:00 AM ET

Operator

Good day and welcome everyone to the American Physicians Capital third quarter 2008 earnings results conference call. Today’s call is being recorded. At this time I would like to turn the call over to Vice President of Investor Relations, Ms. Ann Storberg. Please go ahead ma’am.

Ann Storberg

Thank you very much. Good morning everyone and thank you for your interest in American Physicians Capital, as we discuss our third quarter 2008 financial results. This call is being webcast live on our corporate website at www.apcapital.com. And you can listen to a webcast replay of this call later today, which will also be made available on our website.

Our third quarter earnings release is posted on our website, located in the for investors section under press releases. Also for your convenience, we post a complete transcript of our call on our website in the for investors section under webcast as soon it is made available. As always, I need to remind our listeners that during today’s discussion, management may make certain forward-looking statements under the meaning of the private securities litigation’s reformats of 1995. When we discuss our plans or expectations, we use words such as will, should, believe, expect, anticipates, estimates or similar expressions. We are making forward-looking statements. We do not undertake any obligation to update these statements, except as required by law. While we believe any forward-looking statements made today are reasonable, they are subject to risk and uncertainties, which could our actual results to differ materially. For a discussion of these risks and uncertainties, please refer to today’s press release and the company’s latest Securities and Exchange Commission periodic report.

Participating in today’s call is Kevin Clinton, our President and Chief Executive Officer and Frank Freund our Chief Financial Officer. Also joining us today is Mr. Jim Lucy, President of Alpha Advisors, which is our wholly owned subsidiary of American Physicians Capital. Jim manages over $800 million of our company’s invested assets. We have also asked Jim to join us today to address any questions you may have in regards to our investment portfolio.

As we begin our call today, with Frank and Kevin’s prepared remarks and we will open up the call for questions. At this time, I am going to turn the call over to Kevin.

Kevin Clinton

Thank you, Ann and good morning everyone. We’re very pleased to announce AP Capital third quarter 2008 results. The third quarter was another very solid quarter for AP Capital. Net income for the quarter was 11.2 million or $1.13 per diluted share. This is very comparable to our second quarter 2008 results of a $1.11 per diluted share. Our year-to-date in that income of $33.6 million represents an annualized return on beginning equity of approximately 17%.

Our balance sheet remains very solid. The highlight of our quarter had to be the asset side of the balance sheet with a performance of our investment portfolio. Less than 1% of our total assets were invested in the stock market and we incurred no investment impairments during the third quarter on an $846 million investment portfolio. And as stated earlier, we have Jim Lucy here to answer any of your specific investment questions.

On the liability side of the balance sheet, our professional liability opened plain count decreased 6% during the quarter, from 1639 open claims as of June 30th, to 1540 open claims as of September 30th. Despite this decrease, professional liability IBNR reserves increased by $8.4 million during third quarter.

Our average net keeps reserve for open claim continues to climb, reaching $153,100 as of September 30th, 2008, compared to $144,200 as September 30th, 2007, a 6.2% increase in the average case reserve in the past year. After a slight up-tick in the reported claims in the second quarter, our reported claim count is again down to 233 reported claims reported during the quarter, from 261 claims reported in the second quarter.

We’re retaining our insured doctors, despite strong competition, we’ve retained 87% of our policy holders through the first nine months of 2008 and our insured doctor count is down just 1.2% from year-end 2007. Although our direct written premiums are down 10.4% for the nine months ended September 30th, 2008, when compared to the nine month ending September 30th, 2007, our revenues per diluted share are down just one half of 1%. This is a result of our active stock repurchase program.

We have been active in our stock repurchases, particularly in the past several weeks. From October 1 through October 28th, we repurchases 185,570 shares under 10B51 plan at an average cost of $38.06 per share. We’re also pleased to announce that the board of directors declared a fourth quarter cash dividend of 10 cents per common share, be able December 31st to shareholders on record as of December 12th.

And I will turn the mike over to Frank Freund.

