##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|  |  |                                                                                                                                                                                                                 |  | 
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2002                                                                |  | 
| 
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF
    THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from                to                
    Commission File Number: 000-32057 |  | 

American Physicians Capital, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Michigan                                                           |  | 38-3543910                              
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS employer
    identification number)

1301 North Hagadorn Road, East Lansing,
Michigan 48823

(Address of principal executive offices)(Zip
Code)


Registrants telephone number, including
area code: (517) 351-1150

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act: Common Stock, no par value


Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.

YESxNOo

The number of shares outstanding of the
registrants common stock, no par value per share, as of
November 8, 2002 was 8,694,812.



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TABLE OF CONTENTS



|                                                                                                                    |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                                                  
|PART I. FINANCIAL INFORMATION                                                                                      
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                                              
|ITEM 1. Financial Statements                                                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)                                                            
|CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                                          
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                                        
|AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                      
|ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                                 
|ITEM 4. Controls and Procedures                                                                                    
|PART II. OTHER INFORMATION                                                                                         
|ITEM 6. Exhibits and Reports on Form 8-K                                                                           
|SIGNATURES                                                                                                         
|CERTIFICATION OF DISCLOSURE                                                                                        
|CERTIFICATION OF DISCLOSURE                                                                                        
|Certification of CEO Pursuant to Section 906                                                                       
|Certification of CFO Pursuant to Section 906                                                                       



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TABLE OF CONTENTS


|                              |                                                                                                   |  |    |    | 
|----------------------------- | ------------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I. FINANCIAL INFORMATION |                                                                                                   |  |    |   
|                              | Item 1. Financial Statements (Unaudited)                                                          |  |    |    | 
|                              | Condensed
    Consolidated Balance Sheets                                                         |  |    | 3  | 
|                              | Condensed
    Consolidated Statements of Income                                                   |  |    | 4  | 
|                              | Condensed
    Consolidated Statements of Comprehensive Income                                     |  |    | 5  | 
|                              | Condensed
    Consolidated Statements of Cash Flows                                               |  |    | 6  | 
|                              | Notes
    to Condensed Consolidated Financial Statements                                          |  |    | 7  | 
|                              | Item 2. Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |    | 11 | 
|                              | Item 3. Quantitative and Qualitative
    Disclosures About Market Risk                            |  |    | 20 | 
|                              | Item 4. Controls and Procedures                                                                   |  |    | 21 | 
|PART II. OTHER INFORMATION    |                                                                                                   |  |    |   
|                              | Item 6. Exhibits and Reports on
    Form 8-K                                                      |  |    | 22 | 
|Signatures                    |                                                                                                   |  | 23 |   
|Certification of Disclosure   |                                                                                                   |  | 24 |   

2



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PART I. FINANCIAL INFORMATION


AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED BALANCE
SHEETS







ITEM 1. Financial Statements


|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |         |           | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------------ | --------- | - | ------- | ------- | --------- | 
|                                                                                                                                                                        |                                                                                      | September 30,                              |         | December 31,
|                                                                                                                                                                        |                                                                                      | 2002                                       |         | 2001        
|                                                                                                                                                                        |                                                                                      |                                            |         |             
|                                                                                                                                                                        |                                                                                      | (Unaudited)                                |         |             
|                                                                                                                                                                        |                                                                                      |                                           
|                                                                                                                                                                        |                                                                                      | (In thousands, except share data)         
|Assets                                                                                                                                                                  |                                                                                      |                                            |         |              |           |   |         |        
|Investments:                                                                                                                                                            |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        | Fixed maturities, at fair value                                                      |                                            | $       | 681,902      |           |   | $       | 605,867 |          
|                                                                                                                                                                        | Equity securities, at fair value                                                     |                                            |         | 655          |           |   |         | 656     |          
|                                                                                                                                                                        | Other investments                                                                    |                                            |         | 38,204       |           |   |         | 39,541  |          
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        |                                                                                      | Total investments                          |         |              | 720,761   |   |         |         | 646,064   | 
|Cash and cash equivalents                                                                                                                                               |                                                                                      |                                            | 66,748  |              |           |   | 106,444 |        
|Premiums receivable                                                                                                                                                     |                                                                                      |                                            | 71,316  |              |           |   | 64,194  |        
|Reinsurance recoverable                                                                                                                                                 |                                                                                      |                                            | 96,757  |              |           |   | 95,887  |        
|Federal income tax recoverable                                                                                                                                          |                                                                                      |                                            | 11,185  |              |           |   | 11,266  |        
|Deferred federal income taxes                                                                                                                                           |                                                                                      |                                            | 35,723  |              |           |   | 45,940  |        
|Property and equipment, net of accumulated
    depreciation                                                                                                             |                                                                                      |                                            | 14,319  |              |           |   | 14,742  |        
|Goodwill                                                                                                                                                                |                                                                                      |                                            | 13,968  |              |           |   | 13,968  |        
|Other assets                                                                                                                                                            |                                                                                      |                                            | 43,403  |              |           |   | 40,412  |        
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        |                                                                                      | Total assets                               |         | $            | 1,074,180 |   |         | $       | 1,038,917 | 
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|Liabilities                                                                                                                                                             |                                                                                      |                                            |         |              |           |   |         |        
|Unpaid losses and loss adjustment expenses                                                                                                                              |                                                                                      | $                                          | 628,286 |              |           | $ | 597,046 |        
|Unearned premiums                                                                                                                                                       |                                                                                      |                                            | 119,510 |              |           |   | 100,056 |        
|Other liabilities                                                                                                                                                       |                                                                                      |                                            | 35,517  |              |           |   | 34,850  |        
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        |                                                                                      | Total liabilities                          |         |              | 783,313   |   |         |         | 731,952   | 
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|Shareholders Equity                                                                                                                                                    |                                                                                      |                                            |         |              |           |   |         |        
|Common stock, no par value, 50,000,000 shares
    authorized: 8,695,452 and 10,238,122 shares outstanding at
    September 30, 2002 and December 31, 2001, respectively |                                                                                      |                                            |         |              |           |   |         |        
|Additional paid-in-capital                                                                                                                                              |                                                                                      |                                            | 92,197  |              |           |   | 119,463 |        
|Retained earnings                                                                                                                                                       |                                                                                      |                                            | 174,476 |              |           |   | 182,674 |        
|Unearned stock compensation                                                                                                                                             |                                                                                      |                                            | (773    | )            |           |   | (1,001  | )      
|Accumulated other comprehensive income:                                                                                                                                 |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        | Net unrealized appreciation on investments, net
    of deferred federal income taxes |                                            |         | 24,967       |           |   |         | 5,829   |          
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        |                                                                                      | Total shareholders equity                 |         |              | 290,867   |   |         |         | 306,965   | 
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        
|                                                                                                                                                                        |                                                                                      | Total liabilities and shareholders equity |         | $            | 1,074,180 |   |         | $       | 1,038,917 | 
|                                                                                                                                                                        |                                                                                      |                                            |         |              |           |   |         |        

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

3



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)


