Exhibit 99
AMERICAN PHYSICIANS CAPITAL, INC. REPORTS SECOND QUARTER 2005 RESULTS
EAST LANSING, Mich., Aug. 4 /PRNewswire-FirstCall/ --
Significant Second Quarter 2005 Events
* Net income of $47.8 million or $5.44 per diluted common share
* Pre-tax income of $9.8 million
* The elimination of deferred tax valuation allowance, which added
$41.6 million to net income
* Book value increased $7.15 per share
* Remediation of material weakness
* Reclassification of 57% of fixed income portfolio to held-to-maturity
* Non-renewal of remaining workers' compensation and health insurance
policies
* A.M. Best affirmed a B+ rating for key subsidiaries and revised its
rating outlook to stable from negative
American Physicians Capital, Inc. (APCapital) (Nasdaq: ACAP) today announced
net income of $47.8 million or $5.44 per diluted common share for the second
quarter of 2005. This compares to net income of $3.1 million, or $.36 per
diluted common share for the 2004 second quarter. For the six months ended June
30, 2005, the Company has generated net income of $55.1 million or $6.27 per
diluted common share compared to net income of $9.0 million or $1.05 per diluted
common share in 2004.
The increase in net income was primarily a result of strong pre-tax earnings
and the elimination of the Company's deferred tax valuation allowance. On
September 30, 2003, as a result of recent loss history, the Company established
a 100% deferred tax valuation allowance. Since September 2003, the Company has
shown continued profitability and an improved financial condition. As a result,
the Company has reversed the valuation allowance that had been recorded as of
March 31, 2005. The reversal of the deferred tax valuation allowance increased
book value by $54.7 million. Of the increase, $41.6 million flowed through net
income. The remaining $13.1 million was an increase to other comprehensive
income and additional paid in capital.
"Our continued profitability and improved financial condition supported the
elimination of the deferred tax valuation allowance," stated President and Chief
Executive Officer R. Kevin Clinton. "Our operating performance remained strong,
generating $9.8 million of pre-tax income in the second quarter, and our
exposure in non-core markets continues to diminish. A.M. Best has also
recognized our improved financial condition and earnings outlook by revising
their rating outlook to stable from negative."
Medical Professional Liability Results
(dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Direct Premiums Written $ 34,940 $ 40,433 $ 83,754 $ 93,057
Net Premiums Written $ 29,696 $ 35,690 $ 70,661 $ 79,939
Net Premiums Earned $ 40,546 $ 43,559 $ 82,701 $ 86,015
Incurred Loss and Loss Adjustment
Expenses:
Current Accident Year Losses 32,607 36,578 67,294 75,676
Gerling Commutation 4,139 4,139
Prior Year Losses (1,000) (4,436) (2,550) (4,849)
Total 31,607 36,281 64,744 74,966
Underwriting Expenses 8,746 8,981 17,501 18,155
Underwriting Income (Loss) 193 (1,703) 456 (7,106)
Net Investment Income and Other 10,559 10,492 20,070 22,877
Pre-tax Income $ 10,752 $ 8,789 $ 20,526 $ 15,771
Loss Ratio:
Current Accident Year 80.4% 84.0% 81.4% 88.0%
Prior Year Development (including
Gerling) -2.4% -0.7% -3.1% -0.8%
Calendar Year 78.0% 83.3% 78.3% 87.2%
Underwriting Expense Ratio 21.6% 20.6% 21.2% 21.1%
Combined Ratio 99.6% 103.9% 99.5% 108.3%
Pre-tax income in the second quarter of 2005 totaled $10.8 million, an
increase of $2.0 million or 22% from the same period in 2004. The improved
results reflect the positive impact of rate increases taken since 2002, the exit
from unprofitable markets and market segments, as well as the implementation of
more stringent underwriting standards.
The loss ratio in the second quarter of 2005 was 78.0%, which lowered the
loss ratio for the first six months of 2005 to 78.3%. The 2005 year-to-date loss
ratio is down from 87.2% for the first six months of 2004. The improved loss
ratio was the result of several factors including earned rate increases and the
application of stricter underwriting standards. The 2005 year-to-date loss ratio
includes $2.6 million of positive prior year development as compared to $4.8
million a year ago (excluding the Gerling commutation).
