##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION






---

Form 10-Q

|  |  |                                                                                                                                                                                                       |  | 
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2002                                                           |  | 
| 
| 
|o |  | 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(State or other jurisdiction of
    incorporation or organization) |  | 38-3543910(IRS employer
    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



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  þ       NO  o

The number of shares outstanding of the registrants common
stock, no par value per share, as of August 9, 2002 was
9,308,572.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                            
|PART I. FINANCIAL INFORMATION                                                                
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)                                      
|CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                    
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                  
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                             
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION                                                                   
|ITEM 4. Submission of Matters to a Vote of Security Holders                                  
|ITEM 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                                                                   
|Certification by the Chief Executive Officer                                                 
|Certification by the Chief Financial Officer                                                 



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##### Table of Contents








TABLE OF CONTENTS


|                              |                                                                                                   |  |    |    | 
|----------------------------- | ------------------------------------------------------------------------------------------------- |  | -- | -- | 
|                             
|                             
|                             
|                             
|PART I. FINANCIAL INFORMATION |                                                                                                   |  |    |   
|                              | Item 1. Financial Statements (Unaudited)                                                          |  |    |    | 
|                             
|                             
|                             
|                             
|                              | Condensed
    Consolidated Balance Sheets                                                         |  |    | 3  | 
|                             
|                             
|                             
|                             
|                              | Condensed
    Consolidated Statements of Income                                                   |  |    | 4  | 
|                             
|                             
|                             
|                             
|                              | Condensed
    Consolidated Statements of Comprehensive Income                                     |  |    | 5  | 
|                             
|                             
|                             
|                             
|                              | Condensed
    Consolidated Statements of Cash Flows                                               |  |    | 6  | 
|                             
|                             
|                             
|                             
|                              | Notes
    to Condensed Consolidated Financial Statements                                          |  |    | 7  | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |    | 10 | 
|                             
|                             
|                             
|                             
|                              | Item 3. Quantitative and Qualitative
    Disclosures About Market Risk                            |  |    | 18 | 
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |                                                                                                   |  |    |   
|                             
|                             
|                             
|                             
|                              | Item 4. Submission of Matters to a Vote
    of Security Holders                                   |  |    | 19 | 
|                             
|                             
|                             
|                             
|                              | Item 6. Exhibits and Reports on
    Form 8-K                                                      |  |    | 19 | 
|                             
|                             
|                             
|                             
|SIGNATURES                    |                                                                                                   |  | 20 |   

2



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##### Table of Contents








PART I. FINANCIAL INFORMATION


AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE SHEETS


ITEM 1.     Financial Statements

|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ---------------------------------------------- | ------- | ------------ | --------- | - | ------- | ------- | --------- | 
|                                                                                                                                                                   |                                                                                      | June 30,                                       |         | December 31,
|                                                                                                                                                                   |                                                                                      | 2002                                           |         | 2001        
|                                                                                                                                                                   |                                                                                      |                                                |         |             
|                                                                                                                                                                   |                                                                                      | (Unaudited)                                    |         |             
|                                                                                                                                                                   |                                                                                      |                                               
|                                                                                                                                                                   |                                                                                      | (In thousands, except share data)             
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Assets                                                                                                                                                             |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Investments:                                                                                                                                                       |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                   | Fixed maturities, at fair value                                                      |                                                | $       | 684,056      |           |   | $       | 605,867 |          
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                   | Equity securities, at fair value                                                     |                                                |         | 648          |           |   |         | 656     |          
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                   | Other investments                                                                    |                                                |         | 38,640       |           |   |         | 39,541  |          
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                   |                                                                                      | Total investments                              |         |              | 723,344   |   |         |         | 646,064   | 
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Cash and cash equivalents                                                                                                                                          |                                                                                      |                                                | 45,225  |              |           |   | 106,444 |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Premiums receivable                                                                                                                                                |                                                                                      |                                                | 64,129  |              |           |   | 64,194  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Reinsurance recoverable                                                                                                                                            |                                                                                      |                                                | 97,518  |              |           |   | 95,887  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Federal income tax recoverable                                                                                                                                     |                                                                                      |                                                | 13,409  |              |           |   | 11,266  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Deferred federal income taxes                                                                                                                                      |                                                                                      |                                                | 38,658  |              |           |   | 45,940  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Property and equipment, net of accumulated
    depreciation                                                                                                        |                                                                                      |                                                | 14,138  |              |           |   | 14,742  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Goodwill                                                                                                                                                           |                                                                                      |                                                | 13,968  |              |           |   | 13,968  |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Other assets                                                                                                                                                       |                                                                                      |                                                | 41,530  |              |           |   | 40,412  |        
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                   |                                                                                      | Total assets                                   |         | $            | 1,051,919 |   |         | $       | 1,038,917 | 
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|Liabilities                                                                                                                                                        |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Unpaid losses and loss adjustment expenses                                                                                                                         |                                                                                      | $                                              | 617,033 |              |           | $ | 597,046 |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Unearned premiums                                                                                                                                                  |                                                                                      |                                                | 104,904 |              |           |   | 100,056 |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Other liabilities                                                                                                                                                  |                                                                                      |                                                | 31,300  |              |           |   | 34,850  |        
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                   |                                                                                      | Total liabilities                              |         |              | 753,237   |   |         |         | 731,952   | 
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|Shareholders Equity                                                                                                                                               |                                                                                      |                                                |         |              |           |   |         |        
|Common stock, no par value, 50,000,000 shares
    authorized: 9,638,192 and 10,238,122 shares outstanding at
    June 30, 2002 and December 31, 2001, respectively |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Additional paid-in-capital                                                                                                                                         |                                                                                      |                                                | 108,789 |              |           |   | 119,463 |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Retained earnings                                                                                                                                                  |                                                                                      |                                                | 176,424 |              |           |   | 182,674 |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Unearned stock compensation                                                                                                                                        |                                                                                      |                                                | (849    | )            |           |   | (1,001  | )      
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|Accumulated other comprehensive income:                                                                                                                            |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                  
|                                                                                                                                                                   | Net unrealized appreciation on investments, net
    of deferred federal income taxes |                                                |         | 14,318       |           |   |         | 5,829   |          
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                   |                                                                                      | Total shareholders equity                     |         |              | 298,682   |   |         |         | 306,965   | 
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        
|                                                                                                                                                                   |                                                                                      | Total liabilities and shareholders
    equity |         | $            | 1,051,919 |   |         | $       | 1,038,917 | 
|                                                                                                                                                                   |                                                                                      |                                                |         |              |           |   |         |        

The accompanying notes are an integral part of the condensed
consolidated financial statements.

