American Physicians Service Group Inc. Q2 2010 Earnings Call Transcript

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 |  About: American Physicians Service Group (AMPH-OLD)
by: SA Transcripts

American Physicians Service Group Inc. (AMPH-OLD) 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

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.

Tim LaFrey, our President, will now conclude our comments before opening up the call for questions.

Tim LaFrey

Thanks, Marc. We continue to grow our cash and investments which totaled approximately $264 million at the end of the quarter, up 2% from $259 million at the end of the first quarter. Our share holders’ equity totaled approximately totaled approximately $167 million at June 30 for a book value per share of $24.47, compared to $23.89 at the end of the first quarter, a growth of 2.5%. Our book value per share has grown over 17% since the end of the second quarter last year. Our trailing 12 months return on equity was 15.4% as of June 30.

We continue to be opportunistic in our approach to share repurchases, and during the quarter we purchased approximately 79,000 shares in average price of $23.32 per share, significantly below their book value. As of last Friday, July 30, we had approximately $5.5 million remaining for share repurchases. On the liability side, our reserves are approximately $88 million, remain at the upper end of the estimated range of loss exposure, and we continue to accrue our current acts in a year at the high end of the loss estimate.

During the quarter, we increased our accident and year loss ratio to approximately 83% to reflect additional policy holders added over the last year, even though claim counts remain at historically low level and severity patterns remain stable.

In conclusion, we are pleased to be able to report another successful quarter, and we believe we remained very well positioned for future success. With that I would like to thank everyone for taking the time to listen in today and we will now turn the call back over to the operator to take questions.

Operator: (Operator Instructions)

Before we take questions, the company’s Management would like to make a few comments today. Please, go ahead, gentlemen.

Tim LaFrey

Good morning, everybody. This is Tim LaFrey. Since we did the pre-recorded portion of our call late last week, we have had a development that we’d like to make you aware of and this is going to be in the 10-Q that we’re filing today. It’s a relevant disclosure but not necessarily a technically material one so I think it’s appropriate for us to go ahead and talk about it on the call. And that is that we entered into an agreement to begin the process of winding down our Financial Services segment. And this initial agreement was one under which we have agreed to allow an unaffiliated broker-dealer to recruit our personnel and our customers and assume certain ongoing operating expenses and obligations in exchange for some contingent payments based on future performance. This will effectively exit us from the broker-dealer business and we hope to continue during the third quarter, in short (ph) completely discontinue our Financial Services segment. So I just wanted to put that on the table before we return the call over for questions. So Andrea, you can take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Hare (ph) of Raymond James, please go ahead.

Brian Hare (ph) – Raymond James

Can you talk a little bit about the competitive landscape and taxes you seem to be picking up some market share with 8% policy holder growth in the quarter, and can you also talk a little bit about your outlook for pricing in the second half of the year?

Tim LaFrey

This is Tim LaFrey. The competitive landscape has changed a little bit since the acquisition of Advocate (ph) that we are seeing more disciplined pricing from that particular carrier, there doesn’t seem to be any changes from other major competitors in the market being Medical Protective and TMLT that TMA trusts. So that’s something we’ve been looking forward to that we think, that generally, Texas started because the total reform – - some of the premium pricing pressure earlier than others, and I think, we’re starting to see the tail-end of that. When I get into the second part of your question, last year I think we ended the year with what? 6%, Marc, 4% –

Marc Zimmermann

4% rate (ph) in 2009.

Tim LaFrey

And we’ve been moderating that down closer to 2% to 3% this year, all of that on negotiated renewals. So we’re continuing to take a disciplined approach to pricing and we think that we’re seeing that and you’re coming out of the competitors as well as prices have come down some 30% to 40% since 2004. So that’s helped us, and I think we’re still seeing some tailwinds from getting our best rating in terms of why we’re able to pick up market share, that and also our expansion into Oklahoma, where we’ve got some groups that we’re growing in Oklahoma and we already have some established distribution partners there. So that’s helping us with that headcount growth.

Brian Hare (ph) – Raymond James

Last question on the Financial Services segment, beginning in the third quarter that’s going to be discontinued operation, is that correct?

Marc Zimmermann

This is Marc Zimmermann. We’re in the process of winding down at operation and that’s the point in which we’ve completely wind down, that will be recorded as a discontinued operation, and we anticipate that happening in the third quarter.

Operator

Our next question is from Michael Grasher of Piper Jaffray, please go ahead.

