| For Immediate Release | Contact: Ann Storberg, Investor Relations (517) 324-6629 |
AMERICAN PHYSICIANS CAPITAL, INC. REPORTS
SECOND QUARTER 2007 RESULTS
East Lansing, Mich. (July 20, 2007) - American Physicians Capital, Inc. (APCapital) (NASDAQ:ACAP) today announced net income of $16.3 million or $1.44 per diluted common share for the second quarter of 2007. For the first six months of 2007, the Company has generated net income of $26.8 million, or $2.33 per diluted common share. At June 30, 2007, American Physicians Capital’s book value per share is $24.87 based on 11,082,199 shares outstanding.
The company generated net income of $10.7 million or $.86 per share in the second quarter of 2006 and net income of $19.6 million or $1.56 per share for the first half of 2006.
“We continue to see the positive results of our business strategy,” said President and Chief Executive Officer R. Kevin Clinton. “Our underwriting and claims management efforts are producing strong underwriting results and our conservative, but opportunistic investment strategy is generating a solid return. In addition, we continue to see favorable loss development patterns in our prior year reserves.”
“We repurchased 116,800 common shares in the second quarter and 489,200 shares year to date, which reflects our commitment to effectively manage our shareholder’s capital,” added Clinton.
1
Consolidated Income Statement
(Dollars in thousands)
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
| Direct Premiums Written | $ | 27,847 | $ | 32,402 | $ | 64,149 | $ | 73,923 | |||||
| Net Premiums Written | $ | 26,967 | $ | 30,082 | $ | 61,861 | $ | 69,047 | |||||
| Net Premiums Earned | $ | 34,896 | $ | 37,420 | $ | 69,928 | $ | 74,863 | |||||
| Incurred Loss and Loss Adjustment Expenses: | |||||||||||||
| Current Accident Year Losses | 25,814 | 28,674 | 52,441 | 57,659 | |||||||||
| Prior Year Losses | (12,898 | ) | (2,878 | ) | (17,163 | ) | (4,986 | ) | |||||
| Total | 12,916 | 25,796 | 35,278 | 52,673 | |||||||||
| Underwriting Expenses | 7,566 | 7,734 | 14,927 | 15,411 | |||||||||
| Underwriting Income | 14,414 | 3,890 | 19,723 | 6,779 | |||||||||
| Investment Income | 11,152 | 11,569 | 22,329 | 22,672 | |||||||||
| Other Income (1) | 111 | 1,486 | 322 | 1,975 | |||||||||
| Other Expenses | (1,374 | ) | (1,328 | ) | (2,669 | ) | (2,637 | ) | |||||
| Pre-tax Income | 24,303 | 15,617 | 39,705 | 28,789 | |||||||||
| Federal Income Taxes | 7,970 | 4,905 | 12,867 | 9,214 | |||||||||
| Net Income | $ | 16,333 | $ | 10,712 | $ | 26,838 | $ | 19,575 | |||||
| Loss Ratio: | |||||||||||||
| Current Accident Year | 74.0 | % | 76.6 | % | 75.0 | % | 77.0 | % | |||||
| Prior Year Development | -37.0 | % | -7.7 | % | -24.5 | % | -6.6 | % | |||||
| Calendar Year | 37.0 | % | 68.9 | % | 50.5 | % | 70.4 | % | |||||
| Underwriting Expense Ratio | 21.7 | % | 20.7 | % | 21.3 | % | 20.6 | % | |||||
| Combined Ratio | 58.7 | % | 89.6 | % | 71.8 | % | 91.0 | % | |||||
| (1) | Includes realized gains and losses |
Direct premiums written were $27.8 million in the second quarter of 2007, down $4.6 million or 14.1% from the same period a year ago. For the first six months of 2007, direct premiums written were down $9.8 million, or 13.2%. The declines in direct premiums written were primarily the result of selective price reductions in our major markets. We insured 9,304 physicians at June 30, 2007, down just 1.6% from year end 2006.
