American Physicians Capital, Inc. Q1 2010 Earnings Call Transcript

Apr.30.10 | About: American Physicans (ACAP)

American Physicians Capital, Inc. (ACAP) Q1 2010 Earnings Call Transcript April 30, 2010 10:00 AM ET

Executives

Ann Storberg – VP, IR

Kevin Clinton – President and CEO

Frank Freund – EVP and CFO

Analysts

Amit Kumar – Macquarie Research

Mike Grasher – Piper Jaffray

Mark Hughes – SunTrust Robinson Humphrey

Mike Nannizzi – Oppenheimer

Jaafar Tinmann [ph] – Walthausen & Co.

Ron Bobman – Capital Returns

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2010 AP Capital, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Ms. Ann Storberg, Vice President of Investor Relations. Ms. Storberg, you may begin.

Ann Storberg

Thank you, Chuck; and good morning, everyone. Welcome to American Physicians Capital, Inc.'s First Quarter 2010 Earnings Conference Call. This call is being webcast live on our corporate web site at www.apcapital.com and a webcast replay of this call we be available later today on our web site.

Our first quarter earnings release is posted on our web site located in the For Investors section under Press Releases. Also for your convenience, a complete transcript of this call will be posted on our web site in the For Investors section under webcast as soon as it is made available.

During today's discussion, management may make certain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. When management discusses its plans or expectations, it uses words such as will, should, believe, expect, anticipate, estimates, or similar expressions, they are making forward-looking statements.

Management does not undertake any obligation to update these statements, except as required by law. While management believes any forward-looking statements made today are reasonable, they are subject to risks and uncertainties, which could cause their actual results to differ materially. For discussion of these risks and uncertainties, please refer to today's press release and the company's latest Securities and Exchange Commission periodic reports.

Participating in today's call is Kevin Clinton, our President and Chief Executive Officer; and Frank Freund, our Chief Financial Officer. The call will begin with Mr. Clinton's and Mr. Freund's prepared remarks, and then we are going open it up for questions.

At this time, I am going to turn the call over to Kevin.

Kevin Clinton

Thank you, Ann; and welcome everyone. We are pleased to announce AP Capital's first quarter 2010 results. Net income for the quarter was $9 million or $0.90 per diluted share, compared with $10.1 million or $0.85 cents per common share for the first quarter of 2009.

Book value per share increased 2.8% during the quarter to $24.39. The first quarter net income represents a return on GAAP equity of 15.1%, exceeding our goal of 11% to 13%. There were 296 claims reported in the first quarter of 2010, an increase from the 184 claims reported in the fourth quarter of 2009. We believe the reason for the first quarter – that the first quarter claims reports appear higher than usual is that the fourth quarter claims reports were much lower than average. When you average the two quarters, the first quarter of 2010 and the fourth quarter of 2009, it averages 240 claims, which is consistent with what we have seen in the previous three quarters.

One major cause of this was the processing of claims in New Mexico. Claims in New Mexico our first reported to the New Mexico Medical Review Commission. We receive notification of these claims from the Commission. We recently received word that there were some problems at the Commission in processing claims, which caused claims that would normally have been reported in the fourth quarter of 2009 to be reported in the first quarter of 2010. Our data indicates this to be true as there was just 31 claims reported in New Mexico in the fourth quarter of 2009, an extremely low number for the quarter, compared with 101 claims reported in the first quarter of 2010, a very high number for New Mexico.

As of March 31, 2010, there were 1,372 open claims. This is a 4% increase over the claims inventory of March 31, 2009. And looking at this trend over a longer period of time, there has been a 38% decrease in the number of open claims in the past three years. Our average net paid claim was $91,700 for the quarter, a 23% increase for the quarter ending March 31, 2009. During the same period of time, our average net case reserves rose from $179,000 to $184,400, a 3% increase in the average net case reserves.

