##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|  |  |                                                                                                                                                                                                                 |  | 
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004                                                                    |  | 
|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                                                           |  | 38-3543910                              
|(State or other jurisdiction of
    incorporation or organization) |  | (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

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.

YESxNOo

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act)

YESxNOo

The number of shares outstanding of the
registrants common stock, no par value per share, as of
April 30, 2004 was 8,501,647.



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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 |  |    | 15 | 
|                                                  | Item 3. Quantitative
    and Qualitative Disclosures About Market Risk                                |  |    | 28 | 
|                                                  | Item 4. Controls
    and Procedures                                                                   |  |    | 30 | 
|PART II. OTHER
    INFORMATION                    |                                                                                                       |  |    |   
|                                                  | Item 1. Legal
    Proceedings                                                                         |  |    | 31 | 
|                                                  | Item 6. Exhibits
    and Reports on Form 8-K                                                          |  |    | 31 | 
|Signatures                                        |                                                                                                       |  | 32 |   
|Exhibit Index                                     |                                                                                                       |  | 33 |   
|Sec. 302 Certification of Chief Executive Officer
|Sec. 302 Certification of Chief Financial Officer
|Certification of CEO and CFO to Section 1350     



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

|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |   |         |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------- | ------------ | - | ------- | ------- | --------- | 
|                                                                                                                                                                   |                                                                                      | March 31,                                  |         |         | December 31, |  
|                                                                                                                                                                   |                                                                                      | 2004                                       |         |         | 2003         |  
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | (Unaudited)                                |         |         |             
|                                                                                                                                                                   |                                                                                      |                                           
|                                                                                                                                                                   |                                                                                      | (In thousands, except share data)          |        
|Assets                                                                                                                                                             |                                                                                      |                                            |         |         |              |   |         |        
|Investments:                                                                                                                                                       |                                                                                      |                                            |         |         |              |   |         |        
|                                                                                                                                                                   | Fixed maturities, at fair value                                                      |                                            | $       | 641,655 |              |   | $       | 694,633 |          
|                                                                                                                                                                   | Equity securities, at fair value                                                     |                                            |         | 10,953  |              |   |         | 7,545   |          
|                                                                                                                                                                   | Other investments                                                                    |                                            |         | 27,114  |              |   |         | 29,776  |          
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total investments                          |         |         | 679,722      |   |         |         | 731,954   | 
|Cash and cash equivalents                                                                                                                                          |                                                                                      |                                            | 145,191 |         |              |   | 102,051 |        
|Premiums receivable                                                                                                                                                |                                                                                      |                                            | 54,868  |         |              |   | 65,362  |        
|Reinsurance recoverable                                                                                                                                            |                                                                                      |                                            | 107,038 |         |              |   | 103,652 |        
|Federal income tax recoverable                                                                                                                                     |                                                                                      |                                            | 965     |         |              |   | 973     |        
|Property and equipment, net of accumulated
    depreciation                                                                                                        |                                                                                      |                                            | 16,414  |         |              |   | 16,490  |        
|Intangible assets                                                                                                                                                  |                                                                                      |                                            | 1,311   |         |              |   | 1,539   |        
|Other assets                                                                                                                                                       |                                                                                      |                                            | 50,420  |         |              |   | 41,025  |        
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total assets                               |         | $       | 1,055,929    |   |         | $       | 1,063,046 | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|Liabilities                                                                                                                                                        |                                                                                      |                                            |         |         |              |   |         |        
|Unpaid losses and loss adjustment expenses                                                                                                                         |                                                                                      | $                                          | 682,716 |         |              | $ | 673,605 |        
|Unearned premiums                                                                                                                                                  |                                                                                      |                                            | 99,386  |         |              |   | 103,806 |        
|Note payable, officer                                                                                                                                              |                                                                                      |                                            |        |         |              |   | 6,000   |        
|Long-term debt                                                                                                                                                     |                                                                                      |                                            | 30,928  |         |              |   | 30,928  |        
|Other liabilities                                                                                                                                                  |                                                                                      |                                            | 30,140  |         |              |   | 44,698  |        
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total liabilities                          |         |         | 843,170      |   |         |         | 859,037   | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|Minority Interest in Consolidated
    Subsidiary                                                                                                                   |                                                                                      |                                            | 2,189   |         |              |   | 2,201   |        
|Shareholders Equity                                                                                                                                               |                                                                                      |                                            |         |         |              |   |         |        
|Common stock, no par value, 50,000,000 shares
    authorized: 8,499,997 and 8,445,807 shares outstanding at
    March 31, 2004 and December 31, 2003, respectively |                                                                                      |                                            |        |         |              |   |        |        
|Additional paid-in-capital                                                                                                                                         |                                                                                      |                                            | 86,023  |         |              |   | 85,137  |        
|Retained earnings                                                                                                                                                  |                                                                                      |                                            | 93,225  |         |              |   | 87,352  |        
|Unearned stock compensation                                                                                                                                        |                                                                                      |                                            | (558    | )       |              |   | (288    | )      
|Accumulated other comprehensive income:                                                                                                                            |                                                                                      |                                            |         |         |              |   |         |        
|                                                                                                                                                                   | Net unrealized appreciation on investments, net
    of deferred federal income taxes |                                            |         | 31,880  |              |   |         | 29,607  |          
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total shareholders equity                 |         |         | 210,570      |   |         |         | 201,808   | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total liabilities and shareholders equity |         | $       | 1,055,929    |   |         | $       | 1,063,046 | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  

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

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

|                                                             |                                                                     |                       |        |        |      |   |        |        |  
|------------------------------------------------------------ | ------------------------------------------------------------------- | --------------------- | ------ | ------ | ---- | - | ------ | ------ | -
|                                                             |                                                                     |                      
|                                                             |                                                                     | Three Months Ended    |       
|                                                             |                                                                     | March 31,             |       
|                                                             |                                                                     |                       |       
|                                                             |                                                                     | 2004                  |        |        | 2003 |  
|                                                             |                                                                     |                       |        |        |      |  
|                                                             |                                                                     |                      
|                                                             |                                                                     | (In thousands, except |       
|                                                             |                                                                     | per share data)       |       
|Net premiums written                                         |                                                                     | $                     | 48,033 |        |      | $ | 54,837 |       
|Change in net unearned premiums                              |                                                                     |                       | 6,044  |        |      |   | 3,599  |       
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Net premiums earned                                                 |                       |        | 54,077 |      |   |        | 58,436 |  
|Investment income                                            |                                                                     |                       | 13,213 |        |      |   | 10,385 |       
|Net realized gains (losses)                                  |                                                                     |                       | 1,636  |        |      |   | (3     | )     
|Other income                                                 |                                                                     |                       | 177    |        |      |   | 161    |       
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Total revenues and other income                                     |                       |        | 69,103 |      |   |        | 68,979 |  
|                                                             |                                                                     |                       |        |        |      |  
|Losses and loss adjustment expenses                          |                                                                     |                       | 49,840 |        |      |   | 55,982 |       
|Underwriting expenses                                        |                                                                     |                       | 12,265 |        |      |   | 13,287 |       
|Investment expenses                                          |                                                                     |                       | 733    |        |      |   | 551    |       
|Interest expense                                             |                                                                     |                       | 401    |        |      |   | 95     |       
|Amortization expense                                         |                                                                     |                       | 274    |        |      |   | 44     |       
|General and administrative expenses                          |                                                                     |                       | 688    |        |      |   | 535    |       
|Other expenses                                               |                                                                     |                       | 121    |        |      |   |       |       
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Total expenses                                                      |                       |        | 64,322 |      |   |        | 70,494 |  
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Income (loss) before federal income taxes and
    minority interest |                       |        | 4,781  |      |   |        | (1,515 | )
|Federal income tax benefit                                   |                                                                     |                       | (1,079 | )      |      |   | (530   | )     
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Income (loss) before minority interest                              |                       |        | 5,860  |      |   |        | (985   | )
|Minority interest in net loss of consolidated
    subsidiary |                                                                     |                       | 14     |        |      |   |       |       
|                                                             |                                                                     |                       |        |        |      |  
|                                                             | Net income (loss)                                                   |                       | $      | 5,874  |      |   | $      | (985   | )
|                                                             |                                                                     |                       |        |        |      |  
|Net income (loss) per common share                           |                                                                     |                       |        |        |      |   |        |       
|                                                             | Basic                                                               |                       | $      | 0.70   |      |   | $      | (0.11  | )
|                                                             | Diluted                                                             |                       | $      | 0.69   |      |   | $      | (0.11  | )

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

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)


|                            |                                                                                                                                                                              |                            |       |        |       |   |      |       |       | 
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----- | ------ | ----- | - | ---- | ----- | ----- | 
|                            |                                                                                                                                                                              |                           
|                            |                                                                                                                                                                              | Three Months Ended         |      
|                            |                                                                                                                                                                              | March 31,                  |      
|                            |                                                                                                                                                                              |                            |      
|                            |                                                                                                                                                                              | 2004                       |       |        | 2003  |  
|                            |                                                                                                                                                                              |                            |       |        |       |  
|                            |                                                                                                                                                                              |                           
|                            |                                                                                                                                                                              | (In thousands)             |      
|Net income (loss)           |                                                                                                                                                                              | $                          | 5,874 |        |       | $ | (985 | )    
|Other comprehensive income: |                                                                                                                                                                              |                            |       |        |       |   |      |      
|                            | Unrealized appreciation on investment securities
    arising during the period, net of deferred federal income tax
    expense of $1,846 in 2004 and $697 in 2003            |                            |       | 3,428  |       |   |      | 1,295 |      
|                            | Less reclassification adjustment for realized
    gains on investment securities included in net income (loss),
    net of income tax expense of $622 in 2004 and $0 in 2003 |                            |       | (1,155 | )     |   |      |      |      
|                            |                                                                                                                                                                              |                            |       |        |       |  
|                            |                                                                                                                                                                              | Other comprehensive income |       |        | 2,273 |   |      |       | 1,295 | 
|                            |                                                                                                                                                                              |                            |       |        |       |  
|                            |                                                                                                                                                                              | Comprehensive income       |       | $      | 8,147 |   |      | $     | 310   | 
|                            |                                                                                                                                                                              |                            |       |        |       |  

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

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED)


|                                     |                                                                                          |                                                              |                                                    |        |         |         |   |      |        |         |  
|------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------------- | ------ | ------- | ------- | - | ---- | ------ | ------- | -
|                                     |                                                                                          |                                                             
|                                     |                                                                                          | Three Months Ended                                           |                                                   
|                                     |                                                                                          | March 31,                                                    |                                                   
|                                     |                                                                                          |                                                              |                                                   
|                                     |                                                                                          | 2004                                                         |                                                    |        | 2003    |        
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                             
|                                     |                                                                                          | (In thousands)                                               |                                                   
|Cash flows from operating activities |                                                                                          |                                                              |                                                    |        |         |         |   |     
|                                     | Net income (loss)                                                                        |                                                              | $                                                  | 5,874  |         |         | $ | (985 | )     
|                                     | Adjustments to reconcile net income (loss) to net
    cash used in operating activities: |                                                              |                                                    |        |         |         |   |      |       
|                                     |                                                                                          | Depreciation and amortization                                |                                                    |        | 2,216   |         |   |      | 891    |        
|                                     |                                                                                          | Net realized (gains) losses                                  |                                                    |        | (1,636  | )       |   |      | 3      |        
|                                     |                                                                                          | Change in fair value of derivatives                          |                                                    |        | (208    | )       |   |      |       |        
|                                     |                                                                                          | Deferred federal income taxes                                |                                                    |        | (1,079  | )       |   |      | 778    |        
|                                     |                                                                                          | Minority interest in net loss of consolidated
    subsidiary |                                                    |        | 14      |         |   |      |       |        
|                                     |                                                                                          | Changes in:                                                  |                                                    |        |         |         |   |      |        |        
|                                     |                                                                                          |                                                              | Unpaid loss and loss adjustment expenses           |        |         | 9,111   |   |      |        | 1,837   |  
|                                     |                                                                                          |                                                              | Unearned premiums                                  |        |         | (4,420  | ) |      |        | (2,407  | )
|                                     |                                                                                          |                                                              | Other assets and liabilities                       |        |         | (16,837 | ) |      |        | (2,975  | )
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                              | Net cash used in operating
    activities          |        |         | (6,965  | ) |      |        | (2,858  | )
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|Cash flows from investing activities |                                                                                          |                                                              |                                                    |        |         |         |   |     
|                                     | Purchases                                                                                |                                                              |                                                    |        |         |         |   |      |       
|                                     |                                                                                          | Available-for-sale  fixed maturities                        |                                                    |        | (11,073 | )       |   |      | (1,151 | )      
|                                     |                                                                                          | Available-for-sale  equity securities                       |                                                    |        | (7,828  | )       |   |      |       |        
|                                     |                                                                                          | Physicians Insurance Company, net of cash acquired           |                                                    |        |        |         |   |      | 2,550  |        
|                                     |                                                                                          | Property and equipment                                       |                                                    |        | (414    | )       |   |      | (431   | )      
|                                     | Sales and maturities                                                                     |                                                              |                                                    |        |         |         |   |      |       
|                                     |                                                                                          | Available-for-sale  fixed maturities                        |                                                    |        | 67,630  |         |   |      | 54,273 |        
|                                     |                                                                                          | Available-for-sale  equity securities                       |                                                    |        | 5,165   |         |   |      |       |        
|                                     |                                                                                          | Real estate                                                  |                                                    |        | 2,255   |         |   |      |       |        
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                              | Net cash provided by investing
    activities      |        |         | 55,735  |   |      |        | 55,241  |  
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|Cash flows from financing activities |                                                                                          |                                                              |                                                    |        |         |         |   |     
|                                     | Principal payment on note payable                                                        |                                                              |                                                    | (6,000 | )       |         |   |     |       
|                                     | Proceeds from stock options exercised                                                    |                                                              |                                                    | 370    |         |         |   |     |       
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                              | Net cash used in financing
    activities          |        |         | (5,630  | ) |      |        |        |  
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                              | Net increase in cash and cash
    equivalents      |        |         | 43,140  |   |      |        | 52,383  |  
|                                     |                                                                                          |                                                              | Cash and cash equivalents, beginning of
    period |        |         | 102,051 |   |      |        | 151,825 |  
|                                     |                                                                                          |                                                              |                                                    |        |         |        
|                                     |                                                                                          |                                                              | Cash and cash equivalents, end of
    period       |        | $       | 145,191 |   |      | $      | 204,208 |  
|                                     |                                                                                          |                                                              |                                                    |        |         |        

Supplemental disclosures of cash flow
information

The Company purchased 49% of the outstanding
common stock of Physicians Insurance Company in March 2003 for
$2,450,000. Cash acquired in connection with the purchase was
$5,000,000.

