##### 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 September 30, 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 48823


(Address of principal executive offices, including zip
code)


Registrants telephone number, including area code:


(517) 351-1150


þ o


þ o


o þ












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TABLE OF CONTENTS


|                                                                    |  |                                                                                           |    |  |    | 
|------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|                                                                   
|PART I. FINANCIAL INFORMATION                                      
|Item 1.                                                             |  | Financial Statements                                                                      |    |  | 3  | 
|                                                                    |  | 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 |    |  | 23 | 
|Item 3.                                                             |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |  | 38 | 
|Item 4.                                                             |  | Controls and Procedures                                                                   |    |  | 39 | 
|                                                                   
|PART II. OTHER
    INFORMATION                                     
|Item 2.                                                             |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                           |    |  | 41 | 
|Item 6.                                                             |  | Exhibits                                                                                  |    |  | 41 | 
|Signatures                                                          |  |                                                                                           | 42 | 
|Exhibit Index                                                       |  |                                                                                           | 43 | 
|Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
|Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
|Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350    
|Termination of Stock Purchase Agreement                            



2



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##### Table of Contents






PART I. FINANCIAL INFORMATION







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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Balance Sheets


|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |           |         |       |         |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------- | ------------------------------------------ | ------ | ------------ | --------- | ------- | ----- | ------- | --------- | 
|                                                                                                                                                                       |                                                                                      | September 30,                     |                                            |        | December 31, |          
|                                                                                                                                                                       |                                                                                      | 2005                              |                                            |        | 2004         |          
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      | (Unaudited)                       |                                            |        |             
|                                                                                                                                                                       |                                                                                      | (In thousands,                    |                                           
|                                                                                                                                                                       |                                                                                      | except share data)                |                                           
|ASSETS                                                                                                                                                                
|Investments:                                                                                                                                                           |                                                                                      |                                   |                                            |        |              |           |         |      
|                                                                                                                                                                       | Fixed-income securities                                                              |                                   |                                            |        |              |           |         |       |        
|                                                                                                                                                                       |                                                                                      | Available-for-sale, at fair value |                                            | $      | 252,268      |           |         | $     | 657,706 |          
|                                                                                                                                                                       |                                                                                      | Held-to-maturity (Note 1)         |                                            |        | 355,374      |           |         |       |        |          
|                                                                                                                                                                       | Equity securities, at fair value                                                     |                                   |                                            | 477    |              |           |         | 1,163 |        
|                                                                                                                                                                       | Other investments                                                                    |                                   |                                            | 13,122 |              |           |         | 8,293 |        
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      |                                   | Total investments                          |        |              | 621,241   |         |       |         | 667,162   | 
|Cash and cash equivalents                                                                                                                                              |                                                                                      |                                   | 229,323                                    |        |              |           | 190,936 |      
|Premiums receivable                                                                                                                                                    |                                                                                      |                                   | 56,441                                     |        |              |           | 54,614  |      
|Reinsurance recoverable                                                                                                                                                |                                                                                      |                                   | 108,014                                    |        |              |           | 103,312 |      
|Federal income tax recoverable                                                                                                                                         |                                                                                      |                                   |                                           |        |              |           | 1,569   |      
|Deferred federal income taxes                                                                                                                                          |                                                                                      |                                   | 48,469                                     |        |              |           |        |      
|Property and equipment, net of accumulated depreciation                                                                                                                |                                                                                      |                                   | 11,435                                     |        |              |           | 12,181  |      
|Other assets                                                                                                                                                           |                                                                                      |                                   | 39,690                                     |        |              |           | 40,125  |      
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      |                                   | Total assets                               |        | $            | 1,114,613 |         |       | $       | 1,069,899 | 
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                      
|LIABILITIES                                                                                                                                                           
|Unpaid losses and loss adjustment expenses                                                                                                                             |                                                                                      | $                                 | 687,940                                    |        |              | $         | 693,630 |      
|Unearned premiums                                                                                                                                                      |                                                                                      |                                   | 91,157                                     |        |              |           | 90,040  |      
|Federal income taxes payable                                                                                                                                           |                                                                                      |                                   | 297                                        |        |              |           |        |      
|Long-term debt                                                                                                                                                         |                                                                                      |                                   | 30,928                                     |        |              |           | 30,928  |      
|Other liabilities                                                                                                                                                      |                                                                                      |                                   | 41,953                                     |        |              |           | 50,977  |      
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      |                                   | Total liabilities                          |        |              | 852,275   |         |       |         | 865,575   | 
|Minority Interest in Consolidated Subsidiary                                                                                                                           |                                                                                      |                                   | 2,570                                      |        |              |           | 2,200   |      
|Shareholders Equity                                                                                                                                                   |                                                                                      |                                   |                                            |        |              |           |         |      
|Common stock, no par value, 50,000,000 shares authorized:
    8,501,685 and 8,671,984 shares outstanding at
    September 30, 2005 and December 31, 2004, respectively |                                                                                      |                                   |                                           |        |              |           |        |      
|Additional paid-in-capital                                                                                                                                             |                                                                                      |                                   | 81,768                                     |        |              |           | 86,956  |      
|Retained earnings                                                                                                                                                      |                                                                                      |                                   | 169,321                                    |        |              |           | 107,382 |      
|Unearned stock compensation                                                                                                                                            |                                                                                      |                                   | (150                                       | )      |              |           | (368    | )    
|Accumulated other comprehensive income:                                                                                                                                |                                                                                      |                                   |                                            |        |              |           |         |      
|                                                                                                                                                                       | Net unrealized appreciation on investments, net of deferred
    federal income taxes |                                   |                                            | 8,829  |              |           |         | 8,154 |        
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      |                                   | Total shareholders equity                 |        |              | 259,768   |         |       |         | 202,124   | 
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          
|                                                                                                                                                                       |                                                                                      |                                   | Total liabilities and shareholders equity |        | $            | 1,114,613 |         |       | $       | 1,069,899 | 
|                                                                                                                                                                       |                                                                                      |                                   |                                            |        |              |          



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##### Table of Contents






AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Income


|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |         |         |   |         |         |         | 
|----------------------------------------------------------------- | ------------------- | -------------------------------------------------------- | ------- | ------ | ----------------- | - | ------- | ------ | ------ | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                  |                     | Three Months Ended                                       |         |        | Nine Months Ended |  
|                                                                  |                     | September 30,                                            |         |        | September 30,     |  
|                                                                  |                     |                                                          |         |        |                   |  
|                                                                  |                     | 2005                                                     |         |        | 2004              |   |         | 2005   |        |   | 2004    |        
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | (In thousands, except per share data)                    |        
|                                                                  |                     | (Unaudited)                                              |        
|Net premiums written                                              |                     | $                                                        | 52,991  |        |                   | $ | 63,723  |        |        | $ | 123,414 |         |         | $ | 149,804 |        
|Change in net unearned premiums                                   |                     |                                                          | (12,820 | )      |                   |   | (14,968 | )      |        |   | 330     |         |         |   | 4,155   |        
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  | Net premiums earned |                                                          |         | 40,171 |                   |   |         | 48,755 |        |   |         | 123,744 |         |   |         | 153,959 |        
|Investment income                                                 |                     |                                                          | 10,752  |        |                   |   | 10,947  |        |        |   | 33,582  |         |         |   | 36,451  |        
|Net realized (losses) gains                                       |                     |                                                          | (428    | )      |                   |   | (332    | )      |        |   | (750    | )       |         |   | 1,233   |        
|Other income                                                      |                     |                                                          | 222     |        |                   |   | 156     |        |        |   | 687     |         |         |   | 562     |        
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | Total revenues and other income                          |         |        | 50,717            |   |         |        | 59,526 |   |         |         | 157,263 |   |         |         | 192,205 | 
|Losses and loss adjustment expenses                               |                     |                                                          | 30,794  |        |                   |   | 42,773  |        |        |   | 97,844  |         |         |   | 137,700 |        
|Underwriting expenses                                             |                     |                                                          | 7,538   |        |                   |   | 9,838   |        |        |   | 25,247  |         |         |   | 33,986  |        
|Investment expenses                                               |                     |                                                          | 540     |        |                   |   | 719     |        |        |   | 1,216   |         |         |   | 2,264   |        
|Interest expense                                                  |                     |                                                          | 601     |        |                   |   | 428     |        |        |   | 1,683   |         |         |   | 1,229   |        
|Amortization expense                                              |                     |                                                          | 202     |        |                   |   | 274     |        |        |   | 605     |         |         |   | 822     |        
|General and administrative expenses                               |                     |                                                          | 433     |        |                   |   | 706     |        |        |   | 2,269   |         |         |   | 2,912   |        
|Other expenses                                                    |                     |                                                          | 48      |        |                   |   | 15      |        |        |   | 480     |         |         |   | 162     |        
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | Total expenses                                           |         |        | 40,156            |   |         |        | 54,753 |   |         |         | 129,344 |   |         |         | 179,075 | 
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | Income before federal income taxes and minority interest |         |        | 10,561            |   |         |        | 4,773  |   |         |         | 27,919  |   |         |         | 13,130  | 
|Federal income tax expense (benefit)                              |                     |                                                          | 3,705   |        |                   |   | 226     |        |        |   | (34,393 | )       |         |   | (374    | )      
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | Income before minority interest                          |         |        | 6,856             |   |         |        | 4,547  |   |         |         | 62,312  |   |         |         | 13,504  | 
|Minority interest in net (income) loss of consolidated subsidiary |                     |                                                          | (31     | )      |                   |   | 2       |        |        |   | (373    | )       |         |   | 17      |        
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|                                                                  |                     | Net income                                               |         | $      | 6,825             |   |         | $      | 4,549  |   |         | $       | 61,939  |   |         | $       | 13,521  | 
|                                                                  |                     |                                                          |         |        |                   |   |         |        |        |   |         |        
|Net income  per common share                                     |                     |                                                          |         |        |                   |   |         |        |        |   |         |         |         |   |         |        
|                                                                  | Basic               |                                                          | $       | 0.81   |                   |   | $       | 0.54   |        |   | $       | 7.23    |         |   | $       | 1.60    |        
|                                                                  | Diluted             |                                                          | $       | 0.79   |                   |   | $       | 0.52   |        |   | $       | 7.08    |         |   | $       | 1.57    |        