Direct written premiums for the first half of 2005 are down $9.3 million or
10.0% from a year ago. In the first half of 2005, we voluntarily discontinued a
major ($2.0 million) alternative risk program, and did not renew a large ($5.0
million) hospital policy due to underwriting considerations. Premiums also
declined from 2004 due to our exit from Nevada and reducing exposures in certain
high risk territories and specialties in Ohio and Kentucky. Rate revisions in
2005 have been moderate, with the exception of Kentucky where we took a 23.6%
rate increase. However, we continue to realize rate increases in the 12-15%
range for policies written in the first six months of 2005. At June 30, 2005,
the policies in force totaled 8,893 which is down 6.9% from December 31, 2004.
Net premiums earned were down $3.0 million in the second quarter of 2005, or
6.9% compared to the second quarter of 2004 and down $3.3 million, or 3.9%
year-to-date. The decrease in net premiums earned was the result of the issues
discussed above.
The underwriting expense ratio was up in the second quarter of 2005 as
compared to the prior year second quarter. This was caused by arbitration
expenses and legal costs. However, the underwriting expense ratio for the year
was approximately the same as 2004.
"We continue to see positive trends in our medical professional liability
line," stated Clinton. "Our reported claim count is down to 401 for the second
quarter and our open claim count has decreased 4.0% this year. While we will
continue to monitor and address the decline in premiums, we remain committed to
adequately pricing and underwriting our product."
Other Insurance Lines Results
(dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Direct Premiums Written $ 1,016 $ 2,916 $ 2,144 $ 6,632
Net Premiums Written $ (1,504) $ 2,358 $ (238) $ 6,142
Net Premiums Earned $ (866) $ 7,568 $ 872 $ 19,189
Incurred Loss and Loss Adjustment
Expenses:
Current Accident Year Losses (779) 6,640 611 16,382
Gerling Commutation 271 271
Prior Year Losses 373 1,895 1,695 3,308
Total (406) 8,806 2,306 19,961
Underwriting Expenses (167) 2,902 208 5,993
Underwriting Loss (293) (4,140) (1,642) (6,765)
Net Investment Income and Other 768 902 1,559 2,448
Pre-tax Income (Loss) $ 475 $ (3,238) $ (83) $ (4,317)
Loss Ratio:
Current Accident Year 90.0% 87.7% 70.1% 85.4%
Prior Year Development (including
Gerling) -43.1% 28.6% 194.3% 18.7%
Calendar Year 46.9% 116.3% 264.4% 104.1%
Underwriting Expense Ratio 19.3% 38.3% 23.9% 31.2%
Combined Ratio 66.2% 154.6% 288.3% 135.3%
There were two significant events in this line during the 2005 second
quarter. First, effective June 30, 2005, our remaining health and workers'
compensation insurance policies have expired, effectively completing our exit
from these lines. The majority of residual health claims outstanding should
run-off by the end of 2005. We continue to manage the run-off of the workers'
compensation claims. There were 717 open claims at June 30, 2005, down 35.2%
since the start of the year.
The second major development was a significant reduction to the premiums and
losses allocated to APCapital by the workers' compensation residual market pools
("the Pools") administered by the National Council on Compensation Insurance. In
2004, the Pools had allocated approximately $2.4 million of its premiums to
APCapital based on its estimate of our workers' compensation market-share. Due
to the nature of this business, we had recorded the corresponding losses and
expenses at a 132% combined ratio. However, with our quick exit from this line,
the Pools' estimate of our market-share was too high based on our actual 2004
written premium. Accordingly, in 2005 the Pools revised their allocation
resulting in only $40,000 of 2004 premium being allocated to APCapital. As a
result, we returned the excess premium and reversed the previously accrued
losses and expenses. This change in allocation was recorded in 2005 operations
and generated a $428,000 positive income effect.
Investment Income
Investment income was $12.2 million in the second quarter of 2005, a
decrease of $103,000 from the second quarter of 2004. For the year, investment
income was $22.8 million, down $2.7 million from 2004. Investment income is down
in 2005 as a result of our efforts over the last 18 months to reduce the overall
risk of our portfolio, whereby we have liquidated higher risk securities, which
had been generating higher returns.
