10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________

FORM 10-Q

þ	Quarterly Report Pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2009
	or
¨	Transition Report Pursuant to Sections 13 or 15(d) of the Securities and Exchange Act of 1934 For the transition period from __________ to __________
Commission File Number 001-31434

AMERICAN PHYSICIANS SERVICE GROUP, INC.

(Exact name of registrant as specified in its charter)
Texas	75-1458323
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer Identification No.)
1301 S. Capital of Texas Highway, Suite C-300, Austin, Texas  78746
(Address of principal executive offices)(Zip Code)
(512) 328-0888
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨	Accelerated filer þ
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Title of Each Class Common Stock, $.10 par value	Number of Shares Outstanding At April 30, 2009 6,904,247

AMERICAN PHYSICIANS SERVICE GROUP, INC.

Table of Contents to Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2009

		Page
	Part I Financial Information
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of March 31,2009 and December 31, 2008	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008	5
	Unaudited Condensed Consolidated Statement of Shareholders' Equity and Comprehensive Income for the Three Months Ended March 31, 2009	7
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008	8
	Notes to the Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	42
	Part II Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Submission of Matters to a Vote of Security Holders	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

2

PART 1

FINANCIAL INFORMATION

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands)	March 31,		December 31,
	2009		2008
Assets
Investments:
Fixed maturities available for sale, at fair value	$	190,630	$	198,011
Equity securities available for sale, at fair value		10,110		10,099
Other invested assets		1,478		1,599
Total investments		202,218		209,709
Cash and cash equivalents		38,423		22,060
Accrued investment income		1,333		1,489
Premium and maintenance fees receivable		17,285		17,186
Reinsurance recoverables on paid and unpaid loss adjustment expenses		12,739		13,796
Other amounts receivable under reinsurance contracts		-		1,497
Deferred policy acquisition costs		2,681		2,500
Subrogation recoverables		219		219
Federal income tax receivable		-		738
Deferred tax assets		9,037		9,488
Property and equipment, net		541		590
Intangible assets		2,254		2,264
Other assets		3,095		2,018
Total assets	$	289,825	$	283,554

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)	March 31,		December 31,
	2009		2008
Liabilities
Reserve for loss and loss adjustment expense	$	91,341	$	92,141
Unearned premiums and maintenance fees		38,196		36,785
Reinsurance premiums payable		26		61
Funds held under reinsurance treaties		5,112		3,978
Trade accounts payable		301		290
Accrued expenses and other liabilities		4,121		6,266
Federal income tax payable		2,125		-
Mandatorily redeemable preferred stock		6,464		7,568
Total liabilities		147,686		147,089
Commitments and contingencies
Shareholders' Equity
Preferred stock, $1.00 par value, 1,000,000  shares authorized, 7,050 and 8,074 issued and outstanding at March 31, 2009 and December 31, 2008, respectively
Common stock, $0.10 par value, 20,000,000 shares authorized,  6,971,124 and 7,014,386 issued and outstanding  at March 31, 2009 and December 31, 2008, respectively		697		701
Additional paid-in capital		75,104		75,367
Accumulated other comprehensive income (loss), net of taxes		2,189		368
Retained earnings		64,149		60,029
Total shareholders' equity		142,139		136,465
Total liabilities & shareholders' equity	$	289,825	$	283,554

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)	Three Months Ended March 31,
	2009		2008
REVENUES
Gross premiums and maintenance fees written	$	17,540	$	14,736
Premiums ceded		328		1,395
Change in unearned premiums & maintenance fees		(1,411)		1,223
Net premiums and maintenance fees earned		16,457		17,354
Investment income, net of investment expense		2,551		3,056
Realized capital loss, net		(1,282)		(2,595)
Financial services		1,448		1,800
Other revenue		57		17
Total revenues		19,231		19,632
EXPENSES
Losses and loss adjustment expenses		6,121		7,509
Other underwriting expenses		3,221		2,604
Change in deferred policy acquisition costs		(181)		93
Financial services expenses		1,628		2,570
General and administrative expenses		1,224		1,558
Total expenses		12,013		14,334
Income from operations		7,218		5,298
Income tax expense		2,488		1,918
Net income	$	4,730	$	3,380

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except share data)
	Three Months Ended March 31,
	2009		2008
Net income per common share
Basic:
Net Income	$	0.68	$	0.47
Diluted:
Net Income	$	0.67	$	0.46
Basic weighted average shares outstanding		6,994		7,188
Diluted weighted average shares outstanding		7,083		7,297

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

For the three months ended March 31, 2009 and 2008

(In thousands, except share amounts)
										Accumulated
				Additional						Other				Total
	Shares	Common		Paid-In		Retained		Comprehensive		Comprehensive		Treasury		Shareholders'
	Outstanding	Stock		Capital		Earnings		Income		Income		Stock		Equity
Balance December 31, 2008	7,014,386	$	701	$	75,367	$	60,029			$	368	$	-	$	136,465
Comprehensive income:
Net income	-		-		-		4,730		4,730		-		-		4,730
Other comprehensive income,  net of tax:
Unrealized gain on  securities, (net of reclassification adjustment)	-		-		-		-		1,821		1,821		-		1,821
Comprehensive income:								$	6,551
Stock options expensed	-		-		161		-				-		-		161
Stock options exercised- exchanged	30,000		3		415		-				-		-		418
Tax benefit from exercise of stock options	-		-		5		-				-		-		5
Treasury stock purchases	-		-		-		-				-		(1,506)		(1,506)
Cancelled treasury stock – purchased	(55,082)		(5)		(648)		(435)				-		1,088		-
Cancelled treasury stock – exchanged	(20,480)		(2)		(241)		(175)				-		418		-
Deferred compensation granted	2,300		-		45		-				-		-		45
Balance March 31, 2009	6,971,124	$	697	$	75,104	$	64,149			$	2,189	$	-	$	142,139

										Accumulated
				Additional						Other				Total
	Shares	Common		Paid-In		Retained		Comprehensive		Comprehensive		Treasury		Shareholders'
	Outstanding	Stock		Capital		Earnings		Income		Income		Stock		Equity
Balance December 31, 2007	7,213,626	$	721	$	79,752	$	42,962	$	-	$	545	$	-	$	123,980
Comprehensive income:
Net income	-		-		-		3,380		3,380		-		-		3,380
Other comprehensive income, net of tax:
Unrealized gain on securities, (net of reclassification adjustment)	-		-		-		-		214		214		-		214
Comprehensive income:								$	3,594
Stock options expensed	-		-		155		-				-		-		155
Stock options exercised- proceeds	9,000		1		83		-				-		-		84
Stock options exercised- exchanged	23,000		2		207		-				-		-		209
Tax benefit from exercise of stock options	-		-		103		-				-		-		103
Treasury stock purchases	-		-		-		-				-		(1,598)		(1,598)
Cancelled treasury stock – purchased	(71,746)		(7)		(1,333)		-				-		1,340		-
Cancelled treasury stock – exchanged	(13,278)		(1)		(257)		-				-		258		-
Common stock awarded	16,500		2		300		-				-		-		302
Balance March 31, 2008	7,177,102	$	718	$	79,010	$	46,342			$	759	$	-	$	126,829

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

AMERICAN PHYSICIANS SERVICE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)	Three Months Ended March 31,
	2009		2008
Cash flows from operating activities:
Net Income	$	4,730	$	3,380
Adjustments to reconcile net income to cash provided by operating activities:
Amortization and accretion of investments		28		(321)
Depreciation and amortization		196		181
Realized losses on investments		1,282		2,595
Change in deferred acquisition costs		(181)		92
Common stock awarded		45		302
Stock options expensed		161		155
Deferred income tax benefit		(525)		(1,331)
Other non-cash items		68		97
Changes in operating assets and liabilities, net of business acquisition:
Restricted cash		-		(136)
Premium receivables, net		(99)		1,540
Other amounts receivable under reinsurance contracts		1,459		4,428
Reinsurance recoverables on unpaid and paid loss expenses		1,033		2,022
Funds held under reinsurance treaties		1,134		660
Reserve for losses and loss adjustment expenses		(800)		370
Unearned premiums and maintenance fees		1,411		(1,257)
Other receivables and assets		(916)		837
Federal income tax payable		2,863		5,089
Accrued expenses & other liabilities		(2,168)		(4,195)
Net cash provided by operating activities		9,721		14,508
Cash flows provided by (used in) investing activities:
Capital expenditures		(81)		(403)
Proceeds from the sale of available-for-sale equity and fixed income securities		33,306		12,805
Purchase of available-for-sale equity and fixed income securities		(24,430)		(15,136)
Funds loaned to others		-		(423)
Collection of notes receivable and other		125		485
Net cash provided by (used in)  investing activities		8,920		(2,672)
Cash flows used in financing activities:
Exercise of stock options		-		84
Excess tax benefits from stock-based compensation		5		103
Repurchases of common stock		(1,088)		(1,340)
Preferred stock redemption		(1,195)		-
Net cash used in financing activities		(2,278)		(1,153)
Net change in cash and cash equivalents		16,363		10,683
Cash and cash equivalents at beginning of period		22,060		18,391
Cash and cash equivalents at end of period	$	38,423	$	29,074

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

AMERICAN PHYSICIANS SERVICE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)

1.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated unaudited financial statements as of and for the three month periods ended March 31, 2009 and 2008 reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. These consolidated financial statements have not been audited by our independent registered public accounting firm. The operating results for the interim periods are no t necessarily indicative of results for the full fiscal year.

The notes to consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC should be read in conjunction with this Quarterly Report on Form 10-Q.

2.

Management’s Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

On an on-going basis, we evaluate our estimates, including our most significant estimates related to: reserve for losses and loss adjustment expenses; death, disability and retirement reserves; reinsurance premiums recoverable/payable; premiums ceded; deferred policy acquisition costs; impairment of assets including the fair value of investments; bad debts; income taxes; and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Although considerable judgment is inherent in these estimates, management believes that the current estimates are reasonable in all material respects. The estimates are reviewed regularly and adjusted, as necessary. Adjustments related to changes in estimates are reflected in the Company’s results of operations, or other comprehensive income, in the period in which those estimates are changed.

3.  

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (SFAS) 157, Fair Value Measurements. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities.  Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts its business. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.  

9

Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for our financial assets and financial liabilities, but did not adopt SFAS 157 as it related to nonfinancial assets and liabilities based on the February 2008 issuance of  FASB Staff Position 157-2, Effective Date of FASB Statement No. 157, which permits a one-year deferral of the application of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.  The adoption of SFAS 157 as it pertains to financial assets and liabilities did not have a material impact on our results of operations, financial position or liquidity. Effective January 1, 2009, we adopted FAS 157 for non-financial assets and non-financial liabilities and it did have a material effec t on our results of operations, financial position or liquidity. For additional disclosures, see Note 13, Fair Value Disclosures.

In December 2007, the FASB issued Statement of Financial Accounting Standards, or SFAS No. 141 (Revised December 2007) “Business Combinations” (SFAS 141R). SFAS 141R replaces FASB Statement No. 141, “Business Combinations” but retains the fundamental requirement in SFAS 141 that the acquisition method (referred to as the purchase method in SFAS 141) of accounting be used for all business combinations. SFAS 141R provides new and additional guidance with respect to business combinations including: defining the acquirer in a transaction, the valuation of assets and liabilities when non-controlling interests exist, the treatment of contingent consideration, the treatment of costs incurred to effect the acquisition, the treatment of reorganization costs, and the valuation of assets and liabilities when the purchase price is below the net fair value of assets acquired. SFAS 141R applies prospectively to business combinations f or which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption was prohibited. We have adopted the Statement on its effective date, however, because there were no acquisitions during the current quarter, there was no impact on our financial position, results of operations or cash flows.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We are currently evaluating the impact of the pending adoption of FSP No. 142-3 on our consolidated financial statements.

In April 2009, the Financial Accounting Standards Board, or FASB, issued two FASB Staff Positions, or FSPs, to address concerns about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions and (2) recording impairment charges on investments in debt securities. The FASB also issued a third FSP to require disclosures of fair values of certain financial instruments in interim financial statements.

10

FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidance to highlight and expand on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset. This FSP also requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques).

FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, will change (1) the trigger for determining whether an other-than-temporary impairment exists and (2) the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will be required to assess the likelihood of selling a security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery or maturity. This FSP also expands and increases the frequency of existing disclosure about other-than-temporary impairments and requires new disclosures of the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period.

We currently are evaluating the provisions of these three FSPs which require adoption effective for the quarter ending June 30, 2009.

FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures from annual to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments. We do not anticipate these two pronouncements to have a material impact on our consolidated financial statements.

4.

Investments

Available-For-Sale Fixed Maturities. Of the total $190,630,000 portfolio balance in available-for-sale fixed income maturities at March 31, 2009, all but $2,135,000 are considered investment grade securities. The primary goal of our investment strategy for our Insurance Services segment is to ensure that we have sufficient assets to meet our obligations to our policyholders, and our secondary goal is to provide investment income. The investment plan for our Insurance Services segment provides guidance on diversification, duration of the portfolio, sector allocation and specific restrictions, such as the size of investment in any one issue and limitations on the purchases of securities rated lower than investment grade by Moody’s, Standard and Poor’s or a comparable rating institution.

Our Insurance Services segment employs an investment strategy that emphasizes asset quality to minimize the credit risk of our investment portfolio and also matches fixed-income maturities to anticipated claim payments and expenditures or other liabilities. The amounts and types of investments that may be made by our Insurance Services segment are regulated under the Texas Insurance Code. We utilize APS Asset Management, Inc., our asset management subsidiary, as our fixed-income advisor. We review our fixed-income advisor’s performance and compliance with our investment guidelines on a quarterly basis.

11

Our entire fixed-income portfolio consists of investment grade securities rated “BBB” or higher by Standard and Poor’s, Moody’s or Fitch rating agencies with the exception of four non-agency collateralized mortgage obligations with a combined fair market value of approximately $2,135,000. The following table reflects the composition of our fixed-income portfolio by security rating category of the issuer, as of March 31, 2009. In cases where the rating agencies had a different rating assigned to a security, the classification in the table is the lower rating.

	Fair Value
Rating Category	(in thousands)		Percentage
AAA / Aaa	$	159,025	83%
AA / Aa		15,883	9%
A / A		12,405	7%
BBB		1,182	0%
Non-investment grade		2,135	1%
Total	$	190,630	100%

Available-For-Sale Equity Securities.  Our equity portfolio consists of $10,110,000 in available-for-sale equity securities as of March 31, 2009. We account for equity securities as available for sale.  

The amortized cost and estimated fair values of investments in fixed income and equity securities at March 31, 2009 and December 31, 2008 are as follows (in thousands):

	Cost or		Gross		Gross		Estimated
March 31, 2009	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed Maturities:
U.S. treasury notes / bills	$	27,056	$	793	$	36	$	27,813
U.S. government agency mortgage-backed bonds		27,735		1,630		-		29,365
U.S. government agency collateralized mortgage obligations		47,599		2,066		-		49,665
Collateralized mortgage obligations		14,095		159		673		13,581
U.S. government agency bonds / notes		29,668		361		-		30,029
Government tax-exempt bonds		27,601		810		171		28,240
Corporate bonds		11,848		253		164		11,937
Total fixed maturities		185,602		6,072		1,044		190,630
Equity securities		11,772		64		1,726		10,110
Total fixed maturities and equity securities	$	197,374	$	6,136	$	2,770	$	200,740

	Cost or		Gross		Gross		Estimated
December 31, 2008	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Fixed Maturities:
U.S. treasury notes / bills	$	30,226	$	836	$	70	$	30,992
U.S. government agency mortgage-backed bonds		29,090		1,339		-		30,429
U.S. government agency collateralized mortgage obligations		51,831		1,660		9		53,482
Collateralized mortgage obligations		26,491		750		1,803		25,438
U.S. government agency bonds / notes		23,904		511		-		24,415
Government tax-exempt bonds		26,565		131		1,249		25,447
Corporate bonds		7,784		143		119		7,808
Total fixed maturities		195,891		5,370		3,250		198,011
Equity securities		11,652		159		1,712		10,099
Total fixed maturities and equity securities	$	207,543	$	5,529	$	4,962	$	208,110

12

Of our entire invested assets at March 31, 2009, including unrestricted cash,

·

33% is comprised of agency-backed mortgage obligations, with underlying collateral consisting of GNMA, FHLMC, or FNMA loans;

·

6% is comprised of non-agency collateralized mortgage obligations (“non-agency CMO”);

·

41% is comprised of U.S. Treasury, government agency bonds and notes, municipal tax exempt bonds and corporate bonds; and,

·

20% is comprised of cash, equities and other invested assets.

The majority of the non-agency CMO’s in our portfolio have underlying mortgages categorized as “Prime” quality loans, and none of our CMO’s have underlying mortgages classified as “Subprime.” Also, all CMO underlying mortgages have fixed rates. Within our portfolio at March 31, 2009, there were seven CMO securities classified as “Alternative-A” or “Alt-A”. These Alt-A securities are generally considered to have underlying mortgages with underwriting characteristics that are stronger than “Subprime” mortgages but less stringent than “Prime” mortgages. All but one of our Alt-A securities are investment grade, have underlying fixed rate mortgage collateral and as of March 31, 2009 are rated either AA or A. The Alt-A security that is non-investment grade has a book value at March 31, 2009 of $26,000.

Beginning with the three months ended September 30, 2007, we saw a significant and rapid decline in the market value of our Alt-A securities. We have considered the deepening national housing crisis and its potential effects on the underlying collateral in evaluating this decline, and concluded that the decreases in value of four of our Alt-A securities should be considered to be other than temporary for the three months ended March 31, 2009. The amount of the pretax charge to earnings associated with these adjustments for the three months ended March 31, 2009 and March 31, 2008 was $271,000 and $2,644,000, respectively. The aggregate write-down on the Alt-A securities beginning with the quarter ended September 30, 2007 through March 31, 2009 is $10,655,000 and the book value of all the Alt-A securities is $2,674,000 as of March 31, 2009. While we have the ability to hold all of our Alt-A securities indefinitely, we continue to closely monitor a nd evaluate these securities and their underlying collateral. We also began to observe an increase in the market-reported delinquency rates for not only our Alt-A CMO’s, but also our non-agency CMO’s backed by prime loans.  The delinquency data suggests that continuing home price declines and growth in unemployment are now affecting the behavior by a broader sector of mortgage borrowers, particularly those mortgages with vintage years subsequent to 2005. Rising unemployment, accelerating house price declines, tight credit conditions, volatility in interest rates and weakening consumer confidence not only contributed to rising delinquencies, but also significantly impacted our expectations regarding future performance, both of which are critical to assessing our other-than-temporary impairments.  As a result of these factors and a significant decline in market value and the down-rating by outside rating agencies to below investment grade, we recorded write-downs during the three months end ed March 31, 2009 on one non-agency CMO security in the amount of $284,000.

Due to the risk and uncertainty of the current economic crisis and the ultimate impact on the non-agency CMO market, we sold 18 non-agency CMOs with a book value of $10,637,000 during the first quarter of 2009 and recognized a realized loss of $224,000 on the sale of these securities. During April, 2009, we sold an additional eight non-agency CMO’s with a book value of $3,583,000 for a realized loss of $53,000. As a result of these sales, the fair market value of our non-agency CMO’s has been reduced from $25,438,000 as of December 31, 2008 to approximately $10,000,000 as of April 30, 2009. None of our Alt-A CMO’s were included in these 2009 sales. While we have the ability to hold all of our securities indefinitely, we will continue to closely monitor our non-agency CMO’s and their underlying collateral.