Frank Freund

Great, thanks Kevin. As Kevin highlighted, AP Capital had a very strong third quarter, generating net income of $11.2 million or $1.13 cents per diluted share. This brings our year-to-date net income to $33.6 million or $3.37 per share. This represents an annualized return on beginning equity of 17%. In addition, our book value per share is up 7.4% this year at $27.94 per outstanding share.

The highlight of the third quarter was the performance of our investment portfolio during this period of financial turmoil. We incurred no write-downs due to impairments on any of our securities. In fact, the market value of our available for sale investments decreased by only $1.5 million net of tax or .6% of the beginning market value of this quarter. And while it doesn’t impact our financial statements or held the maturity portfolio also performed very well, decreasing only $3.1 million net of tax or again, .6% of its beginning market value.

These market value declines were caused by interest rate fluctuations and not any credit quality concerns. Our investment portfolio is focused on high-quality, fixed-income securities and cash-equivalence. We hold only one equity holding and that is a strategic investment in another insurance entity and their market value was stable in the quarter. Our fixed income securities consist of 215.3 million or 25% of our portfolio and government sponsored agency debt and mortgage backed securities.

All of these Securities now have the explicit guarantee of the Federal Government. The mortgage backed securities were all purchased in early 2005 or prior, when Freddie Mac and Fannie Mae still had stricter mortgage underwriting standards.

We also have 380.6 million or 45% of our portfolio in tax exempt securities. All of these securities have an underlying rating of A or better. Thus, we are not relying solely on the bond insurance when evaluating credit quality. Our focus here has been on essential purpose bonds, which have a stable tax source to support their repayment.

Our corporate bonds total 116.7 million or 14.8% of our portfolio. The only bank security is the $5 million bond issued by BNP Paribus, a French bank that is performed very well throughout the financial crisis and remains in solid financial condition.

We also own six domestic insurance company bonds including John Hancock, St, Paul, Brookshire Hathaway, State Auto, Reliastar, and Money Group. These securities total 31.8 million. We monitor the performance and financial condition of these companies carefully and they all appear to be in stable condition and are good credits at this time.

As Kevin highlighted, our investments are managed internally by our experienced staff at Alpha Advisors. Jim Lucey is here with us today to answer any specific investment questions. As a result of this internal management, we are able to monitor the status of our investments daily and take quick action when necessary. For example, earlier this year we sold HSBC and CIT Financial Bonds when we became concerned about their financial conditions. Likewise, we stopped buying AIG commercial paper in April of this year. We are able to monitor our cash and short-term investments and avoided any losses in the valuation of these securities. Continuing with our practice of full disclosure, we have provided our shareholders with a detailed listing of our investment holdings, as a supplement to our third quarter press release.

Focusing back on our insurance company operations, direct written premiums again declined this quarter, down 16.4% from third quarter of 2007 and 10.4% year-to-date. Policy holder retention remains strong at 88% and our insured position count is 9,180, down only 1.2% in 2008. However, we continue to see some rate pressure in the third quarter and adding new business at adequate rates can be challenging.

Investment income is also down. Down 1.9 million in the quarter and $5 million year-to-date. Decline in short-term rates and our greater allocation tax exempt securities caused these declines. Through September 30, 2008 our gross yield was 4.43%, down from the 5.15% at this time last year. However, our tax yield decreased only 27 basis points from 3.59 in 2007 to 3.32 so far in 2008.

Like Kevin highlighted, loss trends and reserve development remains very good. Reported claim counts remain at historically low levels, at 233 for the quarter. Our open claim count continues to decrease, down 11.5% in 2008 to 1,540 outstanding claims of September 30, 2008. Settlement payments have remained stable and as a result we again showed positive reserve to this development this quarter of 7.5 million for a total of 23 million year-to-date. Non the less, we remain cautious with our reserving practices. Our average case is up to $153,100 per claim, an increase of 5.7% this year. And our IBNR reserves are up $13 million in 2008.

Due to the decrease in current premium rates, we have been more cautious with our accident year loss ratio. For the 2008 accident year, we are recording 78.4% loss ratio compared to a 74.5 ratio in 2007.

