American Physicians Capital, Inc. Reports First Quarter 2009 Results

American Physicians Capital, Inc. (APCapital) (NASDAQ:ACAP) today announced net income of $10.1 million or $1.13 per diluted common share for the first quarter of 2009. This compares to net income of $11.4 million, or $1.13 per diluted common share for the first quarter of 2008. At March 31, 2009, APCapital’s book value per share was $28.95 based on 8,569,382 shares outstanding.

"APCapital continues to produce solid financial results and to return value to shareholders even in these turbulent times,” said President and Chief Executive Officer R. Kevin Clinton. "During the first quarter, APCapital repurchased 295,200 shares at an average cost of $41.72 per share and paid out a cash dividend of $.11 per common share.”

"Loss development trends continued to be stable, resulting in $8.2 million of positive reserve development in the first quarter. Reported claims were again low at 244 for the first quarter and severity remained relatively flat,” stated Clinton.

Clinton continued, "I am also pleased to report that on April 9, 2009 A.M. Best Co. affirmed the financial strength rating of A- (Excellent) our primary subsidiary, American Physicians Assurance Corporation, and maintained our outlook as stable. This rating is a reflection of continued positive operating performance and an effective strategic plan.”

Reaffirm Annual Guidance for 2009

"If the current trends in frequency, severity and pricing remain stable in our book of business through 2009, we believe our Company will again report operating earnings of at least $4.25 per diluted share in 2009,” said Clinton.

The guidance and related assumptions are subject to the risks and uncertainties outlined in the Company’s Forward-Looking Statements section of this press release.

Direct premiums written were $30.1 million in the first quarter of 2009, down $3.6 million or 10.5% from the same period a year ago. The decline in direct premiums written for the quarter was primarily the result of rate reductions based on lower claims frequency trends and competitive pressures. We insured 8,806 physicians at March 31, 2009, down slightly from 9,068 insureds at year end 2008.

Net premiums earned in the first quarter of 2009 were down $2.3 million or 7.4% from the first quarter of 2008. The decline in net premiums earned was less than the declines in direct premiums written due to the lag in recognition of the effects of premium decreases.

The 2009 first quarter loss ratio was 53.3% with $8.2 million of positive development from prior accident years. For the three months ended March 31, 2008, the loss ratio was 51.2% with $8.4 million of positive prior year development. On an accident year basis, the loss ratio in the first quarter of 2009 was 81.3%, up from the 77.8% reported in the first quarter of 2008. The increases in the loss ratios reflect the impact of our recent rate decreases.

Claim frequency continued to be at historically low levels. The number of claims reported in the first quarter of 2009 was 244 similar to the 232 reported in the first quarter of 2008. Our open claim count was 1,429, down 14.5% from 1,672 at March 31, 2008 and was relatively flat from year-end 2008. Our average paid claims have remained relatively stable since 2002. We continue to be committed to careful reserving practices. Our average net case reserve per open claim stands at $179,000 at March 31, 2009, up from $148,600 from the same period last year.

The underwriting expense ratio increased slightly in the first quarter of 2009 to 24.3% from 22.2% in the first quarter of 2008. The increase in the underwriting expense ratio was the result of our lower premium rates and volume and the amortization of our new policy and claims information system. Other expenses were down in the first quarter of 2009 due to a $303,000 decline in interest on our trust preferred debt.

Investments

Investment income was $8.2 million in the first quarter of 2009, down from $10.0 million for the same period in 2008. The overall investment yield decreased from 4.7% in the first quarter 2008 to 4.0% in the first quarter of 2009. These decreases are primarily attributable to lower short-term interest rates and the increased allocation to tax-exempt securities in our investment portfolio. Our after-tax yield was 3.11%, down 32 basis points from the first quarter of 2008. Our bond portfolio continued to perform well with no impairments in the quarter. We have included a detailed listing of our fixed-income investment portfolio as of March 31, 2009 as a supplement to this press release.

Balance Sheet and Equity Information

APCapital’s total assets were $996.5 million at March 31, 2009, down $9.3 million from December 31, 2008. At March 31, 2009, the Company’s total shareholders’ equity was $248.1 million, down $5.9 million from December 31, 2008. The decrease in shareholders’ equity is a result of the $10.1 million of net income for the first quarter of 2009 being offset by the Company utilizing $12.3 million of equity to repurchase its common shares and $959,000 to pay the first quarter dividend and declines in the market value of our strategic equity investments.

Capital Management

In the first quarter of 2009, APCapital repurchased 295,200 shares at an average cost of $41.72 per share. APCapital has the following outstanding share repurchase authorizations:

The share repurchase program remains an integral part of APCapital’s capital management program. APCapital seeks to maintain an optimal, but flexible, level of capital during this softer market cycle.

In the first quarter of 2009, the Board of Directors declared a first quarter cash dividend of $0.11 per common share, which was paid to shareholders on March 31, 2009. Today, APCapital’s Board of Directors declared a second quarter cash dividend of $0.11 per common share payable on June 30, 2009 to shareholders of record on June 12, 2009.