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During the three months ended March 31, 2009, we evaluated our equity portfolio for other than temporary impairments of certain securities. We based our review on a number of factors including, but not limited to, the continued stock price declines of certain securities, the length of time we have held the equities, any third party research reports or analysis, and the financial condition and near-term prospects of the security’s issuer, taking into consideration the economic prospects of the issuer’s industry and geographical location. For the three months ended March 31, 2009, the write-down in equity securities resulted in a realized loss of $353,000. The fair value of these equities at March 31, 2009 was $318,000.

Gross realized gains and losses on fixed maturity and equity securities included in the statement of operations for the three month periods ended March 31, 2009 and 2008 were as follows (in thousands):

	Three Months Ended March 31,
	2009		2008
Realized gains (losses):
Fixed maturities:
Gross realized gain	$	234	$	105
Gross realized loss		(852)		(2,646)
Net realized loss		(618)		(2,541)
Equities:
Gross realized gain		11		34
Gross realized loss		(675)		(88)
Net realized loss		(664)		(54)
Total net realized loss	$	(1,282)	$	(2,595)

In connection with our acquisition of our insurance subsidiary, American Physicians Insurance Company (“API”), the Texas Department of Insurance (“TDI”) required that funds be set aside in an escrow account with a bank to remain until the aggregate remaining redemption obligation of our Series A redeemable preferred stock is less than the amount of the escrow balance, with no withdrawals to be made from this escrow account without prior approval from TDI. To satisfy this requirement, we maintain a fixed income security in escrow in the amount of $2,500,000 paying 2.14% interest. This security is included in fixed maturities, available for sale.

At March 31, 2009, investments with a fair market value of $1,479,000 were on deposit with state insurance departments to satisfy regulatory requirements and these securities are included in fixed maturities, available for sale.

5.

Reinsurance

Reinsurance Premiums Ceded. Certain premiums are ceded to other insurance companies under reinsurance agreements. These reinsurance contracts provide us with increased capacity to write additional risk and the ability to write specific risks within our capital resources and underwriting guidelines. Effective January 1, 2009, our insurance subsidiary, API changed its reinsurance program so that we now retain the first $1,000,000 of any loss occurrence. The 2009 reinsurance agreement is a fixed-rated treaty and provides 100% coverage in excess of our retention of $1,000,000 with a $5,000,000 aggregate limit. Prior to 2009, API entered into reinsurance contracts, which provided for losses in excess of the retention of $250,000 on individual claims and beginning in 2002 through 2005, $350,000 on multiple insured claims related to a single occurrence. The 2006, 2007 and 2008 reinsurance treaties provide for these same terms with API retaining an additional 10%, 20% and 40% of the risk above the aforementioned retention levels for 2006, 2007 and 2008, respectively.

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The reinsurance contracts for 2002 through 2008 contain variable premium ceding rates based on loss experience. The ceded premium charged under these contracts is dependent upon the development of ultimate losses ceded to the reinsurers under their retrospective treaties. For the three months periods ended March 31, 2009, we recorded favorable development to ceded premiums of $832,000 primarily due to adjustments to treaty years 2006 and 2008.  For the three months ended March 31, 2008, we recorded $2,718,000 primarily due to adjustments to treaty years 2002 through 2005. These adjustments reflect reductions in our estimates of ultimate claims severity and loss experience as a result of claims closures at less than reserved amounts.

In addition to an adjustment to premiums ceded, estimates of ultimate reinsurance ceded premium amounts compared to the amounts paid on a provisional basis for the 2002 through 2008 reinsurance treaties give rise to a balance sheet asset classified as “Other Amounts Receivable Under Reinsurance Contracts” or a balance sheet liability classified as “Funds Held Under Reinsurance Treaties.” Furthermore, each retrospective treaty requires a 24 or 36 month holding period before any premium adjustments or cash can be returned or paid. The ultimate settlement amount is not determined until all losses have been settled under the respective treaties. As of March 31, 2009, a balance sheet liability, “Funds Held Under Reinsurance Treaties” of $5,112,000, which represent the differences between the estimates of ultimate reinsurance premiums ceded amounts for the 2002 through 2008 treaty years as compared to the amounts paid on a provisio nal basis.

Reinsurance Recoverables. Ceded reserves for loss and loss adjustment expenses are recorded as reinsurance recoverables. Reinsurance recoverables are the estimated amount of future loss payments that will be recovered from reinsurers, and represent the portion of losses incurred during the period that are estimated to be allocable to reinsurers. There are several factors that can directly affect the ability to accurately forecast the reinsurance recoverables. Many of the factors discussed in Note 6 related to the sensitivities of forecasting total loss and loss adjustment expense reserves also apply when analyzing reinsurance recoverables. Since we cede excess losses above $250,000 on individual claims and $350,000 on multiple insured claims for treaty years 2002 through 2008, the trends related to severity significantly affect this estimate. Current individual claims severity can be above or fall below our retention level over the period it takes to resolve a claim.

Similar to the estimate for reserves, due to the long-tailed nature of the medical professional liability line of insurance, relatively small changes in the actuarial assumptions for trends, inflation, severity and frequency for projected ultimate loss and loss adjustment expense reserves can have a greater impact on the recorded balance for reinsurance recoverables than with most other property and casualty insurance lines. While we believe that our estimate for ultimate projected losses related to loss and loss adjustment expense is adequate based on reported and open claim counts, there can be no assurance that additional significant reserve enhancements will not be necessary in the future given the many variables inherent in such estimates and the extended period of time that it can take for claim patterns to emerge.

Reinsurance contracts do not relieve us from our obligations to policyholders. We continually monitor our reinsurers to minimize our exposure to significant losses from reinsurer insolvencies. Any amount found to be uncollectible is written off in the period in which the uncollectible amount is identified.

Unsecured reinsurance recoverables at March 31, 2009, that exceeded 10% of total reinsurance paid and unpaid loss and loss adjustment expenses are summarized as follows (in thousands):

Company Name	March 31, 2009
Swiss Reinsurance	$	5,167
Transatlantic Reinsurance		3,209
ACE Tempest Re USA		2,268
Hannover Ruckversicherrungs		1,462

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As of March 31, 2009, ACE Tempest Re USA was A.M. Best rated “A+” (Superior). Swiss Reinsurance (“Swiss Re”), Transatlantic Reinsurance (“Transatlantic”) and Hannover Ruckversicherrungs (“Hannover”) were A.M. Best rated “A” (Excellent). During the quarter ended March 31, 2009, A.M. Best down rated the financial strength rating of Swiss Re from “A+” to its current rating of “A”. In September 2008, Transatlantic’s financial strength rating was down-rated from A+ to its current rating of “A”. To date, both Swiss Re and Transatlantic, as well as our other reinsurers have continued to reimburse us for paid claims in a manner consistent with past practices.

The reinsurers on the 2009 treaty include Swiss Re, Hannover, Transatlantic and General Reinsurance Corporation (“General Re”). General Re is A.M. Best rated “A++” (Superior) as of March 31, 2009.

As of March 31, 2009, all of API’s reinsurance contracts were with companies in adequate financial condition and we believe there was not any need to establish an allowance for doubtful reinsurance recoverable. We have not experienced any material problems collecting from our reinsurers.

6.

Reserve for Loss and Loss Adjustment Expense

The reserve for unpaid losses and loss adjustment expenses represents the estimated liability for unpaid claims reported to us, plus claims incurred but not reported and the related estimated loss adjustment expenses. The reserve for losses and loss adjustment expenses is determined based on our actual experience, available industry data and projections as to future claims frequency, severity, inflationary trends and settlement patterns.

We write medical malpractice insurance policies which have a lengthy period for reporting a claim (tail coverage) and a long process of litigating a claim through the courts and whose risk factors expose its reserves for loss and loss adjustment expenses to significant variability. These conditions subject API’s open reported claims and incurred but not reported claims to increases due to inflation, changes in legal proceedings and changes in the law. While the anticipated effects of inflation is implicitly considered when estimating reserves for loss and loss adjustment expenses, an increase in average severity of claims is caused by a number of factors. Future average severities are projected based on historical trends adjusted for changes in underwriting standards, policy provisions and general economic trends. Those anticipated trends are monitored based on actual experience and are modified as necessary to reflect any changes in the development of ultimate losses and loss adjustment expenses. These specific risks, combined with the variability that is inherent in any reserve estimate, could result in significant adverse deviation from our carried reserve amounts. Settlement of claims is subject to considerable uncertainty. Actual developments will likely vary, perhaps significantly, from the current estimated amounts reflected in the accompanying financial statements.  We believe the reserves for loss and loss adjustment expenses are reasonably stated as of March 31, 2009.

We recorded $6,121,000 for losses and loss adjustment expenses for the three months ended March 31, 2009, which included $11,020,000 for the current accident year, reduced by $4,899,000 of favorable development for prior report years. The favorable development was the result of loss severity for the 2002 through 2008 report years developing favorably compared to prior period estimates driven primarily by claim closures at less than reserved amounts. In addition, the total number of claims closed with indemnity for these report years were less than prior estimates.  

7.

Contingencies

We are involved in various claims and legal actions that arise in the ordinary course of business. One of our subsidiaries, APS Capital Corporation (“APS Capital”), is currently party to litigation regarding a disputed bankruptcy trade claim. We believe that the disposition of these matters will not have a material adverse affect on our consolidated financial position, results of operation or cash flows.

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8.

Earnings Per Share

Basic earnings per share are based on the weighted average shares outstanding without any dilutive effects considered. Diluted earnings per share reflect dilution from all contingently issuable shares, such as options. A reconciliation of income and weighted average shares outstanding used in the calculation of basic and diluted income per share from operations follows:

(in thousands except share data)	Three Months Ended March 31,
	2009		2008
Numerator for basic and diluted income per  common share:
Net income	$	4,730	$	3,380
Denominator:
Denominator for basic income per common share – weighted average shares outstanding		6,994		7,188
Effect of dilutive stock options and awards		89		109
Denominator for diluted income per common share – adjusted weighted average shares outstanding		7,083		7,297
Net income - basic	$	0.68	$	0.47
Net income - diluted	$	0.67	$	0.46

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9.

Segment Information

The Company’s segments are distinct by type of service provided. Comparative financial data for the three month periods ended March 31, 2009 and 2008 are shown as follows:

(in thousands)	Three Months Ended March 31,
	2009		2008
Operating revenue:
Insurance services	$	17,279	$	17,186
Financial services		1,548		1,929
All other		465		593
Total segment revenues	$	19,292	$	19,708
Reconciliation to consolidated statement of operations:
Total segment revenues	$	19,292	$	19,708
Less: intercompany dividends		(61)		(76)
Total revenues	$	19,231	$	19,632
Operating income (loss):
Insurance services	$	8,118	$	6,980
Financial services		(80)		(641)
All other		(820)		(1,041)
Total segment operating income		7,218		5,298
Income tax expense		2,488		1,918
Net income	$	4,730	$	3,380
Capital expenditures:
Insurance services	$	77	$	196
Financial services		2		19
All other		2		188
	$	81	$	403
	March 31, 2009
Balance sheet data:
Identifiable assets:
Insurance services	$	242,945
Financial services		2,233
All other		44,647
	$	289,825

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10.

Stock-Based Compensation

We use the Black-Scholes-Merton option-pricing model to determine the fair value of stock-based awards. For the three months ended March 31, 2009, we recorded compensation cost related to stock options of $161,000 and a related reduction in income taxes of $56,000. The compensation cost is the total fair value, at date of grant, of stock options that vested during the period. No compensation costs were capitalized in the three month period ended March 31, 2009.

During the three months ended March 31, 2009, 30,000 options were exercised with an intrinsic value of $195,000. For the three months ended March 31, 2009, there were no cash proceed exercises and we received $418,000 in value through cashless exercises/exchanges for the options exercised. Also as of March 31, 2009 there was $531,000 of total unrecognized compensation cost related to non-vested shares under our 2005 Incentive and Non-Qualified Stock Option Plan ("2005 Stock Option Plan"), which is expected to be recognized over a weighted-average period of 1.3 years.

The 2005 Stock Option Plan provides for the issuance of up to 1,250,000 shares of common stock to our employees, including officers and directors, as well as non-employee directors. A total of 763,000 of these options have been granted as of March 31, 2009 and 487,000 are available for grants. Of those granted, 75,000 shares have been exercised, 490,000 options are exercisable and 198,000 are not yet exercisable. As of March 31, 2009, we still have exercisable options for 38,000 shares outstanding from our previous plan, the “1995 Incentive and Non-Qualified Stock Option Plan”.

No stock options were granted during the three months ended March 31, 2009. Presented below is a summary of the stock options held by our employees and our directors and the related transactions for the three months ended March 31, 2009.

	Three Months Ended March 31, 2009
	Shares	Weighted Average Exercise Price
Balance at January 1	755,000	$	16.21
Options granted	-		-
Options exercised	30,000		13.94
Options forfeited/expired	-		-
Balance at March 31	725,000		16.30
Options exercisable	490,000		14.78

The following table summarizes our outstanding and exercisable options at March 31, 2009:

Stock Options Outstanding						Stock Options Exercisable
Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Average Remaining Contractual Life	Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Average Remaining Contractual Life
725,000	$	16.30	$	2,277,000	3	490,000	$	14.78	$	2,157,000	2.5

(1)

Based on the $19.17 closing price of our stock at March 31, 2009.

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11.

Manditorily Redeemable Preferred Stock

In conjunction with the acquisition of API we issued 10,198 shares of Series A redeemable preferred stock, par value $1.00 per share, from the 10,500 shares authorized. Holders of Series A redeemable preferred stock are entitled to cumulative dividends thereon at the rate of three percent (3%) per annum payable on the remaining redemption value per share, in priority to the payments of dividends on the common shares. Holders of our Series A redeemable preferred stock have no preemptive rights and have the same voting rights as the holders of our common stock. The shares are non-certificated and mandatorily redeemable. They will be redeemed ratably at not less than $1,000,000 per year, with all remaining outstanding shares being redeemed by December 31, 2016. During the quarter ended March 31, 2009, 1,024 shares of our Series A redeemable preferred stock were redeemed to all preferred shareholders for $1,195,000, which included accrued dividends of $177,00 0. During 2008 and 2007, 1,104 and 1,019 shares of our Series A redeemable preferred stock were redeemed ratably from all preferred shareholders for $1,368,000 and $1,058,000, which included accrued dividends of $297,000 and $40,000, respectively. In the event of any liquidation, the holders of our Series A redeemable preferred stock receive an amount equal to the remaining redemption value before any distribution is made to the holders of our common stock.

Pursuant to Financial Accounting Standards Board (“FASB”) Statement No. 150,  Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity  (“FASB No. 150”), an issuer is required to classify an instrument as a liability if it is issued in the form of shares that are mandatorily redeemable if it embodies an unconditional obligation that requires the issuer to redeem the shares by transferring the entity’s assets at a specified or determinable date(s) or upon an event that is certain to occur. In addition, the preferred stock dividend has been classified as interest expense. The preferred stock’s mandatory cash redemption feature coupled with a fixed redemption date and fixed amount requires that it be classified as debt, rather than equity. As of March 31, 2009, the book value of the Series A redeemable preferred stock was $6,464,000, based on the outstanding bala nce of $7,050,000 discounted at 5.35%.

12.

Income Taxes

The provision for income taxes is based on amounts reported in the statements of income after exclusion of nontaxable income such as interest on state and municipal securities.  Also, certain items of income and expenses are recognized in different time periods for financial statement purposes than for income tax purposes.  Thus, provisions for deferred taxes are recorded in recognition of such temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company and its subsidiaries file a consolidated federal income tax return. Consolidated income tax expense is allocated on the basis of each company's income adjusted for permanent differences.

On January 1, 2007, we adopted the provision of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement No. 109, “Accounting for Income Taxes”.  We do not believe we have any unrecognized tax benefits included in our consolidated financial statements.  We have not recognized any interest or penalties in the consolidated financial statements, nor have we recorded an accrued liability for interest or penalty payments.

Our effective income tax rates for the three months ended March 31, 2009 and March 31, 2008 were approximately 34.5% and 36.2%, respectively.

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13.  

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements.  SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities.  Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts its business.  SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Our assessments with respect to assumptions that market participa nts would make are inherently difficult to determine and the use of different assumptions could result in material changes to these fair value measurements. Effective January 1, 2008, the Company adopted the provisions of SFAS 157 as it relates to financial assets and financial liabilities. The adoption of SFAS 157 did not have a material effect on our results of operations, financial position or liquidity.

In September 2008, the SEC and FASB issued joint guidance providing clarification of issues surrounding the determination of fair value measurements under the provisions of SFAS 157 in the current market environment.  In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, which amended SFAS 157 to provide an illustrative example of how to determine the fair value of a financial asset when the market for that asset is not active.  

Fair value is used on a recurring basis for our equity and fixed maturity, available for sale securities in which fair value is the primary basis of accounting. Fair value for these securities is the market value based on quoted market prices, when available (Level 1) or quoted prices for similar assets or liabilities in active markets or market prices obtained from third-party pricing services for identical or comparable assets (Level 2). Certain assets and liabilities are not actively traded in observable markets with listed prices or quotes and we must use alternative valuation techniques based on independent dealer quotes on the security and our own assumptions and professional judgment to derive a fair value measurement (Level 3). In these instances when significant valuation assumptions are not readily observable in the market, instruments are valued based on the best available data to approximate fair value. This data would consider a risk premium that a market participant would require. We use prices and inputs that are current as of the measurement date, including periods of market dislocation. Typically, during periods of market dislocation, the observability of prices and inputs may be reduced for the instruments we hold. This condition could cause an instrument to be reclassified to a lower level during any given period.

The following table presents the estimated fair value of our financial instruments measured on a recurring basis as of March 31, 2009:

(in thousands)			Fair Value Measurements at March 31, 2009 Using:
			Quoted prices in		Significant		Significant
			active markets for		other ob-		other unob-
	March 31,		identical assets		servable inputs		servable inputs
Description	2009		Level 1		Level 2		Level 3
Financial Assets:
Fixed income securities, available for sale	$	190,630	$	27,814	$	161,055	$	1,761
Equity securities, available for sale		10,110		10,055		55		-
Total	$	200,740	$	37,869	$	161,110	$	1,761

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A reconciliation of the beginning and ending balances of our financial instruments for fair value measurements made using significant unobservable inputs (Level 3) follows (in thousands):

	Fixed Maturity Securities, Available for Sale
Balance, January 1, 2009	$	2,659
Total gains or losses realized/unrealized:
Included in earnings (or changes in net assets)		(10)
Included in other comprehensive income		-
Purchases, issuances, and settlements		(7)
Transfers in and/or out of Level 3		(881)
Balance, March 31, 2009	$	1,761
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2009	$	(10)
Gains and losses (realized and unrealized) included in earnings for the period are reported in net realized investment gains (losses) as follows:
Total gains or losses included in earnings for the period (above)	$	(10)
Change in unrealized gains or losses related to assets held at March 31, 2009	$	-

Level 1 consists of instruments whose values are based on quoted market prices in active markets. We receive quoted market prices from a third party, independent, nationally recognized pricing service (pricing service). The Company utilizes the pricing service, either for market values obtained based on quoted, actively traded market prices (Level 1) or quoted prices for similar assets in active markets or market prices obtained from third-party pricing services for identical or comparable assets (Level 2). Of our investment portfolio of $200,740,000 as of March 31, 2009 approximately 99% of our fixed-income securities are priced either as Level 1 or Level 2. The fair value estimates for our equity portfolio of $10,110,000 and our U.S. Treasury fixed income securities of $27,814,000 are based on Level 1 pricing provided by this pricing service since there is an active, readily tradable market value based on quoted prices, as of March 31, 2009, or the meas urement date. Active markets are those in which transactions occur in significant frequency and volume to provide pricing information on an on-going basis. Valuation of Level 1 securities does not entail a significant degree of judgment since an active market exists and quoted prices are readily and regularly available.  