I think it is a good time that the company, looking at year end data, and make some comments about the overall strength of our reserves. And one way of assessing the strength of reserves is to look back over a period of time and see how well the reserves have developed. And for professional liability, as of 12/31/06, we had $512 million in reserves. During the past three years, we have seen favorable development on these reserves in the amount of $106 million, and we still have $250 million in reserves remaining, may increase the amount of redundancy on those 2006 reserve levels.

We continue to take advantage of our share repurchase program. During the first quarter, we repurchased 386,000 shares at an average cost of $29.37 per share. This repurchase program had a positive accretive effect for our earnings per share. The cash we used to repurchase shares with excess capital would earn very little investment income in this lower interest rate environment; using the money to repurchase shares or reduce the number of outstanding shares and increase the earnings per share a return on equity to our shareholders.

When looking at our financial statements, it is interesting to examine the effect our share repurchases have had on net earned premiums on a per share basis. Although our net earned premiums for the professional liability are down 8.9% for the first quarter of 2010 compared to the first quarter of 2009, our net premiums earned for professional liability per diluted weighted share is up 8.8% during the same period.

We are pleased to announce the Board of Directors declared a first quarter cash dividend of $0.9 per common share payable June 30, 2010 to shareholders of record on June 15, 2010.

And I will turn it over to Frank for some financial information.

Frank Freund

Great. Thanks, Kevin; and good morning. AP Capital has started 2010 with a solid first quarter, generating net income of $9 million or $0.90 per share, which is an increase of $0.05 from the first quarter of 2009. This represents an annualized return on beginning equity of 15.1%. As Kevin highlighted, we remain active with our share repurchase program, purchasing 385,800 shares at an average cost of $29.37 per share in the quarter. This has reduced the number of our shares outstanding to 9.6 million. Our book value per share is up 2.8% in the quarter to $24.39 per share at March 31, 2010.

Our operating results for the first quarter continued some recent trends. Our direct written premium decreased $2.8 million or 9.4% from the first quarter of 2009. Premier rate decreases and competitive pressures were the cause for the drop in premiums. We renewed our reinsurance program at substantially the same terms as 2009, whereby we retain the first money dollar of loss, but have event or class coverage for multiple claims. The reinsurance premium rates were essentially the same as a year ago.

Investment income was down $1.8 million, primarily due to the very low short term interest rates. Our gross portfolio yield has declined from 3.98% in the first quarter of 2009 to 3.24% this quarter. Loss and loss adjustment expenses also remain on a similar trend. The accident year loss ratio increased from 81.3% in the first quarter of 2009 to 82.1% in 2010, reflecting the declining premium rates, claims severity and frequency, while no longer declining, remain at historically good levels. And prior year reserves continue to develop favorably with $8.1 million of positive development this quarter.

Underwriting expenses were down in total, but up slightly as a percentage of net earned premium. Small increases the commission rates and the lower premium level to cover fixed costs caused the increase in the underwriting ratio. Our effective tax rate has decreased to 27.7%, with our increased allocations to tax against securities, and our weighted average shares outstanding are down 16.3% from a year ago.

From a balance sheet perspective, AP Capital remains in very good condition. Our fixed income portfolio was strong, with no credit quality issues, and we remain flushable to take advantage of interest rate increases. Our loss and loss adjustment resolves remain strong, with our average case reserve, as Kevin highlighted, at $184,400, an increase of 3% from a year ago. Our equity is down slightly from the end of 2009, due to our share repurchases, but is up on a book value per share basis. Statutory surplus increased to just under $210 million and we currently ride a 0.51:1 net written premium to surplus ratio. And finally, we have approximately $20.3 million of cash available at our holding company at March 31, 2010.

And that concludes my remarks on the quarter.

Ann Storberg

Thanks, Frank. And Chuck, we are going to open the call up now for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Amit Kumar from Macquarie Research. Go ahead, your line is open.