3



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |         | 
|------------------------------------ | --------------------------------- | ------------------------------------ | ------ | ---------------- | - | ---- | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------- | 
|                                     |                                   |                                      |        |                 
|                                     |                                   | Three Months Ended                   |        | Six Months Ended
|                                     |                                   | June 30,                             |        | June 30,        
|                                     |                                   |                                      |        |                 
|                                     |                                   | 2002                                 |        | 2001             |   | 2002 |        | 2001  
|                                     |                                   |                                      |        |                  |   |      |        |       
|                                     |                                   |                                     
|                                     |                                   | (In thousands except per share data)
|                                    
|                                    
|                                    
|                                    
|Net premiums written                 |                                   | $                                    | 51,002 |                  |   | $    | 42,011 |        |  | $ | 113,379 |         |   | $ | 92,517 |        
|                                    
|                                    
|                                    
|                                    
|Change in unearned premiums          |                                   |                                      | 4,620  |                  |   |      | 7,331  |        |  |   | (3,830  | )       |   |   | 6,075  |        
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                     | Net premiums earned               |                                      |        | 55,622           |   |      |        | 49,342 |  |   |         | 109,549 |   |   |        | 98,592  | 
|                                    
|                                    
|                                    
|                                    
|Investment income                    |                                   |                                      | 11,851 |                  |   |      | 12,280 |        |  |   | 22,687  |         |   |   | 24,790 |        
|                                    
|                                    
|                                    
|                                    
|Net realized (losses) income         |                                   |                                      | (2     | )                |   |      | 19     |        |  |   | (288    | )       |   |   | (182   | )      
|                                    
|                                    
|                                    
|                                    
|Other (loss) income                  |                                   |                                      | (5     | )                |   |      | 180    |        |  |   | 113     |         |   |   | 510    |        
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                     | Total revenues                    |                                      |        | 67,466           |   |      |        | 61,821 |  |   |         | 132,061 |   |   |        | 123,710 | 
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|Losses and loss adjustment expenses  |                                   |                                      | 58,369 |                  |   |      | 42,614 |        |  |   | 115,533 |         |   |   | 86,147 |        
|                                    
|                                    
|                                    
|                                    
|Underwriting expenses                |                                   |                                      | 11,908 |                  |   |      | 10,858 |        |  |   | 23,451  |         |   |   | 21,586 |        
|                                    
|                                    
|                                    
|                                    
|Investment expenses                  |                                   |                                      | 850    |                  |   |      | 411    |        |  |   | 1,604   |         |   |   | 943    |        
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |                                   |                                      | 93     |                  |   |      | 113    |        |  |   | 183     |         |   |   | 235    |        
|                                    
|                                    
|                                    
|                                    
|Amortization expense                 |                                   |                                      |       |                  |   |      | 534    |        |  |   |        |         |   |   | 1,067  |        
|                                    
|                                    
|                                    
|                                    
|General and administrative expenses  |                                   |                                      | 440    |                  |   |      | 541    |        |  |   | 913     |         |   |   | 932    |        
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                     | Total expenses                    |                                      |        | 71,660           |   |      |        | 55,071 |  |   |         | 141,684 |   |   |        | 110,910 | 
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                     | (Loss) income before income taxes |                                      |        | (4,194           | ) |      |        | 6,750  |  |   |         | (9,623  | ) |   |        | 12,800  | 
|                                    
|                                    
|                                    
|                                    
|Federal income tax (benefit) expense |                                   |                                      | (1,475 | )                |   |      | 2,326  |        |  |   | (3,373  | )       |   |   | 4,239  |        
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                     | Net (loss) income                 |                                      | $      | (2,719           | ) |      | $      | 4,424  |  |   | $       | (6,250  | ) |   | $      | 8,561   | 
|                                     |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|Net (loss) income per common share   |                                   |                                      |        |                  |   |      |        |        |  |   |         |         |   |   |        |        
|                                    
|                                    
|                                    
|                                    
|                                     | Basic                             |                                      | $      | (0.28            | ) |      | $      | 0.39   |  |   | $       | (0.63   | ) |   | $      | 0.75    | 
|                                    
|                                    
|                                    
|                                    
|                                     | Diluted                           |                                      | $      | (0.28            | ) |      | $      | 0.38   |  |   | $       | (0.63   | ) |   | $      | 0.74    | 

The accompanying notes are an integral part of the condensed
consolidated financial statements.

4



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(UNAUDITED)


|                            |                                                                                                                                                                         |                      |        |                  |       |      |       |        |       |   |        |       |       |   |       |     |       | 
|--------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------ | ---------------- | ----- | ---- | ----- | ------ | ----- | - | ------ | ----- | ----- | - | ----- | --- | ----- | 
|                            |                                                                                                                                                                         |                      |        |                 
|                            |                                                                                                                                                                         | Three Months Ended   |        | Six Months Ended
|                            |                                                                                                                                                                         | June 30,             |        | June 30,        
|                            |                                                                                                                                                                         |                      |        |                 
|                            |                                                                                                                                                                         | 2002                 |        | 2001             |       | 2002 |       | 2001  
|                            |                                                                                                                                                                         |                      |        |                  |       |      |       |       
|                            |                                                                                                                                                                         |                     
|                            |                                                                                                                                                                         | (In thousands)      
|                           
|                           
|                           
|                           
|Net (loss) income           |                                                                                                                                                                         | $                    | (2,719 | )                |       | $    | 4,424 |        |       | $ | (6,250 | )     |       | $ | 8,561 |    
|                           
|                           
|                           
|                           
|Other comprehensive income: |                                                                                                                                                                         |                      |        |                  |       |      |       |        |       |   |        |       |       |   |       |    
|                           
|                           
|                           
|                           
|                            | Unrealized gains on investment securities net of
    deferred income taxes of $7,166 and $4,571, respectively, in
    2002 and $(2,706) and $279, respectively, in 2001 |                      |        | 13,310           |       |      |       | (5,020 | )     |   |        | 8,489 |       |   |       | 518 |      
|                            |                                                                                                                                                                         |                      |        |                  |       |      |       |        |       |   |        |       |       |   |       |    
|                            |                                                                                                                                                                         | Comprehensive income |        | $                | 5,177 |      |       | $      | 9,079 |   |        | $     | 5,177 |   |       | $   | 9,079 | 
|                            |                                                                                                                                                                         |                      |        |                  |       |      |       |        |       |   |        |       |       |   |       |    

The accompanying notes are an integral part of the condensed
consolidated financial statements.

5



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |          |         |          |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | - | -------- | ------- | -------- | -
|                                     |                                                                                                        |                                        
|                                     |                                                                                                        | Six Months Ended                       
|                                     |                                                                                                        | June 30,                               
|                                     |                                                                                                        |                                        
|                                     |                                                                                                        | 2002                                    |                                                         | 2001   
|                                     |                                                                                                        |                                         |                                                         |        
|                                     |                                                                                                        |                                        
|                                     |                                                                                                        | (In thousands)                         
|                                    
|                                    
|                                    
|                                    
|Cash flows from operating activities |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                    
|                                    
|                                    
|                                    
|                                     | Net (loss) income                                                                                      |                                         | $                                                       | (6,250  | )      |         | $ | 8,561    |        
|                                    
|                                    
|                                    
|                                    
|                                     | Adjustments to reconcile net (loss) income to net
    cash provided by (used in) operating activities: |                                         |                                                         |         |        |         |   |          |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Depreciation and amortization           |                                                         |         | 1,300  |         |   |          | 2,273   |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Net realized losses                     |                                                         |         | 288    |         |   |          | 185     |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Deferred federal income taxes           |                                                         |         | 7,282  |         |   |          | 205     |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Changes in other assets and liabilities |                                                         |         | 14,011 |         |   |          | (14,397 | )       
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                     |                                                                                                        |                                         | Net cash provided by (used in) operating
    activities |         |        | 16,631  |   |          |         | (3,173   | )
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|Cash flows from investing activities |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                    
|                                    
|                                    
|                                    
|                                     | Purchases Available-for-sale  fixed
    maturities                                                    |                                         |                                                         | (79,003 | )      |         |   | (222,666 | )      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Property and equipment                  |                                                         |         | (562   | )       |   |          | (1,393  | )       
|                                    
|                                    
|                                    
|                                    
|                                     | Sales and maturities
    Available-for-sale  fixed maturities                                         |                                         |                                                         | 13,238  |        |         |   | 65,103   |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Available-for-sale  equity securities  |                                                         |         |       |         |   |          | 187     |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Other investments                       |                                                         |         |       |         |   |          | 141     |         
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        | Property and equipment                  |                                                         |         |       |         |   |          | 1,894   |         
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                     |                                                                                                        |                                         | Net cash used in investing
    activities               |         |        | (66,327 | ) |          |         | (156,734 | )
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|Cash flows from financing activities |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock repurchased                                                                               |                                         |                                                         | (10,837 | )      |         |   | (7,906   | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Principal payment on note payable                                                                      |                                         |                                                         | (1,000  | )      |         |   | (1,000   | )      
|                                    
|                                    
|                                    
|                                    
|                                     | Other sources                                                                                          |                                         |                                                         | 314     |        |         |   |         |        
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                     |                                                                                                        |                                         | Net cash used in financing
    activities               |         |        | (11,523 | ) |          |         | (8,906   | )
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                     |                                                                                                        |                                         | Net decrease in cash and cash
    equivalents           |         |        | (61,219 | ) |          |         | (168,813 | )
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                        |                                         | Cash and cash equivalents, beginning of
    period      |         |        | 106,444 |   |          |         | 255,878  |  
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         
|                                     |                                                                                                        |                                         | Cash and cash equivalents, end of
    period            |         | $      | 45,225  |   |          | $       | 87,065   |  
|                                     |                                                                                                        |                                         |                                                         |         |        |         |   |         

The accompanying notes are an integral part of the condensed
consolidated financial statements.