Our underwriting expense ratio moved up slightly this quarter and is up from 21.1% through September 2007 to 21.4% so far this year. We do expect the expense ratio to continue to increase in the future. This is due in part to the declining premium volume, but it also from the implementation of our new information system which is in its final phases. As a result, in 2009 we will no longer be capitalizing any internal development costs and we will begin to amortize those costs already capitalized in connection with our system implementation. The ultimate amount of increase to underwriting ratio is subject to our future premium volume and any efficiencies gained with the new system. However, we do anticipate a 1.5 to 2 percentage point increase in the underwriting ratio for the intermediate term.

Interest expense is down $287,000 or 3.1 % this quarter. Lower short-term rates and a debt pay down of $5 million in late August resulted in this decline.

Our effective tax rate has decreased from 32.2% through September 30, 2007 to 28.7% this year, primarily due to greater allocation of tax exempt securities.

In capital and liquidity, a position of AP Capital remains very solid and shareholder value continues to be our focus. During the third quarter we repurchased 121,200 shares at a cost of 5.6 million. Year-to-date we have repurchased 545,600 shares at a total cost of 23.5 million. And as Kevin highlighted, subsequent to September 30, we have repurchased approximately 186,000 shares through October 28 at an average cost of $38.06 per share.

Our capital and surplus remains strong. GAAP equity is 268.1 million or $27.94 per share, an increase of 7.4% so far this year. Our statutory surplus is 213.2 million, which gives us a very comfortable 0.56 to 1 net written premium to surplus ratio.

We are in a good liquidity position with 118.6 million of cash and cash equivalents. We repaid 5 million of our trust preferred debt in the third quarter and we will continue to evaluate future debt payments as part of our overall capital strategy.

In conclusion, AP Capital has a very strong balance sheet with a stable investment portfolio, solid reserves, and more than adequate capital. We remain careful with our product pricing and underwriting, and we continue to focus on effective capital management as a means to increase shareholder value. And that concludes my comments on the third quarter.

Ann Storberg

Operator, can you please open it up for questions?

Question-and-Answer Session

Operator

Yes, maam. (Operator Instructions) And our first question today comes from David Lewis with Raymond James.

David Lewis – Raymond James

Thank you and good morning. Congratulations first of all on the stability of your investment portfolio and thank you again for all the detail there. First of all Kevin, can we talk a little bit about any changes you are seeing on the competitive landscape and also is Illinois continuing to be one of your more challenging markets? I’m a little surprised that after the first half strike premium declined a 6.3%. It fell off a little harder in the third quarter, so let’s talk about where some of those pressures are coming in, if we could please.

Kevin Clinton

Well, I think a lot of those are generated by rate changes. And keep in mind some of the rate changes that we may have taken a year ago, or nine months ago, are just getting instituted because you know, these are annual policies. So, as they renew over the next year, after we take the rate change, and we took a significant rate change in decrease in Illinois, about 14% decrease, I believe it was.

I don’t see the market changing significantly in Illinois. In fact, I think it’s contracting more than anything else. I’m trying to estimate where this market’s going to go, but I think, you know, with the reinsurers getting hit pretty hard, you know, on some windstorm caps, the stock market going down, the bond market having some issues with some people on specific bonds and the credit crunch, I think capital is getting depleted out of this industry right now, which is good for firming up the prices. I think I like our position that we came through because I think we have a lot of capital and we can take advantage of this when the market does change to grow and grow profitably.

David Lewis – Raymond James

Hey Kevin, when was that 14% decrease in Illinois? Wasn’t that the beginning of the year?

Kevin Clinton

I’m trying to remember. It was last year, but its still affecting the premiums. March of ’07, but I think we took another one. I can’t tell you exactly when it was.

David Lewis – Raymond James

Well lets, you know, if we’re right, the capital is starting to come out the industry. People are again looking at capital as more sacred today. You are very well positioned from a capital standpoint. What’s kind of your outlook in your major markets for pricing as we enter 2009?