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Comprehensive Income


|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |        |         |        |        |         |         |         |  
|--------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | --------------------------------- | ------ | ----------------- | ------ | ----- | ------ | ----- | ----- | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------- | -
|                            |                                                                                                                                                               | Three Months Ended                                                                                    |                                   |        | Nine Months Ended |       
|                            |                                                                                                                                                               | September 30,                                                                                         |                                   |        | September 30,     |       
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |       
|                            |                                                                                                                                                               | 2005                                                                                                  |                                   |        | 2004              |        |       | 2005   |       |       | 2004   |       
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       
|                            |                                                                                                                                                               | (In thousands)                                                                                        |                                  
|                            |                                                                                                                                                               | (Unaudited)                                                                                           |                                  
|Net income                  |                                                                                                                                                               | $                                                                                                     | 6,825                             |        |                   | $      | 4,549 |        |       | $     | 61,939 |        |         | $      | 13,521 |        
|Other comprehensive income: |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |        |         |        |        |        
|                            | Unrealized (depreciation) appreciation on
    available-for-sale investment securities arising during the
    period                                          |                                                                                                       |                                   | (3,524 | )                 |        |       | 3,594  |       |       |        | (9,869 | )       |        |        | (10,060 | )      
|                            | Amortization of net unrealized appreciation on held-to-maturity
    investment securities since the date of transfer from the
    available-for-sale category |                                                                                                       |                                   | (440   | )                 |        |       |       |       |       |        | (696   | )       |        |        |        |        
|                            | Adjustment for realized (gains) losses on investment
    securities included in net income                                                                    |                                                                                                       |                                   | (26    | )                 |        |       | (1,147 | )     |       |        | 42     |         |        |        | (5,789  | )      
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       
|                            |                                                                                                                                                               | Other comprehensive (loss) income before tax and minority
    interests                               |                                   |        | (3,990            | )      |       |        | 2,447 |       |        |        | (10,523 | )      |        |         | (15,849 | )      
|                            |                                                                                                                                                               | Deferred federal income tax (benefit) expense                                                         |                                   |        | (1,396            | )      |       |        | 858   |       |        |        | (3,683  | )      |        |         | (5,548  | )      
|                            |                                                                                                                                                               | (Decrease) increase in deferred tax valuation allowance
    (Note 8)                                  |                                   |        |                  |        |       |        | (858  | )     |        |        | (7,512  | )      |        |         | 5,548   |        
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       
|                            |                                                                                                                                                               | Other comprehensive (loss) income before minority interest                                            |                                   |        | (2,594            | )      |       |        | 2,447 |       |        |        | 672     |        |        |         | (15,849 | )      
|                            |                                                                                                                                                               | Minority interest in unrealized depreciation (appreciation), net
    of deferred federal income taxes |                                   |        | 6                 |        |       |        | (5    | )     |        |        | 3       |        |        |         | 2       |        
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       
|                            |                                                                                                                                                               |                                                                                                       | Other comprehensive (loss) income |        |                   | (2,588 | )     |        |       | 2,442 |        |        |         | 675    |        |         |         | (15,847 | )
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       
|                            |                                                                                                                                                               |                                                                                                       | Comprehensive income (loss)       |        | $                 | 4,237  |       |        | $     | 6,991 |        |        | $       | 62,614 |        |         | $       | (2,326  | )
|                            |                                                                                                                                                               |                                                                                                       |                                   |        |                   |        |       |        |       |       |        |       



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES





Condensed Consolidated Statements of Cash Flows


|                                     |                                                                                       |                                                                   |                                                |        |          |         |   |        |          |         |  
|------------------------------------ | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------- | ------ | -------- | ------- | - | ------ | -------- | ------- | -
|                                     |                                                                                       | Nine Months Ended                                                 |                                               
|                                     |                                                                                       | September 30,                                                     |                                               
|                                     |                                                                                       |                                                                   |                                               
|                                     |                                                                                       | 2005                                                              |                                                |        | 2004     |        
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       | (In thousands)                                                    |                                               
|                                     |                                                                                       | (Unaudited)                                                       |                                               
|Cash flows from operating activities |                                                                                       |                                                                   |                                                |        |          |         |   |       
|                                     | Net income                                                                            |                                                                   | $                                              | 61,939 |          |         | $ | 13,521 |         
|                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                   |                                                |        |          |         |   |        |         
|                                     |                                                                                       | Depreciation and amortization                                     |                                                |        | 4,410    |         |   |        | 6,232    |        
|                                     |                                                                                       | Net realized losses (gains)                                       |                                                |        | 750      |         |   |        | (1,233   | )      
|                                     |                                                                                       | Change in fair value of derivatives                               |                                                |        | 1,050    |         |   |        | 619      |        
|                                     |                                                                                       | Deferred federal income taxes                                     |                                                |        | (35,572  | )       |   |        |         |        
|                                     |                                                                                       | Minority interest in net income (loss) of consolidated subsidiary |                                                |        | 373      |         |   |        | (17      | )      
|                                     |                                                                                       | Changes in:                                                       |                                                |        |          |         |   |        |          |        
|                                     |                                                                                       |                                                                   | Unpaid loss and loss adjustment expenses       |        |          | (5,690  | ) |        |          | 17,955  |  
|                                     |                                                                                       |                                                                   | Unearned premiums                              |        |          | 1,117   |   |        |          | (1,683  | )
|                                     |                                                                                       |                                                                   | Other assets and liabilities                   |        |          | (5,787  | ) |        |          | (6,758  | )
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       |                                                                   | Net cash provided by operating activities      |        |          | 22,590  |   |        |          | 28,636  |  
|Cash flows from investing activities |                                                                                       |                                                                   |                                                |        |          |         |   |       
|                                     | Purchases                                                                             |                                                                   |                                                |        |          |         |   |        |         
|                                     |                                                                                       | Available-for-sale  fixed maturities                             |                                                |        | (3,752   | )       |   |        | (165,005 | )      
|                                     |                                                                                       | Held-to-maturity  fixed maturities                               |                                                |        | (112,912 | )       |   |        |         |        
|                                     |                                                                                       | Available-for-sale  equity securities                            |                                                |        | (606     | )       |   |        | (36,873  | )      
|                                     |                                                                                       | Other invested assets                                             |                                                |        | (7,580   | )       |   |        |         |        
|                                     |                                                                                       | Property and equipment                                            |                                                |        | (670     | )       |   |        | (904     | )      
|                                     | Sales and maturities                                                                  |                                                                   |                                                |        |          |         |   |        |         
|                                     |                                                                                       | Available-for-sale  fixed maturities                             |                                                |        | 100,836  |         |   |        | 224,622  |        
|                                     |                                                                                       | Held-to-maturity  fixed maturities                               |                                                |        | 52,513   |         |   |        |         |        
|                                     |                                                                                       | Available-for-sale  equity securities                            |                                                |        | 1,166    |         |   |        | 34,751   |        
|                                     |                                                                                       | Other invested assets                                             |                                                |        | 1,669    |         |   |        | 18,815   |        
|                                     |                                                                                       | Property and equipment                                            |                                                |        | 30       |         |   |        | 17       |        
|                                     | Pending securities transactions                                                       |                                                                   |                                                | (7,934 | )        |         |   | (2,965 | )       
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       |                                                                   | Net cash provided by investing activities      |        |          | 22,760  |   |        |          | 72,458  |  
|Cash flows from financing activities |                                                                                       |                                                                   |                                                |        |          |         |   |       
|                                     | Principal payment on note payable                                                     |                                                                   |                                                |       |          |         |   | (6,000 | )       
|                                     | Common stock repurchased                                                              |                                                                   |                                                | (9,399 | )        |         |   |       |         
|                                     | Federal income tax effect of share based awards                                       |                                                                   |                                                | 727    |          |         |   |       |         
|                                     | Proceeds from stock options exercised                                                 |                                                                   |                                                | 1,709  |          |         |   | 897    |         
|                                     | Other sources                                                                         |                                                                   |                                                |       |          |         |   | 27     |         
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       |                                                                   | Net cash used in financing activities          |        |          | (6,963  | ) |        |          | (5,076  | )
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       |                                                                   | Net increase in cash and cash equivalents      |        |          | 38,387  |   |        |          | 96,018  |  
|                                     |                                                                                       |                                                                   | Cash and cash equivalents, beginning of period |        |          | 190,936 |   |        |          | 102,051 |  
|                                     |                                                                                       |                                                                   |                                                |        |          |        
|                                     |                                                                                       |                                                                   | Cash and cash equivalents, end of period       |        | $        | 229,323 |   |        | $        | 198,069 |  
|                                     |                                                                                       |                                                                   |                                                |        |          |        



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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                    |       |      | Nine Months Ended |  
|                                                                                                                                                                       |             | September 30,                         |       |      | September 30,     |  
|                                                                                                                                                                       |             |                                       |       |      |                   |  
|                                                                                                                                                                       |             | 2005                                  |       |      | 2004              |   |       | 2005 |  |   | 2004   |     
|                                                                                                                                                                       |             |                                       |       |      |                   |   |       |      |  |   |        |     
|                                                                                                                                                                       |             | (In thousands, except per share data) |      
|Net income as reported                                                                                                                                                 |             | $                                     | 6,825 |      |                   | $ | 4,549 |      |  | $ | 61,939 |      |  | $ | 13,521 |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects                                                         |             |                                       | 63    |      |                   |   | 83    |      |  |   | 190    |      |  |   | 214    |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards granted
    since 2000, net of related tax effects |             |                                       | (160  | )    |                   |   | (267  | )    |  |   | (405   | )    |  |   | (726   | )   
|                                                                                                                                                                       |             |                                       |       |      |                   |   |       |      |  |   |        |     
|Pro forma net income                                                                                                                                                   |             | $                                     | 6,728 |      |                   | $ | 4,365 |      |  | $ | 61,724 |      |  | $ | 13,009 |     
|                                                                                                                                                                       |             |                                       |       |      |                   |   |       |      |  |   |        |     
|Basic income per share                                                                                                                                                 |             |                                       |       |      |                   |   |       |      |  |   |        |      |  |   |        |     
|                                                                                                                                                                       | As reported |                                       | $     | 0.81 |                   |   | $     | 0.54 |  |   | $      | 7.23 |  |   | $      | 1.60 | 
|                                                                                                                                                                       | Pro forma   |                                       | $     | 0.80 |                   |   | $     | 0.52 |  |   | $      | 7.20 |  |   | $      | 1.54 | 
|Diluted income per share                                                                                                                                               |             |                                       |       |      |                   |   |       |      |  |   |        |      |  |   |        |     
|                                                                                                                                                                       | As reported |                                       | $     | 0.79 |                   |   | $     | 0.52 |  |   | $      | 7.08 |  |   | $      | 1.57 | 
|                                                                                                                                                                       | Pro forma   |                                       | $     | 0.78 |                   |   | $     | 0.50 |  |   | $      | 7.05 |  |   | $      | 1.51 | 







| |                                                  
| | -------------------------------------------------
| | Investments in Fixed-Income and Equity Securities



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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








| |                  
| | -----------------
| | Other Investments





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









| |             
| | ------------
| | Income Taxes





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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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








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











| |                 
| | ----------------
| | Reclassification





|   |                                         
|-- | ----------------------------------------
|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)