Net premiums earned in the second quarter of 2007 were down $2.5 million or 6.7% from the second quarter of 2006 and year-to-date are down $4.9 million or 6.6%. The declines in net premiums earned were not as great as the declines in direct premiums written due to the reinsurance terms in place for 2007 whereby the Company retained a greater portion of loss exposure and ceded less premium.
2
The 2007 second quarter loss ratio was 37.0% with $12.9 million of positive development from prior accident years. For the six months ended June 30, 2007, the loss ratio was 50.5% with $17.2 million of positive prior year development. On an accident year basis, the loss ratio in the second quarter of 2007 was 74.0%, down slightly from the 76.6% reported in the second quarter of 2006. Year-to-date the accident loss ratio is 75.0% in 2007 as compared to 77.0% in 2006. This accident year loss ratio reflects the strong book-of-business we have developed and our adherence to an adequate pricing and strict underwriting philosophy.
We continue to experience favorable development in our reserves. The number of reported claims in the second quarter of 2007 was 269 down 9.1% from the 296 reported in the second quarter of 2006. Claim severity has remained relatively stable and claims have been settling for amounts below established case reserves. As a result of this better than anticipated claim frequency and severity, prior year reserves have continued to develop favorably. The amount of favorable development reported in the second quarter of 2007 was higher than that recognized in the last several quarters due to the unusually low reported losses (paid losses plus changes in case reserves) in the quarter.
The underwriting expense ratio increased in the second quarter of 2007 to 21.7% from 20.7% in the second quarter of 2006. The 2007 year-to-date underwriting expense ratio was 21.3%, up from 20.6% a year ago. The increases in the underwriting ratio were principally the result of our lower premium volume giving the Company a smaller base to spread its fixed costs. Other expenses in 2007 for the quarter and year-to-date were approximately the same as a year ago.
Investment income
Investment income was down slightly in the second quarter of 2007 and year-to-date. The overall investment yields decreased from 5.46% in the second quarter 2006 to 5.10% in the second quarter of 2007. For the first six months of 2007, our investment yield was 5.11% compared to 5.36% a year ago. During the quarter, we purchased an additional $61.5 million of tax exempt securities. This brings our total tax exempt securities holdings to $267.3 million or 30.4% of our portfolio. We maintained $78.3 million or 8.9% of our portfolio in cash at June 30, 2007.
Balance Sheet and Equity Information
APCapital’s total assets were $1.085 billion at June 30, 2007, down $10.4 million from December 31, 2006. At June 30, 2007, the Company’s total shareholders’ equity was $275.6 million, up from $268.8 million at December 31, 2006. The increase in shareholders’ equity is a result of net income of $26.8 million for the first half of 2007 being partially offset by the Company utilizing $18.5 million of equity to repurchase shares.
3
Capital Management
The Company has two active share repurchase plans in place with multiple outstanding authorizations:
10b-18 Discretionary Plan
| · | November 2, 2005 Authorization --- 15,200 shares repurchased in the second quarter of 2007, 234,800 shares repurchased year-to-date. There are 55,004 shares remaining to be repurchased under this authorization |
| · | May 22, 2007 Authorization ---up to $15 million under management’s discretion. There has been no activity in 2007 under this authorization. |
10b5-1 Plan
| · | 2006 Authorization --- Carried over $6.4 million unused dollars into 2007. In the second quarter of 2007, the Company repurchased $584,500 and fully utilized the $6.4 million completing the 2006 authorization. |
| · | 2007 Authorization --- $32 million authorized, $3.4 million utilized in the second quarter and year-to-date of 2007. |
The share repurchase program remains an integral part of the Company’s capital management program. The Company seeks to maintain an optimal, but flexible level of capital during this softer market cycle.