With the exception of U.S. Treasury securities, very few of our fixed-income securities are actively traded. Most of our fixed-income securities, such as government or agency mortgage backed securities, tax-exempt municipal securities and corporate securities are valued using a pricing service and fall within Level 2.  Level 2 pricing in our fair value hierarchy comprises $161,055,000 or 80.0% of our investment portfolio which as of March 31, 2009 includes our U.S. Government agency bonds/notes of $30,028,000; U.S Government agency mortgage backed bonds of $40,945,000; U.S. Government agency collateralized mortgage obligations (“CMO’s”) of $20,540,000; Four Alt-A securities with a fair value estimate of $1,761,000 or .8% of our investment portfolio are classified as Level 3 since the securities are priced based on non-binding indications provided by dealers and the professional judgment of our investment professionals in our asset mana gement subsidiary, APS Asset Management (Asset Manager) upon review of the specifics of the security, including class, maturity, credit rating, durations, collateral and comparable markets for similar securities. Alt-A securities are non-agency CMO’s generally considered to have underlying mortgages with underwriting characteristics that are stronger than “Subprime” mortgages but less stringent than “Prime” mortgages.

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In regards to Level 2 pricing, fair values are used and are based on the market prices from the pricing service where valuations are based on quoted market prices for identical or similar assets and/or valuations using industry-standard models such as matrix pricing. The pricing service evaluates each asset based on relevant market information, credit information, perceived market movements and sector news.  The market inputs utilized in the pricing evaluation include, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets benchmark securities, bids and offers, quoted forward prices, time value, volatility factors, current market and contractual prices for the underlying instrument, and industry news and economic events. For mortgage related products, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios. Depending on the security, the priority of the use of inpu ts may change or some market inputs may not be relevant.  The pricing service we utilize has indicated that they will only produce an estimate of fair value if there is objectively verifiable information to produce a valuation.   

Through our Asset Manager, we review the estimates and assumptions of fair value of each security provided by the pricing service for Level 1 and Level 2 pricing and compare these estimates to our custodial bank statement, which also provides a fair market value for the securities we hold to determine if the estimates are representative of the prices in the market. Comparing our fair value pricing obtained from our custodial bank statement serves as a cross-check to the validity of the information provided from the pricing service. Valuations are reviewed for reasonableness based upon the specifics of the security, including class, maturity, credit rating, durations, collateral and comparable markets for similar securities.  We may adjust the valuation of securities from the independent pricing service when we believe its pricing does not fairly represent the market value of the investment.  For example, when market observable data is not as rea dily available or if the security trades in an inactive market, the valuation of financial instruments becomes more subjective and could involve substantial judgment resulting in Level 3 pricing. We generally consider a market to be inactive if the following conditions exist: (1) there are very few transactions for the financial instrument; (2) the prices in the market are not current; (3) the price quotes we receive vary significantly over time or among independent pricing services or dealers; and (4) there is a limited availability of public market information.

In the third quarter of 2007, the market for non-agency collateralized debt obligations, specifically the market for Alt-A’s, became increasingly inactive based on the limited number of transactions, varying market prices provided by dealers and the limited availability of market data for these securities. The inactivity was evidenced by a significant widening of the bid and ask spread in the dealer markets in which these securities trade and a significant decrease in the volume of trades relative to historical levels. As of March 31, 2009, our portfolio contained seven CMO securities classified as Alt-A of which four of these securities, or $1,761,000 representing .8% of our investment portfolio, are classified as Level 3 pricing. The remaining non-agency CMO’s in our investment portfolio have underlying mortgages categorized as “Prime” quality loans with no adjustable features, and none of our CMO’s have underlying mortgages cla ssified as “Subprime.” All of our Alt-A securities have underlying mortgages with fixed interest rates and all but one Alt-A security is investment grade, currently rated either AA or A. During the quarter ended December 31, 2008, one of the Alt-A securities with a fair market value of $27,000 at December 31, 2008 was downgraded to a “C” rating. During the quarter ended March 31, 2009, one of the Alt-A securities with a fair market value of $773,000 at March 31, 2009 was downgraded to an “A” rating from “AA”.

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The deepening national housing crisis and its potential impact on the underlying collateral of our Alt-A securities has resulted in a significant and rapid decline of their fair market value, especially in relation to the market prices provided by the outside pricing service. Consistent with our approach to pricing our entire portfolio, we initially received market pricing on these securities from the pricing service. We then reviewed the pricing of our Alt-A securities based on the market environment and the specific characteristics including the overall structure of the instrument; default rates; demographic and geographic characteristics of the underlying mortgages; support levels; and loan to value ratios.  As a result of this review, as of March 31, 2009, we have adjusted four of the seven Alt-A securities to lower fair market values from those indicated by the pricing service, (a market-corroborated observable input) based on non-binding indica tions received from dealers and the judgment of our Asset Manager (unobservable inputs).  We generally obtain two to three indications from dealers who actively trade in these or similar securities, but are not binding offers. Because the approach to valuing these securities involves significant professional judgment and the expertise of our Asset Manager including the use of unobservable inputs from non-binding dealer indications, we classify securities valued in this manner as Level 3.

As noted in the table above (reconciliation of beginning and ending balances of our financial instruments for fair value measurements made using significant unobservable inputs (Level 3), $881,000 was transferred out of Level 3 to Level 2 during the three months ended March 31, 2009 as the pricing from dealer indications we received were comparable to the independent pricing service. We attempt to apply consistent methods and techniques utilized in previous evaluation periods to determine the appropriate level within the fair value hierarchy. Changes in pricing based on Level 3 pricing assumptions can have a material effect on our results of operations and our financial position. For example, we recognized a realized loss of $9,000 for the three months ended March 31, 2009 as a result of valuing these securities based on Level 3 pricing assumptions or non-binding indications and the professional judgment of our Asset Manager; however, had we selected our pricing based on Level 2 pricing assumptions, we would have increased our fixed maturities, available for sale and accumulated, other comprehensive income by $792,000 as of March 31, 2009 based on higher pricing assumptions provided by the pricing service for these four Alt-A securities.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), “APS,” “we,” “our,” “us” and the “Company” refer to American Physicians Service Group, Inc., together with its subsidiaries, unless the context requires otherwise. The following MD&A should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2009, included in Part I, Item 1, as well as the audited, consolidated financial statements and notes in our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the United States Securities and Exchange Commission (the “SEC”) on March 4, 2009.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove correct, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including statements: of our plans, strategies and objectives for future operations; concerning new products, services, or developments; regarding future economic conditions, performance, or outlook; as to the outcome of contingencies; of beliefs or expectations; and of assumptions underlying any of the foregoing.

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Forward-looking statements may be identified by their use of forward-looking terminology, such as “believes,” “expects,” “may,” “should,” “would,” “intends,” “plans,” “estimates,” “anticipates,” “projects” and similar words or expressions. You should not place undue reliance on these forward-looking statements, which reflect our management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q. Factors that might cause our results to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, those discussed in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part II, Item 1A. Risk Factors, below , and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the SEC on March 4, 2009 (our “2008 Annual Report”) .. Forward-looking statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we undertake no obligation, other than that imposed by law, to update forward-looking statements to reflect further developments or information obtained after the date of filing of this Quarterly Report on Form 10-Q or, in the case of any document incorporated by reference, the date of that document.

The following important factors, in addition to those referenced under “Risk Factors” in Part II, Item 1A and Part I, Item 1A of our Annual Report, could affect the future results of our operations and could cause those results to differ materially from those expressed in or implied by such forward-looking statements:

•

general economic conditions, either nationally or in our market area, that are worse than expected;

•

changes in the healthcare industry;

•

regulatory and legislative actions or decisions that adversely affect our business plans or operations;

•

inflation and changes in the interest rate environment, and/or changes in the securities markets including the performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;

•

uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance;

•

significantly increased competition among insurance providers;

•

changes in the availability or cost of reinsurance including our ability to renew our existing reinsurance treaty or obtain new reinsurance;

•

failure or inability of our reinsurers to pay claims or amounts due us in a timely manner;

•

loss of key executives, personnel, accounts or customers; and

•

potential losses and litigation risk associated with our Financial Services businesses.

The foregoing factors should not be construed as exhaustive and we caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report. In addition to any risks and uncertainties specifically identified in the text surrounding forward-looking statements, you should consult our other filings under the Securities Act of 1933 and the Securities Act of 1934 for factors that could cause our actual results to differ materially from those presented.

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Business Overview

We provide (1) insurance services, specifically medical professional liability insurance in Texas, Arkansas and Oklahoma and (2) financial services, including brokerage and investment services to individuals and institutions.

Insurance Services. We provide medical professional liability insurance primarily in Texas, where our insurance subsidiary, API, has written business for over 30 years. API is authorized to do business in the States of Texas, Arkansas and Oklahoma and specializes in writing medical professional liability insurance for physicians and other healthcare providers, including physician extenders and clinical staff. API currently insures approximately 6,200 physicians, dentists, and other healthcare providers, including physician extenders and clinical staff, the majority of which are in Texas. Our policyholders increased by approximately 880 since December 31, 2008. Approximately 90% of our premiums are written through purchasing groups, which in Texas currently subjects us to less stringent state regulation of premium rates and policy forms. Historically, we operated as the attorney-in-fact manager for API since 1975. In April 2007, we acquired API , thus combining our insurance management experience with an insurance underwriting entity.

Financial Services.  We provide investment and investment advisory services to institutions and individuals throughout the United States through the following subsidiaries:

o

APS Financial. APS Financial is a fully licensed broker/dealer that provides brokerage and investment services primarily to institutional and high net worth individual clients. APS Financial also provides portfolio accounting, analysis and other services to insurance companies, banks and public funds. We recognize commission revenue, and the related compensation expense, on a trade date basis.

o

APS Capital. APS Capital is dedicated to the clearing and settlement of trades involving non-securities including syndicated bank loans, trade claims and distressed private loan portfolios. We seek to develop business with clients who trade in distressed markets. We recognize commission revenue, and the related compensation expense, when the transaction is complete and fully funded.

o

APS Asset Management. APS Asset Management, a registered investment adviser under the Investment Advisers Act of 1940, manages fixed income and equity assets for institutional and individual clients on a fee basis. We recognize fee revenues monthly based on the amount of funds under management.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and assumptions that affect amounts reported in the accompanying unaudited Condensed Consolidated Financial Statements and Notes thereto. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, or that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Adjustments related to changes in estimates are reflected in our results of operations in the period in which those est imates changed.

Our “critical” accounting policies are those policies that we believe to be most sensitive to estimates and judgments. These policies are more fully described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2008 and Note 2 to our audited consolidated financial statements contained in that report. There have been no material changes to these policies since the most recent year end.

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Although we have not changed our accounting policies with respect to determining the fair values of our investment securities, we believe it is beneficial, given the recent market turmoil, to explain our accounting policies regarding the determination of the fair value of our investment securities.  The fair value of our investment securities are determined by following the guidance and hierarchy in SFAS No. 157, Fair Value Measurements.

SFAS 157 describes three levels of inputs that may be used to measure fair value:

Level 1

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Valuations are developed from unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, we consider the principal or most advantageous market in which it would trade and consider assumptions that market participants would use when pricing the asset or liability. When possible, we look to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, we look to market observable data for similar assets and liabilities, independent industry-standard models such as matrix pricing and independent, third-party dealer quotes whose inputs may be less observable than Level 1 pricing. When market observable data is not as readily available, the valuation of financial instruments becomes more subjective and could involve substantial judgment. Certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement. For additional disclosures, see Note 13, Fair Value Disclosures, to the unaudited financial statements included herein.

Results of Operations

Despite continued rate pressure in our Insurance Services segment in the first quarter of 2009, improvements in the terms of our reinsurance contracts coupled with favorable prior year reserve development allowed us to deliver strong results from this operating segment for the three months ended March 31, 2009.  As a result of continued favorable development in both claim counts and claim severity post-tort reform and increased competition, we lowered our rates on average approximately 8% during the three months ended March 31, 2009 as compared to 7% for the three months ended March 31, 2008. The 2009 reductions were the result of negotiated discounts to retain certain group practices with favorable loss histories. As a result, policyholder retention was strong for the first quarter of 2009 at approximately 94% as compared to 92% during 2008. We have seen increased competition by both existing professional liabi lity carriers and recent entrants into the marketplace. Many of these carriers have been aggressive in seeking new business and are willing to compete on price. As a result of this increased competition, we continue to be faced with price pressure on both existing renewals and new business. We will continue to monitor frequency of claims and severity of loss and legal expenses to determine if further rate adjustments are warranted. As a result of these market forces, we will face extensive competition throughout 2009, but will continue to price insurance products at rates we believe are adequate for the risks assumed.

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Furthermore, even though reported claims and claim pay-out trends remain favorable, we increased loss and loss adjustment expenses by $2 million for 2009 accident year as compared to the amount recorded for the 2008 accident year for the quarter ended March 31, 2008. This increase reflects the change in our 2009 reinsurance contract to $1,000,000 in net retention as well as increases in policyholder count from 4,975 as of March 31, 2008 to 6,216 as of March 31, 2009. While we anticipate that the 2009 treaty will reduce our ceded premiums as a percentage of direct premiums written, thus resulting in a relative increase in net premiums written and earned, the overall impact on earnings is uncertain as the frequency and severity of losses in future periods is not yet known.

Our Financial Services segment continues to feel the effect of the 2008 collapse of the investment, mortgage and banking markets. This segment experienced declines in commission revenue from security trading in both investment grade and non-investment grade securities, along with much greater revenue percentage declines in our investment banking and bank debt trade claim businesses when comparing totals for the three month period ended March 31, 2009 with the same period in 2008. However, there are positive signs. Commission revenues from security trading increased $349,000 (32%) to $1,431,000 from $1,082,000 when comparing the three month period ended March 31, 2009 to the three months ended December 31, 2008. Though segment losses have eased substantially as a result of continued efforts to manage costs, it is apparent that a return to profitability for this segment will be dependent to a great extent upon the recovery of the U.S. economy as a whole and the investment markets in particular

The following table sets forth selected historical financial and operating data for the Company. The selected income statement data below for the three months ended March 31, 2009 and 2008 is derived from our condensed consolidated unaudited financial statements included herein which management believes incorporate all of the adjustments necessary for the fair presentation of the financial condition and results of operations for such periods and have been prepared in accordance with GAAP. Actual financial results through March 31, 2009 may not be indicative of future financial performance. Certain Non-GAAP financial measures are included in the underwriting ratio section table below as these ratios represent insurance industry-specific financial performance measures.

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Selected Condensed Consolidated Financial and

Operating Data of American Physicians Service Group, Inc.

(in thousands, except share, per share and ratio data)	Three Months Ended March 31,
	2009		2008
Income Statement Data:
Gross premiums and maintenance fees written - direct and assumed	$	17,540	$	14,736
Premiums ceded		328		1,395
Net premiums and maintenance fees written		17,868		16,131
Net premiums and maintenance fees earned		16,457		17,354
Investment income, net of investment expenses		2,551		3,056
Realized capital losses - net		(1,267)		(2,595)
Financial services		1,433		1,800
Other revenue		57		17
Total revenues		19,231		19,632
Losses and loss adjustment expenses		6,121		7,509
Other underwriting expenses		3,221		2,604
Change in deferred acquisition costs		(181)		93
Financial services expenses		1,628		2,570
General and administrative expenses		1,224		1,558
Total expenses		12,013		14,334
Income from operations		7,218		5,298
Income tax expense		2,488		1,918
Net income	$	4,730	$	3,380
Diluted weighted average shares outstanding		7,083		7,297
Diluted earnings per common share	$	0.67	$	0.46
Underwriting Ratios:
Loss ratio (1)
Current accident year		67%		52%
Prior accident years		-30%		-9%
Calendar year		37%		43%
Expense ratio (2)		18%		16%
Combined ratio (3)		56%		59%

(1) Loss ratio is defined as the ratio of losses and loss adjustment expenses to net premiums and maintenance fees earned.

(2) Expense ratio is defined as the ratio of other underwriting expenses and net change in deferred acquisition costs to net premiums and maintenance fees earned.

(3) Combined ratio is the sum of the loss ratio and the expense ratio.

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	March 31,		December 31,
(in thousands)	2009		2008
Balance Sheet Data:
Cash and cash equivalents and investments	$	240,641	$	231,769
Premiums and maintenance fees receivable		17,285		17,186
Reinsurance recoverables		12,739		15,293
All other assets		19,160		19,306
Total Assets	$	289,825	$	283,554
Reserve for losses and loss adjustment expenses		91,341		92,141
Unearned premiums and maintenance fees		38,196		36,785
Manditorily redeemable preferred stock		6,464		7,568
All other liabilities		11,685		10,595
Total Liabilities		147,686		147,089
Total stockholders'  equity		142,139		136,465
Total Liabilities & Stockholders' Equity	$	289,825	$	283,554

The discussion that follows should be read in connection with the unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this report.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Condensed income statement data for the three months ended March 31, 2009 and 2008 are included in the following table:

(dollars in thousands except per share data and percentages)	Three Months ended March 31,
	2009		2008		Change		% Change
Revenues	$	19,231	$	19,632	$	(401)	-2%
Income from Operations		7,218		5,298		1,920	36%
Net Income		4,730		3,380		1,350	40%
Diluted Net Income Per Share	$	0.67	$	0.46	$	0.21	46%

Further explanation for the quarter over quarter variances are described below throughout the remainder of Item 2 of this Form 10-Q.

Premium related income statement data for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		Change		% Change
Gross premiums and maintenance fees written - direct and assumed	$	17,540	$	14,736	$	2,804	19%
Premium ceded:
Current year		(504)		(1,323)		819	-62%
Prior year		832		2,718		(1,886)	-69%
Net premiums ceded		328		1,395		(1,067)	-76%
Net premiums and maintenance fees earned	$	16,457	$	17,354	$	(897)	-5%

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Gross Premiums and Maintenance Fees Written

Gross premiums and maintenance fees written increased $2,804,000 (19%) to $17,540,000 for the three months ended March 31, 2009 from $14,736,000 for the three months ended March 31, 2008 primarily due to new written business. API increased its number of policyholders to 6,216 at March 31, 2009 from 4,975 at March 31, 2008. Included in the 6,216 policyholder headcount were a number of new physician groups written which included coverage for other healthcare providers including physician extenders and other clinical support staff. Due to a much lower risk profile, the premiums for these additional clinical support personnel are substantially lower than the premiums charged to physicians.  New written business was approximately $4,123,000 for the current year quarter as compared to $1,316,000 of new business for the prior year quarter. Partially offsetting these premium increases were rate decreases which averaged 8% for the current quarter as compared to average rate decreases of 7% for the first quarter of 2008 as a result of competitive pricing pressures. However, policyholder retention continued to be strong at approximately 94% for the quarter ended March 31, 2009.