Conference Call

APCapital will host a live conference call to discuss first quarter 2009 financial results on Friday, May 1, 2009 at 10:00 a.m. Eastern Time. Investors are invited to participate in our live call by dialing (877) 718-5098 or (719) 325-4839. A live webcast will also be available in a listen-only format on APCapital’s website, http://www.apcapital.com. An archived edition of the Webcast can be accessed by going to APCapital’s website and selecting "For Investors,” then "Webcasts.” For individuals unable to listen to the live conference call, a telephone replay will be available by dialing (888) 203-1112 or (719) 457-0820 and entering the conference ID code: 9433796. The replay will be available through 11:59 p.m. Eastern Time on May 7, 2009.

Corporate Description

American Physicians Capital, Inc. is a regional provider of medical professional liability insurance focused primarily in the Midwest and New Mexico markets through American Physicians Assurance Corporation and its other subsidiaries. Further information about the companies is available on the Internet at http://www.apcapital.com.

Forward-Looking Statements

Certain statements made by American Physicians Capital, Inc. in this release may constitute forward-looking statements within the meaning of the federal securities laws. When we discuss future operating results or use words such as "will,” "should,” "believes,” "expects,” "anticipates,” "estimates” or similar expressions, we are making forward-looking statements. These forward-looking statements represent our outlook only as of the date of this release. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive risks and uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the following:

• increased competition could adversely affect our ability to sell our products at premium rates we deem adequate, which may result in a decrease in premium volume, a decrease in our profitability, or both;
• our reserves for unpaid losses and loss adjustment expenses are based on estimates that may prove to be inadequate to cover our losses;
• market liquidity and volatility associated with the current financial crisis makes the fair values of our investments more difficult to estimate and may have other unforeseen consequences that we are currently unable to predict;
• an interruption or change in current marketing and agency relationships could reduce the amount of premium we are able to write;
• if we are unable to obtain or collect on ceded reinsurance, our results of operations and financial condition may be adversely affected;
• our geographic concentration in certain Midwestern states and New Mexico ties our performance to the business, economic, regulatory and legislative conditions in those states;
• a downgrade in the A.M. Best Company financial strength rating of our primary insurance subsidiary could reduce the amount of business we are able to write;
• changes in interest rates could adversely impact our results of operation, cash flows and financial condition;
• the unpredictability of court decisions could have a material adverse financial impact on our operations;
• our business could be adversely affected by the loss of one or more of our key employees;
• the insurance industry is subject to regulatory oversight that may impact the manner in which we operate our business, our ability to obtain future premium rate increases, the type and amount of our investments, the levels of capital and surplus deemed adequate to protect policyholder interests, or the ability of our insurance subsidiaries to pay dividends to the holding company;
• our status as an insurance holding company with no direct operations could adversely affect our ability to meet our debt obligations and fund future cash dividends and share repurchases;
• legislative or judicial changes in the tort system may have adverse or unintended consequences that could materially and adversely affect our results of operations and financial condition;
• applicable law and certain provisions in our articles and bylaws may prevent and discourage unsolicited attempts to acquire our Company that may be in the best interest of our shareholders or that might result in a substantial profit to our shareholders;
• any other factors listed or discussed in the reports filed by APCapital with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Other factors not currently anticipated by management may also materially and adversely affect our financial condition, liquidity or results of operations. APCapital does not undertake, and expressly disclaims any obligation, to update or alter its statements whether as a result of new information, future events or otherwise, except as required by applicable law.

Return on Equity

As a way of evaluating our capital management strategies we measure and monitor our return on equity, or ROE, in addition to our results of operations. We measure ROE as our net income for the period divided by our total shareholders’ equity as of the beginning of the period. Other companies sometimes calculate ROE by dividing annualized net income by an average of beginning and ending shareholders’ equity. Accordingly, the ROE percentage we provide may not be comparable with those provided by other companies. We also use a modified version of ROE as the basis for determining performance-based compensation.

Definition of Non-GAAP Financial Measures

APCapital uses operating income, a non-GAAP financial measure, to evaluate APCapital’s underwriting performance. Operating income differs from net income by excluding the after-tax effect of realized capital gains and (losses).

Although the investment of premiums to generate investment income and capital gains or (losses) is an integral part of an insurance company’s operations, APCapital’s decisions to realize capital gains or (losses) are independent of the insurance underwriting process. In addition, under applicable GAAP accounting requirements, losses may be recognized for accounting purposes as the result of other than temporary declines in the value of investment securities, without actual realization. APCapital believes that the level of realized gains and (losses) for any particular period is not indicative of the performance of our ongoing underlying insurance operations in a particular period. As a result, APCapital believes that providing operating income (loss) information makes it easier for users of APCapital’s financial information to evaluate the success of APCapital’s underlying insurance operations.

In addition to APCapital’s reported loss ratios, management also uses accident year loss ratios, a non-GAAP financial measure, to evaluate APCapital’s current underwriting performance. The accident year loss ratio excludes the effect of prior years’ loss reserve development. APCapital believes that this ratio is useful to investors as it focuses on the relationships between current premiums earned and losses incurred related to the current year. Although considerable variability is inherent in the estimates of losses incurred related to the current year, APCapital believes that the current estimates are reasonable.