American Physicians Service Group: Ready For Prime Time

| About: American Physicians (AMPH-OLD)

Put financial services and insurance together in a sentence and most people think of some of the nation's largest companies in the industry: Berkshire Hathaway Inc. (NYSE: BRKA), American International Group, Inc. (NYSE: AIG), MetLife Inc. (NYSE: MET), Allstate Corp. (NYSE: ALL) and The Hartford Financial Services Group, Inc. (NYSE: HIG). But one ever-growing small-cap is poised to make a name for itself.

Meet American Physicians Service Group, Inc. (Nasdaq: AMPH), an Austin, Texas-based $130 million company that not only provides brokerage and asset management services to individuals and institutions, but also provides insurance services including medical malpractice insurance. The insurance services segment provides financial management service to banks and insurance companies that provide liability insurance to doctors, while its financial services segment provides brokerage, asset management and investment advisory services to individuals and institutions.

Though the company has been around since 1974, American Physicians Service Group is not exactly a household name. But with a strong second quarter under its belt and glowing future prospects, that is bound to change. The company owes much of its recent success to smart management. The ambitious firm is expanding from its rather modest local roots thanks largely to a savvy acquisition. In April 2007, the company completed its acquisition of American Physicians Insurance Company [API], a firm whose operations it had managed since the mid-1970s.

In the quarter ended June 30, APS increased both revenue and earnings, reporting a net income of $12 million, or $2.37 a share, compared with $598,000, or $0.21 a share, in the same quarter last year. Revenues more than tripled to $29 million, compared with $8 million over the same period in 2006. In addition, the company posted a gain of $2.3 million related to the API merger. 2007 EPS projections of $3.38 are more than 300% higher than 2006 results.

"This is our first quarter to report combined results with API . . . and those results have exceeded our expectations. Due to continued positive claims trends, we lowered claims reserves and related reinsurance reserves by $14.1 million in aggregate this quarter. However, we remain very conservatively reserved at the upper end of the actuarial range," Chairman Ken Shifrin said in a statement. "In addition to favorable development in reserves, our policyholder count continues to increase. During the twelve months ended June 30, 2007, our total policyholder count increased by 462 to 4,802. This is largely due to our favorable 90% retention rate in 2007. Though the market continues to be characterized by rate pressure, our profit margin remains strong due to continued favorable trends in the frequency of claims.”

Shifrin also said that American Physicians financial services segment has performed very well, with revenues up 46% for the first six months of 2007, compared with the same period last year, and pretax profits up an impressive 68% in that same time frame.

Wall Street has taken notice. On July 6, Steven D. Schwartz, an analyst at Robert W Baird, initiated coverage of American Physicians with a "strong buy" rating and a target price of $22.50. Analyst John D. Gwynn at Morgan Keegan followed suit on July 18, with a new "outperform" rating. On Aug. 27,, a stock valuation and investment forecasting service, also upgraded the stock to a "5" rating, the service's highest—only 85 of the 5,000 companies they cover have achieved the rating.

After gobbling up API, American Physicians quickly set about extending the brand. The windfall profit from the acquisition, along with a June 20 secondary public offering of stock, is already allowing American Physicians to grow its insurance presence beyond the Lonestar State.

On Aug. 22, company executives announced expansion into Oklahoma's medical malpractice insurance market. The API subsidiary was granted a Certificate of Authority by the Oklahoma Insurance Department to write doctor's professional liability insurance (to protect against lawsuits alleging medical mistakes). With a new CFO scheduled to take the helm on Nov. 16, the company is gearing up to grab some market share from Physicians Liability Insurance Co. [PLICO], a homegrown insurer which controls 80% of the medical malpractice insurance market in the state.

President Tim LaFrey commented on the occasion:

Gaining access to the Oklahoma market is another step in our growth plan. Since our acquisition of API in April, we progressed in our strategic plan by raising approximately $36 million and contributing $10 million of additional surplus to API. That new surplus gives API additional underwriting capacity for initiatives such as this expansion and better positions us to receive a favorable financial strength designation from an insurance rating agency.

Senior VP Maury Magids added:

We are excited to be partnering with Oklahoma physicians. Having the ability to write business in Oklahoma allows our company to extend coverage to existing insureds that are now expanding into Oklahoma. But most importantly, it gives Oklahoma physicians a carrier to consider for their medical malpractice coverage that is supported by a high degree of service, value and integrity. Oklahoma physicians will now be able to experience the commitment API makes to building relationships and protecting its insureds.

On Wednesday, American Physicians’ shares closed at $18.35. The 52-week high is $20.00; the low is $14.37. Analysts who track the stock have a consensus one-year target estimate of $22.50.

Keep your eye on this rising star.

Disclosure: none

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