During the second quarter, management evaluated the remaining securities in
its portfolio, and decided that it had the intent and ability to hold a majority
of the securities in our portfolio until they matured. This decision has
resulted in the transfer of a significant portion of our fixed-income securities
from the available-for-sale category to the held-to-maturity category, which
should reduce the impact of changes in interest rates on the Company's book
value. At June 30, 2005, approximately $378.2 million, or 57% of our fixed
income security portfolio is classified as held-to-maturity.
The Company retains approximately $283.0 million of securities classified as
available-for-sale and $177.3 million of cash and cash equivalent resources that
allow management flexibility with respect to investment options in response to
changes in future interest rates.
Federal Income Tax Expense (Credit)
Since September 30, 2003, the Company has maintained a 100% deferred tax
valuation allowance. This valuation allowance was established because the weight
of evidence was against the Company realizing the benefit of these deferred tax
assets. Since that date, APCapital has changed its operations significantly
shedding unprofitable lines and markets, raising rates and tightening
underwriting. Through these changes, APCapital has been profitable for the last
seven quarters. This combined with the positive outlook for the future has
shifted the weight of evidence regarding the future realization of deferred
taxes to the positive. Accordingly, a valuation allowance is no longer
necessary. Therefore, in the second quarter of 2005 the Company reversed the
$54.7 million valuation allowance that had been recorded as of March 31, 2005. A
portion of this reversal was ultimately reflected as an increase to other
comprehensive income and additional paid in capital for amounts associated with
unrealized gains and stock compensation. This reversal resulted in a $41.6
million tax benefit in the second quarter of 2005.
At June 30, 2005, the Company has a net deferred tax asset of $50.3 million.
The Company has approximately $29.0 million of net loss carryforwards available
to offset future taxable income. In addition, we have $8.7 million of
alternative minimum tax credit carryforwards. For financial reporting purposes,
our effective tax rate is expected to be approximately 34.5% going forward.
Balance Sheet and Equity Information
APCapital's total assets were $1.099 billion at June 30, 2005, up $28.8
million from December 31, 2004. At June 30, 2005, the Company's total
shareholders' equity was $255.8 million compared to $202.1 million at December
31, 2004. The increase in equity was the result of the 2005 net income and the
non-income effect of the deferred tax valuation allowance reversal, partially
offset by the effect of share repurchases during the second quarter of 2005.
APCapital's book value per common share was $30.12 at June 30, 2005, based
on 8,494,835 common shares outstanding, compared to $23.31 at December 31, 2004.
Share Repurchase Program
During the second quarter of 2005, the Company repurchased 220,800 shares of
its common stock at an average price of $35.07. Under the September 11, 2003
authorization, the Company has approximately 197,500 shares available for
repurchase at June 30, 2005.
Internal Controls
As of December 31, 2004, management's report on internal controls over
financial reporting noted a material weakness related to underwriting and claims
processes performed at our New Mexico location. In late 2004 and early 2005, we
established new underwriting and claims procedures and provided additional staff
training to ensure these policies and procedures were being followed in an
effort to remediate the material weakness.
In the second quarter of 2005, we performed on-site testing of policy and
claim files in New Mexico. This testing indicated that the control procedures
were being properly followed and that the material weakness had been remediated.
Management continues to enhance controls and is in the process of converting the
New Mexico policy and claim information system to the home office system.
Outlook
"We are very pleased with our second quarter results," said Clinton. "The
reversal of the deferred tax valuation allowance is significant not only for its
impact on our book value, but also for what it says about the future of our
Company. We have enhanced our internal control structure and continue to reduce
balance sheet risk."
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 2005 second quarter
results on August 5, 2005 at 9:00 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 "Audio Links." For individuals unable to access the Webcast, a
telephone replay will be available by dialing 1-888-286-8010 (international
617-801-6888) and entering the conference passcode: 86343600. The replay will be
available through 11:59 p.m. Eastern time on August 12, 2005.