6



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##### Table of Contents



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,
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 and
workers compensation 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 accounting principles generally accepted in the
United States of America (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 and six-month periods
ended June 30, 2002, are not necessarily indicative of the
results to be expected for the year ending December 31,
2002. 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,
2001.

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.  Shareholders Equity and
Net Income Per Share

In March, July and November 2001 and
May 2002, APCapitals Board of Directors authorized
four separate programs to purchase 5% of its outstanding common
stock, representing approximately 2,188,000 shares. The
Companys purchase of any of its shares is subject to
limitations that may be imposed by applicable securities laws
and regulations and the rules of the Nasdaq Stock Market. The
timing of the purchases and the number of shares to be bought at
any one time depend on market conditions and the
Companys capital requirements. During the quarter, the
Company purchased 327,600 of shares pursuant to these
authorizations, bringing the total number of shares purchased to
1,978,170, at a total cost of $36,061,000. As of June 30,
2002, the Company has approximately 210,000 shares of its May
2002 5% stock repurchase program remaining to be purchased.

On August 8, 2002, the Companys Board
of Directors authorized another program to purchase an
additional 5% of its outstanding common stock, or approximately
481,000 shares.

Net income per share is computed by dividing net
(loss) income by the weighted average number of shares of common
stock and common stock equivalents (e.g., stock options and
stock awards) outstanding, calculated on a daily basis. The
weighted average common shares used for determining basic (loss)
per common share were 9,870,303 and 9,712,499, respectively, for
the six months and three months ended June 30, 2002. The
weighted average common shares used for determining basic income
per common share were 11,413,685 and 11,376,169, for the six
months and three months ended June 30, 2001, respectively.
The

7



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

effect of dilutive stock options and awards added
175,163 and 176,772 shares for the six months and three months
ended June 30, 2001, respectively.

As the Company was in a net loss position for the
six and three months ended June 30, 2002, no effect of
options or other stock awards was calculated as the impact would
be anti-dilutive.

3. Goodwill

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standard
(SFAS) No. 142. The Company has only one
intangible asset, which is the goodwill associated with the
purchase of Stratton Cheeseman Management Company in 1999. As of
June 30, 2002, the Company has completed the first step of
the transitional impairment testing provisions contained in SFAS
No. 142. As a result of this first step test, the Company
believes that a goodwill impairment charge might have to be
recognized related to its medical professional liability,
workers compensation, personal and commercial and health
reporting units. The Company intends to complete step two of the
transitional impairment test and record any impairment charge in
the fourth quarter. At June 30, 2002, goodwill totaled
$17.8 million, with accumulated amortization of
$3.9 million, or net goodwill of $13.9 million. The
Companys net income and earnings per share for all periods
presented in the condensed consolidated statements of income,
exclusive of amortization expense recognized in those periods
related to goodwill no longer being amortized, would have been
as follows:

|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |       |      | 
|--------------------------- | ------------------- | ------------------------------------- | - | ---------------- | - | ---- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | ---- | 
|                            |                     |                                       |   |                 
|                            |                     | Three Months Ended                    |   | Six Months Ended
|                            |                     | June 30,                              |   | June 30,        
|                            |                     |                                       |   |                 
|                            |                     | 2002                                  |   | 2001             |   | 2002 |   | 2001 
|                            |                     |                                       |   |                  |   |      |   |      
|                            |                     |                                      
|                            |                     | (In thousands, except per share data)
|Net income:                 |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Reported net income |                                       | $ | (2,719           | ) |      |   | 4,424 |      |  | $ | (6,250 | ) |  | $ | 8,561 |     
|                            | Add back:           |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |       |     
|                            |                     | Goodwill amortization, net of tax     |   |                  |  |      |   |       | 347  |  |   |        |  |  |   |       | 694  | 
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Adjusted net income |                                       | $ | (2,719           | ) |      | $ | 4,961 |      |  | $ | (6,250 | ) |  | $ | 9,631 |     
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|Basic earnings per share:   |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Reported net income |                                       | $ | (0.28            | ) |      |   | 0.39  |      |  | $ | (0.63  | ) |  | $ | 0.75  |     
|                            | Add back:           |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |       |     
|                            |                     | Goodwill amortization, net of tax     |   |                  |  |      |   |       | 0.03 |  |   |        |  |  |   |       | 0.06 | 
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Adjusted net income |                                       | $ | (0.28            | ) |      | $ | 0.42  |      |  | $ | (0.63  | ) |  | $ | 0.81  |     
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|Diluted earnings per share: |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Reported net income |                                       | $ | (0.28            | ) |      |   | 0.38  |      |  | $ | (0.63  | ) |  | $ | 0.74  |     
|                            | Add back:           |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |       |     
|                            |                     | Goodwill amortization, net of tax     |   |                  |  |      |   |       | 0.03 |  |   |        |  |  |   |       | 0.06 | 
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      
|                            | Adjusted net income |                                       | $ | (0.28            | ) |      | $ | 0.41  |      |  | $ | (0.63  | ) |  | $ | 0.80  |     
|                            |                     |                                       |   |                  |   |      |   |       |      |  |   |        |   |  |   |      

4.  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,
health and other, and corporate and investments. The accounting
policies of the segments are described in the notes to the
financial statements included in the Companys most recent
Annual Report on Form 10-K. Expense allocations are based
primarily on loss and loss adjustment expenses by line of
business

8



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and certain other estimates for underwriting
expenses. Reported segment results would change if different
allocation methods were applied.

Effective January 1, 2001, the Company began
non-renewing personal and commercial policies. As of
December 31, 2001, all net written premiums related to
personal and commercial policies previously issued had been
fully earned. The personal and commercial segment will continue
to generate income (loss) before taxes due to the development of
unpaid loss and loss adjustment expenses associated with this
segment. The Company does, however, write a small amount of
direct personal and commercial business in connection with one
of its alternative-risk-transfer programs. Direct premiums
written related to this program were approximately $397,000 for
the six-months ended June 30, 2002 which were fully ceded
to a reinsurer.

The Company does not allocate assets, investment
income or 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 assessing their performance, is summarized
as follows:

|                                   |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |        |         | 
|---------------------------------- | ------------------------------ | --------------------------------------- | - | ---------------- | ------ | ---- | - | ------ | ------ |  | - | ------- | ------- | - | - | ------ | ------- | 
|                                   |                                |                                         |   |                 
|                                   |                                | Three Months Ended                      |   | Six Months Ended
|                                   |                                | June 30,                                |   | June 30,        
|                                   |                                |                                         |   |                 
|                                   |                                | 2002                                    |   | 2001             |        | 2002 |   | 2001  
|                                   |                                |                                         |   |                  |        |      |   |       
|                                   |                                |                                        
|                                   |                                | (In thousands)                         
|Revenues:                          |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       
|                                   | Medical professional liability |                                         | $ | 35,024           |        |      | $ | 29,802 |        |  | $ | 67,975  |         |   | $ | 59,157 |        
|                                   | Workers compensation          |                                         |   | 15,510           |        |      |   | 13,175 |        |  |   | 30,803  |         |   |   | 26,239 |        
|                                   | Health and other               |                                         |   | 5,678            |        |      |   | 4,423  |        |  |   | 11,361  |         |   |   | 8,610  |        
|                                   | Personal and commercial        |                                         |   | (590             | )      |      |   | 1,942  |        |  |   | (590    | )       |   |   | 4,586  |        
|                                   | Corporate and investments      |                                         |   | 11,844           |        |      |   | 12,479 |        |  |   | 22,512  |         |   |   | 25,118 |        
|                                   |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       
|                                   |                                | Total revenue                           |   | $                | 67,466 |      |   | $      | 61,821 |  |   | $       | 132,061 |   |   | $      | 123,710 | 
|                                   |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       
|(Loss) income before income taxes: |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       
|                                   | Medical professional liability |                                         | $ | (12,004          | )      |      | $ | (1,481 | )      |  | $ | (25,451 | )       |   | $ | (2,738 | )      
|                                   | Workers compensation          |                                         |   | (1,371           | )      |      |   | (1,585 | )      |  |   | (1,233  | )       |   |   | (3,131 | )      
|                                   | Health and other               |                                         |   | (538             | )      |      |   | (539   | )      |  |   | (1,855  | )       |   |   | (672   | )      
|                                   | Personal and commercial        |                                         |   | (742             | )      |      |   | (526   | )      |  |   | (896    | )       |   |   | (2,598 | )      
|                                   | Corporate and investments      |                                         |   | 10,461           |        |      |   | 10,881 |        |  |   | 19,812  |         |   |   | 21,939 |        
|                                   |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       
|                                   |                                | Total (loss) income before income taxes |   | $                | (4,194 | )    |   | $      | 6,750  |  |   | $       | (9,623  | ) |   | $      | 12,800  | 
|                                   |                                |                                         |   |                  |        |      |   |        |        |  |   |         |         |   |   |       

