American Physicians Upgraded

We are upgrading our recommendation to Outperform from Neutral on American Physicians (AMPH), as we believe the company is set to benefit from its expansionary initiatives and excellent policyholder retention as well as aggressive share buyback program.

The company is now focused on expanding its business in the Arkansas and Oklahoma markets. During the second quarter the company produced new business of approximately $0.7 million, with $0.07 million coming from Oklahoma and Arkansas.

American Physicians continues to achieve excellent policyholder retention, exemplified by a retention rate of over 90% in 2009, which continued through the second quarter at 92%.

American Physicians remains committed to returning value to shareholders via share buybacks. During the quarter, the board authorized an additional $5 million in stock repurchase, with the total authorization amounting to $5.5 million. The company’s original share repurchase program worth $2 million was announced on August 17, 2004, and has been increased six times since then. More share repurchases are expected in the second half of 2010.

The company also has a record of paying dividends regularly. In June, the board of directors authorized an annual dividend of 30 cents per share, marking the company’s seventh consecutive dividend payment.

American Physicians reported solid second-quarter 2010 operating earnings of 88 cents per share, beating the Zacks Consensus Estimate of 68 cents. A decline in total expenses, strong policyholder retention and a decrease in pending claims aided the out-performance. However, a decline in revenue growth and net premiums earned were partial offsets.

The Zacks Consensus Estimate for third-quarter 2010 is 69 cents per share. For full years 2010 and 2011, the Zacks Consensus Estimates are, respectively, $2.92 and $2.83.

American Physicians remains focused on improving profitability going forward. The strategic initiatives undertaken by the company will auger well. As a part of this broader endeavor, American Physicians has also decided to hive off its weak Financial Services segment. The segment incurred losses during the first half of the year due to spiked up expenses primarily related to ongoing legal and regulatory disputes. The company’s other alternative to revive the segment would have required more capital than it could generate.

Units of American Physician’s Financial Services segment, APS Financial and its parent, APS Investment Services Inc., entered into an agreement with an unaffiliated broker-dealer. The dealer agreed to stand in for certain contractual obligations and absorb most of APS Financial’s employees. The company will thus not have to incur any severance cost due to the wind-up.

We expect underwriting discipline and strong capital position to provide some relief in a soft pricing environment and in the face of tough competition. The quantitative Zacks #3 Rank (short-term Hold rating) indicates no clear directional movement of the shares over the near term.

AMER PHYSICIANS (AMPH): Free Stock Analysis Report

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