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 Statement
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 entitled "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:
* the potential inadequacy of our loss and loss adjustment expense reserves,
which could require us to make an adjustment to the level of these reserves and
that may materially and adversely impact the results of operations for the
period any such adjustment is made;
* a deterioration in the current accident year experience could result in a
portion or all of our deferred policy acquisition costs not being recoverable,
which would result in a charge to income;
* unforeseen costs or the need for additional reserve enhancements
associated with our exit from the workers' compensation;
* substantial jury awards against our insureds could impose liability on us
exceeding our policy limits or the funds we have reserved for the payment of
claims;
* increased pressures on premium rates and our potential inability to
obtain rate increases;
* changes in competitive conditions;
* the passing of tort reform at a national level may have a material adverse
impact on our results of operations pertaining to certain markets that currently
have tort reform in place at the state level;
* an unanticipated increase in claims frequency or severity patterns;
* our potential inability to obtain adequate and affordable reinsurance
coverage from creditworthy reinsurers;
* our potential inability to collect the full amount of our reinsurance
recoverables from reinsurers experiencing financial difficulties, which could
result in a future charge to income;
* adverse regulatory and market changes in certain states of operation
where our business is concentrated;
* the loss of our relationships with medical associations;
* an interruption or change in our principal third-party distribution
relationship;
* the potential insolvency of any of the guaranty associations in which
we participate;
* the potential inability to obtain regulatory approval of rate
increases;
* our potential inability to comply with insurance regulations;
* a reduction in our A.M. Best Company rating;
* negative changes in financial market conditions;
* a significant increase in short-term interest rates;
* a change in real estate market conditions;
* a downturn in general economic conditions; and
* 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
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.
Summary Financial Information
APCapital, Inc.
Balance Sheet Data
June 30, December 31,
2005 2004
------------ ------------
(Unaudited)
(In thousands, except
per share data)
Assets:
Available-for-sale - bonds $ 282,954 $ 657,706
Held-to-maturity - bonds 378,245 -
Other invested assets 7,389 9,456
Cash and cash equivalents 177,265 190,936
Total cash and investments 845,853 858,098
Premiums receivable 43,469 54,614
Reinsurance recoverable 110,159 103,312
Federal income taxes recoverable - 1,569
Deferred federal income taxes 50,300 -
Intangibles 313 625
Other assets 48,598 51,681
Total assets $ 1,098,692 $ 1,069,899
Liabilities and Shareholders' Equity:
Unpaid losses and loss adjustment
expenses $ 690,887 $ 693,630
Unearned premiums 76,371 90,040
Long-term debt 30,928 30,928
Other liabilities 42,112 50,977
Total liabilities 840,298 865,575
Minority interest in consolidated
subsidiary 2,545 2,200
Net unrealized gains, net of tax 11,417 8,154
Other shareholders' equity 244,432 193,970
Total shareholders' equity 255,849 202,124
Total liabilities and
shareholders' equity $ 1,098,692 $ 1,069,899
Book value per share $ 30.12 $ 23.31
Shares outstanding 8,495 8,672
Summary Financial Information
APCapital, Inc.
Unaudited Income Statements
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(In thousands except per share data)
Direct premiums written $ 35,956 $ 43,349 $ 85,898 $ 99,689
Net premiums written $ 28,192 $ 38,048 $ 70,423 $ 86,081
Net premiums earned $ 39,680 $ 51,127 $ 83,573 $ 105,204
Investment income 12,188 12,291 22,830 25,504
Net realized (losses) gains (256) (71) (322) 1,565
Other income 231 229 465 406
Total revenues 51,843 63,576 106,546 132,679
Losses and loss adjustment expenses 31,201 45,087 67,050 94,927
Underwriting expenses 8,579 11,883 17,709 24,148
Other expenses 2,296 3,030 4,429 5,247
Total expenses 42,076 60,000 89,188 124,322
Income before income taxes and
minority interest 9,767 3,576 17,358 8,357
Federal income tax (benefit) expense (38,268) 479 (38,098) (600)
Income before minority interest 48,035 3,097 55,456 8,957
Minority interest in net (income)
loss of consolidated subsidiary (253) 1 (342) 15
Net income $ 47,782 $ 3,098 $ 55,114 $ 8,972
Adjustments to reconcile net income
to operating income
Net income $ 47,782 $ 3,098 $ 55,114 $ 8,972
Add back:
Realized losses (gains), net of
tax 166 46 209 (1,017)
Net operating income $ 47,948 $ 3,144 $ 55,323 $ 7,955
Ratios:
Loss ratio (1) 78.6% 88.2% 80.2% 90.2%
Underwriting expense ratio (2) 21.6% 23.2% 21.2% 23.0%
Combined ratio (3) 100.2% 111.4% 101.4% 113.2%
Earnings per share data:
Net income
Basic $ 5.54 $ 0.37 $ 6.38 $ 1.07
Diluted $ 5.44 $ 0.36 $ 6.27 $ 1.05
Net operating income per share
Basic $ 5.56 $ 0.37 $ 6.41 $ 0.94
Diluted $ 5.46 $ 0.37 $ 6.29 $ 0.93
Basic weighted average shares
outstanding 8,625 8,427 8,636 8,419
Diluted weighted average shares
outstanding 8,782 8,585 8,796 8,534
(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
APCapital, Inc.
