American Physicians Capital, Inc. (APCapital) (NASDAQ:ACAP) today announced net income of $11.0 million or $1.30 per diluted common share for the second quarter of 2009. This compares to net income of $11.0 million, or $1.11 per diluted common share for the second quarter of 2008. Year-to-date, the Company has generated net income of $21.1 million or $2.43 per diluted common share in 2009, compared to $22.4 million or $2.24 per diluted common share in the first six months of 2008. At June 30, 2009, APCapital’s book value per share was $29.83 based on 8,053,487 shares outstanding.

“Our careful management of investments and capital, solid underwriting, and favorable reserve development resulted in a very strong quarter for APCapital,” said President and Chief Executive Officer R. Kevin Clinton. “We continued to return value to our shareholders through dividends and share repurchases, and effective tomorrow, our shareholders will be distributed additional shares as a result of our recent four-for-three stock split.”

“The market remains competitive, making premium growth challenging,” added Clinton. “However, we remain a disciplined underwriter and continue to be patient as we search for growth opportunities.”

Stock Split

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 will be distributed to shareholders July 31, 2009. All share and per share numbers disclosed in this press release are presented pre-stock split. Our quarterly report on Form 10-Q will be filed subsequent to the stock split, and as such will include disclosures of share and per share amounts on a split adjusted basis.

Updated Annual Guidance for 2009

“We have previously stated that we expect to report operating earnings of at least $4.25 per diluted share for 2009,” said Clinton. “However, as a result of better than expected loss cost trends in the first six months of 2009, we are updating our annual guidance for 2009. We believe that if the trends in frequency, severity and pricing remain stable in our book of business throughout the second half of 2009, we should report operating earnings for 2009 of at least $4.60 per diluted share.”

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 $24.2 million in the second quarter of 2009, down $2.2 million or 8.3% from the same period a year ago. Year-to-date, direct premiums written are down $5.7 million or 9.6%. The declines in direct premiums written were the result of rate reductions based on lower claims frequency trends and competitive pressures. We insured 8,693 physicians at June 30, 2009, down from 9,068 insureds at year end 2008.

Net premiums earned in the second quarter of 2009 were down $3.0 million or 9.7% from the second quarter of 2008 and were down $5.4 million or 8.5% year-to-date. The decline in net premiums earned varied from the declines in direct premiums written due to the lag between premiums written and earned and a slight increase in the percentage of reinsurance premiums ceded.

Although direct premiums written and net premiums earned are down for the second quarter of 2009, our active share repurchase program has resulted in an increase in both direct premiums written and net premiums earned this quarter as compared to the second quarter of 2008 on a per share basis.

The 2009 second quarter loss ratio was 46.2% with $10.1 million of positive development from prior accident years. For the six months ended June 30, 2009, the loss ratio was 49.8% with $18.3 million of positive prior year development. On an accident year basis, the loss ratio for the first half of 2009 was 81.5%, up from the 78.2% reported in the first half of 2008. This increase in accident year loss ratio reflects our recent premium rate decreases.

The amount of positive reserve development in the second quarter of 2009 was $3.1 million higher than the second quarter of 2008 and higher than most other recent quarters. Several claims were settled this quarter at significant savings to amounts previously reserved. As a result, projected ultimate losses were reduced more this quarter.

Claim frequency continued to be at historically low levels, but appears to be leveling-off. The number of claims reported in the second quarter of 2009 was 254, down from 261 reported in the second quarter of 2008. Our open claim count fell 4.9% from December 31, 2008 to 1,349 outstanding claims at June 30, 2009. Our average paid claims have trended up slightly in recent quarters. Our average net case reserve increased to $178,500 at June 30, 2009 from $166,500 at December 31, 2008.

The underwriting expense ratio increased in the second quarter of 2009 to 25.8% from 21.1% in the second quarter of 2008. Year-to-date the underwriting expense ratio is up to 25.1% from 21.6% a year ago. This increase in the underwriting expense ratio is primarily the result of implementing our new policy and claims information system. Effective in the first quarter of 2009 we discontinued capitalizing internally developed system costs, and we are now amortizing costs previously capitalized. In addition, the decline in premium volume also increased the underwriting expense ratio. Other expenses were down $269,000 in the second quarter of 2009 and $514,000 year-to-date as a result of lower interest expense on our trust preferred debt.

Investments

Investment income was $8.0 million in the second quarter of 2009, down from $9.2 million for the same period in 2008. The overall investment yield decreased from 4.38% in the second quarter 2008 to 3.97% in the second quarter of 2009. Year-to-date our investment yield was 3.97% through June 2009 compared to 4.53% through June 30, 2008. These decreases were primarily attributable to our increased position in tax-exempt securities, and the decline in short-term interest rates. Our year-to-date after tax-yield was 3.11% through June 30, 2009 as compared to 3.36% a year ago. Our bond portfolio continued to perform well with no impairments in 2009.

Balance Sheet and Equity Information

APCapital’s total assets were $972.2 million at June 30, 2009, down $33.6 million from December 31, 2008. At June 30, 2009, the Company’s total shareholders’ equity was $240.2 million, down $13.8 million from December 31, 2008. Our net income of $21.1 million through the second quarter of 2009 has been offset by the Company utilizing $33.2 million of equity to repurchase its common shares and $1.9 million to pay shareholder dividends.

Capital Management

In the second quarter of 2009, APCapital repurchased 522,300 shares at an average cost of $39.93 per share. Year-to-date through June 30, 2009 we have repurchased 817,500 shares at an average cost of $40.58 per share. The volume of share repurchases was up in the second quarter of 2009 due to the lower market price of our stock. 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 second quarter of 2009, the Board of Directors declared a second quarter cash dividend of $0.11 per common share, which was paid to shareholders on June 30, 2009. On a post-split basis, today, APCapital’s Board of Directors declared a third quarter cash dividend of $0.0825 per common share payable on September 30, 2009 to shareholders of record on September 12, 2009.

Conference Call

APCapital will host a live conference call to discuss second quarter 2009 financial results on Friday, July 31, 2009 at 10:00 a.m. Eastern Time. Investors are invited to participate in our live call by dialing (888) 576-4398 or (719) 325-2301. 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: 1742633. The replay will be available through 11:59 p.m. Eastern Time on Friday, August 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.

American Physicians Capital, Inc.
Ann Storberg, Investor Relations (517) 324-6629