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

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)


1.     Basis of
Presentation

The accompanying unaudited Condensed Consolidated
Financial Statements include the accounts of American Physicians
Capital, Inc. (APCapital), its wholly owned
subsidiaries, Insurance Corporation of America
(ICA), APSpecialty Insurance Corporation
(APS), APConsulting LLC, APDirect Sales, LLC, Alpha
Advisors, Inc., APIndemnity (Bermuda) Ltd., APManagement Ltd.
and American Physicians Assurance Corporation (American
Physicians). In accordance with the guidance given in
Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN No. 46), the
accounts of two wholly owned subsidiary trusts used to issue
mandatorily redeemable trust preferred securities have been
included on the equity method in the accompanying unaudited
Condensed Consolidated Financial Statements, and the accounts of
Physicians Insurance Company (PIC) have been
included in the accompanying unaudited Condensed Consolidated
Financial Statements. See Note 2 for further discussion
regarding the impact of FIN No. 46. All significant
intercompany accounts and transactions are eliminated in
consolidation.

Certain 2003 amounts have been restated for the
inclusion of PIC, which was not initially consolidated until the
fourth quarter of 2003.

The Company is principally engaged in the
business of providing medical professional liability insurance
throughout the United States with a concentration of writings in
the Midwest, as well as workers compensation and health
insurance on a limited basis.

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 period ended
March 31, 2004 are not necessarily indicative of the
results to be expected for the year ending December 31,
2004. The accompanying unaudited 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, 2003.

The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could 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, investments, income taxes, reinsurance, the reserve
for extended reporting period claims, earned but unbilled
premiums and deferred policy acquisition costs. Although
considerable variability is inherent in these estimates,
management believes that the current estimates are reasonable in
all material respects. The estimates are reviewed regularly and
adjusted as necessary. Such adjustments are reflected in current
operations.

Stock-based Compensation

The Company uses the intrinsic value-based method
to account for all stock-based employee compensation plans and
has adopted the disclosure alternative of Statement of Financial
Accounting Standard (SFAS) No. 123
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. In
accordance with SFAS No. 123, as amended by SFAS
No. 148, the Company is required to disclose the pro forma
effects on operating results as

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

if the Company had elected the fair value
approach to account for its stock-based employee compensation
plans.

If compensation had been determined based on the
fair value at the grant date, consistent with the provisions of
SFAS No. 123, our net income (loss) and net income (loss)
per share would have been as follows for the three months ended
March 31, 2004 and 2003:

|                                                                                                                                                                       |             |                       |       |      |      |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------------------- | ----- | ---- | ---- | - | ------ | ----- | -
|                                                                                                                                                                       |             |                      
|                                                                                                                                                                       |             | Three Months Ended    |      
|                                                                                                                                                                       |             | March 31,             |      
|                                                                                                                                                                       |             |                       |      
|                                                                                                                                                                       |             | 2004                  |       |      | 2003 |  
|                                                                                                                                                                       |             |                       |       |      |      |  
|                                                                                                                                                                       |             |                      
|                                                                                                                                                                       |             | (In thousands, except |      
|                                                                                                                                                                       |             | per share data)       |      
|Net income (loss) as reported                                                                                                                                          |             | $                     | 5,874 |      |      | $ | (985   | )    
|Add: Stock-based employee compensation expense
    included in reported net income (loss), net of related tax
    effects                                              |             |                       | 65    |      |      |   | 75     |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards
    granted since 2000, net of related tax effects |             |                       | (234  | )    |      |   | (385   | )    
|                                                                                                                                                                       |             |                       |       |      |      |  
|Pro forma net income (loss)                                                                                                                                            |             | $                     | 5,705 |      |      | $ | (1,295 | )    
|                                                                                                                                                                       |             |                       |       |      |      |  
|Basic income (loss) per share                                                                                                                                          |             |                       |       |      |      |   |        |      
|                                                                                                                                                                       | As reported |                       | $     | 0.70 |      |   | $      | (0.11 | )
|                                                                                                                                                                       | Pro forma   |                       | $     | 0.68 |      |   | $      | (0.15 | )
|Diluted income (loss) per share(1)                                                                                                                                     |             |                       |       |      |      |   |        |      
|                                                                                                                                                                       | As reported |                       | $     | 0.69 |      |   | $      | (0.11 | )
|                                                                                                                                                                       | Pro forma   |                       | $     | 0.67 |      |   | $      | (0.15 | )




|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As the Company was in a net loss position for the
    three months ended March 31, 2003, no effect of options or
    other stock awards was calculated as the impact would have been
    anti-dilutive.

Such pro forma disclosures may not be
representative of future compensation costs as options may vest
over several years and additional grants may be made.

During the three months ended March 31,
2004, there were 100,000 options granted with an exercise price
of $21.54. At March 31, 2004, there were 903,180 options
outstanding with a weighted average exercise price of $18.61. In
addition, on January 14, 2004, the Company issued
30,000 shares of restricted stock to certain employees with
a fair market value at the date of grant of $17.20 per share.

Derivative Financial Instruments

During the second quarter of 2003, the Company
purchased interest-only certificates that may not allow for the
recovery of substantially all of its investment. These
certificates pay a variable rate of interest that is inversely
related to the London Interbank Offered Rate
(LIBOR). The Company has determined that these
certificates contain an embedded derivative instrument as
defined by SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.

All interest-only certificates with an inverse
floating rate of interest are carried on the balance sheet at
fair value as a fixed maturity security. These certificates are
not linked to specific assets or liabilities on the balance
sheet or to a forecasted transaction and, therefore, do not
qualify for hedge accounting. In addition, the Company does not
feel that it can reliably identify and separately measure the
embedded derivative instrument. Accordingly, any changes in the
fair value of the entire interest-only certificates, based on
quoted market prices, are recorded in current period earnings as
a component of investment income.

8



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At March 31, 2004, the Company had such
certificates with a fair value of approximately
$7.0 million. The fair value of these certificates
increased approximately $208,000 during the three months ended
March 31, 2004.

The Company uses these certificates as a part of
its overall interest rate risk-management strategy related to
its investment portfolio.

2.     Effects of New
Accounting Pronouncements

In June 2002, the Financial Accounting Standards
Board issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. With the
adoption of SFAS No. 146, effective for exit or disposal
activities initiated after December 31, 2002, a liability
for a cost associated with an exit or disposal activity should
be recognized and measured initially at fair value only when the
liability is incurred. Under the previous restructuring
accounting guidance, companies were permitted to record a
liability for costs associated with exit or disposal activities
at the date that management had formally committed to the
activity and announced its plan. As a result of this change in
accounting practices, approximately $350,000 of estimated future
employee separation costs associated with the exit of our
workers compensation line of business were not recorded as
a liability at March 31, 2004, but rather will be accrued
prospectively over the remaining future minimum service period
required of the employees affected.

In January 2003, the FASB issued FIN No. 46,
which was revised in December 2003 by FASB FIN No. 46R.
These interpretations address consolidation by business
enterprises of variable interest entities and are effective
during the first interim or annual period ending after
December 15, 2003. The Company has evaluated certain
investments, as required by FIN No. 46, and has determined
that its investments in subsidiary trusts used to issue
mandatorily redeemable trust preferred securities should not be
consolidated. Accordingly, the Company has not consolidated the
trusts in the accompanying unaudited Condensed Consolidated
Financial Statements. Also, during 2003, the Company invested
$2,450,000 for 49% of the outstanding common stock of a start-up
insurance company in the state of Florida, PIC. The Company has
evaluated its investment in PIC, and based on the guidance given
in FIN No. 46, has determined that PIC should be
consolidated because, among other factors, the Company financed
a portion of the other investors capital contribution at
PICs inception. The amount financed was repaid in full
prior to December 31, 2003. Minority interest in the
accompanying Unaudited Condensed Consolidated Statements of
Income and Condensed Consolidated Balance Sheets represents the
remaining 51% of the net loss and shareholders equity of
PIC, respectively.

PIC was formed in March of 2003 with the intent
of writing as much medical professional liability insurance as
PICs capital and surplus levels could reasonably support.
At March 31, 2004, PICs total assets were
approximately $9.1 million and direct premiums written by
PIC were approximately $1.3 million and $0 for the three
months ended March 31, 2004 and 2003, respectively. The
Company has no future obligations with respect to its investment
in PIC, nor do creditors of PIC have any recourse to the general
credit of the Company. Accordingly, the maximum exposure to loss
as a result of the Companys involvement with PIC, is
approximately $2.7 million, which represents the initial
pro-rata equity contribution of $2,450,000 plus the remaining
unamortized balance of an intangible asset of $217,000 related
to a covenant not to compete.

3.     Income (Loss)
Per Share

Net income (loss) per common share is computed by
dividing net income (loss) 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. Basic weighted average shares outstanding for the three
months ended March 31, 2004 and 2003 were 8,411,234 and
8,594,572, respectively. Diluted weighted average shares
outstanding for the three months ended March 31, 2004 were
8,526,870. As the Company was in a net loss

9



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

position for the three months ended
March 31, 2003, no effect of options or other stock awards
was calculated as the impact would have been anti-dilutive.

The following table sets forth the computation of
basic and diluted net income (loss) per common share:

|                                                                    |                                                                                                           |                       |       |       |      |   |       |       | 
|------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                                                    |                                                                                                           |                      
|                                                                    |                                                                                                           | Three Months Ended    |      
|                                                                    |                                                                                                           | March 31,             |      
|                                                                    |                                                                                                           |                       |      
|                                                                    |                                                                                                           | 2004                  |       |       | 2003 |  
|                                                                    |                                                                                                           |                       |       |       |      |  
|                                                                    |                                                                                                           |                      
|                                                                    |                                                                                                           | (In thousands, except |      
|                                                                    |                                                                                                           | per share data)       |      
|Numerator for basic and diluted income (loss)
    per common share: |                                                                                                           |                       |       |       |      |   |       |      
|Net income (loss)                                                   |                                                                                                           | $                     | 5,874 |       |      | $ | (985  | )    
|                                                                    |                                                                                                           |                       |       |       |      |  
|Denominator:                                                        |                                                                                                           |                       |       |       |      |   |       |      
|                                                                    | Denominator for basic income (loss) per common
    share  weighted average shares outstanding            |                       |       | 8,411 |      |   |       | 8,595 | 
|                                                                    | Effect of dilutive stock options and awards                                                               |                       |       | 116   |      |   |       |      | 
|                                                                    |                                                                                                           |                       |       |       |      |  
|                                                                    | Denominator for diluted income (loss) per common
    share  adjusted weighted average shares outstanding |                       | $     | 8,527 |      |   | $     | 8,595 | 
|                                                                    |                                                                                                           |                       |       |       |      |  
|Net loss  basic                                                    |                                                                                                           | $                     | 0.70  |       |      | $ | (0.11 | )    
|Net loss  diluted                                                  |                                                                                                           | $                     | 0.69  |       |      | $ | (0.11 | )    



|   |                    
|-- | -------------------
|4. | Segment Information

The Company is organized and operates principally
in the property and casualty insurance industry and has three
reportable segments  medical professional liability,
other insurance lines, and corporate and other in 2004. Prior to
2004, the Company had five reportable segments 
medical professional liability, workers compensation,
health, and personal and commercial insurance lines, as well as
a corporate and other segment. As the Company has begun to
implement its exit from the workers compensation and
health insurance lines, and exited the personal and commercial
lines in 2001, managements emphasis on these lines, as
well as their financial significance has decreased. Accordingly,
these three previously separately reported segments have been
aggregated into the other insurance lines segment reported in
2004. Reported 2003 amounts have been reclassified to conform to
the current year presentation.

The accounting policies of the segments are
consistent with those described in the Notes to the Consolidated
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 and certain other estimates for underwriting expenses.
Investment income, investment expense, amortization expense and
interest expense are allocated to the segments based on that
segments ownership percentage of the assets or
liabilities underlying the income or expense. General and
administrative expenses are all attributed to the holding
company and are included in corporate and other.

