AP Capital Reports Fewer Losses, Sees 2003 Profits

American Physicians Capital Inc. reported a net operating loss of $1.1 million, or 12 cents per diluted share, in the fourth quarter of 2002, compared to a net operating loss of $14.5 million, or $1.38 per diluted share, for the year-earlier quarter.

APCapital, which offers medical liability and workers’ compensation insurance through American Physicians Assurance Corp. and other subsidiaries, is now positioned to return to profitability in 2003, said CEO William Cheeseman. Tighter underwriting and a pull-out of Florida’s medical liability market keyed the improvement for the East Lansing, Mich.-based carrier.

For the year, APCapital incurred a net operating loss of $8.8 million, or 94 cents per diluted share. This compares to a net operating loss of $40.1 million, or $3.62 per diluted share, for 2001.

The company reported a net loss of $10.3 million, or $1.20 per diluted share, for the fourth quarter of 2002, compared to a net loss of $16.5 million, or $1.58 per diluted share, in the fourth quarter of 2001. The fourth quarter of 2002 included a non-cash charge of $9.1 million or $1.06 per diluted share, net of tax in connection with the adoption of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” which eliminates the amortization of goodwill and requires annual testing for impairment. The charge reflects the cumulative effect of this accounting change and has no effect on the company’s operating income, cash flow, or tangible book value.

APCapital reported a net loss of $18.5 million, or $1.98 per diluted share, for 2002 including the effect of the accounting change. The net loss for 2002 excluding the one-time accounting charge was $9.4 million, or $1.01 per diluted share. This compares to a net loss of $43.8 million, or $3.95 per diluted share for 2001.

Medical Professional Liability Results

APCapital continued to aggressively improve its medical professional liability book of business in 2002. The company significantly raised premium rates in all markets as annual renewals occurred. Net earned premiums were $40.6 million in the fourth quarter of 2002, a 29.9 percent increase over the fourth quarter of 2001. Annual net earned premiums totaled $148.6 million in 2002, a 24.2 percent increase over 2001. The majority of this premium increase is from the company’s rate actions as the number of physician policies actually decreased in 2002.

In the second quarter of 2002, the company announced its intention to discontinue writing medical professional liability insurance in Florida. The Florida Department of Insurance approved the company’s plan to exit Florida and the company began mailing out non-renewal notices to its policyholders in October 2002 for policies with effective dates beginning in December 2002 and thereafter.

Loss and loss adjustment expenses continued to improve. The fourth quarter 2002 reported loss ratio was 88.2 percent, compared to 145.2 percent in the fourth quarter of 2001. The reported loss ratio was 109.2 percent in 2002, compared to 140.9 percent for 2001. The 2001 loss ratios included a significant reserve adjustment recorded in the 2001 third quarter. On an accident year basis, the Company is realizing the impact of its rate and underwriting actions, showing a 106.1 percent loss ratio in 2002, compared to 121.9 percent for the 2001 accident year.

In the fourth quarter of 2002, the company recorded $500,000 of adverse development on prior year loss reserves. This brings the total reported adverse development to $4.5 million for 2002. The majority of this development is associated with the company’s Florida book of business.

Underwriting expenses were $6.7 million, or 16.4 percent of net earned premium in the fourth quarter of 2002, compared to $5.5 million, or 17.5 percent in the fourth quarter of 2001. Underwriting expenses for 2002 were $27.2 million, or 18.3 percent of net earned premium compared to $23.3 million, or 19.5 percent in 2001. The increase in underwriting expense dollars for 2002 was directly attributable to the 18.8 percent increase in direct written premiums as compared to 2001.

Workers’ Compensation Results

Net earned premiums were $16.9 million in the fourth quarter of 2002, a 9.3 percent decrease from the fourth quarter of 2001. Annual net earned premiums totaled $63.5 million in 2002, an 8.8 percent increase over 2001. The annual increase was the result of premium rate increases and reduced discounts in all markets. The pace of premium growth slowed in the 2002 fourth quarter as the Company began non-renewing certain high-risk categories of policies.

On an annual basis, loss and loss adjustment expenses improved in the workers’ compensation line during 2002. The reported loss ratio for 2002 was 86.8 percent, compared to 107.4 percent for 2001. On an accident year basis, the loss ratio for 2002 was also 86.8 percent, as there was no prior year development. This compared to 97.8 percent for the 2001 accident year.

The reported 2002 fourth quarter loss activity was somewhat of an aberration. Management took a more conservative view on the 2002 accident year by increasing the accident year loss ratio to 86.8 percent. Likewise, previous recognition of positive prior year development was reversed in the 2002 fourth quarter resulting in zero prior year development during 2002.

Underwriting expenses were $4.9 million, or 29.0 percent of net earned premium in the fourth quarter of 2002, compared to $5.7 million, or 30.5 percent in the fourth quarter of 2001. Underwriting expenses for 2002 were $16.2 million, or 25.5 percent of net earned premium, compared to $16.4 million, or 28.1 percent in 2001. The decrease in year-to-date underwriting expense dollars was directly attributable to the restructuring of the book of business.

Investment Income

Investment income was $11.4 million and $11.5 million in the fourth quarter of 2002 and 2001, respectively. Investment income for 2002 was $45.5 million, a 4.9 percent decrease from 2001. These decreases were primarily due to lower interest rates. The average yield on investments was 6.08 percent for 2002, compared to 6.33 percent for 2001.