Amit Kumar – Macquarie Research

Thanks, and congrats on the quarter. I guess just going back to the discussion on claims, you said, I think 101 claims were from New Mexico in Q1 2010, 31 claims were in Q4 2009. Can you sort of give the number for Q1 2009, what was the comparable number for New Mexico claims?

Kevin Clinton

You know what, I don't have that information in front of me. I am not sure there is a whole lot of meaning, to tell you the truth, because they do vary quite a bit from quarter to quarter. They don't vary this much. We actually found a reason for this one, and it was primarily in New Mexico, because unlike other states, we don't necessarily on the great majority of our plans, we don't get them directly from our policyholders. We get them first, because they have a medical screening panel there. It goes to the medical review panel, and that is how the claims deferred for them, and then the medical review panel sends them to us. So if there is any – I understand, I think there was an illness or something there, I am not sure exactly what happened, but there were some issues on processing the claims. We ended up getting more claims in the first quarter. You know, we probably should have been left in the fourth quarter of last year than we should have.

Amit Kumar – Macquarie Research

Okay. I guess what I was trying to ask is, if you ex out this disparity, how do the underlying claims look like? You know, is there anything else going on or you know, is this something we should have seen every quarter?

Kevin Clinton

You know, if you average those two out, you get 165 claims, roughly, and in New Mexico for those two quarters. That is a little bit higher than normal. We are generally averaging, you know, 25 to 30 claims.

Amit Kumar – Macquarie Research

Okay. So I guess we are finally seeing some sort of conclusive proof that we might be, you know, beyond the inflection point. Is that fair?

Kevin Clinton

No, I don't. I have to see more than one quarter to say that. Because I am, you know, as you look at New Mexico, it has been pretty slack for years. And I am not going to say it is because of one quarter, and you know, one quarter that went way down and one quarter that went way up that we are going to see a trend in that area.

Amit Kumar – Macquarie Research

Okay. Just maybe staying on the topic, on the last call, you talked about the old system and the new system and your claims being in the old system. I am talking about the Illinois tort reform issue that we talk about every quarter. Since then, what have you seen on a localized level in terms of claims?

Kevin Clinton

Illinois, I don't think that we see normal variations by quarter, but I haven't seen any big jump in the claims in Illinois. And I don't think we are going to we are going to get it, I really don't. The fact that they took away a cap, you know, it could affect the severity down the road, but I don't think it is going to affect frequency. Anybody who is going to have a claim that had a non-economic cap of $500,000, and you know, that is a big claim. That is going to be reported under the old system, it is going to be reported under the new system, whether that cap is there. Because if you have a, you know, wage loss and medical benefits, and then a $500,000 payment suffering, that is going to get reported. I don't think eliminating the cap is going to cause us to get more claims.

Amit Kumar – Macquarie Research

Okay. That is helpful. Maybe just sort of moving on in terms of capital management, on the last call, you had talked about how you were sort of viewed and you know, what the thought process was behind buying back stock and adjusting for redundant reserves. Obviously, you know, your stock has had a great run since that discussion. How do you view buybacks from this point onwards going ahead?

Frank Freund

Well, I think we will continue to look at, you know, what we think the kind of intrinsic value is of the company. We will monitor the alternative uses that are available for the capital. Again, given the, you know, the market conditions being overly aggressive with growth and things like that, it is fraught with risks. So, I think we will just continue to look at it is as a viable option, and as long as it makes sense from a price perspective and there is no other compelling uses, certainly we will stay on the radar screen.

Kevin Clinton

I will just add. You know, we have enough capital and like Frank said, we are running at about 25:1. We have enough capital to do the buybacks and to take opportunities for growth in the marketplace when they present themselves.

Amit Kumar – Macquarie Research

And there are no other sort of tangible opportunities out there, in terms of M&A. Is that fair?

Kevin Clinton

Well, potentially.

Frank Freund

Well, potentially. Potentially. But, you know, we have our stock, we have a lot of cash. You know, obviously we are not going to go out and buy (inaudible) halfway or anything like that, but we do look for opportunities if they present themselves well.

