Nov 4, 2008
Operator
Good morning and welcome to the Third Quarter 2008 American Physicians Service Group Earnings Conference Call. My name is Andrew and I’ll be your coordinator today.
This call is being webcast in listen-only format through APSG’s corporate website at www.amph.com, and you can listen to a replay of this call which will also be available through their website. There will be an opportunity to ask questions at the end of today’s presentation.
(Operator Instructions). I’d like to remind you that during this call, members of APSG’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 different materially. For example, statements regarding potential development and the industries in which the company operates its ability to expand in existing markets and enter into new markets or growth, requisition and to achieve positive operating results are all forward-looking statements.
For a detailed discussion of the risks and uncertainties that could cause the company’s actual results to differ materially from those described in the forward-looking statements, please refer to the company’s filings with the Securities and Exchanges Commission. Now, I’ll turn the call over to Ken Shifrin, APSG’s Chairman and CEO.
Kenneth S. Shifrin
Thank you and welcome everyone. Also joining me today are Tim LaFrey, our President and Chief Operating Officer.
Marc Zimmermann, our Chief Financial Officer and George Conwill, President of our Financial Services Segment. The third quarter of 2008 was another very strong quarter for our insurance service business, as we continue to experience strong retention and favorable claims development.
Activity in our financial services segment remains well below the 2007 levels to general market instability. However, our cost cutting measures in this segment have helped us to significantly reduce the net loss for the third quarter compared to the second quarter.
Overall, our earnings per share for the quarter was up 36% over the corresponding period last year and we again exceeded our analyst earnings per share estimate. Our balance sheet remains very strong and in light of this our Board has authorized an additional $4 million for repurchases of our shares.
With our shares trading near book value in this market and given our solid fundamentals, we believe our shares are in excellent bargain. Accordingly, we will continue to utilize our repurchase plan to deploy capital for the benefit of our shareholders.
I’ll now turn to the Marc Zimmermann, our CFO to highlight our operating performance.
Marc Zimmermann
Thank you, Ken. Revenues for the quarter were $19.9 compared to $22.9 in the same period last year.
For the nine months ended September 30, 2008, revenues were $57.3 million compared to $61.6 million in the same period last year. Net earnings for the quarter were $7.2 million or $0.99 per diluted share compared to $5.3 or $0.73 per diluted share in the same period last year.
For the nine months ended September 30, 2008, net earnings were $16.7 million or $2.29 per diluted share compared to $17.3 million or $3.37 per diluted share in the same period last year. Reporting our earnings and earnings per share there are two points that I’d like to mention.
First, as a reminder included in the net income for the nine months period last year was the extraordinary gain of approximately $2.3 million or $0.44 per diluted share due to the acquisition of our insurance subsidiary. Second, the full impact of approximately $4.3million additional shares issued in 2007 in connection with the acquisition and secondary offerings are now fully reflected in the 2008 earnings per share calculation.
Where as the full impact was not yet reflected in the 2007 calculation. In regards to our insurance services segment, we continue to stabilize prices in the Texas market with an average rate decrease of 3.7% during the quarter as compared to 7% in the second quarter.
Net earned premium decreased by $1.9 million to $15.7 million from $17.6 million for the quarter ended September 30, 2008, as compared to the same period in 2007. However, we believe these rate decreases are appropriate given the continuing improvement in our claims environment.
It is noteworthy that we continue to achieve excellent policy holder retention of approximately 90% and we grew our policy holders to 5,218 at the end of the quarter an increase of 4% since the end of the second quarter and 6% since the first three years of these competitive market conditions. We also continue our expansion in Oklahoma in the Arkansas markets.
In 2008, we’ve written approximately $1.2 million in new business premiums in Oklahoma and Arkansas up from approximately $750,000 at the end of the second quarter resulting in 118 new policy holders for the company. While the pace in new business in these markets has picked up somewhat in the third quarter, we continue to adhere to strong underwriting and pricing discipline and will avoid market share -- avoid buying market share.
Claims frequency continues to trend very favorably. Our claim closures also continued to outpace the number of new claims resulting in a significant decrease in pending claims.
Our total number of pending claims at September 30, 2008 was 681 down from 746 claims this time last year or a decrease of 9% and down from 740 claims at yearend or decrease of 8%. As a result of these favorable claim trends we experienced favorable development of approximately $9.7 million during the quarter of which $7.7 million was in our routine layer and 2 million was in our reinsurance layer.