Frank Freund

I would estimate, you know, depending on experience, you know, experience is going to drive what our pricing is going to. And we have had some very good experience, but I’ll tell you the truth, I don’t see a lot of changes in the pricing. We have had some competition, actually, on Ohio with some people taking some rate decreases, and that has been justified, I think, in most instances on the experience. It’s been very, very positive for not only us, but other carriers. So I see, if anything, I would look at Ohio for potential rate decrease next year in 2009 and this is just my initial guess, I can’t tell you until the numbers come out, but I think pretty flat on the rates.

David Lewis – Raymond James

So do you think others are going to maybe kind of move in that direction because we are seeing the claim counts and frequency in most markets start to stabilize, or bottom out. Obviously we knew it wasn’t going to continue to decline at the rates we’ve seen in the last four or five years. So you think that’s going to play into people’s thought process?

Frank Freund

Yes, that would be my guess. And I think right now, I think we’ve kind of weeded out the new entrance. They’re not going to get any money to start a new company, I don’t think, in this credit crunch. So I think we’re kind of stable in terms of the competitors we have. I think some of the competitors that were driving prices down a few years ago are probably suffering a little bit right now and so I see the major competitors who I think are rational competitors, making rational decisions. So I think this is probably going to be a better market in 2009 than it has been the last couple of years, let’s say.

David Lewis – Raymond James

That’s very helpful, I’ll requeue. Thank you.

Operator

Our next question today comes from Mike Rasher with Piper Jaffray.

Mike Rasher – Piper Jaffray

Thank you and congratulations on a great quarter, good and clean. Just wanted to gather more comments from you, Kevin, around your ’09 outlook. I think in the press release you were talking about ’09 exceeding the four and a quarter level of ’08. I wonder if you could expand on that. What are some of the things we should be looking for as we anticipate earning’s going through the year?

Kevin Clinton

We haven’t really, I’m not going to get too specific on it because we haven’t gotten too specific on it on the press release. But you can see that we have very, very strong reserves. In fact, this quarter, despite releasing, I think it was $8.4 million; ironically we’ve increased our IBNR. So although we had favorable development of $8.4 million, our total IBNR reserves are now $8.4 million higher than they were last quarter. Those two numbers are just a coincidence.

But I believe we have roughly about $1.25 in IBNR reserves for every dollar amount that we have in case, and I’m not exact on that figure, but I’m pretty close. If you compare that to what we had maybe in 2003 that was about $0.21 for every dollar we had in case reserves. And our case reserves now are stronger, so I would expect that we’d have some, if the trends continue, we’re going to have some favorable development. And our action year numbers are not bad. So we’ve been conservative, we’ve been putting up some higher loss ratios because we have taken some rate decreases, but there’s still some pretty good numbers coming out on the (inaudible 00:28:43) year numbers.

Mike Rasher – Piper Jaffray

And when you talk about trends continuing certainly I presume you’re talking about claim trends and, with that, any concerns out there on a state-by-state basis in terms of legislative changes maybe coming down the road or even the election, for all it may hold for you?

Kevin Clinton

I really don’t, it’s more on a state-by-state basis. Illinois I don’t expect the tort reform to last. It has been declared unconstitutional by one judge in Cook County, and we never anticipated it was going to last. I think it was set up for failure from the beginning, to tell you the truth. So we’re not pricing based upon that, we’re not reserving based upon that, and we’re not, I mean we’re taking things to court right now and we’re being pretty successful in court in Illinois.

So I think, really, it’s pretty much a status quo, despite the overturn by that one judge. They’re talking about some changes in New Mexico, which really won’t affect us. It will affect the doctor’s in the state if they do increase the cap that they have there, because the cap doesn’t affect us because our limits are below the cap, and then it goes into a state fund. So while it doesn’t affect us, it does affect some of the doctors there. But Michigan has been very steady, in fact we’ve had some good news in Ohio that they upheld a certain part of the tort reform there just recently. So I expect the markets to be, and the laws to be pretty stable, going forward.

