##### 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 1934For the quarterly period ended
    March 31, 2006o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  
  PART I.
    FINANCIAL INFORMATIONItem 1.


Financial
    StatementsCondensed
    Consolidated Balance Sheets


3Condensed
    Consolidated Statements of Income


4Condensed
    Consolidated Statements of Comprehensive Income


5Condensed
    Consolidated Statements of Cash Flows


6Notes to Condensed
    Consolidated Financial Statements


7Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


14Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


22Item 4.


Controls and
    Procedures


23PART II.
    OTHER INFORMATIONItem 1A.


Risk Factors


24Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


25Item 4.


Submission of
    Matters to a Vote of Security Holders


25Item 6.


Exhibits


25Signatures


26Exhibit Index


27Section 302 Certification of Chief Executive OfficerSection 302 Certification of Chief Financial OfficerSection 906 Certification of Chief Executive Officer and Chief Financial Officer   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  March 31,


December 31,2006


2005(Unaudited)(In thousands, except share
    data)ASSETSInvestments:Fixed-income securitiesAvailable-for-sale,
    at fair value

$
250,422


$
224,101Held-to-maturity


495,158



345,702Other investments


14,091



11,568Total investments


759,671



581,371Cash and cash equivalents


94,487



272,988Premiums receivable


44,701



50,729Reinsurance recoverable


107,491



109,368Deferred federal income taxes


40,938



44,039Property and equipment, net of
    accumulated depreciation


10,672



11,157Other assets


31,271



39,676Total assets

$
1,089,231


$
1,109,328LIABILITIESUnpaid losses and loss adjustment
    expenses

$
685,481


$
689,857Unearned premiums


77,893



82,098Federal income taxes payable


492



762Long-term debt


30,928



30,928Other liabilities


31,448



41,830Total liabilities


826,242



845,475Minority Interest in
    Consolidated Subsidiary






2,641SHAREHOLDERS
    EQUITYCommon stock, no par value,
    50,000,000 shares authorized: 8,235,582 and
    8,333,417 shares outstanding at March 31, 2006 and
    December 31, 2005, respectively






Additional
    paid-in-capital


69,140



74,360Retained earnings


188,611



179,748Accumulated other comprehensive
    income:Net unrealized appreciation on
    investments, net of deferred federal income taxes


5,238



7,104Total shareholders equity


262,989



261,212Total liabilities and
    shareholders equity

$
1,089,231


$
1,109,328    3




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Income  Three Months EndedMarch 31,2006


2005(Unaudited)(In thousands, except per share
    data)Net premiums written

$
38,965


$
42,231Change in net unearned premiums


(1,522
)


1,662Net premiums earned


37,443



43,893Investment income


11,103



10,642Net realized gains (losses)


12



(66
)Other income


477



234Total revenues and other income


49,035



54,703Losses and loss adjustment expenses


26,877



35,849Underwriting expenses


7,677



9,130Investment expenses


169



299Interest expense


716



569Amortization expense






157General and administrative expenses


363



1,038Other expenses


61



70Total expenses


35,863



47,112Income before federal income taxes
    and minority interest


13,172



7,591Federal income tax expense


4,309



170Income before minority interest


8,863



7,421Minority interest in net income of
    consolidated subsidiary






(89
)Net income

$
8,863


$
7,332Net income  per
    common shareBasic

$
1.07


$
0.85Diluted

$
1.05


$
0.82    4




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIESCondensed Consolidated Statements of Comprehensive
    Income
  Three Months EndedMarch 312006


2005(Unaudited)(In thousands)Net income

$
8,863


$
7,332Other comprehensive loss:Unrealized depreciation on
    available-for-sale
    investment securities arising during the period


(2,586
)


(10,262
)Amortization of net unrealized
    appreciation on
    held-to-maturityinvestment securities since the
    date of transfer from the
    available-for-sale
    category


(285
)


Adjustment for realized losses on
    investment securities included in net income






28Other comprehensive loss before
    tax and minority interests


(2,871
)


(10,234
)Deferred federal income tax
    (benefit) expense


(1,005
)


3,582Change in deferred tax valuation
    allowance






(3,582
)Other comprehensive loss


(1,866
)


(10,234
)Comprehensive income (loss)

$
6,997


$
(2,902
)    5




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Condensed
    Consolidated Statements of Cash Flows
  Three Months EndedMarch 31,2006