Stock Split
In September 2006, the Company’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 second quarter results on July 23, 2007 at 10:00 a.m. Eastern time. An archived edition of the Webcast can be accessed by going to the Company’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: 68625176. The replay will be available through 11:59 p.m. Eastern time on July 26, 2007.
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.
4
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, or make statements in the section titled “Outlook,” 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; |
| · | our exit from various markets and lines of business may prove more costly than originally anticipated; |
| · | 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 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. |
5
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
The Company 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, the Company’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, the Company believes that providing operating income (loss) information makes it easier for users of APCapital’s financial information to evaluate the success of the Company’s underlying insurance operations.
In addition to the Company’s reported loss ratios, management also uses accident year loss ratios, a non-GAAP financial measure, to evaluate the Company’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, the Company believes that the current estimates are reasonable.
###
6
Summary Financial Information
American Physicians Capital, Inc.
Balance Sheet Data | June 30, | December 31, | |||||
2007 | 2006 | ||||||
| (In thousands, except per share data) | |||||||
Assets: | |||||||
| Available-for-sale - bonds | $ | 287,819 | $ | 255,001 | |||
| Held-to-maturity - bonds | 502,125 | 505,572 | |||||
| Other invested assets | 9,631 | 6,476 | |||||
| Cash and cash equivalents | 78,275 | 108,227 | |||||
| Cash and investments | 877,850 | 875,276 | |||||
| Premiums receivable | 34,882 | 43,068 | |||||
| Reinsurance recoverable | 109,885 | 109,013 | |||||
| Deferred federal income taxes | 28,227 | 32,795 | |||||
| Other assets | 34,605 | 35,663 | |||||
| Total assets | $ | 1,085,449 | $ | 1,095,815 | |||
Liabilities and Shareholders' Equity: | |||||||
| Unpaid losses and loss adjustment expenses | $ | 680,124 | $ | 688,031 | |||
| Unearned premiums | 60,673 | 70,744 | |||||
| Long-term debt | 30,928 | 30,928 | |||||
| Federal income taxes payable | 1,903 | 189 | |||||
| Other liabilities | 36,181 | 37,113 | |||||
| Total liabilities | 809,809 | 827,005 | |||||
| Common stock | - | - | |||||
| Additional paid-in-capital | 23,113 | 41,106 | |||||
| Retained earnings | 249,773 | 222,935 | |||||
| Accumulated other comprehensive income: | |||||||
| Net unrealized gains on investments, | |||||||
| net of deferred federal income taxes | 2,754 | 4,769 | |||||
| Shareholders' equity | 275,640 | 268,810 | |||||
| Total liabilities and shareholders' equity | $ | 1,085,449 | $ | 1,095,815 | |||
| Shares outstanding | 11,082 | 11,557 | |||||
| Book value per share | $ | 24.87 | $ | 23.26 | |||
7
Summary Financial Information
American Physicians Capital, Inc.
Income Statement | Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
| (In thousands, except per share data) | (In thousands, except per share data) | ||||||||||||
| Direct premiums written | $ | 27,847 | $ | 32,402 | $ | 64,149 | $ | 73,923 | |||||
| Net premiums written | $ | 26,967 | $ | 30,082 | $ | 61,861 | $ | 69,047 | |||||
| Net premiums earned | $ | 34,896 | $ | 37,420 | $ | 69,928 | $ | 74,863 | |||||
| Investment income | 11,152 | 11,569 | 22,329 | 22,672 | |||||||||
| Net realized (losses) gains | (64 | ) | 1,336 | (66 | ) | 1,348 | |||||||
| Other income | 175 | 150 | 388 | 627 | |||||||||
| Total revenues | 46,159 | 50,475 | 92,579 | 99,510 | |||||||||
| Losses and loss adjustment expenses | 12,916 | 25,796 | 35,278 | 52,673 | |||||||||
| Underwriting expenses | 7,566 | 7,734 | 14,927 | 15,411 | |||||||||
| Other expenses | 1,374 | 1,328 | 2,669 | 2,637 | |||||||||
| Total expenses | 21,856 | 34,858 | 52,874 | 70,721 | |||||||||
| Income before income taxes | 24,303 | 15,617 | 39,705 | 28,789 | |||||||||
| Federal income tax expense | 7,970 | 4,905 | 12,867 | 9,214 | |||||||||
| Net income | $ | 16,333 | $ | 10,712 | $ | 26,838 | $ | 19,575 | |||||
| Adjustments to reconcile net income to operating income: | |||||||||||||
| Net income | $ | 16,333 | $ | 10,712 | $ | 26,838 | $ | 19,575 | |||||
| Add back: | |||||||||||||
| Realized losses (gains), net of tax | 42 | (868 | ) | 43 | (876 | ) | |||||||
| Net operating income | $ | 16,375 | $ | 9,844 | $ | 26,881 | $ | 18,699 | |||||
Ratios: | |||||||||||||
| Loss ratio (1) | 37.0 | % | 68.9 | % | 50.5 | % | 70.4 | % | |||||
| Underwriting ratio (2) | 21.7 | % | 20.7 | % | 21.3 | % | 20.6 | % | |||||
| Combined ratio (3) | 58.7 | % | 89.6 | % | 71.8 | % | 91.0 | % | |||||
Earnings per share data: | |||||||||||||
| Net income | |||||||||||||
| Basic | $ | 1.47 | $ | 0.88 | $ | 2.38 | $ | 1.59 | |||||
| Diluted | $ | 1.44 | $ | 0.86 | $ | 2.33 | $ | 1.56 | |||||
| Net operating income | |||||||||||||
| Basic | $ | 1.47 | $ | 0.81 | $ | 2.38 | $ | 1.52 | |||||
| Diluted | $ | 1.44 | $ | 0.79 | $ | 2.34 | $ | 1.49 | |||||
| Basic weighted average shares outstanding | 11,135 | 12,180 | 11,285 | 12,288 | |||||||||
| Diluted weighted average shares outstanding | 11,353 | 12,438 | 11,501 | 12,558 | |||||||||
| (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. |
8
Summary Financial Information
American Physicians Capital, Inc.
Selected Cash Flow Information | For the Six Months Ended | ||||||
June 30, | |||||||
2007 | 2006 | ||||||
| (In thousands) | |||||||
| Net cash from operating activities | $ | 26,973 | $ | 27,635 | |||
| Net cash for investing activities | $ | (38,536 | ) | $ | (194,960 | ) | |
| Net cash for financing activities | $ | (18,389 | ) | $ | (18,150 | ) | |
| Net decrease in cash and cash equivalents | $ | (29,952 | ) | $ | (185,475 | ) | |
9
American Physicians Capital, Inc.
Supplemental Statistics
Medical Professional Liability
Reported | ||||
Three Months Ended | Claim Count | |||
| 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) | ||||||||||
Three Months Ended | APCapital Excluding PIC Florida | PIC Florida | Total | |||||||
| 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 | |||||||
Three Months Ended | Open Claim Count | Average Net Case Reserve Per Open Claim | Average Net Paid Claim (Trailing Four Quarter Average) | |||||||
| 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 | ||||||||||
Six Months Ended June 30, 2006 | Year Ended 2006 | Six Months Ended June 30, 2007 | ||||||||
| Illinois | 82 | % | 81 | % | 81 | % | ||||
| Kentucky | 69 | % | 70 | % | 86 | % | ||||
| Michigan | 84 | % | 85 | % | 87 | % | ||||
| New Mexico | 83 | % | 82 | % | 88 | % | ||||
| Ohio | 83 | % | 83 | % | 87 | % | ||||
| Total (all states) | 81 | % | 82 | % | 86 | % | ||||
Notes:
All values, except net premiums earned, exclude experience from investment in Physicians Insurance Company (Florida).
10