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





|                                                         |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------- | ----- | ----- | ----------------- | - | ----- | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                         |                                                                                                    | Three Months Ended                    |       |       | Nine Months Ended |  
|                                                         |                                                                                                    | September 30,                         |       |       | September 30,     |  
|                                                         |                                                                                                    |                                       |       |       |                   |  
|                                                         |                                                                                                    | 2005                                  |       |       | 2004              |   |       | 2005  |  |   | 2004   |      
|                                                         |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |      
|                                                         |                                                                                                    | (In thousands, except per share data) |      
|Numerator for basic and diluted income per common share: |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |       |  |   |        |      
|Net income                                               |                                                                                                    | $                                     | 6,825 |       |                   | $ | 4,549 |       |  | $ | 61,939 |       |  | $ | 13,521 |      
|                                                         |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |      
|Denominator:                                             |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |       |  |   |        |      
|                                                         | Denominator for basic income per common share 
    weighted average shares outstanding            |                                       |       | 8,444 |                   |   |       | 8,443 |  |   |        | 8,572 |  |   |        | 8,427 | 
|                                                         | Effect of dilutive stock options and awards                                                        |                                       |       | 208   |                   |   |       | 312   |  |   |        | 182   |  |   |        | 199   | 
|                                                         |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |      
|                                                         | Denominator for diluted income per common share 
    adjusted weighted average shares outstanding |                                       |       | 8,652 |                   |   |       | 8,755 |  |   |        | 8,754 |  |   |        | 8,626 | 
|                                                         |                                                                                                    |                                       |       |       |                   |   |       |       |  |   |        |      
|Net income  basic                                       |                                                                                                    | $                                     | 0.81  |       |                   | $ | 0.54  |       |  | $ | 7.23   |       |  | $ | 1.60   |      
|Net income  diluted                                     |                                                                                                    | $                                     | 0.79  |       |                   | $ | 0.52  |       |  | $ | 7.08   |       |  | $ | 1.57   |      



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







|              |                    |                |   |           |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |           | 
|------------- | ------------------ | -------------- | - | --------- | --------- |  | - | --------- |  |  | ------------ | ------- |  | ------------ | - | -------- | - |  | - | --------- | 
|              |                    | Medical        |   |           | Other     |  |   |           |  |  |              |        
|              |                    | Professional   |   |           | Insurance |  |   | Corporate |  |  | Intersegment |         |  |             
|              |                    | Liability      |   |           | Lines     |  |   | and Other |  |  | Eliminations |         |  | Consolidated |  
|              |                    |                |   |           |           |  |   |           |  |  |              |         |  |              |  
|              |                    | (In thousands) |  
|Total assets: |                    |                |   |           |           |  |   |           |  |  |              |         |  |              |   |          |   |  |   |          
|              | September 30, 2005 |                | $ | 1,048,357 |           |  | $ | 60,793    |  |  | $            | 288,971 |  |              | $ | (283,508 | ) |  | $ | 1,114,613 | 
|              | December 31, 2004  |                | $ | 977,230   |           |  | $ | 75,704    |  |  | $            | 227,106 |  |              | $ | (210,141 | ) |  | $ | 1,069,899 | 

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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


|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |   |      |      |   |        |        |        | 
|------------------------------------------------------- | ----------------------------------- | --------------------------------------------- | ------ | ------ | --------- | - | --- | --------- | --- | - | ------------ | --- | ----- | ------------ | - | ---- | ---- | - | ------ | ------ | ------ | 
|                                                        |                                     | For the Three Months Ended September 30, 2005 |       
|                                                        |                                     |                                               |       
|                                                        |                                     | Medical                                       |        |        | Other     |   |     |          
|                                                        |                                     | Professional                                  |        |        | Insurance |   |     | Corporate |     |   | Intersegment |     |       |             
|                                                        |                                     | Liability                                     |        |        | Lines     |   |     | and Other |     |   | Eliminations |     |       | Consolidated |  
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  
|                                                        |                                     | (In thousands)                                |       
|Revenues:                                               |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |   |      |      |   |        |       
|                                                        | Net premiums earned                 |                                               | $      | 40,280 |           |   | $   | (109      | )   |   | $            |    |       |              | $ |     |      |   | $      | 40,171 |       
|                                                        | Investment income                   |                                               |        | 10,019 |           |   |     | 703       |     |   |              | 30  |       |              |   |     |      |   |        | 10,752 |       
|                                                        | Other revenue items                 |                                               |        | (227   | )         |   |     | (13       | )   |   |              | 199 |       |              |   | (165 | )    |   |        | (206   | )     
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  
|                                                        |                                     | Total revenues                                |        |        | 50,072    |   |     |           | 581 |   |              |     | 229   |              |   |      | (165 | ) |        |        | 50,717 | 
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  
|Expenses:                                               |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |   |      |      |   |        |       
|                                                        | Loss and loss adjustment expenses   |                                               |        | 30,786 |           |   |     | 8         |     |   |              |    |       |              |   |     |      |   |        | 30,794 |       
|                                                        | Underwriting expenses               |                                               |        | 7,401  |           |   |     | 137       |     |   |              |    |       |              |   |     |      |   |        | 7,538  |       
|                                                        | General and administrative expenses |                                               |        |       |           |   |     |          |     |   |              | 433 |       |              |   |     |      |   |        | 433    |       
|                                                        | Other expense items                 |                                               |        | 614    |           |   |     | 60        |     |   |              | 882 |       |              |   | (165 | )    |   |        | 1,391  |       
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  
|                                                        |                                     | Total expenses                                |        |        | 38,801    |   |     |           | 205 |   |              |     | 1,315 |              |   |      | (165 | ) |        |        | 40,156 | 
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  
|Income (loss) before income taxes and minority interest |                                     | $                                             | 11,271 |        |           | $ | 376 |           |     | $ | (1,086       | )   |       | $            |  |      |      | $ | 10,561 |       
|                                                        |                                     |                                               |        |        |           |   |     |           |     |   |              |     |       |              |  

|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |   |      |      |   |       |        |        | 
|------------------------------------------------------- | ----------------------------------- | --------------------------------------------- | ----- | ------ | --------- | - | ------ | --------- | ----- | - | ------------ | --- | ----- | ------------ | - | ---- | ---- | - | ----- | ------ | ------ | 
|                                                        |                                     | For the Three Months Ended September 30, 2004 |      
|                                                        |                                     |                                               |      
|                                                        |                                     | Medical                                       |       |        | Other     |   |        |          
|                                                        |                                     | Professional                                  |       |        | Insurance |   |        | Corporate |       |   | Intersegment |     |       |             
|                                                        |                                     | Liability                                     |       |        | Lines     |   |        | and Other |       |   | Eliminations |     |       | Consolidated |  
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  
|                                                        |                                     | (In thousands)                                |      
|Revenues:                                               |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |   |      |      |   |       |       
|                                                        | Net premiums earned                 |                                               | $     | 44,169 |           |   | $      | 4,586     |       |   | $            |    |       |              | $ |     |      |   | $     | 48,755 |       
|                                                        | Investment income                   |                                               |       | 10,295 |           |   |        | 647       |       |   |              | 5   |       |              |   |     |      |   |       | 10,947 |       
|                                                        | Other revenue items                 |                                               |       | (156   | )         |   |        | (50       | )     |   |              | 187 |       |              |   | (157 | )    |   |       | (176   | )     
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  
|                                                        |                                     | Total revenues                                |       |        | 54,308    |   |        |           | 5,183 |   |              |     | 192   |              |   |      | (157 | ) |       |        | 59,526 | 
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  
|Expenses:                                               |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |   |      |      |   |       |       
|                                                        | Loss and loss adjustment expenses   |                                               |       | 36,181 |           |   |        | 6,592     |       |   |              |    |       |              |   |     |      |   |       | 42,773 |       
|                                                        | Underwriting expenses               |                                               |       | 9,185  |           |   |        | 653       |       |   |              |    |       |              |   |     |      |   |       | 9,838  |       
|                                                        | General and administrative expenses |                                               |       |       |           |   |        |          |       |   |              | 706 |       |              |   |     |      |   |       | 706    |       
|                                                        | Other expense items                 |                                               |       | 839    |           |   |        | 81        |       |   |              | 673 |       |              |   | (157 | )    |   |       | 1,436  |       
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  
|                                                        |                                     | Total expenses                                |       |        | 46,205    |   |        |           | 7,326 |   |              |     | 1,379 |              |   |      | (157 | ) |       |        | 54,753 | 
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  
|Income (loss) before income taxes and minority interest |                                     | $                                             | 8,103 |        |           | $ | (2,143 | )         |       | $ | (1,187       | )   |       | $            |  |      |      | $ | 4,773 |       
|                                                        |                                     |                                               |       |        |           |   |        |           |       |   |              |     |       |              |  

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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


|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |   |      |      |   |        |         |         | 
|------------------------------------------------------- | ----------------------------------- | -------------------------------------------- | ------ | ------- | --------- | - | --- | --------- | ----- | - | ------------ | ----- | ----- | ------------ | - | ---- | ---- | - | ------ | ------- | ------- | 
|                                                        |                                     | For the Nine Months Ended September 30, 2005 |       
|                                                        |                                     |                                              |       
|                                                        |                                     | Medical                                      |        |         | Other     |   |     |          
|                                                        |                                     | Professional                                 |        |         | Insurance |   |     | Corporate |       |   | Intersegment |       |       |             
|                                                        |                                     | Liability                                    |        |         | Lines     |   |     | and Other |       |   | Eliminations |       |       | Consolidated |  
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  
|                                                        |                                     | (In thousands)                               |       
|Revenues:                                               |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |   |      |      |   |        |        
|                                                        | Net premiums earned                 |                                              | $      | 122,981 |           |   | $   | 763       |       |   | $            |      |       |              | $ |     |      |   | $      | 123,744 |        
|                                                        | Investment income                   |                                              |        | 31,106  |           |   |     | 2,394     |       |   |              | 82    |       |              |   |     |      |   |        | 33,582  |        
|                                                        | Other revenue items                 |                                              |        | (164    | )         |   |     | (37       | )     |   |              | 631   |       |              |   | (493 | )    |   |        | (63     | )      
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  
|                                                        |                                     | Total revenues                               |        |         | 153,923   |   |     |           | 3,120 |   |              |       | 713   |              |   |      | (493 | ) |        |         | 157,263 | 
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  
|Expenses:                                               |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |   |      |      |   |        |        
|                                                        | Loss and loss adjustment expenses   |                                              |        | 95,530  |           |   |     | 2,314     |       |   |              |      |       |              |   |     |      |   |        | 97,844  |        
|                                                        | Underwriting expenses               |                                              |        | 24,902  |           |   |     | 345       |       |   |              |      |       |              |   |     |      |   |        | 25,247  |        
|                                                        | General and administrative expenses |                                              |        |        |           |   |     |          |       |   |              | 2,269 |       |              |   |     |      |   |        | 2,269   |        
|                                                        | Other expense items                 |                                              |        | 1,694   |           |   |     | 168       |       |   |              | 2,615 |       |              |   | (493 | )    |   |        | 3,984   |        
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  
|                                                        |                                     | Total expenses                               |        |         | 122,126   |   |     |           | 2,827 |   |              |       | 4,884 |              |   |      | (493 | ) |        |         | 129,344 | 
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  
|Income (loss) before income taxes and minority interest |                                     | $                                            | 31,797 |         |           | $ | 293 |           |       | $ | (4,171       | )     |       | $            |  |      |      | $ | 27,919 |        
|                                                        |                                     |                                              |        |         |           |   |     |           |       |   |              |       |       |              |  

