American Physicians: Limited Room for Earnings Expansion

| About: American Physicians (AMPH-OLD)

We have downgraded our recommendation on American Physicians Service Group Inc. (AMPH-OLD) to Neutral.

The company reported fourth quarter operating earnings of 96 cents per share, significantly ahead of the Zacks Consensus Estimate of 73 cents. Results reflected a favorable claims environment, strong policyholder retention and better-than-expected figures from the Financial Service segment.

American Physicians continues to achieve excellent policyholder retention, approximately 90% in 2009, while the number of policyholders has increased around 19% year-over-year in 2009.

The company, which already maintains a 15% share of the $407 million Texas market, is now focused on expanding its business in the $84 million Arkansas market and the $130 million Oklahoma market. These strategic initiatives augur well for meaningful growth.

However, the soft pricing environment and the competitive conditions continue to pose a challenge for American Physicians. Though we expect the company’s underwriting discipline and capital position to provide some relief, there is limited room for any significant expansion in earnings in the foreseeable future.

The insurance unit continues to experience increased pricing competition from both new entrants and existing competitors in the Texas market. Though rate declines have moderated recently, we think that the increased competition will somehow restrict significant improvement in rates in the upcoming quarters.

Hence, we believe that the positive and the negative factors for the stock have balanced each other and there exists no significant catalyst for a substantial share price movement in either direction. As such, we have changed the recommendation to Neutral.