##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
| 
|  |  | For the quarterly period ended March 31, 2005                                               
| 
|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(Address of principal executive offices) |  | 48823(Zip Code)                         

Registrants telephone number, including area code:


(517) 351-1150


þ o


þ o












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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 |    |  | 19 | 
|Item 3                                                     |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |  | 31 | 
|Item 4                                                     |  | Controls and Procedures                                                                   |    |  | 33 | 
|                                                          
|PART II. OTHER INFORMATION                                
|Item 1                                                     |  | Legal Proceedings                                                                         |    |  | 34 | 
|Item 4                                                     |  | Submission of Matters to a Vote of a
    Security Holders                                 |    |  | 34 | 
|Item 6                                                     |  | Exhibits                                                                                  |    |  | 34 | 
|                                                           |  |                                                                                           |    |  |    | 
|Signatures                                                 |  |                                                                                           | 35 | 
|                                                           |  |                                                                                           |    |  |    | 
|Exhibit Index                                              |  |                                                                                           | 36 | 
|Certification of Chief Executive Officer to Rule 13a-14(a)
|Certification of Chief Financial Officer to Rule 13a-14(a)
|Certification of CEO and CFO Pursuant to 18 U.S.C.        



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PART I. FINANCIAL INFORMATION







|        |                     
|------- | --------------------
|ITEM 1. | FINANCIAL STATEMENTS

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Balance Sheets


|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |   |         |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------- | ------------ | - | ------- | ------- | --------- | 
|                                                                                                                                                                   |                                                                                      | March 31,                                  |         |         | December 31, |  
|                                                                                                                                                                   |                                                                                      | 2005                                       |         |         | 2004         |  
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | (Unaudited)                                |         |         |             
|                                                                                                                                                                   |                                                                                      | (In thousands, except                      |        
|                                                                                                                                                                   |                                                                                      | share data)                                |        
|ASSETS                                                                                                                                                            
|Investments:                                                                                                                                                       |                                                                                      |                                            |         |         |              |   |         |        
|                                                                                                                                                                   | Fixed maturities, at fair value                                                      |                                            | $       | 727,246 |              |   | $       | 657,706 |          
|                                                                                                                                                                   | Equity securities, at fair value                                                     |                                            |         | 2,513   |              |   |         | 2,091   |          
|                                                                                                                                                                   | Other investments                                                                    |                                            |         | 7,322   |              |   |         | 7,365   |          
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total investments                          |         |         | 737,081      |   |         |         | 667,162   | 
|Cash and cash equivalents                                                                                                                                          |                                                                                      |                                            | 103,229 |         |              |   | 190,936 |        
|Premiums receivable                                                                                                                                                |                                                                                      |                                            | 50,782  |         |              |   | 54,614  |        
|Reinsurance recoverable                                                                                                                                            |                                                                                      |                                            | 109,079 |         |              |   | 103,312 |        
|Federal income tax recoverable                                                                                                                                     |                                                                                      |                                            | 1,400   |         |              |   | 1,569   |        
|Property and equipment, net of accumulated depreciation                                                                                                            |                                                                                      |                                            | 11,914  |         |              |   | 12,181  |        
|Intangible assets                                                                                                                                                  |                                                                                      |                                            | 469     |         |              |   | 625     |        
|Other assets                                                                                                                                                       |                                                                                      |                                            | 40,154  |         |              |   | 39,500  |        
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total assets                               |         | $       | 1,054,108    |   |         | $       | 1,069,899 | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                  
|LIABILITIES                                                                                                                                                       
|Unpaid losses and loss adjustment expenses                                                                                                                         |                                                                                      | $                                          | 697,339 |         |              | $ | 693,630 |        
|Unearned premiums                                                                                                                                                  |                                                                                      |                                            | 89,200  |         |              |   | 90,040  |        
|Long-term debt                                                                                                                                                     |                                                                                      |                                            | 30,928  |         |              |   | 30,928  |        
|Other liabilities                                                                                                                                                  |                                                                                      |                                            | 34,133  |         |              |   | 50,977  |        
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total liabilities                          |         |         | 851,600      |   |         |         | 865,575   | 
|Minority Interest in Consolidated Subsidiary                                                                                                                       |                                                                                      |                                            | 2,289   |         |              |   | 2,200   |        
|Shareholders Equity                                                                                                                                               |                                                                                      |                                            |         |         |              |   |         |        
|Common stock, no par value, 50,000,000 shares authorized:
    8,716,640 and 8,671,984 shares outstanding at
    March 31, 2005 and December 31, 2004, respectively |                                                                                      |                                            |        |         |              |   |        |        
|Additional paid-in-capital                                                                                                                                         |                                                                                      |                                            | 87,856  |         |              |   | 86,956  |        
|Retained earnings                                                                                                                                                  |                                                                                      |                                            | 114,714 |         |              |   | 107,382 |        
|Unearned stock compensation                                                                                                                                        |                                                                                      |                                            | (271    | )       |              |   | (368    | )      
|Accumulated other comprehensive income:                                                                                                                            |                                                                                      |                                            |         |         |              |   |         |        
|                                                                                                                                                                   | Net unrealized appreciation on investments, net of deferred
    federal income taxes |                                            |         | (2,080  | )            |   |         | 8,154   |          
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total shareholders equity                 |         |         | 200,219      |   |         |         | 202,124   | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  
|                                                                                                                                                                   |                                                                                      | Total liabilities and shareholders equity |         | $       | 1,054,108    |   |         | $       | 1,069,899 | 
|                                                                                                                                                                   |                                                                                      |                                            |         |         |              |  



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Income


|                                                                  |                     |                                                          |        |        |        |   |        |        |        | 
|----------------------------------------------------------------- | ------------------- | -------------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                  |                     | Three Months Ended                                       |       
|                                                                  |                     | March 31,                                                |       
|                                                                  |                     |                                                          |       
|                                                                  |                     | 2005                                                     |        |        | 2004   |  
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | (In thousands, except                                    |       
|                                                                  |                     | per share data)                                          |       
|                                                                  |                     | (Unaudited)                                              |       
|Net premiums written                                              |                     | $                                                        | 42,231 |        |        | $ | 48,033 |       
|Change in net unearned premiums                                   |                     |                                                          | 1,662  |        |        |   | 6,044  |       
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  | Net premiums earned |                                                          |        | 43,893 |        |   |        | 54,077 |       
|Investment income                                                 |                     |                                                          | 10,642 |        |        |   | 13,213 |       
|Net realized (losses) gains                                       |                     |                                                          | (66    | )      |        |   | 1,636  |       
|Other income                                                      |                     |                                                          | 234    |        |        |   | 177    |       
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | Total revenues and other income                          |        |        | 54,703 |   |        |        | 69,103 | 
|Losses and loss adjustment expenses                               |                     |                                                          | 35,849 |        |        |   | 49,840 |       
|Underwriting expenses                                             |                     |                                                          | 9,130  |        |        |   | 12,265 |       
|Investment expenses                                               |                     |                                                          | 299    |        |        |   | 733    |       
|Interest expense                                                  |                     |                                                          | 524    |        |        |   | 401    |       
|Amortization expense                                              |                     |                                                          | 202    |        |        |   | 274    |       
|General and administrative expenses                               |                     |                                                          | 1,038  |        |        |   | 688    |       
|Other expenses                                                    |                     |                                                          | 70     |        |        |   | 121    |       
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | Total expenses                                           |        |        | 47,112 |   |        |        | 64,322 | 
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | Income before federal income taxes and minority interest |        |        | 7,591  |   |        |        | 4,781  | 
|Federal income tax expense (benefit)                              |                     |                                                          | 170    |        |        |   | (1,079 | )     
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | Income before minority interest                          |        |        | 7,421  |   |        |        | 5,860  | 
|Minority interest in net (income) loss of consolidated subsidiary |                     |                                                          | (89    | )      |        |   | 14     |       
|                                                                  |                     |                                                          |        |        |        |  
|                                                                  |                     | Net income                                               |        | $      | 7,332  |   |        | $      | 5,874  | 
|                                                                  |                     |                                                          |        |        |        |  
|Net income per common share                                       |                     |                                                          |        |        |        |   |        |       
|                                                                  | Basic               |                                                          | $      | 0.85   |        |   | $      | 0.70   |       
|                                                                  | Diluted             |                                                          | $      | 0.82   |        |   | $      | 0.69   |       