9



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##### Table of Contents








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, 2001. The following
discussion of our financial condition and results of operations
contains certain forward-looking statements relating to our
anticipated future financial condition and operating results and
our current business plans. These forward-looking statements
represent our outlook only as of the date of this report. While
we believe any forward-looking statements we have made are
reasonable, actual results could differ materially since the
statements are based on our current expectations and are subject
to risks and uncertainties. These risks and uncertainties are
detailed from time to time in reports filed by the Company with
the Securities and Exchange Commission. See, for example, the
disclosures in Item 1 
Business  Uncertainties Relating to Forward-Looking
Statements of the Companys Annual Report on
Form 10-K and in other reports filed by the Company with
the Securities and Exchange Commission. Other factors not
currently anticipated by management may also materially and
adversely affect the Companys results of operations. The
Company does not undertake, and expressly disclaims any
obligation, to update or alter its forward-looking statements
whether as a result of new information, future events or
otherwise, except as required by applicable law.

We operate primarily in four insurance product
segments: Medical Professional Liability, Workers
Compensation, Health/ Other and Personal and Commercial Lines.
See Note 4 to the Notes to Condensed Consolidated Financial
Statements for further information regarding the operating
results of our business segments.

The following tables set forth key premium and
loss financial data for each of our insurance product segments.
The tables are a summary, and should be read in conjunction with
managements discussion regarding the underwriting results
of each insurance product segment.

10



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##### Table of Contents



Summary Premium Volume by Product Segment and
Major Market

|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |       |       |        | 
|------------------------ | ------------------------------- | --------------------------- | ------------------------------------ | ------------------------- | ----- | ------ |  | ----- | ----- | ------ | - | ------ | ----- | ------ |  | ----- | ----- | ------ | - | ------ | ------ | ------- |  | ----- | ----- | ------ | - | ------ | ------ | ------- |  | ----- | ----- | ------ | 
|                         |                                 |                             |                                      |                          
|                         |                                 | Three Months Ended June 30, |                                      | Six Months Ended June 30,
|                         |                                 |                             |                                      |                          
|                         |                                 |                             |                                      |                           |       |        |  |      
|                         |                                 | 2002                        |                                      | 2001                      |       | 2002   |  | 2001 
|                         |                                 |                             |                                      |                           |       |        |  |      
|                         |                                 |                             |                                      | % of                      |       |        |  | % of  |       |        |   | % of   |       |        |  | % of 
|                         |                                 | Amount                      |                                      | Total                     |       | Amount |  | Total |       | Amount |   | Total  |       | Amount |  | Total
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |      
|                         |                                 |                            
|                         |                                 | (dollars in thousands)     
|Direct premiums written: |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability  |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |       |      
|                         |                                 | Michigan                    |                                      | $                         | 8,848 |        |  |       | 15.6% |        |   | $      | 7,384 |        |  |       | 16.0% |        |   | $      | 16,457 |         |  |       | 12.9% |        |   | $      | 14,106 |         |  |       | 13.7% |       
|                         |                                 | Ohio                        |                                      |                           | 7,099 |        |  |       | 12.6% |        |   |        | 3,273 |        |  |       | 7.1%  |        |   |        | 16,119 |         |  |       | 12.7% |        |   |        | 10,770 |         |  |       | 10.5% |       
|                         |                                 | Illinois                    |                                      |                           | 7,011 |        |  |       | 12.4% |        |   |        | 4,434 |        |  |       | 9.6%  |        |   |        | 14,027 |         |  |       | 11.0% |        |   |        | 8,416  |         |  |       | 8.2%  |       
|                         |                                 | Florida                     |                                      |                           | 4,555 |        |  |       | 8.1%  |        |   |        | 4,469 |        |  |       | 9.7%  |        |   |        | 11,898 |         |  |       | 9.4%  |        |   |        | 10,120 |         |  |       | 9.8%  |       
|                         |                                 | Kentucky                    |                                      |                           | (159  | )      |  |       | -0.3% |        |   |        | 799   |        |  |       | 1.7%  |        |   |        | 10,013 |         |  |       | 7.9%  |        |   |        | 10,552 |         |  |       | 10.3% |       
|                         |                                 | New Mexico                  |                                      |                           | 1,542 |        |  |       | 2.7%  |        |   |        | 1,925 |        |  |       | 4.2%  |        |   |        | 4,045  |         |  |       | 3.2%  |        |   |        | 3,877  |         |  |       | 3.8%  |       
|                         |                                 | Nevada                      |                                      |                           | 1,074 |        |  |       | 1.9%  |        |   |        | 633   |        |  |       | 1.4%  |        |   |        | 2,014  |         |  |       | 1.6%  |        |   |        | 885    |         |  |       | 0.8%  |       
|                         |                                 | Other                       |                                      |                           | 598   |        |  |       | 1.1%  |        |   |        | 359   |        |  |       | 0.9%  |        |   |        | 1,402  |         |  |       | 1.1%  |        |   |        | 899    |         |  |       | 0.8%  |       
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                 |                             | Total medical professional liability |                           |       | 30,568 |  |       |       | 54.1%  |   |        |       | 23,276 |  |       |       | 50.6%  |   |        |        | 75,975  |  |       |       | 59.8%  |   |        |        | 59,625  |  |       |       | 57.9%  | 
|                         | Workers compensation Minnesota |                             |                                      | 10,020                    |       |        |  | 17.7% |       |        |   | 7,451  |       |        |  | 16.2% |       |        |   | 20,139 |        |         |  | 15.8% |       |        |   | 18,101 |        |         |  | 17.6% |      
|                         |                                 | Michigan                    |                                      |                           | 3,424 |        |  |       | 6.1%  |        |   |        | 2,211 |        |  |       | 4.8%  |        |   |        | 6,431  |         |  |       | 5.1%  |        |   |        | 5,175  |         |  |       | 5.0%  |       
|                         |                                 | Illinois                    |                                      |                           | 3,058 |        |  |       | 5.4%  |        |   |        | 2,893 |        |  |       | 6.3%  |        |   |        | 4,543  |         |  |       | 3.6%  |        |   |        | 4,161  |         |  |       | 4.0%  |       
|                         |                                 | Indiana                     |                                      |                           | 1,962 |        |  |       | 3.5%  |        |   |        | 1,522 |        |  |       | 3.3%  |        |   |        | 3,372  |         |  |       | 2.7%  |        |   |        | 2,447  |         |  |       | 2.4%  |       
|                         |                                 | Kentucky                    |                                      |                           | 680   |        |  |       | 1.2%  |        |   |        | 1,003 |        |  |       | 2.2%  |        |   |        | 3,138  |         |  |       | 2.5%  |        |   |        | 1,797  |         |  |       | 1.7%  |       
|                         |                                 | Iowa                        |                                      |                           | 670   |        |  |       | 1.2%  |        |   |        | 3,246 |        |  |       | 7.1%  |        |   |        | 1,033  |         |  |       | 0.8%  |        |   |        | 3,471  |         |  |       | 3.4%  |       
|                         |                                 | Other                       |                                      |                           | 316   |        |  |       | 0.5%  |        |   |        | 112   |        |  |       | 0.2%  |        |   |        | 743    |         |  |       | 0.5%  |        |   |        | 482    |         |  |       | 0.5%  |       
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                 |                             | Total workers compensation          |                           |       | 20,130 |  |       |       | 35.6%  |   |        |       | 18,438 |  |       |       | 40.1%  |   |        |        | 39,399  |  |       |       | 31.0%  |   |        |        | 35,634  |  |       |       | 34.6%  | 
|                         | Health and other                |                             |                                      | 5,817                     |       |        |  | 10.2% |       |        |   | 4,388  |       |        |  | 9.5%  |       |        |   | 11,345 |        |         |  | 8.9%  |       |        |   | 8,098  |        |         |  | 7.9%  |      
|                         | Personal and commercial         |                             |                                      | 37                        |       |        |  | 0.1%  |       |        |   | (94    | )     |        |  | -0.2% |       |        |   | 397    |        |         |  | 0.3%  |       |        |   | (451   | )      |         |  | -0.4% |      
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                 |                             | Total                                |                           | $     | 56,552 |  |       |       | 100.0% |   |        | $     | 46,008 |  |       |       | 100.0% |   |        | $      | 127,116 |  |       |       | 100.0% |   |        | $      | 102,906 |  |       |       | 100.0% | 
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|Net premiums written:    |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability  |                             | $                                    | 27,002                    |       |        |  | 52.9% |       |        | $ | 21,191 |       |        |  | 50.4% |       |        | $ | 65,570 |        |         |  | 57.8% |       |        | $ | 52,767 |        |         |  | 57.0% |      
|                         | Workers compensation           |                             |                                      | 18,912                    |       |        |  | 37.1% |       |        |   | 16,655 |       |        |  | 39.6% |       |        |   | 37,038 |        |         |  | 32.7% |       |        |   | 32,249 |        |         |  | 34.9% |      
|                         | Health and other                |                             |                                      | 5,678                     |       |        |  | 11.1% |       |        |   | 4,423  |       |        |  | 10.5% |       |        |   | 11,361 |        |         |  | 10.0% |       |        |   | 8,610  |        |         |  | 9.3%  |      
|                         | Personal and commercial         |                             |                                      | (590                      | )     |        |  | -1.1% |       |        |   | (258   | )     |        |  | -0.5% |       |        |   | (590   | )      |         |  | -0.5% |       |        |   | (1,109 | )      |         |  | -1.2% |      
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                 |                             | Total                                |                           | $     | 51,002 |  |       |       | 100.0% |   |        | $     | 42,011 |  |       |       | 100.0% |   |        | $      | 113,379 |  |       |       | 100.0% |   |        | $      | 92,517  |  |       |       | 100.0% | 
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|Net premiums earned:     |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability  |                             | $                                    | 35,024                    |       |        |  | 63.0% |       |        | $ | 29,802 |       |        |  | 60.4% |       |        | $ | 67,975 |        |         |  | 62.0% |       |        | $ | 59,157 |        |         |  | 60.0% |      
|                         | Workers compensation           |                             |                                      | 15,510                    |       |        |  | 27.9% |       |        |   | 13,175 |       |        |  | 26.7% |       |        |   | 30,803 |        |         |  | 28.1% |       |        |   | 26,239 |        |         |  | 26.6% |      
|                         | Health and other                |                             |                                      | 5,678                     |       |        |  | 10.2% |       |        |   | 4,423  |       |        |  | 9.0%  |       |        |   | 11,361 |        |         |  | 10.4% |       |        |   | 8,610  |        |         |  | 8.7%  |      
|                         | Personal and commercial         |                             |                                      | (590                      | )     |        |  | -1.1% |       |        |   | 1,942  |       |        |  | 3.9%  |       |        |   | (590   | )      |         |  | -0.5% |       |        |   | 4,586  |        |         |  | 4.7%  |      
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                 |                             | Total                                |                           | $     | 55,622 |  |       |       | 100.0% |   |        | $     | 49,342 |  |       |       | 100.0% |   |        | $      | 109,549 |  |       |       | 100.0% |   |        | $      | 98,592  |  |       |       | 100.0% | 
|                         |                                 |                             |                                      |                           |       |        |  |       |       |        |   |        |       |        |  |       |       |        |   |        |        |         |  |       |       |        |   |        |        |         |  |      