The following tables show total assets and income
(loss) before income taxes and minority interests for each of
the Companys reportable segments:

|              |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |           | 
|------------- | ----------------- | -------------- | - | ------- | --------- |  | - | --------- |  |  | ------------ | ------- |  | ------------ | - | -------- | - |  | - | --------- | 
|              |                   | Medical        |   |         | Other     |  |   |           |  |  |              |        
|              |                   | Professional   |   |         | Insurance |  |   | Corporate |  |  | Intersegment |         |  |             
|              |                   | Liability      |   |         | Lines     |  |   | and Other |  |  | Eliminations |         |  | Consolidated |  
|              |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |  
|              |                   |               
|              |                   | (In thousands) |  
|Total assets: |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |          
|              | March 31, 2004    |                | $ | 944,519 |           |  | $ | 107,157   |  |  | $            | 243,632 |  |              | $ | (239,379 | ) |  | $ | 1,055,929 | 
|              | December 31, 2003 |                | $ | 909,372 |           |  | $ | 123,064   |  |  | $            | 234,326 |  |              | $ | (203,716 | ) |  | $ | 1,063,046 | 

10



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |   |      |      |   |       |        |        | 
|----------------------------------------------------------- | ----------------------------------- | ----------------------------------------- | ----- | ------ | --------- | - | ------ | --------- | ------ | - | ------------ | --- | ----- | ------------ | - | ---- | ---- | - | ----- | ------ | ------ | 
|                                                            |                                     |                                          
|                                                            |                                     | For the Three Months Ended March 31, 2004 |      
|                                                            |                                     |                                           |      
|                                                            |                                     | Medical                                   |       |        | Other     |   |        |          
|                                                            |                                     | Professional                              |       |        | Insurance |   |        | Corporate |        |   | Intersegment |     |       |             
|                                                            |                                     | Liability                                 |       |        | Lines     |   |        | and Other |        |   | Eliminations |     |       | Consolidated |  
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  
|                                                            |                                     |                                          
|                                                            |                                     | (In thousands)                            |      
|Revenues:                                                   |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |   |      |      |   |       |       
|                                                            | Net premiums earned                 |                                           | $     | 42,456 |           |   | $      | 11,621    |        |   | $            |    |       |              | $ |     |      |   | $     | 54,077 |       
|                                                            | Investment income                   |                                           |       | 11,614 |           |   |        | 1,576     |        |   |              | 23  |       |              |   |     |      |   |       | 13,213 |       
|                                                            | Other revenue items                 |                                           |       | 1,561  |           |   |        | 196       |        |   |              | 199 |       |              |   | (143 | )    |   |       | 1,813  |       
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  
|                                                            |                                     | Total revenues                            |       |        | 55,631    |   |        |           | 13,393 |   |              |     | 222   |              |   |      | (143 | ) |       |        | 69,103 | 
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  
|Expenses:                                                   |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |   |      |      |   |       |       
|                                                            | Loss and loss adjustment expenses   |                                           |       | 38,685 |           |   |        | 11,155    |        |   |              |    |       |              |   |     |      |   |       | 49,840 |       
|                                                            | Underwriting expenses               |                                           |       | 9,174  |           |   |        | 3,091     |        |   |              |    |       |              |   |     |      |   |       | 12,265 |       
|                                                            | General and administrative expenses |                                           |       |       |           |   |        |          |        |   |              | 688 |       |              |   |     |      |   |       | 688    |       
|                                                            | Other expense items                 |                                           |       | 790    |           |   |        | 226       |        |   |              | 656 |       |              |   | (143 | )    |   |       | 1,529  |       
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  
|                                                            |                                     | Total expenses                            |       |        | 48,649    |   |        |           | 14,472 |   |              |     | 1,344 |              |   |      | (143 | ) |       |        | 64,322 | 
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  
|Income (loss) before income taxes and minority
    interest |                                     | $                                         | 6,982 |        |           | $ | (1,079 | )         |        | $ | (1,122       | )   |       | $            |  |      |      | $ | 4,781 |       
|                                                            |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  

|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |   |      |      |   |        |        |        | 
|----------------------------------------------------------- | ----------------------------------- | ----------------------------------------- | ------ | ------ | --------- | - | -- | --------- | ------ | - | ------------ | --- | --- | ------------ | - | ---- | ---- | - | ------ | ------ | ------ | 
|                                                            |                                     |                                          
|                                                            |                                     | For the Three Months Ended March 31, 2003 |       
|                                                            |                                     |                                           |       
|                                                            |                                     | Medical                                   |        |        | Other     |   |    |          
|                                                            |                                     | Professional                              |        |        | Insurance |   |    | Corporate |        |   | Intersegment |     |     |             
|                                                            |                                     | Liability                                 |        |        | Lines     |   |    | and Other |        |   | Eliminations |     |     | Consolidated |  
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  
|                                                            |                                     |                                          
|                                                            |                                     | (In thousands)                            |       
|Revenues:                                                   |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |   |      |      |   |        |       
|                                                            | Net premiums earned                 |                                           | $      | 39,485 |           |   | $  | 18,951    |        |   | $            |    |     |              | $ |     |      |   | $      | 58,436 |       
|                                                            | Investment income                   |                                           |        | 8,824  |           |   |    | 1,493     |        |   |              | 68  |     |              |   |     |      |   |        | 10,385 |       
|                                                            | Other revenue items                 |                                           |        | 111    |           |   |    | (1        | )      |   |              | 197 |     |              |   | (149 | )    |   |        | 158    |       
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  
|                                                            |                                     | Total revenues                            |        |        | 48,420    |   |    |           | 20,443 |   |              |     | 265 |              |   |      | (149 | ) |        |        | 68,979 | 
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  
|Expenses:                                                   |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |   |      |      |   |        |       
|                                                            | Loss and loss adjustment expenses   |                                           |        | 41,186 |           |   |    | 14,796    |        |   |              |    |     |              |   |     |      |   |        | 55,982 |       
|                                                            | Underwriting expenses               |                                           |        | 7,816  |           |   |    | 5,471     |        |   |              |    |     |              |   |     |      |   |        | 13,287 |       
|                                                            | General and administrative expenses |                                           |        |       |           |   |    |          |        |   |              | 535 |     |              |   |     |      |   |        | 535    |       
|                                                            | Other expense items                 |                                           |        | 596    |           |   |    | 111       |        |   |              | 132 |     |              |   | (149 | )    |   |        | 690    |       
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  
|                                                            |                                     | Total expenses                            |        |        | 49,598    |   |    |           | 20,378 |   |              |     | 667 |              |   |      | (149 | ) |        |        | 70,494 | 
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  
|Income (loss) before income taxes and minority
    interest |                                     | $                                         | (1,178 | )      |           | $ | 65 |           |        | $ | (402         | )   |     | $            |  |      |      | $ | (1,515 | )     
|                                                            |                                     |                                           |        |        |           |   |    |           |        |   |              |     |     |              |  

In late 2003, management announced its intention
to exit both the workers compensation and health insurance
lines of business, both of which are included above in other
insurance lines. In early 2004 the Company began non-renewing
workers compensation policies and will begin non-renewing
health policies effective July 1, 2004.



|   |            
|-- | -----------
|5. | Investments

The following table shows the Companys fair
value and gross unrealized investment losses, aggregated by
investment category and length of time that individual
securities have been in a continuous unrealized loss position,
at March 31, 2004.

11



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                  |                                       |                     |       |        |                   |                |       |       |   |            |   |       |  |   |            |   |  |   |       |        |  |   |      |      |  
|--------------------------------- | ------------------------------------- | ------------------- | ----- | ------ | ----------------- | -------------- | ----- | ----- | - | ---------- | - | ----- |  | - | ---------- | - |  | - | ----- | ------ |  | - | ---- | ---- | -
|                                  |                                       |                     |       |        |                   |               
|                                  |                                       | Less Than 12 Months |       |        | 12 Months or More |                | Total |      
|                                  |                                       |                     |       |        |                   |                |       |      
|                                  |                                       | Fair                |       |        | Unrealized        |                |       | Fair  |   | Unrealized |   | Fair  |  |   | Unrealized |  
|Description of Securities         |                                       | Value               |       |        | Losses            |                |       | Value |   | Losses     |   | Value |  |   | Losses     |  
|                                  |                                       |                     |       |        |                   |                |       |       |   |            |   |       |  |   |            |  
|                                  |                                       |                     |       |        |                   |                |       |       |   |           
|                                  |                                       |                     |       |        |                   | (In thousands) |       |       |   |           
|U.S. government obligations       |                                       | $                   |      |        |                   | $              |      |       |   | $          |  |       |  | $ |           |   |  | $ |      |        |  | $ |     |     
|States and political subdivisions |                                       |                     |      |        |                   |                |      |       |   |            |  |       |  |   |           |   |  |   |      |        |  |   |     |     
|Corporate securities              |                                       |                     | 1,747 |        |                   |                | (46   | )     |   |            |  |       |  |   |           |   |  |   | 1,747 |        |  |   | (46  | )   
|Mortgage-backed securities        |                                       |                     | 6,191 |        |                   |                | (520  | )     |   |            |  |       |  |   |           |   |  |   | 6,191 |        |  |   | (520 | )   
|Other debt securities             |                                       |                     |      |        |                   |                |      |       |   |            |  |       |  |   |           |   |  |   |      |        |  |   |     |     
|                                  |                                       |                     |       |        |                   |                |       |       |   |            |   |       |  |   |            |   |  |  
|Subtotal fixed maturities         |                                       |                     | 7,938 |        |                   |                | (566  | )     |   |            |  |       |  |   |           |   |  |   | 7,938 |        |  |   | (566 | )   
|Equity securities                 |                                       |                     | 3,488 |        |                   |                | (347  | )     |   |            |  |       |  |   |           |   |  |   | 3,488 |        |  |   | (347 | )   
|                                  |                                       |                     |       |        |                   |                |       |       |   |            |   |       |  |   |            |   |  |  
|                                  | Total temporarily impaired securities |                     | $     | 11,426 |                   |                | $     | (913  | ) |            | $ |      |  |   | $          |  |  |   | $     | 11,426 |  |   | $    | (913 | )
|                                  |                                       |                     |       |        |                   |                |       |       |   |            |   |       |  |   |            |   |  |  

Unrealized losses above are primarily related to
mortgage-backed securities, which are typically slightly more
sensitive to changes in prevailing interest rates than other
fixed-maturity securities due to pre-payment options. The
unrealized losses associated with mortgage-backed securities are
considered by the Company to be interest rate related and
temporary in nature.



|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies

On both December 30, 2003 and
February 20, 2004, separate putative shareholder class
action complaints were filed in United States District Court for
the Western District of Michigan against the Company, its former
President and Chief Executive Officer, and its Chief Financial
Officer. The complaints allege violations of federal securities
laws for certain disclosures made by the Company between
February 13, 2003 and November 6, 2003, regarding its
operating results and the adequacy of its reserves, and each
seeks monetary damages in an unspecified amount. The Company
denies the allegations and intends to vigorously defend the
lawsuits. On March 23, 2004, the Court dismissed the first
case and entered an Order approving a lead plaintiff in the
second case. A consolidated amended complaint was filed by the
lead plaintiff on May 7, 2004. The Company and individual
defendants intend to file a motion to have the complaint
dismissed. While management believes that meritorious defenses
to the allegations exist, the ultimate disposition of this
litigation could have a material adverse impact on the
Companys financial position, liquidity and results of
operations.

7.     Related Party
Transactions

On January 2, 2004, the $6.0 million
obligation to the Companys former President and Chief
Executive Officer (CEO) was repaid in its entirety
in connection his retirement.

At December 31, 2003, the Company had a
$286,000 non-interest bearing note receivable from SCW Agency
Group, Inc. (SCW), an insurance agency that is
principally owned by the Companys former President and
CEO. At December 31, 2003, the Company had established an
allowance in the amount of $286,000 related to the note. As part
of a new master agency agreement between American Physicians, a
wholly owned subsidiary of APCapital, and SCW, which was
effective January 1, 2004, this note was forgiven in
exchange for certain more favorable contract terms. Accordingly,
the note and the allowance were written off during 2004, which
did not result in a charge to income.

8.     Restructuring
Charges

In the fourth quarter of 2003, the Company began
to exit its workers compensation and health lines of
business. In connection with the exit of these lines, the
Company expects to incur a total of approximately
$1.3 million of restructuring charges for one-time employee
termination benefits and employee stay bonuses.

12



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the three months ended March 31,
2004, $121,000 of additional restructuring costs were incurred,
bringing the total amount incurred through March 31, 2004,
to $929,000. The costs are included on the accompanying
unaudited Condensed Consolidated Statements of Income in the
other expenses line item.

The activity in the liability for restructuring
charges for the three months ended March 31, 2004 was as
follows:

|                     |  |      |      |  
|-------------------- |  | ---- | ---- | -
|                     |  | 2004 |     
|                     |  |      |     
|Balance, January 1   |  | $    | 727  |  
|Employee separations |  |      | 121  |  
|Payments             |  |      | (249 | )
|                     |  |      |     
|Balance, March 31    |  | $    | 599  |  
|                     |  |      |     

Payments related to this liability will primarily
be made in the next six months; however, some payments will
extend through 2005.

Certain employees related to the workers
compensation line of business have been retained to manage the
run-off of this line through June 30, 2005. The employee
separation costs related to these individuals will be recognized
prospectively over the future service period. At March 31,
2004, total future employee separation costs are estimated to be
approximately $350,000.