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Comprehensive Income


|                            |                                                                                                                                                                                                    |                                   |       |        |         |   |       |        |       | 
|--------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ----- | ------ | ------- | - | ----- | ------ | ----- | 
|                            |                                                                                                                                                                                                    | Three Months Ended                |      
|                            |                                                                                                                                                                                                    | March 31,                         |      
|                            |                                                                                                                                                                                                    |                                   |      
|                            |                                                                                                                                                                                                    | 2005                              |       |        | 2004    |  
|                            |                                                                                                                                                                                                    |                                   |       |        |         |  
|                            |                                                                                                                                                                                                    | (In thousands)                    |      
|                            |                                                                                                                                                                                                    | (Unaudited)                       |      
|Net income                  |                                                                                                                                                                                                    | $                                 | 7,332 |        |         | $ | 5,874 |       
|Other comprehensive income: |                                                                                                                                                                                                    |                                   |       |        |         |   |       |       
|                            | Unrealized (depreciation) appreciation on investment
    securities arising during the period, net of deferred federal
    income tax (benefit) expense of $(3,592) in 2005 and $1,846 in
    2004 |                                   |       | (6,670 | )       |   |       | 3,428  |      
|                            | Change in deferred tax valuation allowance                                                                                                                                                         |                                   |       | (3,582 | )       |   |       |       |      
|                            | Less reclassification adjustment for realized losses
    (gains) on investment securities included in net income,
    net of income tax expense (benefit) of $10 in 2005 and $(622) in
    2004    |                                   |       | 18     |         |   |       | (1,155 | )    
|                            |                                                                                                                                                                                                    |                                   |       |        |         |  
|                            |                                                                                                                                                                                                    | Other comprehensive (loss) income |       |        | (10,234 | ) |       |        | 2,273 | 
|                            |                                                                                                                                                                                                    |                                   |       |        |         |  
|                            |                                                                                                                                                                                                    | Comprehensive (loss) income       |       | $      | (2,902  | ) |       | $      | 8,147 | 
|                            |                                                                                                                                                                                                    |                                   |       |        |         |  



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Cash Flows


|                                     |                                                                                   |                                                                   |                                                      |       |          |         |   |        |         |         |  
|------------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------- | ----- | -------- | ------- | - | ------ | ------- | ------- | -
|                                     |                                                                                   | Three Months Ended                                                |                                                     
|                                     |                                                                                   | March 31,                                                         |                                                     
|                                     |                                                                                   |                                                                   |                                                     
|                                     |                                                                                   | 2005                                                              |                                                      |       | 2004     |        
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   | (In thousands)                                                    |                                                     
|                                     |                                                                                   | (Unaudited)                                                       |                                                     
|Cash flows from operating activities |                                                                                   |                                                                   |                                                      |       |          |         |   |       
|                                     | Net income                                                                        |                                                                   | $                                                    | 7,332 |          |         | $ | 5,874  |        
|                                     | Adjustments to reconcile net income to net cash used in
    operating activities: |                                                                   |                                                      |       |          |         |   |        |        
|                                     |                                                                                   | Depreciation and amortization                                     |                                                      |       | 1,650    |         |   |        | 2,244   |        
|                                     |                                                                                   | Net realized losses (gains)                                       |                                                      |       | 66       |         |   |        | (1,636  | )      
|                                     |                                                                                   | Change in fair value of derivatives                               |                                                      |       | 819      |         |   |        | (208    | )      
|                                     |                                                                                   | Deferred federal income taxes                                     |                                                      |       |         |         |   |        | (1,079  | )      
|                                     |                                                                                   | Minority interest in net income (loss) of consolidated subsidiary |                                                      |       | 89       |         |   |        | (14     | )      
|                                     |                                                                                   | Changes in:                                                       |                                                      |       |          |         |   |        |         |        
|                                     |                                                                                   |                                                                   | Unpaid loss and loss adjustment expenses             |       |          | 3,709   |   |        |         | 9,111   |  
|                                     |                                                                                   |                                                                   | Unearned premiums                                    |       |          | (840    | ) |        |         | (4,420  | )
|                                     |                                                                                   |                                                                   | Other assets and liabilities                         |       |          | (19,264 | ) |        |         | (16,837 | )
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   |                                                                   | Net cash used in operating activities                |       |          | (6,439  | ) |        |         | (6,965  | )
|Cash flows from investing activities |                                                                                   |                                                                   |                                                      |       |          |         |   |       
|                                     | Purchases                                                                         |                                                                   |                                                      |       |          |         |   |        |        
|                                     |                                                                                   | Available-for-sale  fixed maturities                             |                                                      |       | (114,425 | )       |   |        | (11,073 | )      
|                                     |                                                                                   | Available-for-sale  equity securities                            |                                                      |       | (606     | )       |   |        | (7,828  | )      
|                                     |                                                                                   | Property and equipment                                            |                                                      |       | (259     | )       |   |        | (414    | )      
|                                     | Sales and maturities                                                              |                                                                   |                                                      |       |          |         |   |        |        
|                                     |                                                                                   | Available-for-sale  fixed maturities                             |                                                      |       | 33,049   |         |   |        | 67,630  |        
|                                     |                                                                                   | Available-for-sale  equity securities                            |                                                      |       | 62       |         |   |        | 5,165   |        
|                                     |                                                                                   | Real estate                                                       |                                                      |       |         |         |   |        | 2,255   |        
|                                     |                                                                                   | Property and equipment                                            |                                                      |       | 11       |         |   |        |        |        
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   |                                                                   | Net cash (used in) provided by investing activities  |       |          | (82,168 | ) |        |         | 55,735  |  
|Cash flows from financing activities |                                                                                   |                                                                   |                                                      |       |          |         |   |       
|                                     | Principal payment on note payable                                                 |                                                                   |                                                      |      |          |         |   | (6,000 | )      
|                                     | Proceeds from stock options exercised                                             |                                                                   |                                                      | 900   |          |         |   | 370    |        
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   |                                                                   | Net cash provided by (used in) financing activities  |       |          | 900     |   |        |         | (5,630  | )
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   |                                                                   | Net (decrease) increase in cash and cash equivalents |       |          | (87,707 | ) |        |         | 43,140  |  
|                                     |                                                                                   |                                                                   | Cash and cash equivalents, beginning of period       |       |          | 190,936 |   |        |         | 102,051 |  
|                                     |                                                                                   |                                                                   |                                                      |       |          |        
|                                     |                                                                                   |                                                                   | Cash and cash equivalents, end of period             |       | $        | 103,229 |   |        | $       | 145,191 |  
|                                     |                                                                                   |                                                                   |                                                      |       |          |        



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial
Statements  (Unaudited)




|   |                                
|-- | -------------------------------
|1. | Significant Accounting Policies



| |                                     
| | ------------------------------------
| | Basis of consolidation and reporting













| |                   
| | ------------------
| | Nature of business



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




| |                         
| | ------------------------
| | Stock-based Compensation





|                                                                                                                                                                       |             |                       |       |      |      |   |       |      | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------------------- | ----- | ---- | ---- | - | ----- | ---- | 
|                                                                                                                                                                       |             | Three Months Ended    |      
|                                                                                                                                                                       |             | March 31,             |      
|                                                                                                                                                                       |             |                       |      
|                                                                                                                                                                       |             | 2005                  |       |      | 2004 |  
|                                                                                                                                                                       |             |                       |       |      |      |  
|                                                                                                                                                                       |             | (In thousands, except |      
|                                                                                                                                                                       |             | per share data)       |      
|Net income as reported                                                                                                                                                 |             | $                     | 7,332 |      |      | $ | 5,874 |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects                                                         |             |                       | 63    |      |      |   | 65    |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards granted
    since 2000, net of related tax effects |             |                       | (123  | )    |      |   | (234  | )   
|                                                                                                                                                                       |             |                       |       |      |      |  
|Pro forma net income                                                                                                                                                   |             | $                     | 7,272 |      |      | $ | 5,705 |     
|                                                                                                                                                                       |             |                       |       |      |      |  
|Basic income per share                                                                                                                                                 |             |                       |       |      |      |   |       |     
|                                                                                                                                                                       | As reported |                       | $     | 0.85 |      |   | $     | 0.70 | 
|                                                                                                                                                                       | Pro forma   |                       | $     | 0.84 |      |   | $     | 0.68 | 
|Diluted income per share                                                                                                                                               |             |                       |       |      |      |   |       |     
|                                                                                                                                                                       | As reported |                       | $     | 0.82 |      |   | $     | 0.69 | 
|                                                                                                                                                                       | Pro forma   |                       | $     | 0.82 |      |   | $     | 0.67 | 







| |                                 
| | --------------------------------
| | Derivative Financial Instruments





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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)








| |                   
| | ------------------
| | Minority Interests











|   |                                         
|-- | ----------------------------------------
|2. | Effects of New Accounting Pronouncements





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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)












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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




|                      |       |                   |    |                   |        |   |                                |   |  |        |    |    |            |   |    |        |  |   |              |      |   |   |    |     |  |   |    |    | 
|--------------------- | ----- | ----------------- | -- | ----------------- | ------ | - | ------------------------------ | - |  | ------ | -- | -- | ---------- | - | -- | ------ |  | - | ------------ | ---- | - | - | -- | --- |  | - | -- | -- | 
|                      |       | Current Intrinsic |    | SFAS No. 123R     |        |   | Increase (Decrease) in Expense |  
|                      |       | Value Method      |    | Fair Value Method |        |   | Under SFAS No. 123R            |  
|                      |       |                   |    |                   |        |   |                                |  
|                      |       | Non-Vested        |    |                   | Stock  |   | Non-Vested                     |   |  | Stock  |    |    | Non-Vested |   |    | Stock  |  |   | Total of All |     
|                      |       | Stock             |    |                   | Option |   | Stock                          |   |  | Option |    |    | Stock      |   |    | Option |  |   | Stock Based  |     
|For the Quarter Ended |       | Awards            |    |                   | Grants |   | Awards                         |   |  | Grants |    |    | Awards     |   |    | Grants |  |   | Awards       |     
|                      |       |                   |    |                   |        |   |                                |   |  |        |    |    |            |   |    |        |  |   |              |     
|                      |       | (In thousands)    |   
|March 31, 2006        |       | $                 | 39 |                   |        | $ |                               |   |  | $      | 11 |    |            | $ | 30 |        |  | $ | (28          | )    |   | $ | 30 |     |  | $ | 2  |   
|June 30, 2006         |       |                   | 40 |                   |        |   |                               |   |  |        | 13 |    |            |   | 30 |        |  |   | (26          | )    |   |   | 30 |     |  |   | 4  |   
|September 30, 2006    |       |                   | 40 |                   |        |   |                               |   |  |        | 14 |    |            |   | 31 |        |  |   | (27          | )    |   |   | 31 |     |  |   | 4  |   
|December 31, 2006     |       |                   | 40 |                   |        |   |                               |   |  |        | 14 |    |            |   | 31 |        |  |   | (27          | )    |   |   | 31 |     |  |   | 4  |   
|March 31, 2007        |       |                   | 6  |                   |        |   |                               |   |  |        | 2  |    |            |   | 17 |        |  |   | (4           | )    |   |   | 17 |     |  |   | 13 |   
|                      |       |                   |    |                   |        |   |                                |   |  |        |    |    |            |   |    |        |  |   |              |      |  
|                      | Total |                   | $  | 165               |        |   | $                              |  |  |        | $  | 54 |            |   | $  | 139    |  |   | $            | (112 | ) |   | $  | 139 |  |   | $  | 27 | 
|                      |       |                   |    |                   |        |   |                                |   |  |        |    |    |            |   |    |        |  |   |              |      |  



|      |                                                                        
|----- | -----------------------------------------------------------------------
|Note: | Amounts reported in table are gross, not net of related tax
    effects





|   |                 
|-- | ----------------
|3. | Income Per Share





|                                                         |                                                                                                    |                  |       |       |      |   |       |       | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------- | ----- | ----- | ---- | - | ----- | ----- | 
|                                                         |                                                                                                    | Three Months     |      
|                                                         |                                                                                                    | Ended March 31,  |      
|                                                         |                                                                                                    |                  |      
|                                                         |                                                                                                    | 2005             |       |       | 2004 |  
|                                                         |                                                                                                    |                  |       |       |      |  
|                                                         |                                                                                                    | (In thousands,   |      
|                                                         |                                                                                                    | except per share |      
|                                                         |                                                                                                    | data)            |      
|Numerator for basic and diluted income per common share: |                                                                                                    |                  |       |       |      |   |       |      
|Net income                                               |                                                                                                    | $                | 7,332 |       |      | $ | 5,874 |      
|                                                         |                                                                                                    |                  |       |       |      |  
|Denominator:                                             |                                                                                                    |                  |       |       |      |   |       |      
|                                                         | Denominator for basic income per common share 
    weighted average shares outstanding            |                  |       | 8,648 |      |   |       | 8,411 | 
|                                                         | Effect of dilutive stock options and awards                                                        |                  |       | 271   |      |   |       | 116   | 
|                                                         |                                                                                                    |                  |       |       |      |  
|                                                         | Denominator for diluted income per common share 
    adjusted weighted average shares outstanding |                  | $     | 8,919 |      |   | $     | 8,527 | 
|                                                         |                                                                                                    |                  |       |       |      |  
|Net income  basic                                       |                                                                                                    | $                | 0.85  |       |      | $ | 0.70  |      
|Net income  diluted                                     |                                                                                                    | $                | 0.82  |       |      | $ | 0.69  |      



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



11



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)






|              |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |           | 
|------------- | ----------------- | -------------- | - | ------- | --------- |  | - | --------- |  |  | ------------ | ------- |  | ------------ | - | -------- | - |  | - | --------- | 
|              |                   | Medical        |   |         | Other     |  |   |           |  |  |              |        
|              |                   | Professional   |   |         | Insurance |  |   | Corporate |  |  | Intersegment |         |  |             
|              |                   | Liability      |   |         | Lines     |  |   | and Other |  |  | Eliminations |         |  | Consolidated |  
|              |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |  
|              |                   | (In thousands) |  
|Total assets: |                   |                |   |         |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |          
|              | March 31, 2005    |                | $ | 977,354 |           |  | $ | 70,803    |  |  | $            | 231,936 |  |              | $ | (225,985 | ) |  | $ | 1,054,108 | 
|              | December 31, 2004 |                | $ | 977,230 |           |  | $ | 75,704    |  |  | $            | 227,106 |  |              | $ | (210,141 | ) |  | $ | 1,069,899 | 

|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |   |      |      |   |       |        |        | 
|------------------------------------------------------- | ----------------------------------- | ----------------------------------------- | ----- | ------ | --------- | - | ---- | --------- | ----- | - | ------------ | ----- | ----- | ------------ | - | ---- | ---- | - | ----- | ------ | ------ | 
|                                                        |                                     | For the Three Months Ended March 31, 2005 |      
|                                                        |                                     |                                           |      
|                                                        |                                     | Medical                                   |       |        | Other     |   |      |          
|                                                        |                                     | Professional                              |       |        | Insurance |   |      | Corporate |       |   | Intersegment |       |       |             
|                                                        |                                     | Liability                                 |       |        | Lines     |   |      | and Other |       |   | Eliminations |       |       | Consolidated |  
|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |  
|                                                        |                                     | (In thousands)                            |      
|Revenues:                                               |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |   |      |      |   |       |       
|                                                        | Net premiums earned                 |                                           | $     | 42,155 |           |   | $    | 1,738     |       |   | $            |      |       |              | $ |     |      |   | $     | 43,893 |       
|                                                        | Investment income                   |                                           |       | 9,755  |           |   |      | 862       |       |   |              | 25    |       |              |   |     |      |   |       | 10,642 |       
|                                                        | Other revenue items                 |                                           |       | 114    |           |   |      | (5        | )     |   |              | 222   |       |              |   | (163 | )    |   |       | 168    |       
|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |  
|                                                        |                                     | Total revenues                            |       |        | 52,024    |   |      |           | 2,595 |   |              |       | 247   |              |   |      | (163 | ) |       |        | 54,703 | 
|Expenses:                                               |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |   |      |      |   |       |       
|                                                        | Loss and loss adjustment expenses   |                                           |       | 33,137 |           |   |      | 2,712     |       |   |              |      |       |              |   |     |      |   |       | 35,849 |       
|                                                        | Underwriting expenses               |                                           |       | 8,755  |           |   |      | 375       |       |   |              |      |       |              |   |     |      |   |       | 9,130  |       
|                                                        | General and administrative expenses |                                           |       |       |           |   |      |          |       |   |              | 1,038 |       |              |   |     |      |   |       | 1,038  |       
|                                                        | Other expense items                 |                                           |       | 358    |           |   |      | 66        |       |   |              | 834   |       |              |   | (163 | )    |   |       | 1,095  |       
|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |  
|                                                        |                                     | Total expenses                            |       |        | 42,250    |   |      |           | 3,153 |   |              |       | 1,872 |              |   |      | (163 | ) |       |        | 47,112 | 
|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |  
|Income (loss) before income taxes and minority interest |                                     | $                                         | 9,774 |        |           | $ | (558 | )         |       | $ | (1,625       | )     |       | $            |  |      |      | $ | 7,591 |       
|                                                        |                                     |                                           |       |        |           |   |      |           |       |   |              |       |       |              |  

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (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 |       
|                                                        |                                     |                                           |       |        |           |   |        |           |        |   |              |     |       |              |  



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



|                   |                                   |                          |   |         |            |  |       |            |        |  |            |        |        |   |   |         |         | 
|------------------ | --------------------------------- | ------------------------ | - | ------- | ---------- |  | ----- | ---------- | ------ |  | ---------- | ------ | ------ | - | - | ------- | ------- | 
|                   |                                   | March 31, 2005           |  
|                   |                                   |                          |  
|                   |                                   |                          |   | Gross   |            |  | Gross |            |        | 
|                   |                                   | Amortized                |   |         | Unrealized |  |       | Unrealized |        |  | Estimated  |       
|                   |                                   | Cost/Cost                |   |         | Gains      |  |       | Losses     |        |  | Fair Value |       
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |       
|                   |                                   | (In thousands)           |  
|Available-for-sale |                                   |                          |   |         |            |  |       |            |        |  |            |        |        |   |   |        
|                   | U.S. government obligations       |                          | $ | 136,647 |            |  | $     | 338        |        |  | $          | (1,062 | )      |   | $ | 135,923 |        
|                   | States and political subdivisions |                          |   | 4,665   |            |  |       | 230        |        |  |            |       |        |   |   | 4,895   |        
|                   | Corporate securities              |                          |   | 342,139 |            |  |       | 14,591     |        |  |            | (400   | )      |   |   | 356,330 |        
|                   | Mortgage-backed securities        |                          |   | 220,888 |            |  |       | 866        |        |  |            | (1,592 | )      |   |   | 220,162 |        
|                   | Other debt securities             |                          |   | 9,742   |            |  |       | 194        |        |  |            |       |        |   |   | 9,936   |        
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |       
|                   |                                   | Fixed maturities         |   |         | 714,081    |  |       |            | 16,219 |  |            |        | (3,054 | ) |   |         | 727,246 | 
|                   | Equity securities                 |                          |   | 2,552   |            |  |       |           |        |  |            | (39    | )      |   |   | 2,513   |        
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |       
|                   |                                   | Total available-for-sale |   | $       | 716,633    |  |       | $          | 16,219 |  |            | $      | (3,093 | ) |   | $       | 729,759 | 
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |       

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)


|                   |                                   |                          |   |         |            |  |       |            |        |  |            |      |      |   |   |         |         | 
|------------------ | --------------------------------- | ------------------------ | - | ------- | ---------- |  | ----- | ---------- | ------ |  | ---------- | ---- | ---- | - | - | ------- | ------- | 
|                   |                                   | December 31, 2004        |  
|                   |                                   |                          |  
|                   |                                   |                          |   | Gross   |            |  | Gross |            |        | 
|                   |                                   | Amortized                |   |         | Unrealized |  |       | Unrealized |        |  | Estimated  |     
|                   |                                   | Cost/Cost                |   |         | Gains      |  |       | Losses     |        |  | Fair Value |     
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |     
|                   |                                   | (In thousands)           |  
|Available-for-sale |                                   |                          |   |         |            |  |       |            |        |  |            |      |      |   |   |        
|                   | U.S. government obligations       |                          | $ | 150,787 |            |  | $     | 1,020      |        |  | $          | (242 | )    |   | $ | 151,565 |        
|                   | States and political subdivisions |                          |   | 5,173   |            |  |       | 331        |        |  |            |     |      |   |   | 5,504   |        
|                   | Corporate securities              |                          |   | 342,046 |            |  |       | 20,185     |        |  |            | (24  | )    |   |   | 362,207 |        
|                   | Mortgage-backed securities        |                          |   | 125,838 |            |  |       | 2,816      |        |  |            | (300 | )    |   |   | 128,354 |        
|                   | Other debt securities             |                          |   | 9,767   |            |  |       | 309        |        |  |            |     |      |   |   | 10,076  |        
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |     
|                   |                                   | Fixed maturities         |   |         | 633,611    |  |       |            | 24,661 |  |            |      | (566 | ) |   |         | 657,706 | 
|                   | Equity securities                 |                          |   | 2,007   |            |  |       | 84         |        |  |            |     |      |   |   | 2,091   |        
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |     
|                   |                                   | Total available-for-sale |   | $       | 635,618    |  |       | $          | 24,745 |  |            | $    | (566 | ) |   | $       | 659,797 | 
|                   |                                   |                          |   |         |            |  |       |            |        |  |            |     





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







|   |                                           
|-- | ------------------------------------------
|7. | Restructuring Charges and Other Exit Costs



| |                     
| | --------------------
| | Termination benefits



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




|                                 |  |                |     |   |                   |   |      |  
|-------------------------------- |  | -------------- | --- | - | ----------------- | - | ---- | -
|                                 |  | Three          |     |   |                  
|                                 |  | Months Ended   |     |   | Year Ended        |  
|                                 |  | March 31, 2005 |     |   | December 31, 2004 |  
|                                 |  |                |     |   |                   |  
|                                 |  | (In thousands) |    
|Balance, January 1               |  | $              | 101 |   |                   | $ | 727  |  
|Employee separations             |  |                | 26  |   |                   |   | 185  |  
|Payments                         |  |                | (14 | ) |                   |   | (811 | )
|                                 |  |                |     |   |                   |  
|Balance, March 31 or December 31 |  | $              | 113 |   |                   | $ | 101  |  
|                                 |  |                |     |   |                   |  





| |                           
| | --------------------------
| | Contract termination costs





|                                 |  |                |      |   |                   |   |       |  
|-------------------------------- |  | -------------- | ---- | - | ----------------- | - | ----- | -
|                                 |  | Three          |      |   |                  
|                                 |  | Months Ended   |      |   | Year Ended        |  
|                                 |  | March 31, 2005 |      |   | December 31, 2004 |  
|                                 |  |                |      |   |                   |  
|                                 |  | (In thousands) |     
|Balance, January 1               |  | $              | 921  |   |                   | $ |      |  
|Payments                         |  |                | (102 | ) |                   |   | (170  | )
|Contract termination costs       |  |                |     |   |                   |   | 1,091 |  
|Changes in estimated cash flows  |  |                | 44   |   |                   |   |      |  
|Discount accretion               |  |                | 20   |   |                   |   |      |  
|                                 |  |                |      |   |                   |  
|Balance, March 31 or December 31 |  | $              | 883  |   |                   | $ | 921   |  
|                                 |  |                |      |   |                   |  



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




|   |             
|-- | ------------
|8. | Income Taxes



|                                 |       |                    |        |     |      |   |        |        |  
|-------------------------------- | ----- | ------------------ | ------ | --- | ---- | - | ------ | ------ | -
|                                 |       | Three Months Ended |       
|                                 |       | March 31,          |       
|                                 |       |                    |       
|                                 |       | 2005               |        |     | 2004 |  
|                                 |       |                    |        |     |      |  
|Current expense                  |       | $                  | 398    |     |      | $ |       |       
|Deferred benefit                 |       |                    | 2,210  |     |      |   | 1,546  |       
|Deferred tax valuation allowance |       |                    | (2,438 | )   |      |   | (2,625 | )     
|                                 |       |                    |        |     |      |  
|                                 | Total |                    | $      | 170 |      |   | $      | (1,079 | )
|                                 |       |                    |        |     |      |  



|                      |                     |                              |       |        |      |  |      |       |    |   |        |        |   |  |       |       |   
|--------------------- | ------------------- | ---------------------------- | ----- | ------ | ---- |  | ---- | ----- | -- | - | ------ | ------ | - |  | ----- | ----- | --
|                      |                     | Three Months Ended March 31, |      
|                      |                     |                              |      
|                      |                     | 2005                         |       |        | 2004 | 
|                      |                     |                              |       |        |      | 
|Income before taxes   |                     | $                            | 7,591 |        |      |  |      |       |    | $ | 4,781  |        |   |  |       |      
|                      |                     |                              |       |        |      |  |      |       |    |   |        |       
|Tax at statutory rate |                     |                              | 2,658 |        |      |  | 35.0 | %     |    |   | 1,673  |        |   |  | 35.0  | %    
|Tax effect of:        |                     |                              |       |        |      |  |      |       |    |   |        |        |   |  |       |      
|                      | Tax exempt interest |                              |       | (57    | )    |  |      | (0.8  | )% |   |        | (107   | ) |  |       | (2.2  | )%
|                      | Other items, net    |                              |       | 7      |      |  |      | 0.1   | %  |   |        | (20    | ) |  |       | (0.4  | )%
|                      | Valuation allowance |                              |       | (2,438 | )    |  |      | (32.2 | )% |   |        | (2,625 | ) |  |       | (55.0 | )%
|                      |                     |                              |       |        |      |  |      |       |    |   |        |       
|                      |                     | $                            | 170   |        |      |  | 2.2  | %     |    | $ | (1,079 | )      |   |  | (22.6 | )%   
|                      |                     |                              |       |        |      |  |      |       |    |   |        |       



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




|                                                  |                                     |                                |         |        |              |  |         |        |        | 
|------------------------------------------------- | ----------------------------------- | ------------------------------ | ------- | ------ | ------------ |  | ------- | ------ | ------ | 
|                                                  |                                     | March 31,                      |         |        | December 31, | 
|                                                  |                                     | 2005                           |         |        | 2004         | 
|                                                  |                                     |                                |         |        |              | 
|                                                  |                                     | (In thousands)                 |        
|Deferred tax assets arising from                  |                                     |                                |         |        |              |  |         |       
|                                                  | Losses and loss adjustment expenses |                                | $       | 27,518 |              |  | $       | 27,612 |       
|                                                  | Net operating loss carryforwards    |                                |         | 12,333 |              |  |         | 14,225 |       
|                                                  | Unearned and advanced premiums      |                                |         | 6,492  |              |  |         | 6,884  |       
|                                                  | Minimum tax credits                 |                                |         | 8,569  |              |  |         | 8,445  |       
|                                                  | Realized losses on investments      |                                |         | 2,642  |              |  |         | 2,633  |       
|                                                  | Goodwill                            |                                |         | 4,423  |              |  |         | 4,509  |       
|                                                  | Other                               |                                |         | 2,405  |              |  |         | 2,598  |       
|                                                  |                                     |                                |         |        |              | 
|                                                  |                                     | Total deferred tax assets      |         |        | 64,382       |  |         |        | 66,906 | 
|                                                  |                                     |                                |         |        |              | 
|Deferred tax liabilities arising from             |                                     |                                |         |        |              |  |         |       
|                                                  | Deferred policy acquisition costs   |                                |         | 2,810  |              |  |         | 2,758  |       
|                                                  | Net unrealized gains on securities  |                                |         | 4,848  |              |  |         | 8,430  |       
|                                                  | Other                               |                                |         | 2,020  |              |  |         | 2,352  |       
|                                                  |                                     |                                |         |        |              | 
|                                                  |                                     | Total deferred tax liabilities |         |        | 9,678        |  |         |        | 13,540 | 
|                                                  |                                     |                                |         |        |              | 
|Net deferred tax asset before valuation allowance |                                     |                                | 54,704  |        |              |  | 53,366  |       
|Valuation allowance                               |                                     |                                | (54,704 | )      |              |  | (53,366 | )     
|                                                  |                                     |                                |         |        |              | 
|                                                  | Net deferred tax asset              |                                | $       |       |              |  | $       |       |       
|                                                  |                                     |                                |         |        |              | 



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial
Statements  (Unaudited)  (Continued)




|                                                      |                                             |                                                                                                   |         |   |          |   |         |   |        |  
|----------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------- | - | -------- | - | ------- | - | ------ | -
|                                                      |                                             | March 31,                                                                                         |         |   | December |  
|                                                      |                                             | 2005                                                                                              |         |   | 2004     |  
|                                                      |                                             |                                                                                                   |         |   |          |  
|                                                      |                                             | (In thousands)                                                                                    |        
|Valuation allowance balance, January 1                |                                             | $                                                                                                 | (53,366 | ) |          | $ | (50,672 | )
|                                                      | Change in valuation allowance allocated to: |                                                                                                   |         |   |          |   |         |   |       
|                                                      |                                             | Federal income tax benefit (expense) from operations                                              |         |   | 2,438    |   |         |   | 6,621  |  
|                                                      |                                             | Unrealized depreciation on investment securities allocated to
    other comprehensive income      |         |   | (3,582   | ) |         |   | (7,512 | )
|                                                      |                                             | Incremental tax benefit from stock based compensation allocated
    to additional paid in capital |         |   | (228     | ) |         |   | (1,775 | )
|                                                      |                                             | Other items allocated to shareholders equity                                                     |         |   | 34       |   |         |   | (28    | )
|                                                      |                                             |                                                                                                   |         |   |          |  
|Valuation allowance balance, March 31, or December 31 |                                             | $                                                                                                 | (54,704 | ) |          | $ | (53,366 | )
|                                                      |                                             |                                                                                                   |         |   |          |  



|                                                         |  |                |        |        |            |   |         |            |  |  |      | 
|-------------------------------------------------------- |  | -------------- | ------ | ------ | ---------- | - | ------- | ---------- |  |  | ---- | 
|                                                         |  |                |        | Annual |            |   | Year of |           
|                                                         |  | Amount         |        |        | Limitation |   |         | Expiration | 
|                                                         |  |                |        |        |            |   |         |            | 
|                                                         |  | (In thousands) |        |        |            |   |        
|New Mexico Physicians Mutual Liability Company merger(2) |  | $              | 2,331  |        |            | $ | 575     |            |  |  | 2010 | 
|State Mutual Insurance Company merger(2)                 |  | $              | 2,037  |        |            | $ | 340     |            |  |  | 2012 | 
|2003 net operating loss(1)                               |  | $              | 30,869 |        |            |   | N/A     |            |  |  | 2018 | 






|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | There is 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.          



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The process of estimating the reserves for unpaid losses and
    loss adjustment expenses involves significant judgment and is
    complex and imprecise due to the number of variables and
    assumptions inherent in the estimation process. These variables
    include the effects on ultimate loss payments of internal
    factors such as changes in claims handling practices and changes
    in the mix of our products, as well as external factors such as
    changes in loss severity trends, economic inflation, judicial
    trends and legislative and regulatory changes. In addition,
    medical professional liability claims may take several years to
    resolve due to typical delays in reporting claims to us, the
    often lengthy discovery process, and the time necessary to
    defend the claim. Also, claims with similar characteristics may
    result in very different ultimate losses depending on the state
    or region where the claim occurred. All of these factors
    contribute to the variability in estimating ultimate loss
    payments, especially since the effects of many of these
    variables cannot be directly quantified, particularly on a
    prospective basis. 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. Any such adjustments could
    materially and adversely affect our results of operations for
    the period with respect to which the adjustment is made. Due to
    the volatility of losses in the medical professional liability
    and workers compensation industries, adjustments have
    occurred in each of the last several years, and additional
    adjustments may occur in the future.
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | 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 additional
    reserve enhancements. Additional reserve enhancements may be
    necessary due to the volatility of loss reserves on these
    run-off lines. Run-off lines typically have increased volatility
    as reported and paid claim trends often emerge differently than
    those that have been historically indicated, thus increasing the
    uncertainty inherent in reserve estimates, especially on
    longer-tailed lines such as workers compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | If we are unable to timely and effectively convert data from our
    New Mexico policy administration information system to the same
    system as used for the underwriting and claims function in our
    other locations, underwriting and claim controls related to our
    New Mexico operations may continue to operate ineffectively. As
    a result, errors or inaccuracies in our processing and recording
    of premiums, paid losses and loss adjustment expenses and case
    reserves may not be detected on a timely basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Although we are taking steps to remediate these control
    deficiencies, there can be no assurance that we will be
    effective in doing so. If our remediation efforts are
    unsuccessful, there will continue to be a more than remote
    likelihood that a material misstatement in our financial
    statements relating to our New Mexico operation will not be
    detected.
|
| |  | 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.                                                                                                                                                                                                                 
|
| |  | Tort reform is currently being considered in various forms by
    Congress. If enacted, such reform could preempt state tort
    reforms currently in effect in the markets in which we do
    business. If federal reforms are less favorable than those
    currently in place in our markets, such reforms could have a
    material adverse effect on our business.                
|
| |  | 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.                                                                                                                                                                                                                                                                      
|
| |  | We may be unable to collect the full amount of reinsurance
    recoverable from PMA Capital Insurance Company and/or Converium
    Reinsurance (NA), Inc., as well as our other reinsurers, if
    their cash flow or surplus levels are inadequate to make claim
    payments, which could result in a future charge to income.                                                       
|
| |  | If reinsurance rates rise significantly or reinsurance from
    creditworthy reinsurers becomes unavailable, our results of
    operations and financial condition may be adversely affected.                                                                                                                                                                                          
|
| |  | The concentration of our business in Michigan, Illinois, Ohio
    and New Mexico 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 that 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 our financial condition or results
    of operations.                                                                                                     
|
| |  | 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.                                                                                                                                          
|
| |  | An increase in short-term interest rates will increase our debt
    service costs related to our variable rate long-term debt.                                                                                                                                                                                                                                                         

20



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| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



Overview of APCapitals Operations




Significant Accounting Policies






Description of Ratios Analyzed






| |                                              
| | ---------------------------------------------
| | GAAP Ratios and Other GAAP Financial Measures



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| |                         
| | ------------------------
| | Accident Year Loss Ratio



Results of Operations-Three Months Ended March 31, 2005
Compared to Three Months Ended March 31, 2004






| |                                   
| | ----------------------------------
| | Consolidated Results of Operations



|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |        |        |       |  |        |        |      |  
|----------------------------- | ----------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------- | ------ | ------ | ----- | - | ------ | ------ | ----- | ---------- | ------ | ------ | ----- |  | ------ | ------ | ---- | -
|                              |                                     | For the Three Months Ended March 31,                          |                                                         
|                              |                                     |                                                               |                                                         
|                              |                                     |                                                               |                                                          | Change |       
|                              |                                     |                                                               |                                                          |        |       
|                              |                                     | 2005                                                          |                                                          |        | 2004   |       |   | Dollar |        |       | Percentage |       
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     | (Dollars in thousands)                                        |                                                         
|Underwriting gain (loss)      |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |        |        |       |  |       
|                              | Medical professional liability      |                                                               | $                                                        | 263    |        |       | $ | (5,403 | )      |       | $          | 5,666  |        |       |  | (104.9 | )%    
|                              | Other insurance lines               |                                                               |                                                          | (1,349 | )      |       |   | (2,625 | )      |       |            | 1,276  |        |       |  | (48.6  | )%    
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     | Total underwriting gain (loss)                                |                                                          |        | (1,086 | )     |   |        | (8,028 | )     |            |        | 6,942  |       |  |        | (86.5  | )%  
|Other revenue (expense) items |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |        |        |       |  |       
|                              | Investment income                   |                                                               |                                                          | 10,642 |        |       |   | 13,213 |        |       |            | (2,571 | )      |       |  | (19.5  | )%    
|                              | Net realized (losses) gains         |                                                               |                                                          | (66    | )      |       |   | 1,636  |        |       |            | (1,702 | )      |       |  | (104.0 | )%    
|                              | Other income                        |                                                               |                                                          | 234    |        |       |   | 177    |        |       |            | 57     |        |       |  | 32.2   | %     
|                              | Investment expenses                 |                                                               |                                                          | (299   | )      |       |   | (733   | )      |       |            | 434    |        |       |  | (59.2  | )%    
|                              | Interest expense                    |                                                               |                                                          | (524   | )      |       |   | (401   | )      |       |            | (123   | )      |       |  | 30.7   | %     
|                              | Amortization expense                |                                                               |                                                          | (202   | )      |       |   | (274   | )      |       |            | 72     |        |       |  | (26.3  | )%    
|                              | General and administrative expenses |                                                               |                                                          | (1,038 | )      |       |   | (688   | )      |       |            | (350   | )      |       |  | 50.9   | %     
|                              | Other expenses                      |                                                               |                                                          | (70    | )      |       |   | (121   | )      |       |            | 51     |        |       |  | (42.1  | )%    
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     | Total other revenue and expense items                         |                                                          |        | 8,677  |       |   |        | 12,809 |       |            |        | (4,132 | )     |  |        | (32.3  | )%  
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     |                                                               | Income before federal income taxes and minority interest |        |        | 7,591 |   |        |        | 4,781 |            |        |        | 2,810 |  |        |        | 58.8 | %
|                              |                                     | Federal income tax expense (benefit)                          |                                                          |        | 170    |       |   |        | (1,079 | )     |            |        | 1,249  |       |  |        | (115.8 | )%  
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     |                                                               | Income before minority interest                          |        |        | 7,421 |   |        |        | 5,860 |            |        |        | 1,561 |  |        |        | 26.6 | %
|                              |                                     | Minority interest in (income) loss of consolidated subsidiary |                                                          |        | (89    | )     |   |        | 14     |       |            |        | (103   | )     |  |        | (735.7 | )%  
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       
|                              |                                     |                                                               | Net income                                               |        | $      | 7,332 |   |        | $      | 5,874 |            |        | $      | 1,458 |  |        |        | 24.8 | %
|                              |                                     |                                                               |                                                          |        |        |       |   |        |        |       |            |       



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



|                                                          |               |                              |        |        |        |        |        |        |        |        |            |        |        |        |        |       |       |       |   
|--------------------------------------------------------- | ------------- | ---------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ---------- | ------ | ------ | ------ | ------ | ----- | ----- | ----- | --
|                                                          |               | Three Months Ended March 31, |       
|                                                          |               |                              |       
|                                                          |               |                              |        | Change |       
|                                                          |               |                              |        |        |       
|                                                          |               | 2005                         |        |        | 2004   |        |        | Dollar |        |        | Percentage |       
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|                                                          |               | (Dollars in thousands)       |       
|Direct premiums written:                                  |               |                              |        |        |        |        |        |        |        |        |            |        |        |        |        |      
|                                                          | Illinois      |                              | $      | 17,000 |        |        | $      | 14,802 |        |        | $          | 2,198  |        |        |        | 14.8  | %    
|                                                          | Ohio          |                              |        | 8,670  |        |        |        | 10,406 |        |        |            | (1,736 | )      |        |        | (16.7 | )%   
|                                                          | Michigan      |                              |        | 9,701  |        |        |        | 9,177  |        |        |            | 524    |        |        |        | 5.7   | %    
|                                                          | Kentucky      |                              |        | 5,323  |        |        |        | 7,799  |        |        |            | (2,476 | )      |        |        | (31.7 | )%   
|                                                          | New Mexico    |                              |        | 5,440  |        |        |        | 5,025  |        |        |            | 415    |        |        |        | 8.3   | %    
|                                                          | Florida       |                              |        | 251    |        |        |        | 245    |        |        |            | 6      |        |        |        | 2.4   | %    
|                                                          | Florida  PIC |                              |        | 1,818  |        |        |        | 1,262  |        |        |            | 556    |        |        |        | 44.1  | %    
|                                                          | Nevada        |                              |        | 46     |        |        |        | 1,274  |        |        |            | (1,228 | )      |        |        | (96.4 | )%   
|                                                          | Other         |                              |        | 565    |        |        |        | 2,634  |        |        |            | (2,069 | )      |        |        | (78.5 | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|                                                          |               | Total                        |        | $      | 48,814 |        |        | $      | 52,624 |        |            | $      | (3,810 | )      |        |       | (7.2  | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Net premiums written                                      |               | $                            | 40,965 |        |        | $      | 44,249 |        |        | $      | (3,284     | )      |        |        | (7.4   | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Net premiums earned                                       |               | $                            | 42,155 |        |        | $      | 42,456 |        |        | $      | (301       | )      |        |        | (0.7   | )%   
|Incurred loss and LAE:                                    |               |                              |        |        |        |        |        |        |        |        |            |        |        |        |        |      
|                                                          |               | Current accident year losses |        |        | 34,687 |        |        |        | 39,098 |        |            |        | (4,411 | )      |        |       | (11.3 | )%   
|                                                          |               | Prior year losses            |        |        | (1,550 | )      |        |        | (413   | )      |            |        | (1,137 | )      |        |       | 275.3 | %    
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|                                                          |               |                              | Total  |        |        | 33,137 |        |        |        | 38,685 |            |        |        | (5,548 | )      |       |       | (14.3 | )%
|Underwriting expenses                                     |               |                              | 8,755  |        |        |        | 9,174  |        |        |        | (419       | )      |        |        | (4.6   | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Underwriting income (loss)                                |               | $                            | 263    |        |        | $      | (5,403 | )      |        | $      | 5,666      |        |        |        | (104.9 | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Income before federal income taxes and minority interests |               | $                            | 9,774  |        |        | $      | 6,982  |        |        | $      | 2,792      |        |        |        | (40.0  | )%   
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Loss ratio:                                               |               |                              |        |        |        |        |        |        |        |        |            |        |        |        |        |      
|                                                          | Accident year |                              |        | 82.3   | %      |        |        | 92.1   | %      |        |            | (9.8   | )%     |        |        |       |      
|                                                          | Prior years   |                              |        | (3.7   | )%     |        |        | (1.0   | )%     |        |            | (2.7   | )%     |        |        |       |      
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|                                                          | Calendar year |                              |        | 78.6   | %      |        |        | 91.1   | %      |        |            | (12.5  | )%     |        |        |       |      
|Underwriting expense ratio                                |               |                              | 20.8   | %      |        |        | 21.6   | %      |        |        | (0.8       | )%     |        |        |        |      
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       
|Combined ratio                                            |               |                              | 99.4   | %      |        |        | 112.7  | %      |        |        | (13.3      | )%     |        |        |        |      
|                                                          |               |                              |        |        |        |        |        |        |        |        |            |       

24



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25



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Reported Claim Counts by Quarter


|     |     |  |      |  |     |      |  |  |     |  |  |    |     |  |    |  |     |    |  |  |     |  |  |    |     |  |  |  |     |  |  |  |     | 
|---- | --- |  | ---- |  | --- | ---- |  |  | --- |  |  | -- | --- |  | -- |  | --- | -- |  |  | --- |  |  | -- | --- |  |  |  | --- |  |  |  | --- | 
|2003 |     |  | 2004 |  |     | 2005 | 
|     |     |  |      |  |     |      | 
|Q1   |     |  | Q2   |  |     | Q3   |  |  | Q4  |  |  | Q1 |     |  | Q2 |  |     | Q3 |  |  | Q4  |  |  | Q1 |    
|     |     |  |      |  |     |      |  |  |     |  |  |    |     |  |    |  |     |    |  |  |     |  |  |    |    
|     | 803 |  |      |  | 694 |      |  |  | 631 |  |  |    | 529 |  |    |  | 525 |    |  |  | 459 |  |  |    | 431 |  |  |  | 371 |  |  |  | 404 | 









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



|                                                        |               |                              |        |            |       |       |        |        |       |        |        |      |        |        |       |    |       |       |   
|------------------------------------------------------- | ------------- | ---------------------------- | ------ | ---------- | ----- | ----- | ------ | ------ | ----- | ------ | ------ | ---- | ------ | ------ | ----- | -- | ----- | ----- | --
|                                                        |               | Three Months Ended March 31, |       
|                                                        |               |                              |       
|                                                        |               |                              |        | Percentage |      
|                                                        |               | 2005                         |        |            | 2004  |       |        | Change |       |        | Change |     
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|                                                        |               | (Dollars in thousands)       |       
|Direct premiums written                                 |               | $                            | 1,128  |            |       | $     | 3,716  |        |       | $      | (2,588 | )    |        |        | (69.6 | )%
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Net premiums written                                    |               | $                            | 1,266  |            |       | $     | 3,784  |        |       | $      | (2,518 | )    |        |        | (66.5 | )%
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Net premiums earned                                     |               | $                            | 1,738  |            |       | $     | 11,621 |        |       | $      | (9,883 | )    |        |        | (85.0 | )%
|Incurred loss and LAE:                                  |               |                              |        |            |       |       |        |        |       |        |        |      |        |        |       |   
|                                                        |               | Current accident year losses |        |            | 1,390 |       |        |        | 9,742 |        |        |      | (8,352 | )      |       |    | (85.7 | )%   
|                                                        |               | Prior year losses            |        |            | 1,322 |       |        |        | 1,413 |        |        |      | (91    | )      |       |    | (6.4  | )%   
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|                                                        |               |                              | Total  |            |       | 2,712 |        |        |       | 11,155 |        |      |        | (8,443 | )     |    |       | (75.7 | )%
|Underwriting expenses                                   |               |                              | 375    |            |       |       | 3,091  |        |       |        | (2,716 | )    |        |        | (87.9 | )%
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Underwriting loss                                       |               | $                            | (1,349 | )          |       | $     | (2,625 | )      |       | $      | 1,276  |      |        |        | (48.6 | )%
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Loss before federal income taxes and minority interests |               | $                            | (558   | )          |       | $     | (1,079 | )      |       | $      | 521    |      |        |        | (48.3 | )%
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Loss ratio:                                             |               |                              |        |            |       |       |        |        |       |        |        |      |        |        |       |   
|                                                        | Accident year |                              |        | 80.0       | %     |       |        | 83.8   | %     |        |        | (3.8 | )%     |        |       |    |      
|                                                        | Prior years   |                              |        | 76.0       | %     |       |        | 12.2   | %     |        |        | 63.8 | %      |        |       |    |      
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|                                                        | Calendar year |                              |        | 156.0      | %     |       |        | 96.0   | %     |        |        | 60.0 | %      |        |       |    |      
|Underwriting expense ratio                              |               |                              | 21.6   | %          |       |       | 26.6   | %      |       |        | (5.0   | )%   |        |        |       |   
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     
|Combined ratio                                          |               |                              | 177.6  | %          |       |       | 122.6  | %      |       |        | 55.0   | %    |        |        |       |   
|                                                        |               |                              |        |            |       |       |        |        |       |        |        |     



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



Liquidity and Capital Resources






27



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##### Table of Contents















Financial Condition






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



28



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##### Table of Contents







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





|                  |  |                                     |         |   |          |   |         |           |  |   |             |  |  |                |       |  |  |   |       |  
|----------------- |  | ----------------------------------- | ------- | - | -------- | - | ------- | --------- |  | - | ----------- |  |  | -------------- | ----- |  |  | - | ----- | -
|                  |  |                                     |         |   |          |   |         | 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, 2004 |  | $                                   | 391,048 |   |          | $ | 143,809 |           |  | $ | 534,857     |  |  |                | 3,342 |  |  | $ | 117.0 |  
|Change            |  |                                     | (6,979  | ) |          |   | 9,800   |           |  |   | 2,821       |  |  |                | 2     |  |  |   | (2.2  | )
|                  |  |                                     |         |   |          |   |         |           |  |   |             |  |  |                |      
|March 31, 2005    |  | $                                   | 384,069 |   |          | $ | 153,609 |           |  | $ | 537,678     |  |  |                | 3,344 |  |  | $ | 114.9 |  
|                  |  |                                     |         |   |          |   |         |           |  |   |             |  |  |                |      



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|                                                     |                                |                |         |         |           |   |        |              |       |   |         |         |        | 
|---------------------------------------------------- | ------------------------------ | -------------- | ------- | ------- | --------- | - | ------ | ------------ | ----- | - | ------- | ------- | ------ | 
|                                                     |                                | Medical        |         |         | Other     |   |        |             
|                                                     |                                | Professional   |         |         | Insurance |   |        |             
|                                                     |                                | Liability      |         |         | Lines     |   |        | Consolidated |      
|                                                     |                                |                |         |         |           |   |        |              |      
|                                                     |                                | (In thousands) |        
|Balance, December 31, 2004                           |                                | $              | 634,304 |         |           | $ | 59,326 |              |       | $ | 693,630 |        
|                                                     | Less, reinsurance recoverables |                |         | 97,949  |           |   |        | 3,842        |       |   |         | 101,791 |       
|                                                     |                                |                |         |         |           |   |        |              |      
|Net reserves, December 31, 2004                      |                                |                | 536,355 |         |           |   | 55,484 |              |       |   | 591,839 |        
|Incurred related to                                  |                                |                |         |         |           |   |        |              |       |   |         |        
|                                                     | Current year                   |                |         | 34,687  |           |   |        | 1,390        |       |   |         | 36,077  |       
|                                                     | Prior years                    |                |         | (1,550  | )         |   |        | 1,322        |       |   |         | (228    | )     
|                                                     |                                |                |         |         |           |   |        |              |      
|                                                     |                                | Total          |         |         | 33,137    |   |        |              | 2,712 |   |         |         | 35,849 | 
|Paid related to                                      |                                |                |         |         |           |   |        |              |       |   |         |        
|                                                     | Current year                   |                |         | 166     |           |   |        | 602          |       |   |         | 768     |       
|                                                     | Prior years                    |                |         | 29,785  |           |   |        | 6,098        |       |   |         | 35,883  |       
|                                                     |                                |                |         |         |           |   |        |              |      
|                                                     |                                | Total          |         |         | 29,951    |   |        |              | 6,700 |   |         |         | 36,651 | 
|                                                     |                                |                |         |         |           |   |        |              |      
|Net reserves, March 31, 2005                         |                                |                | 539,541 |         |           |   | 51,496 |              |       |   | 591,037 |        
|                                                     | Plus, reinsurance recoverables |                |         | 102,671 |           |   |        | 3,631        |       |   |         | 106,302 |       
|                                                     |                                |                |         |         |           |   |        |              |      
|Balance, March 31, 2005                              |                                | $              | 642,212 |         |           | $ | 55,127 |              |       | $ | 697,339 |        
|                                                     |                                |                |         |         |           |   |        |              |      
|Development as a % of December 31, 2004 net reserves |                                |                | (0.3    | )%      |           |   | 2.4    | %            |       |   | 0.0     | %      
|                                                     |                                |                |         |         |           |   |        |              |      



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



|                                          |  |       |         |   |            |        |         |           |           |   |           |          |            |           |             |   |        |   |    |  |  |   |         |  
|----------------------------------------- |  | ----- | ------- | - | ---------- | ------ | ------- | --------- | --------- | - | --------- | -------- | ---------- | --------- | ----------- | - | ------ | - | -- |  |  | - | ------- | -
|                                          |  |       |         |   |            |        |         | Change in |           |   |           |          | Net Amount |          
|                                          |  |       |         |   |            | Net of |         |           | Valuation |   |           | Minority |            |           | Recorded in |  
|                                          |  | Gross |         |   | Tax Effect |        |         | Tax       |           |   | Allowance |          |            | Interests |             |   | Equity |  
|                                          |  |       |         |   |            |        |         |           |           |   |           |          |            |           |             |   |        |  
|Net unrealized gains at December 31, 2003 |  | $     | 45,549  |   |            | $      | (15,942 | )         |           | $ | 29,607    |          |            | $         |            |   |        |   |    |  |  | $ | 29,607  |  
|Change during 2004                        |  |       | (21,464 | ) |            |        | 7,512   |           |           |   | (13,952   | )        |            |           | (7,512      | ) |        |   | 11 |  |  |   | (21,453 | )
|                                          |  |       |         |   |            |        |         |           |           |   |           |          |            |           |             |   |        |  
|Net unrealized gains at December 31, 2004 |  |       | 24,085  |   |            |        | (8,430  | )         |           |   | 15,655    |          |            |           | (7,512      | ) |        |   | 11 |  |  |   | 8,154   |  
|Change during Q1 2005                     |  |       | (10,234 | ) |            |        | 3,582   |           |           |   | (6,652    | )        |            |           | (3,582      | ) |        |   |   |  |  |   | (10,234 | )
|                                          |  |       |         |   |            |        |         |           |           |   |           |          |            |           |             |   |        |  
|Net unrealized gains at March 31, 2005    |  | $     | 13,851  |   |            | $      | (4,848  | )         |           | $ | 9,003     |          |            | $         | (11,094     | ) |        | $ | 11 |  |  | $ | (2,080  | )
|                                          |  |       |         |   |            |        |         |           |           |   |           |          |            |           |             |   |        |  



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Contractual Obligations and Off-Balance Sheet Arrangements




31



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Effects of New Accounting Pronouncements









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

General






Qualitative Information About Market Risk












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Quantitative Information About Market Risk




Entire Fixed Maturity Portfolio (Including-Only
Certificates)


|                |  |                        |         |  |                        |   |         |          |  |  |           |  |  |           |         |  |          |   |         |   |  |  |      | 
|--------------- |  | ---------------------- | ------- |  | ---------------------- | - | ------- | -------- |  |  | --------- |  |  | --------- | ------- |  | -------- | - | ------- | - |  |  | ---- | 
|                |  | March 31, 2005         |         |  | December 31, 2004      |  
|                |  |                        |         |  |                        |  
|                |  | Portfolio              |         |  | Change in              |   |         | Modified |  |  | Portfolio |  |  | Change in |         |  | Modified |  
|Change in Rates |  | Value                  |         |  | Value                  |   |         | Duration |  |  | Value     |  |  | Value     |         |  | Duration |  
|                |  |                        |         |  |                        |   |         |          |  |  |           |  |  |           |         |  |          |  
|                |  | (Dollars in thousands) |         |  | (Dollars in thousands) |  
|+2%             |  | $                      | 666,870 |  |                        | $ | (60,376 | )        |  |  | 4.83      |  |  | $         | 612,330 |  |          | $ | (45,376 | ) |  |  | 4.58 | 
|+1%             |  |                        | 698,641 |  |                        |   | (28,605 | )        |  |  | 4.54      |  |  |           | 639,822 |  |          |   | (17,884 | ) |  |  | 3.63 | 
|0               |  |                        | 727,246 |  |                        |   |         |          |  |  | 3.33      |  |  |           | 657,706 |  |          |   |         |   |  |  | 2.77 | 
|-1%             |  |                        | 738,235 |  |                        |   | 10,989  |          |  |  | 1.66      |  |  |           | 665,172 |  |          |   | 7,466   |   |  |  | 1.89 | 
|-2%             |  |                        | 747,240 |  |                        |   | 19,994  |          |  |  | 1.58      |  |  |           | 677,559 |  |          |   | 19,853  |   |  |  | 1.97 | 

Interest-Only Certificates


|                |  |                        |       |  |                        |   |        |          |  |  |           |  |  |           |        |  |          |   |        |   |  |  |      | 
|--------------- |  | ---------------------- | ----- |  | ---------------------- | - | ------ | -------- |  |  | --------- |  |  | --------- | ------ |  | -------- | - | ------ | - |  |  | ---- | 
|                |  | March 31, 2005         |       |  | December 31, 2004      |  
|                |  |                        |       |  |                        |  
|                |  | Portfolio              |       |  | Change in              |   |        | Modified |  |  | Portfolio |  |  | Change in |        |  | Modified |  
|Change in Rates |  | Value                  |       |  | Value                  |   |        | Duration |  |  | Value     |  |  | Value     |        |  | Duration |  
|                |  |                        |       |  |                        |   |        |          |  |  |           |  |  |           |        |  |          |  
|                |  | (Dollars in thousands) |       |  | (Dollars in thousands) |  
|+2%             |  | $                      | 8,062 |  |                        | $ | 3,211  |          |  |  | 1.96      |  |  | $         | 10,289 |  |          | $ | 3,153  |   |  |  | 4.18 | 
|+1%             |  |                        | 5,687 |  |                        |   | 836    |          |  |  | 1.46      |  |  |           | 10,713 |  |          |   | 3,577  |   |  |  | 3.67 | 
|0               |  |                        | 4,851 |  |                        |   |        |          |  |  | 1.22      |  |  |           | 7,136  |  |          |   |        |   |  |  | 1.99 | 
|-1%             |  |                        | 2,260 |  |                        |   | (2,591 | )        |  |  | 0.54      |  |  |           | 2,240  |  |          |   | (4,896 | ) |  |  | 0.68 | 
|-2%             |  |                        | 1,008 |  |                        |   | (3,843 | )        |  |  | 0.34      |  |  |           | 1,601  |  |          |   | (5,535 | ) |  |  | 0.56 | 






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures



| |                                                     
| | ----------------------------------------------------
| | Evaluation of Disclosure Controls and
    Procedures







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| |                                 
| | --------------------------------
| | Remediation of Material Weakness









| |                                                         
| | --------------------------------------------------------
| | Changes in Internal Control Over Financial
    Reporting






PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings








|        |                                                          
|------- | ---------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of a Security
    Holders



|                        |  |           |           |       |          |  |         | 
|----------------------- |  | --------- | --------- | ----- | -------- |  | ------- | 
|                        |  |           |           | Votes |         
|Nominee                 |  | Votes For |           |       | Withheld | 
|                        |  |           |           |       |          | 
|AppaRao Mukkamala, M.D. |  |           | 6,722,023 |       |          |  | 101,097 | 
|Spencer L. Schneider    |  |           | 6,722,906 |       |          |  | 100,214 | 
|Joseph Stilwell         |  |           | 6,692,369 |       |          |  | 130,751 | 

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|                                                                                                 |  |     |           |  |         |  |        |         |  |  |           |  |  |  |   | 
|------------------------------------------------------------------------------------------------ |  | --- | --------- |  | ------- |  | ------ | ------- |  |  | --------- |  |  |  | - | 
|                                                                                                 |  |     |           |  |         |  |        | Broker  | 
|Proposal                                                                                         |  | For |           |  | Against |  |        | Abstain |  |  | Non-Votes | 
|                                                                                                 |  |     |           |  |         |  |        |         |  |  |           | 
|Ratification of appointment of BDO Seidman, LLP as independent
    registered public accountants |  |     | 6,783,589 |  |         |  | 37,928 |         |  |  | 1,603     |  |  |  |  | 






|        |         
|------- | --------
|Item 6. | Exhibits

Exhibits.




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SIGNATURES






| |                                      
| | -------------------------------------
| | 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 and

| |                        
| | -----------------------
| | Chief Financial Officer



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EXHIBIT INDEX


|            |    |                     |  |                                                                                                                                                                                                                                                                                                                                              
|----------- | -- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Exhibit Description
|            |    |                    
|            | 3  |                     |  | Amended and Restated Bylaws, as amended January 26, 2005
    (filed as an Exhibit to APCapitals Current Report on
    Form 8-K dated January 31, 2005 and incorporated
    herein by reference).                                                                                                                                            
|           
|            | 10 | .1                  |  | Form of Executive Employment Agreement dated February 23,
    2005, by and between American Physicians Assurance Corporation
    and each of R. Kevin Clinton, Frank H. Freund and Annette E.
    Flood (filed as an Exhibit to APCapitals Current Report on
    Form 8-K dated February 28, 2005 and incorporated
    herein by reference).
|           
|            | 10 | .2                  |  | Summary of Incentive Compensation Plan as of March 2005 (filed
    as an Exhibit to APCapitals Current Report on
    Form 8-K dated March 10, 2005 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 |                     |  | 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.                                                                                                                                                                
|           
|            | 99 |                     |  | Amendment No. 2 to Stock Purchase Agreement with Exhibits,
    dated as of April 11, 2005, by and among American
    Physicians Assurance Corporation and certain shareholders of
    Physicians Insurance Company of Wisconsin, Inc.                                                                                                        

37