Premiums Ceded

Premiums ceded expenses increased $1,067,000 from $1,395,000 for the three months ended March 31, 2008 to $328,000 for the three months ended March 31, 2009. Effective January 1, 2009, we have changed our reinsurance treaty such that we now retain the first $1,000,000 of any loss occurrence. The 2009 reinsurance contract is a fixed-rated treaty and provides 100% coverage in excess of our retention of $1,000,000 with a $5,000,000 aggregate limit.  We are retaining this additional risk in the reinsurance layer in order to lower our ceding costs based on decreases in claims.  Due to the increased retention, the 2009 ceded premium rate is much lower which resulted in $504,000 in current year ceded premiums versus $1,323,000 for the same period in 2008. The 2009 treaty, which is anticipated to significantly reduce ceded premiums in 2009, provides us with coverage against large losses and multiple claims arising from a single event, as well as excess policy limit coverage. While we anticipate that the 2009 treaty will reduce our ceded premiums as a percentage of direct premiums written, thus resulting in a relative increase in net premiums written and earned, the overall impact on earnings is uncertain as the frequency and severity of losses in future periods is not yet known.

The reinsurance contracts we utilized from 2002 through 2008 are variable premium treaties that have various minimum and maximum rates. The actual premium rate is dependent upon the ultimate losses ceded to the reinsurer under the related treaty. The increase in premiums ceded of $1,067,000 is primarily the result of recognizing $2,718,000 of favorable prior reinsurance development for prior years’ reinsurance treaties during the three months ended March 31, 2008 as compared to recognizing only $832,000 of prior years’ favorable development during the three months ended March 31, 2009. The favorable development reflects reductions in our estimates of claim severity and loss experience as a result of claim closures at less than reserved amounts.

Net Premiums and Maintenance Fees Earned

Net premiums and maintenance fees earned decreased by $897,000 (5%) to $16,457,000 from $17,354,000 for the three months ended March 31, 2009 as compared to the same period in 2008. Net earned premiums and maintenance fees were down primarily due to rate decreases and we recognized $1,886,000 less in favorable development for the prior years’ reinsurance treaties during the current year quarter as compared to the same period in 2008.

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Investment Income

Investment income statement data for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		Change		% Change
Investment income:
Fixed Maturities	$	2,385	$	2,823	$	(438)	-16%
Equity Securities		85		60		25	42%
Short-term investments and other		86		190		(104)	-55%
Finance charges on premiums receivable		35		29		6	21%
Structured annuity		18		19		(1)	-5%
Total investment income	$	2,609	$	3,121	$	(512)	-16%
Investment expense		58		65		(7)	-11%
Net investment income	$	2,551	$	3,056	$	(505)	-17%

Investment income, net of investment expenses, decreased by $505,000 (17%) to $2,551,000 from $3,056,000 for the three months ended March 31, 2009 as compared to the same period for 2008.  Recently we began to observe a significant increase in the market-reported delinquency rates for non-agency CMO’s backed by prime loans. The delinquency data suggests that continuing home price declines and unemployment growth are now affecting the behavior by a broader sector of mortgage borrowers. Rising unemployment, accelerating house price declines, tight credit conditions, volatility in interest rates and weakening consumer confidence not only contributed to rising delinquencies in the current quarter, but also significantly impacted our expectations regarding future performance, both of which are critical to assessing our security impairments. Due to the risk and uncertainty of the current economic crisis and the ultimate impact on the non-agency CMO ma rket, we sold 18 non-agency CMOs with a book value of $10,637,000 during the first quarter of 2009 and recognized a realized loss of $224,000 on the sale of these securities for the three months ended March 31, 2009 (which is included in the realized losses below). Primarily due to the sale of these securities, our fixed maturity portfolio decreased $7,381,000 from $198,011,000 at December 31, 2008 to $190,630,000 at March 31, 2009 and cash and cash equivalents increased $16,363,000 to $38,423,000 at March 31, 2009 from $22,060,000 at December 31, 2008. This rebalancing of our portfolio resulted in overall lower yields and returns on our investments and a corresponding decrease in investment income for the three months ended March 31, 2009 as compared to the same period in 2008.  Subsequent to March 31, 2009, we sold an additional eight non-agency CMO’s with a book value of $3,583,000 for a realized loss of $53,000. As a result of these sales, the fair market value of our non-agency CMO’s has been reduced from $25,438,000 as of December 31, 2008 to approximately $10,000,000 as of April 30, 2009.

Realized Capital Gains (Loss)

Realized capital gains and losses income statement data for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		Change		% Change
Realized capital gains (losses) - net
Net realized gains	$	246	$	139	$	107	77%
Net realized (losses)		(620)		(90)		(530)	589%
Other -than-temporary impairment (losses)		(908)		(2,644)		1,736	-66%
Net realized gains (losses)	$	(1,282)	$	(2,595)	$	1,313	-51%

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Net realized capital losses were $1,282,000 for the three months ended March 31, 2009 as compared to a $2,595,000 for the three months ended March 31, 2008. Net realized losses decreased for the current quarter primarily as a result of lower “other than temporary” impairment losses incurred in our investment in Alt-A collateralized mortgage-backed securities during the current quarter as compared to the prior year.

The majority of the non-agency CMO’s in our portfolio have underlying mortgages categorized as “Prime” quality loans, and none of our CMO’s have underlying mortgages classified as “Subprime.” Also, all CMO underlying mortgages have fixed rates. However, within our portfolio at March 31, 2009, there were seven CMO securities classified as “Alternative-A” or “Alt-A”. These Alt-A securities are generally considered to have underlying mortgages with underwriting characteristics that are stronger than “Subprime” mortgages but less stringent than “Prime” mortgages. All but one of our Alt-A securities are investment grade, have underlying fixed rate mortgage collateral and as of March 31, 2009 are rated either AA or A. The Alt-A security that is non-investment grade has a book value at March 31, 2009 of $26,000.

Beginning with the three months ended September 30, 2007, we saw a significant and rapid decline in the market value of our Alt-A securities. We have considered the deepening national housing crisis and its potential effects on the underlying collateral in evaluating this decline, and concluded that the decreases in value of four of our Alt-A securities should be considered to be “other than temporary” for the three months ended March 31, 2009. The amount of the pretax charge to earnings associated with these adjustments for the three months ended March 31, 2009 and March 31, 2008 was $271,000 and $2,644,000, respectively. The aggregate write-down on the Alt-A securities beginning with the quarter ended September 30, 2007 through March 31, 2009 is $10,655,000 and the book value of all the Alt-A securities is $2,674,000 as of March 31, 2009. While we have the ability to hold all of our Alt-A securities indefinitely, we continue to close ly monitor and evaluate these securities and their underlying collateral.

The following table reflects the composition of our Alt-A securities as of March 31, 2009 after the other than temporary impairments (dollars in thousands):

					% of Portfolio
Rating Category	Book Value		Fair Value		(Fair Value)
AA	$	655	$	655	0.3%
A		1,993		2,026	0.8%
C		26		26	0.0%
Total	$	2,674	$	2,707	1.1%

We have also experienced an increase in the market-reported delinquency rates for our non-agency CMO’s backed by prime loans. As a result of these weak economic conditions and a significant decline in market value and the down-rating by outside rating agencies to below investment grade, we recorded write-downs during the three months ended March 31, 2009, on one non-agency CMO security in the amount of $284,000. The credit support may continue to weaken for our non-agency CMO’s including our Alt-A securities, particularly in light of the current economic forecasts regarding unemployment, further deterioration of the housing and mortgage markets and continued declines in the value of the collateral underlying these mortgages. While we have the ability to hold all of these securities indefinitely, we continue to closely monitor and evaluate these securities and their underlying collateral. Our inte nt is to continue to focus on preservation of principal over yield during the current economic crisis. We will continue to consider opportunities to reduce our position in non-agency CMO’s including Alt-A securities if we determine that it prudently reduces our exposure to further declines that may be considered “other-than-temporary.”

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During the three months ended March 31, 2009, we evaluated our equity portfolio for other than temporary impairments of certain securities. We based our review primarily on continued stock price declines of certain securities and the length of time we have held the stocks. For the three months ended March 31, 2009, the write-down in equity securities resulted in a realized loss of $353,000. The fair value of these stocks at March 31, 2009 was $318,000.

Financial Services Revenues

Financial services revenue for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		$ Change		% Change
Broker/Dealer Commissions	$	1,431	$	1,577	$	(146)	-9%
Investment Banking Fees		10		146		(136)	-93%
Bank Debt Trade Claim Fees		-		60		(60)	-100%
Management Fees and Other		7		17		(10)	-59%
Total Financial Services Revenues	$	1,448	$	1,800	$	(352)	-20%

Our Financial Services revenue decreased $367,000 (20%) for the three months ended March 31, 2009 compared to the same period in 2008.  APS Financial, our broker/dealer, derives most of its revenue from transactions in the fixed income market, in both investment and non-investment grade securities. As the table above shows, commission revenue at APS Financial was down 146,000 (9%) for the three months ended March 31, 2009 compared to the same period in 2008 due to a continuing trend of very low transaction activity seen throughout 2008. Among the factors affecting transaction activity include the well-publicized issues in the mortgage lending and financial markets with the anticipation of the continuation of these factors. This, along with widespread uncertainty as to the length and severity of the current economic recession, has led to the inclination of many of our investors to remain inactive. The same general market conditions affected the revenu es derived from our investment banking and the bank debt/trade claims business. Decreases in investment banking revenues totaled $136,000 (93%) while bank debt-trade claim revenues were off $60,000 (100%) for the three months ended March 31, 2009 compared to the same period in 2008 due again to difficult credit market conditions. During the first quarter of 2009, we decided to no longer actively pursue investment banking business. While our Financial Services business constitutes a much less significant portion of our consolidated results of operation since the acquisition of API, we are actively exploring avenues to return this segment to profitability. Cost cutting measures are detailed below under “Financial Services Expenses”. However, a return to profitability for this segment will also depend, to a large extent, on improved market conditions and a corresponding increase in revenues. We cannot predict when this could occur.

Loss and Loss Adjustment Expenses  

Loss and loss adjustment expenses for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		Change		% Change
Losses and loss adjustment expenses:
Current accident year	$	11,020	$	9,056	$	1,964	22%
Prior accident years		(4,899)		(1,547)		(3,352)	217%
Calendar year	$	6,121	$	7,509	$	(1,388)	-18%

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Loss and loss adjustment expenses for the three months ended March 31, 2009 decreased by $1,388,000 (18%) to $6,121,000 from $7,509,000 for the three months ended March 31, 2008. The decrease of $1,388,000 is the result of higher favorable development on prior year losses for the quarter ended March 31, 2009 as compared to the same period in 2008. For the three months ended March 31, 2009, current accident year loss and loss adjustment expenses totaled $11,020,000 based on 94 claims reported and prior year losses developed favorably by $4,899,000 as a result of reductions in our estimates of claims severity, principally the 2002 through 2008 report years, driven by closure of 106 claims during the period. For the three months ended March 31, 2008, current accident year loss and loss adjustment expenses were $9,056,000 based on 89 claims reported and there was $1,547,000 of favorable development on prior years. The positive effects of tort reform in Texas on average claim severity has resulted in continued favorable development of reserves and improved claim development patterns. We continued to favorably settle a significant number of post-tort reform claims at below the reserved amounts. Even though reported claims have increased by only 5 claims during the current quarter over the prior year quarter and claim pay-out trends remain favorable, we  increased our current accident year loss to reflect the change in our reinsurance contract to $1,000,000 in net retention and increases in policyholder count from 4,975 as of March 31, 2008 to 6,216 as of March 31, 2009.  We also continue to employ a conservative reserving methodology, in all periods, including the current accident year. .

Other Underwriting Expenses and Net Change in Deferred Acquisition Costs

Other underwriting expenses and net change in deferred acquisition costs for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		Change		% Change
Other underwriting expenses	$	3,221	$	2,604	$	617	24%
Net change in deferred acquisition costs		(181)		93		(274)	-295%
Total	$	3,040	$	2,697	$	343	13%

Other underwriting expenses increased by $617,000 (24%) to $3,221,000 from $2,604,000 for the year ended December 31, 2008 as compared to the same period in 2007. Other underwriting expenses consist primarily of commissions to agents, premium taxes and other general underwriting expenses related to managing our Insurance Services segment. Commissions to agents and premium taxes increased by $380,000 for the quarter ended March 31, 2009 as compared to the prior year quarter due to increased premiums written and higher commission rates paid on new business than renewal business. In addition, legal, auditing, actuarial and other professional fees were $50,000 higher in the 2009 quarter versus the 2008 quarter primarily due to additional expenses incurred for actuarial services. The net change in deferred acquisition costs, which is comprised of the change in deferred and amortized commissions paid to agents on new and renewal business and deferred and amorti zed premium taxes, decreased for three months ended March 31, 2009 by $274,000 to $(181,000) from $93,000 for the comparable period in 2008 due to new costs capitalized exceeding the amortization of prior deferred expenses.

Financial Services Expenses

Financial services expenses for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
		2009		2008		$ Change	% Change
Broker Commissions	$	785	$	982	$	(197)	-20%
Payroll and Benefits		510		763		(253)	-33%
Information Services		109		151		(42)	-28%
Legal and Professional Fees		75		459		(384)	-84%
Other		149		215		(66)	-31%
Total Financial Services Expenses	$	1,628	$	2,570	$	(942)	-37%

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Our Financial Services expenses decreased $942,000 (37%) for the three months ended March 31, 2009 compared to the same period in 2008. With the drop in trading activity associated with the U.S. economic downturn and the resultant investor uncertainty, we began making cost cuts in this division that began to take effect by mid-year 2008. All costs, from personnel to rent, dues and information services were scrutinized. The resulting cost cutting measures were then implemented during the latter half of 2008 with additional cost cuts continuing into the current period. As the table above shows, payroll and benefits decreased $253,000 (33%) and information services decreased $42,000 (28%) in the three months ended March 31, 2009 compared to the same period in 2008 as a result of these cost cuts. In addition, legal and professional fees decreased $384,000 (84%) in the current period as a result of non-recurring legal fees in the first three months of 2008 as well as to lower Sarbanes-Oxley consulting and audit fees. Lastly, variable costs, in particular commission expenses, decreased $197,000 (20%) for the three months ended March 31, 2009 compared to the same period in 2008 as a result of the decline in trading activity and associated commission revenues mentioned above.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2009 and 2008 are included in the following table:

(in thousands)	Three Months ended March 31,
	2009		2008		$ Change		% Change
Payroll and Benefits	$	433	$	423	$	10	2%
Incentive Compensation		224		308		(84)	-27%
Board Compensation and Fees		207		425		(218)	-51%
Options and Other Compensation		25		13		12	92%
Legal and Professional Fees		103		160		(57)	-36%
Interest and Dividends		98		109		(11)	-10%
Other		134		120		14	12%
Total General & Administrative Expenses	$	1,224	$	1,558	$	(334)	-21%

General and administrative expenses decreased $334,000 (21%) for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in general and administrative expenses in the current period includes lower board compensation and fees of $218,000 (51%) resulting from deferred stock awards expensed at the time they were granted in the first quarter of 2008 in recognition of the effort involved in closing the acquisition of API in 2007. Legal and professional fees declined $57,000 (36%), the result of lower SOX related consulting and audit fees in the current period. Incentive compensation expense decreased $84,000 (27%) in the three months ended March 31, 2009 compared to the same period in 2008 primarily as a result of reversing excess annual accruals for 2008 incentive compensation in 2009. Interest and dividends represents interest paid on the outstanding balance of redeemable preferred stock. The $11,000 (10%) decline is a result of interest paid on a lower preferred stock balance of resulting from the $1,368,000 redemption made in 2008. Partially offsetting these decreases was a $10,000 (2%) increase in payroll and benefits in the three months ended March 31, 2009 compared to the same period in 2008. Finally, options and other expense to non-board member executives and key employees increased $12,000 (92%) in the current period compared to the same period in 2008 resulting primarily from common stock options expensed over the life of the options for awards made in September 2008.

Liquidity and Capital Resources

The primary sources of our liquidity for the three months ended March 31, 2009 were funds provided by insurance premiums collected, net investment income, recoveries from reinsurers and proceeds from the maturity and sale of invested assets.  The primary uses of cash are losses from insurance claims, loss adjustment expenses, operating expenses, the acquisition of invested and fixed assets and reinsurance premiums.

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Cash Flows. Our total cash and cash equivalents balance at March 31, 2009 was $38,423,000, an increase of $16,363,000 (74%) in the current quarter as cash provided by operating and investing activities more than offset net cash used in financing activities. Our cash flows provided by operating activities totaled $9,721,000 at March 31, 2009 on the strength of $6,012,000 in net income adjusted for net realized investment losses and from reinsurance reimbursements for prior years’ swing-rated treaties totaling $2,492,000. Our Insurance Services segment generated the bulk of the cash received from operating activities, the result of increased premium and maintenance fee receipts and decreased claims payouts. Our cash flows provided by investing activities totaled $8,920,000 in the current quarter primarily as a result of proceeds from the sale of available-for-sale fixed income and equity securities in excess of purchases of these securiti es. Cash used in financing activities totaled $2,278,000 for the three months ended March 31, 2009 primarily as a result of preferred share redemptions and repurchases of our common stock under our share repurchase program. For details of the amounts described above, refer to the Condensed Consolidated Statements of Cash Flows of this Form 10-Q.

Historically, we have maintained a strong liquidity position and, as a result, we have been able to satisfy our operational and capital expenditure requirements with cash generated from our operating and investing activities. These same sources of funds have also allowed us to pursue investment and expansion opportunities consistent with our growth plans. Although there can be no assurance our operating activities will provide positive cash flow in the future, we are optimistic that our working capital requirements will be met for the foreseeable future because our current cash position is very strong, with a balance of approximately $38,423,000, and a large portion of our approximate $202,218,000 investment portfolio is in short-term, highly liquid bonds and other fixed income securities.

Letters of Credit. From 1997 through 2002, we assumed reinsurance liabilities on medical professional liability policies written by another insurance company in the state of Texas. In the course of assuming this business, we have established a letter of credit for the benefit of this insurance company in the amount of $500,000 and pledged assets in the amount of $525,000 to secure the letter of credit as of March 31, 2009.  

Capital Expenditures. In April 2007 we entered into a contract with a vendor to provide us with and implement an integrated policy and claims administration system. The total capitalized expenditures for the project is anticipated to be approximately $2,000,000. Our capital expenditures for all equipment including hardware and software costs were $81,000 for the three months ended March 31, 2009 of which approximately $70,000 were related to this software implementation project and the remainder of $11,000 was primarily related to network and hardware upgrades. We expect to incur additional capitalized expenditures of approximately $850,000 for the remainder of this project, which are expected to be funded from cash on hand over the remainder of 2009.

Our ability to make scheduled payments or to fund planned capital expenditures will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. There can be no assurance that our business will generate cash flow from operations or that we will realize anticipated revenue growth and operating improvements sufficient to make scheduled payments and fund planned future capital expenditures.

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Restrictions on Dividends by API. In addition to restrictions on dividends and distributions applicable to all Texas stock insurance companies, for so long as any of our Series A redeemable preferred stock is outstanding, the Texas Department of Insurance prohibits API from paying dividends to the Company  in any calendar year unless and until we have complied with our redemption and dividend payment obligations to the holders of our Series A redeemable preferred stock for that year. Our agreement with the Texas Department of Insurance also provides that, until all of the Series A redeemable preferred stock has been fully redeemed and all dividends have been paid, API will not make aggregate annual dividends to us with respect to API’s capital stock in excess of the lesser of 10% of API’s prior year-end policyholder statutory surplus or API’s prior year statutory net income, and in no event may such distributions exceed A PI’s statutory earned surplus. Accordingly our subsidiaries may not be able to pay funds to us and, even if paid such funds may not be sufficient to enable us to meet our obligations. For calendar year 2008, the dividend restriction is $8,804,000 and $1,000,000 of these dividends were paid to us during the quarter ended March 31, 2009.