Amit Kumar – Macquarie Research

That is helpful. Maybe just quickly on investment income, I guess cash effect may be aids you to 20%. How do you view that going forward? You know, obviously, it is a function of your income and your buyback, but are the allocations going to change going forward, or you know, is this where you want it to be?

Frank Freund

No, this is certainly a bit higher. I mean, it has moved down. Our cash was 21.5% of the portfolio at the December, and we are down to – as you said, about 18%, a little less than 18% right now. And we did find a few tax exempt bonds that we could buy during the quarter. It is just kind of slow and deliberate right now, finding good alternative bonds to buy, and obviously, we are just trying to be careful, because, you know, we, like everyone else, view interest rates moving up at some point in the future, and so we want to be careful not to lock into anything too long term at this juncture.

Amit Kumar – Macquarie Research

Okay. That is helpful. And then a final question, and I will re-queue after that. Can you just update us on your ownership of KFS and AMPH, where does that stand?

Frank Freund

Sure. I can do that. Again, at the end of March, we own 785,000 shares of AMPH and we still own the 1.05 million shares of KFS.

Amit Kumar – Macquarie Research

And then, I am sorry, what was the number at Q4?

Frank Freund

At the end of 12/31/09, we had 690 shares of AMPH, and there has been no change in Kingsway.

Amit Kumar – Macquarie Research

And then what is your view on the KFS ownership going forward?

Frank Freund

What was my read on it?

Amit Kumar – Macquarie Research

No, no. What is your thought process on that ownership of 1.5 million? Is that sort of a long-term view or, you know, has your view changed in the past few months based on what the stock has done?

Frank Freund

Well, I think, you know, our origin of position of viewing it as kind of an investment opportunity, you know, just given the track record of the management and things like that, they now still make sense. They seem to continue to be doing the right things and streamlining the company, and so, again, our expectation is, you know, the market price will eventually get back more to a book value.

Kevin Clinton

Well, I think that the actions they have taken, it put a lot less risk in that stock, let us say. They got rid of a lot of their problem operations, and actually, the stock has gone up since year end. I think we wrote it down to $1.35 and I am not exactly sure, but it is in the $2.20 range I think right now.

Amit Kumar – Macquarie Research

And then, what was your entry point on that stock?

Frank Freund

Well, our entry point was a little north of $4, but as of 12/31/09, you know, we – last year, we wrote it down, and basically, our basis now is about $1.37.

Amit Kumar – Macquarie Research

$1.37. Okay, that is very helpful. Thanks for the detailed answers.

Frank Freund

You are welcome.

Operator

Thank you. Our next question comes from Mike Grasher of Piper Jaffray.

Mike Grasher – Piper Jaffray

Good morning, everybody. Couple of questions here. I guess, first one, Kevin, I wanted to go back to your opening remarks. I think you highlighted the professional liability reserves. Could you basically reiterate that or restate that in terms of what your comment was there? I kind of missed it.

Kevin Clinton

Yes, if you – what we did at the company, if you want to find out how strong your reserves are, we went back to 2006, and said, we are just going to look at professional liability reserves and what did we establish? We established $512 million. In the runoff in the past three years, I didn't include the first quarter. I just went through year-end. We were down to $250 million. We had paid – I forget exactly, $130 million something, but we wrote down, you know, we took favorable development of $106 million on those reserves. So basically, half the reserves had been, you know, taken off the books. We went from $512 million in reserves down to $250 million. And on that, we have recorded a favorable development of $106 million. Now, how much in total is going to end on top of those remaining $250 million runoff? Obviously, if they do it at the same pace that they did at the first, we would have $200 million. If it was zero, we would have $106 million, and if it was half the pace, we would have $150 million in redundant reserves at a time.

