A.M. Best Affirms Rating for APA, APSpecialty

A.M. Best Co. has affirmed the financial strength ratings of B+ (Very Good) of American Physicians Assurance Corporation (APA) and its subsidiary, APSpecialty Insurance Corporation (APSpecialty).

Additionally, A.M. Best has affirmed the financial strength rating of B- (Fair) of Insurance Corporation of America (ICA). APA and ICA are wholly owned subsidiaries of American Physicians Capital Inc. (ACAP). All companies are located in East Lansing, Mich. All ratings have been removed from under review with negative implications and assigned negative outlooks. Effective March 31, 2004, ACAP contributed the outstanding common shares of APSpecialty to APA. These were formerly sister companies.

The rating of APA reflects its adequate capitalization, reduced focus on non-core business lines and its good business position as a specialty provider of medical liability coverages within the Midwest.

However, during 2003, APA lost $50.2 million in surplus. This was due largely to a reserve charge of $28 million, net of tax, attributed to adverse loss reserve development reported during the third quarter of 2003 on claims associated with the company’s run-off Florida medical liability business and Ohio and Kentucky policies, which were written on occurrence forms. APA exited the Florida market in December 2002 and ceased writing Ohio and Kentucky occurrence business in July 2002 and January 2003, respectively. However, APA continues to offer medical liability coverages on a claims-made form in Ohio and Kentucky.

APA’s risk-adjusted capitalization improved during the first quarter of 2004 due to a $25 million capital infusion from ACAP in January 2004 and the transfer of ownership of APSpecialty to APA. The excess capital at APSpecialty provided a near-term boost to APA’s capitalization, as APSpecialty retained very little risk relative to its surplus level. Furthermore, rate increases, a sizable reduction in reported and open claims as well as strengthened case reserves should lead to an improvement in prospective underwriting results.

The rating of APSpecialty reflects its limited business profile and volatile operating performance. While the company was originally formed to operate as a non-admitted carrier to capitalize on limited capacity in certain segments of professional liability markets, management has ceased growth plans for APSpecialty and expects to deploy the majority of its capital to the core book of medical liability business of APA.

The rating of ICA reflects its fair capitalization, which is the direct result of the third quarter 2003 loss portfolio transfers of all assets and liabilities pertaining to workers’ compensation business that was previously written at APA and APSpecialty to ICA, and the subsequent dissolution of an intercompany reinsurance agreement with APA. In December 2003, ACAP announced its intention to withdraw from offering workers’ comp products with the expectation of a sharp decline in workers’ comp premiums in 2004.

Nonetheless, A.M. Best is concerned that further adverse development of workers’ comp reserves could lead to a drain on the group’s consolidated earnings.

APA’s negative rating outlook highlights A.M. Best’s concerns that additional adverse loss reserve development and any slippage in operating performance could impact APA’s risk- adjusted capitalization.

These concerns are magnified when assessing the historically poor earnings track record of APA. Moreover, the financial flexibility of ACAP is limited, as the majority of funds have been downstreamed into APA.

While debt-to-capital at ACAP is less than 15 percent, A.M. Best is concerned that the holding company could be constrained in meeting ongoing debt service payments should the operations of the insurance entities not improve.