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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
/ / 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)(Zip Code)
Registrant's telephone number, including area code: (517) 351-1150
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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 /X/ NO / /
The number of shares outstanding of the registrant's common stock, no par value
per share, as of May 11, 2001 was 11,623,992.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000.......................... 3
Condensed Consolidated Statements of Income
Three months ended March 31, 2001 and 2000.................... 4
Condensed Consolidated Statements of Comprehensive Income
Three months ended March 31, 2001 and 2000.................... 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000.................... 6
Notes to Condensed Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 14
SIGNATURES...................................................................... 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
March 31, December 31,
2001 2000
--------- -----------
Assets (In thousands)
Investments:
Fixed maturities
Available-for-sale, at fair value $ 611,067 $ 464,784
Equity securities, at fair value 577 730
Other investments 53,098 40,631
--------- ---------
Total investments 664,742 506,145
Cash and cash equivalents 95,251 255,878
Premiums receivable 53,439 51,354
Reinsurance recoverable 72,091 72,002
Deferred federal income taxes 29,750 32,725
Property and equipment, net of accumulated depreciation 13,612 15,949
Goodwill, net of accumulated amortization 15,948 16,481
Other assets 37,147 27,442
--------- ---------
Total assets $ 981,980 $ 977,976
========= =========
Liabilities
Unpaid losses and loss adjustment expenses $ 482,143 $ 483,273
Unearned premiums 93,453 88,047
Other liabilities 27,226 37,231
--------- ---------
Total liabilities 602,822 608,551
Shareholders' Equity
Common stock, no par value, 50,000,000 shares
authorized, 11,626,592 shares outstanding
Authorized: 11,626,592 and 11,625,055 shares outstanding
at December 31, 2000 and March 31, 2001,
respectively
Additional paid-in-capital 144,940 144,940
Retained earnings 230,591 226,454
Unearned stock compensation (1,392) (1,450)
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) on investments,
net of deferred federal income taxes 5,019 (519)
--------- ---------
Total shareholders' equity 379,158 369,425
--------- ---------
Total liabilities and shareholders' equity $ 981,980 $ 977,976
========= =========
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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED MARCH 31,
---------------------------------
2001 2000
---- ----
(In thousands, except share data)
Net premiums written $50,506 $ 46,210
Change in unearned premiums (1,256) (3,956)
------- --------
Net premiums earned 49,250 42,254
Investment income 12,510 8,285
Net realized gains (losses) (201) 743
Other income 330 173
------- --------
Total revenues 61,889 51,455
Losses and loss adjustment expenses 43,533 36,106
Underwriting expenses 10,728 10,224
Investment expenses 532 859
Interest expense 122 193
Amortization expense 533 582
General and administrative expenses 391 (67)
------- --------
Total expenses 55,839 47,897
------- --------
Income before income taxes 6,050 3,558
Federal income tax expense 1,913 1,151
------- --------
Net income $ 4,137 $ 2,407
======= ========
Net income per common share
Basic $ 0.36
Diluted $ 0.36
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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Three Months Ended March 31,
----------------------------
2001 2000
------ -------
(In thousands)
Net income $4,137 $ 2,407
Other comprehensive income (loss):
Unrealized gains (losses) on investment securities
net of deferred income taxes of $2,985 in 2001 and
($2,677) in 2000 5,538 (5,197)
------ -------
Comprehensive income (loss) $9,675 $(2,790)
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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Three Months Ended March 31,
---------------------------
2001 2000
--------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,137 $ 2,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,145 965
Net realized (gains) losses 201 (743)
Deferred federal income taxes (81) (2,400)
Changes in other assets and liabilities (18,068) 26,152
--------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (12,666) 26,381
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases
Available-for-sale - fixed maturities (185,404) (79,423)
Available-for-sale - equity securities (13,548)
Real estate (4,149)
Property and equipment (475) (856)
Sales and maturities
Available-for-sale - fixed maturities 35,812 70,113
Available-for-sale - equity securities 179 15,461
Held-to-maturity 980
Other investments 35 3,046
Property and equipment 1,892
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (147,961) (8,376)
--------- --------
NET (DECREASE) INCREASE IN CASH (160,627) 18,005
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 255,878 33,093
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 95,251 $ 51,098
========= ========
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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying 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, APConsulting LLC, APDirect Sales LLC, Alpha Advisors,
Inc. and American Physicians Assurance Corporation ("APA"), together referred to
in this report as the "Company". All significant intercompany accounts and
transactions are eliminated in consolidation.
The Company is principally engaged in the business of providing medical
professional liability, workers' compensation and personal and commercial
insurance throughout the United States with a concentration of writings in the
Midwest.