Mike Rasher – Piper Jaffray

Okay, and just given your capital position and your outlook, do you continue to review or look at, explore, other opportunities, other lines of business?

Kevin Clinton

I think on the other lines of business, it would have to certainly be an acquisition and we’re certainly open to that. Are we actively going out looking for that? Not necessarily. If something pops on our radar screen we will certainly investigate it, though.

Mike Rasher – Piper Jaffray

Open minded to it, okay.

Kevin Clinton

Yes.

Mike Rasher – Piper Jaffray

Thank you.

Operator

We’ll go next to Michael Nannizzi at Oppenheimer.

Michael Nannizzi – Oppenheimer

Hi. Just a question actually. I wanted to ask you about the insured position count. Do you guys, can you tell us what sort of new physicians you’ve added or what kind of numbers of new physicians you’ve added in the quarter? That’s all I want to talk about, thanks.

Kevin Clinton – President and CEO

I apologize, I don’t have those figures in front of me. I wish I did. I could even go into specific accounts, I know we’ve written some accounts, but to tell you the truth I’m not even sure when they’re effective. So I’m not sure if they were effective in the third quarter or if they are going to be effective in the fourth quarter. I know we found coverage on some decent size accounts, but I don’t have those figures, and I can—

Michael Nannizzi – Oppenheimer

That’s okay, no, I guess maybe put it another way. The retention number, that’s based off of, that’s a year-over-year number, so it’s 87 over last years or is it 87 over the quarter?

Kevin Clinton

Last year’s, yes.

Michael Nannizzi – Oppenheimer

Okay, over last year, okay.

Kevin Clinton

It really is, I mean you can almost back into it by multiplying the retention and—

Michael Nannizzi – Oppenheimer

Yes, that’s what I figured, I just can get there. Okay, and just a balance question, the other numbers are AMPH, did you guys add to your holdings in the quarter?

Kevin Clinton

Yes, we did. When they went down; Frank, do you know how many shares of that we had?

Frank Freund

Yes, we actually–

Kevin Clinton

Probably about 50, no, 40-some thousand shares, I believe it was.

Frank Freund

Yes, we didn’t do anything in the quarter, but subsequently we bought a few shares. So quarter-over-quarter, Mike, the shares held remained the same.

Michael Nannizzi – Oppenheimer

Yes, got it, okay, the same. Okay, and you do your reserve study from, you do it twice a year, I think? You start it in the third quarter, is that right, the kind of the full-blown study?

Kevin Clinton

We do a reserve study every quarter internally.

Michael Nannizzi – Oppenheimer

Right, yes.

Kevin Clinton

And our actuary comes up with it, and I’m an actuary by trade, so we have a reserve committee meet of our actuary, myself, and Frank. We go over the numbers every quarter and then we have an outside, independent actuary review those, and I believe right now he’s doing a September 30th, and then he rolls that forward and looks at it again at the end of the year and gives us our reserve certification.

Michael Nannizzi – Oppenheimer

Got it, okay. And then, just one last question if I could and I’ll jump back into the queue. On reinsurance, are you guys starting to have those conversations now for January, and if you are, any thoughts about the loss corridor or do you think that that will kind of remain as it is for next year?

Kevin Clinton

I think our program is going to remain almost identical to what it was last year. We’ve already had discussions with our reinsurer’s and we’re just waiting basically for some pricing.

Michael Nannizzi – Oppenheimer

Got you, okay. Thank you very much.

Kevin Clinton

Okay, thanks.

Operator

(Operator instructions) And we’ll go next to Mark Aden with KeyBanc.

Mark Aden – KeyBanc Capital Markets

Hi, good morning, and congratulations on the quarter. The question I had had to do with the reserve releases in the quarter. Since the fourth quarter of ’07, it seems like the trend has been that they were decreasing quarter-to-quarter, but then in this quarter, obviously, they increased. I was just wondering is that a trend that we should expect that they’ll continue to increase, or is it going to go back to decreasing quarter-to-quarter?