Even following these adjustments for favorable development, our average net reserve for ultimate claim remained strong at approximately 113,000 as of September 30, 2008 as compared to 110,000 at the year end 2007 and we still remain very considerably reserved at the upper end of the actuarial range in all period including the current accident year. With respect to the revenue declines for the current quarter, these primarily result from lower financial services revenue in 2008 coming off the record year for that segment in 2007.
The economic turmoil has continued to negatively impact the financial services business through the third quarter (inaudible) to cost reduction measures we’ve been taking throughout the year. Financial services revenues were $1.6 million for the quarter compared to $5.4 million in the same period last year.
Financial service expenses were $2.1 million compared to $4.9 million in third quarter of 2007. Most of the decrease in expenses is the result of lower broker commissions in the current year together with the cost reductions I just mentioned.
On a net basis this segment had an after tax loss of $294,000 during the quarter, which is still disappointing, but a significant improvement over the second quarter. Obviously, we will continue to explore ways to reduce costs and return this segment to profitability.
Investment income was $3.2 million for the third quarter versus $3.3 million in the third quarter of 2007. Tim LaFrey, our President and Chief Operating Officer will now conclude the comments before opening the call up for questions.
Timothy L. LaFrey
Thanks Marc. Given all that’s been happening in the economy we would like to assure you that we have managed to avoid exposure to the hardest hit types of the investments.
Our portfolio has no subprime or auction rate exposure nor have we experienced any defaults in our fixed income security. We also do not hold any direct interest in AIG, Lehman Brothers, Washington Mutual or Fannie Mae or Freddie Mac common or preferred stock.
Having said this, we continue to take a very conservative approach to accounting for our investments. We incurred a net capital loss of approximately $474,000 in the third quarter resulting from write downs on certain investments.
With respect to Alt-A securities some of which we’ve been writing down in previous quarters, we recorded an additional $894,000 write down on these securities in the third quarter. The portfolio contains seven Alt-A securities with the book value of approximately $4.2 million as of September 30.
This capital loss was offset by $558,000 capital gain on the sale of our shares and financial industries corporation. Turning back to the balance sheet, we continue to grow our cash and investments, which totaled approximately $229 million at the end of the quarter up from $223 million at year end 2007.
Our shareholders’ equity was approximately $133 million at the end of the quarter for book value per share of $18.69 compared to $16.18 at September 30, 2007, or a 16% growth over the last 12 months. Our stock has been trading near book value at recent prices making our shares an excellent bargain as Ken mentioned.
We are continuing to make purchases of our stock under our share repurchase program, we believe our share price is under valued. During the quarter we repurchased approximately 41,000 shares and we will continue to do so when we believe this use of capital is a benefit to our shareholders.
On the liability side, our reserves of approximately $93.4 million remain at the upper end of the actuarial range and we continue to improve our current accident year at the high end of the actuarial estimate. This reserving approach combined with our effective underwriting and claims management produces a likelihood of continued favorable development.
However, it is currently our intention to continue to report favorable development only to the extent we can maintain our overall reserves at the upper end of the actuarial range. 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). Our first question comes from David Lewis of Raymond James.
Please go ahead.
David Lewis
Good morning and congratulations on another fine quarter. Couple of questions.
First, we talked a little bit about the competitive landscape in Texas, it appears you’re picking up some market share with 4% policyholder growth overall in the quarter, I know you got some benefits from Oklahoma and Arkansas but it appears the bulk of that came through Texas. And then, talk a little bit about the pricing outlook as we approach 2009, please?
Timothy L. LaFrey
Okay this is Tim. Let me talk about the competitive landscape first.
There’s three major players in our market and then there’s some private companies that we consider to be sort of the price options for potential policyholders. Our market share increases are coming from the two major competitors in our market where we think that we can sell our value proposition more effectively as opposed to taking market share away from the price sellers.
So, the overall of the landscape hasn’t changed, I think we’re doing a little bit better of blocking and tackling in terms of getting out in front of prospects and some of our targeted marketing. In terms of the pricing outlooks for 2009, we think the market will remain soft, we think we’ll still have pricing pressures in 2009.