Escrow Account. In connection with the API acquisition, the Texas Department of Insurance has required us to place $2,500,000 into an escrow account with a bank, to remain in escrow until the aggregate remaining redemption and dividend obligation relating to our Series A redeemable preferred stock is less than the amount of the escrow balance. No withdrawals may be made from this escrow account without prior approval from the Texas Department of Insurance. To satisfy this condition of the merger, we have been purchasing fixed income securities with one year terms. As of March 31, 2009, we hold in escrow a $2,500,000 fixed income security paying 2.14% interest. This security is included in fixed maturities, available for sale.

At March 31, 2009, API had investments with a fair market value of $1,479,000 on deposit with state insurance departments to satisfy regulatory requirements and these securities are included in fixed maturities, available for sale.

There are no participation agreements or purchase commitments as of March 31, 2009. Our primary liability is the reserves for losses and loss adjustment expenses which are estimates of the ultimate expected payouts on existing reported and estimated unreported claims. These reserves totaled $91,341,000 at March 31, 2009. Our reserves for unpaid losses and loss adjustment expenses are an estimate of future cash flows necessary to fulfill insurance obligations based on insured events that have already occurred, but the amount and timing of the cash flow is uncertain. As a result of the acquisition of API on April 1, 2007, we issued Series A mandatorily redeemable preferred stock. The holders of our Series A redeemable preferred stock are entitled to cumulative dividends thereon at the rate of three percent per annum payable on the remaining redemption value per share, in priority to the payments of dividends on our common shares. Holders of Series A redeema ble preferred stock have no preemptive rights and have the same voting rights as the holders of our common stock. The preferred shares are non-certificated and mandatorily redeemable. They must be redeemed ratably at not less than $1,000,000 per year, with all remaining outstanding shares being redeemed by December 31, 2016. The remaining redemption obligation was $7,050,000 at March 31, 2009.

Other Significant Balance Sheet Items

We maintain a portion of our investment portfolio in short-term securities and cash to meet short-term operating liquidity requirements, including the payment of losses and loss expenses. We also invest a substantial part of our cash flow from operations principally in bonds and other fixed income securities. We plan to continue our emphasis on fixed income securities investments.

Cash and cash equivalents and invested assets totaled $240,641,000 and $231,769,000 at March 31, 2009 and December 31, 2008, respectively. Cash and cash equivalents and invested assets represent 83% and 82% of our total assets for the same respective periods. We believe that a majority of our short-term and fixed-maturity securities are readily marketable, and that our invested assets have scheduled maturities in line with our projected cash needs.

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Reinsurance recoverables decreased by $1,057,000 (8%) to $12,739,000 at March 31, 2009 from $13,796,000 at December 31, 2008 primarily as a result of the favorable development in the reinsurance layer of $832,000 as discussed in Note 5 to the unaudited financial statements included herein.

In addition to an adjustment to premiums ceded, estimates of ultimate reinsurance ceded premium amounts compared to the amounts paid on a provisional basis give rise to a balance sheet asset classified as “Other Amounts Receivable Under Reinsurance Contracts” or a balance sheet liability classified as “Funds Held Under Reinsurance Treaties.” Furthermore, each retrospective treaty requires a 24 or 36 month holding period before any premium adjustments or cash can be returned or paid. The ultimate settlement amount is not determined until all losses have been settled under the respective treaties. As of March 31, 2009, we have recorded a balance sheet liability, “Funds Held Under Reinsurance Treaties” of $5,112,000, which represent the differences between the estimates of ultimate reinsurance premiums ceded amounts for the 2002 through 2008 treaty years as compared to the amounts paid on a provisional basis.

Other amounts receivable under reinsurance contracts decreased $1,497,000 (100%) to $0 at March 31, 2009 from $1,497,000 at December 31, 2008 due to a net payment of $3,463,000 received from reinsurers primarily for the initial reimbursement for the excess reinsurance premiums paid on a provisional basis for the 2006 treaty year.  

Accrued expenses and other liabilities decreased $2,145,000 (34%) to $4,121,000 at March 31, 2009 from $6,266,000 at December 31, 2008 primarily due to payment of 2008 incentive compensation in March, 2009.

Adoption of Recent Accounting Pronouncements

The effects of new accounting pronouncements are described in Note 3 of the Notes to unaudited condensed consolidated financial statements included elsewhere in this report. Such information is incorporated herein by reference.

Off Balance Sheet Arrangements

There were no off-balance sheet arrangements as of March 31, 2009.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are principally exposed to three types of market risk related to our investment operations, including credit risk, interest rate risk, and equity price risk. The term market risk refers to the risk of a loss arising from adverse changes in market rates and prices such as interest rates, credit risk, equity prices and foreign currency exchange rates.

We invest our assets primarily in fixed-maturity securities, which as of March 31, 2009 and December 31, 2008 comprised approximately 79% and 85% of total investments, respectively, including unrestricted cash balances, at market value. As of March 31 2009 and December 31, 2008, the fair value of investments in fixed maturity securities was $190,630,000 and $198,011,000, respectively. The decrease in fixed-income maturities is primarily the result of the sale of additional fixed-maturity securities, primarily non-agency CMO’s during the three months ended March 31, 2009. Our intent is to continue to focus on preservation of principal over yield during the current economic crisis.

The fixed-income maturities consist predominately of investment grade U.S. government agency and non-agency collateralized mortgage obligations and U.S. government agency mortgage-backed bonds for the purpose of generating ample cash flow to meet claim funding requirements while maintaining a reasonable investment yield.  

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We have exposure to credit risk primarily as a holder of fixed-income securities. We control this exposure by emphasizing investment grade quality in the fixed-income securities we purchase. At March 31, 2009 and at December 31, 2008, substantially all of our fixed-income portfolio consisted of investment grade securities. We believe that this concentration of investment grade securities limits our exposure to credit risk on our fixed-income investments. The financial environment globally and in the United States has recently experienced significant volatility. Our investment portfolio and the fair value of our investment holdings has been affected by these poor economic conditions and recent changes in the financial and credit markets, and we rely on the investment income produced by our investment portfolio to contribute to our profitability. Future changes in interest rates and credit quality caused by a continued market downturn will likely resul t in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on, our fixed income securities, which could have a material adverse affect on our financial condition, liquidity or results of operations.  

Our investment portfolio is also subject to credit and cash flow risk, including risks associated with our investments in mortgage-backed securities. Because our investment portfolio is the largest component of our consolidated balance sheet, further deterioration of the economy and the financial and credit markets could result in additional other-than-temporary impairments that could be material to our financial condition and operating results. For examples, such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies or municipalities in which we maintain our investment holdings. Also, in periods of market illiquidity and instability such as the current financial crisis, the fair value of our investments is more difficult to estimate, could result in assessments of fair value greater or less than amounts received in actual transactions and may have unforeseen consequences that we are curren tly unable to predict. Volatile or illiquid markets increase the likelihood that such assumptions may not behave in historically predictable manners, resulting in fair value estimates that are overstated compared with actual amounts that could be realized upon disposition or maturity of the security. For additional discussion of our fixed income securities including our non-agency collateralized mortgage obligations and related other than temporary impairment as well as our fair value measurements, see Notes 4 and 13 to our unaudited condensed consolidated financial statements included herein.

The value of the fixed-income maturities are also subject to interest rate risk. As market interest rates decrease, the value portfolio increases with the opposite holding true in rising interest rate environments. All of our fixed income securities are designated as available-for-sale and, accordingly, are presented at fair value on our balance sheets. Fixed rate securities may have their fair market value adversely affected due to a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. We believe we are in a position to hold our fixed-income investments until maturity if we elect to do so.

Changes in interest rates as well as continued market instability due to a prolonged economic crisis continue to have an impact in our Financial Services segment. The general level of interest rates may trend higher or lower in 2009 and this move may impact our level of business in different fixed-income sectors. Since revenues are primarily recorded as commissions earned on the trading of fixed-income securities, a volatile interest rate environment or continued poor economic conditions in 2009 could lead to investor uncertainty and an unwillingness to invest, thus negatively affecting our commission revenues.  

Equity securities comprised approximately 4% of total investments, including unrestricted cash, at market value as of both March 31, 2009 and December 31, 2008. As of March 31, 2009 and December 31, 2008, the fair value of investments in equity securities was $10,110,000 and $10,099,000, respectively.

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Equity securities are subject to equity price risk, which is defined as the potential for loss in market value due to a decline in equity prices. The value of common stock equity investments is dependent upon the general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by investors in the equity markets. We regularly review the carrying value of our investments and identify and record losses when events and circumstances indicate that such declines in the fair value of such assets below our accounting basis are other-than-temporary. We recorded net write-downs on equity securities of $311,000 for the three months ended March 31, 2009 as a result of these equities having other-than-temporary impairments.

The remainder of the investment portfolio consists of cash and highly liquid short-term investments.

As mentioned above, our invested assets are subject to interest rate risk and equity price risk. The following table presents the effect as of March 31, 2009 on current estimated fair values of the fixed-maturity securities available-for-sale and equity securities assuming a 1% increase in market interest rates and a 10% decline in equity prices.

	Carrying Value		Estimated Fair Value at Current Market Rates/Prices		Estimated Fair Value at Adjusted Market Rates/Prices (1)
			(in thousands)
Interest rate risk:
Fixed-maturities; available for sale	$	190,630	$	190,630	$	185,322
Equity price risk:
Equity securities	$	10,110	$	10,110	$	9,099

(1)

Adjusted rates assume a 1% increase in market rates for fixed rate securities and a 10% decline in equity market values.

For all our financial assets and liabilities, we seek to maintain reasonable average durations, consistent with the maximization of income, without sacrificing investment quality and providing for liquidity and diversification.

The estimated fair values at current market rates for financial instruments subject to interest rate risk and equity price risk in the table above are the same as those included elsewhere herein. The estimated fair values are calculated using simulation modeling based on the most likely outcome, assuming a 1% shift in interest rates.

This sensitivity analysis provides only a limited, point-in-time view of the market risk sensitivity of certain of our financial instruments. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in the sensitivity analysis. The sensitivity analysis is further limited, as it does not consider any actions that we could take in response to actual and/or anticipated changes in interest rates and equity prices.

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We are also subject to credit risk with respect to our reinsurers. Although our reinsurers are liable to us to the extent we cede risk to them, we are ultimately liable to our policyholders on all risks we have reinsured. As a result, reinsurance agreements do not limit our ultimate obligations to pay claims to policyholders and we may not recover claims made to our reinsurers. The ultimate effects of the recent market volatility, credit crises, and overall economic downturn may have unforeseen consequences on the credit quality, liquidity and financial stability of the reinsurers with which we do business. As recent market experience indicates, such deteriorations in financial condition can occur rapidly, leaving us unable to react to such a scenario in a prudent manner consistent with orderly markets. This in turn could adversely affect our financial condition, liquidity or results of operations. For additional discussion of our reinsurers and related r einsurance recoverable, see Note 5 to unaudited financial statements included herein.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure material information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2009.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on our financial condition or results of operations. See Note 7 to the unaudited consolidated financial statements included herein.

ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the period ended December 31, 2008 which could materially affect our business, financial condition or future results. The risks described in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could have a material adverse effect on our business, financial condition and results of operations.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Items 2(a) and (b) are inapplicable.

(c)  Stock Repurchases for the three months ended March 31, 2009:

Period	Total Number of shares Purchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May yet be Purchased under the Plans or Programs (2)
January 1, 2009 – January 31, 2009	11,575	$	20.18	11,575	$	2,673,000
February 1, 2009 – February 28, 2009	16,507	$	20.23	16,507	$	2,339,000
March 1, 2009 – March 31, 2009	27,000	$	19.29	27,000	$	5,819,000

(1)

Of the total shares purchased, all were purchased in open market transactions.

(2)

Our original $2,000,000 share repurchase program was announced August 17, 2004 and was increased on six subsequent occasions, most recently being increased by $4,000,000 on March 11, 2009. As of March 31, 2009, we had a maximum dollar value of $5,819,000 remaining for the future purchase of shares under the Stock Repurchase program.

Our open market stock repurchases are made in reliance upon Rule 10b-18 of the Exchange Act safe harbor from certain market manipulation claims for purchases by an issuer of its own common stock. Under this rule, we may not open trading in our shares, may not trade in the last thirty minutes of the trading session, may bid no more than the current bid or last trade, and may purchase no more in a single day than 25% of the average daily trading volume for the last four calendar weeks, unless certain rules for larger block trades are followed. Our stock option plan allows us to accept shares owned by an optionee immediately prior to the exercise of an option in payment for the option exercise. Additionally, we consider unsolicited offers to sell shares back to us and make a decision on purchasing them based on the price and our business needs at the time of the offer. We give priority in our repurchases to shares offered in option exercises, followed by ope n market purchases and finally unsolicited offers from shareholders. We do not reissue any shares acquired in repurchases, instead canceling them upon acquisition.

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to vote to security holders during the three months ended March 31, 2009.

ITEM 5.  OTHER INFORMATION

Not Applicable

ITEM 6.  EXHIBITS

10.1

Executive Employment Agreement between American Physicians Service Group and Kenneth S. Shifrin (1)

10.2

Executive Employment Agreement between American Physicians Service Group and Timothy L. LaFrey (1)

10.3

Executive Employment Agreement between American Physicians Service Group and Marc J. Zimmermann. (1)

10.4

Executive Employment Agreement between American Physicians Service Group and Maury L. Magids (1)

31.1

Section 302 Certification of Chief Executive Officer (1)

31.2

Section 302 Certification of Chief Financial Officer (1)

32.1

Section 906 Certification of Chief Executive Officer (1)

32.2

Section 906 Certification of Chief Financial Officer (1)

99.1        Investment Holdings Listing as of March 31, 2009 (1)

________________

(1)

Filed herewith.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	American Physicians Service Group, Inc.
Date:  May 8, 2009	/s/ Marc J. Zimmermann
	Marc J. Zimmermann, Chief Financial Officer

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EX-10

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is by and between American Physicians Service Group, Inc., a Texas corporation (“Employer”) and Kenneth S. Shifrin, an individual (“Executive”), and shall be effective as of April 1, 2009 (the “Effective Date”).

Preliminary Statements

Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill.

Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable.

Statement of Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I.
Term; Termination; Prior Agreements.

Section 1.1

Term.  Employer hereby hires Executive and Executive accepts such employment for a term of four years commencing on the Effective Date.

Section 1.2

Termination Upon Expiration.  Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the four-year term described in Section 1.1.

Section 1.3

Termination Upon Death or Permanent Disability.  This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive’s ability to materially perform Executive’s duties hereunder for a period of three months or more shall be considered to be permanent.

Section 1.4

Termination for Cause.  If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement “for cause” if:

(a)

In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or

(b)

in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the “Board”), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.

A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive’s regular duties.

Section 1.5

Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for “good reason.” Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control):

(a)

Executive may terminate this Agreement for any or no reason upon six months’ prior written notice, which notice cannot be given before the consummation of such Change of Control or after the expiration of the term of this Agreement pursuant to Section 1.1;

(b)

Executive may terminate this Agreement upon thirty days’ prior written notice if Executive’s base salary, as provided hereunder, is diminished;

(c)

Executive may terminate this Agreement upon thirty days’ prior written notice if Employer requires that Executive move to a city other than Austin;

(d)

Executive may terminate this Agreement upon thirty days’ prior written notice if the Board or any person authorized to act by the Board (for purposes of this Agreement, any such authorized person is referred to as an “Authorized Board Designee”) materially and unreasonably interferes with Executive’s ability to fulfill Executive’s job duties; or

(e)

Executive may terminate this Agreement upon thirty days’ prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive’s job responsibilities are materially narrowed or diminished.

Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section and, in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Furthermore, if the term of this Agreement expires pursuant to Section 1.1 prior to the end of any notice period otherwise required under this Section, then the applicable notice period does not apply and notice may be given at any time prior to expiration pursuant to Section 1.1.

Section 1.6

Termination of Agreement by Employer Without Cause.  Employer has the right to terminate this Agreement, other than “for cause,” on thirty days’ prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given.

Section 1.7

Termination of Agreement by Executive Without Good Reason.  Executive may terminate Executive’s employment, other than for “good reason,” upon thirty days’ prior written notice stating that this Agreement is terminated other than for “good reason.” Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such thirty-day notice period and, in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.

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Section 1.8

Executive’s Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following:

(a)

If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4 or Section 1.7 then Employer shall pay Executive or Executive’s representative, as the case may be, Executive’s then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive’s duties hereunder), and, except as specifically described in subsection 1.8(e) below, Employer shall have no further obligations hereunder.

(b)

If Employer terminates this Agreement without cause pursuant to Section 1.6, or Executive terminates this Agreement pursuant to Section 1.5(b), (c), (d) or (e) then, in addition to receiving Executive’s then-current base salary through the effective date of termination Executive shall receive within fifteen days of the effective date of termination a lump sum payment equal to four times the average annual total cash compensation earned by Executive for the prior four years, including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.

(c)

If Executive terminates this Agreement for good reason pursuant to Section 1.5(a), then, in addition to receiving Executive’s then-current base salary through the effective date of termination Executive shall receive within fifteen days of the effective date of termination a lump sum payment equal to two times the average annual total cash compensation earned by Executive for the prior four years, including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.

(d)

Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the thirty-day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive’s duties hereunder. Furthermore, if this Agreement is terminated after a Change of Control, and Executive holds any rights or options exercisable or exchangeable for, or convertible into, a class of capital stock of Employer that is not or will not be publicly traded on the NASDAQ or another national exchange after such termination or Change of Control, then Employer agrees to buy from Ex ecutive all such rights and options that have an exercise price below the per share price assigned to the capital stock in the Change of Control, or if no price was assigned, the per share market price on the date of the Change of Control (whichever price is applicable, the “Market Price”). The purchase price for each such right or option shall be determined by multiplying the number of shares of capital stock that may be acquired using such right or option by the difference between the exercise price stated in such right or option and the Market Price.

(e)

Notwithstanding anything contained in this Agreement to the contrary, if Executive’s employment is terminated by either Executive or Employer for any reason other than (i) upon the death of Executive, or (ii) by Employer “for cause” pursuant to Section 1.4; then Executive shall be entitled to additional health care benefits as described in this paragraph. Upon a qualifying termination and thereafter for the remainder of Executive’s life Employer will use its best efforts to provide health insurance coverage to Executive and Executive’s spouse at the same level as such coverage was provided through Employer’s health insurance benefit plan that provided health care coverage for Executive and Executive’s spouse at the time of termination. Employer shall be entitled to determine the method for securing such coverage from time to time and may utilize government provided health benefits such as Medicare coverage, if available, to satisfy this obligation in whole or in part. Employer will not be obligated to maintain or secure coverage from any specific provider to satisfy this obligation. Executive agrees to cooperate fully with Employer in securing and providing these additional benefits including, without limitation, providing consulting services or working flexible hours to the extent Executive is able to do so, so that Executive can remain covered under Employer’s group benefit plan(s). In no event will Employer be obligated to incur annual costs exceeding a multiple of three times the actual annual cost to Employer for Executive’s and Executive’s spouse’s health insurance coverage in effect at the date of Executive’s termination to satisfy the obligations described in this paragraph.

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Section 1.9

Survival.  Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive’s employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment related benefits to Executive.

Section 1.10

Change of Control.  As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:

(a)

Any person, entity or “group” within the meaning of Sections 13(d) or 14(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board;

(b)

a merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors;

(c)

the sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors; or

(d)

any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where “Incumbent Director” means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors.