The accompanying unaudited condensed consolidated financial statements
of the Company have been prepared in conformity with generally accepted
accounting principles ("GAAP") and with the instructions for Form 10-Q and Rule
10-01 of Regulation 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.
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 period ended March 31, 2001
are not necessarily indicative of the results to be expected for the year ending
December 31, 2001. The accompanying condensed consolidated financial statements
should be read with the annual consolidated financial statements and notes
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. Certain 2000 amounts have been reclassified to conform to the
2001 presentation.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods then ended. Actual results may differ from those estimates.
The most significant estimates that are susceptible to significant
change in the near term relate to the determination of the losses and loss
adjustment expense reserves. Although considerable variability is inherent in
these estimates, management believes that the reserves are adequate. The
estimates are reviewed regularly and adjusted as necessary. Such adjustments are
reflected in current operations.
2. NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (stock
options and stock awards) outstanding calculated on a daily basis. The weighted
average common shares used for
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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
determining basic income per common share were 11,451,661 for the three months
ended March 31, 2001. The effect of dilutive stock options and awards added
170,651 shares for the three months ended March 31, 2001 for the computation of
diluted income per common share.
3. SEGMENT INFORMATION
The Company is organized and operates principally in the property and
casualty insurance industry and has five reportable segments - medical
professional liability, workers' compensation, personal and commercial lines,
other, and corporate and investments. The accounting policies of the segments
are the same as those described in the basis of presentation. Expense
allocations are based primarily on loss and loss adjustment expenses by line of
business and certain other estimates for underwriting expenses; reported segment
results would change if different methods were applied. The Company does not
allocate assets, investment income and income taxes to operating segments.
Segment information, for which results are regularly reviewed by management in
making decisions about resources to be allocated to the segments and assess
their performance, is summarized as follows:
Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
Revenues:
Medical professional liability $ 29,355 $ 26,296
Workers' compensation 13,065 10,927
Personal and commercial 2,644 2,916
Other 4,187 2,114
Corporate and investments 12,638 9,202
-------- --------
Total revenue $ 61,889 $ 51,455
======== ========
Income (loss) before income taxes:
Medical professional liability (1,257) (2,978)
Workers' compensation (1,546) (1,112)
Personal and commercial (2,072) (232)
Other (133) 245
Corporate and investments 11,058 7,635
-------- --------
Total income before income taxes $ 6,050 $ 3,558
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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 condensed consolidated financial statements and the notes thereto
included elsewhere in this report and the Company's Annual Report on Form 10-K
for the year ended December 31, 2000. The following discussion contains certain
forward-looking statements relating to the Company's anticipated future
financial condition and operating results of and its current business plans. In
the future, the financial condition and operating results the Company could
differ materially from those discussed herein and its current business plans
could be altered in response to market conditions and other factors beyond the
Company's control. Important factors that could cause or contribute to such
differences are discussed elsewhere in this report and in "Item 1 - Business -
Uncertainties Relating to Forward-Looking Statements" of the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 and other reports filed
by the Company with the Securities and Exchange Commission. 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. Except as required by applicable law, the Company does not undertake any
obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2000
APCapital operates primarily in three insurance product segments:
Medical Professional Liability, Workers' Compensation and Personal and
Commercial Lines.
MEDICAL PROFESSIONAL LIABILITY INSURANCE OPERATIONS SEGMENT
Medical professional liability net premiums earned were $29.4 million
for the three months ended March 31, 2001, an increase of $3.1 million, or
11.8%, compared to the three months ended March 31, 2000. The increase in
medical professional liability net premiums earned was mainly due to price
increases instituted by the Company in all states plus greater penetration in
the Florida and Ohio markets.
Medical professional liability incurred loss and loss adjustment
expenses totaled $24.9 million for the three months ended March 31, 2001, an
increase of $624,000, or 2.6%, compared to the three months ended March 31,
2000. The medical professional liability incurred loss and loss adjustment
expense ratio decreased to 84.7% for the three months ended March 31, 2001 from
92.2% for the same period of 2000, due primarily to an increase in premium
rates, tightening of underwriting standards, and lowering of policy limits in
certain states. Incurred losses for the three months ended March 31, 2001
included $750,000 of favorable development on prior accident year compared to $2
million for the three months ended March 31, 2000.
Medical professional liability underwriting expenses were $5.8 million
for the three months ended March 31, 2001, an increase of $715,000, or 14.0%,
compared to the same period of 2000. The
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underwriting expense ratio was 19.6% for the three months ended March 31, 2001,
compared to 19.2% for the same period of 2000. This increase was due primarily
to the growth of premiums in states where the Company pays higher commissions.