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Summary Loss and Loss Adjustment Expense Data
by Product Segment

|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |        |        | 
|------------------------------------------------- | ------------------------------ | --------------------------- | ----- | ------------------------- | ------ | ------ |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | ----- | ----- | ------ |  | - | ------- | ------- |  |  | ------ | ------ |  | - | ------ | ------ |  |  | ------ | ------ | 
|                                                  |                                |                             |       |                          
|                                                  |                                | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                                  |                                |                             |       |                          
|                                                  |                                |                             |       |                           |        |        |  |      
|                                                  |                                | 2002                        |       | 2001                      |        | 2002   |  | 2001 
|                                                  |                                |                             |       |                           |        |        |  |      
|                                                  |                                |                             |       | Loss                      |        |        |  | Loss  |        |        |  | Loss  |        |        |  | Loss 
|                                                  |                                | Amount                      |       | Ratio                     |        | Amount |  | Ratio |        | Amount |  | Ratio |        | Amount |  | Ratio
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |      
|                                                  |                                |                            
|                                                  |                                | (dollars in thousands)     
|Incurred losses and loss adjustment
    expenses: |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  | Medical professional liability |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |       
|                                                  |                                | Current year losses         |       | $                         | 39,321 |        |  |       | 112.3% |        |  | $     | 24,798 |        |  |       | 83.2% |        |  | $ | 77,795  |         |  |  | 114.4% |        |  | $ | 50,418 |        |  |  | 85.2%  |       
|                                                  |                                | Prior year losses           |       |                           | 1,000  |        |  |       |        |        |  |       | 725    |        |  |       |       |        |  |   | 2,500   |         |  |  |        |        |  |   | (25    | )      |  |  |        |       
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  |                                |                             | Total |                           | $      | 40,321 |  |       |        | 115.1% |  |       | $      | 25,523 |  |       |       | 85.6%  |  |   | $       | 80,295  |  |  |        | 118.1% |  |   | $      | 50,393 |  |  |        | 85.2%  | 
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  | Workers compensation          |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |       
|                                                  |                                | Current year losses         |       | $                         | 13,535 |        |  |       | 87.3%  |        |  | $     | 10,891 |        |  |       | 82.7% |        |  | $ | 25,775  |         |  |  | 83.7%  |        |  | $ | 21,686 |        |  |  | 82.6%  |       
|                                                  |                                | Prior year losses           |       |                           | (500   | )      |  |       |        |        |  |       | 300    |        |  |       |       |        |  |   | (1,500  | )       |  |  |        |        |  |   | 600    |        |  |  |        |       
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  |                                |                             | Total |                           | $      | 13,035 |  |       |        | 84.0%  |  |       | $      | 11,191 |  |       |       | 84.9%  |  |   | $       | 24,275  |  |  |        | 78.8%  |  |   | $      | 22,286 |  |  |        | 84.9%  | 
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  | Health and other               |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |       
|                                                  |                                | Current year losses         |       | $                         | 4,861  |        |  |       | 85.6%  |        |  | $     | 3,793  |        |  |       | 85.8% |        |  | $ | 10,657  |         |  |  | 93.8%  |        |  | $ | 7,241  |        |  |  | 84.1%  |       
|                                                  |                                | Prior year losses           |       |                           |       |        |  |       |        |        |  |       |       |        |  |       |       |        |  |   |        |         |  |  |       |        |  |   |       |        |  |  |        |       
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  |                                |                             | Total |                           | $      | 4,861  |  |       |        | 85.6%  |  |       | $      | 3,793  |  |       |       | 85.8%  |  |   | $       | 10,657  |  |  |        | 93.8%  |  |   | $      | 7,241  |  |  |        | 84.1%  | 
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  | Personal and commercial        |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |       
|                                                  |                                | Current year losses         |       | $                         |       |        |  |       | 0.0%   |        |  | $     | 1,407  |        |  |       | 72.5% |        |  | $ |        |         |  |  | 0.0%   |        |  | $ | 5,527  |        |  |  | 120.5% |       
|                                                  |                                | Prior year losses           |       |                           | 152    |        |  |       |        |        |  |       | 700    |        |  |       |       |        |  |   | 306     |         |  |  |        |        |  |   | 700    |        |  |  |        |       
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  |                                |                             | Total |                           | $      | 152    |  |       |        | -25.8% |  |       | $      | 2,107  |  |       |       | 108.5% |  |   | $       | 306     |  |  |        | -51.9% |  |   | $      | 6,227  |  |  |        | 135.8% | 
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  | Total all segments             |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  |  |       
|                                                  |                                | Current year losses         |       | $                         | 57,717 |        |  |       | 103.8% |        |  | $     | 40,889 |        |  |       | 82.9% |        |  | $ | 114,227 |         |  |  | 104.3% |        |  | $ | 84,872 |        |  |  | 86.1%  |       
|                                                  |                                | Prior year losses           |       |                           | 652    |        |  |       |        |        |  |       | 1,725  |        |  |       |       |        |  |   | 1,306   |         |  |  |        |        |  |   | 1,275  |        |  |  |        |       
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 
|                                                  |                                |                             | Total |                           | $      | 58,369 |  |       |        | 104.9% |  |       | $      | 42,614 |  |       |       | 86.4%  |  |   | $       | 115,533 |  |  |        | 105.5% |  |   | $      | 86,147 |  |  |        | 87.4%  | 
|                                                  |                                |                             |       |                           |        |        |  |       |        |        |  |       |        |        |  |       |       |        |  |   |         |         |  |  |        |        |  |   |        |        |  | 