ARTICLE II.
Duties of Executive

Subject to the approvals by and the ultimate supervision of the Board, Executive during the term hereof shall serve as Employer’s Chairman of the Board, President and Chief Executive Officer. Subject to the control of the Board, Executive shall have the responsibilities commensurate with Executive’s title and as otherwise provided in Employer’s bylaws and other governing documents, but in any event, construed in a manner generally consistent with the responsibilities of Executive that existed immediately prior to the Effective Date.

During the period of employment hereunder, Executive shall devote to the business of Employer substantially the same amount of Executive’s time and efforts that Executive devoted to the business of Employer prior to the Effective Date; provided, however, that this Section shall not be construed as preventing Executive from investing Executive’s personal assets in business ventures that do not compete with Employer or Employer’s Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Employer acknowledges that Executive owns a material ownership interest in HealthTronics, Inc., a Delaware corporation (“HTRN”), and that Executive serves as a director and may serve as an officer of HTRN. Employer agrees that Executive may continue to serve HTRN in such capacities and devote Executive’ s time and efforts to such service in a manner generally consistent with the time and efforts devoted by Executive prior to the Effective Date. Consistent with the foregoing, Executive shall use Executive’s best efforts to promote the interests of Employer and Employer’s Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer’s Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”

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ARTICLE III.
Salary; Expense Reimbursements

Section 3.1

Salary.  As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $400,000 per calendar year (prorated for partial years), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate.

Section 3.2

Other Benefits.  During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board.

Section 3.3

Bonuses.  In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.

Section 3.4

Expenses.  Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

Section 3.5

Location of Employment.  The parties acknowledge and agree that Executive’s employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive’s duties hereunder and as otherwise requested by Employer.

ARTICLE IV.
Executive’s Restrictive Covenants

Section 4.1

Confidentiality Agreement.  Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets (“Proprietary Information”) pertaining to, or arising from, the business of Employer and/or Employer’s Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer’s Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer’s Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive’s employment, any and all information which Executive acquires, or to which Executive has access, during Executive’s employment by Employer, that has not been publicly disclosed by Employer or Employer’s Affiliates, that is not a matter of common knowledge by their respective competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer’s Affiliates.

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Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive’s employment hereunder:  (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer’s or Employer’s Affiliates’ business, all other tangible Proprietary Information in Executive’s possession or control, and all of Em ployer’s and the Affiliates’ credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive’s control.

Section 4.2

Nonsolicitation Agreement.  During Executive’s employment hereunder and for a period of four years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive’s own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer’s Affiliates, any client, account or location of Employer or Employer’s Affiliates with which Executive has had any contact as a result of Executive’s employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer’s Affiliates.

Section 4.3

Remedies.  Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing the provisions of this Agreement.

ARTICLE V.
Miscellaneous

Section 5.1

Assignment.  No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement.

Section 5.2

Amendments.  This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

Section 5.3

Waiver of Provisions; Remedies Cumulative.  Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise there of or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.

6

Section 5.4

Further Assurances.  At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder.

Section 5.5

Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith constitute the entire agreement of the parties hereto regarding the subject matter hereof and, except as provided otherwise herein, supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof. Without limiting the foregoing, this Agreement supersedes and replaces that prior Employment Agreement with Executive dated December 1, 2007.

Section 5.6

Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detri ment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.

Section 5.7

GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.

Section 5.8

Language Construction.  This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the s ingular and plural. Use of the words “herein,” “hereof,” “hereto,” “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.

7

Section 5.9

Notice.  Whenever this Agreement requires or permits any notice, request or demand from one party to another, the notice, request or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by courier service, when actually received by the party to whom notice is sent, or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail (postage prepaid, certified or registered), addressed to the appropriate party or parties at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):

If to Employer:

American Physicians Service Group, Inc.

1301 S. Capital of Texas Hwy., Suite C-300

Austin, TX  78746

Attention:  Board of Directors

If to Executive:

Kenneth S. Shifrin

15801 Chateau Avenue

Austin, TX  78734

SECTION 5.10

CHOICE OF FORUM; ATTORNEYS’ FEES.  THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS, MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS’ FEES IN ADDITION TO ANY OTHER RELIEF GRANTED.

Section 5.11

Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

[Signature page follows]

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SIGNATURE PAGE
TO
EXECUTIVE EMPLOYMENT AGREEMENT

EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above.

EMPLOYER:	American Physicians Service Group, Inc.
	/s/ Tim LaFrey
	Tim LaFrey, President
EXECUTIVE:
	/s/ Kenneth S. Shifrin
	Kenneth S. Shifrin

S-1

EX-10

Exhibit 10.2

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is by and between American Physicians Service Group, Inc., a Texas corporation (“Employer”) and Timothy L. LaFrey, an individual (“Executive”), and shall be effective as of April 1, 2009 (the “Effective Date”).  

Preliminary Statements

Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill.  

Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable.  

Statement of Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:  

ARTICLE I.

Term; Termination; Prior Agreements.

Section 1.1

Term.  Employer hereby hires Executive and Executive accepts such employment for a term of four years commencing on the Effective Date.  

Section 1.2

Termination Upon Expiration.  Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the four-year term described in Section 1.1.  

Section 1.3

Termination Upon Death or Permanent Disability.  This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder.  For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive’s ability to materially perform Executive’s duties hereunder for a period of three months or more shall be considered to be permanent.

Section 1.4

Termination for Cause.  If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement “for cause” if:  

(a)

In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or

(b)

In a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the “Board”), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.  

A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination.  Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination.  If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement for cause.  Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive’s regular duties.  

Section 1.5

Termination for Good Reason.  Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for “good reason.” Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control):

(a)

Executive may terminate this Agreement for any or no reason upon six months prior written notice, which notice cannot be given before the consummation of such Change of Control or after the expiration of the term of this Agreement pursuant to Section 1.1;

(b)

Executive may terminate this Agreement upon thirty days’ prior written notice if Executive’s base salary, as provided hereunder, is diminished;

(c)

Executive may terminate this Agreement upon thirty days’ prior written notice if Employer requires that Executive move to a city other than Austin;

(d)

Executive may terminate this Agreement upon thirty days’ prior written notice if the Board or any person authorized to act by the Board (for purposes of this Agreement, any such authorized person is referred to as an “Authorized Board Designee”) materially and unreasonably interferes with Executive’s ability to fulfill Executive’s job duties; or

(e)

Executive may terminate this Agreement upon thirty days’ prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive’s job responsibilities are materially narrowed or diminished.  

Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.  Furthermore, if the term of this Agreement expires pursuant to Section 1.1 prior to the end of any notice period otherwise required under this Section, then the applicable notice period does not apply and notice may be given at any time prior to expiration pursuant to Section 1.1.

Section 1.6

Termination of Agreement by Employer Without Cause.  Employer has the right to terminate this Agreement, other than “for cause,” on thirty days’ prior written notice.  Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given.

Section 1.7

Termination of Agreement by Executive Without Good Reason.  Executive may terminate Executive’s employment, other than for “good reason,” upon thirty days’ prior written notice stating that this Agreement is terminated other than for “good reason.” Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such thirty-day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.  

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Section 1.8

Executive’s Rights Upon Termination.  Upon termination of this Agreement, Executive shall be entitled to the following:

(a)

If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive’s representative, as the case may be, Executive’s then current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive’s duties hereunder), and Employer shall have no further obligations hereunder.  

(b)

If Employer terminates this Agreement without cause pursuant to Section 1.6, or Executive terminates this Agreement pursuant to Section 1.5(b), (c), (d), or (e) then, in addition to receiving Executive’s then current base salary through the effective date of termination Executive shall receive within fifteen days of the effective date of termination a lump sum payment equal to four times the average annual total cash compensation earned by Executive for the prior four years (or the period since Executive’s initial employment with Employer, if less than four years), including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.  

(c)

If Executive terminates this Agreement for good reason pursuant to Section 1.5(a), then, in addition to receiving Executive’s then current base salary through the effective date of termination Executive shall receive within fifteen days of the effective date of termination a lump sum payment equal to two times the average annual total cash compensation earned by Executive for the prior four years (or the period since Executive’s initial employment with Employer, if less than four years), including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.  

(d)

Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder.  Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the thirty-day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive’s duties hereunder.  Furthermore, if this Agreement is terminated after a Change of Control, and Executive holds any rights or options exercisable or exchangeable for, or convertible into, a class of capital stock of Employer that is not or will not be publicly traded on the NASDAQ or another national exchange after such termination or Change of Control, then Employer agrees to buy from Executive all such rights and options that have an exercise price below the per share price assigned to the capital stock in the Change of Control, or if no price was assigned, the per share market price on the date of the Change of Control (whichever price is applicable, the “Market Price”).  The purchase price for each such right or option shall be determined by multiplying the number of shares of capital stock that may be acquired using such right or option by the difference between the exercise price stated in such right or option and the Market Price.  

Section 1.9

Survival.  Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV.  Furthermore, neither the termination of this Agreement nor the termination of Executive’s employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment-related benefits to Executive.  

Section 1.10

“Change of Control.”  As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:  

(a)

Any person, entity or “group” within the meaning of Section 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board;

(b)

A merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors;

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(c)

The sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors; or

(d)

Any change in the identity of directors constituting a majority of the Board within a twenty-four-month period unless the change was approved by a majority of the Incumbent Directors, where “Incumbent Director” means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors.  

ARTICLE II.

Duties of Executive

Subject to the approvals by and the ultimate supervision of the Board and the Chairman of the Board and Chief Executive Officer of Employer, Executive during the term hereof shall serve as Employer’s President and Chief Operating Officer.  Subject to the control of the Board and the Chairman of the Board and Chief Executive Officer of Employer, Executive shall have the responsibilities commensurate with Executive’s title and as otherwise provided in Employer’s bylaws and other governing documents.  

During the period of employment hereunder, Executive shall devote substantially all of Executive’s professional time and best efforts to the business of Employer and for the profit, benefit and advantage of Employer; provided, however, that this Section shall not be construed as preventing Executive from investing Executive’s personal assets in business ventures that do not compete with Employer or Employer’s Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof.  Consistent with the foregoing, Executive shall use Executive’s best efforts to promote the interests of Employer and Employer’s Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer.  Executive agrees to accept and h old all such offices and/or directorships with Employer and Employer’s Affiliates as to which Executive may, from time to time, be elected.  For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”  

ARTICLE III.

Salary; Expense Reimbursements

Section 3.1

Salary.  As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $400,000 per calendar year (prorated for partial years) payable in accordance with the regular payroll practices of Employer, as in effect from time to time.  Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate.  

Section 3.2

Other Benefits.  During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as is available to the Chief Executive Officer and other senior management executives of Employer under the policy of Employer in effect on the Effective Date.  Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years.  Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities.  Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board.  

Section 3.3

Bonuses.  In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement.  If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.  

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Section 3.4

Expenses.  Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement.  Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.  In addition to the foregoing, Employer shall pay or reimburse Executive for costs associated with Executive maintaining his licenses as an attorney and a certified public accountant, including without limitation license fees, dues and fees for professional association memberships which Executive maintains as of the date of this Agreement and attendance at professional continuing education seminars to the same extent as Executive participated in professional continuing education activities p rior to the entering into this Agreement.  

Section 3.5

Location of Employment.  The parties acknowledge and agree that Executive’s employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive’s duties hereunder and as otherwise requested by Employer.  

ARTICLE IV.

Executive’s Restrictive Covenants

Section 4.1

Confidentiality Agreement.  Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets (“Proprietary Information”) pertaining to, or arising from, the business of Employer and/or Employer’s Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer’s Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer’s Affiliates.  Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive’s employment, any and all information which Executive acquires, or to which Executive has access, during Executive’s employment by Employer, that has not been publicly disclosed by Employer or Employer’s Affiliates, that is not a matter of com mon knowledge by their respective competitors or that is not required to be disclosed through legal process.  The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer’s Affiliates.  

Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive’s employment hereunder:  (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer.  Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer’s or Employer’s Affiliates’ business, all other tangible Proprietary Information in Executive’s possession or control, and all of Employer’s and th e Affiliates’ credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive’s control.  

Section 4.2

Nonsolicitation Agreement.  During Executive’s employment hereunder and for a period of four years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive’s own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer’s Affiliates, any client, account or location of Employer or Employer’s Affiliates with which Executive has had any contact as a result of Executive’s employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer’s Affiliates.  

Section 4.3

Remedies.  Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement.  Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms.  Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief.  Injunctive relief may be sought in addition to any other available rights or remedies at law.  Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing the provisions of this Agreement.  

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ARTICLE V.

Miscellaneous

Section 5.1

Assignment.  No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto.  Any assignment in violation of the foregoing shall be null and void.  Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.  This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder.  The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to o ther provisions of this Agreement.  

Section 5.2

Amendments.  This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.  

Section 5.3

Waiver of Provisions; Remedies Cumulative.  Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto.  The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof.  No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof.  No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof.  No single or partial exercise of any right, power, privilege or remedy hereunde r shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.  No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.  

Section 5.4

Further Assurances.  At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder.  

Section 5.5

Entire Agreement.  This Agreement and the agreements contemplated hereby or executed in connection herewith constitute the entire agreement of the parties hereto regarding the subject matter hereof and, except as provided otherwise herein, supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof.  Without limiting the foregoing, this Agreement supersedes and replaces that prior Employment Agreement with Executive dated March 22, 2007.  

Section 5.6

Severability; Illegality.  In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom.  Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the part ies hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.  No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.  

Section 5.7

GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.  

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Section 5.8

Language Construction.  This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein.  The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof.  As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance.  The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof.  When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural.  Use of the words “herein,” “hereof,” “hereto,” “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.  

Section 5.9

Notice.  Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):  

If to Employer:

American Physicians Service Group, Inc.

1301 Capital of Texas Hwy, Suite C-300

Austin, TX  78746

Attention:  Board of Directors

If to Executive:

Timothy L. LaFrey

8507 Alverstone Way

Austin, TX  78759

Section 5.10

CHOICE OF FORUM; ATTORNEYS’ FEES.  THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS.  EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING.  THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGRE EMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL.  THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS’ FEES IN ADDITION TO ANY OTHER RELIEF GRANTED.

Section 5.11

Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.  

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EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above.  

EMPLOYER:	American Physicians Service Group, Inc.
	/s/ Kenneth S. Shifrin
	Kenneth S. Shifrin, Chief Executive Officer
EXECUTIVE:
	/s/ Timothy L. LaFrey
	Timothy L. LaFrey

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EX-10

Exhibit 10.3

EXECUTIVE EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is by and between American Physicians Service Group, Inc., a Texas corporation (“Employer”) and Marc J. Zimmermann, an individual (“Executive”), and shall be effective as of April 1, 2009 (the “Effective Date”).

Preliminary Statements

Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill.

Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable.

Statement of Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I.
Term; Termination; Prior Agreements.

Section 1.1

Term; Legal Employer.  Employer hereby hires Executive and Executive accepts such employment for a term of two years commencing on the Effective Date. The Parties acknowledge and agree that Employer is a holding company with multiple subsidiaries and, accordingly, Executives’ legal “employer” may, notwithstanding anything contained in this Agreement to the contrary, be either Employer or one or more of its current or future subsidiaries, which shall not constitute a breach or default under this Agreement by either Party hereto or alter the enforceability hereof in any respect; and the Parties further agree that the legal “employer” of Executive may be changed from time to time between and among Employer and one or more of its current or future subsidiaries without any need to amend or otherwise modify this Agreement.

Section 1.2

Termination Upon Expiration.  Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the two-year term described in Section 1.1.

Section 1.3

Termination Upon Death or Permanent Disability.  This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive’s ability to materially perform Executive’s duties hereunder for a period of three months or more shall be considered to be permanent.

Section 1.4

Termination for Cause.  If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement “for cause” if:

(a)

In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or

(b)

in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the “Board”), or any person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an “Authorized Board Designee”), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.

A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive’s regular duties.

Section 1.5

Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for “good reason.” Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control):

(a)

Executive may terminate this Agreement upon thirty days prior written notice if Executive’s base salary, as provided hereunder, is diminished;

(b)

Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin;

(c)

Executive may terminate this Agreement upon thirty days prior written notice if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive’s ability to fulfill Executive’s job duties; or

(d)

Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive’s job responsibilities are materially narrowed or diminished.

Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Furthermore, if the term of this Agreement expires pursuant to Section 1.1 prior to the end of any notice period otherwise required under this Section, then the applicable notice period does not apply and notice may be given at any time prior to expiration pursuant to Section 1.1.

Section 1.6

Termination of Agreement by Employer Without Cause.  Employer has the right to terminate this Agreement, other than “for cause,” on 30 days’ prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given.

Section 1.7

Termination of Agreement by Executive Without Good Reason.  Executive may terminate Executive’s employment, other than for “good reason,” upon 30 days prior written notice stating that this Agreement is terminated other than for “good reason.” Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.

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Section 1.8

Executive’s Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following:

(a)

If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive’s representative, as the case may be, Executive’s then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive’s duties hereunder), and Employer shall have no further obligations hereunder.

(b)

If Employer terminates this Agreement without cause pursuant to Section 1.6, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive’s then current base salary through the effective date of termination Executive shall receive within 15 days of the effective date of termination a lump-sum payment equal to two times the average annual total cash compensation earned by Executive for the prior two years, including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.

(c)

Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive’s duties hereunder. Furthermore, if this Agreement is terminated after a Change of Control, and Executive holds any rights or options exercisable or exchangeable for, or convertible into, a class of capital stock of Employer that is not or will not be publicly traded on the NASDAQ or another national exchange after such termination or Change of Control, then Employer agrees to buy from Execut ive all such rights and options that have an exercise price below the per share price assigned to the capital stock in the Change of Control, or if no price was assigned, the per share market price on the date of the Change of Control (whichever price is applicable, the “Market Price”). The purchase price for each such right or option shall be determined by multiplying the number of shares of capital stock that may be acquired using such right or option by the difference between the exercise price stated in such right or option and the Market Price.

Section 1.9

Survival.  Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive’s employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment related benefits to Executive.

Section 1.10

Change of Control.  As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:

(a)

Any person, entity or “group” within the meaning of § 13(d) or 14(d) of the of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board;

(b)

a merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors;

(c)

the sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors; or

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(d)

any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where “Incumbent Director” means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors.

Section 1.11

Prior Agreements.  The Parties acknowledge and agree that Executive has been subject to a prior Employment Agreement dated June 1, 2006, with FMI Partners, Ltd., a Texas limited partnership and a subsidiary of Employer (the “Prior Employment Agreement”). The Parties acknowledge and agree that the Prior Employment Agreement is, as of the execution of this Agreement, null and void in all respects and is hereby superseded and replaced in its entirety with this Agreement. Furthermore, this Agreement supersedes and replaces any other previous agreements, written or oral, between Executive and Employer or any subsidiary of Employer concerning employment of Executive.

ARTICLE II.
Duties of Executive

Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive shall serve as the Senior Vice President – Finance and Chief Financial Officer of Employer. Subject to the control of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with such titles and as otherwise provided in Employer’s or, as applicable, any subsidiary’s, bylaws and other governing documents.

During the period of employment hereunder, Executive shall devote substantially all of Executive’s professional time and best efforts to the business of Employer for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee; provided, however, that this Section shall not be construed as preventing Executive from investing Executive’s personal assets in business ventures that do not compete with Employer or Employer’s Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Executive shall use Executive’s best efforts to promote the interests of Employer and Employer’s Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer’s Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”

ARTICLE III.
Salary; Expense Reimbursements

Section 3.1

Salary.  As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $200,000 per calendar year (prorated for partial years), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate.