|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |         |  
|----------------------------------- | ------------------------ | ------------------------------------ | ------- | ----------------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                    |                          |                                      |         |                  
|                                    |                          | Three Months Ended                   |         | Nine Months Ended
|                                    |                          | September 30,                        |         | September 30,    
|                                    |                          |                                      |         |                  
|                                    |                          | 2002                                 |         | 2001              |   | 2002 |         | 2001   
|                                    |                          |                                      |         |                   |   |      |         |        
|                                    |                          |                                     
|                                    |                          | (In thousands except per share data)
|Net premiums written                |                          | $                                    | 74,944  |                   |   | $    | 56,833  |         |   | $ | 188,323 |         |   | $ | 149,350 |        
|Change in net unearned premiums     |                          |                                      | (13,523 | )                 |   |      | (7,868  | )       |   |   | (17,353 | )       |   |   | (1,793  | )      
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Net premiums earned      |                                      |         | 61,421            |   |      |         | 48,965  |   |   |         | 170,970 |   |   |         | 147,557 |  
|Investment income                   |                          |                                      | 11,421  |                   |   |      | 11,619  |         |   |   | 34,108  |         |   |   | 36,409  |        
|Net realized losses                 |                          |                                      | (390    | )                 |   |      | (2,358  | )       |   |   | (678    | )       |   |   | (2,540  | )      
|Other income                        |                          |                                      | 359     |                   |   |      | 4       |         |   |   | 472     |         |   |   | 514     |        
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Total revenues           |                                      |         | 72,811            |   |      |         | 58,230  |   |   |         | 204,872 |   |   |         | 181,940 |  
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|Losses and loss adjustment expenses |                          |                                      | 62,928  |                   |   |      | 100,451 |         |   |   | 178,461 |         |   |   | 186,598 |        
|Underwriting expenses               |                          |                                      | 11,913  |                   |   |      | 11,186  |         |   |   | 35,364  |         |   |   | 32,772  |        
|Investment expenses                 |                          |                                      | 481     |                   |   |      | 411     |         |   |   | 2,085   |         |   |   | 1,354   |        
|Interest expense                    |                          |                                      | 95      |                   |   |      | 75      |         |   |   | 278     |         |   |   | 310     |        
|Amortization expense                |                          |                                      |        |                   |   |      | 533     |         |   |   |        |         |   |   | 1,600   |        
|General and administrative expenses |                          |                                      | 390     |                   |   |      | 618     |         |   |   | 1,303   |         |   |   | 1,550   |        
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Total expenses           |                                      |         | 75,807            |   |      |         | 113,274 |   |   |         | 217,491 |   |   |         | 224,184 |  
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Loss before income taxes |                                      |         | (2,996            | ) |      |         | (55,044 | ) |   |         | (12,619 | ) |   |         | (42,244 | )
|Federal income tax benefit          |                          |                                      | (1,048  | )                 |   |      | (19,216 | )       |   |   | (4,421  | )       |   |   | (14,977 | )      
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Net loss                 |                                      | $       | (1,948            | ) |      | $       | (35,828 | ) |   | $       | (8,198  | ) |   | $       | (27,267 | )
|                                    |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|Net loss per common share           |                          |                                      |         |                   |   |      |         |         |   |   |         |         |   |   |         |        
|                                    | Basic                    |                                      | $       | (0.21             | ) |      | $       | (3.26   | ) |   | $       | (0.85   | ) |   | $       | (2.42   | )
|                                    | Diluted                  |                                      | $       | (0.21             | ) |      | $       | (3.26   | ) |   | $       | (0.85   | ) |   | $       | (2.42   | )

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

4



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME


(UNAUDITED)


|                            |                                           |                                 |                             |                   |        |       |         |        |        |         |        |        |         |        |         |        |        |         |  
|--------------------------- | ----------------------------------------- | ------------------------------- | --------------------------- | ----------------- | ------ | ----- | ------- | ------ | ------ | ------- | ------ | ------ | ------- | ------ | ------- | ------ | ------ | ------- | -
|                            |                                           |                                 |                             |                  
|                            |                                           | Three Months Ended              |                             | Nine Months Ended
|                            |                                           | September 30,                   |                             | September 30,    
|                            |                                           |                                 |                             |                  
|                            |                                           | 2002                            |                             | 2001              |        | 2002  |         | 2001  
|                            |                                           |                                 |                             |                   |        |       |         |       
|                            |                                           |                                
|                            |                                           | (In thousands)                 
|Net loss                    |                                           | $                               | (1,948                      | )                 |        | $     | (35,828 | )      |        | $       | (8,198 | )      |         | $      | (27,267 | )     
|Other comprehensive income: |                                           |                                 |                             |                   |        |       |         |        |        |         |        |        |         |        |         |       
|                            | Unrealized gains on investment securities |                                 |                             | 16,383            |        |       |         | 18,845 |        |         |        | 29,443 |         |        |         | 19,642 |       
|                            |                                           | Effect of deferred income taxes |                             |                   | (5,734 | )     |         |        | (6,596 | )       |        |        | (10,305 | )      |         |        | (6,875 | )      
|                            |                                           |                                 |                             |                   |        |       |         |        |        |         |        |        |         |        |         |       
|                            |                                           |                                 | Comprehensive income (loss) |                   | $      | 8,701 |         |        | $      | (23,579 | )      |        | $       | 10,940 |         |        | $      | (14,500 | )
|                            |                                           |                                 |                             |                   |        |       |         |        |        |         |        |        |         |        |         |       