We’re hoping that will continue to moderate but I would be -- I don’t think its fair to say that we expected to be substantially different in 2009 than it is in 2008, but I do think that we may be approaching sort of the end of the softest part of the cycle here in Texas at least.
Operator
Was there a follow up Mr. Lewis?
David Lewis
So, 2009 pricing probably down somewhere in what the 3% to 6% range?
Timothy L. LaFrey
Yeah, I would say 3% probably towards that bottom end of that range you just mentioned.
David Lewis
And on the financial service segment expense reductions, I know a lot of that occurred in the second quarter, so we’ve seen the majority of the benefits flow through in the third quarter as a further expense reduction benefits coming in the fourth quarter?
Timothy L. LaFrey
You saw most of it in the third quarter, there’ll be some continuing smoothing of that into the fourth quarter because some of the personnel related changes involve some restructuring costs and some severance costs and that sort of thing. But, I think you won’t see the flow impact David until the fourth quarter.
David Lewis
Right, I will re-queue with some additional questions. Thank you.
Timothy L. LaFrey
Thanks.
Operator
The next question comes from Mike Rasher of Piper Jaffray. Please go ahead.
Mike Rasher
Good morning gentlemen. Just a follow up on that with the volatility that we’ve seen in October, is that were to continue, do you feel like there’s an opportunity here to breakeven within the financial services by year end?
Timothy L. LaFrey
Well, our internal goal Mike has been to break even in the last half of the year, it now I think it’s, I can say unlikely that we are going to be able to accomplish that unless there is a pickup in activity. I think we’ve done most of what we can do on the cost side like I just said some of that still going evolve into the fourth quarter, we’re going to see some of the realization of that.
But, we really I think are going to be dependant on some revenue upticks to try and accomplish a breakeven and we have all been sitting around thinking that we were at the bottom of this trough and it just continues to get longer and longer. So, I’m not optimistic that we are going to see the sufficient uptick in revenue that we’re going to need to breakeven.
Mike Rasher
For the quarter or for the second half of the year?
Timothy L. LaFrey
For the second half of the year.
Mike Rasher
Okay. And then, I don’t know Ken or Tim you want to handle this But, just the business in Oklahoma, Arkansas 118 new policyholders in the quarter.
Can you talk about your acceptance in those markets, is this kind of where you thought you would be, you’re looking to penetrate that or thought you would have penetrated more by now or is this a fair?
Timothy L. LaFrey
Well let me split the space. We expected when we started this year that we would have quicker headcount growth in Oklahoma then we’ve had.
We saw a real pick-up in Oklahoma in the third quarter, but it has been slower than we thought. If we could replicate the rate of growth that we had in the third quarter going forward would be very pleased with our growth in Oklahoma.
Conversely, Arkansas has been quicker than we expected, we were already in Arkansas with some legacy business, it was easier or at least not, I don’t want to say easier but little more effective I think at reinvigorating our efforts and our presence there than we excepted and so we exceeded our internal estimates already for the year in Arkansas and are continuing to increase our marketing activities in that state. And let me just say that we are looking to add marketing reps localized in each of those states here in the fourth quarter and we think that will continue to help us grow our local presence in both states.
Mike Rasher
Okay. And then, just follow that up to the next, I guess, transition to your capital position, you seem to be in a very, very good capital position excess capital position Are there opportunities right now that you continue to look at exploring in terms of picking up additional share and maybe not just in State of Texas, but in Oklahoma, Arkansas as well?
Kenneth S. Shifrin
You mean in terms of acquisitions or you just talking about organic activities?
Mike Rasher
I’m talking about acquisitions and then I guess to that would you prefer the organic?
Kenneth S. Shifrin
Well, we would prefer the acquisition approach, if the right opportunity became available, there is nothing on the drawing board in those two states for us acquisition lines right now. So, our emphasis is on organic growth in both of those states.
Mike Rasher
Okay, thank you.
Operator
Your next question comes from [Dana Murphy of Physician Insurer Magazine]. Please go ahead.
Dana Murphy
Yes, good morning. I know you touched on things like restructuring and severance costs are declining.
But, can you point to any other ARIE has gone down some $7 million?
Timothy L. LaFrey
Yeah, you’re referring to reserve development?
Dana Murphy
Yeah.