Frank Freund

Yes, we didn’t add new reserves to it. And let me try to compare, you know, after that, you know, how strong are our reserves now compared to what they were as of 12/31/06, and as we look at it, we have slightly less dollars, about $30 million less in reserves, but we had a lot less claims of higher case reserves. We feel we are in a strong reserve position.

Mike Grasher – Piper Jaffray

Understood. And then just curious, the timeframe that you selected, you know, year-end 2006 up to or through year-end 2009, any particular reason for picking that date?

Kevin Clinton

No, not in particular. I think if you look at the 2005 results, you would see about the same number.

Mike Grasher – Piper Jaffray

Okay. I didn't know if you were –

Kevin Clinton

You know, once you start getting into more recent reserves, you haven't given them a chance to develop, you haven't given them the time to develop. So we try to pick a year that has, you know, developed fairly, you know, at least halfway through, and that is why we picked 2006.

Mike Grasher – Piper Jaffray

And that is kind of where I was headed is sort of your tail that you are looking at here. Are you kind of expecting a four-year type of tail risk?

Kevin Clinton

Yes, that will run off for years and years and years. It won't be just four years. Probably the claims made what the occurrence are going to last for quite some time.

Mike Grasher – Piper Jaffray

Understood. Okay. And then, Frank, the investment yield in the quarter, obviously lower; we were anticipating it to be lower. But I thought that the sequential change was maybe a bit more than what I had sort of forecasted or modeled and I am just curious what exactly led to that. It looks like the cash, cash equivalent number sequentially was actually less. And at least it ended up being less at quarter end. Just a little bit more, I guess, detail there?

Frank Freund

Sure. I think what you have going on is, you know, you continue to have the bonds that we did have that were, you know, generating some reasonable returns, maturing or being called. The other thing, if you recall, we took part of the portfolio as of 12/31 and moved it into a couple of hedge funds. So again, that was our – those aren't generating book income or interest, you know, you mean they are carried at that cost. So that is going to dilute the percentage a bit too. In fact, one of the things we are kind of looking at going forward is maybe tweaking the calculation of the statistics and just focusing on, you know, fixed income and cash and kind of getting the other investments out of the calculation. But I think those are the two primary drivers.

Mike Grasher – Piper Jaffray

Okay. So those investments would be over in other invested assets?

Frank Freund

Yes.

Mike Grasher – Piper Jaffray

Okay. In that category, okay.

Frank Freund

Yes.

Mike Grasher – Piper Jaffray

Tax rate falling to 27.5%, down considerably. Do we expect it to sort of flatten in here at 27%, 27.5%?

Frank Freund

Yes, more or less. Again it depends, quite honestly, just in the buying opportunities. Again, most of the opportunities have been in tax exempts, and you know, we haven't, you know, reached an AMT issue yet, and so to the extent that is where the opportunities lie, I can see the tax exempt interest income increasing. So I wouldn’t want to say it couldn’t go lower, but certainly, you know, we would like to generate more gross yield if we could.

Mike Grasher – Piper Jaffray

Okay. It would be hard to move the needle from here I would say.

Frank Freund

Yes.

Mike Grasher – Piper Jaffray

Kevin, just the final question would be just around the competitive marketplace. Obviously premiums lower overall, certainly higher on a per-share basis, but do you see the stress at any of your competitors? I know it is a highly fragmented industry, but on the states that you compete in, what is it like?

Kevin Clinton

We have seen some stress in other companies. In fact, in Illinois, we have had looks at business, not only the great business that you give the looks at, but we have had looks at business, we have written some business on some stressed Illinois companies. They don’t tend to be the real, you know, big, solid ones that you have heard of, but they are typically the small ones, but it is the small one that can really disrupt marketplaces. They come in with a limited amount of capital cut rates in half, some of them are having financial problems right now. And we are trying to take advantage of it, as well as our creditors are trying to take advantage of it. But we have written some business on that. I don't see any new entrants in the marketplaces that I think – I haven't seen that in probably a bit of time.