9.     Income
Taxes

The provision for income taxes for the three
months ended March 31, 2004 and 2003 consists of:

|                                 |       |                    |        |        |      |   |        |      |  
|-------------------------------- | ----- | ------------------ | ------ | ------ | ---- | - | ------ | ---- | -
|                                 |       |                   
|                                 |       | Three Months Ended |       
|                                 |       | March 31,          |       
|                                 |       |                    |       
|                                 |       | 2004               |        |        | 2003 |  
|                                 |       |                    |        |        |      |  
|Current benefit                  |       | $                  |       |        |      | $ | (1,310 | )   
|Deferred benefit                 |       |                    | 1,546  |        |      |   | 780    |     
|Deferred tax valuation allowance |       |                    | (2,625 | )      |      |   |       |     
|                                 |       |                    |        |        |      |  
|                                 | Total |                    | $      | (1,079 | )    |   | $      | (530 | )
|                                 |       |                    |        |        |      |  

Income taxes incurred do not bear the usual
relationship to income before federal income taxes for the three
months ended March 31, 2004 and 2003 due to the following:

|                           |                     |                              |        |        |      |  |       |       |   |   |        |      |   |  |      |      |  
|-------------------------- | ------------------- | ---------------------------- | ------ | ------ | ---- |  | ----- | ----- | - | - | ------ | ---- | - |  | ---- | ---- | -
|                           |                     |                             
|                           |                     | Three Months Ended March 31, |       
|                           |                     |                              |       
|                           |                     |                              |        |       
|                           |                     | 2004                         |        |        | 2003 | 
|                           |                     |                              |        |        |      | 
|                           |                     |                              |        |        |      |  |       |      
|Income (loss) before taxes |                     | $                            | 4,781  |        |      |  |       |       |   | $ | (1,515 | )    |   |  |      |     
|                           |                     |                              |        |        |      |  |       |       |   |   |        |     
|Tax at statutory rate      |                     |                              | 1,673  |        |      |  | 35.0  | %     |   |   | (530   | )    |   |  | 35.0 | %   
|Tax effect of:             |                     |                              |        |        |      |  |       |       |   |   |        |      |   |  |      |     
|                           | Tax exempt interest |                              |        | (107   | )    |  |       | -2.2  | % |   |        | (131 | ) |  |      | 8.6  | %
|                           | Cushion adjustment  |                              |        |       |      |  |       | 0.0   | % |   |        | 106  |   |  |      | -7.0 | %
|                           | Other items, net    |                              |        | (20    | )    |  |       | -0.4  | % |   |        | 25   |   |  |      | -1.6 | %
|                           | Valuation allowance |                              |        | (2,625 | )    |  |       | -55.0 | % |   |        |     |   |  |      | 0.0  | %
|                           |                     |                              |        |        |      |  |       |       |   |   |        |     
|                           |                     | $                            | (1,079 | )      |      |  | -22.6 | %     |   | $ | (530   | )    |   |  | 35.0 | %   
|                           |                     |                              |        |        |      |  |       |       |   |   |        |     

Deferred federal income tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to the differences between financial
statement carrying amounts of existing assets and liabilities,
and their respective tax bases. The Company has reviewed its
deferred federal income tax assets for recoverability based on
the availability of future taxable income when the deductible
temporary differences are

13



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expected to reverse, and has determined, based on
its recent loss experience, that sufficient taxable income may
not exist in the periods of reversal. Accordingly, the Company
has recorded a deferred tax asset valuation allowance for the
entire net deferred tax asset. As the Companys deferred
tax assets and liabilities change, the valuation allowance also
changes. Any change in the valuation allowance is recorded as
federal income tax expense (benefit) in the period of change.
Once the Company has re-established a pattern of profitability,
the deferred tax asset valuation allowance may be reduced upon
evaluation of the availability of future taxable income.

At March 31, 2004 and December 31,
2003, the components of the net deferred federal income tax
asset were as follows:

|                                      |                                     |                                                   |   |        |              |   |   |        |         |  
|------------------------------------- | ----------------------------------- | ------------------------------------------------- | - | ------ | ------------ | - | - | ------ | ------- | -
|                                      |                                     | March 31,                                         |   |        | December 31, |  
|                                      |                                     | 2004                                              |   |        | 2003         |  
|                                      |                                     |                                                   |   |        |              |  
|                                      |                                     |                                                  
|                                      |                                     | (In thousands)                                    |  
|Deferred tax assets arising from      |                                     |                                                   |   |        |              |   |   |       
|                                      | Losses and loss adjustment expenses |                                                   | $ | 29,636 |              |   | $ | 29,385 |        
|                                      | Net operating loss carryforwards    |                                                   |   | 14,513 |              |   |   | 15,658 |        
|                                      | Unearned and audit premiums         |                                                   |   | 7,158  |              |   |   | 7,732  |        
|                                      | Minimum tax credits                 |                                                   |   | 8,242  |              |   |   | 8,242  |        
|                                      | Realized losses on investments      |                                                   |   | 4,257  |              |   |   | 4,257  |        
|                                      | Goodwill                            |                                                   |   | 4,747  |              |   |   | 4,827  |        
|                                      | Other                               |                                                   |   | 2,445  |              |   |   | 2,604  |        
|                                      |                                     |                                                   |   |        |              |  
|                                      |                                     | Total deferred tax assets                         |   |        | 70,998       |   |   |        | 72,705  |  
|                                      |                                     |                                                   |   |        |              |  
|Deferred tax liabilities arising from |                                     |                                                   |   |        |              |   |   |       
|                                      | Deferred policy acquisition costs   |                                                   |   | 3,552  |              |   |   | 3,656  |        
|                                      | Net unrealized gains on securities  |                                                   |   | 17,166 |              |   |   | 15,942 |        
|                                      | Other                               |                                                   |   | 2,233  |              |   |   | 2,435  |        
|                                      |                                     |                                                   |   |        |              |  
|                                      |                                     | Total deferred tax liabilities                    |   |        | 22,951       |   |   |        | 22,033  |  
|                                      |                                     |                                                   |   |        |              |  
|                                      |                                     | Net deferred tax asset before valuation allowance |   |        | 48,047       |   |   |        | 50,672  |  
|                                      |                                     |                                                   |   |        |              |  
|                                      |                                     | Valuation allowance                               |   |        | (48,047      | ) |   |        | (50,672 | )
|                                      |                                     |                                                   |   |        |              |  
|                                      | Net deferred tax asset              |                                                   | $ |       |              |   | $ |       |        
|                                      |                                     |                                                   |   |        |              |  

At March 31, 2004, the Company had the
following net operating loss carryforwards:

|                                                             |  |                |        |        |            |   |         |            |  |  |      | 
|------------------------------------------------------------ |  | -------------- | ------ | ------ | ---------- | - | ------- | ---------- |  |  | ---- | 
|                                                             |  |                |        | Annual |            |   | Year of |           
|                                                             |  | Amount         |        |        | Limitation |   |         | Expiration | 
|                                                             |  |                |        |        |            |   |         |            | 
|                                                             |  | (in thousands) |        |        |            |   |        
|New Mexico Physicians Mutual Liability Company
    merger(2) |  | $              | 3,169  |        |            | $ | 575     |            |  |  | 2010 | 
|State Mutual Insurance Company merger(2)                     |  | $              | 3,054  |        |            | $ | 340     |            |  |  | 2012 | 
|2003 net operating loss(1)                                   |  | $              | 34,222 |        |            |   | N/A     |            |  |  | 2018 | 



---



|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) | There are no change in control limitations on the
    annual use of net operating losses related to the year ended
    December 31, 2003.
|   
|(2) | American Physicians merged with New Mexico
    Physicians Mutual Liability Company and State Mutual Insurance
    Company in 1997.       

In addition, at March 31, 2004, the Company
had approximately $8.2 million of minimum tax credits,
which can be carried forward indefinitely.

14



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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 unaudited 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, 2003,
particularly Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report.

The following discussion of our financial
condition and results of operations contains certain
forward-looking statements related to our anticipated future
financial condition and operating results and our current
business plans. When we use words such as believes,
expects, anticipates,
estimates or similar expressions, we are making
forward-looking statements. These forward-looking statements
represent our outlook only as of the date of this report.

We claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 for all of our forward-looking
statements. While we believe that our forward-looking statements
are reasonable, you should not place undue reliance on any such
forward-looking statements, which speak only as of the date
made. Because these forward-looking statements are based on
estimates and assumptions that are subject to significant
business, economic and competitive uncertainties, many of which
are beyond our control or are subject to change, actual results
could be materially different. Factors that might cause such a
difference include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The assumptions and methodologies used in
    estimating and establishing the reserve for unpaid losses and
    loss adjustment expenses are continually reviewed and any
    adjustments are reflected as income or expense in the period in
    which the adjustment is made. Historically, such estimates have
    not exceeded plus or minus 8% of our recorded net reserves as of
    the beginning of the period, but can materially and adversely
    affect our results of operations when an adjustment is made. Due
    to the current volatility of losses in the medical professional
    liability industry, adjustments have occurred in each of the
    last several years.
|
| |  | A deterioration in the current accident year
    experience could result in a portion or all of our deferred
    policy acquisition costs not being recoverable, which would
    result in a charge to income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We may be unable to collect the full amount of
    reinsurance recoverable from Gerling Global, a significant
    reinsurer, if their cash flow or surplus levels are inadequate
    to make claim payments, which could result in a future charge to
    income.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Our exit from various markets and lines of
    business, including without limitation our exit from, the
    workers compensation, health and personal and commercial
    lines of business, as well as various geographic markets, could
    result in future charges to income due to unforeseen costs or
    the need for unanticipated reserve enhancements.                                                                                                                                                                                                                                                                                                                         
|
| |  | An adverse outcome in the putative shareholder
    class action lawsuits against us may result in a charge to
    income that could have a material adverse effect on our
    financial condition, liquidity and results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Substantial jury awards against our insureds
    could impose liability on us exceeding our policy limits or the
    funds we have reserved for the payment of claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | If the marketplace puts pressure on pricing
    increases, we may not be able to obtain expected rate increases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | If competitive or other conditions change, our
    revenues may decrease or our expenses may increase.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | If we experience substantial changes in claims
    frequency or severity patterns, our profitability may decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

15



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If reinsurance rates rise significantly or
    reinsurance becomes unavailable or reinsurers are unable to pay
    our claims, our results of operations and financial condition
    may be adversely affected.                                                                                                                                              
|
| |  | The concentration of our business in Michigan,
    Illinois and Ohio leaves us vulnerable to various factors
    specific to those states.                                                                                                                                                                                                                   
|
| |  | If our current relationship with medical
    associations and physicians does not continue, our ability to
    market our products and compete successfully may be harmed.                                                                                                                                                                                   
|
| |  | An interruption or change in our relationship
    with SCW Agency Group, an insurance sales agency, which is
    principally owned by our former President and CEO, could reduce
    our insurance premiums and net income. This agency accounts for
    substantially more of our medical professional liability
    premiums written than any other agency.
|
| |  | If any of the member companies in the various
    guaranty associations in which we participate were to become
    insolvent, we could be assessed by the relevant association in
    an amount that could materially affect the financial condition
    or results of operations of the Company.                                                            
|
| |  | We may not be able to obtain regulatory approval
    for rate increases, which may negatively affect our
    profitability.                                                                                                                                                                                                                                  
|
| |  | If we fail to comply with insurance industry
    regulations, or if those regulations become more burdensome to
    us, we may not be able to operate profitably.                                                                                                                                                                                            
|
| |  | A further reduction in our A.M. Best Company
    rating could make it more difficult for us to sell our products.                                                                                                                                                                                                                                            
|
| |  | Changes in prevailing interest rates and other
    negative changes in financial market conditions may reduce our
    revenues, cash flows or assets, including the amount of
    unrealized gains on investments shown on our balance sheet.                                                                                                                
|
| |  | Changes in current market conditions may
    adversely impact the property value of real estate investments
    that we currently hold.                                                                                                                                                                                                                      
|
| |  | A downturn in general economic conditions or
    significant increase in inflation in the markets in which we
    compete could negatively affect our profitability.                                                                                                                                                                                         

Other factors not currently anticipated by
management may also materially and adversely affect the
Companys financial position and 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.

Overview of APCapitals
Operations

We are a leading provider of medical professional
liability insurance. Medical professional liability insurance
coverage protects physicians and other health providers from
claims filed against them for alleged acts of medical
malpractice. In addition to medical professional liability
insurance, we have historically also offered workers
compensation insurance and health insurance products. However,
in late 2003, we announced our intention to exit the
workers compensation and health insurance markets. We
began non-renewing workers compensation policies in the
first quarter of 2004 and will begin non-renewing health
policies effective July 1, 2004.

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

16



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##### Table of Contents



results will conform to our estimates and
assumptions, or 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. Adjustments related to changes in
estimates are reflected in the Companys earnings in the
period those estimates changed.


The policies relating to unpaid loss and loss
adjustment expenses, investments, income taxes, reinsurance, the
reserve for extended reporting period claims, earned but
unbilled premiums and deferred policy acquisition costs are
those we believe to be most sensitive to estimates and
judgments. These policies are more fully described in
Item 7  Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Significant Accounting Policies of our Annual Report on
Form 10-K for the year ended December 31, 2003, and in
Note 1 to our Consolidated Financial Statements contained
in that report. There have been no material changes to these
policies during the most recent quarter.

Description of Ratios Analyzed

In the analysis of our operating results that
follows, we refer to various financial ratios and other measures
that management uses to analyze and compare the underwriting
results of our insurance operations.

GAAP
Ratios and Other GAAP Financial Measures

We calculate loss ratio, underwriting expense
ratio and combined ratio on a GAAP basis. There have been no
material changes to the calculation and use of these ratios
during the most recent quarter. The Company also calculates
underwriting gain (loss) on a GAAP basis. This measure equals
the net premiums earned less loss and loss adjustment expenses
(LAE) as well as underwriting expenses. It is
another measure used by management and insurance regulators to
evaluate the underwriting performance of our insurance
operations.

Accident
Year Loss Ratio

In addition to our reported GAAP loss ratios, we
also report accident year loss ratios, a non-GAAP financial
measure. The accident year loss ratio excludes the effect of
development on prior year loss reserves. We believe this ratio
is useful in evaluating our current underwriting performance, as
it focuses on the relationships between current premiums earned
and losses incurred related to the current year. Considerable
variability is inherent in the establishment of loss reserves
related to the current accident year. While management believes
that its estimate is reasonable, there can be no assurance that
these loss reserves will develop as expected. Our method of
calculating accident year loss ratios may differ from those used
by other companies and, therefore, comparability may be limited.

17



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##### Table of Contents



Results of Operations 
Three Months Ended March 31, 2004, Compared to
Three Months Ended March 31, 2003

Consolidated
Results of Operations

The following table sets forth our results of
operations for the three months ended March 31, 2004 and
2003, on a consolidated basis. The discussion that follows
should be read in connection with the unaudited Condensed
Consolidated Financial Statements, and Notes thereto, included
elsewhere in this report.

|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |        |        |   |         |        |        | 
|------------------------------------------------------------ | ------------------------------ | ------------------------------------------------------------------- | ------ | ------ | ------ |  | ------ | ------ | ------ | - | ---------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                             |                                |                                                                    
|                                                             |                                | For the Three Months Ended March 31,                                |       
|                                                             |                                |                                                                     |       
|                                                             |                                |                                                                     |        |       
|                                                             |                                |                                                                     |        | Change |       
|                                                             |                                |                                                                     |        |        |       
|                                                             |                                | 2004                                                                |        |        | 2003   |  |        | Dollar |        |   | Percentage |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                |                                                                     |        |       
|                                                             |                                | (dollars in thousands)                                              |        |        |       
|Net premiums earned by insurance segment:                    |                                |                                                                     |        |        |        |  |        |        |        |   |            |        |        |   |         |       
|                                                             | Medical professional liability |                                                                     | $      | 42,456 |        |  | $      | 39,485 |        |   | $          | 2,971  |        |   |         | 7.5%   |       
|                                                             | Other insurance lines          |                                                                     |        | 11,621 |        |  |        | 18,951 |        |   |            | (7,330 | )      |   |         | -38.7% |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Total net premiums earned                                           |        |        | 54,077 |  |        |        | 58,436 |   |            |        | (4,359 | ) |         |        | -7.5%  | 
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|Investment income                                            |                                |                                                                     | 13,213 |        |        |  | 10,385 |        |        |   | 2,828      |        |        |   | 27.2%   |       
|Net realized gains (losses)                                  |                                |                                                                     | 1,636  |        |        |  | (3     | )      |        |   | 1,639      |        |        |   | NM      |       
|Other income                                                 |                                |                                                                     | 177    |        |        |  | 161    |        |        |   | 16         |        |        |   | 9.9%    |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Total revenues and other income                                     |        |        | 69,103 |  |        |        | 68,979 |   |            |        | 124    |   |         |        | 0.2%   | 
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|Losses and loss adjustment expenses                          |                                |                                                                     | 49,840 |        |        |  | 55,982 |        |        |   | (6,142     | )      |        |   | -11.0%  |       
|Underwriting expenses                                        |                                |                                                                     | 12,265 |        |        |  | 13,287 |        |        |   | (1,022     | )      |        |   | -7.7%   |       
|Investment expenses                                          |                                |                                                                     | 733    |        |        |  | 551    |        |        |   | 182        |        |        |   | 33.0%   |       
|Interest expense                                             |                                |                                                                     | 401    |        |        |  | 95     |        |        |   | 306        |        |        |   | 322.1%  |       
|Amortization expense                                         |                                |                                                                     | 274    |        |        |  | 44     |        |        |   | 230        |        |        |   | 522.7%  |       
|General and administrative expenses                          |                                |                                                                     | 688    |        |        |  | 535    |        |        |   | 153        |        |        |   | 28.6%   |       
|Other expenses                                               |                                |                                                                     | 121    |        |        |  |       |        |        |   | 121        |        |        |   |        |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Total expenses                                                      |        |        | 64,322 |  |        |        | 70,494 |   |            |        | (6,172 | ) |         |        | -8.8%  | 
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Income (loss) before federal income taxes and
    minority interest |        |        | 4,781  |  |        |        | (1,515 | ) |            |        | 6,296  |   |         |        | 415.6% | 
|Federal income tax benefit                                   |                                |                                                                     | (1,079 | )      |        |  | (530   | )      |        |   | (549       | )      |        |   | -103.6% |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Income (loss) before minority interest                              |        |        | 5,860  |  |        |        | (985   | ) |            |        | 6,845  |   |         |        | 694.9% | 
|Minority interest in net loss of consolidated
    subsidiary |                                |                                                                     | 14     |        |        |  |       |        |        |   | 14         |        |        |   |        |       
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|                                                             |                                | Net income (loss)                                                   |        | $      | 5,874  |  |        | $      | (985   | ) |            | $      | 6,859  |   |         |        | 696.3% | 
|                                                             |                                |                                                                     |        |        |        |  |        |        |        |   |            |       
|Loss ratio                                                   |                                |                                                                     | 92.2%  |        |        |  | 95.8%  |        |        |   | -3.6%      |        |        |   |         |       
|Underwriting ratio                                           |                                |                                                                     | 22.7%  |        |        |  | 22.7%  |        |        |   | 0.0%       |        |        |   |         |       
|Combined ratio                                               |                                |                                                                     | 114.9% |        |        |  | 118.5% |        |        |   | -3.6%      |        |        |   |         |       



---



|     |                                    
|---- | -----------------------------------
|NM = | Percentage change is not meaningful

Net income for the three months ended
March 31, 2004 was $5.9 million compared to a net loss
of ($985,000) for the three months ended March 31, 2003.
The $6.9 million increase in net income was primarily the
result of decreases in loss and loss adjustment expenses and
underwriting expenses, a $2.8 million increase in
investment income, and $1.6 million of net realized gains
during the three months ended March 31, 2004, partially
offset by a $4.4 million decrease in net premiums earned.

The decrease in net premiums earned was primarily
the result of decreased premium writings related to our
workers compensation and health insurance lines. We began
to de-emphasize the workers compensation line in 2003 and
officially announced our intent to exit this line and our health
insurance line in late 2003. We anticipate that net premiums
earned will continue to remain at lower levels than in previous
periods for the near future as we complete our exit from these
lines; however, we believe that rate increases related to our

18



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##### Table of Contents



medical professional line will eventually offset
the decrease in net premiums earned from the exit of the
workers compensation and health lines.


Investment income for the three months ended
March 31, 2004 increased compared to the same period of
2003 as a result of investments in collateralized mortgage
obligation securities and high-yield corporate bond securities,
which were acquired in the second quarter of 2003. In addition,
we recorded approximately $600,000 of investment income for a
prepayment penalty that was received in the first quarter of
2004 on a bond that was called prior to its scheduled maturity.
Finally, a decrease in the percentage of our investment
portfolio that was allocated to short-term investments during
the three months ended March 31, 2004 compared to the same
period of 2003 added to our investment returns. During the first
three months of 2003, we had several bonds that matured or were
called. The proceeds were not immediately reinvested into
longer-term more productive assets due to historically low
interest rates at the time. Overall, the yield on our investment
portfolio increased to 6.78% for the three months ended
March 31, 2004 compared to 5.48% for the three months ended
March 31, 2003.

The increase in realized gains was primarily the
result of the liquidation of a substantial portion of our
high-yield securities, as well as gains from the sale of equity
securities, which we did not hold in the first quarter of 2003.
We have liquidated a substantial portion of our high-yield
portfolio to reduce the overall credit risk associated with our
investments. When we initially invested in high-yield securities
in the second quarter of 2003, management believed that the
higher yield offered by these securities offset the credit risk
associated with them. However, since that time, the spreads on
these high-yield securities have tightened in relation to
U.S. Treasury bonds, and management no longer believes that
the return provided outweighs the associated risk. Accordingly,
we intend to liquidate our remaining high-yield securities in
the second quarter of 2004, which will improve the overall
credit quality of our investment portfolio, but will likely
decrease future investment income as we reinvest in lower risk,
lower-yield securities.

Loss and loss adjustment expenses decreased as a
result of fewer paid and reported losses during the three months
ended March 31, 2004 compared to the same period of 2003.
The decrease in paid and reported losses is partially
attributable to the decrease in our workers compensation
and health premium volume and partially the result of recent
underwriting initiatives we have implemented and enhanced claims
handling related to our medical professional liability line.
Overall, we recorded approximately $1.0 million of adverse
development on prior year loss reserves, primarily related to
our workers compensation line.

The decrease in underwriting expenses was
primarily the result of reduced salary and employee benefit
costs due to the departure of our workers compensation
management team during the last nine-months of 2003, partially
offset by costs incurred in connection with the development and
implementation of a new medical professional liability policy
administration system, as well as severance costs associated
with a reduction in headcount in several of our corporate and
shared-services departments.

The increase in investment expenses was primarily
the result of additional fees related to the management of our
equity securities and high-yield bond portfolio, as these
investments were not acquired until the second quarter of 2003.

The increase in interest expense is related to
the issuance of approximately $30.9 million of long-term
debt in connection with the issuance of mandatorily redeemable
trust preferred securities in the second quarter of 2003. This
long-term debt and the transactions that gave rise to its
issuance are more fully described in
Item 8  Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2003. The increase in
interest expense related to this long-term debt was partially
offset by the elimination of interest associated with an
obligation to the Companys former President and Chief
Executive Officer (CEO). This obligation was fully
repaid in January of 2004 in connection with his retirement.

The increase in amortization expense is primarily
related to an intangible asset arising from a two-year covenant
not to compete with the Companys former CEO and President
upon his retirement effective December 31, 2003.

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##### Table of Contents



The increase in general and administrative
expenses is primarily the result of increased legal, audit and
other professional fees incurred as a result of recent SEC rules
and regulations and the previously announced exploration of
strategic alternatives by the Board of Directors.

Other expenses represent the accrual of stay
bonuses and termination benefits associated with our exit from
the workers compensation line of business. The impact of
employee separation costs related to the exit from our
workers compensation line of business is more fully
described in Note 8 to the unaudited Condensed Consolidated
Financial Statements, included elsewhere in this report.

The effective tax rate for the three months ended
March 31, 2004 was (22.6%) compared to 35.0% for the three
months ended March 31, 2003. The (22.6%) effective tax rate
in 2004 is primarily the result of a decrease in the deferred
tax valuation allowance as a result of an increase in unrealized
gains on our investment portfolio. The effect of the valuation
allowance, and other tax components, are more fully described in
Note 9 to the unaudited Condensed Consolidated Financial
Statements.

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| |                                                         
| | --------------------------------------------------------
| | Medical Professional Liability Results of
    Operations

The following table sets forth the results of
operations of our medical professional liability insurance
segment for the three months ended March 31, 2004 and 2003.

|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |        |        |   |        |         |       | 
|-------------------------------------------------------------------- | ---------------------------- | ---------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ---------- | ------ | ------ | - | ------ | ------- | ----- | 
|                                                                     |                              |                             
|                                                                     |                              | Three Months Ended March 31, |       
|                                                                     |                              |                              |       
|                                                                     |                              |                              |        |       
|                                                                     |                              |                              |        | Change |       
|                                                                     |                              |                              |        |        |       
|                                                                     |                              | 2004                         |        |        | 2003   |   |        | Dollar |        |   | Percentage |       
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|                                                                     |                              |                              |        |       
|                                                                     |                              | (dollars in thousands)       |        |        |       
|Direct premiums written:                                             |                              |                              |        |        |        |   |        |        |        |   |            |        |        |   |        |        
|                                                                     | Illinois                     |                              | $      | 14,802 |        |   | $      | 12,930 |        |   | $          | 1,872  |        |   |        | 14.5%   |      
|                                                                     | Ohio                         |                              |        | 10,406 |        |   |        | 7,905  |        |   |            | 2,501  |        |   |        | 31.6%   |      
|                                                                     | Michigan                     |                              |        | 9,177  |        |   |        | 8,442  |        |   |            | 735    |        |   |        | 8.7%    |      
|                                                                     | Kentucky                     |                              |        | 7,799  |        |   |        | 8,215  |        |   |            | (416   | )      |   |        | -5.1%   |      
|                                                                     | New Mexico.                  |                              |        | 5,025  |        |   |        | 3,813  |        |   |            | 1,212  |        |   |        | 31.8%   |      
|                                                                     | Florida                      |                              |        | 245    |        |   |        | 3,475  |        |   |            | (3,230 | )      |   |        | -92.9%  |      
|                                                                     | Florida  PIC                |                              |        | 1,262  |        |   |        |       |        |   |            | 1,262  |        |   |        |        |      
|                                                                     | Nevada                       |                              |        | 1,274  |        |   |        | 1,044  |        |   |            | 230    |        |   |        | 22.0%   |      
|                                                                     | Other                        |                              |        | 2,634  |        |   |        | 1,767  |        |   |            | 867    |        |   |        | 49.1%   |      
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|                                                                     |                              | Total                        |        | $      | 52,624 |   |        | $      | 47,591 |   |            | $      | 5,033  |   |        |         | 10.6% | 
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Net premiums written                                                 |                              | $                            | 44,249 |        |        | $ | 40,119 |        |        | $ | 4,130      |        |        |   | 10.3%  |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Net premiums earned                                                  |                              | $                            | 42,456 |        |        | $ | 39,485 |        |        | $ | 2,971      |        |        |   | 7.5%   |        
|Incurred loss and LAE:                                               |                              |                              |        |        |        |   |        |        |        |   |            |        |        |   |        |        
|                                                                     | Current accident year losses |                              |        | 39,098 |        |   |        | 40,186 |        |   |            | (1,088 | )      |   |        | -2.7%   |      
|                                                                     | Prior year losses            |                              |        | (413   | )      |   |        | 1,000  |        |   |            | (1,413 | )      |   |        | -141.3% |      
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|                                                                     |                              | Total                        |        |        | 38,685 |   |        |        | 41,186 |   |            |        | (2,501 | ) |        |         | -6.1% | 
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Underwriting expenses                                                |                              |                              | 9,174  |        |        |   | 7,816  |        |        |   | 1,358      |        |        |   | 17.4%  |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Underwriting loss                                                    |                              | $                            | (5,403 | )      |        | $ | (9,517 | )      |        | $ | 4,114      |        |        |   | -43.2% |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Income (loss) before federal income taxes and
    minority interests |                              | $                            | 6,982  |        |        | $ | (1,178 | )      |        | $ | 8,160      |        |        |   | 692.7% |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Loss ratio:                                                          |                              |                              |        |        |        |   |        |        |        |   |            |        |        |   |        |        
|                                                                     | Accident year                |                              |        | 92.1%  |        |   |        | 101.8% |        |   |            | -9.7%  |        |   |        |         |      
|                                                                     | Prior years                  |                              |        | -1.0%  |        |   |        | 2.5%   |        |   |            | -3.5%  |        |   |        |         |      
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|                                                                     | Calendar year                |                              |        | 91.1%  |        |   |        | 104.3% |        |   |            | -13.2% |        |   |        |         |      
|Underwriting expense ratio                                           |                              |                              | 21.6%  |        |        |   | 19.8%  |        |        |   | 1.8%       |        |        |   |        |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       
|Combined ratio                                                       |                              |                              | 112.7% |        |        |   | 124.1% |        |        |   | -11.4%     |        |        |   |        |        
|                                                                     |                              |                              |        |        |        |   |        |        |        |   |            |       

Direct premiums written increased primarily as a
result of rate increases, particularly in the states of Illinois
and Ohio. These increases were partially offset by reduced
physician counts in Kentucky, as we have discontinued writing
occurrence-based policies and other high-risk specialties in
that state, and Florida, which we began to exit in late 2002.
The majority of the direct premiums written in the state of
Florida are from our consolidated subsidiary, Physicians
Insurance Company (PIC). See Note 2 of the
Notes to unaudited Condensed Consolidated Financial Statements,
included elsewhere in this report, for further information
regarding PIC. We anticipate the direct premiums written will
continue to increase in the near-term as we implement additional
rate increases.

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##### Table of Contents



Net premiums earned did not increase as much as
direct and net premiums written as many of the rate increases
taken in the later part of 2003 have not yet been fully earned.

Effective January 1, 2004, we retained a
thirty percent (30%) participation in our primary medical
professional liability excess of loss contract, which reinsures
the first $500,000 of a loss in excess of $500,000. We
anticipate that the retention of this additional risk will
result in an increase in net premiums written of approximately
$10 million during 2004. However, this increase will be
partially offset by an increase in the overall cost of our
reinsurance programs and an increase in net incurred losses. As
a result, we expect that the impact on net income to be
immaterial.

Incurred loss and loss adjustment expenses
decreased as a result of a decrease in net paid losses and lower
reported claim counts. Net paid losses for the three months
ended March 31, 2004 were $31.9 million compared to
$39.1 million for the three months ended March 31,
2003. Claims reported to us during the three months ended
March 31, 2004 numbered 525 compared to 803 for the three
months ended March 31, 2003. We believe that the decreases
in our paid losses and reported claim counts are the result of
stricter underwriting standards that we have worked to implement
over the past few years. The decrease in incurred loss and loss
adjustment expenses combined with the increase in net premiums
earned resulted in a decrease of the loss ratio to 91.1% for the
three months ended March 31, 2004 compared to 104.3% for
the same period of 2003.

The increase in underwriting expenses is
partially attributable to an increase in commissions and premium
taxes associated with the increase in direct premiums written.
Also, a greater allocation of salary, severance and employee
benefit costs related to corporate and shared-services
departments was made to the medical professional liability line
as a result of the decrease in premium volume associated with
other insurance lines. The medical professional liability line
also incurred costs during the three months ended March 31,
2004 in connection with the development and implementation of a
new policy administration system.

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##### Table of Contents





| |                                                
| | -----------------------------------------------
| | Other Insurance Lines Results of
    Operations

The following table sets forth the results of
operations of our other insurance lines segment for the three
months ended March 31, 2004 and 2003. The other insurance
lines segment consists of the operations of our workers
compensation, health and personal and commercial lines of
business.

|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |        |         |   |          |         |        | 
|-------------------------------------------------------------------- | ---------------------------- | ---------------------------- | ------ | ---------- | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------- | - | -------- | ------- | ------ | 
|                                                                     |                              |                             
|                                                                     |                              | Three Months Ended March 31, |       
|                                                                     |                              |                              |       
|                                                                     |                              |                              |        | Percentage |       
|                                                                     |                              | 2004                         |        |            | 2003   |   |        | Change |        |   | Change  |       
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|                                                                     |                              |                              |        |           
|                                                                     |                              | (dollars in thousands)       |        |            |       
|Direct premiums written:                                             |                              |                              |        |            |        |   |        |        |        |   |         |        |         |   |          |        
|                                                                     | Michigan                     |                              | $      | 3,202      |        |   | $      | 8,517  |        |   | $       | (5,315 | )       |   |          | -62.4%  |       
|                                                                     | Minnesota                    |                              |        | 562        |        |   |        | 3,743  |        |   |         | (3,181 | )       |   |          | -85.0%  |       
|                                                                     | Illinois                     |                              |        | 108        |        |   |        | 1,047  |        |   |         | (939   | )       |   |          | -89.7%  |       
|                                                                     | Kentucky                     |                              |        | 36         |        |   |        | 88     |        |   |         | (52    | )       |   |          | -59.1%  |       
|                                                                     | Wisconsin                    |                              |        | (4         | )      |   |        | (19    | )      |   |         | 15     |         |   |          | -78.9%  |       
|                                                                     | Iowa                         |                              |        | (12        | )      |   |        | 90     |        |   |         | (102   | )       |   |          | -113.3% |       
|                                                                     | Indiana                      |                              |        | (201       | )      |   |        | 564    |        |   |         | (765   | )       |   |          | -135.6% |       
|                                                                     | Other                        |                              |        | 25         |        |   |        | 37     |        |   |         | (10    | )       |   |          | -28.6%  |       
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|                                                                     |                              | Total                        |        | $          | 3,716  |   |        | $      | 14,067 |   |         | $      | (10,349 | ) |          |         | -73.6% | 
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Net premiums written                                                 |                              | $                            | 3,784  |            |        | $ | 14,718 |        |        | $ | (10,934 | )      |         |   | -74.3%   |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Net premiums earned                                                  |                              | $                            | 11,621 |            |        | $ | 18,951 |        |        | $ | (7,330  | )      |         |   | -38.7%   |        
|Incurred loss and LAE:                                               |                              |                              |        |            |        |   |        |        |        |   |         |        |         |   |          |        
|                                                                     | Current accident year losses |                              |        | 9,742      |        |   |        | 15,906 |        |   |         | (6,164 | )       |   |          | -38.8%  |       
|                                                                     | Prior year losses            |                              |        | 1,413      |        |   |        | (1,110 | )      |   |         | 2,523  |         |   |          | -227.3% |       
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|                                                                     |                              | Total                        |        |            | 11,155 |   |        |        | 14,796 |   |         |        | (3,641  | ) |          |         | -24.6% | 
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Underwriting expenses                                                |                              |                              | 3,091  |            |        |   | 5,471  |        |        |   | (2,380  | )      |         |   | -43.5%   |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Underwriting loss                                                    |                              | $                            | (2,625 | )          |        | $ | (1,316 | )      |        | $ | (1,309  | )      |         |   | 99.5%    |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|(Loss) income before federal income taxes and
    minority interests |                              | $                            | (1,079 | )          |        | $ | 65     |        |        | $ | (1,144  | )      |         |   | -1760.0% |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Loss ratio:                                                          |                              |                              |        |            |        |   |        |        |        |   |         |        |         |   |          |        
|                                                                     | Accident year                |                              |        | 83.8%      |        |   |        | 83.9%  |        |   |         | -0.1%  |         |   |          |         |       
|                                                                     | Prior years                  |                              |        | 12.2%      |        |   |        | -5.8%  |        |   |         | 18.0%  |         |   |          |         |       
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|                                                                     | Calendar year                |                              |        | 96.0%      |        |   |        | 78.1%  |        |   |         | 17.9%  |         |   |          |         |       
|Underwriting expense ratio                                           |                              |                              | 26.6%  |            |        |   | 28.9%  |        |        |   | -2.3%   |        |         |   |          |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       
|Combined ratio                                                       |                              |                              | 122.6% |            |        |   | 107.0% |        |        |   | 15.6%   |        |         |   |          |        
|                                                                     |                              |                              |        |            |        |   |        |        |        |   |         |       

The decrease in direct premiums written was the
result of our exit from the workers compensation and
health lines of business. In the first quarter of 2004, we began
the process of non-renewing all workers compensation
policies. In addition, as is often the case when a company
announces its exit from a certain line of business, a number of
our policyholders with policies currently in-force cancelled
their coverage. Workers compensation direct premiums
written for the three months ended March 31, 2004 were
$194,000, a decrease of $7.0 million compared to the same
period of 2003.

We cannot start non-renewing health policies
until July 1, 2004 due to certain contractual obligations
with a third-party who administers a substantial portion of our
health insurance business. However, we have implemented very
strict underwriting and pricing guidelines that have resulted in
a 33.2% reduction in the number of covered lives since
December 31, 2003 and a 58.0% decrease in the number of
covered lives since

23



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##### Table of Contents



March 31, 2003. Health direct premiums
written were $3.5 million for the three months ended
March 31, 2004, a decrease of $3.3 million compared to
the same period of 2003.


The decrease in net premiums written is
relatively consistent with the decrease in direct premiums
written. Net premiums earned, however, did not decrease as much
as direct and net premiums written as premiums associated with
workers compensation policies written in 2003 continue to
be earned in 2004. We anticipate that direct and net premiums
written as well as net premiums earned related to our other
insurance lines will continue to decrease a we continue the
process of non-renewing policies during our exit from these
lines.

Incurred loss and loss adjustment expenses
decreased $3.6 million or 24.6% primarily as a result of
the decrease in the number of insureds. The workers
compensation line of business incurred approximately
$1.4 million of unfavorable development on prior year loss
reserves as a result of paid losses during the three months
ended March 31, 2004 exceeding those originally projected
in the estimation of the December 31, 2003 reserves.

The decrease in underwriting expenses is
primarily the result of reduced salary and employee benefit
costs as a result of the departure of the workers
compensation management team in the last nine months of 2003.
Also, as a result of the decreased premium volume, there was a
decrease in corporate and shared services salary, employee
benefit and other costs allocated to the other insurance lines
segment.



| |                    
| | -------------------
| | Corporate and Other

Loss before federal income taxes and minority
interests for this segment was $1.1 million for the three
months ended March 31, 2004 compared to a loss of $402,000
for the three months ended March 31, 2003. Increase in
interest expense and general and administrative expenses were
the primary reasons for the increase in the loss. These items
are more fully described in the discussion of our consolidated
results of operations.

Liquidity and Capital Resources

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
reinsurers and proceeds from the maturity or sale of invested
assets. We also enter into financing transactions from time to
time to acquire additional capital, such as the issuance of
trust preferred securities and related debentures in May 2003,
which resulted in the incurrence of $30.9 million in
long-term debt. The primary uses of cash, on both a short-and
long-term basis, are losses, loss adjustment expenses, operating
expenses, the acquisition of invested assets and fixed assets,
reinsurance premiums, interest payments, taxes, and the
repurchase of the Companys stock.

Our holding companys only material assets
are the capital stock of American Physicians and its other
subsidiaries, and cash. APCapitals ongoing cash flow will
consist primarily of dividends and other permissible payments
from its subsidiaries and investment earnings on funds held. The
payment of dividends to APCapital by its insurance subsidiaries
is subject to limitations imposed by applicable law.
APCapitals primary uses of cash, on both a short-and
long-term basis include periodic interest payments, operating
expenses, and the repayment of the debentures. In January 2004,
APCapital made a $25 million surplus contribution to its
American Physicians subsidiary. The purpose of the contribution
was to increase American Physicians statutory capital and
surplus, which is a critical factor in the financial stability
rating process by insurance rating agencies such as A.M. Best.
At March 31, 2004, APCapitals cash and cash
equivalent resources totaled approximately $2.3 million,
which will be held at the holding company for future debt
service and other operating costs.

At March 31, 2004, we had no material
planned expenditures for the acquisition of assets, or other
expenditures, other than expenses incurred in the normal course
of operations.

The Board of Directors from time to time
authorizes the Company to purchase shares of its outstanding
common stock. There were no shares repurchased during the three
months ended March 31, 2004. The total number of shares
purchased pursuant to these authorizations as of March 31,
2004 was 3,197,070, at a total cost of $60,382,000, or an
average price per share of $18.89. The Companys repurchase
of any of its shares is

24



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##### Table of Contents



subject to limitations that may be imposed by
applicable 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. As of
March 31, 2004, the Company has 418,369 shares of its
September 11, 2003 stock repurchase program remaining to be
purchased. The Company does not anticipate repurchasing any of
its shares in the near future.


Our net cash flow used by operations was
$7.0 million for the three months ended March 31,
2004, compared to $2.9 million used in operations for the
same period of 2003. The cash used in operations in 2004 was
primarily the result of a $11.0 million payment for ceded
reinsurance premiums in February of 2004 related to our
swing-rated reinsurance treaties. This payment
represents additional ceded premiums related to the 2002 and
2001 accident years, as a result of loss development on those
accident years in the third quarter of 2003. With the decrease
in our loss ratio related to the 2003 and 2004 accident years,
we anticipate that future reinsurance premium payments related
to these swing-rated treaties will not be as large.

At March 31, 2004, the Company had
$145.2 million of cash and cash equivalents available and
an investment portfolio of $679.7 million. The portfolio
includes $46.3 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 to meet future
policyholder obligations and ongoing cash needs to fund
operations. As of March 31, 2004, our fixed maturity
portfolio included $342.9 million of bonds that mature in
the next one to five years and $113.0 million that mature
in the next five to ten years. In addition, at March 31,
2004, we have $59.8 million of mortgage-backed securities
that provide periodic principal repayments.

Based on historical trends, market conditions and
our business plans, we believe that our existing resources and
sources of funds, including payments from our insurance
subsidiaries to the APCapital holding company, will be
sufficient to meet our short- and long-term liquidity needs.
However, economic, market and regulatory conditions may change,
and there can be no assurance that our funds will be sufficient
to meet these liquidity needs.

Financial Condition

In evaluating our financial condition, two
factors are the most critical. First, the availability of
adequate statutory capital and surplus to satisfy state
regulators and to support our current A.M. Best rating, and
second, the adequacy of our reserves for unpaid loss and loss
adjustment expenses.



| |                              
| | -----------------------------
| | Statutory Capital and Surplus

Our statutory capital and surplus
(surplus) at March 31, 2004 was approximately
$186.5 million, which results in a net premiums written to
surplus ratio of 1.16:1. Statutory capital and surplus at
December 31, 2003 was approximately $150.3 million,
for a net premiums written to surplus ratio of 1.49:1. The
decrease in our ratio of net premiums written to surplus was
primarily the result of the $25 million of capital
contributed to American Physicians, the improved underwriting
results of the first quarter of 2004 and the decrease in net
premiums written as a result of our exit from the workers
compensation and health lines of business. The continued exit
from the workers compensation and health insurance lines
of business in 2004 is expected to provide additional surplus to
support future medical professional liability premiums. We are
considering alternatives on how to maximize our use of the
approximately $35 million of statutory surplus related to
our APSpecialty and ICA insurance subsidiaries to support the
medical professional liability premium writings in American
Physicians.



| |                                                            
| | -----------------------------------------------------------
| | Reserves for Unpaid Losses and Loss
    Adjustment Expenses

The adequacy of our reserves for unpaid loss and
loss adjustment expenses is another critical factor in
evaluating our financial condition.

For the three months ended March 31, 2004,
we recorded an increase in ultimate loss estimates, net of
reinsurance, for accident years 2003 and prior of
$1.0 million, or 0.2% of $574.6 million of net loss
and loss

25



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##### Table of Contents



adjustment expense reserves as of
December 31, 2003. The $1.0 million of unfavorable
development on prior year reserves was entirely attributable to
the workers compensation line of business, partially
offset by $413,000 of favorable development on our medical
professional liability line. The adverse development for
workers compensation was the result of paid losses
exceeding those originally projected in the estimation of the
December 31, 2003 reserves. Historical results have shown
that ultimate losses have varied from our initial estimates in a
range of plus or minus 8%.


The following table shows net case reserves, net
incurred but not reported (IBNR) reserves, total net
reserves, open claim counts, and average net case reserve per
open claim for our medical professional liability segment at
March 31, 2004 and December 31, 2003.

|                  |  |                                     |         |  |          |   |         |           |  |   |             |  |  |                |       |   |  |   |      | 
|----------------- |  | ----------------------------------- | ------- |  | -------- | - | ------- | --------- |  | - | ----------- |  |  | -------------- | ----- | - |  | - | ---- | 
|                  |  |                                     |         |  |          |   |         | Number    |  |   | Average Net | 
|                  |  | Net Case                            |         |  | Net IBNR |   |         | Total Net |  |   | of Open     |  |  | Case Reserve   |      
|                  |  | Reserves                            |         |  | Reserves |   |         | Reserves  |  |   | Claims      |  |  | Per Open Claim |      
|                  |  |                                     |         |  |          |   |         |           |  |   |             |  |  |                |      
|                  |  |                                    
|                  |  | (In thousands, except claim counts) |        
|December 31, 2003 |  | $                                   | 389,521 |  |          | $ | 117,806 |           |  | $ | 507,327     |  |  |                | 4,447 |   |  | $ | 87.6 | 
|Change            |  |                                     | 1,980   |  |          |   | 4,820   |           |  |   | 6,800       |  |  |                | (344  | ) |  |   | 7.8  | 
|                  |  |                                     |         |  |          |   |         |           |  |   |             |  |  |                |      
|March 31, 2004    |  | $                                   | 391,501 |  |          | $ | 122,626 |           |  | $ | 514,127     |  |  |                | 4,103 |   |  | $ | 95.4 | 
|                  |  |                                     |         |  |          |   |         |           |  |   |             |  |  |                |      

As seen above, net case, net IBNR and total net
reserves increased from December 31, 2003 to March 31,
2004, while our open claim count decreased, which had the effect
of increasing the average net case reserve per open claim from
approximately $87,600 at December 31, 2003 to approximately
$95,400 at March 31, 2004.

Activity in the liability for unpaid loss and
loss adjustment expenses by insurance segment for the three
months ended March 31, 2004 was as follows:

|                                                         |                                |                |         |        |           |   |        |              |        |   |         |         |        | 
|-------------------------------------------------------- | ------------------------------ | -------------- | ------- | ------ | --------- | - | ------ | ------------ | ------ | - | ------- | ------- | ------ | 
|                                                         |                                | Medical        |         |        | Other     |   |        |             
|                                                         |                                | Professional   |         |        | Insurance |   |        |             
|                                                         |                                | Liability      |         |        | Lines     |   |        | Consolidated |       
|                                                         |                                |                |         |        |           |   |        |              |       
|                                                         |                                |               
|                                                         |                                | (In thousands) |        
|Balance, December 31, 2003                               |                                | $              | 598,329 |        |           | $ | 75,276 |              |        | $ | 673,605 |        
|                                                         | Less, reinsurance recoverables |                |         | 91,002 |           |   |        | 7,956        |        |   |         | 98,958  |       
|                                                         |                                |                |         |        |           |   |        |              |       
|Net reserves, December 31, 2003                          |                                |                | 507,327 |        |           |   | 67,320 |              |        |   | 574,647 |        
|Incurred related to                                      |                                |                |         |        |           |   |        |              |        |   |         |        
|                                                         | Current year                   |                |         | 39,098 |           |   |        | 9,742        |        |   |         | 48,840  |       
|                                                         | Prior years                    |                |         | (413   | )         |   |        | 1,413        |        |   |         | 1,000   |       
|                                                         |                                |                |         |        |           |   |        |              |       
|                                                         |                                | Total          |         |        | 38,685    |   |        |              | 11,155 |   |         |         | 49,840 | 
|                                                         |                                |                |         |        |           |   |        |              |       
|Paid related to                                          |                                |                |         |        |           |   |        |              |        |   |         |        
|                                                         | Current year                   |                |         | 17     |           |   |        | 2,438        |        |   |         | 2,455   |       
|                                                         | Prior years                    |                |         | 31,868 |           |   |        | 11,174       |        |   |         | 43,042  |       
|                                                         |                                |                |         |        |           |   |        |              |       
|                                                         |                                | Total          |         |        | 31,885    |   |        |              | 13,612 |   |         |         | 45,497 | 
|                                                         |                                |                |         |        |           |   |        |              |       
|Net reserves, March 31, 2004                             |                                |                | 514,127 |        |           |   | 64,863 |              |        |   | 578,990 |        
|                                                         | Plus, reinsurance recoverables |                |         | 98,519 |           |   |        | 5,207        |        |   |         | 103,726 |       
|                                                         |                                |                |         |        |           |   |        |              |       
|Balance, March 31, 2004                                  |                                | $              | 612,646 |        |           |   | 70,070 |              |        | $ | 682,716 |        
|                                                         |                                |                |         |        |           |   |        |              |       
|Development as a % of December 31, 2003 net
    reserves |                                |                | -0.1%   |        |           |   | 2.1%   |              |        |   | 0.2%    |        
|                                                         |                                |                |         |        |           |   |        |              |       



| |                                          
| | -----------------------------------------
| | Other Significant Balance Sheet
    Items

Our invested assets consist primarily of fixed
maturity and equity securities, which are carried in the
unaudited Condensed Consolidated Balance Sheets, included
elsewhere in this report, at their estimated fair value,
investment real estate, and investment real estate limited
partnerships. At March 31, 2004, our investment portfolio
included net unrealized gains of approximately
$49.0 million, an increase of $3.5 million as compared
to December 31, 2003. Net unrealized gains are reported,
net of tax, in the shareholders equity

26



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section of the unaudited Condensed Consolidated
Balance Sheets, included elsewhere in this report, and
represented approximately 15.1% and 14.7% of consolidated
shareholders equity at March 31, 2004 and
December 31, 2003, respectively. Generally, the estimated
fair value of our fixed maturity securities is inversely related
to current interest rates. Therefore, as interest rates rise or
fall, our net unrealized gains will change accordingly. See
Item 3  Quantitative and Qualitative
Disclosure About Market Risk, for further information
regarding the potential impact of changes in prevailing interest
rates on the fair value of our fixed maturity portfolio. The
cross-referenced information is incorporated herein by reference.


Premiums receivable decreased $10.5 million,
or 16.1% to $54.9 million at March 31, 2004. The
decrease in the premiums receivable balance was primarily the
result of the collection of workers compensation premiums
written in 2003. With our exit from this line, these premium
writings were not replaced in 2004, and consequently, the
premium receivable balance has decreased.

Reinsurance recoverables increased
$3.4 million to $107.0 million at March 31, 2004,
compared to approximately $103.6 at December 31, 2003. The
increase in reinsurance recoverables related to an increase in
ceded case and IBNR reserves as a result of an increase in our
gross case and IBNR reserves, which increased $9.1 million
during the same period. Of the $107.0 million of
reinsurance recoverables at March 31, 2004, approximately
$17.9 million, $17.0 million net of ceded reinsurance
premiums payable, were ceded to Gerling Global Reinsurance
Corporation (Gerling). In 2002, Gerlings
parent company put Gerlings United States subsidiary into
run off, resulting in a series of A.M. Best rating downgrades
for Gerling. We have not experienced any difficulties or delays
in collecting amounts due from Gerling, and continue to believe
that they have adequate surplus and cash flow to satisfy their
obligations to us. However, there can be no assurance that
amounts currently recoverable from Gerling will ultimately be
collected. We are continuing to monitor Gerlings financial
strength and liquidity and may pursue a settlement in the future
if circumstances change. Our periodic analysis of Gerling
includes reviews of Gerlings publicly available financial
information, as well as monitoring of trade publications and
press releases. Should there be a material change in the
financial condition of Gerling, our assessment of its ability to
meet its obligations to us may also change. Our assessment of
the financial strength and liquidity of Gerling is the primary
basis by which we have determined not to record a valuation
allowance against this recoverable.

At March 31, 2004 and December 31,
2003, we have no recorded deferred federal income tax assets due
to the establishment of a valuation allowance during 2003. The
valuation allowance was established in the third quarter of 2003
as the Companys recent loss experience increased the
uncertainty with respect to the generation of sufficient taxable
income in the periods when the deductible temporary differences
that gave rise to the deferred tax assets are expected to
reverse. Once the Company has re-established a pattern of
profitability, the deferred tax asset valuation allowance may be
reduced in whole or in part upon evaluation of the availability
of future taxable income.