Section 3.2

Other Benefits.  During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board.

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Section 3.3

Bonuses. In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.

Section 3.4

Expenses.  Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

Section 3.5

Location of Employment. The parties acknowledge and agree that Executive’s employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive’s duties hereunder and as otherwise requested by Employer.

ARTICLE IV.
Executive’s Restrictive Covenants

Section 4.1

Confidentiality Agreement.  Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets (“Proprietary Information”) pertaining to, or arising from, the business of Employer and/or Employer’s Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer’s Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer’s Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive’s employment, any and all information which Executive acquires, or to which Executive has access, during Executive’s employment by Employer, that has not been publicly disclosed by Employer or Employer’s Affiliates, that is not a matter of common kn owledge by their respective competitors or that is not required to be disclosed through legal process. The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer’s Affiliates.

Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive’s employment hereunder:  (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer’s or Employer’s Affiliates’ business, all other tangible Proprietary Information in Executive’s possession or control, and all of Employer’s and the Affi liates’ credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive’s control.

Section 4.2

Nonsolicitation Agreement.  During Executive’s employment hereunder and for a period of two years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive’s own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer’s Affiliates, any client, account or location of Employer or Employer’s Affiliates with which Executive has had any contact as a result of Executive’s employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer’s Affiliates.

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Section 4.3

Remedies.  Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing the provisions of this Agreement.

ARTICLE V.
Miscellaneous

Section 5.1

Assignment.  No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement.

Section 5.2

Amendments.  This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

Section 5.3

Waiver of Provisions; Remedies Cumulative.  Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any oth er or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.

Section 5.4

Further Assurances.  At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder.

Section 5.5

Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith constitute the entire agreement of the parties hereto regarding the subject matter hereof and, except as provided otherwise herein, supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof.  Without limiting the foregoing, this Agreement supersedes and replaces that prior Employment Agreement with Executive dated September 1, 2007.  

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Section 5.6

Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto withou t substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.

Section 5.7

GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.

Section 5.8

Language Construction.  This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of a ll words shall include the singular and plural. Use of the words “herein,” “hereof,” “hereto,” “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.

Section 5.9

Notice.  Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):

If to Employer:

American Physicians Service Group, Inc.

1301 S. Capital of Texas Hwy, Suite C-300

Austin, TX  78746

Attention:  Board of Directors

If to Executive:

Marc J. Zimmermann

2306 Indian Trail

Austin, TX  78703

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Section 5.10

CHOICE OF FORUM; ATTORNEYS’ FEES.  THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A J URISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS’ FEES IN ADDITION TO ANY OTHER RELIEF GRANTED.

Section 5.11

Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above.

EMPLOYER:	American Physicians Service Group, Inc.
	/s/ Tim LaFrey
	Tim LaFrey, President
EXECUTIVE:
	/s/ Marc J. Zimmermann
	Marc J. Zimmermann

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EX-10

Exhibit 10.4

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (this “Agreement”) is by and among American Physicians Service Group, Inc. (“Employer”) and Maury Magids, an individual (“Executive”), and shall be effective as of April 1, 2009 (the “Effective Date”).

Preliminary Statements

Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill.

Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable.

Statement of Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I.
Term; Termination; Prior Agreements.

Section 1.1

Term; Legal Employer.  Employer hereby hires Executive and Executive accepts such employment for a term of one year commencing on the Effective Date.  The Parties acknowledge and agree that Employer is a holding company with multiple subsidiaries and, accordingly, Executives’ legal “employer” may, notwithstanding anything contained in this Agreement to the contrary, be either Employer or one or more of its current or future subsidiaries, which shall not constitute a breach or default under this Agreement by either Party hereto or alter the enforceability hereof in any respect; and the Parties further agree that the legal “employer” of Executive may be changed from time to time between and among Employer and one or more of its current or future subsidiaries without any need to amend or otherwise modify this Agreement.

Section 1.2

Termination Upon Expiration.  Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the term described in Section 1.1.

Section 1.3

Termination Upon Death or Permanent Disability.  This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder.  For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive’s ability to materially perform Executive’s duties hereunder for a period of three months or more shall be considered to be permanent.

Section 1.4

Termination for Cause.  If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement “for cause” if:

(a)

In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or

(b)

in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the “Board”), or any person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an “Authorized Board Designee”), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.

A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination.  Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination.  If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement for cause.  Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive’s regular duties.

Section 1.5

Termination for Good Reason. Any termination by Executive of this Agreement pursuant to this Section shall be deemed a termination by Executive for “good reason.” Executive may terminate this Agreement for good reason any time after a Change of Control in accordance with any of the following (with the further agreement that any election by Executive to not terminate this Agreement pursuant to this Section following a particular Change of Control shall not prevent the application of this Section to a subsequent Change of Control):

(a)

Executive may terminate this Agreement upon thirty days prior written notice if Executive’s base salary, as provided hereunder, is diminished;

(b)

Executive may terminate this Agreement upon thirty days prior written notice if Employer requires that Executive move to a city other than Austin;

(c)

Executive may terminate this Agreement upon thirty days prior written notice if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive’s ability to fulfill Executive’s job duties; or

(d)

Executive may terminate this Agreement upon thirty days prior written notice if Executive is reassigned to a position with diminished responsibilities, or Executive’s job responsibilities are materially narrowed or diminished.

Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.   Furthermore, if the term of this Agreement expires pursuant to Section 1.1 prior to the end of any notice period otherwise required under this Section, then the applicable notice period does not apply and notice may be given at any time prior to expiration pursuant to Section 1.1.

Section 1.6

Termination of Agreement by Employer Without Cause.  Employer has the right to terminate this Agreement, other than “for cause,” on 30 days prior written notice.  Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given.

Section 1.7

Termination of Agreement by Executive Without Good Reason.  Executive may terminate Executive’s employment, other than for “good reason,” upon 30 days prior written notice stating that this Agreement is terminated other than for “good reason.”  Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.

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Section 1.8

Executive’s Rights Upon Termination.  Upon termination of this Agreement, Executive shall be entitled to the following:

(a)

If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive’s representative, as the case may be, Executive’s then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive’s duties hereunder), and Employer shall have no further obligations hereunder.

(b)

If Employer terminates this Agreement without cause pursuant to Section 1.6, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive’s then current base salary through the effective date of termination, Executive shall receive within 15 days of the effective date of termination a lump-sum payment equal to two times the average annual total cash compensation earned by Executive for the prior two years including, without limitation, salary and bonus, and excluding all equity-based compensation, including, but not limited to, deferred stock and stock options.

(c)

Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder.  Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive’s duties hereunder.  Furthermore, if this Agreement is terminated after a Change of Control, and Executive holds any rights or options exercisable or exchangeable for, or convertible into, a class of capital stock of Employer that is not or will not be publicly traded on the NASDAQ or another national exchange after such termination or Change of Control, then Employer agrees to buy from Executive all such rights and options that have an exercise price below the per share price assigned to the capital stock in the Change of Control, or if no price was assigned, the per share market price on the date of the Change of Control (whichever price is applicable, the “Market Price”).  The purchase price for each such right or option shall be determined by multiplying the number of shares of capital stock that may be acquired using such right or option by the difference between the exercise price stated in such right or option and the Market Price.

Section 1.9

Survival.  Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV.  Furthermore, neither the termination of this Agreement nor the termination of Executive’s employment under this Agreement shall affect, limit, or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment related benefits to Executive.

Section 1.10

“Change of Control.”  As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:

(a)

Any person, entity or “group” within the meaning of §§ 13(d) or 14(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board;

(b)

a merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors;

(c)

the sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors; or

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(d)

any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where “Incumbent Director” means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors.

ARTICLE II.
Duties of Executive

Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive during the term hereof shall serve as President and Chief Operating Officer of American Physicians Insurance Company (“APIC”).  Subject to the control of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with Executive’s title and as otherwise provided in APIC’s bylaws and other governing documents.

During the period of employment hereunder, Executive shall devote substantially all of Executive’s professional time and best efforts to the business of Employer and for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee; provided, however, that this Section shall not be construed as preventing Executive from investing Executive’s personal assets in business ventures that do not compete with Employer or Employer’s Affiliates (as hereinafter defined) or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof.  Executive shall use Executive’s best efforts to promote the interests of Employer and Employer’s Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer’s Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”

ARTICLE III.
Salary; Expense Reimbursements

Section 3.1

Salary.  As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay, or cause one or more of Employer’s Affiliates to pay, Executive a salary of $300,000 per calendar year (prorated for partial years), payable in accordance with the regular payroll practices of Employer, as in effect from time to time.  Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate.  

Section 3.2

Other Benefits.   During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date.  Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years.  Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities.  Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board.

Section 3.3

Bonuses.  In the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement.  If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.

Section 3.4

Expenses.  Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement.  Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

4

Section 3.5

Location of Employment.  The parties acknowledge and agree that Executive’s employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive’s duties hereunder and as otherwise requested by Employer.

ARTICLE IV.
Executive’s Restrictive Covenants

Section 4.1

Confidentiality Agreement.  Executive acknowledges that Executive has been and will continue to be exposed to confidential information and trade secrets (“Proprietary Information”) pertaining to, or arising from, the business of Employer and/or Employer’s Affiliates, that such Proprietary Information is unique and valuable and that Employer and/or Employer’s Affiliates would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer’s Affiliates. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive’s employment, any and all information which Executive acquires, or to which Executive has access, during Executive’s employment by Employer, that has not been publicly disclosed by Employer or Employer’s Affiliates, that is not a matter of common kn owledge by their respective competitors or that is not required to be disclosed through legal process.  The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer’s Affiliates.

Except with prior approval of the Board or any Authorized Board Designee, Executive will not, either during or after Executive’s employment hereunder:  (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer.  Upon termination of employment, whether voluntary or involuntary, within forty-eight hours of termination, Executive will deliver to Employer (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer’s or Employer’s Affiliates’ business, all other tangible Proprietary Information in Executive’s possession or control, and all of Employer’s and th e Affiliates’ credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive’s control.

Section 4.2

Nonsolicitation Agreement.  During Executive’s employment hereunder and for a period of two years after Executive ceases to be employed by Employer, Executive shall not, directly or indirectly, for Executive’s own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or Employer’s Affiliates, any client, account or location of Employer or Employer’s Affiliates with which Executive has had any contact as a result of Executive’s employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer’s Affiliates.

Section 4.3

Remedies.  Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement.  Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms.  Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief.  Injunctive relief may be sought in addition to any other available rights or remedies at law.  Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing the provisions of this Agreement.

5

ARTICLE V.
Miscellaneous

Section 5.1

Assignment.  No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto.  Any assignment in violation of the foregoing shall be null and void.  Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.  This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder.  The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to o ther provisions of this Agreement.

Section 5.2

Amendments.  This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

Section 5.3

Waiver of Provisions; Remedies Cumulative.  Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto.  The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof.  No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof.  No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof.  No single or partial exercise of any right, power, privilege or remedy hereunde r shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.  No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.

Section 5.4

Further Assurances.  At and from time to time after the Closing, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder.

Section 5.5

Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith constitute the entire agreement of the parties hereto regarding the subject matter hereof and, except as provided otherwise herein, supersede all prior agreements and understandings, both written and oral, among the parties hereto with respect to the subject matter hereof.  Without limiting the foregoing, this Agreement supersedes and replaces that prior Employment Agreement with Executive dated March 1, 2008.

Section 5.6

Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom.  Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.  No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.

Section 5.7

GOVERNING LAW.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.

6

Section 5.8

Language Construction.  This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein.  The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof.  As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance.  The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof.  When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural.  Use of the words “herein,” “hereof,” “hereto,” “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.  

Section 5.9

Notice.  Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):

If to Employer:

American Physicians Service Group, Inc.

1301 Capital of Texas Hwy, Suite C-300

Austin, TX  78746

Attention:  Board of Directors

If to Executive:

Maury Magids

1500 Marshall Lane

Austin, TX  78703

Section 5.10

CHOICE OF FORUM; ATTORNEYS’ FEES.  THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS.  EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING.  THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT I N A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL.  THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS’ FEES IN ADDITION TO ANY OTHER RELIEF GRANTED.

Section 5.11

Counterparts.  This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

7

EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above.

EMPLOYER:	American Physicians Service Group, Inc.
	/s/ Timothy L. LaFrey
	Timothy L. LaFrey, President
EXECUTIVE:
	/s/ Maury L. Magids
	Maury L. Magids

8

EX-31

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

CERTIFICATION

I, Kenneth S. Shifrin, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of American Physicians Service Group, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 8, 2009	/s/ Kenneth S. Shifrin
		Kenneth S. Shifrin Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

CERTIFICATION

I, Marc J. Zimmermann, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of American Physicians Service Group, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	May 8, 2009	/s/ Marc J. Zimmermann
		Marc J. Zimmermann Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of American Physicians Service Group, Inc. (the “Company”) on Form 10-Q for the quarter ending March 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

/s/ Kenneth S. Shifrin	May 8, 2009
Kenneth S. Shifrin Chief Executive Officer	Date

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of American Physicians Service Group, Inc. (the “Company”) on Form 10-Q for the quarter ending March 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

/s/ Marc J. Zimmermann	May 8, 2009
Marc J. Zimmermann Chief Financial Officer	Date

EX-99

Exhibit 99.1

APSG Securities Held

As Of 03/31/2009

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
US Government Bonds
912795-S3-6	US Treasury Bill	4,175,000	4,128,721	4,167,360
912827-7B-2	US Treasury Note	500,000	501,077	549,530
912828-CL-2	US Treasury Note	2,000,000	2,007,352	2,015,620
912828-EM-8	US Treasury Note	1,000,000	993,702	1,062,730
912828-FD-7	US Treasury Note	1,000,000	998,851	1,083,670
912828-FN-5	US Treasury	300,000	302,178	327,915
912828-FX-3	US Treasury Note	1,000,000	998,543	1,025,270
912828-GG-9	US Treasury Note	1,000,000	998,619	1,035,980
912828-GM-6	US Treasury Note	1,000,000	996,454	1,098,280
912828-GR-5	US Treasury Note	1,500,000	1,492,485	1,565,565
912828-GT-1	US Treasury Note	1,000,000	999,989	1,007,620
912828-GU-8	US Treasury Note	1,000,000	993,400	1,108,980
912828-HW-3	US Treasury Inflation Protection	11,900,000	11,644,883	11,764,827
	Total Treasuries:	27,375,000	27,056,254	27,813,347
Government Agency Bonds
3128X5-4D-7	FHLMC Agency Note DC	2,000,000	2,001,327	2,005,320
3128X7-MP-6	FHLMC Agency Step-Up DC	1,000,000	997,787	1,002,580
3128X7-U3-6	FHLMC Agency Note NC	1,000,000	1,033,398	1,033,340
3128X8-GQ-9	FHLMC Agency Note DC	3,000,000	2,999,639	2,999,640
3128X8-KP-6	FHLMC Agency Note DC	3,000,000	2,999,735	3,000,120
3128X8-QT-2	FHLMC Agency Note NC	1,000,000	1,000,171	1,004,040
3133XC-TF-0	FHLB Agency Note NC	1,000,000	1,006,173	1,016,560
3133XF-LG-9	FHLB Agency Note NC	1,000,000	1,000,093	1,009,380
3133XH-RK-0	FHLB Agency Note NC	1,000,000	986,066	1,076,250
3133XL-HQ-9	FHLB Agency Note NC	2,000,000	2,002,201	2,163,760
3133XL-ME-0	FHLB Agency Note 1xC	1,000,000	1,000,000	1,013,440
3133XL-UM-3	FHLB Agency Note NC	1,000,000	1,008,592	1,015,940
3133XP-PN-8	FHLB Agency Note CC	2,000,000	1,997,776	2,000,620
3133XQ-GA-4	FHLB Agency Note 1xC	2,500,000	2,500,000	2,500,000
3134A4-US-1	FHLMC Agency Note NC	1,000,000	1,004,746	1,010,940
31359M-EY-5	FNMA Agency Note NC	2,000,000	2,035,708	2,051,880
31359M-ZL-0	FNMA Agency Note NC	1,000,000	1,055,022	1,060,000
3136F6-DJ-5	FNMA Agency Note NC	1,000,000	995,543	1,014,690
3137EA-BL-2	FHLMC Agency Note NC	1,000,000	1,021,919	1,022,110
31398A-TZ-5	FNMA Agency Note NC	1,000,000	1,022,173	1,027,810
	Total Agency:	29,500,000	29,668,070	30,028,420

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
Corporate Bonds
002819-AA-8	Abbott Laboratories NC	1,000,000	1,028,999	1,086,280
084664-AD-3	Berkshire Hathaway Fin NC	1,000,000	1,005,183	1,014,200
14912L-2Y-6	Caterpillar Fin Serv Corp NC	500,000	501,090	447,795
191216-AK-6	Coca-Cola Co. NC	1,000,000	1,047,942	1,068,210
264399-EQ-5	Duke Energy Corp. NC	1,000,000	1,013,326	1,023,730
36962G-3F-9	General Electric Cap Corp NC	1,000,000	1,009,628	949,650
377372-AC-1	GlaxoSmithKline Cap Inc. NC	1,000,000	1,005,378	1,040,400
478160-AQ-7	Johnson & Johnson NC	1,000,000	1,047,042	1,113,760
713448-BK-3	Pepsico Inc.	1,000,000	1,006,783	1,014,330
72447X-AA-5	Pitney Bowes Inc MTN NC	1,000,000	957,937	960,940
742718-DM-8	Procter & Gamble Co. NC	1,000,000	999,726	999,580
931422-AD-1	Walgreen Co. NC	1,000,000	1,015,528	1,059,680
53079E-AS-3	Liberty Mutual Group	200,000	209,457	158,104
	Total Corporate:	11,700,000	11,848,020	11,936,659
Municipal Bonds
012122-3E-5	Albany Cnty NY GO CC	1,000,000	986,052	973,300
017086-EA-3	Allegany Cnty NY GO DC	1,070,000	1,079,823	1,042,769
121403-WL-9	Burleson ISD TX GO NC	1,960,000	1,993,297	2,099,630
162375-3G-2	Chattanooga TN GO CC SNK	1,060,000	1,035,919	1,048,997
199491-YQ-8	Columbus OH GO CC	1,900,000	1,857,957	1,880,183
373028-PV-5	Georgetown TX GO CC	410,000	415,017	427,601
386137-4G-5	Grand Prairie TX GO CC	345,000	338,990	328,157
40727E-S5-7	Hamilton Cnty OH GO CC	1,205,000	1,192,538	1,209,459
40727E-T9-8	Hamilton Cnty OH GO CC	500,000	501,416	521,385
442330-T6-3	Houston TX GO CC	1,000,000	1,030,852	1,061,950
442403-BV-2	Houston ISD TX GO CC	1,000,000	969,103	1,001,920
478718-ZH-5	Johnson Cnty USD KS GO CC	1,000,000	936,623	1,003,640
528828-SJ-6	Lewisville ISD TX GO CC	1,000,000	953,563	999,950
590759-N5-1	Mesquite ISD TX GO CC	1,065,000	1,090,198	1,097,131
642169-5J-1	New Bedford MA GO NC	1,600,000	1,678,739	1,741,808
667027-A2-2	Northside ISD TX GO CC	1,000,000	968,451	1,010,390
667825-TW-3	Northwest ISD TX GO CC	1,000,000	1,068,071	1,111,770
702333-N5-0	Pasadena ISD TX GO CC	1,000,000	1,026,912	1,093,040
717095-U3-5	Pflugerville ISD TX GO CC	1,000,000	1,045,901	1,005,040
731197-UL-1	Polk Cnty IA GO CC	500,000	487,684	512,725
83710D-D5-4	South Carolina State SC GO CC	1,440,000	1,414,540	1,458,835
83710D-D7-0	South Carolina State SC GO CC	1,125,000	1,114,467	1,126,654
889855-TE-2	Tomball ISD TX GO CC	1,000,000	955,362	1,025,790
902307-HK-6	Tyler Jr. College TX REV CC	425,000	414,690	378,981
915137-E9-0	University of Tx TX REV CC	400,000	428,433	454,780
947100-MF-7	Weatherford TX GO CC	1,000,000	990,562	1,004,140
95308R-AL-3	West Harris Cnty TX REV CC SNK	500,000	524,970	541,570
969887-SD-1	Williamson Cnty TX GO CC	265,000	264,317	275,918
974450-RS-9	Winnebago Cnty IL GO CC SNK	845,000	836,363	802,944
	Total Municipal:	27,615,000	27,600,812	28,240,457