WORKERS' COMPENSATION INSURANCE OPERATIONS SEGMENT
Workers' compensation net premiums earned were $13.1 million for the
three months ended March 31, 2001, an increase of $2.1 million, or 19.1%,
compared to the three months ended March 31, 2000. The increase in net premiums
earned is due to premium rate increases and policy growth in the states of
Minnesota, Illinois and Iowa.
Workers' compensation incurred loss and loss adjustment expenses
totaled $11.1 million for the three months ended March 31, 2001, an increase of
$2.2 million, or 24.7%, compared to the same period of 2000. The workers'
compensation incurred loss and loss adjustment expense ratio increased to 85.0%
for the three months ended March 31, 2001 from 81.1% for the same period of
2000, primarily due to higher loss expenses in Minnesota and some adverse
reserve development on prior year loss developments.
Workers' compensation underwriting expenses were $3.5 million for the
three months ended March 31, 2001, an increase of $331,000, or 10.4%, compared
to the same period of 2000. The underwriting expense ratio decreased to 26.9%
for the three months ended March 31, 2001, from 29.1% for the same period of
2000. This decrease resulted from the Company's expense reduction initiatives
and lower assessments and fees.
PERSONAL AND COMMERCIAL LINES INSURANCE OPERATIONS SEGMENT
Personal and commercial net premiums earned were $2.6 million for the
three months ended March 31, 2001, a decrease of $272,000, or 10.5%, compared to
the three months ended March 31, 2000, due to the Company's phase-out of this
line.
Personal and commercial incurred loss and loss adjustment expenses
totaled $4.1 million for the three months ended March 31, 2001, an increase of
$2.0 million or 95.2%, compared to the three months ended March 31, 2000. The
personal and commercial insurance incurred loss and loss adjustment expense
ratio increased to 155.9% for the three months ended March 31, 2001, from 73.1%
for the same period of 2000, primarily due to a higher amount of winter
storm-related losses in 2001.
Personal and commercial and underwriting expenses were $595,000 for the
three months ended March 31, 2001, a decrease of $423,000, or 41.6%, compared to
the same period of 2000. The underwriting expense ratio decreased to 22.5% for
the three months ended March 31, 2001 from 34.9% for the same period of 2000.
This reduction of expense is directly related to the closing of this line of
business, which began in the fourth quarter of 2000. Costs associated with staff
layoffs had been accrued in 2000. Actual severance costs were approximately
equal to amounts accrued.
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GENERAL INSURANCE OPERATIONS
Net investment income, excluding realized investment gains, was $12.5
million for the three months ended March 31, 2001, an increase of $4.2 million,
or 50.6%, compared to the three months ended March 31, 2000. Approximately $2.3
million of this increase is attributable to investment of the proceeds of the
Company's initial public offering received in December 2000. In addition, in
December 2000 the Company liquidated approximately $35 million in equity
securities, investing the proceeds in interest income producing government and
corporate bonds. The remaining increase reflects a higher amount of total
investments and a shift of some of the Company's portfolio from tax exempt
securities to higher yielding taxable corporate securities. Net realized gains
and losses were ($201,000) and $743,000 during the three month periods ended
March 31, 2001 and 2000, respectively.
The Company's general and administrative expenses increased $458,000
from a credit of $67,000. The increase was due to new costs incurred by the
holding company, which were not present in the first quarter of 2000. The credit
in 2000 arose due to a reduction in the allowance for doubtful accounts.
Management expects the results from 2001 to be more representative of continuing
operations.
The Company recorded $1.9 million in federal income tax expense for the
three months ended March 31, 2001, compared to a $1.2 million expense during the
same period in 2000, due to the higher income for the current quarter. The
effective tax rate was 31.5% for the three months ended March 31, 2001, compared
to 32.3% for the three months ended March 31, 2000.
Net income for the three months ended March 31, 2001 was $4.1 million
on revenues of $61.9 million compared to net income of $2.4 million on revenues
of $51.4 million for the three months ended March 31, 2000. The increase in net
income was due primarily to increased investment income and reductions in the
Company's expense ratio. Further reductions to underwriting expenses will be
offset by investments made to improve technology systems of the Company.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
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 reinsurance and proceeds from the maturity or sale of
invested assets. The primary uses of cash, on both a short- and long-term basis,
are losses, loss adjustment expenses, operating expenses, reinsurance premiums
and taxes. In addition, the Company is indebted to a related party in the amount
of $10 million in connection with the purchase of Stratton-Cheeseman Management
Company. The indebtedness is due in installments, without interest, over the
next nine years beginning in April 2001. At March 31, 2001, the Company had no
material commitments for capital expenditures. However the Company intends to
invest in technology systems to improve its operational efficiency.
