APCapital announces net income of $9.7M for fourth-quarter of 2009

American Physicians Capital, Inc. (APCapital) (NASDAQ:ACAP) today announced net income of $9.7 million or $.94 per diluted common share for the fourth quarter of 2009. For the year ended December 31, 2009, APCapital generated net income of $40.6 million, or $3.67 per diluted common share. The 2009 net income represents a return on beginning GAAP equity of 16.0%. At December 31, 2009, APCapital’s book value per share was $23.74 based on 9,986,187 shares outstanding, an increase of 9.8% from $21.62 at December 31, 2008.

“The Company had a very successful 2009, reporting another year of strong profitability”

APCapital generated net income of $11.6 million or $.93 per diluted share in the fourth quarter of 2008 and net income of $45.2 million or $3.45 per diluted share for the year ended December 31, 2008.

“The Company had a very successful 2009, reporting another year of strong profitability,” said President and Chief Executive Officer R. Kevin Clinton. “We generated a return on beginning equity of 16.0%, returned $59.7 million to our shareholders through share repurchases and cash dividends, and increased our book value per share by 9.8%.”

“We were able to retain 88.0% of our business and generate new premiums in select markets while maintaining our underwriting discipline in a soft market. In addition, we completed a major information systems enhancement in 2009,” added Clinton.

Stock Split

As previously announced, on June 23, 2009, the Company’s Board of Directors declared a four-for-three stock split of its common shares to shareholders of record on July 10, 2009. Shares resulting from the stock split were distributed to shareholders on July 31, 2009. All share and per share numbers disclosed in this press release have been adjusted to reflect this stock split.

Premiums

Direct premiums written were $24.2 million in the fourth quarter of 2009, down $2.9 million or 10.6% from the same period a year ago. For the year ended December 31, 2009, direct premiums written were down $11.8 million, or 9.4%. The declines in direct premiums written for 2009 were primarily the result of rate reductions based on a decline in claim frequency trends and on competitive pressures. These reductions resulted in an overall average premium rate decline of 7.0% in 2009, as compared to an 8.2% decrease in 2008. The rate reductions were offset by our strong retention ratio of 88.0% in 2009. We ended 2009 with 8,821 insureds, down 2.7% from year end 2008.

Net premiums written in the fourth quarter of 2009 were greater than direct premiums written due to ceded premium credits and reinsurance treaty profit sharing. These reductions to ceded premiums were the result of favorable loss experience on older accident years. As a result of the fourth quarter ceded premium credits, ceded premiums written in 2009 were 3.1% of direct premiums. Ceded premiums in recent years have typically been approximately 4.0% of direct premiums written. Our 2010 reinsurance program was renewed at terms similar to the 2009 treaties.

Loss Trends

Throughout 2009 we continued to experience better than expected loss trends. As a result, we recognized $9.4 million of favorable loss reserve development in the fourth quarter and $36.6 million during the 2009 calendar year. Favorable development in 2009 increased slightly, $0.2 million for the quarter and $4.4 million for the year, from the same periods in 2008. However, the increases in favorable development were largely offset by increases in our current accident year loss ratios. As a result the reported loss ratio for the year decreased modestly and increased slightly in the fourth quarter of 2009, when compared to the same periods of 2008. The increases in the accident year loss ratios were the result of recent premium rate decreases.

While the average paid claim increased in 2009, the increase was much less than anticipated in our original loss reserve estimates. In addition, our reported claim frequency appears to have leveled-off, but remains at historically low levels. There were 919 new claims reported in 2009, compared to 908 reported in 2008. Our open claim count fell 9.0% from 1,418 at December 31, 2008 to 1,290 at December 31, 2009 and our average case reserve per open claim increased from $166,500 at December 31, 2008 to $183,100 at the end of 2009. There is a great deal of uncertainty inherent in the estimation of medical professional liability loss reserves, and as a result, we remain committed to careful reserving practices.

Expenses

The underwriting expense ratio increased in the fourth quarter of 2009 to 25.5% from 24.3% in the fourth quarter of 2008 and increased to 24.8% for the full year of 2009 from 22.1% for 2008. These increases were due to a smaller base of net premiums earned to cover our fixed underwriting costs. In addition, we began to amortize our new policy and claims information system, which added approximately $250,000 to our underwriting expense in the fourth quarter of 2009 and $940,000 in total for 2009.

Investments

Investment income was $7.3 million in the fourth quarter of 2009 and $30.9 million for the year. Both amounts are down over 16.0% from the comparable periods of 2008. For the year ended December 31, 2009, our gross investment yield was 3.85% compared to 4.38% a year ago. The decline in return is due primarily to the decline in the overall interest rate environment, especially short-term rates, and our increased allocation to cash and short-term securities compared to 2008.

We incurred one investment impairment loss of $4.5 million in the fourth quarter of 2009 due to the decline in market value in one of our strategic investments. However, this loss was partially offset by gains generated when we restructured a portion of our investment portfolio. This restructuring included the previously announced allocation of $30.0 million to various Stilwell investment funds. Our portfolio remains comprised of high quality securities and is well positioned should interest rates increase in 2010.

Balance Sheet and Equity Information

APCapital’s total assets were $944.5 million at December 31, 2009, and total shareholders’ equity was $237.0 million. Shareholders’ equity was down $17.0 million in 2009 as a result of our share repurchases and dividends during the year. However, our book value per share was up 9.8% and we still write at a conservative net premiums written to statutory surplus ratio of .53 to one.

Capital Management

In the fourth quarter of 2009, APCapital repurchased 460,600 shares at an average cost of $28.94 per share. During the full year of 2009, APCapital repurchased 1,863,833 shares for $56.1 million. APCapital has the following outstanding share repurchase authorizations as of December 31, 2009:

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 2009, the Board of Directors increased its fourth quarter cash dividend by 9.0% to $0.09 per common share, which was paid to shareholders on December 31, 2009. Today, APCapital’s Board of Directors declared a first quarter cash dividend of $0.09 per common share payable on March 31, 2010 to shareholders of record on March 15, 2010.