|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |   |      |      |   |        |         |         | 
|------------------------------------------------------- | ----------------------------------- | -------------------------------------------- | ------ | ------- | --------- | - | ------ | --------- | ------ | - | ------------ | ----- | ----- | ------------ | - | ---- | ---- | - | ------ | ------- | ------- | 
|                                                        |                                     | For the Nine Months Ended September 30, 2004 |       
|                                                        |                                     |                                              |       
|                                                        |                                     | Medical                                      |        |         | Other     |   |        |          
|                                                        |                                     | Professional                                 |        |         | Insurance |   |        | Corporate |        |   | Intersegment |       |       |             
|                                                        |                                     | Liability                                    |        |         | Lines     |   |        | and Other |        |   | Eliminations |       |       | Consolidated |  
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  
|                                                        |                                     | (In thousands)                               |       
|Revenues:                                               |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |   |      |      |   |        |        
|                                                        | Net premiums earned                 |                                              | $      | 130,184 |           |   | $      | 23,775    |        |   | $            |      |       |              | $ |     |      |   | $      | 153,959 |        
|                                                        | Investment income                   |                                              |        | 33,152  |           |   |        | 3,264     |        |   |              | 35    |       |              |   |     |      |   |        | 36,451  |        
|                                                        | Other revenue items                 |                                              |        | 1,489   |           |   |        | 111       |        |   |              | 641   |       |              |   | (446 | )    |   |        | 1,795   |        
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  
|                                                        |                                     | Total revenues                               |        |         | 164,825   |   |        |           | 27,150 |   |              |       | 676   |              |   |      | (446 | ) |        |         | 192,205 | 
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  
|Expenses:                                               |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |   |      |      |   |        |        
|                                                        | Loss and loss adjustment expenses   |                                              |        | 111,147 |           |   |        | 26,553    |        |   |              |      |       |              |   |     |      |   |        | 137,700 |        
|                                                        | Underwriting expenses               |                                              |        | 27,340  |           |   |        | 6,646     |        |   |              |      |       |              |   |     |      |   |        | 33,986  |        
|                                                        | General and administrative expenses |                                              |        |        |           |   |        |          |        |   |              | 2,912 |       |              |   |     |      |   |        | 2,912   |        
|                                                        | Other expense items                 |                                              |        | 2,464   |           |   |        | 411       |        |   |              | 2,048 |       |              |   | (446 | )    |   |        | 4,477   |        
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  
|                                                        |                                     | Total expenses                               |        |         | 140,951   |   |        |           | 33,610 |   |              |       | 4,960 |              |   |      | (446 | ) |        |         | 179,075 | 
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  
|Income (loss) before income taxes and minority interest |                                     | $                                            | 23,874 |         |           | $ | (6,460 | )         |        | $ | (4,284       | )     |       | $            |  |      |      | $ | 13,130 |        
|                                                        |                                     |                                              |        |         |           |   |        |           |        |   |              |       |       |              |  

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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




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



|                   |                                   |                                                  |   |         |            |  |       |            |       |  |            |      |        |   |   |         |         | 
|------------------ | --------------------------------- | ------------------------------------------------ | - | ------- | ---------- |  | ----- | ---------- | ----- |  | ---------- | ---- | ------ | - | - | ------- | ------- | 
|                   |                                   | September 30, 2005                               |  
|                   |                                   |                                                  |  
|                   |                                   |                                                  |   | Gross   |            |  | Gross |            |       | 
|                   |                                   | Amortized                                        |   |         | Unrealized |  |       | Unrealized |       |  | Estimated  |     
|                   |                                   | Cost/Cost                                        |   |         | Gains      |  |       | Losses     |       |  | Fair Value |     
|                   |                                   |                                                  |   |         |            |  |       |            |       |  |            |     
|                   |                                   | (In thousands)                                   |  
|Available-for-sale |                                   |                                                  |   |         |            |  |       |            |       |  |            |      |        |   |   |        
|                   | U.S. government obligations       |                                                  | $ | 9,758   |            |  | $     | 91         |       |  | $          | (13  | )      |   | $ | 9,836   |        
|                   | States and political subdivisions |                                                  |   | 6,346   |            |  |       | 154        |       |  |            |      |        |   |   | 6,500   |        
|                   | Corporate securities              |                                                  |   | 224,497 |            |  |       | 8,280      |       |  |            | (241 | )      |   |   | 232,536 |        
|                   | Mortgage-backed securities        |                                                  |   | 4,251   |            |  |       | 120        |       |  |            | (975 | )      |   |   | 3,396   |        
|                   |                                   |                                                  |   |         |            |  |       |            |       |  |            |     
|                   |                                   | Total available-for-sale fixed-income securities |   |         | 244,852    |  |       |            | 8,645 |  |            |      | (1,229 | ) |   |         | 252,268 | 
|                   | Equity securities                 |                                                  |   | 477     |            |  |       |            |       |  |            |      |        |   |   | 477     |        
|                   |                                   |                                                  |   |         |            |  |       |            |       |  |            |     
|                   |                                   | Total available-for-sale securities              |   | $       | 245,329    |  |       | $          | 8,645 |  |            | $    | (1,229 | ) |   | $       | 252,745 | 
|                   |                                   |                                                  |   |         |            |  |       |            |       |  |            |     

|                   |                                   |                                                  |   |         |            |  |       |            |        |  |            |      |      |   |   |         |         | 
|------------------ | --------------------------------- | ------------------------------------------------ | - | ------- | ---------- |  | ----- | ---------- | ------ |  | ---------- | ---- | ---- | - | - | ------- | ------- | 
|                   |                                   | 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  |        
|                   |                                   |                                                  |   |         |            |  |       |            |        |  |            |     
|                   |                                   | Total available-for-sale fixed-income securities |   |         | 633,611    |  |       |            | 24,661 |  |            |      | (566 | ) |   |         | 657,706 | 
|                   | Equity securities                 |                                                  |   | 1,079   |            |  |       | 84         |        |  |            |     |      |   |   | 1,163   |        
|                   |                                   |                                                  |   |         |            |  |       |            |        |  |            |     
|                   |                                   | Total available-for-sale securities              |   | $       | 634,690    |  |       | $          | 24,745 |  |            | $    | (566 | ) |   | $       | 658,869 | 
|                   |                                   |                                                  |   |         |            |  |       |            |        |  |            |     





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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




|                                                                       |  |       |       |        |     |   |       |  
|---------------------------------------------------------------------- |  | ----- | ----- | ------ | --- | - | ----- | -
|                                                                       |  |       |       | Net of |    
|                                                                       |  | Gross |       |        | Tax |  
|                                                                       |  |       |       |        |     |  
|Net unrealized appreciation, May 1, 2005                               |  | $     | 5,886 |        |     | $ | 3,826 |  
|Amortization for the period May 1, 2005 through
    September 30, 2005 |  |       | (696  | )      |     |   | (452  | )
|                                                                       |  |       |       |        |     |  
|Net unrealized appreciation, September 30, 2005                        |  | $     | 5,190 |        |     | $ | 3,374 |  
|                                                                       |  |       |       |        |     |  



|                 |                                   |                                                |   |         |            |  |       |            |    |  |            |        |        |   |   |         |         | 
|---------------- | --------------------------------- | ---------------------------------------------- | - | ------- | ---------- |  | ----- | ---------- | -- |  | ---------- | ------ | ------ | - | - | ------- | ------- | 
|                 |                                   | September 30, 2005                             |  
|                 |                                   |                                                |  
|                 |                                   |                                                |   | Gross   |            |  | Gross |            |    | 
|                 |                                   | Carrying                                       |   |         | Unrealized |  |       | Unrealized |    |  | Estimated  |       
|                 |                                   | Value                                          |   |         | Gains      |  |       | Losses     |    |  | Fair Value |       
|                 |                                   |                                                |   |         |            |  |       |            |    |  |            |       
|                 |                                   | (In thousands)                                 |  
|Held-to-maturity |                                   |                                                |   |         |            |  |       |            |    |  |            |        |        |   |   |        
|                 | U.S. government obligations       |                                                | $ | 82,631  |            |  | $     |            |    |  | $          | (598   | )      |   | $ | 82,033  |        
|                 | States and political subdivisions |                                                |   | 2,892   |            |  |       |            |    |  |            | (15    | )      |   |   | 2,877   |        
|                 | Corporate securities              |                                                |   | 69,806  |            |  |       | 78         |    |  |            | (461   | )      |   |   | 69,423  |        
|                 | Mortgage-backed securities        |                                                |   | 200,045 |            |  |       | 8          |    |  |            | (2,527 | )      |   |   | 197,526 |        
|                 |                                   |                                                |   |         |            |  |       |            |    |  |            |       
|                 |                                   | Total held-to-maturity fixed-income securities |   | $       | 355,374    |  |       | $          | 86 |  |            | $      | (3,601 | ) |   | $       | 351,859 | 
|                 |                                   |                                                |   |         |            |  |       |            |    |  |            |       



|                                                                                                                                                                |                                   |                |        |       |              |   |        |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | -------------- | ------ | ----- | ------------ | - | ------ | ----- | 
|                                                                                                                                                                |                                   | September 30,  |        |       | December 31, |  
|                                                                                                                                                                |                                   | 2005           |        |       | 2004         |  
|                                                                                                                                                                |                                   |                |        |       |              |  
|                                                                                                                                                                |                                   | (In thousands) |       
|Net unrealized appreciation on available-for-sale securities                                                                                                    |                                   | $              | 8,372  |       |              | $ | 24,085 |      
|Net unrealized appreciation on a held-to-maturity securities                                                                                                    |                                   |                | 5,190  |       |              |   |       |      
|Deferred federal income taxes                                                                                                                                   |                                   |                | (4,747 | )     |              |   | (8,430 | )    
|Impact of changes of the deferred tax asset valuation allowance
    as a result of changes in net unrealized appreciation on
    investment securities (Note 8) |                                   |                |       |       |              |   | (7,512 | )    
|Minority interest in net unrealized depreciation, net of tax                                                                                                    |                                   |                | 14     |       |              |   | 11     |      
|                                                                                                                                                                |                                   |                |        |       |              |  
|                                                                                                                                                                | Total net unrealized appreciation |                | $      | 8,829 |              |   | $      | 8,154 | 
|                                                                                                                                                                |                                   |                |        |       |              |  