Timothy L. LaFrey
A large percentage of the period-over-period as we had $3.2 million as favorable development in the third quarter of 2007 compared to $7.7 million of favorable development and that includes both favorable development in regards to indemnity, developing better than expected as well as legal expenses in regards to defending the cases, developing better than expected. So that’s working it’s way to the income statement in 2008, we continue to look at our G&A across the Board in addition to our financial services division.
And, in 2007 was our first year [indiscernible] and when our second year confines in consistent with most part of the companies second year cost generally decline. And so, those are the two things that I can point to.
Dana Murphy
Is the decline on legal cost just marked or you have some consistent strategy that’s been yielding these savings?
Timothy L. LaFrey
A lot of had to do just with lower frequency. We’re obviously moderating our cost associated with, we get charged by our outside counsel in regard to saying adapters [ph] but a lot of it just due to significant drop in frequency in comparison to [indiscernible].
Dana Murphy
Are you continuing to see increasing gains as we go out in time?
Timothy L. LaFrey
Well, it’s hard to predict what will happen in regards to development, obviously we’re conservatively reserved in all our report years for those claims that are open, how that will play out is difficult to predict.
Dana Murphy
No, but as you look at the lines at the last three or four years, you continue to see a trend downward?
Timothy L. LaFrey
Yeah, in regards to frequency, yes, we actually had a spike in 2006, naught to 500 claims and we anticipated that being more normal however, it gets back down to the low 400. And, in particular, what is unique about that is we have grown policyholder growth since the beginning 2004, 74%.
So, significant growth in policyholder but there hasn’t been a corresponding increase in the numbers of claims associated with that increase and headcount exposure.
Kenneth S. Shifrin
And, we continue to reserve that at very high level per claims, so we do expect development pick-ups over time.
Dana Murphy
And same trend for severity or different?
Kenneth S. Shifrin
Severity is down from the [indiscernible] driven out of the -- in regards to specifically we had a lower claim path but also we have also saw limit compression, limit profile in regards to policies that our doctors hold, move more from a million; three million, down to two hundred, six hundred thousand per claim, on a policy. So that’s had an impact in regards to the amount of the pain and indemnity.
Dana Murphy
Because it’s not worth to file a claim for many attorneys?
Timothy L. LaFrey
Presumably that’s the approach, it’s hard to say what drives the lower frequency and severity but I think the lack of economic incentive is certainly a big factor.
Kenneth S. Shifrin
Tort reform has obviously been a big winner for us, the doctors’ etcetera. But, on the other hand on a national basis claims frequency has been dropping these last couple of years.
Timothy L. LaFrey
And with the lower claim activity we have also reduced rates considerably over that period of time.
Dana Murphy
Thank you.
Timothy L. LaFrey
Thank you.
Operator
(Operator Instructions). The next question is from Mike Rasher of Piper Jaffray.
Please go ahead.
Mike Rasher
Thanks. Just wanted to come back to the physician that A-cap has established has there been any other, I guess, update that you can provide to us, I know by and large the conversations always continue in a quadrille [ph] manner.
But, just wanted to see if there is any update around that?
Kenneth S. Shifrin
Not really, they have not changed their position, we talk to them from time to time but outside of being where that they have a physician and once and while we might ask each other questions about the industry that’s been the only contact.
Mike Rasher
Thanks, Ken. And then I did want to repeat [ph] a bit here just in the quarter, I believe claims recorded were 114 versus the last quarter 92 and part of that 90, anything within those, I guess new claims that is unusual?
Kenneth S. Shifrin
No, nothing unusual Mike in regard to the reported claims for the quarter.
Mike Rasher
Okay, thank you very much.
Kenneth S. Shifrin
Thank you.
Operator
The next question comes from David Lewis of Raymond James. Please go ahead.
David Lewis
Thank you, given the election day do you see any potential problems with democratic house and senate that might be an impact or reform, I know there is some articles out recently that several provisions of the house bill for is being challenged potentially by the trail lawyers?
Kenneth S. Shifrin
Yeah, let me talk first about the election, full reform and tort laws generally are state laws and so the national elections most, it was going to have impact on state tort reform, it would have an impact via any cocktail impact that swept people into local offices or statewide offices. We don’t really see that happening in Texas.