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

5



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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED)


|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |         |          |          |  
|------------------------------------ | ----------------------------------------------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------- | ------- | ------- | ------- | - | ------- | -------- | -------- | -
|                                     |                                                                                     |                                                         
|                                     |                                                                                     | Nine Months Ended                                       
|                                     |                                                                                     | September 30,                                           
|                                     |                                                                                     |                                                         
|                                     |                                                                                     | 2002                                                     |                                                    | 2001   
|                                     |                                                                                     |                                                          |                                                    |        
|                                     |                                                                                     |                                                         
|                                     |                                                                                     | (In thousands)                                          
|Cash flows from operating activities |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     | Net loss                                                                            |                                                          | $                                                  | (8,198  | )       |         | $ | (27,267 | )       
|                                     | Adjustments to reconcile net loss to net cash
    provided by operating activities: |                                                          |                                                    |         |         |         |   |         |         
|                                     |                                                                                     | Depreciation and amortization                            |                                                    |         | 3,011   |         |   |         | 3,666    |         
|                                     |                                                                                     | Net realized losses                                      |                                                    |         | 678     |         |   |         | 2,540    |         
|                                     |                                                                                     | Deferred federal income taxes                            |                                                    |         | (196    | )       |   |         | (5,436   | )       
|                                     |                                                                                     | Increase in unpaid loss and loss adjustment
    expenses |                                                    |         | 31,240  |         |   |         | 89,152   |         
|                                     |                                                                                     | Increase in unearned premiums                            |                                                    |         | 19,454  |         |   |         | 7,592    |         
|                                     |                                                                                     | Changes in other assets and liabilities                  |                                                    |         | (8,759  | )       |   |         | (64,176  | )       
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     |                                                                                     |                                                          | Net cash provided by operating
    activities      |         |         | 37,230  |   |         |          | 6,071    |  
|Cash flows from investing activities |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     | Purchases                                                                           |                                                          |                                                    |         |         |         |   |         |         
|                                     |                                                                                     | Available-for-sale  fixed maturities                    |                                                    |         | (84,973 | )       |   |         | (233,517 | )       
|                                     |                                                                                     | Leasehold Improvements                                   |                                                    |         | (224    | )       |   |         |          |         
|                                     |                                                                                     | Property and equipment                                   |                                                    |         | (1,195  | )       |   |         | (1,782   | )       
|                                     | Sales and maturities                                                                |                                                          |                                                    |         |         |         |   |         |         
|                                     |                                                                                     | Available-for-sale  fixed maturities                    |                                                    |         | 37,719  |         |   |         | 92,416   |         
|                                     |                                                                                     | Available-for-sale  equity securities                   |                                                    |         |        |         |   |         | 180      |         
|                                     |                                                                                     | Other investments                                        |                                                    |         |        |         |   |         | 260      |         
|                                     |                                                                                     | Property and equipment                                   |                                                    |         |        |         |   |         | 1,919    |         
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     |                                                                                     |                                                          | Net cash used in investing
    activities          |         |         | (48,673 | ) |         |          | (140,524 | )
|Cash flows from financing activities |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     | Common stock repurchased                                                            |                                                          |                                                    | (27,483 | )       |         |   | (13,150 | )       
|                                     | Principal payment on note payable                                                   |                                                          |                                                    | (1,000  | )       |         |   | (1,000  | )       
|                                     | Other sources                                                                       |                                                          |                                                    | 230     |         |         |   |        |         
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     |                                                                                     |                                                          | Net cash used in financing
    activities          |         |         | (28,253 | ) |         |          | (14,150  | )
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     |                                                                                     |                                                          | Net decrease in cash and cash
    equivalents      |         |         | (39,696 | ) |         |          | (148,603 | )
|                                     |                                                                                     |                                                          | Cash and cash equivalents, beginning of
    period |         |         | 106,444 |   |         |          | 255,878  |  
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        
|                                     |                                                                                     |                                                          | Cash and cash equivalents, end of
    period       |         | $       | 66,748  |   |         | $        | 107,275  |  
|                                     |                                                                                     |                                                          |                                                    |         |         |         |   |        

