American Physicians Capital, Inc. Reports Fourth Quarter and Year End 2009 Results

American Physicians Capital, Inc. (APCapital) (NASDAQ:ACAP) today announced net income of $9.7 million or $.94 per diluted common share for the fourth quarter of 2009. For the year ended December 31, 2009, APCapital generated net income of $40.6 million, or $3.67 per diluted common share. The 2009 net income represents a return on beginning GAAP equity of 16.0%. At December 31, 2009, APCapital’s book value per share was $23.74 based on 9,986,187 shares outstanding, an increase of 9.8% from $21.62 at December 31, 2008.

APCapital generated net income of $11.6 million or $.93 per diluted share in the fourth quarter of 2008 and net income of $45.2 million or $3.45 per diluted share for the year ended December 31, 2008.

"The Company had a very successful 2009, reporting another year of strong profitability,” said President and Chief Executive Officer R. Kevin Clinton. "We generated a return on beginning equity of 16.0%, returned $59.7 million to our shareholders through share repurchases and cash dividends, and increased our book value per share by 9.8%.”

"We were able to retain 88.0% of our business and generate new premiums in select markets while maintaining our underwriting discipline in a soft market. In addition, we completed a major information systems enhancement in 2009,” added Clinton.

Stock Split

As previously announced, on June 23, 2009, the Company’s Board of Directors declared a four-for-three stock split of its common shares to shareholders of record on July 10, 2009. Shares resulting from the stock split were distributed to shareholders on July 31, 2009. All share and per share numbers disclosed in this press release have been adjusted to reflect this stock split.

Premiums

Direct premiums written were $24.2 million in the fourth quarter of 2009, down $2.9 million or 10.6% from the same period a year ago. For the year ended December 31, 2009, direct premiums written were down $11.8 million, or 9.4%. The declines in direct premiums written for 2009 were primarily the result of rate reductions based on a decline in claim frequency trends and on competitive pressures. These reductions resulted in an overall average premium rate decline of 7.0% in 2009, as compared to an 8.2% decrease in 2008. The rate reductions were offset by our strong retention ratio of 88.0% in 2009. We ended 2009 with 8,821 insureds, down 2.7% from year end 2008.

Net premiums written in the fourth quarter of 2009 were greater than direct premiums written due to ceded premium credits and reinsurance treaty profit sharing. These reductions to ceded premiums were the result of favorable loss experience on older accident years. As a result of the fourth quarter ceded premium credits, ceded premiums written in 2009 were 3.1% of direct premiums. Ceded premiums in recent years have typically been approximately 4.0% of direct premiums written. Our 2010 reinsurance program was renewed at terms similar to the 2009 treaties.

Loss Trends

Throughout 2009 we continued to experience better than expected loss trends. As a result, we recognized $9.4 million of favorable loss reserve development in the fourth quarter and $36.6 million during the 2009 calendar year. Favorable development in 2009 increased slightly, $0.2 million for the quarter and $4.4 million for the year, from the same periods in 2008. However, the increases in favorable development were largely offset by increases in our current accident year loss ratios. As a result the reported loss ratio for the year decreased modestly and increased slightly in the fourth quarter of 2009, when compared to the same periods of 2008. The increases in the accident year loss ratios were the result of recent premium rate decreases.

While the average paid claim increased in 2009, the increase was much less than anticipated in our original loss reserve estimates. In addition, our reported claim frequency appears to have leveled-off, but remains at historically low levels. There were 919 new claims reported in 2009, compared to 908 reported in 2008. Our open claim count fell 9.0% from 1,418 at December 31, 2008 to 1,290 at December 31, 2009 and our average case reserve per open claim increased from $166,500 at December 31, 2008 to $183,100 at the end of 2009. There is a great deal of uncertainty inherent in the estimation of medical professional liability loss reserves, and as a result, we remain committed to careful reserving practices.

Expenses

The underwriting expense ratio increased in the fourth quarter of 2009 to 25.5% from 24.3% in the fourth quarter of 2008 and increased to 24.8% for the full year of 2009 from 22.1% for 2008. These increases were due to a smaller base of net premiums earned to cover our fixed underwriting costs. In addition, we began to amortize our new policy and claims information system, which added approximately $250,000 to our underwriting expense in the fourth quarter of 2009 and $940,000 in total for 2009.

Investments

Investment income was $7.3 million in the fourth quarter of 2009 and $30.9 million for the year. Both amounts are down over 16.0% from the comparable periods of 2008. For the year ended December 31, 2009, our gross investment yield was 3.85% compared to 4.38% a year ago. The decline in return is due primarily to the decline in the overall interest rate environment, especially short-term rates, and our increased allocation to cash and short-term securities compared to 2008.

We incurred one investment impairment loss of $4.5 million in the fourth quarter of 2009 due to the decline in market value in one of our strategic investments. However, this loss was partially offset by gains generated when we restructured a portion of our investment portfolio. This restructuring included the previously announced allocation of $30.0 million to various Stilwell investment funds. Our portfolio remains comprised of high quality securities and is well positioned should interest rates increase in 2010.

Balance Sheet and Equity Information

APCapital’s total assets were $944.5 million at December 31, 2009, and total shareholders’ equity was $237.0 million. Shareholders’ equity was down $17.0 million in 2009 as a result of our share repurchases and dividends during the year. However, our book value per share was up 9.8% and we still write at a conservative net premiums written to statutory surplus ratio of .53 to one.

Capital Management

In the fourth quarter of 2009, APCapital repurchased 460,600 shares at an average cost of $28.94 per share. During the full year of 2009, APCapital repurchased 1,863,833 shares for $56.1 million. APCapital has the following outstanding share repurchase authorizations as of December 31, 2009:

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 fourth quarter of 2009, the Board of Directors increased its fourth quarter cash dividend by 9.0% to $0.09 per common share, which was paid to shareholders on December 31, 2009. Today, APCapital’s Board of Directors declared a first quarter cash dividend of $0.09 per common share payable on March 31, 2010 to shareholders of record on March 15, 2010.

Conference Call

APCapital will host a live conference call to discuss fourth quarter and year-end 2009 financial results on Friday, February 12, 2010 at 10:00 a.m. Eastern Time. Investors are invited to participate in our live call by dialing (800) 289-0496 or (913) 643-4197. 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: 5952409. The replay will be available through 11:59 p.m. Eastern Time on February 19, 2010.

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, plans, objectives, expectations and intentions, 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.