Unaudited Selected Cash Flow Information
Six Months Ended
June 30,
---------------------------
2005 2004
------------ ------------
(In thousands)
Net cash provided by operating
activities $ 12,536 $ 21,589
Net cash (used in) provided by
investing activities $ (19,597) $ 22,051
Net cash used in financing activities $ (6,610) $ (5,604)
APCapital, Inc.
Supplemental Statistics
Medical Professional Liability
Reported Claim Count
-----------------------------------
Excluding Total
Florida Florida (All States)
--------- ------- ------------
Three Months Ended
June 30, 2005 395 6 401
March 31, 2005 403 1 404
December 31, 2004 365 6 371
September 30, 2004 424 7 431
June 30, 2004 454 5 459
March 31, 2004 515 10 525
December 31, 2003 467 62 529
September 30, 2003 566 65 631
June 30, 2003 588 106 694
March 31, 2003 602 201 803
Net Premium Earned (in thousands)
---------------------------------------------------------
Florida
Excluding --------------------------- Total
Florida APCapital PIC (All States)
------------ ------------ ------------ ------------
Three Months Ended
June 30, 2005 $ 39,677 $ - $ 869 $ 40,546
March 31, 2005 41,124 232 799 42,155
December 31, 2004 42,715 199 737 43,651
September 30, 2004 42,965 531 673 44,169
June 30, 2004 42,842 203 514 43,559
March 31, 2004 41,793 281 382 42,456
December 31, 2003 37,833 1,431 610 39,874
September 30, 2003 38,279 2,764 - 41,043
June 30, 2003 32,463 5,912 - 38,375
March 31, 2003 34,700 4,785 - 39,485
December 31, 2002 34,151 6,431 - 40,582
September 30, 2002 33,608 6,481 - 40,089
June 30, 2002 28,724 6,300 - 35,024
March 31, 2002 26,760 6,191 - 32,951
Average Net
Case Reserve
Open Per Average Net
Claim Count Open Claim Paid Claim
------------ ------------ ------------
Three Months Ended
June 30, 2005 3,211 $ 116,300 $ 72,500
March 31, 2005 3,344 114,900 85,800
December 31, 2004 3,342 117,000 50,500
September 30, 2004 3,803 103,300 78,100
June 30, 2004 3,885 100,100 61,000
March 31, 2004 4,103 95,400 55,200
December 31, 2003 4,447 87,600 55,100
September 30, 2003 4,780 82,200 82,200
June 30, 2003 4,788 79,800 60,300
March 31, 2003 4,830 75,400 71,500
December 31, 2002 4,863 70,900 55,100
September 30, 2002 4,941 67,800 67,200
June 30, 2002 4,878 66,100 74,100
March 31, 2002 4,828 63,400 72,800
Retention Ratio
------------------------------------------
Six Months Six Months
Ended Ended
June 30, Year Ended June 30,
2004 2004 2005
------------ ------------ ------------
Illinois 70% 67% 71%
Kentucky 80% 73% 64%
Michigan 88% 88% 80%
New Mexico 92% 92% 89%
Ohio 84% 79% 81%
Total 85% 83% 80%
Notes:
All values, except net premiums earned, exclude experience from our
investment in Physicians Insurance Company (Florida).
(Logo: http://www.newscom.com/cgi-bin/prnh/20020123/ACAPLOGO )
SOURCE American Physicians Capital, Inc.
-0- 08/04/2005
/CONTACT: Ann Storberg, Investor Relations of American Physicians
Capital, Inc., +1-517-324-6629/
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