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




|                   |                            |                          |   |         |            |  |   |         |         | 
|------------------ | -------------------------- | ------------------------ | - | ------- | ---------- |  | - | ------- | ------- | 
|                   |                            | Amortized                |   |         | Estimated  | 
|                   |                            | Cost                     |   |         | Fair Value | 
|                   |                            |                          |   |         |            | 
|                   |                            | (In thousands)           |  
|Available-for-sale |                            |                          |   |         |            |  |   |        
|                   | Less than one year         |                          | $ | 56,046  |            |  | $ | 56,535  |        
|                   | One to five years          |                          |   | 166,399 |            |  |   | 172,990 |        
|                   | Five to ten years          |                          |   | 10,500  |            |  |   | 10,769  |        
|                   | More than ten years        |                          |   | 7,656   |            |  |   | 8,578   |        
|                   | Mortgage-backed securities |                          |   | 4,251   |            |  |   | 3,396   |        
|                   |                            |                          |   |         |            | 
|                   |                            | Total available-for-sale |   | $       | 244,852    |  |   | $       | 252,268 | 
|                   |                            |                          |   |         |            | 

|                 |                            |                        |   |         |         |  |  |  |  | 
|---------------- | -------------------------- | ---------------------- | - | ------- | ------- |  |  |  |  | 
|                 |                            | Carrying Value         |   |         |        
|                 |                            |                        |   |         |        
|                 |                            | (In thousands)         |   |         |        
|Held-to-maturity |                            |                        |   |         |         |  |  | 
|                 | Less than one year         |                        | $ |        |         |  |  |  | 
|                 | One to five years          |                        |   | 25,562  |         |  |  |  | 
|                 | Five to ten years          |                        |   | 79,369  |         |  |  |  | 
|                 | More than ten years        |                        |   | 50,397  |         |  |  |  | 
|                 | Mortgage-backed securities |                        |   | 200,046 |         |  |  |  | 
|                 |                            |                        |   |         |         | 
|                 |                            | Total held-to-maturity |   | $       | 355,374 |  |  |  |  | 
|                 |                            |                        |   |         |         | 



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









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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




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



| |                             
| | ----------------------------
| | Employee separation benefits





|                                     |  |                    |     |   |                   |   |      |  
|------------------------------------ |  | ------------------ | --- | - | ----------------- | - | ---- | -
|                                     |  | Nine               |     |   |                  
|                                     |  | Months Ended       |     |   | Year Ended        |  
|                                     |  | September 30, 2005 |     |   | December 31, 2004 |  
|                                     |  |                    |     |   |                   |  
|                                     |  | (In thousands)     |    
|Balance, January 1                   |  | $                  | 101 |   |                   | $ | 727  |  
|Employee separations                 |  |                    | 59  |   |                   |   | 185  |  
|Payments                             |  |                    | (69 | ) |                   |   | (811 | )
|                                     |  |                    |     |   |                   |  
|Balance, September 30 or December 31 |  | $                  | 91  |   |                   | $ | 101  |  
|                                     |  |                    |     |   |                   |  





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



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




|                                          |  |                    |       |   |                   |   |       |  
|----------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | -
|                                          |  | Nine               |       |   |                  
|                                          |  | Months Ended       |       |   | Year Ended        |  
|                                          |  | September 30, 2005 |       |   | December 31, 2004 |  
|                                          |  |                    |       |   |                   |  
|                                          |  | (In thousands)     |      
|Balance, January 1                        |  | $                  | 921   |   |                   | $ |      |  
|Payments                                  |  |                    | (288  | ) |                   |   | (170  | )
|Contract termination costs (new sublease) |  |                    | 345   |   |                   |   | 1,091 |  
|Changes in estimated cash flows           |  |                    | 76    |   |                   |   |      |  
|Discount accretion                        |  |                    | 43    |   |                   |   |      |  
|                                          |  |                    |       |   |                   |  
|Balance, September 30 or December 31      |  | $                  | 1,097 |   |                   | $ | 921   |  
|                                          |  |                    |       |   |                   |  





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



|                      |                     |                                  |        |                                 |      |                |      |      |    |   |       |        |   |  |      |       |    |   |         |         |   |  |        |        |    |   |        |        |   |  |      |       |   
|--------------------- | ------------------- | -------------------------------- | ------ | ------------------------------- | ---- | -------------- | ---- | ---- | -- | - | ----- | ------ | - |  | ---- | ----- | -- | - | ------- | ------- | - |  | ------ | ------ | -- | - | ------ | ------ | - |  | ---- | ----- | --
|                      |                     | Three Months Ended September 30, |        |                                 |      |                |      |      |    |   |      
|                      |                     |                                  |        |                                 |     
|                      |                     |                                  |        | Nine Months Ended September 30, |     
|                      |                     |                                  |        |                                 |     
|                      |                     | 2005                             |        |                                 | 2004 |                |      | 2005 |    |   | 2004  |       
|                      |                     |                                  |        |                                 |      |                |      |      |    |   |       |       
|                      |                     |                                  |        |                                 |      | (In thousands) |      |      |    |   |      
|Income before taxes   |                     | $                                | 10,561 |                                 |      |                |      |      |    | $ | 4,773 |        |   |  |      |       |    | $ | 27,919  |         |   |  |        |        |    | $ | 13,130 |        |   |  |      |      
|                      |                     |                                  |        |                                 |      |                |      |      |    |   |       |        |   |  |      |       |    |   |         |         |   |  |        |       
|Tax at statutory rate |                     |                                  | 3,689  |                                 |      |                | 34.9 | %    |    |   | 1,671 |        |   |  | 35.0 | %     |    |   | 9,764   |         |   |  | 35.0   | %      |    |   | 4,596  |        |   |  | 35.0 | %    
|Tax effect of:        |                     |                                  |        |                                 |      |                |      |      |    |   |       |        |   |  |      |       |    |   |         |         |   |  |        |        |    |   |        |        |   |  |      |      
|                      | Tax exempt interest |                                  |        | (39                             | )    |                |      | (0.4 | )% |   |       | (88    | ) |  |      | (1.9  | )% |   |         | (142    | ) |  |        | (0.5   | )% |   |        | (285   | ) |  |      | (2.4  | )%
|                      | Cushion adjustment  |                                  |        |                                |      |                |      |      |    |   |       |       |   |  |      |       |    |   |         |        |   |  |        |        |    |   |        | (600   | ) |  |      | (7.2  | )%
|                      | Other items, net    |                                  |        | 55                              |      |                |      | 0.5  | %  |   |       |       |   |  |      |       |    |   |         | 36      |   |  |        | 0.1    | %  |   |        | 60     |   |  |      | 0.7   | % 
|                      | Valuation allowance |                                  |        |                                |      |                |      | 0.0  | %  |   |       | (1,357 | ) |  |      | (28.4 | )% |   |         | (44,051 | ) |  |        | (157.8 | )% |   |        | (4,145 | ) |  |      | (33.3 | )%
|                      |                     |                                  |        |                                 |      |                |      |      |    |   |       |        |   |  |      |       |    |   |         |         |   |  |        |       
|                      |                     | $                                | 3,705  |                                 |      |                | 35.1 | %    |    | $ | 226   |        |   |  | 4.7  | %     |    | $ | (34,393 | )       |   |  | (123.2 | )%     |    | $ | (374   | )      |   |  | (7.2 | )%   
|                      |                     |                                  |        |                                 |      |                |      |      |    |   |       |        |   |  |      |       |    |   |         |         |   |  |        |       

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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




|                                 |       |                    |       |       |                   |   |        |      |  |   |         |         |   |   |        |      |  
|-------------------------------- | ----- | ------------------ | ----- | ----- | ----------------- | - | ------ | ---- |  | - | ------- | ------- | - | - | ------ | ---- | -
|                                 |       | Three Months Ended |       |       | Nine Months Ended |  
|                                 |       | September 30,      |       |       | September 30,     |  
|                                 |       |                    |       |       |                   |  
|                                 |       | 2005               |       |       | 2004              |   |        | 2005 |  |   | 2004    |        
|                                 |       |                    |       |       |                   |   |        |      |  |   |         |        
|                                 |       | (In thousands)     |      
|Current expense (benefit)        |       | $                  | 774   |       |                   | $ | 226    |      |  | $ | 1,179   |         |   | $ | (374   | )   
|Deferred expense                 |       |                    | 2,931 |       |                   |   | 1,357  |      |  |   | 8,479   |         |   |   | 4,145  |     
|Deferred tax valuation allowance |       |                    |      |       |                   |   | (1,357 | )    |  |   | (44,051 | )       |   |   | (4,145 | )   
|                                 |       |                    |       |       |                   |   |        |      |  |   |         |        
|                                 | Total |                    | $     | 3,705 |                   |   | $      | 226  |  |   | $       | (34,393 | ) |   | $      | (374 | )
|                                 |       |                    |       |       |                   |   |        |      |  |   |         |        



|                                                                            |                                    |                                |        |        |              |   |         |        |        | 
|--------------------------------------------------------------------------- | ---------------------------------- | ------------------------------ | ------ | ------ | ------------ | - | ------- | ------ | ------ | 
|                                                                            |                                    | September 30,                  |        |        | December 31, |  
|                                                                            |                                    | 2005                           |        |        | 2004         |  
|                                                                            |                                    |                                |        |        |              |  
|                                                                            |                                    | (In thousands)                 |       
|Deferred tax assets arising from
    Losses and loss adjustment expenses    |                                    | $                              | 24,439 |        |              | $ | 27,612  |       
|                                                                            | Net operating loss carryforwards   |                                |        | 9,698  |              |   |         | 14,225 |       
|                                                                            | Unearned and advanced premiums     |                                |        | 6,604  |              |   |         | 6,884  |       
|                                                                            | Minimum tax credits                |                                |        | 8,629  |              |   |         | 8,445  |       
|                                                                            | Realized losses on investments     |                                |        | 1,774  |              |   |         | 2,633  |       
|                                                                            | Goodwill                           |                                |        | 4,254  |              |   |         | 4,509  |       
|                                                                            | Other                              |                                |        | 2,346  |              |   |         | 2,598  |       
|                                                                            |                                    |                                |        |        |              |  
|                                                                            |                                    | Total deferred tax assets      |        |        | 57,744       |   |         |        | 66,906 | 
|                                                                            |                                    |                                |        |        |              |  
|Deferred tax liabilities arising from
    Deferred policy acquisition costs |                                    |                                | 3,020  |        |              |   | 2,758   |       
|                                                                            | Net unrealized gains on securities |                                |        | 4,747  |              |   |         | 8,430  |       
|                                                                            | Other                              |                                |        | 1,508  |              |   |         | 2,352  |       
|                                                                            |                                    |                                |        |        |              |  
|                                                                            |                                    | Total deferred tax liabilities |        |        | 9,275        |   |         |        | 13,540 | 
|                                                                            |                                    |                                |        |        |              |  
|Net deferred tax asset before valuation allowance                           |                                    |                                | 48,469 |        |              |   | 53,366  |       
|Valuation allowance                                                         |                                    |                                |       |        |              |   | (53,366 | )     
|                                                                            |                                    |                                |        |        |              |  
|                                                                            | Net deferred tax asset             |                                | $      | 48,469 |              |   | $       |       |       
|                                                                            |                                    |                                |        |        |              |  



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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








|                                                              |                                             |                                                                                                   |         |   |                   |   |         |   |        |  
|------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------- | - | ----------------- | - | ------- | - | ------ | -
|                                                              |                                             | Nine Months                                                                                       |         |   |                  
|                                                              |                                             | Ended                                                                                             |         |   | Year Ended        |  
|                                                              |                                             | September 30, 2005                                                                                |         |   | December 31, 2004 |  
|                                                              |                                             |                                                                                                   |         |   |                   |  
|                                                              |                                             | (In thousands)                                                                                    |        
|Valuation allowance balance, January 1                        |                                             | $                                                                                                 | (53,366 | ) |                   | $ | (50,672 | )
|                                                              | Change in valuation allowance allocated to: |                                                                                                   |         |   |                   |   |         |   |       
|                                                              |                                             | Federal income tax benefit from operations                                                        |         |   | 51,563            |   |         |   | 6,621  |  
|                                                              |                                             | Reclass benefit from continuing operations to other
    comprehensive income                      |         |   | (7,512            | ) |         |   |       |  
|                                                              |                                             | Unrealized depreciation on investment securities allocated to
    other comprehensive income      |         |   | 7,512             |   |         |   | (7,512 | )
|                                                              |                                             | Incremental tax benefit from stock based compensation allocated
    to additional paid-in-capital |         |   | 1,775             |   |         |   | (1,775 | )
|                                                              |                                             | Other items allocated to shareholders equity                                                     |         |   | 28                |   |         |   | (28    | )
|                                                              |                                             |                                                                                                   |         |   |                   |  
|Valuation allowance balance, September 30, or
    December 31 |                                             | $                                                                                                 |        |   |                   | $ | (53,366 | )
|                                                              |                                             |                                                                                                   |         |   |                   |  



|                                                         |  |                |        |  |            |   |     |            |  |  |      | 
|-------------------------------------------------------- |  | -------------- | ------ |  | ---------- | - | --- | ---------- |  |  | ---- | 
|                                                         |  | Gross          |        |  | Annual     |   |     | Year of    | 
|                                                         |  | Amounts        |        |  | Limitation |   |     | Expiration | 
|                                                         |  |                |        |  |            |   |     |            | 
|                                                         |  | (In thousands) |        |  |           
|New Mexico Physicians Mutual Liability Company merger(1) |  | $              | 2,847  |  |            | $ | 575 |            |  |  | 2010 | 
|State Mutual Insurance Company merger(1)                 |  | $              | 2,037  |  |            | $ | 340 |            |  |  | 2012 | 
|2003 net operating loss(2)                               |  | $              | 22,825 |  |            |   | N/A |            |  |  | 2018 | 






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



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AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES


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




|   |                    
|-- | -------------------
|9. | Shareholders Equity







|    |                 
|--- | ----------------
|10. | Subsequent Event



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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 to prior
    years reserves have occurred in each of the last several
    years, and additional adjustments may occur in the future.
|
| |  | Our exit from various markets and lines of business, including
    without limitation our exit from the workers compensation
    line 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 as our workers compensation line runs off. Lines
    in run-off 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. This is especially problematic on
    longer-tailed lines such as workers compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | income. This agency accounts for substantially more of our
    medical professional liability premiums written than any other
    agency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | The concentration of our business in Michigan, Illinois, Ohio
    and New Mexico leaves us vulnerable to various factors specific
    to those states. Recently passed tort reform legislation in
    Illinois, which is effective January 1, 2006, puts limits
    on non-economic damager. However, it also places significant
    reporting requirements and potential constraints related to
    pricing our products. While the impact on our results of
    operations and financial condition of the new Illinois tort
    reform is not yet known, it may have an adverse impact if
    changes in claims frequency or severity trend upwards, as we may
    be unable to obtain rate increases we deem necessary to write
    business profitably in Illinois.
|
| |  | 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 our current relationship with medical associations and
    physicians does not continue, our ability to market our products
    and compete successfully may be harmed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | If reinsurance rates rise significantly or reinsurance from
    creditworthy reinsurers becomes unavailable, our results of
    operations and financial condition may be adversely affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | A further reduction in our A.M. Best Company rating could make
    it more difficult for us to sell our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | An increase in short-term interest rates will increase our debt
    service costs related to our variable rate long-term debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We may not be able to obtain regulatory approval for rate
    increases, which may negatively affect our profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Changes in prevailing interest rates and other negative changes
    in financial market conditions may reduce our revenues, cash
    flows or assets, including the amount of unrealized gains on
    investments shown on our balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Changes in current market conditions may adversely impact the
    property value of real estate investments that we currently hold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | A downturn in general economic conditions or significant
    increase in inflation in the markets in which we compete could
    negatively affect our profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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Overview of APCapitals Operations




Significant Accounting Policies








| |            
| | -----------
| | Investments







25



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| |             
| | ------------
| | Income Taxes







Description of Ratios Analyzed






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





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



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Results of Operations-Three and Nine Months Ended
September 30, 2005 Compared to Three and Nine Months Ended
September 30, 2004






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



|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |        |         |        |   |        |         |        |  |        |         |       |  
|----------------------------- | ----------------------------------- | ------------------------------------------------------------- | -------------------------------------------------------- | ------ | ------------------------- | ------ | - | ------ | ------ | ----- | ---------- | ----- | ----- | ----- |  | ------ | ------- | ----- | - | ------ | ------- | ------ | ---------- | ------ | ------- | ------ | - | ------ | ------- | ------ |  | ------ | ------- | ----- | -
|                              |                                     | For the Three Months Ended                                    |                                                          |        | For the Nine Months Ended |       
|                              |                                     | September 30,                                                 |                                                          |        | September 30,             |       
|                              |                                     |                                                               |                                                          |        |                           |       
|                              |                                     |                                                               |                                                          | Change |                           |        |   |        | Change |      
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |      
|                              |                                     | 2005                                                          |                                                          |        | 2004                      |        |   | Dollar |        |       | Percentage |       |       | 2005  |  |        | 2004    |       |   | Dollar |         |        | Percentage |       
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     | (Dollars in thousands)                                        |                                                         
|Underwriting gain (loss)      |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |        |         |        |   |        |         |        |  |       
|                              | Medical professional liability      |                                                               | $                                                        | 2,093  |                           |        | $ | (1,197 | )      |       | $          | 3,290 |       |       |  | (274.9 | )%      |       | $ | 2,549  |         |        | $          | (8,303 | )       |        | $ | 10,852 |         |        |  | (130.7 | )%     
|                              | Other insurance lines               |                                                               |                                                          | (254   | )                         |        |   | (2,659 | )      |       |            | 2,405 |       |       |  | (90.4  | )%      |       |   | (1,896 | )       |        |            | (9,424 | )       |        |   | 7,528  |         |        |  | (79.9  | )%     
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     | Total underwriting gain (loss)                                |                                                          |        | 1,839                     |        |   |        | (3,856 | )     |            |       | 5,695 |       |  |        | (147.7  | )%    |   |        | 653     |        |            |        | (17,727 | )      |   |        | 18,380  |        |  |        | (103.7  | )%   
|Other revenue (expense) items |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |        |         |        |   |        |         |        |  |       
|                              | Investment income                   |                                                               |                                                          | 10,752 |                           |        |   | 10,947 |        |       |            | (195  | )     |       |  | (1.8   | )%      |       |   | 33,582 |         |        |            | 36,451 |         |        |   | (2,869 | )       |        |  | (7.9   | )%     
|                              | Net realized (losses) gains         |                                                               |                                                          | (428   | )                         |        |   | (332   | )      |       |            | (96   | )     |       |  | 28.9   | %       |       |   | (750   | )       |        |            | 1,233  |         |        |   | (1,983 | )       |        |  | (160.8 | )%     
|                              | Other income                        |                                                               |                                                          | 222    |                           |        |   | 156    |        |       |            | 66    |       |       |  | 42.3   | %       |       |   | 687    |         |        |            | 562    |         |        |   | 125    |         |        |  | 22.2   | %      
|                              | Investment expenses                 |                                                               |                                                          | (540   | )                         |        |   | (719   | )      |       |            | (179  | )     |       |  | 24.9   | %       |       |   | (1,216 | )       |        |            | (2,264 | )       |        |   | (1,048 | )       |        |  | 46.3   | %      
|                              | Interest expense                    |                                                               |                                                          | (601   | )                         |        |   | (428   | )      |       |            | 173   |       |       |  | (40.4  | )%      |       |   | (1,683 | )       |        |            | (1,229 | )       |        |   | 454    |         |        |  | (36.9  | )%     
|                              | Amortization expense                |                                                               |                                                          | (202   | )                         |        |   | (274   | )      |       |            | (72   | )     |       |  | 26.3   | %       |       |   | (605   | )       |        |            | (822   | )       |        |   | (217   | )       |        |  | 26.4   | %      
|                              | General and administrative expenses |                                                               |                                                          | (433   | )                         |        |   | (706   | )      |       |            | (273  | )     |       |  | 38.7   | %       |       |   | (2,269 | )       |        |            | (2,912 | )       |        |   | (643   | )       |        |  | 22.1   | %      
|                              | Other expenses                      |                                                               |                                                          | (48    | )                         |        |   | (15    | )      |       |            | 33    |       |       |  | (220.0 | )%      |       |   | (480   | )       |        |            | (162   | )       |        |   | 318    |         |        |  | (196.3 | )%     
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     | Total other revenue and expense items                         |                                                          |        | 8,722                     |        |   |        | 8,629  |       |            |       | 93    |       |  |        | 1.1     | %     |   |        | 27,266  |        |            |        | 30,857  |        |   |        | (3,591  | )      |  |        | (11.6   | )%   
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     |                                                               | Income before federal income taxes and minority interest |        |                           | 10,561 |   |        |        | 4,773 |            |       |       | 5,788 |  |        |         | 121.3 | % |        |         | 27,919 |            |        |         | 13,130 |   |        |         | 14,789 |  |        |         | 112.6 | %
|                              |                                     | Federal income tax (benefit) expense                          |                                                          |        | 3,705                     |        |   |        | 226    |       |            |       | 3,479 |       |  |        | 1539.4  | %     |   |        | (34,393 | )      |            |        | (374    | )      |   |        | (34,019 | )      |  |        | 9096.0  | %    
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     |                                                               | Income before minority interest                          |        |                           | 6,856  |   |        |        | 4,547 |            |       |       | 2,309 |  |        |         | 50.8  | % |        |         | 62,312 |            |        |         | 13,504 |   |        |         | 48,808 |  |        |         | 361.4 | %
|                              |                                     | Minority interest in (income) loss of consolidated subsidiary |                                                          |        | (31                       | )      |   |        | 2      |       |            |       | (33   | )     |  |        | (1650.0 | )%    |   |        | (373    | )      |            |        | 17      |        |   |        | (390    | )      |  |        | (2294.1 | )%   
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       
|                              |                                     |                                                               | Net income                                               |        | $                         | 6,825  |   |        | $      | 4,549 |            |       | $     | 2,276 |  |        |         | 50.0  | % |        | $       | 61,939 |            |        | $       | 13,521 |   |        | $       | 48,418 |  |        |         | 358.1 | %
|                              |                                     |                                                               |                                                          |        |                           |        |   |        |        |       |            |       |       |       |  |        |         |       |   |        |         |        |            |       





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



|                         |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |        |         |   |         |        |         |   |       |       |       |   
|------------------------ | ------------- | -------------------------------- | ------ | ------ | ------------------------------- | - | ------ | ------ | ------ | - | ---------- | ------ | ------ | ---- | ----- | ------ | ----- | -- | ------- | ------ | ------- | - | ---------- | ------ | ------- | - | ------- | ------ | ------- | - | ----- | ----- | ----- | --
|                         |               | Three Months Ended September 30, |        |        | Nine Months Ended September 30, |  
|                         |               |                                  |        |        |                                 |  
|                         |               |                                  |        | Change |                                 |   |        |        | Change |  
|                         |               |                                  |        |        |                                 |   |        |        |        |  
|                         |               | 2005                             |        |        | 2004                            |   |        | Dollar |        |   | Percentage |        |        | 2005 |       |        | 2004  |    |         | Dollar |         |   | Percentage |       
|                         |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |       
|                         |               | (Dollars in thousands)           |       
|Direct premiums written: |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |        |         |   |         |        |         |   |       |      
|                         | Illinois      |                                  | $      | 21,067 |                                 |   | $      | 24,179 |        |   | $          | (3,112 | )      |      |       | (12.9  | )%    |    | $       | 47,960 |         |   | $          | 48,397 |         |   | $       | (437   | )       |   |       | (0.9  | )%   
|                         | Michigan      |                                  |        | 18,215 |                                 |   |        | 20,026 |        |   |            | (1,811 | )      |      |       | (9.0   | )%    |    |         | 36,998 |         |   |            | 43,165 |         |   |         | (6,167 | )       |   |       | (14.3 | )%   
|                         | Ohio          |                                  |        | 8,887  |                                 |   |        | 10,976 |        |   |            | (2,089 | )      |      |       | (19.0  | )%    |    |         | 25,119 |         |   |            | 29,261 |         |   |         | (4,142 | )       |   |       | (14.2 | )%   
|                         | New Mexico    |                                  |        | 6,882  |                                 |   |        | 6,891  |        |   |            | (9     | )      |      |       | (0.1   | )%    |    |         | 16,929 |         |   |            | 16,111 |         |   |         | 818    |         |   |       | 5.1   | %    
|                         | Kentucky      |                                  |        | 1,840  |                                 |   |        | 3,047  |        |   |            | (1,207 | )      |      |       | (39.6  | )%    |    |         | 8,195  |         |   |            | 12,095 |         |   |         | (3,900 | )       |   |       | (32.2 | )%   
|                         | Florida  PIC |                                  |        | 3,223  |                                 |   |        | 2,828  |        |   |            | 395    |        |      |       | 14.0   | %     |    |         | 7,292  |         |   |            | 6,136  |         |   |         | 1,156  |         |   |       | 18.8  | %    
|                         | Florida       |                                  |        |       |                                 |   |        | 419    |        |   |            | (419   | )      |      |       | (100.0 | )%    |    |         | 251    |         |   |            | 812    |         |   |         | (561   | )       |   |       | (69.1 | )%   
|                         | Nevada        |                                  |        | 145    |                                 |   |        | 975    |        |   |            | (830   | )      |      |       | (85.1  | )%    |    |         | 250    |         |   |            | 3,416  |         |   |         | (3,166 | )       |   |       | (92.7 | )%   
|                         | Other         |                                  |        | 1,644  |                                 |   |        | 1,443  |        |   |            | 201    |        |      |       | 13.9   | %     |    |         | 2,663  |         |   |            | 4,448  |         |   |         | (1,785 | )       |   |       | (40.1 | )%   
|                         |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |       
|                         |               | Total                            |        | $      | 61,903                          |   |        | $      | 70,784 |   |            | $      | (8,881 | )    |       |        | (12.5 | )% |         | $      | 145,657 |   |            | $      | 163,841 |   |         | $      | (18,184 | ) |       |       | (11.1 | )%
|                         |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |       
|Net premiums written     |               | $                                | 53,101 |        |                                 | $ | 61,149 |        |        | $ | (8,048     | )      |        |      | (13.2 | )%     |       | $  | 123,762 |        |         | $ | 141,088    |        |         | $ | (17,326 | )      |         |   | (12.3 | )%   
|                         |               |                                  |        |        |                                 |   |        |        |        |   |            |        |        |      |       |        |       |    |         |        |         |   |            |       

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|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |      |         |         |        |      |         |         |        |    |        |       |   
|--------------------------------------------------------- | ------------- | --------------------------------------- | ------ | ------ | ------------------------------- | ------ | ------ | ------ | ------ | ------ | ---------- | ---- | ------ | ------ | ------ | -- | ----- | ----- | ------- | ------ | ------ | ------ | ---------- | ---- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | -- | ------ | ----- | --
|                                                          |               | Three Months Ended September 30,        |        |        | Nine Months Ended September 30, |       
|                                                          |               |                                         |        |        |                                 |       
|                                                          |               |                                         |        | Change |                                 |        |        |        | Change |       
|                                                          |               |                                         |        |        |                                 |        |        |        |        |       
|                                                          |               | 2005                                    |        |        | 2004                            |        |        | Dollar |        |        | Percentage |      |        | 2005   |        |    | 2004  |       |         | Dollar |        |        | Percentage |     
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|                                                          |               | (Dollars in thousands)                  |       
|Net premiums earned                                       |               | $                                       | 40,280 |        |                                 | $      | 44,169 |        |        | $      | (3,889     | )    |        |        | (8.8   | )% |       | $     | 122,981 |        |        | $      | 130,184    |      |         | $       | (7,203 | )    |         |         | (5.5   | )%
|Incurred loss and LAE:                                    |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |      |         |         |        |      |         |         |        |   
|                                                          |               | Current accident year losses            |        |        | 32,161                          |        |        |        | 36,881 |        |            |      | (4,720 | )      |        |    | (12.8 | )%    |         |        | 99,455 |        |            |      | 112,557 |         |        |      | (13,102 | )       |        |    | (11.6  | )%   
|                                                          |               | Prior year losses  Gerling commutation |        |        |                                |        |        |        |       |        |            |      |       |        |        |    |       |       |         |        |       |        |            |      | 4,139   |         |        |      | (4,139  | )       |        |    | (100.0 | )%   
|                                                          |               | Prior year losses  excluding Gerling   |        |        | (1,375                          | )      |        |        | (700   | )      |            |      | (675   | )      |        |    | 96.4  | %     |         |        | (3,925 | )      |            |      | (5,549  | )       |        |      | 1,624   |         |        |    | (29.3  | )%   
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|                                                          |               |                                         | Total  |        |                                 | 30,786 |        |        |        | 36,181 |            |      |        | (5,395 | )      |    |       | (14.9 | )%      |        |        | 95,530 |            |      |         | 111,147 |        |      |         | (15,617 | )      |    |        | (14.1 | )%
|Underwriting expenses                                     |               |                                         | 7,401  |        |                                 |        | 9,185  |        |        |        | (1,784     | )    |        |        | (19.4  | )% |       |       | 24,902  |        |        |        | 27,340     |      |         |         | (2,438 | )    |         |         | (8.9   | )%
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|Underwriting income (loss)                                |               | $                                       | 2,093  |        |                                 | $      | (1,197 | )      |        | $      | 3,290      |      |        |        | (274.9 | )% |       | $     | 2,549   |        |        | $      | (8,303     | )    |         | $       | 10,852 |      |         |         | (130.7 | )%
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|Income before federal income taxes and minority interests |               | $                                       | 11,271 |        |                                 | $      | 8,103  |        |        | $      | 3,168      |      |        |        | 39.1   | %  |       | $     | 31,797  |        |        | $      | 23,874     |      |         | $       | 7,923  |      |         |         | 33.2   | % 
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|Loss ratio:                                               |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |      |         |         |        |      |         |         |        |   
|                                                          | Accident year |                                         |        | 79.8   | %                               |        |        | 83.5   | %      |        |            | (3.7 | )%     |        |        |    |       |       |         | 80.9   | %      |        |            | 86.5 | %       |         |        | (5.6 | )%      |         |        |    |       
|                                                          | Prior years   |                                         |        | (3.4   | )%                              |        |        | (1.6   | )%     |        |            | (1.8 | )%     |        |        |    |       |       |         | (3.2   | )%     |        |            | (1.1 | )%      |         |        | (2.1 | )%      |         |        |    |       
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|                                                          | Calendar year |                                         |        | 76.4   | %                               |        |        | 81.9   | %      |        |            | (5.5 | )%     |        |        |    |       |       |         | 77.7   | %      |        |            | 85.4 | %       |         |        | (7.7 | )%      |         |        |    |       
|Underwriting expense ratio                                |               |                                         | 18.4   | %      |                                 |        | 20.8   | %      |        |        | (2.4       | )%   |        |        |        |    |       |       | 20.2    | %      |        |        | 21.0       | %    |         |         | (0.8   | )%   |         |         |        |   
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     
|Combined ratio                                            |               |                                         | 94.8   | %      |                                 |        | 102.7  | %      |        |        | (7.9       | )%   |        |        |        |    |       |       | 97.9    | %      |        |        | 106.4      | %    |         |         | (8.5   | )%   |         |         |        |   
|                                                          |               |                                         |        |        |                                 |        |        |        |        |        |            |      |        |        |        |    |       |       |         |        |        |        |            |     







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



|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |       |        |        |         |       |         |         |        |    |        |       |   
|---------------------------------------------------------------- | ------------- | --------------------------------------- | ------ | ---------- | ------------------------------- | - | ------ | ------ | ---------- | ----- | ------ | ------ | ------ | ------ | ------ | -- | ------ | ----- | ------ | ------ | ----- | ----- | ------ | ----- | ------ | ------ | ------- | ----- | ------- | ------- | ------ | -- | ------ | ----- | --
|                                                                 |               | Three Months Ended September 30,        |        |            | Nine Months Ended September 30, |  
|                                                                 |               |                                         |        |            |                                 |  
|                                                                 |               |                                         |        | Percentage |                                 |   |        |        | Percentage |      
|                                                                 |               | 2005                                    |        |            | 2004                            |   |        | Change |            |       | Change |        |        | 2005   |        |    | 2004   |       |        | Change |       |       | Change |      
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|                                                                 |               | (Dollars in thousands)                  |       
|Direct premiums written                                          |               | $                                       | (62    | )          |                                 | $ | 2,306  |        |            | $     | (2,368 | )      |        |        | (102.7 | )% |        | $     | 2,082  |        |       | $     | 8,938  |       |        | $      | (6,856  | )     |         |         | (76.7  | )%
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Net premiums written                                             |               | $                                       | (110   | )          |                                 | $ | 2,574  |        |            | $     | (2,684 | )      |        |        | (104.3 | )% |        | $     | (348   | )      |       | $     | 8,716  |       |        | $      | (9,064  | )     |         |         | (104.0 | )%
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Net premiums earned                                              |               | $                                       | (109   | )          |                                 | $ | 4,586  |        |            | $     | (4,695 | )      |        |        | (102.4 | )% |        | $     | 763    |        |       | $     | 23,775 |       |        | $      | (23,012 | )     |         |         | (96.8  | )%
|Incurred loss and LAE:                                           |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |       |        |        |         |       |         |         |        |   
|                                                                 |               | Current accident year losses            |        |            | (106                            | ) |        |        | 4,706      |       |        |        | (4,812 | )      |        |    | (102.3 | )%    |        |        | 505   |       |        |       | 21,088 |        |         |       | (20,583 | )       |        |    | (97.6  | )%   
|                                                                 |               | Prior year losses  Gerling commutation |        |            |                                |   |        |        |           |       |        |        |       |        |        |    |        |       |        |        |       |       |        |       | 271    |        |         |       | (271    | )       |        |    | (100.0 | )%   
|                                                                 |               | Prior year losses  excluding Gerling   |        |            | 114                             |   |        |        | 1,886      |       |        |        | (1,772 | )      |        |    | (94.0  | )%    |        |        | 1,809 |       |        |       | 5,194  |        |         |       | (3,385  | )       |        |    | (65.2  | )%   
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|                                                                 |               |                                         | Total  |            |                                 | 8 |        |        |            | 6,592 |        |        |        | (6,584 | )      |    |        | (99.9 | )%     |        |       | 2,314 |        |       |        | 26,553 |         |       |         | (24,239 | )      |    |        | (91.3 | )%
|Underwriting expenses                                            |               |                                         | 137    |            |                                 |   | 653    |        |            |       | (516   | )      |        |        | (79.0  | )% |        |       | 345    |        |       |       | 6,646  |       |        |        | (6,301  | )     |         |         | (94.8  | )%
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Underwriting loss                                                |               | $                                       | (254   | )          |                                 | $ | (2,659 | )      |            | $     | 2,405  |        |        |        | (90.4  | )% |        | $     | (1,896 | )      |       | $     | (9,424 | )     |        | $      | 7,528   |       |         |         | (79.9  | )%
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Income (loss) before federal income taxes and minority interests |               | $                                       | 376    |            |                                 | $ | (2,143 | )      |            | $     | 2,519  |        |        |        | (117.5 | )% |        | $     | 293    |        |       | $     | (6,460 | )     |        | $      | 6,753   |       |         |         | (104.5 | )%
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Loss ratio:                                                      |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |       |        |        |         |       |         |         |        |   
|                                                                 | Accident year |                                         |        | 97.2       | %                               |   |        | 102.6  | %          |       |        | (5.4   | )%     |        |        |    |        |       |        | 66.2   | %     |       |        | 88.7  | %      |        |         | (22.5 | )%      |         |        |    |       
|                                                                 | Prior years   |                                         |        | (104.5     | )%                              |   |        | 41.1   | %          |       |        | (145.6 | )%     |        |        |    |        |       |        | 237.1  | %     |       |        | 23.0  | %      |        |         | 214.1 | %       |         |        |    |       
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|                                                                 | Calendar year |                                         |        | (7.3       | )%                              |   |        | 143.7  | %          |       |        | (151.0 | )%     |        |        |    |        |       |        | 303.3  | %     |       |        | 111.7 | %      |        |         | 191.6 | %       |         |        |    |       
|Underwriting expense ratio                                       |               |                                         | (125.7 | )%         |                                 |   | 14.2   | %      |            |       | (139.9 | )%     |        |        |        |    |        |       | 45.2   | %      |       |       | 28.0   | %     |        |        | 17.2    | %     |         |         |        |   
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      
|Combined ratio                                                   |               |                                         | (133.0 | )%         |                                 |   | 157.9  | %      |            |       | (290.9 | )%     |        |        |        |    |        |       | 348.5  | %      |       |       | 139.7  | %     |        |        | 208.8   | %     |         |         |        |   
|                                                                 |               |                                         |        |            |                                 |   |        |        |            |       |        |        |        |        |        |    |        |       |        |        |       |       |        |      





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Liquidity and Capital Resources










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Financial Condition






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



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| |                                                            
| | -----------------------------------------------------------
| | 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             |  |                                     | (20,613 | ) |          |   | 26,375  |           |  |   | 5,762       |  |  |                | (233  | ) |  |   | 2.1   | 
|                   |  |                                     |         |   |          |   |         |           |  |   |             |  |  |                |      
|September 30, 2005 |  | $                                   | 370,435 |   |          | $ | 170,184 |           |  | $ | 540,619     |  |  |                | 3,109 |   |  | $ | 119.1 | 
|                   |  |                                     |         |   |          |   |         |           |  |   |             |  |  |                |      





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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                 |                                |                | 99,455  |         |           |   | 505    |              |        |   | 99,960  |        
|                                                     | Prior years                    |                |         | (3,925  | )         |   |        | 1,809        |        |   |         | (2,116  | )      
|                                                     |                                |                |         |         |           |   |        |              |       
|                                                     |                                | Total          |         |         | 95,530    |   |        |              | 2,314  |   |         |         | 97,844  | 
|Paid related to
    Current year                     |                                |                | 1,746   |         |           |   | 1,816  |              |        |   | 3,562   |        
|                                                     | Prior years                    |                |         | 87,379  |           |   |        | 16,456       |        |   |         | 103,835 |        
|                                                     |                                |                |         |         |           |   |        |              |       
|                                                     |                                | Total          |         |         | 89,125    |   |        |              | 18,272 |   |         |         | 107,397 | 
|                                                     |                                |                |         |         |           |   |        |              |       
|Net reserves, September 30, 2005                     |                                |                | 542,760 |         |           |   | 39,526 |              |        |   | 582,286 |        
|                                                     | Plus, reinsurance recoverables |                |         | 102,394 |           |   |        | 3,260        |        |   |         | 105,654 |        
|                                                     |                                |                |         |         |           |   |        |              |       
|Balance, September 30, 2005                          |                                | $              | 645,154 |         |           | $ | 42,786 |              |        | $ | 687,940 |        
|                                                     |                                |                |         |         |           |   |        |              |       
|Development as a % of December 31, 2004 net reserves |                                |                | (0.7    | )%      |           |   | 3.3    | %            |        |   | (0.4    | )%     
|                                                     |                                |                |         |         |           |   |        |              |       



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







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Contractual Obligations and Off-Balance Sheet Arrangements




Effects of New Accounting Pronouncements









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

General








Qualitative Information About Market and Credit Risk








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Quantitative Information About Market Risk




|                |  |                        |         |  |                        |   |         |          |  |  |           |  |  |           |         |  |          |   |         |   |  |  |      | 
|--------------- |  | ---------------------- | ------- |  | ---------------------- | - | ------- | -------- |  |  | --------- |  |  | --------- | ------- |  | -------- | - | ------- | - |  |  | ---- | 
|                |  | September 30, 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%             |  | $                      | 241,489 |  |                        | $ | (10,779 | )        |  |  | 2.14      |  |  | $         | 612,330 |  |          | $ | (45,376 | ) |  |  | 4.58 | 
|+1%             |  |                        | 246,667 |  |                        |   | (5,601  | )        |  |  | 2.35      |  |  |           | 639,822 |  |          |   | (17,884 | ) |  |  | 3.63 | 
|0               |  |                        | 252,268 |  |                        |   |         |          |  |  | 2.34      |  |  |           | 657,706 |  |          |   |         |   |  |  | 2.77 | 
|-1%             |  |                        | 256,663 |  |                        |   | 4,395   |          |  |  | 2.40      |  |  |           | 665,172 |  |          |   | 7,466   |   |  |  | 1.89 | 
|-2%             |  |                        | 261,937 |  |                        |   | 9,669   |          |  |  | 2.31      |  |  |           | 677,559 |  |          |   | 19,853  |   |  |  | 1.97 | 






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



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



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





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PART II. OTHER INFORMATION







|        |                                                                 
|------- | ----------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity Securities and Use of
    Proceeds.



|                     |  |           |        |  |            |              |              |                  |         |           |                    |  |  |  |         | 
|-------------------- |  | --------- | ------ |  | ---------- | ------------ | ------------ | ---------------- | ------- | --------- | ------------------ |  |  |  | ------- | 
|                     |  |           |        |  |            | Total Number |              |                  |        
|                     |  |           |        |  |            | of Shares    |              |                  | Maximum |          
|                     |  | Total     |        |  |            |              | Purchased as |                  |         | Number of |                   
|                     |  | Number of |        |  | Average    |              |              | Part of Publicly |         |           | Shares that May    | 
|                     |  | Shares    |        |  | Price Paid |              |              | Announced        |         |           | Yet be Purchased   | 
|Period               |  | Purchased |        |  | per Share  |              |              | Plans            |         |           | Under the Plans(1) | 
|                     |  |           |        |  |            |              |              |                  |         |           |                    | 
|July 1-31, 2005      |  |           | 44,100 |  |            | $            | 37.56        |                  |         |           | 44,100             |  |  |  | 153,469 | 
|August 1-31, 2005    |  |           |       |  |            | $            |             |                  |         |           |                   |  |  |  | 153,469 | 
|September 1-30, 2005 |  |           |       |  |            | $            |             |                  |         |           |                   |  |  |  | 153,469 | 
|                     |  |           |        |  |            |              |              |                  |         |           |                    | 
|Total                |  |           | 44,100 |  |            | $            | 37.56        |                  |         |           | 44,100             |  |  |  | 153,469 | 
|                     |  |           |        |  |            |              |              |                  |         |           |                    | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On September 11, 2003, our Board of Directors authorized
    APCapital to repurchase an additional 500,000 shares of its
    common stock. As of September 30, 2005, we had
    153,469 shares remaining to be purchased under the stock
    repurchase program. Unless terminated earlier by resolution of
    our Board of Directors, the share repurchase program will expire
    when we have repurchased all shares authorized for repurchase
    thereunder. In addition, on November 2, 2005 the Board of
    Directors authorized the purchase of an additional five percent
    of the outstanding common shares calculated as of the date that
    the previous purchase authorizations are exhausted. Based on
    outstanding common shares of 8,502,185 as of October 31,
    2005, the number of additional shares authorized to be purchased
    under the November 2, 2005 authorization would be
    approximately 417,500.






|        |         
|------- | --------
|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
|            |    |    |                    
|            | 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 | .1 |                     | Termination of Stock Purchase Agreement, dated as of
    August 31, 2005, by and among American Physicians Assurance
    Corporation and certain shareholders of Physicians Insurance
    Company of Wisconsin, Inc.

43