So our competitors are what they are and I think they are solid competitors. Sometimes, we view the markets a little bit differently, but it is getting increasingly, you know, difficult to write new business. I think our retentions are real good, we are hanging on to our business, but we think it is a very, very good book of business. The difficulty is writing new business. What we are trying to do on that is several things. We are trying to leverage our endorsements with the medical society that we have to write new business, come up with additional notional campaigns on that. And we are trying to use our predictive modeling results and come up and try to segment the market. In other words, you know, look at things the different way.

Are there certain segments of the market, smaller segments, instead of just the typical specialty territory limits, you know, way of diversifying doctors and say, is there another way we can look at this, and be aggressive on the rates, but still maintain profit margins?

Mike Grasher – Piper Jaffray

And then on the retention, the 88% retention, what was the premium rate on the renewals did you say?

Kevin Clinton

I don’t think we disclosed that and I am not sure I have that information in front of me right now.

Mike Grasher – Piper Jaffray

Okay. Directionally up or down?

Kevin Clinton

I would say on average it was probably down, because as you see our premium, but I don't think it is significantly down. I think we are probably having to throw, you know, two or three more points, you know, to save accounts, good accounts that are deserving of a better rate. And then I think that comes from competitive pressures.

Mike Grasher – Piper Jaffray

Okay. Thanks for addressing my questions.

Operator

And our next question comes from Mr. Mark Hughes of SunTrust.

Mark Hughes – SunTrust Robinson Humphrey

Thank you very much. Good morning. The increase in severity that you have seen, I guess, progressively over the last few quarters, I know you have talked about the fact that you have been reserving – assuming that the claims that are left in your book are probably more valid claims and so therefore you might see higher costs associated with those, can you say to what extent that phenomenon is behind the increase? Or is there possibly some underlying increase in severity?

Kevin Clinton

Well, I think you are going to see, you know, if you were to ask any company right now what are claim costs going to be five or 10 years from now, everybody will probably tell you they are going to be higher. So I think you have an embedded increase in the claims severity. Not as large as you might see in our numbers, and I think what you are seeing in our numbers is, you know, and you are going to see in everybody's numbers, if you compare it to what it was five years ago, you are going to see higher claims severity. That is because I think you are getting rid of a lot of the non-meritorious claims that just aren't being filed anymore. So you are not averaging these zeros into the calculation anymore. I don't think claims severity, you know, if we are using trends, depending on state, it can be anywhere between 3% and 6% embedded in our rates. But I expect that number to continue to go up. I mean, our average case reserve is now $184,000. We are only paying out $91,000. Actually, what is coming out is lower than what we are expecting and lower than what we are booking, and that is why you are seeing, you know, favorable development on that. But we do expect that number to go up.

Mark Hughes – SunTrust Robinson Humphrey

Thank you.

Operator

And our next question comes from Mike Nannizzi of Oppenheimer.

Mike Nannizzi – Oppenheimer

Thank you. I was scratching my head here to ask a question that hasn't been asked a couple of times at least already. But I just had a question, if I could, about numbers. Paid losses in the quarter?

Frank Freund

I am trying to get that for you. Just go ahead and ask another one, and I will track that down for you.

Mike Nannizzi – Oppenheimer

Okay. Any comps development in the quarter?

Frank Freund

Nothing significant.

Mike Nannizzi – Oppenheimer

Okay. Just kind of a higher-level question I guess, so you talked about the reserves, I mean, you are adding municipal debt in the quarter, which will probably result in pushing out that AMT boundary, I would assume. I mean, is that kind of – is that a gesture we should think about? I mean, you are adding to the muni bond portfolio that if you are shrinking in future years, that means that the reserve development becomes an increasingly large percentage of your income; and so you will want to shelter more of that or think about protecting more of that with municipal bonds. Is that kind of how we should think about the investment portfolio decision?