Results of Operations  Three
and Six Months Ended June 30, 2002 Compared to the Three
and Six Months Ended June 30, 2001

Medical Professional Liability Insurance
Operations

Medical professional liability direct premiums
written were $76.0 million for the six months ended
June 30, 2002, an increase of $16.4 million, or 27.4%
compared to the same period of 2001. Direct premiums written for
the three months ended June 30, 2002 were
$30.6 million, an increase of $7.3 million, or 31.3%
compared to the three months ended June 30, 2001. The
increases in direct premiums written were primarily the result
of premium rate increases and reduced discounts instituted by
the Company in the first six months of 2002. The Company is
seeking regulatory approval of additional rate increases.

During the three months ended June 30, 2002,
the Company announced its intention to discontinue writing
medical professional liability insurance in Florida. Medical
professional liability direct written premiums in the state of
Florida for the year ended December 31, 2001 were $26.7
million and the Company reported net allocated loss and loss
adjustment expenses of $33.9 million in Florida in 2001.
The Florida Department of Insurance has yet to acknowledge the
Companys plan to exit this market.

Medical professional liability net premiums
earned were $68.0 million for the six months ended
June 30, 2002, an increase of $8.8 million, or 14.9%
compared to the six months ended June 30, 2001. Net
premiums earned for the three months ended June 30, 2002
were $35.0 million, an increase of $5.2 million, or 17.5%
compared with the same three months of 2001. As with the
increase in direct premiums written, the increases

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in net premiums earned were primarily due to
premium rate increases and reduced discounts instituted in the
first half of the year. Net premiums earned have not grown as
rapidly as direct premiums written because much of the premiums
written in the first six months of 2002 at the higher rates
are yet to be earned.


Medical professional liability incurred loss and
loss adjustment expenses totaled $80.3 million for the
six months ended June 30, 2002, an increase of
$29.9 million, or 59.3% compared to the six months ended
June 30, 2001. For the three months ended
June 30, 2002, loss and loss adjustment expenses were
$40.3 million, an increase of $14.8 million or 57.9%
compared to the three months ended June 30, 2001. The
incurred loss and loss adjustment expense ratio increased to
118.1% for the six months ended June 30, 2002, from
85.2% for the same period of 2001. For the three months
ended June 30, 2002 and 2001, the loss ratios were 115.1%
and 85.6%, respectively.

The loss and loss adjustment expense ratios for
the six months and three months ended June 30, 2001 of
85.2% and 85.6%, respectively, changed significantly due to
reserve adjustments taken in the third quarter of 2001, which
revised the 2001 accident year loss and loss adjustment expense
ratio to 121.9%. The 2002 reported loss and loss adjustment
expense ratio includes $2.5 million of adverse development
on prior accident years. As a result of these additional prior
year losses, the accident year loss and loss adjustment expense
ratio was 114.4% for the six months ended June 30, 2002.
Accordingly, the accident year loss and loss adjustment expense
ratio for the six months ended June 30, 2002 actually
improved compared to the 2001 accident year loss and loss
adjustment expense ratio. This improvement was the direct result
of premium rate increases taken by the Company in the first six
months of 2002.

Medical professional liability underwriting
expenses were $13.1 million for the six months ended
June 30, 2002, an increase of $1.6 million, or 14.2%
compared to the same period of 2001. The underwriting expense
ratio was 19.3% for the six months ended June 30,
2002, compared to 19.4% for the same period of 2001.
Underwriting expenses were $6.7 million for the quarter
ended June 30, 2002, an increase of $948,000, or 16.5% from
the same three months in 2001. The underwriting ratio
decreased to 19.1% for the second quarter of 2002 from 19.3% for
the same period in 2001. Commission expense, a component of
overall underwriting expense, for the six months and
three months ended June 30, 2002 was $5.4 million
and $3.6 million, respectively, compared with
$3.6 million and $1.7 million for the same period of
2001. The decrease in the medical professional liability
underwriting expense ratio was primarily the result of holding
underwriting salaries and other employee costs relatively
constant with the same period last year, while net earned
premiums increased 14.9% during the six months ended
June 30, 2002 as compared with the same period of 2001.

Workers
Compensation Insurance Operations

Workers compensation direct premiums
written were $39.4 million for the six months ended
June 30, 2002, an increase of $3.8 million, or 10.6%
compared to the same period of 2001. Direct premiums written for
the three months ended June 30, 2002 were
$20.1 million, an increase of $1.7 million, or 9.2%
compared to the three months ended June 30, 2001. The
increases in direct premiums written were primarily the result
of premium rate increases and reduced discounts, as well as
policy growth in Kentucky, during the first six months of
2002. The Company is seeking regulatory approval of additional
rate increases. In June 2002, the Company filled several
executive and management positions in our workers
compensation segment. The intent of filling these positions is
to grow our workers compensation segment. However, this
growth is not anticipated until 2003, as management is still
implementing the plans for future growth.

Workers compensation net premiums earned
were $30.8 million for the six months ended
June 30, 2002, an increase of $4.6 million, or 17.4%
compared to the six months ended June 30, 2001. For
the three months ended June 30, 2002, workers
compensation net premiums earned were $15.5 million, an
increase of $2.3 million, or 17.7% compared to the three
months ended June 30, 2001. The increases were consistent
with the growth in direct premiums written.

Workers compensation incurred loss and loss
adjustment expenses totaled $24.3 million for the six
months ended June 30, 2002, an increase of
$2.0 million, or 8.9% compared to the same period of 2001.
For the three months ended June 30, 2002, loss and
loss adjustment expenses were $13.0 million, an increase of

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$1.8 million, or 16.5% compared to the
three months ended June 30, 2001. The workers
compensation incurred loss and loss adjustment expense ratio
decreased to 78.8% for the six months ended June 30,
2002 from 84.9% for the same period of 2001. For the three-month
periods ended June 30, 2002 and 2001, the loss ratios were
84.0% and 84.9%, respectively. The decreasing loss ratios were
due to an overall pattern of increasing premium rates and
reducing discounts in all markets.


Workers compensation underwriting expenses
were $7.8 million for the six months ended June 30,
2002, an increase of $646,000, or 9.1% compared to the same
period of 2001. The underwriting expense ratio decreased to
25.2% for the six months ended June 30, 2002, from 27.0%
for the same period of 2001. Underwriting expenses were
$3.8 million for the quarter ended June 30, 2002, an
increase of $277,000, or 7.8% from the same three months in
2001. The underwriting ratio decreased to 24.8% for the second
quarter of 2002 from 27.1% for the same period in 2001.
Commission expense for the six months and three months
ended June 30, 2002 was $3.2 million and
$1.6 million, respectively, compared to $2.2 million
and $1.3 million during the same periods of 2001. The
decreases in the workers compensation underwriting ratios
resulted primarily from the Companys expense reduction
initiatives, lower assessments and fees, combined with 17.4%
growth in net premiums earned for the six months ended
June 30, 2002 as compared with the six months ended
June 30, 2001. Management expects that the workers
compensation underwriting expense ratio will increase in the
near future due to the hiring of several workers
compensation executives and managers as described above.
However, the addition of the workers compensation
executives and managers is expected to have a positive impact on
premium growth, and the premium growth should eventually offset
the increase in underwriting expenses and bring the workers
compensation underwriting expense ratio back approximately to
its present level.

Health Insurance
Operations

Health direct premiums written were
$11.3 million for the six months ended June 30,
2002, an increase of $3.2 million, or 40.1% compared to the
same period of 2001. Direct premiums written for the
three months ended June 30, 2002 were
$5.8 million, an increase of $1.4 million, or 32.6%
compared to the three months ended June 30, 2001. The
increases in direct premiums written were exclusively related to
our involvement with a single preferred provider organization
located in Western Michigan. This coverage is provided as part
of our long-term strategic relationship with the physician
organization that sponsors this plan. Working with the plan
sponsor, we are implementing rate increases of up to 25%, and
tightening underwriting standards.

Health net premiums earned were
$11.4 million for the six months ended June 30,
2002, an increase of $2.8 million, or 32.0% compared to the
six months ended June 30, 2001. Net earned premiums
were $5.7 million for the three months ended
June 30, 2002, an increase of $1.3 million, or 28.4%
compared with the same three months in 2001. The growth in
health net premiums earned was consistent with the growth in
direct premiums written.

Health incurred loss and loss adjustment expenses
totaled $10.7 million for the six months ended
June 30, 2002, an increase of $3.4 million, or 47.2%
compared to the six months ended June 30, 2001. The
incurred loss and loss adjustment expense ratio increased to
93.8% for the six months ended June 30, 2002 from
84.1% for the same period of 2001. The increase in the loss and
loss adjustment expense ratio was primarily the result of the
overall trend of increasing medical costs. Incurred loss and
loss adjustment expenses for the three months ended
June 30, 2002 were $4.9 million, an increase of
$1.1 million, or 28.2% compared to the same period of 2001.
The loss and loss adjustment expense ratios were 85.6% and
85.8%, respectively, for the three months ended
June 30, 2002 and 2001.

Health underwriting expenses were
$2.6 million for the six months ended June 30,
2002, an increase of 522,000, or 25.6%, compared to the same
period of 2001. The health underwriting expense ratio decreased
to 22.5% for the six months ended June 30, 2002 from
23.7% for the same period of 2001. For the three months
ended June 30, 2002, health underwriting expenses were
$1.4 million, an increase of $186,000, or 15.9% compared to
the same three months of 2001. The health underwriting
ratios were 23.9% and 26.4%, respectively, for the
three months ended June 30, 2002 and 2001. Health
commission expense for the six months and three months
ended June 30, 2002 was $1.2 million and $864,000,
respectively, compared to

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$1.1 million and $621,000 during the same
periods of 2001. The decreases in the health underwriting ratios
were primarily due to holding certain underwriting expenses
constant while net premiums earned increased 32.0% during the
six months ended June 30, 2002 compared with the same
period of 2001.


Personal and
Commercial Lines Insurance Operations

Effective December 31, 2001, the Company
exited the personal and commercial lines of business with the
exception of a single alternative-risk-transfer program. Direct
written premiums associated with this program were $397,000 and
$37,000 for the six and three months ended June 30,
2002, respectively. These premiums and risk were 100% ceded to a
reinsurer. Direct written premiums for the six and
three months ended June 30, 2001 were $(451,000) and
$(94,000).

The $590,000 of returned premiums in the second
quarter of 2002 was the result of additional premiums ceded in
connection with one of the Companys reinsurance treaties.
Personal and commercial net premiums earned were
$4.6 million and $1.9 million, respectively, for the
six and three-month periods ended June 30, 2001.

Personal and commercial incurred loss and loss
adjustment expenses totaled $306,000 for the six months
ended June 30, 2002, a decrease of $5.9 million, or
95.1%, compared to the six months ended June 30, 2001.
Incurred loss and loss adjustment expenses for the
six months ended June 30, 2002, represent unfavorable
development on December 31, 2001 unpaid loss and loss
adjustment expenses as the Company is not retaining any risk
related to new personal and commercial business.

As previously discussed, there were no net
underwriting expenses associated with the personal and
commercial line of business during the six months ended
June 30, 2002. Personal and commercial underwriting
expenses for the six-month and three-month periods ended
June 30, 2001 were $957,000 and $361,000, respectively. The
related underwriting ratios for the same periods in 2001 were
20.9% and 18.6%, respectively.

Corporate,
Investments and Other

Investment income, excluding realized investment
losses, was $22.7 million for the six months ended
June 30, 2002, a decrease of $2.1 million, or 8.4%,
compared to the six months ended June 30, 2001. Net
realized losses were $288,000 and $182,000 during the six-month
periods ended June 30, 2002 and 2001, respectively.
Investment income for the three months ended June 30,
2002, was $11.9 million, a decrease of $429,000, or 3.5%
compared to the same three months of 2001. The declines in
investment income were the result of a lower interest rate
environment in the first half of 2002, compared to 2001, and the
reduction of invested assets primarily due to our share
repurchase program. The Company maintains a portfolio of cash
and short-term investments to meet operating cash needs, fund
the share repurchase program, and for potential acquisitions.

The average yield on the Companys
investment portfolio was 6.10% for the six months ended
June 30, 2002 compared to 6.57% for the same period of
2001. The market value of the Companys fixed income
security portfolio is inversely related to interest rates;
therefore, as interest rates have declined the market value of
the Companys fixed income security portfolio has
increased. Unrealized gains on the Companys investments
were $22.0 million at June 30, 2002, an increase of
$13.1 million compared to December 31, 2001.

Investment expenses were $1.6 million during
the six months ended June 30, 2002 and $850,000 during
the three months ended June 30, 2002. This represents
increases of $661,000 or 70.1%, and $439,000 or 106.8%,
respectively, compared to the same period during 2001. The
increases in investment expenses were primarily due to increased
depreciation expense on several of the Companys investment
real estate properties.

The Companys general and administrative
expenses decreased $19,000, or 2.0%, to $913,000 during the six
months ended June 30, 2002 as compared to the prior year.
General and administrative expenses for the three months
ended June 30, 2002 were $440,000, a decrease of $101,000,
or 18.7%, compared to the three month ended June 30,
2001. The decreases in general and administrative expenses were
primarily the

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In accordance with the provisions of SFAS No. 142, the
Company did not record any amortization expense during the six
months or three months ended June 30, 2002. Amortization
expense for the six months and three months ended June 30,
2001 was $1.1 million and $534,000, respectively. See
Effects of New Accounting Pronouncements and
Note 3 to the Condensed Consolidated Financial Statements
for further discussion regarding amortization expense and the
effect of SFAS No. 142 on the Companys future
operating results.

The Company recorded $3.4 million in federal income tax
benefit for the six months ended June 30, 2002, compared to
a $4.2 million expense during the same period in 2001. The
effective tax rate was 35.1% for the six months ended
June 30, 2002, compared to 33.1% for the six months
ended June 30, 2001. The Company has reduced its tax-exempt
interest income, thereby increasing the effective rate.

Net loss for the six months ended June 30, 2002 was
$6.3 million on revenues of $132.1 million compared to
net income of $8.6 million on revenues of
$123.7 million for the six months ended June 30,
2001. Net loss for the second quarter of 2002 was
$2.7 million on revenues of $67.5 million, compared to
net income of $4.4 million on revenues of
$61.8 million for the second quarter of 2001. The decreases
in net income were due primarily to increased incurred losses.

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 $8.0 million
in connection with the purchase of Stratton-Cheeseman Management
Company. The indebtedness is due in annual installments, without
interest, over the next seven years. Certain events could
accelerate these payments. At June 30, 2002, the Company
had no material commitments for capital expenditures.

The Companys net cash flow generated by operations was
approximately $16.6 million for the six months ended
June 30, 2002, compared to $3.2 million used in
operations for the six months ended June 30, 2001. The
improvement in cash flows generated from operations was
primarily the result of increased premium rates.

At June 30, 2002, the Company had $45.2 million of
cash available and an investment portfolio of
$723.3 million. The portfolio includes $34.9 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 June 30, 2002,
$303.2 million of bonds mature in the next one to
five years and $289.3 million mature in the next five
to ten years. In addition, the Company has
$2.7 million of mortgage-backed securities that provide
periodic principal repayments.

Total assets increased $13.0 million to
$1,051.9 million at June 30, 2002, compared to
$1,038.9 million at December 31, 2001. The increase
was primarily attributable to cash flow generated from
operations and the increase in the market value of our fixed
income securities.