Frank Freund

Yes, Mark, again as Kevin highlighted, we do a reserve study, an internal study every quarter and the amount of reserve releases really is subject to the trends and developments we see in that quarter. I guess I’d maybe go back to the second quarter of last year as an example. Remember we added like $12 million of prior development in that one quarter, which was unusually large, but there were a lot of claims that settled, and settled at very favorable terms. So I can’t tell you a trend. Every quarter we put forth our best estimate and it really depends on the subsequent activity.

Kevin Clinton

We looked at this quarter because of some of the claims we actually took to court and won, and other ones that were dismissed. We had some very, very good numbers and that’s why we added to IBNR. We just didn’t want to assume that all of those numbers were true, so we added $8.4 million. Had we not, our earning’s would have been about $5.5 million higher after that.

Mark Aden – KeyBanc Capital Markets

All right, thank you very much.

Kevin Clinton

You’re welcome.

Operator

Next we’ll go to Beth Malone with KeyBanc.

Beth Malone – KeyBanc Capital Markets

Good morning. Also congratulations.

Kevin Clinton

Thank you.

Beth Malone – KeyBanc Capital Markets

On the outlook for medical malpractice, can we assume that it's kind of a recession-proof business or is it possible in a recession that you will see lower sales or I mean, logically I would assume that it's recession-proof.

Frank Freund

I've given that some thought because some people have asked us that question, what's going to happen. I don't think, you know, you're still going to need the doctors. They're still going to have to buy our product. Certainly they're going to be looking for the best price that you get out there in tight money times.

We really rate - there's a few - procedures are down at hospital, particularly electric procedures, are down, and we rate very, very few accounts on a per-procedure basis. We do rate, for instance, OBs, on a per-delivery basis, but that pretty much isn't affected by this. So as I look at it, we actually may have some better experience because we're caring the same rates we're not, we're not decreasing it because of the economy.

And if there's less procedures out there there may be less claims. So I'm not exactly sure how that's going to wash, but we seem to be a little bit recession-proof in terms of the top line. I know people are going to be looking for money but there's been studies in this industry for quite a while and it doesn't seem to be - the claim count doesn't seem to be, you know, economically related, the number of claims coming in.

Beth Malone – KeyBanc Capital Markets

Okay. and then do you - would you change your - the way you do things or the way that you're underwriting were we to get a Democratic Congress and Senate and President in terms of you know, how you would price - would there be an immediate effect in terms of the possibility for more lawsuits and claims and some revisions of some of these reforms that have taken place?

Frank Freund

No, I don't believe so. In fact, most of our products are priced on a claims-made basis, so if there is any changes to the law we can react quickly and change our pricing. But I don't think we're going to change our underwriting standards based upon who takes the White House.

Beth Malone – KeyBanc Capital Markets

Okay. All right. And on the acquisition front, do you think because of the investment experience in the industry in general, you think there's more vulnerable small companies out there in the Med Mal market or are they still so overcapitalized it may not be an issue?

Frank Freund

No, we've been actually looking because I think it depends on the company. Some companies have come through very clean and I think other ones have been hurt and may have some difficulty down the road. So I think as you said, I think there may be some opportunities down the road on those, particularly with some of the smaller companies.

Beth Malone – KeyBanc Capital Markets

And how do you find these? Do you have an active effort or is it more just the relationships?

Frank Freund

A little bit of both. I mean, you'd have to kind of - we have a lot of statistics that we can take a look at their balance sheets and we can look at their particular investments, at least it may be a little bit dated but not too dated. So we do have access to that information to look and see is there some opportunities there. And a lot of it is, as you said, relationship-oriented.

Beth Malone – KeyBanc Capital Markets

Okay. All right, well thank you.

Frank Freund

Okay, thanks.

Operator

And we'll go next to Mike Rasher with Piper Jaffrey.

Mike Rasher – Piper Jaffrey

Just a quick numbers question. Frank, what was interest expenses in the quarter?

Frank Freund

I'm sorry, what was the interest expense in the quarter?

Mike Rasher – Piper Jaffrey

Yeah.