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

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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)

1.     Basis of
Presentation

The accompanying condensed consolidated financial
statements include the accounts of American Physicians Capital,
Inc. (APCapital) and its wholly owned subsidiaries,
together referred to in this report as the Company.
All significant intercompany accounts and transactions are
eliminated in consolidation.

The Company is principally engaged in the
business of providing medical professional liability and
workers compensation insurance throughout the United
States with a concentration of writings in the Midwest.

The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the
United States of America (GAAP) and with the
instructions for Form 10-Q and Rule 10-01 of
Regulation S-X as they apply to interim financial
information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete
financial statements.

In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. The
operating results for the three-month and nine-month periods
ended September 30, 2002, are not necessarily indicative of
the results to be expected for the year ending December 31,
2002. The accompanying condensed consolidated financial
statements should be read with the annual consolidated financial
statements and notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31,
2001.

In preparing the financial statements, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of
the balance sheets and revenues and expenses for the periods
then ended. Actual results may differ from those estimates.

The most significant estimates that are
susceptible to significant change in the near term relate to the
determination of the losses and loss adjustment expense
reserves. Although considerable variability is inherent in these
estimates, management believes that the reserves are adequate.
The estimates are reviewed regularly and adjusted as necessary.
Such adjustments are reflected in current operations.

2.     Shareholders
Equity

In March, July and November 2001,
May 2002 and twice in August 2002, APCapitals
Board of Directors authorized six separate programs to purchase
5% of its outstanding common stock, representing approximately
3,115,000 shares. The Companys purchase of any of its
shares is subject to limitations that may be imposed by
applicable securities laws and regulations and the rules of the
Nasdaq Stock Market. The timing of the purchases and the number
of shares to be bought at any one time depend on market
conditions and the Companys capital requirements. During
the quarter, the Company purchased 946,100 shares pursuant to
these authorizations, bringing the total number of shares
purchased to 2,924,270, at a total cost of $52,707,000. As of
September 30, 2002, the Company has approximately
191,000 shares of its August 28, 2002 stock repurchase
program remaining to be purchased.

3.     Earnings Per
Share

Net loss per common share is computed by dividing
net loss by the weighted average number of shares of common
stock and common stock equivalents (e.g., stock options and
stock awards) outstanding calculated on a daily basis. The
weighted average shares outstanding were 9,061,300 and 9,597,521
for the three months and nine months ended September 30,
2002, respectively, and 11,002,095 and 11,274,980 for the three
months and nine months ended September 30, 2001,
respectively.

7



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AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the computation of
basic and diluted loss per share:

|                                                           |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------- | - | ----------------- | - | ---- | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                           |                                                                                                  |                                       |   |                  
|                                                           |                                                                                                  | Three Months Ended                    |   | Nine Months Ended
|                                                           |                                                                                                  | September 30,                         |   | September 30,    
|                                                           |                                                                                                  |                                       |   |                  
|                                                           |                                                                                                  | 2002                                  |   | 2001              |   | 2002 |   | 2001   
|                                                           |                                                                                                  |                                       |   |                   |   |      |   |        
|                                                           |                                                                                                  |                                      
|                                                           |                                                                                                  | (In thousands, except per share data)
|Numerator for basic and diluted loss per
    common share: |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|                                                           | Net loss                                                                                         |                                       | $ | (1,948            | ) |      | $ | (35,828 | ) |  | $ | (8,198 | ) |  | $ | (27,267 | )
|                                                           |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|Denominator:                                               |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|                                                           | Denominator for basic loss per common
    share  weighted average shares outstanding            |                                       |   | 9,061             |   |      |   | 11,002  |   |  |   | 9,598  |   |  |   | 11,275  |  
|                                                           | Effect of dilutive stock options and awards(1)                                                   |                                       |   |                  |   |      |   |        |   |  |   |       |   |  |   |        |  
|                                                           |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|                                                           | Denominator for diluted loss per common
    share  adjusted weighted average shares outstanding |                                       |   | 9,061             |   |      |   | 11,002  |   |  |   | 9,598  |   |  |   | 11,275  |  
|                                                           |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|Loss per common share                                      |                                                                                                  |                                       |   |                   |   |      |   |         |   |  |   |        |   |  |   |        
|                                                           | Basic                                                                                            |                                       | $ | (0.21             | ) |      | $ | (3.26   | ) |  | $ | (0.85  | ) |  | $ | (2.42   | )
|                                                           | Diluted                                                                                          |                                       | $ | (0.21             | ) |      | $ | (3.26   | ) |  | $ | (0.85  | ) |  | $ | (2.42   | )




|    |                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As the Company was in a net loss position for the
    three months and nine months ended September 30, 2002 and
    2001, no effect of options or other stock awards was calculated
    as the impact would be anti-dilutive.

4.     Goodwill

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standard
(SFAS) No. 142, Goodwill and Other
Intangible Assets. The Company has only one intangible
asset, which is the goodwill associated with the purchase of
Stratton-Cheeseman Management Company in 1999. As of
September 30, 2002, the Company has substantially completed
the transitional impairment testing provisions contained in SFAS
No. 142. Based on the preliminary results of the impairment
testing, the Company will likely write off the remaining
$2.1 million of goodwill associated with its health and
personal and commercial reporting units in the fourth quarter.
At September 30, 2002, goodwill totaled $17.8 million,
with accumulated amortization of $3.9 million, or net
goodwill of $13.9 million. The Companys net loss per

8



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

share for all periods presented in the condensed
consolidated statements of income, exclusive of amortization
expense recognized in those periods related to goodwill no
longer being amortized, would have been as follows:

|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |         |       | 
|----------------------- | ----------------- | ------------------------------------- | - | ----------------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | ----- | 
|                        |                   |                                       |   |                  
|                        |                   | Three Months Ended                    |   | Nine Months Ended
|                        |                   | September 30,                         |   | September 30,    
|                        |                   |                                       |   |                  
|                        |                   | 2002                                  |   | 2001              |   | 2002 |   | 2001   
|                        |                   |                                       |   |                   |   |      |   |        
|                        |                   |                                      
|                        |                   | (In thousands, except per share data)
|Net loss:               |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Reported net loss |                                       | $ | (1,948            | ) |      | $ | (35,828 | )    |  | $ | (8,198 | ) |  | $ | (27,267 | )    
|                        | Add back:         |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |         |      
|                        |                   | Goodwill amortization, net of tax     |   |                   |  |      |   |         | 346  |  |   |        |  |  |   |         | 1,040 | 
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Adjusted net loss |                                       | $ | (1,948            | ) |      | $ | (35,482 | )    |  | $ | (8,198 | ) |  | $ | (26,227 | )    
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|Basic loss per share:   |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Reported net loss |                                       | $ | (0.21             | ) |      | $ | (3.26   | )    |  | $ | (0.85  | ) |  | $ | (2.42   | )    
|                        | Add back:         |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |         |      
|                        |                   | Goodwill amortization, net of tax     |   |                   |  |      |   |         | 0.03 |  |   |        |  |  |   |         | 0.09  | 
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Adjusted net loss |                                       | $ | (0.21             | ) |      | $ | (3.23   | )    |  | $ | (0.85  | ) |  | $ | (2.33   | )    
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|Diluted loss per share: |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Reported net loss |                                       | $ | (0.21             | ) |      | $ | (3.26   | )    |  | $ | (0.85  | ) |  | $ | (2.42   | )    
|                        | Add back:         |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |         |      
|                        |                   | Goodwill amortization, net of tax     |   |                   |  |      |   |         | 0.03 |  |   |        |  |  |   |         | 0.09  | 
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        
|                        | Adjusted net loss |                                       | $ | (0.21             | ) |      | $ | (3.23   | )    |  | $ | (0.85  | ) |  | $ | (2.33   | )    
|                        |                   |                                       |   |                   |   |      |   |         |      |  |   |        |   |  |   |        