The Company's net cash flow used in operating activities was
approximately $12.7 million for the three months ended March 31, 2001, compared
to $26.4 million generated from
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operations for the three months ended March 31, 2000. The first quarter of 2000
included the receipt of $27.7 million related to the settlement with the
Internal Revenue Service.
At March 31, 2001, the Company had $95.3 million of cash available and
an investment portfolio of $664.7 million. The portfolio includes $11.4 million
of bonds maturing in the next year to meet short-term cash flow needs. On a
long-term basis, fixed income securities are purchased on a basis intended to
provide adequate cash flows from future maturities. As of March 31, 2001, $223.4
million of bonds mature in the next one to five years and $323.9 million mature
in the next five to ten years.
Total assets increased $4.0 million to $982.0 million at March 31,
2001, compared to $978.0 million at December 31, 2000. The increase was due
primarily to an increase in other assets and, to a lesser extent, an increase in
premiums receivable. Other assets increased due to a larger amount of accrued
investment income and certain prepaid assets. Premiums receivable increased
primarily due to the increase in written premiums in the quarter.
Loss and loss adjustment expense reserves decreased $1.1 million to
$482.2 million at March 31, 2001, from $483.3 million at December 31, 2000. This
decrease was due primarily to non-renewing the personal and commercial line of
business and the settlement of several large medical professional liability
claims in the quarter.
The unearned premium reserve increased $5.4 million, or 6.1% to $93.4
million at March 31, 2001, from $88.0 million at December 31, 2000. The increase
was due primarily to the increased premium writings in the first quarter of 2001
compared to the same period in 2000.
The Company's Board of Directors has approved a stock repurchase
program authorizing the Company to acquire up to 5% or approximately 600,000
shares of its common stock. Under this program, the Company may purchase its
stock in the open market or through privately negotiated transactions. No shares
have been repurchased under the program as of March 31, 2001.
Based on historical trends, market conditions and its business plans,
we believe that our existing resources and sources of funds will be sufficient
to meet our short- and long-term liquidity needs over the next year and beyond.
Because economic, market and regulatory conditions may change, there can be no
assurance that our funds will be sufficient to meet these liquidity needs.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal quarters of all fiscal
years beginning after June 15, 2000 (as amended by SFAS Nos. 137 and 138). SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction, and if it is, the type
of hedge transaction. Because we
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currently do not use derivative instruments, the adoption of SFAS No. 133 did
not affect our results of operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss due to adverse changes in market rates
and prices. We invest primarily in fixed maturity securities, which are
interest-sensitive assets. Accordingly, our primary market risk is exposure to
changes in interest rates.
As of March 31, 2001, the majority of our investment portfolio was
invested in fixed maturity securities and short-term investments. The fixed
maturity securities primarily consisted 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 RISK
Investments in our portfolio have varying degrees of risk. The primary
market risk exposure to the fixed maturity portfolio is interest rate risk,
which is limited somewhat by our management of duration. The distribution of
maturities and sector concentrations are monitored on a regular basis.
We regularly examine the quality distribution of our investment
portfolio for evidence of impairment. When a security in our investment
portfolio has a decline in market value, which is other than temporary, we are
required by GAAP to reduce the carrying value of such security to its net
realizable value. All declines in market values of our investment securities at
March 31, 2001 were deemed to be temporary.
QUANTITATIVE INFORMATION ABOUT MARKET RISK
Our fixed income security portfolio was valued at $611.1 million at
March 31, 2001 and had an average modified duration of 4.44 years. The following
table shows the effects of a change in interest rates on the fair value and
duration of our portfolio. 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.
Portfolio Change Modified
Changes in Rates Value in Value Duration
--------- -------- --------
(dollars in thousands)
+2%................. $555,849 $(55,218) 4.40
+1%................. 582,659 (28,406) 4.42
0................... 611,067 -- 4.44
- -1%................. 637,219 26,152 4.02
- -2%................. 663,685 52,618 4.13
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) Reports on Form 8-K.
No reports were filed during the three months ended March 31, 2001.
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.
Date: May 11, 2001
AMERICAN PHYSICIANS CAPITAL, INC.
By: /s/ William B. Cheeseman
------------------------
William B. Cheeseman
Its: President and Chief Executive Officer
By: /s/ Frank H. Freund
-------------------
Frank H. Freund
Its: Vice President, Treasurer,
Chief Financial Officer
and principal accounting officer
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