So, from national perspective even though I think generally, anecdotally it is suppose to be better for trial lawyers if there is a democratic administration, it doesn’t really impact our business at a state level unless there is state law changes. With respect to house bill four, which you refer to, which is the Texas tort reform statute, the legislature, we are monitoring with our lobby as the activity and possible attacks that may be made against tort reform, right now, I would just point that the Texas Governor who is not up for reelection has indicated publicly he will veto any attacks on tort reform and has vetoed the attacks that were put forward in the last legislature.
So, we have that working on our side nevertheless, we know that there is going to be some activity to try and ether index the caps or exclude certain practices like emergency doctors from reforms generally. And, we will be monitoring those very closely but the session hasn’t really started yet, so those bill haven’t been filed yet.
David Lewis
Sure, its helpful and I know that MedPro indicated recently they were planning a 6.2% rate reduction as they approach 2009. Have they been a little behind the curve in kind of bringing rates because I know you are one of the earlier players to bring your rates down, is that really just put any more competitive position than they were historically?
Kenneth S. Shifrin
Yeah, our understanding is yes that they have been more disciplined in our market, they have been one of the disciplined pricing players in our market but I think that their advertising of the rig is the marketing effort on their part.
David Lewis
Very good, thank you.
Operator
Your next question comes from Ron Bobman of Capital Returns. Please go ahead.
Ron Bobman
Hi, good morning, congratulations on a nice job this quarter.
Kenneth S. Shifrin
Thanks.
Ron Bobman
I just had a couple of questions that you already covered. On the buyback, the press release mentioned and you mentioned as well I think the $4 million increment, sorry I missed it, how much remains on whatever was outstanding from prior authorizations?
Kenneth S. Shifrin
We had about $1.5 million left on the end of the quarter and we actually in October with the price dropping to below book value we are pretty aggressive. So, we spent that and have about a $1 million left now..
Ron Bobman
I’m sorry, you spent 500K on the million is that what you mean?
Kenneth S. Shifrin
No, we spent over a $1 million, almost a $1.5 million in October.
Ron Bobman
Okay.
Kenneth S. Shifrin
So, we have the $4 million that was recently approved last.
Ron Bobman
And then, the $4 million that was just authorized is that split between what I will call sort of the standard buyback program and then some portion of it is allocated to the 10B5?
Kenneth S. Shifrin
Its not, that cap applies to both activities and so if by virtue of either discretionary purchases or plan purchases we exceed that. We would need the Board to increase the buyback.
Ron Bobman
Okay, I think, I understand. And then, sort of related question with, I was just sort of languishing with the stock price whatever languishing under pressure whereas using in own words, I think an excellent bargain.
How do you change the relative amount of allocate to the buyback versus acquisitions opportunities, I guess, you’re having certain amount of excess capital or capital that you can allocate to buybacks and maybe separating apart to acquisition opportunities and obviously sort of a return hurdle associated with each. But with the stock languishing and the risk associated with each of those two sort of endeavors, do you shift your focus or your appeal would it in a sort of objective, qualitative manner from a little bit emphasis to one over the other, do you raise the bar for one over the other because of the stock languishing or you get my sort of thoughts any comment on that?
Kenneth S. Shifrin
Yeah, and I would say as you know we have been truly diligent in looking at potential acquisitions but have not made one and will not do one unless we think its just an acquisition that really, really makes sense for us at the right price. So, we always said we will do buybacks as long as we think the stock is attractive and using that capital doesn’t take away our ability to grow the company and we have enough excess capital that that’s been the case, I hate to use the word languishing but this current stock prices extremely attractive, trading around our book value and as you know most of our competitors that are public or trading, 1.3 to 1.5 times book value.
So, I think at this point in time we are able to be a lot more aggressive in the buyback and still be looking for acquisitions and I think we have enough excess capital that we can do both.
Ron Bobman
Okay, thank you and best of luck. Hope it continues.
Kenneth S. Shifrin
Thank you.
Operator
This does conclude today’s question and answer session. I would like to turn the conference back over to Ken Shifrin for any closing comments.
Kenneth S. Shifrin
Just wanted to thank everybody, it has been a great quarter and clearly in investments we have been able to do fine and avoid the decline that a lot of people have had and as we just had in the last question, we still think our stock is very, very attracted and in a very good environment so, thank you for joining us today.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.