5.     Segment
Information

The Company is organized and operates principally
in the property and casualty insurance industry and has five
reportable segments  medical professional liability,
workers compensation, health and other, personal and
commercial lines, and corporate and investments. The accounting
policies of the segments are described in the notes to the
financial statements included in the Companys most recent
Annual Report on Form 10-K. Expense allocations are based
primarily on loss and loss adjustment expenses by line of
business and certain other estimates for underwriting expenses.
Reported segment results would change if different allocation
methods were applied.

Effective January 1, 2001, the Company began
non-renewing personal and commercial policies. As of
December 31, 2001, all net written premiums related to
personal and commercial policies previously issued had been
fully earned. The personal and commercial segment will continue
to generate income (loss) before taxes due to the
development of unpaid loss and loss adjustment expenses
associated with this segment. In 2002, the Company did, however,
write a small amount of direct personal and commercial business
in connection with one of its alternative-risk-transfer
programs. Direct premiums written in 2002 related to this
program were approximately $380,000, and were fully ceded to a
reinsurer. The personal and commercial alternative-risk-transfer
program was discontinued in the third quarter of 2002.

9



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##### Table of Contents



AMERICAN PHYSICIANS CAPITAL, INC. AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company does not allocate assets, investment
income or income taxes to operating segments. Segment
information, for which results are regularly reviewed by
management in making decisions about resources to be allocated
to the segments and assessing their performance, is summarized
as follows:

|                                   |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |         |         |  
|---------------------------------- | ------------------------------ | ------------------------------ | - | ----------------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                   |                                |                                |   |                  
|                                   |                                | Three Months Ended             |   | Nine Months Ended
|                                   |                                | September                      |   | September        
|                                   |                                |                                |   |                  
|                                   |                                | 2002                           |   | 2001              |        | 2002 |   | 2001   
|                                   |                                |                                |   |                   |        |      |   |        
|                                   |                                |                               
|                                   |                                | (In thousands)                
|Revenues:                          |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        
|                                   | Medical professional liability |                                | $ | 40,089            |        |      | $ | 29,261  |         |   | $ | 108,064 |         |   | $ | 88,418  |        
|                                   | Workers compensation          |                                |   | 15,833            |        |      |   | 13,526  |         |   |   | 46,636  |         |   |   | 39,765  |        
|                                   | Health and other               |                                |   | 5,499             |        |      |   | 5,198   |         |   |   | 16,860  |         |   |   | 13,808  |        
|                                   | Personal and commercial        |                                |   |                  |        |      |   | 980     |         |   |   | (590    | )       |   |   | 5,566   |        
|                                   | Corporate and investments      |                                |   | 11,390            |        |      |   | 9,265   |         |   |   | 33,902  |         |   |   | 34,383  |        
|                                   |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        
|                                   |                                | Total revenue                  |   | $                 | 72,811 |      |   | $       | 58,230  |   |   | $       | 204,872 |   |   | $       | 181,940 |  
|                                   |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        
|(Loss) income before income taxes: |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        
|                                   | Medical professional liability |                                | $ | (13,428           | )      |      | $ | (49,880 | )       |   | $ | (38,879 | )       |   | $ | (52,618 | )      
|                                   | Workers compensation          |                                |   | 965               |        |      |   | (9,524  | )       |   |   | (268    | )       |   |   | (12,655 | )      
|                                   | