American Physicians Capital 10Q 2006 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2006
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number:000-32057

American Physicians Capital, Inc.

(Exact name of registrant as specified in its charter)


Michigan		38-3543910
(State or other jurisdiction of		(IRS employer
incorporation or organization)		identification number)

1301 North Hagadorn Road, East Lansing, Michigan 48823

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:
(517) 351-1150

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated Filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s common stock, no par value per share, as of July 31, 2006 was 7,911,682.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29

PART II. OTHER INFORMATION
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 6.	Exhibits	31
Signatures		32
Exhibit Index		33
Section 302 Certification of Chief Executive Officer
Section 302 Certification of Chief Financial Officer
Section 906 Certification of Chief Executive Officer and Chief Financial Officer

PART I. FINANCIAL INFORMATION


ITEM 1.	*FINANCIAL STATEMENTS*

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


	June 30,		December 31,
	2006		2005
	(Unaudited)
	(In thousands, except
	share data)

ASSETS
Investments:
Fixed-income securities
Available-for-sale, at fair value	$	235,414	$	224,101
Held-to-maturity		516,579		345,702
Other investments		14,247		11,568

Total investments		766,240		581,371
Cash and cash equivalents		87,513		272,988
Premiums receivable		40,477		50,729
Reinsurance recoverable		109,791		109,368
Deferred federal income taxes		37,845		44,039
Federal income tax recoverable		766		—
Property and equipment, net of accumulated depreciation		10,403		11,157
Other assets		33,491		39,676

Total assets	$	1,086,526	$	1,109,328


LIABILITIES
Unpaid losses and loss adjustment expenses	$	691,676	$	689,857
Unearned premiums		68,749		82,098
Federal income taxes payable		—		762
Long-term debt		30,928		30,928
Other liabilities		36,125		41,830

Total liabilities		827,478		845,475
Minority Interest in Consolidated Subsidiary		—		2,641
Shareholders’ Equity
Common stock, no par value, 50,000,000 shares authorized: 7,957,182 and 8,333,417 shares outstanding at June 30, 2006 and December 31, 2005, respectively		—		—
Additionalpaid-in-capital		56,163		74,360
Retained earnings		199,323		179,748
Accumulated other comprehensive income:
Net unrealized appreciation on investments, net of deferred federal income taxes		3,562		7,104

Total shareholders’ equity		259,048		261,212

Total liabilities and shareholders’ equity	$	1,086,526	$	1,109,328

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006		2005			2006		2005
	(Unaudited)
	(In thousands, except per share data)

Net premiums written	$	30,082	$	28,192		$	69,047	$	70,423
Change in net unearned premiums		7,338		11,488			5,816		13,150

Net premiums earned		37,420		39,680			74,863		83,573
Investment income		11,569		12,188			22,672		22,830
Net realized gains (losses)		1,336		(256	)		1,348		(322	)
Other income		150		231			627		465

Total revenues and other income		50,475		51,843			99,510		106,546
Losses and loss adjustment expenses		25,796		31,201			52,673		67,050
Underwriting expenses		7,734		8,579			15,411		17,709
Investment expenses		228		377			397		676
Interest expense		756		603			1,472		1,172
Amortization expense		—		156			—		313
General and administrative expenses		323		798			686		1,836
Other expenses		21		362			82		432

Total expenses		34,858		42,076			70,721		89,188

Income before federal income taxes and minority interest		15,617		9,767			28,789		17,358
Federal income tax expense (benefit)		4,905		(38,268	)		9,214		(38,098	)

Income before minority interest		10,712		48,035			19,575		55,456
Minority interest in net income of consolidated subsidiary		—		(253	)		—		(342	)

Net income	$	10,712	$	47,782		$	19,575	$	55,114

Net income — per common share
Basic	$	1.32	$	5.54		$	2.39	$	6.38
Diluted	$	1.29	$	5.44		$	2.34	$	6.27

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Unaudited)
	(In thousands)

Net income	$	10,712		$	47,782		$	19,575		$	55,114
Other comprehensive (loss) income:
Unrealized (appreciation) depreciation onavailable-for-sale investment securities arising during the period		(2,158	)		3,917			(4,744	)		(6,345	)
Amortization of net unrealized appreciation onheld-to-maturity investment securities since the date of transfer from theavailable-for-sale category		(272	)		(256	)		(557	)		(256	)
Adjustment for realized (gains) losses on investment securities included in net income		(148	)		40			(148	)		68

Other comprehensive (loss) income before tax and minority interests		(2,578	)		3,701			(5,449	)		(6,533	)
Deferred federal income tax (benefit) expense		(902	)		1,295			(1,907	)		(2,287	)
Change in deferred tax valuation allowance		—			(11,094	)		—			(7,512	)

Other comprehensive (loss) income before minority interest		(1,676	)		13,500			(3,542	)		3,266
Minority interest in unrealized depreciation		—			(3	)		—			(3	)

Other comprehensive (loss) income		(1,676	)		13,497			(3,542	)		3,263

Comprehensive income	$	9,036		$	61,279		$	16,033		$	58,377

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows


	Six Months Ended
	June 30,
	2006			2005
	(Unaudited)
	(In thousands)

Cash flows from (for) operating activities
Net income	$	19,575		$	55,114
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		1,451			2,882
Net realized (gains) losses		(1,348	)		322
Change in fair value of derivatives		—			143
Deferred federal income taxes		7,793			(38,505	)
Share-based compensation		337			195
Income on equity method investee		(706	)		—
Minority interest in net income of consolidated subsidiary		—			342
Changes in:
Unpaid loss and loss adjustment expenses		5,962			(2,743	)
Unearned premiums		(8,885	)		(13,669	)
Other assets and liabilities		3,456			8,455

Net cash from operating activities		27,635			12,536
Cash flows from (for) investing activities
Purchases
Available-for-sale — fixed income		(71,850	)		(1,774	)
Held-to-maturity — fixed income		(188,188	)		(112,912	)
Other investments		(262	)		(606	)
Property and equipment		(175	)		(485	)
Proceeds from sales and maturities
Available-for-sale — fixed income		50,015			29,876
Held-to-maturity — fixed income		16,365			73,184
Other investments		2,123			2,203
Property and equipment		6			24
Deconsolidation of PIC-Florida		(2,941	)		—
Pending securities transactions		(53	)		(9,107	)

Net cash for investing activities		(194,960	)		(19,597	)
Cash flows from (for) financing activities
Common stock repurchased		(19,620	)		(7,743	)
Federal income tax effect of share based awards		679			233
Payable for shares repurchased		338			—
Proceeds from stock options exercised		453			900

Net cash for financing activities		(18,150	)		(6,610	)

Net decrease in cash and cash equivalents		(185,475	)		(13,671	)
Cash and cash equivalents, beginning of period		272,988			190,936

Cash and cash equivalents, end of period	$	87,513		$	177,265

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Unaudited)

1. Significant Accounting Policies

Basis of Consolidation and Reporting

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of American Physicians Capital, Inc. (“APCapital”) and its wholly owned subsidiaries, Insurance Corporation of America (“ICA”), APSpecialty Insurance Corporation (“APS”), Alpha Advisors, Inc., APIndemnity (Bermuda) Ltd., APManagement Ltd. and American Physicians Assurance Corporation (“American Physicians”). Effective May 10, 2006 APIndemnity (Bermuda) Ltd. was liquidated. APCapital and its consolidated subsidiaries are referred to collectively herein as the Company. All significant intercompany accounts and transactions are eliminated in consolidation.

The accounts of Physicians Insurance Company, a Florida domiciled insurance company (“PIC-Florida”), were consolidated in the accompanying unaudited Condensed Consolidated Financial Statements during 2005. However, as described under the heading “Minority Interests” below, in 2006 PIC-Florida is no longer being consolidated, but rather is accounted for using the equity method of accounting.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions forForm 10-Q andRule 10-01 ofRegulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The December 31, 2005 Condensed Consolidated Balance Sheet of the Company presented in this Report onForm 10-Q was derived from audited financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The operating results for the three-month and six-month periods ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the annual consolidated financial statements and notes contained in the Company’s Annual Report onForm 10-K for the year ended December 31, 2005.

Use of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates that are susceptible to significant change in the near-term relate to the determination of the liability for unpaid losses and loss adjustment expenses, value of investments, income taxes, reinsurance, the reserve for extended reporting period claims and deferred policy acquisition costs. 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 in the period in which those estimates changed.

Nature of Business and Segment Reporting

The Company is principally engaged in the business of providing medical professional liability insurance to physicians and other health care providers, with an emphasis on markets in the Midwest. While the Company had historically provided workers’ compensation and health insurance, in 2003 the Company initiated plans to exit these lines and in the second quarter of 2005, the last health and workers’ compensation policies expired. In 2005, the health and workers’ compensation lines of business were included in the Company’s other insurance lines segment

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

along with the results of the Company’s personal and commercial insurance business, which it discontinued writing in 2001. With the expiration of all other insurance lines policies in 2005, and the diminished financial significance of these lines, the Company, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” has determined that effective January 1, 2006 it has a single reportable segment, which includes all of the Company’s operations.

Share-Based Compensation

On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment.” The adoption and its impact on amounts reported in the accompanying unaudited Condensed Consolidated Financial Statements is more fully described in Note 4.

Minority Interests

Minority interest in the accompanying Condensed Consolidated Financial Statements at December 31, 2005 represents the 51% ownership interest of other investors in PIC-Florida. PIC-Florida was included in the Company’s Consolidated Financial Statements at and for the year ended December 31, 2005, as it had been determined to be a variable interest entity and the Company’s subsidiary, American Physicians, had been determined to be the primary beneficiary in accordance with the guidance given in Financial Accounting Standards Board Interpretation (“FIN”) 46(R), “Consolidation of Variable Interest Entities.”

On December 31, 2004, the Company consummated a transaction in which PIC-Florida’s other investor assumed ownership of 100% of PIC-Florida’s outstanding common stock. In exchange for its 49% ownership interest, American Physicians received a $3 million note that bears interest at a rate of eight percent. The note is collateralized by 100% of the outstanding common stock of PIC-Florida. As the note received in exchange for American Physicians ownership interest is collateralized by the common stock of PIC-Florida, the exchange was deemed not to be a sale in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a replacement of FASB Statement 125,” but was rather accounted for as a secured borrowing with pledge of collateral. During 2005, monthly interest-only payments were made on the note. Principal payments on the note began in January 2006, and will continue every month for the next seven years. The principal payments that began in January 2006 resulted in deemed partial sales of the Company’s investment inPIC-Florida in accordance with SFAS N0. 140. As a result of these deemed partial sales, and the resulting change in circumstance, the Company re-evaluated the appropriateness of continuing to consolidate PIC-Florida in accordance with the guidance in FIN 46(R) and determined that the Company was no longer the primary beneficiary as it was no longer at risk for a majority of PIC-Florida’s potential losses. Accordingly, the Company determined that as of January 1, 2006, that its investment in PIC-Florida should be accounted for under the equity method of accounting and no longer consolidated.

The balance of the Company’s investment in PIC-Florida was approximately $2.6 million at June 30, 2006 and is included in the accompanying unaudited Condensed Consolidated Balance Sheet in other investments. The Company’s share of PIC-Florida’s reported net income for the three and six months ended June 30, 2006 was approximately $214,000 and $289,000, respectively, and is included in investment income in the accompanying unaudited Condensed Consolidated Statements of Income.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)


2.	Effects of New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) has recently released the following staff positions, statements and interpretations that will be effective in the near future. The adoption of these recent FASB releases have not had, or are not expected to have, a material effect on the Company’s consolidated financial position or results of operations.


	•	FASB Staff Position (“FSP”)FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction.” This FSP addresses how a change or projected change in the timing of cash flows relating to income taxes generated by a leveraged lease transaction affects the accounting by a lessor for that lease, and amends SFAS No. 13, “Accounting for Leases.” The guidance in FSPFAS 13-2 shall be applied to fiscal years beginning after December 15, 2006. (Issued July 2006)

	•	FSP FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FIN 46(R),” addresses how a reporting enterprise should determine the variability to be considered in applying FIN 46(R), “Consolidation of Variable Interest Entities.” FSP FIN 46(R) will be effective beginning in third quarter of 2006. (Issued April 2006)

	•	FSP FTB 85-4-1, “Accounting for Life Settlement Contracts by Third-Party Investors,” provides initial and subsequent measurement guidance and financial statement presentation and disclosure guidance for investments by third-party investors in life settlement contracts. The provisions of this FSP are effective for fiscal years beginning after June 15, 2006. (Issued March 2006)

	•	SFAS No. 156, “Accounting for Servicing of Financial Assets,” amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities, and is effective for an entity’s first fiscal year that begins after September 15, 2006. (Issued March 2006)

	•	SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of SFAS Nos. 133 and 140,” resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 permits the fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. (Issued February 2006)

	•	FSP No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event,” clarifies that options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event, do not meet the criteria for classification as a liability if the contingent event is outside the employee’s control. Such options or similar instruments would not be classified as liabilities until it becomes probable that the event will occur. The provisions of FSP No. FAS 123(R)-4 are effective upon the initial adoption of SFAS No. 123(R), which was effective January 1, 2006 for the Company. (Issued February 2006)

In addition to these recent FASB releases, in June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years ending after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.


3.	Income Per Share

The following table sets forth the details regarding the computation of basic and diluted net income per common share for each period presented:


	Three Months Ended				Six Months Ended
	June 30				June 30,
	2006		2005		2006		2005
	(In thousands, except per share data)

Numerator for basic and diluted income per common share:
Net income	$	10,712	$	47,782	$	19,575	$	55,114

Denominator:
Denominator for basic income per common share — weighted average shares outstanding		8,120		8,625		8,192		8,636
Effect of dilutive stock options and awards		172		157		180		160

Denominator for diluted income per common share — adjusted weighted average shares outstanding		8,292		8,782		8,372		8,796

Net income — basic	$	1.32	$	5.54	$	2.39	$	6.38
Net income — diluted	$	1.29	$	5.44	$	2.34	$	6.27

In accordance with SFAS No. 128, “Earnings per Share,” the diluted weighted average number of shares outstanding includes an incremental adjustment for the assumed exercise of dilutive stock options and non-vested share awards. Stock options are considered dilutive when the exercise price exceeds the average stock price during the period and the assumed conversion of the options, using the treasury stock method as required by SFAS No. 128, produces an increased number of shares. Stock options with an exercise price that is higher than the average stock price during the period are excluded from the computation as their impact would be anti-dilutive. During the three months and six months ended June 30, 2005 and 2005, there were no stock options that were considered to be anti-dilutive.


4.	Share-Based Compensation

Equity Compensation Plans

The Board of Directors and shareholders have authorized the American Physicians Capital, Inc. Stock Compensation Plan (the “Plan”). The Plan provides for the award of stock options and other share-based awards for officers, directors and employees of the Company.

These awards must be approved by the compensation committee of the board of directors. The total number of shares of the Company’s common stock authorized for issuance under the Plan is 1,200,000 shares, of which only 4,360 remain available for future grants.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Certain executive officers, board members and employees have been granted options to purchase shares of APCapital common stock. All outstanding options vest in annual installments of 33%, 33%, and 34% on the first through the third anniversaries, respectively, of the date of grant. All options expire on the tenth anniversary of the grant date.

The following table summarizes activity in the Company’s equity compensation plans for stock options awards for the six months ended June 30, 2006:


	For the Period Ended June 30, 2006
						Weighted
				Weighted		Average		Aggregate
	Number of			Average		Remaining		Intrinsic
	Options			Exercise Price		Term		Value
						(In years)		(In thousands)

Options outstanding at January 1, 2006		517,400		$	22.80
Granted during the period		—			—
Exercised during the period		(50,400	)	$	14.34
Canceled during the period		(1,000	)	$	39.75

Options outstanding at June 30, 2006		466,000		$	23.67		6.59	$	13,477

Options exercisable at June 30, 2006		337,500		$	19.39		5.78	$	11,205

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted market price of the Company’s common stock for the options that werein-the-money at June 30, 2006. During the six months ended June 30, 2006, the total intrinsic value of options exercised under the stock option plan was $1.7 million. For the years ended December 31, 2005 and 2004, the total intrinsic value of options exercised was $2.1 million and $4.8 million, respectively, determined as of the date of option exercise.

In January 2004, the Company issued 30,000 shares of non-vested stock under the Plan to certain employees with a market price at the date of grant of $17.20 per share. The shares granted in 2004 vest annually at a rate of 33%, 33% and 34% in January 2005, 2006 and 2007, respectively, as long as the grantees remain employed by the Company.

A summary of the status and changes of nonvested shares issued under the Plan as of and during the six months ended June 30, 2006 is presented below:


				Weighted
	Number of			Average
	Non-vested			Grant Date
	Shares			Fair Value

Non-vested shares outstanding at January 1, 2006		16,079		$	17.20
Granted during the period		—			—
Vested during the period		(7,921	)	$	17.20
Forfeited during the period		(510	)	$	17.20

Non-vested shares outstanding at June 30, 2006		7,648		$	17.20

The total fair value, at the date of vesting, of stock options and non-vested share awards vested during the six months ended June 30, 2006 was $2.1 million. For the years ended December 31, 2005 and 2004 the total fair value of stock options and non-vested share awards vested was $5.7 million and $8.5 million, respectively.

As of June 30, 2006, the Company had $426,000 of unrecognized compensation costs related to non-vested share-based payment awards that are expected to be recognized over a weighted average period of 8 months.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Impact of the Adoption of SFAS No. 123(R)

The Company adopted SFAS No. 123(R), “Share-Based Payment,” beginning January 1, 2006 using the modified prospective transition method. Accordingly, during the three-month and six-month periods ended June 30, 2006, the Company recorded share-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, adjusted for estimated forfeitures, using the fair value method. Share-based compensation for option awards is being recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award were, in substance, multiple awards. Compensation expense for restricted shares granted is being recognized on a straight-line basis over the requisite service period for the entire award, or three years. The impact on our results of operations of recording share-based compensation for the three and six months ended June 30, 2006 was as a pre-tax charge to underwriting expense of $157,000 and $337,000, respectively. Net of taxes, the effect on net income was $102,000, or $0.01, per basic and diluted share for the three months ended June 30, 2006 and $219,000, or $0.03, per basic and diluted share for the six months ended June 30, 2006.

SFAS No. 123(R) also requires that the cash flows resulting from the excess tax benefits associated with the share-based compensation be classified as cash flows from financing activities. Accordingly, the Company has reported excess tax benefits of $679,000 and $233,000 as cash inflows in the financing activities section of the statement of cash flows for the six-month periods ended June 30, 2006 and 2005, respectively. These incremental tax benefits are also credited toadditional-paid-in-capital.

Prior to the adoption of SFAS No. 123(R), the unrecognized portion of share-based compensation, based on the APB No. 25 intrinsic value method, was reported as a contra account in the shareholders’ equity section of the balance sheet, net of deferred taxes. Upon the adoption of SFAS No. 123(R) in January 2006, the unearned share-based compensation balance of approximately $84,000 was reclassified toadditional-paid-in-capital.

Employee share-based compensation expense recognized under SFAS No. 123(R)was not reflected in our results of operations for the three and six-month periods ended June 30, 2005 for employee stock option awards as all options were granted with an exercise price equal to the market value of the underlying common stock on the date of grant. However, the Company has historically provided the required pro forma disclosures under SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosures.” The originally disclosed pro forma effects of share-based compensation expense have been included here for purposes of comparison to the results of operations for the three and six months ended June 30, 2006. In accordance with adoption pursuant to the modified-prospective method, previously reported amounts in the income statement have not been changed.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

The pro forma information for the three and six months ended June 30, 2005 was as follows:


	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
	(In thousands, except per share data)

Net income as reported	$	47,782		$	55,114
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		64			127
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards granted since 2000, net of related tax effects		(122	)		(245	)

Pro forma net income	$	47,724		$	54,996

Basic income per share
As reported	$	5.54		$	6.38
Pro forma	$	5.53		$	6.37
Diluted income per share
As reported	$	5.44		$	6.27
Pro forma	$	5.43		$	6.25

Valuation Assumptions

There were no stock options or other share-based awards granted during the six months ended June 30, 2006. The grant date fair value of stock options for award grants made in 2005 was estimated using a binomial lattice model. Prior to 2005, the Company used a Black-Scholes option pricing model to estimate the fair value of option grants at the date of grant. The following table indicates the assumptions used, or in the case of the binomial lattice model the range of assumptions, in estimating the grant date fair value for options granted during the years ended December 31, 2005 and 2004.


	2005			2004
	(Binomial Lattice)			(Black-Scholes)

Risk-free interest rate		4.44	%		3.12	%
Dividend yield		0	%		0	%
Expected volatility		10% - 25	%		40	%
Weighted average volatility		20	%		40	%
Expected term (years)		4.0			5.0
Weighted average estimated grant date fair value	$	7.27		$	8.55

Expected volatility is based on historical volatility for the Black-Scholes valuation model. Under the binomial lattice model, expected volatility is based on a number of factors, including historical volatility, return on equity, price to book value ratios and trends impacting the medical professional liability insurance industry. The Company uses historical data to estimate option exercise and employee termination behavior within both valuation models. Employee groups and option characteristics are considered separately for valuation purposes. The expected term represents an estimate of the period of time options are expected to remain outstanding based on the past exercise behavior of employees in relation to the Company’s current stock price. The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a remaining term to maturity equal to the contractual term of the option, in the case of the binomial lattice model, and over the expected term for the Black-Scholes model.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)


5.	Investments

The composition of the Company’savailable-for-sale investment security portfolio, including unrealized gains and losses at June 30, 2006 and December 31, 2005 was as follows:


	June 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost/Cost		Gains		Losses			Fair Value
	(In thousands)

Available-for-sale
U.S. government obligations	$	2,498	$	18	$	(13	)	$	2,503
States and political subdivisions		80,672		44		(1,228	)		79,488
Corporate securities		150,813		2,854		(482	)		153,185
Mortgage-backed securities		217		21					238

Totalavailable-for-sale securities	$	234,200	$	2,937	$	(1,723	)	$	235,414


	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost/Cost		Gains		Losses			Fair Value
	(In thousands)

Available-for-sale
U.S. government obligations	$	3,752	$	55	$	(19	)	$	3,788
States and political subdivisions		16,106		145					16,251
Corporate securities		197,926		6,028		(230	)		203,724
Mortgage-backed securities		287		57		(6	)		338

Totalavailable-for-sale securities	$	218,071	$	6,285	$	(255	)	$	224,101

The following table shows the carrying value, gross unrecognized holding gains and losses, as well as the estimated fair value of the Company’sheld-to-maturity fixed-income security portfolio as of June 30, 2006 and December 31, 2005:


	June 30, 2006
			Gross		Gross
			Unrecognized		Unrecognized
	Carrying		Holding		Holding			Estimated
	Value(1)		Gains		Losses			Fair Value
	(In thousands)

Held-to-maturity
U.S. government obligations	$	142,593			$	(4,445	)	$	138,148
States and political subdivisions		130,583				(2,748	)		127,835
Corporate securities		69,379		72		(4,111	)		65,340
Mortgage-backed securities		174,024				(7,729	)		166,295

Totalheld-to-maturity fixed-income securities	$	516,579	$	72	$	(19,033	)	$	497,618


(1)		Carrying value includes $4.3 million of unamortized net unrealized appreciation.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)


	December 31, 2005
			Gross		Gross
			Unrecognized		Unrecognized
	Carrying		Holding		Holding			Estimated
	Value(1)		Gains		Losses			Fair Value
	(In thousands)

Held-to-maturity
U.S. government obligations	$	82,628			$	(1,638	)	$	80,990
States and political subdivisions		2,879				(28	)		2,851
Corporate securities		69,681		173		(1,572	)		68,282
Mortgage-backed securities		190,514		51		(3,753	)		186,812

Totalheld-to-maturity fixed-income securities	$	345,702	$	224	$	(6,991	)	$	338,935


(1)		Carrying value includes $4.9 million of unamortized net unrealized appreciation.

At June 30, 2006, the Company’s entire fixed-income portfolio, bothavailable-for-sale andheld-to-maturity (excluding approximately $13.2 million of private placement issues) was considered investment grade. The Company defines investment grade securities as those that have a Standard & Poors’ credit rating of BBB and above. The increase in the gross unrealized losses and unrecognized holding losses from December 31, 2005 to June 30, 2006 is due to an increase in prevailing interest rates. The Company has evaluated each fixed-income security in an unrealized or unrecognized loss position and has concluded that the declines in market value are temporary in nature due to interest rate increases. The Company has determined that there is no impairment based on the Company’s ability and intent to hold these securities to maturity.

During the three and six months ended June 30, 2006, the Company recognized impairments totaling $153,000 for other than temporary declines in the market value of unaffiliated equity securities, which are included in other investments in the accompanying unaudited Condensed Consolidated Balance Sheets.


6.	Income Taxes

In the second quarter of 2005, the Company reversed the entire deferred tax asset valuation allowance as it had concluded that it was more likely than not that sufficient taxable income would exist in future periods when the deductible temporary differences were expected to reverse. As a result of the reversal, income taxes incurred do not bear the usual relationship to income before federal income taxes for the three and six months ended June 30, 2005, while a more customary relationship was present for the three and six months ended June 30, 2006, as shown in the table below.


	Three Months Ended June 30,										Six Months Ended June 30,
	2006					2005					2006					2005
	(Dollars in thousands)

Income before taxes	$	15,617				$	9,767				$	28,789				$	17,358

Tax at statutory rate		5,466		35.0	%		3,418		35.0	%		10,076		35.0	%		6,075		35.0	%
Tax effect of:
Tax exempt interest		(601	)	(3.8	)%		(46	)	(0.5	)%		(893	)	(3.1	)%		(103	)	(0.6	)%
Other items, net		40		0.3	%		(27	)	(0.3	)%		31		0.1	%		(19	)	(0.1	)%
Valuation allowance		—		0.0	%		(41,613	)	(426.1	)%		—		0.0	%		(44,051	)	(253.8	)%

	$	4,905		31.4	%	$	(38,268	)	(391.8	)%	$	9,214		32.0	%	$	(38,098	)	(219.5	)%

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

For additional information regarding the Company’s accounting for the deferred tax valuation allowance and its reversal during 2005, see Note 11 of the Notes to Consolidated Financial Statements in the Company’s annual report onForm 10-K for the year ended December 31, 2005.


7.	Shareholders Equity

The Board of Directors has authorized the Company to purchase shares of its outstanding common stock under two separate plans. In November 2005, the Board of Directors authorized the purchase of approximately 425,000 additional shares at the discretion of management (referred to as the “discretionary plan”). This most recent authorization brings the total number of shares authorized to be repurchased under the discretionary plan to 4,040,439. At June 30, 2006, 269,869 shares remained available for repurchase under the discretionary plan, subject to limitations that may be imposed by applicable laws and regulations and the rules of the Nasdaq Stock Market. The timing of the purchases and the number of shares to be bought at any one time depend on market conditions and the Company’s capital resources and requirements. Shares repurchased under this authorization during the three-month and six-month periods ended June 20, 2006, as well as the total number of shares repurchased pursuant to prior authorizations under the discretionary plan are shown in the table below.


	Discretionary Plan
	Total
	Number of				Average
	Shares		Total		Price Paid
	Purchased		Cost		per Share
			(In thousands)

Three months ended March 31, 2006		127,500	$	6,110	$	47.92
Three months ended June 30, 2006		12,500		594		47.53

Six months ended June 30, 2006		140,000	$	6,704	$	47.89

Inception to date as of June 30, 2006		3,770,570	$	84,144	$	22.32

In April 2006, the Company announced that its Board of Directors had authorized an additional share repurchase of $20 million of its common shares, which are being repurchased under a newly adopted plan underRule 10b5-1 of the Securities Exchange Act of 1934. A plan underRule 10b5-1 allows a company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. A broker selected by the Company has the authority under the terms and limitations specified in the plan to repurchase shares on the Company’s behalf.


	Rule 10b5-1 Plan
	Total
	Number of				Average
	Shares		Total		Price Paid
	Purchased		Cost		per Share
			(In thousands)

Three months ended March 31, 2006		—	$	—	$	—
Three months ended June 30, 2006		280,600		12,916		46.03

Six months ended June 30, 2006		280,600	$	12,916	$	46.03

Inception to date as of June 30, 2006		280,600	$	12,916	$	46.03

There was $7.1 million remaining to be purchased under theRule 10b5-1 plan at June 30, 2006. TheRule 10b5-1 plan share repurchases are expected to continue until the entire authorization is utilized, subject to conditions specified in theRule 10b5-1 plan, but not later than December 31, 2006. The Company may terminate the plan at any time.

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)


8.	Subsequent Event

On July 26, 2006, ProAssurance Corporation (“ProAssurance”) and Physicians Insurance Company of Wisconsin, Inc. (“PIC-Wisconsin”) announced that PIC-Wisconsin shareholders had approved PIC-Wisconsin’s merger into ProAssurance effective on August 1, 2006. Under the terms of the merger, each share of PIC-Wisconsin common stock will be converted to shares of ProAssurance common stock having a value of approximately $5,000. Accordingly, the Company will receive ProAssurance common stock, having a total value of approximately $9.7 million in exchange for the 1,942 shares of PIC-Wisconsin common stock the Company owns. The carrying value of the Company’s PIC-Wisconsin common stock is $7.6 million. The Company intends to sell the shares of ProAssurance common stock it receives upon completion of the conversion. The Company anticipates that it will recognize a gain when such a sale occurs.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the Notes thereto included elsewhere in this report and our Annual Report onForm 10-K for the year ended December 31, 2005, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

The following discussion of our financial condition and results of operations contains certain forward-looking statements related to our anticipated future financial condition and operating results and our current business plans. When we use words such as “will,” “should,” “likely,” “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements. These forward-looking statements represent our outlook only as of the date of this report.

We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive 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 risks and uncertainties discussed from time to time in our reports filed with the Securities and Exchange Commission, including those listed in our Annual Report onForm 10-K under “Item 1A — Risk Factors,” as modified in “Part II, Item 1A — Risk Factors” in this report, and 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.

	•	Our exit from various markets and lines of business may prove more costly than originally anticipated.

	•	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.

	•	If we are unable to obtain or collect on ceded reinsurance, our results of operations and financial condition may be adversely affected.

	•	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 geographic concentration in certain Midwestern states and New Mexico ties our performance to the business, economic, regulatory and legislative conditions in those states.

	•	An interruption or change in current marketing and agency relationships could reduce the amount of premium we are able to write.

	•	A downgrade in the A.M. Best Company rating of our insurance subsidiaries 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.

	•	Our status as an insurance holding company with no direct operations could adversely affect our ability to meet our debt obligations and fund future share repurchases.

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

Overview of APCapital’s Operations

We are a leading provider of medical professional liability insurance coverage, which protects physicians and other health providers from claims filed against them for alleged acts of medical malpractice. We currently write medical professional liability coverage in seven states, with a concentration in our core Midwestern states of Michigan, Illinois and Ohio as well as Kentucky and New Mexico.

We previously offered workers’ compensation insurance and health insurance products. However, we discontinued writing these products starting in 2004 and the last of these policies expired in the second quarter of 2005. As workers’ compensation is a long-tailed line of business, we will continue to settle and pay these claims for a number of years.

Historically, we have reported three segments: Medical Professional Liability, Other Insurance and Corporate and Other. However, with the diminished significance of the lines of business previously reported in the Other Insurance Lines segment, the Company has discontinued segment reporting and now reports its results of operations on a consolidated basis. Accordingly, the discussion that follows focuses on the Company’s consolidated results of operations.

Critical Accounting Policies

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 estimates 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, Significant Accounting Policies” of our Annual Report onForm 10-K for the year ended December 31, 2005, and in Note 1 to our Consolidated Financial Statements contained in that report. Except as noted below, there have been no material changes to these policies since the most recent year end.

Share-Based Compensation

Beginning on January 1, 2006, we began accounting for stock options and non-vested stock awards under the provisions of Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”, or SFAS No. 123(R), which requires the recognition of share-based compensation expense based on the fair value of the awards granted. Prior to the adoption of SFAS No. 123(R), we had accounted for stock options using the intrinsic value method, which resulted in no compensation expense for stock option awards as the option exercise prices were equal to the market price of the Company’s stock at the respective dates of grant. Under both the intrinsic value and fair value models, compensation expense for non-vested share awards is based on the market price of the Company’s stock at the date of grant.

Details regarding the adoption of SFAS No. 123(R), and our equity compensation plans, including the assumptions utilized in estimating the fair value of option awards, are more fully described in Note 4 of the Notes to Condensed Consolidated Financial Statements. If different assumptions were used in the option valuation models, share-based compensation expense would differ from that recorded in the current period, and from that which is expected to be recorded in future periods. Pre-tax share-based compensation expense for the three and six months ended June 30, 2006 was approximately $157,000 and $337,000, respectively. As of June 30, 2006, the Company had $426,000 of unrecognized compensation costs related to non-vested share-based payment awards that are expected to be recognized over a weighted average period of 8 months.

Description of Ratios Analyzed

In the analysis of our operating results that follows, we refer to various financial ratios and other measures that management uses to analyze and compare the underwriting results of our insurance operations.

GAAP Ratios and Other GAAP Financial Measures

We calculate loss ratio, underwriting expense ratio and combined ratio on a GAAP basis. There have been no material changes to the calculation and use of these ratios during the most recent quarter. We also calculate underwriting gain (loss) on a GAAP basis. This measure equals the net premiums earned less loss and loss adjustment expenses and underwriting expenses. It is another measure used by management and others in the industry to evaluate the underwriting performance of our insurance operations in relation to peer companies.

Accident Year Loss Ratio

In addition to our reported GAAP loss ratios, we also report accident year loss ratios. The accident year loss ratio excludes the effect of development on prior year loss reserves. We believe this ratio is useful in evaluating our current underwriting performance, as it focuses on the relationships between current premiums earned and losses incurred related to the current year. Considerable variability is inherent in the establishment of loss reserves related to the current accident year. While management believes that its estimate is reasonable, there can be no assurance that these loss reserves will develop as expected. Our method of calculating accident year loss ratios may differ from the method used by other companies and, therefore, comparability may be limited.

Results of Operations — Three and Six Months Ended June 30, 2006 Compared to Three and Six Months Ended June 30, 2005

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

The following tables show our underwriting results, as well as other revenue and expense items included in our unaudited Condensed Consolidated Statements of Income, for the three and six-month period ended June 30, 2006 and 2005.


	For the Three Months Ended June 30,
							Change
	2006			2005			Dollar			Percentage
	(Dollars in thousands)

Direct premiums written
Illinois	$	9,746		$	9,892		$	(146	)		(1.5	)%
Kentucky		777			1,032			(255	)		(24.7	)%
Michigan		10,938			10,136			802			7.9	%
New Mexico		4,475			4,607			(132	)		(2.9	)%
Ohio		6,085			7,562			(1,477	)		(19.5	)%
PIC-Florida		—			2,251			(2,251	)		(100.0	)%
Other		381			476			(95	)		(20.0	)%

Total	$	32,402		$	35,956		$	(3,554	)		(9.9	)%

Net premiums written	$	30,082		$	28,192		$	1,890			6.7	%

Net earned premium	$	37,420		$	39,680		$	(2,260	)		(5.7	)%
Losses and loss adjustment expenses
Current year losses		28,674			31,828			(3,154	)		(9.9	)%
Prior year losses		(2,878	)		(627	)		(2,251	)		359.0	%

Total		25,796			31,201			(5,405	)		(17.3	)%
Underwriting expenses		7,734			8,579			(845	)		(9.8	)%

Total underwriting gain (loss)		3,890			(100	)		3,990			(3990.0	)%
Add:
Investment income		11,569			12,188			(619	)		(5.1	)%
Net realized gains (losses)		1,336			(256	)		1,592			621.9	%
Other income		150			231			(81	)		(35.1	)%
Less:
Investment expenses		228			377			(149	)		(39.5	)%
Interest expense		756			603			153			25.4	%
Amortization expense		—			156			(156	)		(100.0	)%
General and administrative expenses		323			798			(475	)		(59.5	)%
Other expenses		21			362			(341	)		(94.2	)%

Total other revenue and expense items		11,727			9,867			1,860			18.9	%

Income before federal income taxes and minority interest		15,617			9,767			5,850			59.9	%
Federal income tax expense (benefit)		4,905			(38,268	)		43,173			112.8	%

Income before minority interest		10,712			48,035			(37,323	)		(77.7	)%
Minority interest in income of consolidated subsidiary		—			(253	)		253			(100.0	)%

Net income	$	10,712		$	47,782		$	(37,070	)		(77.6	)%

Loss Ratio:
Accident year		76.6	%		80.2	%					3.6	%
Prior years		(7.7	)%		(1.6	)%					6.1	%
Calendar year		68.9	%		78.6	%					9.7	%
Underwriting expense ratio		20.7	%		21.6	%					0.9	%
Combined ratio		89.6	%		100.2	%					10.5	%


	For the Six Months Ended June 30,
							Change
	2006			2005			Dollar			Percentage
	(Dollars in thousands)

Direct premiums written
Illinois	$	24,806		$	26,848		$	(2,042	)		(7.6	)%
Kentucky		3,785			6,355			(2,570	)		(40.4	)%
Michigan		19,328			21,059			(1,731	)		(8.2	)%
New Mexico		9,779			10,047			(268	)		(2.7	)%
Ohio		15,078			16,232			(1,154	)		(7.1	)%
PIC-Florida		—			4,069			(4,069	)		(100.0	)%
Other		1,147			1,288			(141	)		(10.9	)%

Total	$	73,923		$	85,898		$	(11,975	)		(13.9	)%

Net premiums written	$	69,047		$	70,423		$	(1,376	)		(2.0	)%

Net earned premium	$	74,863		$	83,573		$	(8,710	)		(10.4	)%
Losses and loss adjustment expenses
Current year losses		57,659			67,905			(10,246	)		(15.1	)%
Prior year losses		(4,986	)		(855	)		(4,131	)		483.2	%

Total		52,673			67,050			(14,377	)		(21.4	)%
Underwriting expenses		15,411			17,709			(2,298	)		(13.0	)%

Total underwriting gain (loss)		6,779			(1,186	)		7,965			(671.6	)%
Add:
Investment income		22,672			22,830			(158	)		(0.7	)%
Net realized gains (losses)		1,348			(322	)		1,670			518.6	%
Other income		627			465			162			34.8	%
Less:
Investment expenses		397			676			(279	)		(41.3	)%
Interest expense		1,472			1,172			300			25.6	%
Amortization expense		—			313			(313	)		(100.0	)%
General and administrative expenses		686			1,836			(1,150	)		(62.6	)%
Other expenses		82			432			(350	)		(81.0	)%

Total other revenue and expense items		22,010			18,544			3,466			18.7	%

Income before federal income taxes and minority interest		28,789			17,358			11,431			65.9	%
Federal income tax expense (benefit)		9,214			(38,098	)		47,312			124.2	%

Income before minority interest		19,575			55,456			(35,881	)		(64.7	)%
Minority interest in income of consolidated subsidiary		—			(342	)		342			(100.0	)%

Net income	$	19,575		$	55,114		$	(35,539	)		(64.5	)%

Loss Ratio:
Accident year		77.0	%		81.2	%					4.2	%
Prior years		(6.6	)%		(1.0	)%					5.6	%
Calendar year		70.4	%		80.2	%					9.8	%
Underwriting expense ratio		20.6	%		21.2	%					0.6	%
Combined ratio		91.0	%		101.4	%					10.4	%

Net income for the three and six months ended June 30, 2006 decreased $37.1 million and $35.5 million to $10.7 million and $19.6 million, respectively, compared to the same periods in 2005. The 2005 results included the effects of the reversal of the deferred tax valuation allowance in the second quarter, which contributed $41.6 million and $44.1 million to net income in the form of a federal income tax benefit for the three and six months ended June 30, 2005, respectively. Income before federal income taxes and minority interest for the three and six months ended June 30, 2006 increased $5.9 million, or 59.9%, and $11.4 million, or 65.9%, respectively, compared to the same periods in 2005. These increases were primarily a result of improved loss experience and the other factors discussed below.

Direct premiums written for the three months ended June 30, 2006 decreased $3.5 million compared to the same period in 2005. The deconsolidation of PIC-Florida accounted for $2.3 million of this decrease, and $1.1 million was attributable to the completion of our exit from the health line of business. The deconsolidation of PIC-Florida is described more fully in Note 1 of the Notes to unaudited Condensed Consolidated Financial Statements included elsewhere in this report. Absent these two factors, direct written premiums decreased $229,000. In most states we experienced modest decreases in direct premiums written. However, in Michigan, we experienced a $1.9 million increase compared to the second quarter of 2005. The increase in Michigan was primarily the result of strategic rate decreases and other marketing and agency initiatives that we have implemented, which increased our insured physician count in the state by approximately 2.0% from December 31, 2005 to June 30, 2006. While we do not anticipate that Michigan premiums will continue to grow at this level, we do expect continued moderate growth. The decreases noted in states other than Michigan were primarily the result of increased price competition. Although the medical professional liability market continues to be competitive, we remain committed to our strategy of adequate pricing and strict underwriting. This strategy may result in the loss of additional policyholders. Our insured physician count at June 30, 2006 was 9,518, a decrease of 562, or 5.6% compared to June 30, 2005. However, the count dropped less than 1% compared to December 31, 2005.

The decrease in direct premiums written for the six months ended June 30, 2006 was primarily attributable to deconsolidating PIC-Florida and the completion of our exit from the health line. The growth in Michigan medical professional liability premiums was $545,000, and decreases in other states, especially Kentucky, where we face the greatest price competition, were greater than those noted for the three months ended June 30, 2006.

Our net premiums written during the three months ended June 30, 2006 increased $1.9 million, or 6.7%, compared to prior year. Effective January 1, 2006 we began retaining a 50% participation in our excess of loss reinsurance layer, which is all losses in excess of $500,000, compared to a 20% participation in 2005. In addition to the increase in retention, our 2006 reinsurance treaty is no longer swing-rated. While we anticipate that the changes in our reinsurance treaties from 2005 to 2006 will result in an increase in our net premiums written and earned, the ultimate impact of these changes in our reinsurance treaties on net income will depend upon future underwriting results.

For the six months ended June 30, 2006, net premiums written decreased $1.4 million, or 2.0%, compared to the prior year. The decrease in net premiums written was primarily related to the decrease in direct premiums written, most notably in the first quarter. This decrease was offset in part by the effects of changes in our reinsurance treaties.

As a percentage of our medical professional liability direct premiums written, net premiums written were 93.2% and 93.5% for the three and six months ended June 30, 2006, respectively. This compares with 74.4% and 84.4% for the same periods of 2005. While the changes in reinsurance treaties is the primary factor accounting for the increases in the net to direct written premium ratio, the deconsolidation of PIC — Florida was also a contributing factor as PIC — Florida’s reinsurance programs required the cession of a much greater percentage of their direct premiums written. For the three and six months ended June 30, 2005, PIC-Florida’s net to direct written premium ratios were 43.6% and 44.8%, respectively.

The effects of the changes in our reinsurance program did not have as dramatic an impact on net premiums earned as it did on net premiums written, as in 2006 we continue to earn in some of the premiums written under the 2005 treaty.

The decreases in our incurred loss and loss adjustment expenses were partially attributable to decreases in exposure as a result of the 5.7% and 10.4% decreases in net premiums earned for the three and six months ended June 30, 2006. We also continue to benefit from the enhancements we have made in our underwriting processes and claims processes over the last several years. The number of reported claims has decreased in thirteen of the last fourteen quarters when each quarter is compared with the previous quarter. Reported claims for the quarter ended June 30, 2006 totaled 296, compared to 401 in the second quarter of 2005. While we anticipate that the benefits of the changes in our underwriting and claims handling practices will continue to result in decreases in the number of claims reported, we anticipate that the rate of decrease will be slower than the current rate.

The loss ratios for the three and six months ended June 30, 2006 were 68.9% and 70.4%, respectively, compared with loss ratios of 78.6% and 80.2% for the three and six months ended June 30, 2005, respectively. Favorable development on December 31, 2005 loss reserves was $2.9 million and $5.0 million for the three and six months ended June 30, 2006, respectively. Incurred losses and loss adjustment expenses for the three and six months ended June 30, 2005 included approximately $627,000 and $855,000 of favorable development on prior year’s loss reserves. The favorable development on prior year loss reserves experienced in 2006 was primarily attributable to the emergence of lower frequency and severity trends than originally projected, especially related to accident years 2003 and 2004 in our Kentucky and Ohio medical professional liability markets.

The decreases in underwriting expenses correlate approximately with the decreases in net premiums earned. However, a portion of the decrease is attributable to cost cutting initiatives undertaken by management.

The decreases in investment income were primarily related to the increased allocation of our portfolio for tax-exempt securities. In the first half of 2006, we purchased $193.0 million of tax-exempt securities. We now have a 24.6% allocation of our cash and investment portfolio in tax-exempt securities. The average annual yield on these securities is expected to be approximately 3.8%. Although we anticipate our annual gross investment returns to decrease in the future as a result of this allocation decision, we expect that the overall impact on net income of the purchase of these securities will be positive because of the associated tax savings. Partially offsetting these decreases were increases in investment income of approximately $616,000 and $706,000 for the three and six months ended June 30, 2006 related to two of our equity method investees.

As a result of the items discussed above, the overall annual yield on our investment portfolio decreased to 5.36% for the six months ended June 30, 2006 compared to 5.52% for the six months ended June 30, 2005.

The net realized gains reported for the three and six months ended June 30, 2006 were primarily the result of the sale of investment real estate in the second quarter of 2006. This sale resulted in a realized gain of $1.4 million.

The decreases in investment expenses were primarily a result of a decrease in depreciation expense related to investment real estate properties. All depreciable investment real estate was disposed of as of December 31, 2005.

The increases in interest expense were the result of an increase in short-term interest rates. Our long-term debt of $30.9 million bears interest at 4.15% plus the three-month London Inter Bank Offered Rate, or LIBOR. The weighted average annual interest rate for this debt was 9.23% and 8.97% for the three and six months ended June 30, 2006, compared to 7.29% and 7.00% for the same periods in 2005. If the three-month LIBOR continues to increase, our interest expense will also increase. However, the annual rate of interest on this debt is capped at 12.5%. We currently anticipate that this debt will be reduced or eliminated in 2008. However, any such debt reduction is subject to cash flow and other liquidity factors as discussed in “— Liquidity and Capital Resources” below.

Intangible assets were fully amortized as of December 31, 2005, and therefore, there was no amortization recorded during the first half of 2006.

The decreases in general and administrative expenses were primarily the result of higher professional service fees and other expenses incurred in 2005 in connection with the initial year implementation of the Securities and Exchange Commission requirements relating to internal control over financial reporting.

The decreases in other expenses primarily relate to the contract termination costs incurred in the second quarter of 2005 in connection with the sublease of approximately 3,000 square feet of office space in Chicago.

The effective tax rate for the three and six months ended June 30, 2006 was 31.4% and 32.0%, respectively. This differs from the statutory rate of 35% primarily as a result of tax exempt investment income. Federal income taxes do not bear the usual relationship to pre-tax income for the three and six-month periods ended June 30, 2005 as a result of the effects of the reversal of the deferred tax asset valuation allowance, which created a $41.6 million and $44.1 million tax benefit during the three and six months ended June 30, 2005, respectively.

Liquidity and Capital Resources

The primary sources of our liquidity, on both a short- and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurers and proceeds from the maturity or sale of invested assets and principal receipts from our mortgage-backed securities. The primary uses of cash, on both a short- and long-term basis, are losses, loss adjustment expenses, operating expenses, the acquisition of invested assets and fixed assets, reinsurance premiums, interest payments, taxes, the repayment of long-term debt, and the purchase of shares of APCapital’s outstanding common stock.

APCapital’s only material assets are cash and the capital stock of American Physicians and its other subsidiaries. APCapital’s cash flow consists primarily of dividends and other permissible payments from its subsidiaries and investment earnings on funds held. The payment of dividends to APCapital by its insurance subsidiaries is subject to limitations imposed by applicable law. Through June 30, 2006, American Physicians had paid APCapital $32 million in dividends, which was the maximum amount of dividends that could be paid without prior approval by the State of Michigan Office of Financial and Insurance Services. These dividends are being used to fund APCapital’s debt service and other operating costs, as well as the purchase of shares of APCapital’s outstanding common stock. At June 30, 2006, APCapital’s net cash and cash equivalent resources totaled approximately $21.0 million.

We continue to repurchase shares of our outstanding common stock, including 420,600 shares for $19.6 million in the first 6 months of 2006. See Note 7 of the Notes to Condensed Consolidated Financial Statements for details of our share repurchase plans.

Our net cash flow from operations was $27.6 million for the six months ended June 30, 2006, compared to $12.5 million for the same period of 2005. The increase in cash provided by operations was primarily the result of a $27.7 million decrease in paid loss and loss adjustment expenses, partially offset by a reduction in cash premium receipts of $8.7 million, a $2.6 million reduction in investment income collected and an increase in operating expenses paid of $1.3 million.

At June 30, 2006, the Company had $87.5 million of cash and cash equivalents and $38.3 million of fixed-income securities that mature in the next year that are available to meet short-term cash flow needs. On a long-term basis, fixed-income securities are purchased with the intent to provide adequate cash flows from maturities to meet future policyholder obligations and ongoing operational expenses. As of June 30, 2006, we had approximately $173.0 million, $279.2 million and $87.3 million ofavailable-for-sale andheld-to-maturity fixed-income securities that mature in the next one to five years, five to ten years and more than ten years, respectively. We also have approximately $174.3 million of mortgage-backed securities that provide periodic principal repayments.

On July 26, 2006, ProAssurance Corporation (“ProAssurance”) and Physicians Insurance Company of Wisconsin, Inc. (“PIC-Wisconsin”) announced that PIC-Wisconsin shareholders had approved PIC-Wisconsin’s merger into ProAssurance effective on August 1, 2006. Under the terms of the merger, each share of PIC-Wisconsin common stock will be converted to shares of ProAssurance common stock having a value of approximately $5,000. Accordingly, we will receive ProAssurance common stock having a total value of approximately $9.7 million in exchange for the 1,942 shares of PIC-Wisconsin common stock we own. The carrying value of our PIC-Wisconsin common stock is $7.6 million. We intend to sell the shares of ProAssurance common stock we receive upon completion of the conversion. We anticipate that we will recognize a gain when such a sale occurs.

Based on historical trends, economic, market and regulatory conditions and our current business plans, we believe that our existing resources and sources of funds, including possible dividend payments from our insurance subsidiaries to APCapital, will be sufficient to meet our short- and long-term liquidity needs. However, these trends,

conditions and plans are subject to change, and there can be no assurance that our funds will be sufficient to meet our liquidity needs.

Financial Condition

In evaluating our financial condition, two factors are the most critical: first, the availability of adequate statutory capital and surplus to satisfy state regulatory requirements and support our current A.M. Best Company (“A.M. Best”) rating and second, the adequacy of our reserves for unpaid loss and loss adjustment expenses.

Statutory Capital and Surplus

Our statutory capital and surplus (collectively referred to herein as “surplus”) at June 30, 2006 was approximately $233.6 million. The $233.6 million of surplus results in a net premiums written to surplus ratio of 0.66:1. Surplus at December 31, 2005 was approximately $240.1 million, yielding a net premiums written to surplus ratio of 0.64:1. The decrease in statutory surplus from December 31, 2005 to June 30, 2006 is the result of dividend payments by American Physicians to its parent company, APCapital. In general, A.M. Best and regulators prefer to see a net written premiums to surplus ratio for medical professional liability insurance companies of 1:1 or lower.

During the second quarter of 2006, our primary insurance subsidiary, American Physicians received an upgrade in its A.M. Best rating from B+ to B++. Both the B++ and B+ ratings are considered “Very Good” by A.M. Best.

Reserves for Unpaid Losses and Loss Adjustment Expenses

For the six months ended June 30, 2006, we recorded a decrease in ultimate loss estimates, net of reinsurance, for accident years 2005 and prior of $5.0 million, or 0.9% of $582.2 million of net loss and loss adjustment expense reserves as of December 31, 2005.

Medical professional liability insurance is a “long-tailed” line of business, which means that claims may take several years from the date they are reported to us until the time at which they are either settled or closed. In addition, we also offer occurrence-based coverage in select markets. Occurrence-based policies offer coverage for insured events that occurred during the dates that a policy was in-force. This means that claims that have been incurred may not be reported to us until several years after the insured event has occurred. The following table shows the number of open claims, net case reserves, average net case reserve per open claim, net incurred but not reported, or IBNR, reserves and total net reserves for our medical professional liability line of business as of June 30, 2006 and December 31, 2005.


	Number						Average Net
	of Open			Net Case			Case Reserve		Net IBNR		Total Net
	Claims			Reserves			per Open Claim		Reserves		Reserves
	(In thousands, except claim and per claim data)

December 31, 2005		2,991		$	366,138		$	122,413	$	178,123	$	544,261
Change		(433	)	$	(17,421	)	$	13,911	$	24,744	$	7,323

June 30, 2006		2,558		$	348,717		$	136,324	$	202,867	$	551,584

While we believe that our estimate for ultimate projected losses related to our medical professional liability segment is adequate based on our open and reported 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 it can take for claim patterns to emerge.

Workers’ compensation is also a long-tailed line of business, and as a result, even though all workers’ compensation policies expired in the second quarter of 2005, it will be several years until we settle all workers’ compensation claims. Our open number of workers’ compensation claims has decreased from 585 at December 31, 2005 to 462 at June 30, 2006. Workers’ compensation net reserves at June 30, 2006 were $33.6 million compared with $38.9 million at December 31, 2005. As the remaining open claims age, the ultimate amount of claim settlement should become more evident. As a result, volatility inherent in the actuarial projection of ultimate losses

begins to stabilize, reducing the need to adjust loss reserves for previous accident years. We believe that the reserve we have established for workers’ compensation unpaid loss and loss adjustment expenses as of June 30, 2006 is adequate. However, due to the uncertainty inherent in such estimates, there can be no assurance that the ultimate cost of claims settlement will not exceed the reserves we have established, as future claims patterns may emerge differently than the assumptions utilized in our estimates.

Activity in the liability for unpaid loss and loss adjustment expenses for the six months ended June 30, 2006 and the year ended December 31, 2005 was as follows:


	Six Months Ended			Year Ended
	June 30, 2006			December 31, 2005

Beginning balance, gross	$	689,857		$	693,630
Less, reinsurance recoverables		107,692			101,791
Net reserves, beginning balance		582,165			591,839
Deconsolidation of PIC-FL		(2,418	)		—
Incurred related to
Current year		57,659			131,496
Prior years		(4,986	)		(4,372	)
��
		52,673			127,124

Paid related to
Current year		538			5,054
Prior years		49,193			131,744

		49,731			136,798

Net reserves, ending balance		582,689			582,165
Plus, reinsurance recoverables		108,987			107,692

Ending balance, gross	$	691,676		$	689,857

Development as a % of beginning net reserves		(0.9	)%		(0.7	)%

Other Significant Balance Sheet Items

Our invested assets consist primarily of fixed-income securities and cash and cash equivalents. In addition we hold a small amount of strategic equity security investments, investment real estate and investment real estate limited partnerships.

At June 30, 2006, we had $87.5 million of cash and cash equivalents compared to $273.0 million at December 31, 2005. In the first half of 2006, we purchased $193.0 million of tax-exempt securities in anticipation of the utilization of the majority of our federal income tax net operating loss carryforwards sometime during 2006.

Premiums receivable decreased $10.3 million, or 20.2%, to $40.5 million at June 30, 2006. Approximately $2.9 million was due to the deconsolidation of PIC-Florida in the first quarter of 2006. The remaining decrease in the premiums receivable balance was primarily the result of reduced premium writings as well as the timing of those writings. Historically, the third quarter has been the most significant in terms of premium volume. Our payment plans are designed to collect the full premium within nine months of issuing the policy. Accordingly, only minimal amounts of the third quarter 2005 premium writings remain at June 30, 2006, while the December 31, 2005 premium receivable balance included a substantial portion of the third quarter 2005 premiums written.

Our deferred income tax assets decreased approximately $6.2 million almost exclusively as a result of utilizing the remaining net operating loss carryforwards from the 2003 tax year. We still have approximately $4.0 million of net operating loss carryforwards. However these carryforwards are limited to an annual use of about $914,000 per year.

Other assets decreased $6.2 million to $33.5 million at June 30, 2006. The decrease was primarily the result of a $5.6 million decrease in the prepaid reinsurance premium, also known as ceded unearned premium. Approximately $2.5 million of the $5.6 million decrease in prepaid reinsurance premiums was the result of the deconsolidation of PIC-Florida. The remaining $3.1 million decrease was the result of changes in our 2006 reinsurance treaties as discussed under “— Results of Operations.”

Unearned premiums decreased $13.3 million to $68.7 million at June 30, 2006. Approximately $4.5 million was due to the deconsolidation of PIC-Florida in the first quarter of 2006. The remaining decrease was primarily the result of a decrease in direct premiums written and seasonal premium volume fluctuations. As mentioned previously, the third quarter has historically been the Company’s most significant in terms of premium volume. Accordingly, the ratio of unearned premiums to premiums written at June 30 of any given year has typically been lower than that reported at any other quarter end as the majority of the third quarter premium volume from the preceding year is earned as of June 30 of the subsequent year.

Other liabilities decreased $5.7 million to $36.1 million at June 30, 2006. In addition to accounts payable and other accruals, other liabilities included ceded reinsurance premium payable, advanced premiums and a liability account for pending security transactions. The $5.7 million decrease was partially the result of a $4.3 million decrease in ceded reinsurance payable, attributable to the settlement of prior year “swing-rated” treaties ($4.9 million) and the deconsolidation of PIC-Florida ($1.6 million). Offsetting these decreases in ceded reinsurance payable was the receipt of amounts due from the reinsurers as a result of deposit premiums paid in 2005 in excess of actual premium cessions. In addition, accounts payable and other accruals decreased approximately $2.9 million, partially offset by increases in the liabilities for advance premium payments ($686,000) and pending security transactions ($821,000).

Shareholders’ equity at June 30, 2006 was $259.0 million, a decrease of $2.2 million from $261.2 million at December 31, 2005. The decrease was primarily attributable to the repurchase of $19.6 million of the Company’s outstanding common stock in the first half of 2006 and a $3.5 million decrease, net of tax, in net unrealized gains on our investment security portfolio. This decrease was partially offset by reported net income of $19.6 million for the six months ended June 30, 2006, as well as an increase inadditional-paid-in-capital of approximately $1.4 million attributable to our equity compensation plans. The Company’s book value per common share outstanding at June 30, 2006 was $32.56, based on 7,957,182 shares outstanding, compared to $31.35 per common share outstanding at December 31, 2005. Total shares outstanding at December 31, 2005 were 8,333,417.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements are described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report onForm 10-K for the year ended December 31, 2005. Except as described elsewhere in this report onForm 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the most recent fiscal year end.

Effects of New Accounting Pronouncements

The effects of new accounting pronouncements are described in Note 2 of the Notes to unaudited Condensed Consolidated Financial Statements included elsewhere in this report. Such information is incorporated herein by reference.


Item 3.	*Quantitative and Qualitative Disclosures About Market and Credit Risk*

General

Market risk is the risk of loss due to adverse changes in market rates and prices. We invest primarily in fixed-income securities, which are interest-sensitive assets. Accordingly, our primary market risk is exposure to changes in interest rates.

In addition, our fixed-income securities, bothavailable-for-sale andheld-to-maturity, are subject to a degree of credit risk. Credit risk is the risk that the issuer will default on interest or principal payments, or both, which could prohibit us from recovering a portion or all of our original investment.

As of June 30, 2006, the majority of our investment portfolio was invested in fixed-income security investments, as well as cash and cash equivalents. The fixed-income securities consisted primarily of U.S. government and agency bonds, high-quality corporate bonds, mortgage-backed securities and tax-exempt U.S. municipal bonds.

Qualitative Information About Market and Credit Risk

At June 30, 2006, our entire fixed-income portfolio, bothavailable-for-sale andheld-to-maturity, (excluding approximately $13.2 million of private placement issues, which constitutes 1.8% of our portfolio) was considered investment grade. We define investment grade securities as those that have a Standard & Poor’s credit rating of BBB and above. Non-investment grade securities typically bear more credit risk than those of investment grade quality. In addition, we try to limit credit risk by not maintaining fixed-income security investments pertaining to any one issuer, with the exception of U.S. Government and agency backed securities, in excess of $6 million. We also diversify our holdings so that there is not a significant concentration in any one industry or geographical region. We periodically review our investment portfolio for any potential credit quality or collection issues and for any securities with respect to which we consider any decline in market value to be other than temporary.

Ourheld-to-maturity portfolio is not carried at estimated fair value. As a result, changes in interest rates do not affect the carrying amount of these securities. However, ourheld-to-maturity investment security portfolio includes approximately $174.0 million, or 33.7%, of mortgage-backed securities. While the carrying value of these securities is not subject to fluctuations as a result of changes in interest rates, changes in interest rates could impact our cash flows as an increase in interest rates will slow principal payments, and a decrease in interest rates will accelerate principal payments.

Quantitative Information About Market Risk

At June 30, 2006, ouravailable-for-sale fixed-income security portfolio was valued at $235.4 million and had an average modified duration of 3.00 years, compared to a portfolio valued at $224.1 million with an average modified duration of 2.27 years at December 31, 2005. The following tables show the effects of a change in interest rates on the fair value and duration of ouravailable-for-sale fixed-income security portfolio at June 30, 2006 and December 31, 2005. We have assumed an immediate increase or decrease of 1% or 2% in interest rate for illustrative purposes. You should not consider this assumption or the values shown in the table to be a prediction of actual future results.


	June 30, 2006							December 31, 2005
	Portfolio		Change in			Modified		Portfolio		Change in			Modified
Change in Rates	Value		Value			Duration		Value		Value			Duration
	(Dollars in thousands)							(Dollars in thousands)

+2%	$	222,816	$	(12,598	)		2.62	$	215,014	$	(9,087	)		1.89
+1%		228,825		(6,589	)		2.69		219,173		(4,928	)		2.16
0		235,414					3.00		224,101					2.27
−1%		242,627		7,213			3.09		228,991		4,890			2.36
−2%		250,269		14,855			3.19		234,917		10,816			2.50


Item 4.	*Controls and Procedures*

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure material information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) 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 our management, including our Chief Executive Officer

and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosures. In designing and evaluating the disclosure controls and procedures, we 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, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange ActRule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2006.

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.

PART II. OTHER INFORMATION


Item 1A.	*Risk Factors*

An investment in our common stock involves numerous risks and uncertainties. The first risk factor in Item 1A of the Company’sForm 10-K for the year ended December 31, 2005 is amended and restated in its entirety as set forth below. There have been no other material changes from the risk factors contained in Item 1A of thatForm 10-K.


	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.

The medical professional liability insurance business tends to cycle through what are often referred to as “hard” and “soft” markets. A hard market is generally characterized as a period of rapidly raising premium rates, tightened underwriting standards, narrowed coverage and the withdrawal of insurers from certain markets. Soft markets are usually characterized by relatively flat or slow-rising premium rates, less stringent underwriting standards, expanded coverage and strong competition among insurers. The medical professional liability insurance market has been moving towards a softer market. This change in trend and the accompanying competitive pressures could adversely impact our ability to obtain rate increases we deem necessary to adequately cover insured risks, which could ultimately result in a decrease in premium volume as physicians currently insured with us elect to place their coverage elsewhere or an increase in related underwriting and loss and loss adjustment expenses. Each of these outcomes could have a material adverse effect on our future results of operations.


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds.*

The following table sets forth the repurchases of common stock for the quarter ended June 30, 2006:


					Total Number
	Total				of Shares		Maximum Number (or Approximate Dollar
	Number of		Average		Purchased as		Value) of Shares That May Yet be
	Shares		Price Paid		Part of Publicly		Purchased Under the Plans or Programs
	Purchased		per Share		Announced Plans		Discretionary Plan(a)		Rule 10b5-1 Plan(b)

For the month ended April 30, 2006		43,600	$	47.86		43,600		269,869	$	18,507,418
For the month ended May 31, 2006		126,100	$	45.65		126,100		269,869	$	12,751,474
For the month ended June 30, 2006		123,400	$	45.92		123,400		269,869	$	7,084,483
For the three months ended June 30, 2006		293,100	$	46.09		293,100		269,869	$	7,084,483


(a)		In November 2005, the Board of Directors authorized the purchase of an additional five percent of the Company’s outstanding common shares, which represents approximately 425,000 shares, at the discretion of management as part of a repurchase program that began March 30, 2001 (referred to as the “discretionary plan”). This most recent authorization brings the total number of shares authorized to be repurchased under the discretionary plan to 4,040,439. The timing of the purchases and the number of shares to be bought at any time depend on market conditions and the Company’s capital resources and requirements. The discretionary plan has no expiration date and may be terminated at any time.

(b)		In April 2006, the Company announced that its Board of Directors authorized an additional share repurchase of $20 million of its common shares, which would be repurchased under a newly adopted plan underRule 10b5-1 of the Securities Exchange Act of 1934. TheRule 10b5-1 plan share repurchases are made pursuant to a formula in the plan and are expected to continue until the entire authorization is utilized, subject to conditions specified in the plan, but not later than December 31, 2006. The Company may terminate the plan at any time.


Item 4.	*Submission of Matters to a Vote of Security Holders*

The Company held its Annual Meeting of Shareholders on April 27, 2006, at which the shareholders approved the ratification of BDO Seidman, LLP as their independent register public accountants and elected three directors. Two of the directors were incumbents, with Mr. Larry Thomas being a newly appointed nominee. All nominees were elected. The following table sets for the results of the voting at the meeting.


	Votes		Votes
Nominee	For		Withheld

Billy B. Baumann, M.D.		7,534,202		81,421
R. Kevin Clinton		7,524,802		90,821
Larry W. Thomas		7,536,202		79,421


							Broker
	For		Against		Abstain		Non-Votes

Proposal to ratify appointment of BDO Seidman, LLP as the Company’s independent registered public accountants		7,535,532		79,243		848		0


Item 6.	*Exhibits*

Exhibits.

The Exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by reference.

SIGNATURES

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 CAPITAL, INC.


	By:	/s/ R. Kevin Clinton

R. Kevin Clinton

Its: President and Chief Executive Officer


	By:	/s/ Frank H. Freund

Frank H. Freund

Its: Executive Vice President, Treasurer and

Chief Financial Officer

Date: August 9, 2006

EXHIBIT INDEX


Exhibit No.			Exhibit Description

	31	.1	Certification of Chief Executive Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	31	.2	Certification of Chief Financial Officer pursuant toRule 13a-14(a) under the Securities Exchange Act of 1934.
	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 andRule 13a-14(b) under the Securities Exchange Act of 1934.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

American Physicians Capital (ACAP) Inactive 10-Q2006 Q2 Quarterly report

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