Frank Freund

Let's see, make sure I get the right -- 509,000.

Mike Rasher – Piper Jaffrey

Okay, thank you.

Operator

And we'll go next to David Lewis of Raymond James.

David Lewis – Raymond James

Thanks, just a couple of follow-ups. First, regarding Beth's question about recession proof. You might look at it the other way, Kevin, OB procedures, nine or 12 months down the road actually may pick up following a recessionary environment, if history plays out the same.

On the expense ratio side, refresh my memory why the third quarter always seems to be the lowest and then the fourth quarter tends to be the highest? Is that some accruals that kind of, you know, get shored up in the fourth quarter because you've been beating numbers the last couple of years? Is that one way to look at it?

Frank Freund

Never. Well, part of it is we touched on about it earlier, like the external reserve study work tends to be commentated in the fourth quarter. More of your 404 and audit work actually occurs in the fourth quarter so it tends to pick up and then I'm not sure there's any specific reason for the third quarter being down other than, I know sometimes like you know, August tends to be a slow month for business. I don't know if that's what's driving it but as far as fourth quarter picking up, it's just more - there's more of these services are kind of concentrated towards year-end.

David Lewis – Raymond James

Right. And if we look at adding maybe a point and a half to 2 points to the expense ratio in '09 should that begin in the first quarter?

Frank Freund

You know, again it depends a little bit on again as we go through these final phases with the system. But yeah, we're going to be as I mentioned amortizing what we've capitalized and no longer capitalize anything so I could see it moving up pretty quickly.

David Lewis – Raymond James

Okay. And Kevin, just any thoughts on kind of the open plain counts flattening out? I know that's a difficult prediction. We've had fabulous results over the last couple years and my guess is that probably starts to level out here before long. Any thoughts on that?

Kevin Clinton

Yeah, to tell you the truth I thought it was going to level off before now. And I'm very pleased it's gone down to just 1,500 and some claims. So you know, it's a combination of a few things but primarily it's the result of the lower reported claim counts. We continue to settle claims by getting in few and fewer so our inventory's going down.

So it's nice from our standpoint we have a lot more IBNR than we had in the past, and it's necessary to cover fewer and fewer claims.

David Lewis – Raymond James

That's helpful. And Jim for you would you give us any thoughts on your expectations, tax exempts? I know it's a 45 percent currently. I think it's been fairly steady over the past year. Is that kind of a good area where you want to keep it or are you going to take advantage of some opportunities out there?

Jim Lucey

Well, we did spend about a 100 million earlier this year primarily in March a little bit in June in tax exempts. Going into the year we really didn't think we'd be buying anything with the low rate, but then some of the hedge funds who do arbitrage you and we both had to dump a lot of the higher-quality ones, really, those were the best ones for them to sell.

So we took very good advantage of that in March and for now we're also looking at good relationships to treasuries and that would be something that we're considering.

David Lewis – Raymond James

Okay. and with that assumption, Frank, do you think that the tax rate probably holds in something similar to what we see here in the third quarter, so maybe somewhere in the mid-28% range?

Frank Freund

Well, it could, I could see it moving down a little bit, mainly because of what Jim's already done this year. We didn't get the full affect of it 2008. When was it, March?

Kevin Clinton

Primarily in March -

Frank Freund

So you know, that first quarter really didn't benefit that much so when I look at the annualized effective tax rate I can - it could scoot down a little bit more.

David Lewis – Raymond James

That’s very helpful; thank you.

Frank Freund

You're welcome.

Operator

We'll go next to Michael Nannizzi with Oppenheimer.

Michael Nannizzi – Oppenheimer

Hi. Actually that was my exact question. Thanks again for having the call.

Frank Freund

You're welcome.

Kevin Clinton

Thank you.

Operator

And with that we have no further questions in queue.

Kevin Clinton

Thank you very much everyone and we'll see you again next quarter.

Operator

That does conclude today's conference, ladies and gentlemen. We thank you for your participation and you may disconnect at any time.

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Source: American Physicians Capital Q3 2008 Earnings Call Transcript
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