Mike Grasher – Piper Jaffray

Just a follow up on that, I know you said it’s not immaterial amount but can you give us any sort of expectation on not just the amount but the timing of the payment or the duration?

Ken Shifrin

Well, there is a couple of issues. First, we are under a confidentiality agreement, the other party is a private part. So we are not a publicly held company. So we don’t want to go into details of it. The payments that we – the revenue that we might receive from this are all contingent and so I would not expect any significant revenue here in this year because of the way the measurement periods work out.

Mike Grasher – Piper Jaffray

Okay. And then that’s fine I appreciate that. And then second, this accident your loss ratio moved dramatically higher here in the quarter. Is it just your conservative nature? Or is there actually something that you’re seeing on the horizon? I mean, everything looks to be in order, just curious as to why the uptick, such a strong uptick here.

Marc Zimmermann

Hi, Mike. This is Marc. In regards to the accident – the uptick in the second quarter, we did see an increase before new claims in the quarter, 107 claims compared to 84. Keep in mind that 107 claims is not anything out of the ordinary relative to reported claims since the passage of total reform but the second quarter reflects obviously that increase quarter-over-quarter. And also it reflects, as we mentioned in our prepared remarks, an increase in headcount of around 8% year-over-year. We also shifted our re-insurance structures beginning in ‘09 but also in 2010 from our historical net retention of 250,000. So it’s also reflective of that. And lastly, we just want to take, we obviously want to take a conservative view as we enter new markets, and shift from our course state taxes. We want to make sure we exit the year, it reflects that. I think on the year-to-date basis we’re at about 75% to 76%, and so we feel comfortable with that.

Mike Grasher – Piper Jaffray

And it looks like that. And then, I guess, just a follow-up on that. Sort of expectations for the second half of the year, it sounds like you’ve built a lot into it with this 82% number. Is it a new run rate? Or can we expect to see more normal 72 type of number?

Ken Shifrin

Buying and any significant changes in frequency and I could – the other thing we continue to see is paid severity as well as the number of paid claims that we actually anticipated in regards to those that would be paid with indemninate (ph) lower than what we expected. I think, as we look into the rest of the year, somewhere in that range is I see is conceivable.

Mike Grasher – Piper Jaffray

Okay, that’s helpful. Thank you very much.

Operator

Our next question is from Ron Bobman of Capital Return. Please go ahead.

Ron Bobman – Capital Return

Hi. Good morning. I didn’t realize you can pre-record the prepared remarks, Tim. You should drop your Milli Vanilli strategy.

Tim LaFrey

Yes, well. That helps us to say the numbers correctly.

Ron Bobman – Capital Return

Hopefully it’s not a reflection of the Texas-educational system.

Tim LaFrey

No.

Ron Bobman – Capital Return

One of my questions were asked and answered. But it obviously is seeing a broker-dealer business would be shutdown but I think you’ve given it a fair run. Are you expecting any operating cost one time? Or should have any increase in cost associated with that wind down in your third quarter that we should consider prepared ourselves for? Or is this second quarter a decent indicator for the third quarter? Are you sure of direction there would be appreciated?

Marc Zimmermann

Hi, Ron. This is Marc. When we look at the third quarter and the wind down in that business, we don’t anticipate any material severance cost due to the transition of those employees to the new broker dealer, and then to the extent possible we plan on transitioning contract cost to that unaffiliated broker dealer in the third quarter as well. So we don’t anticipate any material change or impact on their overall financial results of the holding company or the insurance company as a result of the wind down.

Ron Bobman – Capital Return

And could you give us a little bit more metrics on the Oklahoma production and your progress there?

Marc Zimmermann

Yes, we’ve written year-to-date in 2010, we’ve written about 1.2 million in Oklahoma. And that compares to about 1.2 million in the same period year-to-date in ‘09. We got a slight drop in our Arkansas new business. We had 400,000 for the first six months in 2009, compared to about 100,000.

Ron Bobman – Capital Return

I’m sorry, I dropped the phone. 300k, could you repeat those numbers? I just didn’t hear them.

Marc Zimmermann

Sure. In Oklahoma in 2009 for the first six months, we…

Ron Bobman – Capital Return

That I got. I got Oklahoma, Arkansas its target. I’m sorry.

Marc Zimmermann

We wrote 400,000 in 2009 for the first six months and about 100,000 approximately for the first six months in 2010.