Loss and loss adjustment expense reserves increased
$20.0 million, or 3.3%, to $617.0 million at
June 30, 2002, from $597.0 million at
December 31, 2001. This increase was due to increased
writings in both the workers compensation and medical
professional liability lines.

The unearned premium reserve increased $4.8 million, or
4.8%, to $104.9 million at June 30, 2002, from
$100.1 million at December 31, 2001. The increase was
primarily due to premium rate increases in the first half of
2002.

In March, July and November 2001 and May 2002, APCapitals
Board of Directors authorized four separate programs to
purchase 5% of its outstanding common stock, representing a
total of approximately

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On August 8, 2002, the Companys Board of Directors
authorized another program to purchase an additional 5% of its
outstanding common stock, or approximately 481,000 shares.

Based on historical trends, market conditions and our business
plans, we believe that our existing resources and sources of
funds will be sufficient to meet our short- and long-term
liquidity needs. Because economic, market and regulatory
conditions may change, there can be no assurance that our funds
will be sufficient to meet these liquidity needs.

Significant Accounting Policies

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that
affect amounts reported in the accompanying consolidated
financial statements and related footnotes. These estimates and
assumptions are evaluated on an on-going basis based on
historical developments, market conditions, industry trends and
other information we believe to be reasonable under the
circumstances. There can be no assurance that actual results
will conform to our estimates and assumptions, and that reported
results of operations will not be materially adversely affected
by the need to make accounting adjustments to reflect changes in
these estimates and assumptions from time to time.

The policies relating to unpaid losses and loss adjustment
expenses, investments, reinsurance and the reserve for extended
reporting period claims are those we believe to be the most
sensitive to estimates and judgments. They are more fully
described in Item 7 of our most recent Annual Report on
Form 10-K and in Note 1 to our consolidated financial
statements contained in that report.

Effects of New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued
SFAS No. 142, Goodwill and Other Intangible
Assets. With the adoption of SFAS No. 142, goodwill
is no longer amortized, but rather, is reviewed at least
annually for impairment in accordance with the provisions set
forth in the statement. In addition, SFAS No. 142
introduced the concept of definite and indefinite lived
intangible assets. Definite lived intangible assets are
amortized over their useful life, unless circumstances indicate
that the asset has been impaired. Indefinite lived intangible
assets, similar to goodwill, are no longer amortized, but rather
reviewed annually for impairment.

In accordance with the transitional guidance given in SFAS
No. 142, the Company had until June 30, 2002 to
complete its initial impairment review required under SFAS
No. 142. As a result of the first step test, the Company
believes that a goodwill impairment charge might have to be
recognized related to its medical professional liability,
workers compensation, personal and commercial and health
reporting units. The Company intends to complete step two of the
transitional impairment test and record any impairment charge in
the fourth quarter. Without regards to the impairment testing
provisions, the Company expects that the adoption of SFAS
No. 142 will have a significant impact on its 2002
operating results, as goodwill will no longer be amortized. No
amortization expense was recorded for the six months ended
June 30, 2002, compared to $1.1 million, or
$0.06 per share, net of tax, for the six months ended
June 30, 2001. Amortization expense for the
three months ended June 30, 2001 was $534,000, or
$0.03 per share, net of tax. At June 30, 2002,
goodwill totaled $17.8 million, with accumulated
amortization of $3.9 million, or $13.9 million of
goodwill on a net basis.

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In August 2001, the Financial Accounting Standards Board
issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective for fiscal years
beginning after December 15, 2001. This Statement
supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30
Reporting the Results of Operations  Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB No. 30). SFAS No. 144
generally retains the basic accounting model for the
identification and measurement of impairments to long-lived
assets to be held, and long-lived assets to be disposed. SFAS
No. 144 broadens the definition of discontinued
operations, as previously defined by APB No. 30, but
does not allow for the accrual of future operating losses, as
was previously permitted under that standard. SFAS No. 144
also addresses several implementation and financial statement
presentation issues not previously addressed under
U.S. GAAP. SFAS No. 144 excludes from its scope
financial accounting and reporting for the impairment of
goodwill and other intangible assets. The implementation of SFAS
No. 144 did not have an effect on the Companys
consolidated financial position or results of operations for the
six or three-month periods ended June 30, 2002.






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 June 30, 2002, 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
June 30, 2002 were deemed to be temporary with the
exception of an investment in Frontier bonds, which was written
down $5.9 million during 2001.

Quantitative Information About Market Risk

Our fixed income security portfolio was valued at
$684.1 million at June 30, 2002, and had an average
modified duration of 3.52 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
|                 |  |                       |       |            |  |         
|                 |  |                       |       | (in years)
|                 |  | (dollars in millions) |       |           
|                
|                
|                
|                
|+2%              |  | $                     | 636.3 |            |  | $        | (47.8 | ) |  |  | 3.63 | 
|                
|                
|                
|                
|+1%              |  |                       | 660.2 |            |  |          | (23.9 | ) |  |  | 3.51 | 
|                
|                
|                
|                
|0                |  |                       | 684.1 |            |  |          |      |   |  |  | 3.52 | 
|                
|                
|                
|                
|-1%              |  |                       | 708.1 |            |  |          | 24.0  |   |  |  | 3.57 | 
|                
|                
|                
|                
|-2%              |  |                       | 733.8 |            |  |          | 49.7  |   |  |  | 3.68 | 

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PART II. OTHER INFORMATION







ITEM 4.     Submission of
Matters to a Vote of Security Holders


The Company held its Annual Meeting of Shareholders on
May 8, 2002, at which the shareholders elected three
directors. Each of the nominees for director at the meeting was
an incumbent and all nominees were elected. The following table
sets forth the number of votes for and withheld with respect to
each nominee.

|                           |  |       |           |          |  |  |         | 
|-------------------------- |  | ----- | --------- | -------- |  |  | ------- | 
|                           |  | Votes |           | Votes   
|Nominee                    |  | For   |           | Withheld
|                           |  |       |           |         
|Myron R. Emerick, D.O.     |  |       | 8,188,024 |          |  |  | 285,411 | 
|                          
|                          
|                          
|                          
|AppaRao Mukkamala, M.D.    |  |       | 8,188,524 |          |  |  | 284,911 | 
|                          
|                          
|                          
|                          
|Spencer L. Schneider, J.D. |  |       | 8,388,834 |          |  |  | 84,601  | 






ITEM 6.     Exhibits and
Reports on Form 8-K


(a) Exhibits.



| |                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 99.1 Certification by the Chief Executive Officer as to the
    fair presentation and compliance with of Section 13(a) of
    the Securities Exchange Act of 1934 as it relates to the
    Companys Quarterly Report on Form 10-Q for the period
    ending June 30, 2002 as filed with the Securities and
    Exchange Commission.
|
| | 99.2 Certification by the Chief Financial Officer as to the
    fair presentation and compliance with of Section 13(a) of
    the Securities Exchange Act of 1934 as it relates to the
    Companys Quarterly Report on Form 10-Q for the period
    ending June 30, 2002 as filed with the Securities and
    Exchange Commission.

(b) Reports on Form 8-K

There were no Reports on Form 8-K filed during the three
months ended June 30, 2002.

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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: August 13, 2002



| |                                  
| | ---------------------------------
| | 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: Executive Vice President, Treasurer,
| | Chief Financial Officer                  
| | and principal accounting officer         

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EXHIBIT INDEX

|            |      |                     |  |                                                                                                                                                                                                                                                                                                                             
|----------- | ---- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |      | Exhibit Description
|            |      |                    
|            | 99.1 |                     |  | Certification by the Chief Executive Officer as
    to the fair presentation and compliance with Section 13(a) of
    the Securities Exchange Act of 1934 as it relates to the
    Companys Quarterly Report on Form 10-Q for the period
    ending June 30, 2002 as filed with the Securities and
    Exchange Commission.
|           
|            | 99.2 |                     |  | Certification by the Chief Financial Officer as
    to the fair presentation and compliance with Section 13(a) of
    the Securities Exchange Act of 1934 as it relates to the
    Companys Quarterly Report on Form 10-Q for the period
    ending June 30, 2002 as filed with the Securities and
    Exchange Commission.