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
Agency Mortgage-Backed Bonds
31283K-N4-6	FHLMC Pool #G11311	166,068	164,519	173,659
3128GV-BY-5	FHLMC Pool #E90955	110,313	109,284	115,355
3128GV-BZ-2	FHLMC Pool #E90956	118,634	117,525	124,057
3128H4-E8-8	FHLMC Pool #E96459	584,296	578,493	610,456
3128KL-GN-1	FHLMC Pool #A57405	1,660,521	1,643,330	1,724,854
3128MJ-A4-2	FHLMC Pool #G08026	995,854	964,950	1,030,291
3128MJ-AQ-3	FHLMC Pool #G08014	1,264,161	1,224,949	1,307,876
31292J-BG-4	FHLMC Pool #C01839	1,909,357	1,850,204	1,975,383
31294K-KT-1	FHLMC Pool #E01206	188,203	186,432	196,183
31294K-KU-8	FHLMC Pool #E01207	180,308	178,616	187,951
31296W-NK-9	FHLMC Pool #A20394	993,551	962,809	1,027,908
31297P-JS-1	FHLMC Pool #A33873	939,516	909,651	971,417
31371K-GB-1	FNMA Pool # 254094	199,978	198,382	208,493
31371K-UK-5	FNMA Pool #254486	189,285	187,512	197,996
31371K-WE-7	FNMA Pool #254545	200,193	198,309	209,406
31371M-3X-3	FNMA Pool #256514	759,512	753,701	794,677
31371M-KF-3	FNMA Pool #255994	727,994	725,108	757,980
31371M-PJ-0	FNMA Pool #256125	768,185	749,753	796,433
31371M-RT-6	FNMA Pool #256198	673,832	670,520	702,426
31371M-SX-6	FNMA Pool #256234	1,381,044	1,374,252	1,439,648
31371M-T5-6	FNMA Pool #256272	1,027,194	1,022,145	1,070,783
31371N-CL-7	FNMA Pool #256675	822,523	799,893	852,373
31371N-CM-5	FNMA Pool #256676	770,267	760,964	802,328
31371N-EW-1	FNMA Pool #256749	1,232,630	1,220,398	1,288,859
31387A-W6-8	FNMA Pool #578569	315,712	314,212	331,128
31387C-P3-9	FNMA Pool #580142	204,859	203,227	213,581
31390K-3W-6	FNMA Pool #648913	126,387	125,213	132,204
31402D-C4-0	FNMA Pool #725591	1,831,478	1,773,974	1,894,292
31404J-3Y-9	FNMA Pool #770415	756,105	732,367	782,037
31406N-RB-2	FNMA Pool #815082	672,760	666,510	699,723
31409G-GX-8	FNMA Pool #870614	1,462,983	1,414,331	1,511,559
31411D-S7-5	FNMA Pool #905142	1,317,309	1,303,604	1,368,589
31411L-5E-7	FNMA Pool #911745	1,670,343	1,650,056	1,736,252
31413A-WS-8	FNMA Pool #939957	875,221	865,042	915,147
36202E-AY-5	GNMA II Pool #3623	1,168,740	1,134,746	1,214,055
	Total MBS:	28,265,314	27,734,981	29,365,356

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
AGENCY CMO's
31392H-C9-2	FNR 2003-9 BJ	846,903	836,505	871,683
31392H-RQ-8	FNR 2003-4 AD	700,197	691,344	721,167
31392J-3M-9	FNR 2003-21 PJ	342,362	335,250	349,829
31392J-Y5-2	FNR 2003-21 OV	554,159	526,303	563,009
31393C-AR-4	FNR 2003-34 VD	376,514	367,715	377,968
31393E-AE-9	FNR 2003-74 PJ	536,459	489,789	527,639
31393E-BF-5	FNR 2003-74 AE	726,295	699,087	723,746
31393E-FX-2	FNR 2003-79 NL	598,543	584,172	613,902
31393F-6H-4	FHR 2522 AH	1,228,000	1,200,196	1,271,074
31393F-JK-3	FHR 2527 LG	118,587	116,800	120,265
31393G-Y6-5	FHR 2541 LM	212,132	209,121	214,913
31393H-S4-5	FHR 2558 JS	593,889	582,595	612,593
31393J-4D-7	FHR 2554 JW	359,056	357,130	366,229
31393K-U2-9	FHR 2575 QP	93,692	92,756	95,423
31393L-JD-6	FHR 2564 GC	396,910	392,226	399,825
31393M-RM-5	FHR 2586 HL	775,281	735,159	800,969
31393Q-WR-9	FHR 2610 DG	732,197	703,807	734,948
31393R-4P-2	FHR 2617 BG	407,156	397,161	408,851
31393U-UC-5	FNR 2003-134 ME	455,672	442,480	469,050
31393V-P9-6	FHR 2628 LE	1,059,547	1,012,598	1,058,653
31393W-6K-0	FHR 2640 AL	768,356	749,972	793,197
31393W-EZ-8	FHR 2643 HJ	1,100,000	1,058,234	1,151,382
31393W-N5-4	FHR 2644 EC	354,290	339,957	355,650
31394E-JC-3	FNR 2005-55 LC	581,860	583,444	601,003
31394E-MW-5	FNR 2005-62 DT	1,000,000	982,607	1,032,680
31394K-ZA-5	FHR 2692 QT	840,017	833,142	851,441
31394T-RH-0	FHR 2762 XC	370,466	349,648	374,745
31394W-G5-1	FHR 2779 YA	678,344	645,347	684,517
31394X-K5-4	FHR 2772 QA	1,267,971	1,235,496	1,295,164
31395A-C8-6	FHR 2806 AC	1,950,523	1,936,365	1,994,465
31395C-Q3-8	FHR 2825 LE	1,000,000	986,754	1,028,024
31395D-BP-3	FNR 2006-40 VA	1,179,818	1,183,836	1,234,384
31395H-3S-7	FHR 2874 LC	1,000,000	998,049	1,046,782
31395L-XA-4	FHR 2916 YE	452,637	449,683	466,242
31395M-QS-1	FHR 2935 LM	586,590	575,328	605,318
31395N-QR-1	FHR 2006 QD	1,000,000	1,001,437	1,035,200
31395P-XB-3	FHR 2950 ON	922,579	916,502	947,183
31395P-ZJ-4	FHR 2949 BV	932,352	931,306	935,503
31395T-LX-0	FHR 2963 BK	772,073	740,667	779,193
31395U-SY-8	FHR 2977 PC	1,400,000	1,382,116	1,461,384
31395V-KF-5	FHR 2984 NA	342,484	342,318	348,408
31396C-SQ-4	FHR 3048 QA	678,907	672,817	697,013
31396F-HS-5	FHR 3072 AE	1,012,430	1,003,726	1,039,180
31396G-AV-3	FHR 3087 JB	597,066	599,286	617,058
31396G-UG-4	FHR 3099 PB	1,000,000	1,003,077	1,029,453
31396H-F8-7	FHR 3107 ME	1,098,969	1,089,988	1,122,357
31396H-VV-8	FHR 3117 PC	1,500,000	1,480,240	1,558,921
31396J-A3-9	FHR 3133 PB	2,000,000	2,003,122	2,048,657
31396N-7C-4	FHR 3138 QA	258,277	258,066	262,513
31396N-CW-4	FHR 3145 KC	2,000,000	1,962,602	2,088,401
31396N-M2-9	FHR 3147 YE	602,630	604,396	619,701
31396R-NN-3	FHR 3154 PJ	535,397	534,995	545,431
31396U-NL-0	FHR 3188 CK	780,463	773,156	800,139

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
AGENCY CMO's (continued)
31397A-HX-4	FHR 3200 MX	1,460,000	1,439,797	1,518,073
31397A-HY-2	FHR 3200 NA	757,962	758,788	769,867
31397A-QG-1	FHR 3203 MA	700,601	694,336	717,091
31397G-B9-0	FHR 3310 A	779,490	770,648	798,153
31397G-J5-0	FHR 3306 PB	1,400,000	1,383,563	1,443,543
31397J-GE-8	FHR 3330 PB	1,000,000	988,997	1,031,926
38374F-H4-9	GNR 2004-17 HG	518,173	498,136	534,661
38374M-EQ-8	GNR 2005-84 SC	95,448	84,304	99,140
	Total AGENCY CMO:	48,389,724	47,598,443	49,664,880
CORPORATE CMO’s
000780-KN-5	AMAC 2003-7 A2	635,512	631,480	633,526
05946X-FF-5	BAFC 2003-3 2A2	1,147,586	1,117,407	1,075,144
05948K-4E-6	BOAA 2006-3 2CB1	748,914	359,010	482,581
05948X-HJ-3	BOAMS 2003-4 1A67	485,082	471,349	454,093
12637H-AV-0	CSMC 2006-4 6A2	1,943,486	1,281,486	1,252,334
12667F-7S-8	CWALT 2005-4 B1	3,199,391	265,828	265,828
126694-XX-1	CWHL 2006-J1 3A1	656,547	374,511	374,511
12669D-LJ-5	CWHL 2002-32 3A1	84,538	84,003	81,079
12669E-XB-7	CWHL 2003-J7 1A1	498,328	494,456	474,472
12669F-PW-7	CWHL 2004-3 A22	153,255	153,151	139,983
16162T-4J-2	Chase 2003-S4 1A6	36,476	36,358	36,094
22541S-HE-1	CSFB 2004-3 DB2	1,942,747	291,412	291,412
22541S-VQ-8	CSFB 2004-4 DB2	1,861,758	772,629	772,629
22541S-X2-9	CSFB 2004-8 6A1	597,969	576,919	555,737
22541S-Z7-6	CSFB 2004-8 DB2	1,641,844	369,415	402,252
225458-BS-6	CSFB 2005-1 3A2	721,341	699,333	565,412
225458-G4-4	CSFB 2005-7 4A2	772,426	759,756	685,045
225458-LV-8	CSFB 2005-3 DB2	2,947,394	294,739	294,739
2254W0-HF-5	CSFB 2004-6 3A2	800,308	786,025	704,917
23244E-AK-3	CWALT 2006-J6 B1	484,796	25,561	25,561
32051D-Z2-1	FHASI 2004-3 1A1	465,794	461,053	455,018
32051G-LE-3	FHASI 2005-2 2A2	688,792	677,093	552,192
55265K-3H-0	MASTR 2003-11 5A2	613,734	601,376	563,210
55265K-T2-5	MASTR 2003-10 1A2	1,082,798	1,060,740	1,061,287
576434-QT-4	MALT 2004-4 B1	1,649,016	654,510	654,510
76111X-GN-7	RFMSI 2004-S3 A1	409,902	400,099	371,729
76111X-HC-0	RFMSI 2004-S4 1A5	398,013	394,876	355,451
	Total CORPORATE CMO:	26,667,745	14,094,573	13,580,747
Total Fixed Income		199,512,783	185,601,153	190,629,867

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
Common Stocks
00206R-10-2	AT&T Inc	364	14,718	9,173
002824-10-0	Abbott Laboratories	455	24,567	21,704
00724F-10-1	Adobe Systems Inc	1,138	29,662	24,342
025537-10-1	American Electric Power Co.	5,000	143,663	126,300
025816-10-9	American Express Co.	4,095	107,522	55,815
037833-10-0	Apple Computer Inc	235	33,411	24,703
038222-10-5	Applied Materials Inc	8,225	142,012	88,419
053015-10-3	Automatic Data Processing Inc	2,790	119,342	98,096
053611-10-9	Avery Dennison Corp	3,550	79,307	79,307
064058-10-0	Bank of New York Mellon Corp	828	23,394	23,391
067383-10-9	CR Bard Inc.	300	24,031	23,916
075887-10-9	Becton Dickinson & Co	360	27,013	24,206
075896-10-0	Bed, Bath & Beyond, Inc.	800	24,264	19,800
125071-10-0	CDI Corp	2,490	24,203	24,203
12572Q-10-5	CME Group, Inc.	87	16,390	21,436
126650-10-0	CVS Corp	1,011	36,053	27,792
12673P-10-5	CA Inc.	1,013	18,265	17,839
143130-10-2	Carmax Inc.	1,475	20,501	18,349
156708-10-9	Cephalon Inc.	352	23,908	23,971
17275R-10-2	Cisco Systems Inc	1,483	39,705	24,870
172908-10-5	Cintas Corp	850	17,859	21,012
191216-10-0	Coca-Cola Co	3,176	161,699	139,585
194162-10-3	Colgate Palmolive Co	2,461	163,229	145,150
209115-10-4	Consolidated Edison Inc.	50,000	2,091,819	1,980,500
24702R-10-1	Dell Inc.	6,200	99,985	58,776
249030-10-7	DentSply International Inc.	882	23,931	23,682
25243Q-20-5	Diageo PLC-Sponsored ADR	455	36,754	20,361
25459L-10-6	DirecTV Group Inc.	1,030	26,430	23,474
254687-10-6	Disney, Walt	2,185	54,919	39,680
257651-10-9	Donaldson Co. Inc.	704	23,503	18,895
263534-10-9	EI Dupont De Nemours & Co	2,705	60,403	60,403
26441C-10-5	Duke Energy Corp	35,000	633,326	501,200
26483E-10-0	Dun & Bradstreet Corp.	310	22,716	23,870
268648-10-2	EMC Corp	2,135	24,906	24,339
291011-10-4	Emerson Electric Co	950	30,240	27,151
302491-30-3	FMC Corp	357	15,366	15,401
302563-10-1	FPIC Insurance Group, Inc.	3,000	109,062	111,090
302571-10-4	FPL Group Inc.	491	29,219	24,908
303075-10-5	Factset Research Systems Inc.	566	21,239	28,294
31428X-10-6	FedEx Corp	835	60,025	37,149
33734X-18-4	1st Trust Utilities AlphaDEX ETF	86,500	1,346,243	1,005,995
36467W-10-9	Gamestop Corp. Class A	851	23,857	23,845
369550-10-8	General Dynamics Corp	435	39,129	18,092
369604-10-3	General Electric	5,450	55,100	55,100
370334-10-4	General Mills Inc	255	14,846	12,719
372917-10-4	Genzyme Corp	391	25,894	23,221
375558-10-3	Gilead Sciences Inc.	475	25,593	22,002
38259P-50-8	Google Inc.	77	39,289	26,801
413875-10-5	Harris Corp	658	24,118	19,043
42222L-10-7	HealthTronics Inc.	48,565	109,271	65,563
423074-10-3	HJ Heinz Co.	625	26,841	20,663
428236-10-3	Hewlett-Packard Co	748	33,468	23,981

CUSIP	Security Description	Par Value/Shares	Book Value	Market Value
Common Stocks (continued)
456788-10-8	Infosys Technologies-Sp ADR	927	41,525	24,686
458140-10-0	Intel Corp	3,750	67,718	56,363
464287-22-6	IShares Lehman Aggr. Bond Fund	10,000	1,004,573	1,014,700
464287-22-6	IShares IBOXX Inv Grade Corp BF	3,000	295,025	282,360
464288-41-4	Ishares S&P National Municipal	5,000	506,582	498,450
522015-10-6	Learning Tree Int'l Inc	1,295	14,530	10,969
524660-10-7	Leggett & Platt Inc	3,490	45,335	45,335
539830-10-9	Lockheed Martin Corp	280	22,817	19,328
552676-10-8	MDC Holdings Inc.	2,380	73,414	74,113
552715-10-4	MEMC Electronic Materials	1,675	24,513	27,621
571748-10-2	Marsh & McLennan Co	3,045	89,188	61,661
57636Q-10-4	MasterCard Inc. - Class A	168	24,825	28,137
577767-10-6	Maxwell Technologies, Inc	3,220	40,314	22,379
580135-10-1	McDonald's Corp	352	20,886	19,209
594918-10-4	Microsoft Corp	9,807	274,446	180,155
595017-10-4	Microchip Technology Inc.	1,310	42,677	27,759
608190-10-4	Mohawk Industries Inc.	415	16,606	12,396
61166W-10-1	Monsanto Co.	215	18,125	17,867
61945A-10-7	The Mosaic Co.	365	17,175	15,323
637071-10-1	National Oilwell Varco Inc.	740	35,691	21,245
65248E-10-4	News Corp - Class A	5,250	64,887	34,755
654106-10-3	Nike Inc. - Class B	384	23,027	18,006
655044-10-5	Noble Energy Inc.	350	27,803	18,858
664397-10-6	NorthEast Utilites Co.	10,000	229,120	215,900
68389X-10-5	Oracle Corp	1,379	30,564	24,919
695257-10-5	Pactiv Corporation	1,179	18,035	17,202
69840W-10-8	Panera Bread Company-Class A	395	16,754	22,081
704549-10-4	Peabody Energy Corp	729	22,372	18,254
736508-84-7	Portland General Electric Co.	20,000	401,982	351,800
740189-10-5	Precision Castparts Corp	382	23,823	22,882
74267C-10-6	ProAssurance Corp	10,800	497,833	503,496
742718-10-9	Procter & Gamble	960	59,799	45,206
778296-10-3	Ross Stores Inc.	625	18,145	22,425
790849-10-3	St. Jude Medical Inc.	750	30,859	27,248
81369Y-60-5	Sector Spdr Trust (Financial)	6,115	53,873	53,873
847560-10-9	Spectra Energy Corp	5,000	137,532	70,700
871829-10-7	Sysco  Corp	1,095	25,267	24,966
882508-10-4	Texas Instruments Inc.	2,075	37,473	34,258
88579Y-10-1	3M Company	2,095	160,121	104,163
907818-10-8	Union Pacific Corp	486	28,471	19,979
911312-10-6	United Parcel Service Class B	1,360	83,961	66,939
91324P-10-2	UnitedHealth Group Inc.	4,475	135,037	93,662
920253-10-1	Valmont Industries Inc	391	22,980	19,632
931142-10-3	Wal-Mart Stores Inc	2,699	130,121	140,618
931422-10-9	Walgreen Company	2,280	85,902	59,189
949746-10-1	Wells Fargo Co.	6,165	152,585	87,790
98385X-10-6	XTO Energy Inc	473	16,141	14,483
FEMPTN-RS-4	FemPartners	449,617	55,000	55,000
G1150G-11-1	Accenture Ltd. CL-A	766	30,031	21,057
H8817H-10-0	TransOcean Ltd.	365	34,566	21,477
	Total Common Stock:	885,447	11,772,239	10,110,447
Grand Total:			197,373,392	200,740,313