Okay. Anything though you can consider immaterial since the numbers are also low? Or…

Marc Zimmermann

We’ve been opportunistic in Oklahoma. We’ve been able to get some good looks. We’ve got some good relationships with our agent force there. Arkansas we’ve got two very strong carriers in that state, INASIPIC (ph) and SCMIC (ph). So it’s reflective of our ability to move groups from that at the right adequate rate, and in groups that carry the expectancy of profit. We’ve had looks, we just couldn’t get comfortable with the pricing.

Ron Bobman – Capital Return

Okay. And has the behavioral – in Texas, has the behavioral change that you were hoping or thinking might happen by way of your competitor that was bought by Pacific (ph), maybe it was six months ago or nine months ago, has that changed and in effect improve insured classes? Anything that were there?

Marc Zimmermann

Not in classes, Ron. We still see from all our competitors. We’ll see pricing pressure directed at what looks like programs either directed to geographic, locales or specialties, and those come and go. So we see that from medical protective, we see that from TMLT and from Abequit (ph). So occasionally, these come. We don’t see across the board type sort of macro shifts in terms of all neurologists now are under attack, or all OB-GYNs are under attack from a pricing perspective. We don’t see that. We might see Houston OB-GYNs or Houston Orthopedists, somebody’s got a program working on those and we’ll see some competitive pricing for a period of six months and then it goes back to normal. So nothing that’s really trend worthy.

Ron Bobman – Capital Return

Okay. Thanks a lot and continue your good luck, guys.

Marc Zimmermann

Thanks.

Operator

Our next question is from Paul Newsome of Sandler O’Neill. Please go ahead.

Paul Newsome – Sandler O’Neill

Great. Just a couple of follow-up questions. With the run-off of the financial services business, who will end up running your investment portfolio?

Marc Zimmermann

Well, that’s the part of the business that we have, that we still have. The individuals there in the commission-based asset manager, I mean, the fee-based asset manager, which is where or business is, are still managing that business and it would be our anticipation that, regardless of what happens to that segment of our business, because there’s a few other customers in there, and we do want to exit that business as well but that our asset management would be conditioned on the individuals in that organization continuing personally to manage it. At least for some period of time, and then who knows we might go – we might put that business out for bid or something else.

Paul Newsome – Sandler O’Neill

But for the moment, those sources you are going to move over to the other…

Marc Zimmermann

We’re not entirely sure but they’re going to continue to manage our portfolio, our fixed income portfolio.

Paul Newsome – Sandler O’Neill

Okay. And just curious if that’s going to have any effect on the actual running of the portfolio?

Marc Zimmermann

No, it won’t

Paul Newsome – Sandler O’Neill

And does this transfer have any impact at all on the ongoing investigation?

Marc Zimmermann

Technically, it doesn’t. We’re – we think we’re close to a negotiated resolution of that general investigation. We had hoped to get it done in time to report it. So that gives you an idea how close we think we are, but they’re technically unrelated. We continue to believe they were going to favorably resolve that in the near term.

Paul Newsome – Sandler O’Neill

That’s helpful. I appreciate it.

Operator

Our next question is from Ray Irregela (ph) of Oppenheimer. Please go ahead.

Ray Irregela (ph) – Oppenheimer

Good morning, guys. Just a quick question on the stable development, can you give us a breakdown, I guess, of the different acts (ph) in use?

Marc Zimmermann

It’s predominantly coming from 2007 and even as always 2009. What we are seeing is the speed of closure both for the ‘08 and ‘09 year had significantly faster paces that our historical patterns which show and also what we anticipated. So really the breakdown of that development is coming from and quite frankly that’s where most of the open claims are, but we’re seeing those coming from ‘07, ‘08 and ‘09.

Ray Irregela (ph) – Oppenheimer

And that’s just from I guess claims closing for less than they were reserved for.

Ken Shifrin

Yes and you make a projection on severity on based on your increases and loss exposures and if that doesn’t play out as you anticipated that obviously would draw down both your IBNR and then also many cases were closing cases less than a case reserve.

Ray Irregela (ph) – Oppenheimer

Okay, great. And then I guess last question. Do you have the cash and investments of the holding company?

Ken Shifrin

Yes, I do we got approximately $44 million at the holding company, $33 million is in fixed income about $7 million in equities and about $4 million to $5 million in cash.

Operator

And then we have no further questions at this time. Do you have any closing remarks today?

Ken Shifrin

No, just we’d want to thank everybody for taking the time to call in and we look forward to future success.

Operator

Thank you. This concludes today’s conference. Thank you for joining. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!