American Physicians Capital (ACAP) Inactive
Filed: 7 Feb 08, 12:00am
EAST LANSING, MI -- 02/07/2008 -- American Physicians Capital, Inc. (APCapital) (NASDAQ: ACAP) today announced net income of $12.7 million or $1.19 per diluted common share for the fourth quarter of 2007. For the year ended December 31, 2007, APCapital generated net income of $52.8 million, or $4.73 per diluted common share. At December 31, 2007, APCapital's book value per share was $26.02 based on 10,127,740 shares outstanding, an increase of 11.9% from $23.26 at December 31, 2006.
APCapital generated net income of $12.6 million or $1.06 per share in the fourth quarter of 2006 and net income of $43.2 million or $3.52 per share for the year ended December 31, 2006.
"APCapital completed one of its most profitable years from operations in 2007," said President and Chief Executive Officer R. Kevin Clinton. "Our solid book of medical professional liability business continued to produce good income levels and our conservative reserving practices resulted in significant positive reserve development."
Annual Guidance for 2008
APCapital's 2007 net income represents a return on beginning GAAP equity (ROE) of 19.6% -- well above management's stated ROE goal of 11-13%. In addition, the combined ratio for the 2007 year of 71.7% is well below the 90-95% target ratio. The 2007 year benefited from positive prior year development.
"If the current loss trends continue and pricing remains reasonable, we would expect to have another solid year in 2008," said Clinton. "Our seasoned book-of-business and effective capital management strategy should produce operating earnings of at least $4.25 per diluted share in 2008, and even higher earnings per diluted share in 2009. The $4.25 earnings per diluted share in 2008 represents a ROE of approximately 16%."
The guidance and related assumptions are subject to the risks and uncertainties outlined in the Company's Forward-Looking Statements section of this press release.
Consolidated Income Statement
(Dollars in thousands)
Three Months Ended Year Ended
December 31, December 31,
-------------------- --------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Direct Premiums Written $ 26,053 $ 31,124 $ 135,415 $ 156,866
========= ========= ========= =========
Net Premiums Written $ 25,321 $ 29,372 $ 130,808 $ 146,723
========= ========= ========= =========
Net Premiums Earned $ 33,479 $ 37,053 $ 138,923 $ 149,688
Incurred Loss and Loss
Adjustment Expenses:
Current Accident Year Losses 25,041 27,986 103,673 113,338
Prior Year Losses (9,124) (4,748) (34,245) (12,880)
--------- --------- --------- ---------
Total 15,917 23,238 69,428 100,458
Underwriting Expenses 7,939 7,737 30,141 30,521
--------- --------- --------- ---------
Underwriting Income 9,623 6,078 39,354 18,709
Investment Income 10,440 11,243 43,506 45,253
Other Income (1) 269 2,068 704 4,341
Other Expenses (1,381) (1,362) (5,411) (5,300)
--------- --------- --------- ---------
Pre-tax Income 18,951 18,027 78,153 63,003
Federal Income Taxes 6,279 5,440 25,362 19,816
--------- --------- --------- ---------
Net Income $ 12,672 $ 12,587 $ 52,791 $ 43,187
========= ========= ========= =========
Loss Ratio:
Current Accident Year 74.8% 75.5% 74.6% 75.7%
Prior Year Development -27.3% -12.8% -24.6% -8.6%
Calendar Year 47.5% 62.7% 50.0% 67.1%
Underwriting Expense Ratio 23.7% 20.9% 21.7% 20.4%
Combined Ratio 71.2% 83.6% 71.7% 87.5%
(1) Includes realized gains and losses
Direct premiums written were $26.1 million in the fourth quarter of 2007, down $5.1 million or 16.3% from the same period a year ago. For the year ended December 31, 2007, direct premiums written were down $21.5 million, or 13.7%. The declines in direct premiums written were primarily the result of rate reductions based on a decline in claim frequency trends and competitive pressures. These reductions resulted in an overall average premium rate decline of 7.8% in 2007, as compared to a 3.1% decrease in 2006. We insured 9,217 physicians at December 31, 2007, down 2.5% from year end 2006.
Net premiums earned in the fourth quarter of 2007 were down $3.6 million or 9.6% from the fourth quarter of 2006 and for the year were down $10.8 million or 7.2%. The declines in net premiums earned were not as great as the declines in direct premiums written due to changes in the reinsurance terms in place for 2007 whereby APCapital retained a greater portion of loss exposure and ceded less premium than in 2006.
The 2007 fourth quarter loss ratio was 47.5% with $9.1 million of positive development from prior accident years. For the year ended December 31, 2007, the loss ratio was 50.0% with $34.2 million of positive prior year development. On an accident year basis, the loss ratio in the fourth quarter of 2007 was 74.8%, similar to the 74.6% ratio of the entire 2007 accident year. This is consistent with the 75.7% reported in 2006.