Other assets increased $9.4 million from
$41.0 million at December 31, 2003 to
$50.4 million at March 31, 2004. This increase was
primarily the result of the liquidation of a portion of our
high-yield bond portfolio near the March 31, 2004 period
end date. We record sales and purchases of securities on the
trade date; however, those sales or purchases may not settle
until a few days after the end of the period, which creates a
receivable or payable for securities related to the purchase or
sale. At March 31, 2004, we had recorded a receivable for
securities of $11.0 million compared to $680,000 at
December 31, 2003.

Unearned premiums decreased $4.4 million
from $103.8 million at December 31, 2003 to
$99.4 million at March 31, 2004. This decrease was
primarily the result of our exit from the workers
compensation line of business, which continues to earn premiums
written in 2003. Because we are in the process of non-renewing
all workers compensation business, the unearned premiums
being earned in 2004 are not being replaced with new premium
writings.

The $6.0 million obligation to an officer
recorded at December 31, 2003 was paid in its entirety in
January 2004 in connection with the retirement of the
Companys former President and CEO.

Other liabilities decreased $14.6 million
from $44.7 million at December 31, 2003 to
$30.1 million at March 31, 2004. In addition to
accounts payable and other accruals, other liabilities includes
ceded

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reinsurance premium payable and advanced
premiums. Ceded reinsurance premiums payable decreased
$10.5 million during the period as a result of a
$11.0 million payment made in February related to our
swing rated medical professional liability
reinsurance treaty. Also, January 1, is a heavy renewal
date for medical professional liability insurance, and as a
result, we often receive a large volume of premium payments
during late December in advance of the renewal date.
Accordingly, our advanced premium balance decreased to
$2.1 million at March 31, 2004, from $4.3 million
at December 31, 2003.


Shareholders equity at March 31, 2004
was $210.6 million, an increase of $8.8 million from
$201.8 million at December 31, 2003. The increase in
shareholders equity was primarily attributable to the
reported net income of $5.9 million for the three months
ended March 31, 2004 and an increase in unrealized gains,
net of tax, of $2.3 million. The Companys book value
per common share outstanding at March 31, 2004 was $24.77
per share, based on 8,499,997 shares outstanding, compared to
$23.89 per common share outstanding at December 31, 2003.
Total shares outstanding at December 31, 2003 were
8,445,807.

Contractual Obligations and Off-Balance Sheet
Arrangements

Our contractual obligations and off-balance sheet
arrangements are described in Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations contained in our Annual Report
on Form 10-K for the year ended December 31, 2003.
Except as described elsewhere in this report on Form 10-Q,
there have been no material changes to those obligations or
arrangements outside of the ordinary course of business during
the most recent quarter.

Effects of New Accounting
Pronouncements

The effects of new accounting pronouncements are
described in Note 2 to the unaudited Condensed Consolidated
Financial Statements included elsewhere in this report.






|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 3. | Quantitative and Qualitative Disclosures About
    Market Risk

General

Market risk is the risk of loss due to adverse
changes in market rates and prices. We invest primarily in fixed
maturity securities, which are interest-sensitive assets.
Accordingly, our primary market risk is exposure to changes in
interest rates.

As of March 31, 2004, 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, high-yield 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.

Equity securities are carried at quoted market
values. The fair value of publicly traded fixed maturity
securities is based upon independent market quotations. The fair
value of non-publicly traded securities is based on independent
third party pricing sources that use valuation models. The
valuation models used by the independent third party pricing
sources use indicative information such as ratings, industry,
coupon, and maturity along with publicly traded bond prices to
determine security specific spreads, and the ultimate fair value
of the non-publicly traded fixed maturity securities. Realized
gains or losses on sales or maturities of investments are
determined on a specific identification basis and are credited
or charged to income.

At March 31, 2004, approximately 93.9% of
our fixed maturity portfolio (excluding approximately
$13.2 million of private placement issues) was considered
investment grade. We define investment grade securities as those
that have a Standards & Poors credit rating of
BBB and above. Non-investment grade

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securities typically bear more credit risk than
those of investment grade quality. Credit risk is the risk that
amounts due the Company by creditors may not ultimately be
collected. We periodically review our investment portfolio for
any potential credit quality or collection issues and for any
securities with respect to which we consider any decline in
market value to be other than temporary.


In June 2003, the Company invested approximately
$20 million in mortgage-backed securities. Approximately
$11.2 million of the mortgage-backed securities purchased
are interest-only certificates. Unlike traditional fixed
maturity securities, the fair value of these investments is not
inversely related to interest rates, but rather, moves in the
same direction as interest rates as the underlying financial
instruments are mortgage-backed securities. With mortgage-backed
securities, as interest rates rise, prepayments will decrease,
which means that the interest-only certificates will generate
interest for a longer period of time than originally
anticipated, which in turn will increase the fair value of these
investments.

Approximately $7.0 million of these
interest-only certificates have an inverse floating rate of
interest tied to LIBOR. The Company has determined that these
inverse floating interest-only certificates contain
an embedded derivative as defined by SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Because the Company cannot readily segregate
the fair value of the embedded derivative from the host debt
instrument, the entire change in the fair value of these inverse
floating interest-only certificates is reported in earnings as
investment income. For the three months ended March 31,
2004, approximately $208,000 of income was included in
investment income for the change in fair value of the inverse
floating interest-only certificates.

Quantitative Information About Market
Risk

At March 31, 2004, our fixed income security
portfolio was valued at $641.7 million and had an average
modified duration of 2.76 years, compared to a portfolio
valued at $694.6 million with an average modified duration
of 2.89 years at December 31, 2003. Of the
$641.7 million at March 31, 2004, $11.2 million
were interest only certificates that had a modified duration of
1.00 year. The following tables show the effects of a
change in interest rates on the fair value and duration of our
entire fixed maturity portfolio at March 31, 2004 and
December 31, 2003, and then separately for our
interest-only certificates. 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.



| |                                                                           
| | --------------------------------------------------------------------------
| | Entire Fixed Maturity Portfolio (Including
    Interest-Only Certificates)

|                |  |                        |         |                       |                   |   |         |          |  |  |           |  |  |           |         |  |          |   |         |   |  |  |      | 
|--------------- |  | ---------------------- | ------- | --------------------- | ----------------- | - | ------- | -------- |  |  | --------- |  |  | --------- | ------- |  | -------- | - | ------- | - |  |  | ---- | 
|                |  |                        |         |                      
|                |  | March 31, 2004         |         |                       | December 31, 2003 |  
|                |  |                        |         |                       |                   |  
|                |  | Portfolio              |         |                       | Change in         |   |         | Modified |  |  | Portfolio |  |  | Change in |         |  | Modified |  
|Change in Rates |  | Value                  |         |                       | Value             |   |         | Duration |  |  | Value     |  |  | Value     |         |  | Duration |  
|                |  |                        |         |                       |                   |   |         |          |  |  |           |  |  |           |         |  |          |  
|                |  |                        |         |                       |                   |   |         |         
|                |  | (dollars in thousands) |         |                       |                   |   |         |          | 
|                |  |                        |         | )                     |                  
|                |  |                        |         | (dollars in thousands |                  
|+2%             |  | $                      | 617,688 |                       |                   | $ | (23,967 | )        |  |  | 2.77      |  |  | $         | 664,072 |  |          | $ | (30,561 | ) |  |  | 3.07 | 
|+1%             |  |                        | 630,490 |                       |                   |   | (11,165 | )        |  |  | 2.76      |  |  |           | 680,389 |  |          |   | (14,244 | ) |  |  | 2.81 | 
|0               |  |                        | 641,655 |                       |                   |   |         |          |  |  | 2.76      |  |  |           | 694,633 |  |          |   |         |   |  |  | 2.89 | 
|-1%             |  |                        | 652,756 |                       |                   |   | 11,101  |          |  |  | 2.71      |  |  |           | 708,257 |  |          |   | 13,624  |   |  |  | 2.80 | 
|-2%             |  |                        | 668,743 |                       |                   |   | 27,088  |          |  |  | 2.78      |  |  |           | 726,316 |  |          |   | 31,683  |   |  |  | 2.87 | 

Interest-Only Certificates

|                |  |                        |        |  |                        |   |        |          |  |  |           |  |  |           |        |  |          |   |        |   |  |  |      | 
|--------------- |  | ---------------------- | ------ |  | ---------------------- | - | ------ | -------- |  |  | --------- |  |  | --------- | ------ |  | -------- | - | ------ | - |  |  | ---- | 
|                |  |                        |        | 
|                |  | March 31, 2004         |        |  | December 31, 2003      |  
|                |  |                        |        |  |                        |  
|                |  | Portfolio              |        |  | Change in              |   |        | Modified |  |  | Portfolio |  |  | Change in |        |  | Modified |  
|Change in Rates |  | Value                  |        |  | Value                  |   |        | Duration |  |  | Value     |  |  | Value     |        |  | Duration |  
|                |  |                        |        |  |                        |   |        |          |  |  |           |  |  |           |        |  |          |  
|                |  |                        |        | 
|                |  | (dollars in thousands) |        |  | (dollars in thousands) |  
|+2%             |  | $                      | 17,946 |  |                        | $ | 6,759  |          |  |  | 1.79      |  |  | $         | 19,217 |  |          | $ | 5,751  |   |  |  | 1.57 | 
|+1%             |  |                        | 16,194 |  |                        |   | 5,007  |          |  |  | 1.59      |  |  |           | 17,792 |  |          |   | 4,326  |   |  |  | 1.44 | 
|0               |  |                        | 11,187 |  |                        |   |        |          |  |  | 1.00      |  |  |           | 13,466 |  |          |   |        |   |  |  | 1.02 | 
|-1%             |  |                        | 5,278  |  |                        |   | (5,909 | )        |  |  | 0.69      |  |  |           | 7,136  |  |          |   | (6,330 | ) |  |  | 1.03 | 
|-2%             |  |                        | 4,063  |  |                        |   | (7,124 | )        |  |  | 0.41      |  |  |           | 5,536  |  |          |   | (7,930 | ) |  |  | 0.42 | 

29



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|        |                        
|------- | -----------------------
|ITEM 4. | Controls and Procedures

As of the end of the period covered by this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures are effective to cause the material information
required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. There have
been no changes in the Companys internal controls over
financial reporting during the quarter ended March 31, 2004
that have materially affected, or are reasonably likely to
materially affect the Companys internal controls over
financial reporting.

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PART II. OTHER INFORMATION




ITEM 1.     Legal
Proceedings

On both December 30, 2003 and
February 20, 2004, separate putative shareholder class
action complaints were filed in United States District Court for
the Western District of Michigan against the Company, its former
President and Chief Executive Officer, and its Chief Financial
Officer. The complaints allege violations of federal securities
laws for certain disclosures made by the Company between
February 13, 2003 and November 6, 2003, regarding its
operating results and the adequacy of its reserves, and each
seeks monetary damages in an unspecified amount. The Company
denies the allegations and intends to vigorously defend the
lawsuits. On March 23, 2004, the Court dismissed the first
case and entered an Order approving a lead plaintiff in the
second case. A consolidated amended complaint was filed by the
lead plaintiff on May 7, 2004. The Company and the
individual defendants intend to file a motion to have the
complaint dismissed. While management believes that meritorious
defenses to the allegations exist, the ultimate disposition of
this litigation could have a material adverse impact on the
Companys financial position, liquidity and results of
operations.




ITEM 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits.

The Exhibits included as part of this report are
listed in the attached Exhibit Index, which is incorporated
herein by reference.

(b) Reports on Form 8-K.

During the three months ended March 31,
2004, the following reports on Form 8-K were filed by the
Company.

Current Report on Form 8-K filed
January 23, 2004 disclosing under Items 5 and 7
the issuance of a press release announcing an update on the
Companys exit from the workers compensation line of
business.

Current Report on Form 8-K filed
January 26, 2004 disclosing under Item 9 the
furnishing of materials that were prepared for a presentation to
an institutional investor conference occurring on
January 26, 2004.

Current Report on Form 8-K filed
January 30, 2004 disclosing under Items 5 and 7
the issuance of a press release announcing a change in the
Companys A.M. Bests financial strength rating.

Current Report on Form 8-K filed
February 13, 2004 disclosing under Item 12 the
issuance of a press release announcing its financial results for
the three months and year ended December 31, 2003 and
certain other information.

Current Report on Form 8-K filed
February 27, 2004 disclosing under Item 9 the
furnishing of materials that were prepared for a presentation to
an institutional investor conference occurring on March 2,
2004.

The information included in the reports filed on
January 26, February 13 and February 27, 2004 was
considered furnished rather than filed. No financial statements
were filed with any of the reports on Form 8-K filed during
the quarter.

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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: May 10, 2004



| |                                  
| | ---------------------------------
| | AMERICAN PHYSICIANS CAPITAL, INC.



| |     |                     
| | --- | --------------------
| | By: | /s/ R. KEVIN CLINTON

| |                                           
| | ------------------------------------------
| |                                           
| | R. Kevin Clinton                          
| | 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
|            |       |  |                    
|            | 10.35 |  |                     | Master Agency Agreement between American
    Physicians Assurance Corporation and SCW Agency
    Group, Inc., effective January 1, 2004 (filed as an
    exhibit to APCapitals Annual Report on Form 10-K for
    the year ended December 31, 2003 and incorporated herein by
    reference.)
|            | 31.1  |  |                     | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                                                            
|            | 31.2  |  |                     | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                                                            
|            | 32.1  |  |                     | Certification of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C.
    Section 1350 and Rule 13a-14(b) under the Securities
    Exchange Act of 1934.                                                                                                             

33