2005(Unaudited)(In thousands)Cash flows from (for) operating
    activitiesNet income

$
8,863


$
7,332Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


621



1,553Net realized (gains) losses


(12
)


66Change in fair value of derivatives






819Deferred federal income taxes


3,799



Share-based compensation


180



97Income on equity method investee


(90
)


Minority interest in net income of
    consolidated subsidiary






89Changes in:Unpaid loss and loss adjustment
    expenses


(233
)


3,709Unearned premiums


259



(840
)Other assets and liabilities


(4,630
)


(12,029
)Net cash from operating
    activities


8,757



796Cash flows from (for) investing
    activitiesPurchasesAvailable-for-sale  fixed
    maturities


(65,350
)


(114,425
)Held-to-maturity  fixed
    maturities


(158,188
)


Other investments






(606
)Property and equipment


(61
)


(259
)Proceeds from sales and maturitiesAvailable-for-sale  fixed
    maturities


30,928



33,049Held-to-maturity  fixed
    maturities


8,330



Other investments


125



62Property and equipment


5



11Deconsolidation of PIC-Florida


(2,941
)


Pending securities transactions


5,248



(7,463
)Net cash for investing
    activities


(181,904
)


(89,631
)Cash flows from (for) financing
    activitiesCommon stock repurchased


(6,110
)


Federal income tax effect of share
    based awards


510



228Proceeds from stock options
    exercised


246



900Net cash (for) from financing
    activities


(5,354
)


1,128Net decrease in cash and cash
    equivalents


(178,501
)


(87,707
)Cash and cash equivalents,
    beginning of period


272,988



190,936Cash and cash equivalents, end
    of period

$
94,487


$
103,229    6




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes
    to Condensed Consolidated Financial
    Statements  (Unaudited)
  1.
    Significant
    Accounting Policies  Basis
    of Consolidation and Reporting
      Form 10-Q Rule 10-01 Regulation S-X
  Form 10-K
  Use of
    Estimates
      Nature
    of Business and Segment Reporting
   7




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
    Share-Based
    Compensation
    Minority
    Interests
          Reclassification
    2.
    Effects
    of New Accounting Pronouncements    
    FASB Staff Position (FSP)
    No. FIN 46(R)-6, Determining the Variability to
    Be Considered in Applying FIN 46(R), which will be
    effective beginning in third quarter of 2006.
    SFAS No. 156, Accounting for Servicing of
    Financial Assets  an amendment of
    SFAS No. 140 is effective for an entitys
    first fiscal year that begins after September 15, 2006. 8




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
   
    SFAS No. 155, Accounting for Certain Hybrid
    Financial Instruments  an amendment of
    SFAS Nos. 133 and 140, which is effective for all
    financial instruments acquired or issued after the beginning of
    an entitys first fiscal year that begins after
    September 15, 2006.
    FSP No. FAS 123(R)-4, Classification of Options
    and Similar Instruments Issued as Employee Compensation That
    Allow for Cash Settlement upon the Occurrence of a Contingent
    Event. The provisions of FSP No. FAS 123(R)-4
    are effective upon the initial adoption of
    SFAS No. 123(R), which was effective January 1,
    2006 for the Company.
    SFAS No. 154, Accounting Changes and Error
    Corrections  a replacement of APB Opinion
    No. 20 and FASB Statement No. 3. This Statement
    was adopted by the Company effective January 1, 2006.    3.
    Income
    Per Share      Three Months Ended
    March 31,2006


2005(In thousands, except per share
    data)Numerator for basic and diluted
    income per common share:Net income

$
8,863


$
7,332Denominator:Denominator for basic income per
    common share  weighted average shares outstanding


8,265



8,648Effect of dilutive stock options
    and awards


190



271Denominator for diluted income per
    common share  adjusted weighted average shares
    outstanding


8,455



8,919Net
    income  basic

$
1.07


$
0.85Net
    income  diluted

$
1.05


$
0.82   4.
    Share-Based
    Compensation  Equity
    Compensation Plans
       9




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
      For the Period Ended
    March 31, 2006WeightedWeighted


Average


AggregateNumber of


Average


Remaining


IntrinsicOptions


Exercise Price


Term (In Years)


ValueOptions outstanding at
    January 1, 2006


517,400


$
22.80Granted during the period






Exercised during the period


(35,700
)

$
14.45Canceled during the period


(1,000
)

$
39.75Options outstanding at
    March 31, 2006


480,700


$
23.38



6.78


$
11,834,834Options exercisable at
    March 31, 2006


352,200


$
19.17



5.98


$
10,153,926   in-the-money
      WeightedNumber of


AverageNon-Vested


Grant DateShares


Fair ValueNon-vested shares outstanding as
    of the beginning of the year


16,079


$
17.20Granted during the year






Vested during the year


(7,921
)

$
17.20Forfeited during the year


(510
)

$
17.20Non-vested shares outstanding as
    of the end of the period


7,648


$
17.20      10




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
   Impact
    of the Adoption of SFAS No. 123(R)
    additional-paid-in-capital.
  additional-paid-in-capital.
      Three Months EndedMarch 31, 2005(In thousands, exceptper share data)Net income as reported

$
7,332Add: Stock-based employee
    compensation expense included in reported net income, net of
    related tax effects


63Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards granted since 2000, net of related tax effects


(123
)Pro forma net income

$
7,272Basic income per shareAs reported

$
0.85Pro forma

$
0.84Diluted income per shareAs reported

$
0.83Pro forma

$
0.82Basic weighted average shares


8,648Diluted weighted average shares


8,852  11




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
   Valuation
    Assumptions
    2005


2004(Binomial Lattice)


(Black-Scholes)Risk-free interest rate


4.44
%


3.12
%Dividend yield


0
%


0
%Expected volatility


10%-25
%


40
%Weighted average volatility


20
%


40
%Expected term (years)


4.0



5.0Weighted average estimated grant
    date fair value

$
7.27


$
8.55     5.
    Income
    Taxes    Three Months Ended
    March 31,2006


2005(Dollars in thousands)Income before taxes

$
13,172






$
7,591Tax at statutory rate


4,610



35.0
%


2,658



35.0
%Tax effect of:Tax exempt interest


(292
)


(2.2
)%


(57
)


(0.8
)%Other items, net


(9
)


(0.1
)%


7



0.1
%Valuation allowance






0.0
%


(2,438
)


(32.2
)%$
4,309



32.7
%

$
170



2.1
%   Form 10-K
 12




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##### Table of Contents



AMERICAN
    PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES
  Notes to
    Condensed Consolidated Financial
    Statements  (Unaudited)  (Continued)
   6.
    Shareholders
    Equity    7.
    Subsequent
    Event  Rule 10b5-1
  Rule 10b5-1
  Rule 10b5-1 Rule 10b5-1
 13




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-K
    Form 10-K
  
    Increased competition could adversely affect our ability to sell
    our products at premium rates we deem adequate, which may result
    in a decrease in premium volume, a decrease in our
    profitability, or both.
    Our reserves for unpaid losses and loss adjustment expenses are
    based on estimates that may prove to be inadequate to cover our
    losses.
    Our exit from various markets and lines of business may prove
    more costly than originally anticipated.
    Tort reform legislation may have adverse or unintended
    consequences that could materially and adversely affect our
    results of operations and financial condition.
    If we are unable to obtain or collect on ceded reinsurance, our
    results of operations and financial condition may be adversely
    affected.
    The insurance industry is subject to regulatory oversight that
    may impact the manner in which we operate our business, our
    ability to obtain future premium rate increases, the type and
    amount of our investments, the levels of capital and surplus
    deemed adequate to protect policyholder interests, or the
    ability of our insurance subsidiaries to pay dividends to the
    holding company.
    Our geographic concentration in certain Midwestern states and
    New Mexico ties our performance to the business, economic,
    regulatory and legislative conditions in those states.
    An interruption or change in current marketing and agency
    relationships could reduce the amount of premium we are able to
    write.
    A downgrade in the A.M. Best Company rating of our
    insurance subsidiaries could reduce the amount of business we
    are able to write.
    Changes in interest rates could adversely impact our results of
    operation, cash flows and financial condition.    Overview
    of APCapitals Operations
   14




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##### Table of Contents



Critical
    Accounting Policies
    Form 10-K
  Share-Based
    Compensation
      2005


2004(Binomial Lattice)


(Black-Scholes)Risk-free interest rate


4.44
%


3.12
%Dividend yield


0
%


0
%Expected volatility


10% - 25
%


40
%Weighted average volatility


20
%


40
%Expected term (years)


4.0



5.0Weighted average estimated grant
    date fair value

$
7.27


$
8.55  15




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##### Table of Contents



Pre-tax
  Description
    of Ratios Analyzed
    GAAP Ratios
    and Other GAAP Financial Measures
    Accident
    Year Loss Ratio
    Results
    of Operations  Three Months Ended March 31,
    2006 Compared to Three Months Ended March 31,
    2005
   16




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##### Table of Contents



For the Three Months Ended
    March 31,Change2006


2005


Dollar


Percentage(Dollars in thousands)Direct premiums writtenIllinois

$
15,060


$
16,956


$
(1,896
)


(11.2
)%Kentucky


3,008



5,323



(2,315
)


(43.5
)%Michigan


8,390



10,923



(2,533
)


(23.2
)%New Mexico


5,304



5,440



(136
)


(2.5
)%Ohio


8,993



8,670



323



3.7
)%PIC-Florida






1,818



(1,818
)


(100.0
)%Other


766



812



(46
)


(5.7
)%Total

$
41,521


$
49,942


$
(8,421
)


(16.9
)%Net premiums written

$
38,965


$
42,231


$
(3,266
)


(7.7
)%Net earned premium

$
37,443


$
43,893


$
(6,450
)


(14.7
)%Losses and loss adjustment expensesCurrent year losses


28,985



36,077



(7,092
)


(19.7
)%Prior year losses


(2,108
)


(228
)


(1,880
)


824.6
)%Total


26,877



35,849



(8,972
)


(25.0
)%Underwriting expenses


7,677



9,130



(1,453
)


(15.9
)%Total underwriting gain (loss)


2,889



(1,086
)


3,975



(366.0
)%Other revenue (expense) itemsInvestment income


11,103



10,642



461



4.3
)%Net realized gains (losses)


12



(66
)


78



118.2
)%Other income


477



234



243



103.8
)%Investment expenses


(169
)


(299
)


130



43.5
)%Interest expense


(716
)


(569
)


(147
)


(25.8
)%Amortization expense






(157
)


157



100.0
)%General and administrative expenses


(363
)


(1,038
)


675



65.0
)%Other expenses


(61
)


(70
)


9



12.9
)%Total other revenue and expense
    items


10,283



8,677



1,606



18.5
)%Income before federal income taxes
    and minority interest


13,172



7,591



5,581



73.5
)%Federal income tax expense


4,309



170



4,139



(2434.7
)%Income before minority interest


8,863



7,421



1,442



19.4
)%Minority interest in income of
    consolidated subsidiary






(89
)


89



(100.0
)%Net income

$
8,863


$
7,332


$
1,531



20.9
)%Loss Ratio:Accident year


77.4
%


82.2
%






4.8
%Prior years


(5.6
)%


(0.5
)%






5.1
%Calendar year


71.8
%


81.7
%






9.9
%Underwriting expense ratio


20.5
%


20.8
%






0.3
%Combined ratio


92.3
%


102.5
%






10.2
%  17




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##### Table of Contents



18




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##### Table of Contents



Form 10-K
    Liquidity
    and Capital Resources
        Rule 10b5-1 Rule 10b5-1 Rule 10b5-1 Rule 10b5-1
     19




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##### Table of Contents



available-for-sale held-to-maturity
    Financial
    Condition
    Statutory
    Capital and Surplus
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses
      Number





Average Netof Open


Net Case


Case Reserve


Net IBNR


Total NetClaims


Reserves


per Open Claim


Reserves


Reserves(In thousands, except claim and
    per claim data)December 31, 2005


2,991


$
366,138


$
122,413


$
178,123


$
544,261Change


(30
)

$
(15,878
)

$
(4,100
)

$
18,852


$
2,974March 31, 2006


2,976


$
358,199


$
120,363


$
187,549


$
545,748      20




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##### Table of Contents



Three Months Ended


Year EndedMarch 31, 2006


December 31, 2005Beginning balance, gross

$
689,857


$
693,630Less, reinsurance recoverables


107,692



101,791Net reserves, beginning balance


582,165



591,839Deconsolidation of PIC-FL


(2,418
)


Incurred related toCurrent year


28,985



131,496Prior years


(2,108
)


(4,372
)26,877



127,124Paid related toCurrent year


108



5,054Prior years


27,847



131,74427,955



136,798Net reserves, ending balance


578,669



582,165Plus, reinsurance recoverables


106,812



107,692Ending balance, gross

$
685,481


$
689,857Development as a % of beginning
    net reserves


(0.4
)%


(0.7
)%   Other
    Significant Balance Sheet Items
         21




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##### Table of Contents



Contractual
    Obligations and Off-Balance Sheet Arrangements
  Form 10-K Form 10-Q,
  Effects
    of New Accounting Pronouncements
    Item 3.
    Quantitative
    and Qualitative Disclosures About Market and Credit
    Risk  General
    available-for-sale held-to-maturity,
    Qualitative
    Information About Market and Credit Risk
  available-for-sale held-to-maturity,
 22




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##### Table of Contents



held-to-maturity held-to-maturity
  Quantitative
    Information About Market Risk
  available-for-sale available-for-sale
  March 31, 2006


December 31, 2005Portfolio


Change in


Modified


Portfolio


Change in


ModifiedChange in Rates

Value


Value


Duration


Value


Value


Duration(Dollars in thousands)


(Dollars in thousands)+2%

$
235,944


$
(14,478
)


2.68


$
215,014


$
(9,087
)


1.89+1%


242,761



(7,661
)


2.76



219,173



(4,928
)


2.160


250,422







3.07



224,101







2.27−1%


258,598



8,176



3.18



228,991



4,890



2.36−2%


267,324



16,902



3.30



234,917



10,816



2.50   Item 4.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
    Rule 13a-15(b).
 23




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##### Table of Contents



Changes
    in Internal Control Over Financial Reporting
   PART II.
    OTHER INFORMATION  Item 1A.
    Risk
    Factors  Form 10-K Form 10-K.
  Increased
    competition could adversely affect our ability to sell our
    products at premium rates we deem adequate, which may result in
    a decrease in premium volume, a decrease in our profitability,
    or both.
   24




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##### Table of Contents



Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds.    Total





Total Number of


Maximum Number ofNumber of


Average


Shares Purchased


Shares that MayShares


Price Paid


as Part of Publicly


Yet be PurchasedPurchased(1)


per Share


Announced Plans


Under the PlansFor the month ended
    January 31, 2006


56,700


$
46.68



56,700



353,169For the month ended
    February 28, 2006


23,026


$
49.06



17,500



335,669For the month ended March 31,
    2006


53,300


$
48.87



53,300



282,369For the three months ended
    March 31, 2006


133,026


$
47.92



127,500



282,369     (1)
    
    In February 2006, a member of the Companys Board of
    Directors exercised 20,000 options. As permitted by the American
    Physicians Capital, Inc. Stock Compensation Plan, the Board
    member tendered 5,526 mature shares in lieu of a cash payment.
    In addition in April 2006, the Company announced that its Board
    of Directors authorized an additional share repurchase of
    $20 million of its common shares, which will be repurchased
    under a newly adopted plan under
    Rule 10b5-1
    of the Securities Exchange Act of 1934. For further information
    regarding a repurchase plan under
    Rule 10b5-1
    see Note 7 of the Notes to the unaudited Condensed
    Consolidated Financial Statements included elsewhere in this
    report.  Item 4.
    Submission
    of Matters to a Vote of Security Holders    Votes


VotesNominee

for


WithheldBilly B. Baumann, M.D.


7,534,202



81,421R. Kevin Clinton


7,524,802



90,821Larry W. Thomas


7,536,202



79,421   For


Against


AbstainProposal to ratify appointment of
    BDO Seidman, LLP as the Companys independent registered
    public accountants


7,535,532



79,243



848   Item 6.
    Exhibits  Exhibits.
   25




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##### Table of Contents



SIGNATURES      By:
    /s/  R. Kevin Clinton       By:
    /s/  Frank H. Freund          26




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##### Table of Contents



EXHIBIT INDEX  ExhibitNo.

Exhibit Description10
.46

Summary of Incentive Compensation
    Plan as of March 2006 (filed as an exhibit to the Companys
    Form 8-K
    filed on March 15, 2006 and incorporated herein by
    reference)31
.1

Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 193431
.2

Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a)
    under the Securities Exchange Act of 193432


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  27