Throughout 2007 we experienced better than expected loss trends. Claim frequency continued to decline. The number of claims reported in 2007 was down 18.5% from the number reported in 2006. Our open claim count fell 22.8% from December 31, 2006 to December 31, 2007, and our average paid claims have remained relatively flat since 2002.
These favorable claim trends resulted in the stable accident year loss ratio and the emergence of significant positive reserve development on prior accident years. As part of our methodology for establishing reserves, we assume normal loss cost inflation and increased claim frequency consistent with historical patterns. Accordingly, when more favorable trends develop, there are redundant reserves on these accident years.
Even with the favorable development recorded in 2007, we remain committed to careful reserving practices. Our average case reserve increased from $137,900 at December 31, 2006 to $144,800 at the end of 2007. During 2007 we added $38 million to medical professional incurred but not reported reserves.
The underwriting expense ratio increased in the fourth quarter of 2007 to 23.7% from 20.9% in the fourth quarter of 2006. The 2007 year end underwriting expense ratio was also up to 21.7% from 20.4% for 2006. Although our underwriting expenses were largely unchanged period to period, we have a smaller base of net earned premiums to cover our fixed underwriting costs as a result of premium rate reductions in 2007.
Investments
Investment income was $10.4 million in the fourth quarter of 2007 and $43.5 million for the year. For the year ended December 31, 2007, our investment yield was 5.0% compared to 5.3% a year ago. The decline in return is due to the decline in the overall interest rate environment and our increased allocation to tax-exempt securities compared to 2006.
We incurred no subprime losses in 2007. Our investment portfolio has an overall average rating of AA+. All of our mortgage-backed securities were issued by government sponsored agencies. Our insured municipal securities have an underlying rating of "A" or higher and are essential purpose bonds.
Balance Sheet and Equity Information
APCapital's total assets were $1.06 billion at December 31, 2007, and total shareholders' equity was $263.6 million. Shareholder's equity was down $5.3 million in 2007 as a result of our share repurchases and dividends during the year. However, our book value per share was up 11.9% and we still write at a very strong net written premium to statutory surplus ratio of .59 to 1.0.
Capital Management
In the fourth quarter of 2007, APCapital repurchased 476,521 shares at an average cost of $42.88 per share. For the full year, APCapital repurchased 1,472,121 shares utilizing $57.7 million of equity. APCapital has the following outstanding share repurchase authorizations:
Type of (In thousands)
Date Approved Repurchase Amount Amount
By Board Plan Authorized Remaining (2)
- ---------------- ------------- ------------- -------------
October 27, 2006 Rule 10b5-1 $ 32,000 $ 19,404
October 29, 2007 Rule 10b5-1 $ 20,000 $ 20,000
August 16, 2007 Discretionary (1) $ 20,000 $ 7,018
------------- -------------
$ 72,000 $ 46,422
============= =============
(1) All shares will be repurchased under management's discretion in the
open market or in privately negotiated transactions during the Company's
normal trading windows.
(2) As of December 31, 2007.
The share repurchase program remains an integral part of APCapital's capital management program. APCapital seeks to maintain an optimal but flexible level of capital during this softer market cycle.
In the fourth quarter of 2007, the Board of Directors declared a fourth quarter cash dividend of $0.10 per common share, which was paid to shareholders on December 31, 2007. Today, APCapital's Board of Directors declared a first quarter cash dividend of $0.10 per common share payable on March 31, 2008 to shareholders of record on March 14, 2008.
Stock Split
In September 2006, APCapital's Board of Directors declared a three-for-two stock split of its common shares to shareholders. All prior year share and per share numbers disclosed in this press release are split adjusted.
Conference Call
APCapital's website, http://www.apcapital.com, will host a live Webcast of its conference call in a listen-only format to discuss 2007 fourth quarter results on February 8, 2008 at 10:00 a.m. Eastern time. An archived edition of the Webcast can be accessed by going to APCapital's website and selecting "For Investors," then "Webcasts." For individuals unable to access the Webcast, a telephone replay will be available by dialing 1-888-286-8010 or (617) 801-6888 and entering the conference ID code: 52522611. The replay will be available through 11:59 p.m. Eastern time on February 13, 2008.
Corporate Description
American Physicians Capital, Inc. is a regional provider of medical professional liability insurance focused primarily in the Midwest markets through American Physicians Assurance Corporation and its other subsidiaries. Further information about the companies is available on the Internet at http://www.apcapital.com.
Forward-Looking Statements
Certain statements made by American Physicians Capital, Inc. in this release may constitute forward-looking statements within the meaning of the federal securities laws. When we use words such as "will," "should," "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements. While we believe any forward-looking statements we have made are reasonable, they are subject to risks and uncertainties, and actual results could differ materially. These risks and uncertainties include, but are not limited to, 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;
- -- tort reform legislation 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 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 financial strength 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 dividends and share repurchases;
- -- the loss of one or more of our key employees could adversely affect
our business;
- -- unpredictable court decisions could have a material adverse financial
impact on our business operations if the amount of the award is expanded
beyond the intended insurance coverage;
- -- applicable law and certain provisions in our articles and bylaws may
prevent and discourage unsolicited attempts to acquire our Company that may
be in the best interest of our shareholders;
- -- any other factors listed or discussed in the reports filed by
APCapital with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
APCapital does not undertake, and expressly disclaims any obligation, to update or alter its statements whether as a result of new information, future events or otherwise, except as required by law.
Definition of Non-GAAP Financial Measures
APCapital uses operating income, a non-GAAP financial measure, to evaluate APCapital's underwriting performance. Operating income differs from net income by excluding the after-tax effect of realized capital gains and (losses).
Although the investment of premiums to generate investment income and capital gains or (losses) is an integral part of an insurance company's operations, APCapital's decisions to realize capital gains or (losses) are independent of the insurance underwriting process. In addition, under applicable GAAP accounting requirements, losses may be recognized for accounting purposes as the result of other than temporary declines in the value of investment securities, without actual realization. APCapital believes that the level of realized gains and (losses) for any particular period is not indicative of the performance of our ongoing underlying insurance operations in a particular period. As a result, APCapital believes that providing operating income (loss) information makes it easier for users of APCapital's financial information to evaluate the success of APCapital's underlying insurance operations.
In addition to APCapital's reported loss ratios, management also uses accident year loss ratios, a non-GAAP financial measure, to evaluate APCapital's current underwriting performance. The accident year loss ratio excludes the effect of prior years' loss reserve development. APCapital believes that this ratio is useful to investors as it focuses on the relationships between current premiums earned and losses incurred related to the current year. Although considerable variability is inherent in the estimates of losses incurred related to the current year, APCapital believes that the current estimates are reasonable.
Summary Financial Information
American Physicians Capital, Inc.
Balance Sheet Data December 31, December 31,
2007 2006
------------- --------------
(In thousands, except per
share data)
Assets:
Available-for-sale - bonds $ 262,301 $ 255,001
Held-to-maturity - bonds 497,662 505,572
Other invested assets 11,487 6,476
Cash and cash equivalents 87,498 108,227
------------- --------------
Cash and investments 858,948 875,276
Premiums receivable 35,542 43,068
Reinsurance recoverable 106,961 109,013
Deferred federal income taxes 22,439 32,795
Federal income taxes recoverable 1,076 -
Other assets 32,496 35,663
------------- --------------
Total assets $ 1,057,462 $ 1,095,815
============= ==============
Liabilities and Shareholders' Equity:
Unpaid losses and loss adjustment expenses $ 664,117 $ 688,031
Unearned premiums 60,080 70,744
Long-term debt 30,928 30,928
Federal income taxes payable - 189
Other liabilities 38,780 37,113
------------- --------------
Total liabilities 793,905 827,005
Common stock - -
Additional paid-in-capital (16,127) 41,106
Retained earnings 273,629 222,935
Accumulated other comprehensive income:
Net unrealized gains on investments,
net of deferred federal income taxes 6,055 4,769
------------- --------------
Shareholders' equity 263,557 268,810
------------- --------------
Total liabilities and shareholders' equity $ 1,057,462 $ 1,095,815
============= ==============
Shares outstanding 10,128 11,557
Book value per share $ 26.02 $ 23.26
Summary Financial Information
American Physicians Capital, Inc.
Income Statement
Three Months Ended Year Ended
December 31, December 31,
-------------------- --------------------
2007 2006 2007 2006
--------- --------- --------- ---------
(In thousands, (In thousands,
except per share except per share
data) data)
Direct premiums written $ 26,053 $ 31,124 $ 135,415 $ 156,866
========= ========= ========= =========
Net premiums written $ 25,321 $ 29,372 $ 130,808 $ 146,723
========= ========= ========= =========
Net premiums earned $ 33,479 $ 37,053 $ 138,923 $ 149,688
Investment income 10,440 11,243 43,506 45,253
Net realized gains (losses) 28 1,862 (111) 3,310
Other income 241 206 815 1,031
--------- --------- --------- ---------
Total revenues 44,188 50,364 183,133 199,282
Losses and loss adjustment
expenses 15,917 23,238 69,428 100,458
Underwriting expenses 7,939 7,737 30,141 30,521
Other expenses 1,381 1,362 5,411 5,300
--------- --------- --------- ---------
Total expenses 25,237 32,337 104,980 136,279
--------- --------- --------- ---------
Income before income taxes 18,951 18,027 78,153 63,003
Federal income tax expense 6,279 5,440 25,362 19,816
--------- --------- --------- ---------
Net income $ 12,672 $ 12,587 $ 52,791 $ 43,187
========= ========= ========= =========
Adjustments to reconcile net
income to operating income:
Net income $ 12,672 $ 12,587 $ 52,791 $ 43,187
Add back:
Realized (gains) losses,
net of tax (18) (1,210) 72 (2,152)
--------- --------- --------- ---------
Net operating income $ 12,654 $ 11,377 $ 52,863 $ 41,035
========= ========= ========= =========
Ratios:
Loss ratio (1) 47.5% 62.7% 50.0% 67.1%
Underwriting ratio (2) 23.7% 20.9% 21.7% 20.4%
Combined ratio (3) 71.2% 83.6% 71.7% 87.5%
Earnings per share data:
Net income
Basic $ 1.21 $ 1.09 $ 4.82 $ 3.59
Diluted $ 1.19 $ 1.06 $ 4.73 $ 3.52
Net operating income
Basic $ 1.21 $ 0.98 $ 4.83 $ 3.42
Diluted $ 1.19 $ 0.96 $ 4.74 $ 3.34
Basic weighted average shares
outstanding 10,432 11,599 10,951 12,015
Diluted weighted average shares
outstanding 10,634 11,865 11,163 12,274
(1) The loss ratio is calculated by dividing incurred loss and loss
adjustment expenses by net premiums earned.
(2) The underwriting ratio is calculated by dividing underwriting expenses
by net premiums earned.
(3) The combined ratio is the sum of the loss and underwriting ratios.
Summary Financial Information
American Physicians Capital, Inc.
Selected Cash Flow Information
For the Year Ended
December 31,
----------------------
2007 2006
---------- ----------
(In thousands)
Net cash from operating activities $ 45,993 $ 55,984
========== ==========
Net cash for investing activities $ (9,629) $ (187,372)
========== ==========
Net cash for financing activities $ (57,093) $ (33,373)
========== ==========
Net decrease in cash and cash equivalents $ (20,729) $ (164,761)
========== ==========
American Physicians Capital, Inc.
Supplemental Statistics
Medical Professional Liability
Reported
Three Months Ended Claim Count
- ------------------ --------------
December 31, 2007 245
September 30, 2007 191
June 30, 2007 269
March 31, 2007 247
December 31, 2006 267
September 30, 2006 297
June 30, 2006 296
March 31, 2006 308
December 31, 2005 347
September 30, 2005 361
June 30, 2005 401
March 31, 2005 404
Net Premium Earned (in thousands)
-----------------------------------------------
APCapital
Excluding PIC
Three Months Ended Florida PIC Florida Total
- ------------------ -------------- -------------- ---------------
December 31, 2007 $ 33,471 $ - $ 33,471
September 30, 2007 35,517 - 35,517
June 30, 2007 34,896 - 34,896
March 31, 2007 35,034 - 35,034
December 31, 2006 37,051 - 37,051
September 30, 2006 37,774 - 37,774
June 30, 2006 37,517 - 37,517
March 31, 2006 37,448 - 37,448
December 31, 2005 39,918 671 40,589
September 30, 2005 39,305 975 40,280
June 30, 2005 39,677 869 40,546
March 31, 2005 41,356 799 42,155
Average Net
Average Net Paid Claim
Open Case Reserve (Trailing Four
Three Months Ended Claim Count Per Open Claim Quarter Average)
- ------------------ -------------- -------------- ---------------
December 31, 2007 1,741 $ 144,800 $ 67,300
September 30, 2007 1,913 144,200 70,400
June 30, 2007 2,124 136,200 69,600
March 31, 2007 2,200 138,800 56,600
December 31, 2006 2,256 137,900 59,100
September 30, 2006 2,347 138,800 57,600
June 30, 2006 2,558 136,300 63,000
March 31, 2006 2,976 120,400 78,800
December 31, 2005 2,991 122,400 75,900
September 30, 2005 3,109 119,100 67,900
June 30, 2005 3,211 116,300 68,200
March 31, 2005 3,344 114,900 65,200
Retention Ratio
Year Ended
------------------------------
December 31, December 31,
2007 2006
-------------- --------------
Illinois 82% 81%
Kentucky 86% 70%
Michigan 85% 85%
New Mexico 88% 82%
Ohio 88% 83%
Total (all states) 85% 82%
Notes:
All values, except net premiums earned, exclude experience from investment
in Physicians Insurance Company (Florida).
Contact: Ann Storberg Investor Relations (517) 324-6629