Frank Freund

No, I am not sure we are that sophisticated. No, we really – when we are looking at bonds, and again, you know, we manage them internally, and we have got two great bond guys in Chicago in, you know, Jim Lucie and Scott Ralls, and Jim has been in the business forever. I mean, his specialty are U.S. securities, investment-grade corporates, and tax exempts and you know, government agency CMOs, and he looks at all of those and really focuses on you know, what is going to be the best investment given the current conditions, and you know, he looks at the after-tax yield obviously, and then, you know, we monitor our overall AMT position, but you know, if he had some great corporate, you know, taxable corporates to buy, he would be buying those. So it is really more of a function of the marketplace.

And so, the net paid losses for the quarter were $18.7 million.

Mike Nannizzi – Oppenheimer

Great. Thank you. Just one last one, Kevin, on the topic of health reform, I mean, this was a very frequent topic for a long time that kind of has fallen by the wayside. But can you just talk a little bit about your expectation or how you are thinking about the impact of a larger insured population in your footprint at some point or just kind of how you are handicapping that potential change? Thank you very much.

Kevin Clinton

You know, I think we are going to have to – you know, see how this unfolds, but I guess maybe my initial concerns are, you know, what effect it is going to have on doctors? I mean, that is our insured base, and when I look at it, I think you are going to see a squeeze on the doctors' income. It may not come initially, but it is going to come at some point. And I think that is going to cause doctors to shop more, and it may cause them to go into hospital systems to become employed physicians, which may dry up the insured base. So I think we, as an industry, have to plan for that and adjust our business accordingly.

Mike Nannizzi – Oppenheimer

I mean, if doctors are seeing more patients, like if all of a sudden they are seeing more patients, is that something that you can look at in terms of a change in exposure and potentially resulting in a change in rate, or would it just be when you have practices that are employing more doctors that would result in a different rate?

Kevin Clinton

Yes, when we look at our predictive modeling, if there was no doubt that doctors to see more patients have higher claim frequencies. There is no doubt, they just don't spend the time necessary, they don't communicate well with their patients, which generally blossoms in of themselves. For that is certainly something that we have to keep our eye on. I think if they want to see more patients on their mill, it is going to be difficult.

Mike Nannizzi – Oppenheimer

And can you price based on that change and just the dynamic of seeing patients? Or from your standpoint, do you need to wait until that is reflected in loss trends?

Kevin Clinton

No, I think you can press forward.

Mike Nannizzi – Oppenheimer

Okay, great. Thank you very much.

Kevin Clinton

Thank you.

Operator

And our next question comes from Jaafar Tinmann [ph] from Walthausen & Co. Go ahead.

Jaafar Tinmann – Walthausen & Co.

Most of my questions have been answered. On the paid loss trends, I know we have a cap based on our reinsurance, but with those trends that we are seeing, is that driven, I guess more on an average basis or is there some outliers in there that are kind of moving that average to this higher level of growth?

Kevin Clinton

Yes, I think you bring up a very good point. And it is not necessarily the outliers. We will get a lot of claims that settle for $1 million. Now, if you go back several years, we would have only had a retention of $500,000 per claim. We have upped that to $1 million per claim. So we are getting the premium on that, however, and where we used to see that premium off the reinsurers and the reason we changed was, we had very good experience, the reinsurers were demanding a 20% return on equity to insure our exposure, and we thought, well, why don't we take the 20% return on equity and insure ourselves, since we have more capital than we need. So, we made the change, but that will result in, you know, what may appear as higher claimed severity, which really isn't, because you know, it was kept at $500,000 before and now it is $1 million. But we get that over narrowly. I don't think there is anything necessarily embedded in our numbers except, you know, we get one large claim, which is affecting this bill.

Jaafar Tinmann – Walthausen & Co.

All right. And then on a forward basis, do we feel like we are still going to see an upward trajectory with that paid claim costs or do we believe that will level out to some extent?

Kevin Clinton

I think embedded in our numbers and embedded in our reserving, we anticipate that to go up in the future. So I wouldn't be surprised if you see that number continue to go up, and that is what we are planning for. It is going up at a amount a great lower than what we are reserving. We go over what really we are anticipating, so if it is producing, you know, favorable reserve trends for us.

Jaafar Tinmann – Walthausen & Co.

All right, thank you.

Operator

One moment for our next question. And our next question comes from Ron Bobman of Capital Returns.

Ron Bobman – Capital Returns

Congrats again. I just had a quick question, on your increase in the American Physician Service position, did you in 2009 or do you now in 2010 have any sort of Form-A requirement?

Kevin Clinton

Yes. We actually file with the Texas department. We waive control, which basically said we are not controlling any company, we don’t have any forward seats, we are not trying to control the company. We think they were doing a very good job. So, we do have some Form-A requirements on that.

Ron Bobman – Capital Returns

When did that occur?

Kevin Clinton

I am trying to remember. Third quarter of last year or fourth quarter of last year.

Ron Bobman – Capital Returns

Later on, okay. Thanks. Best of luck, hope it continues.

Kevin Clinton

Okay, thank you.

Operator

One moment for our next question. And our next question comes from Amit Kumar of Macquarie.

Amit Kumar – Macquarie Research

I guess I couldn't get off. Maybe just going back to the discussion on the environment, I know that Kevin Dyke I think had gone to the Crittenden Conference. And I don't know if he is on the call, but I was just looking for some comments on what the industry as a whole is thinking about the future and what is the sentiment right now?

Kevin Clinton

You know, I mean, I guess I can only speak to our company. I can't speak for the industry as a whole. You know, I think it will vary, and I went to a conference and answered certain questions about you know, where do you see the markets going and how long will the market be soft and I think there were generalities that they think that we are going to continue in a soft market for a while, but you know, the answers are up and down depending on who you are talking to, and what markets they are in.

Amit Kumar – Macquarie Research

And then did you see more – sort of more companies, not you specifically, but other companies, talking about M&A, or was it still the same old story that results are so good, let us see how long this continues and then we will sort of revisit consolidation?

Kevin Clinton

Well, I can only speak for our company. I don't think there was any specific questions on that, on M&A that I recall. But you know what, I have seen maybe some more troubled companies, you know, coming on the market. It – yes, I think you are going to see that. Companies that don't reserve well, have not run their practices well have cut rates in the past. It is going to catch up with them. And at some point, you know, a lot of the – I think they are entrepreneurial companies, I think it was in their intention to sell after a few years. I think you are going to see those come on the marketplace. Whether there is a big market for those companies, particularly if they have financial trouble, I don't know if there is going to be a big market, but it may result in additional premiums being available to the market.

Amit Kumar – Macquarie Research

Okay, that is helpful. Maybe just one quick follow-up on the buyback. What was the number for Q2 to date?

Frank Freund

The second quarter to date?

Amit Kumar – Macquarie Research

Yes.

Frank Freund

I don't have that right in front of me.

Kevin Clinton

We haven't disclosed that yet.

Frank Freund

We only disclose things at quarter end or –

Amit Kumar – Macquarie Research

But have you been in the market?

Kevin Clinton

Well, again, I don't think we have disclosed any of that. So I think we have this – you know we have a 10-B51 plan in there. So if it does have a formula that drives purchases, and as long as our stock price has met those, because if it varies how much we buy based on our stock price. So the lower the stock price, the more we buy and the higher the stock price, the less we buy. But we haven't disclosed what that formula is and it is a formula driven 10-B51 plan.

Amit Kumar – Macquarie Research

Okay, that is helpful. That is all for now. Thanks so much.

Kevin Clinton

Thanks.

Operator

At this time, I am showing no further questions. I would like to turn the call over to Mr. Kevin Clinton for closing remarks.

Kevin Clinton

I just want to say thank you to everybody for joining us today and have a great day, thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a great day.

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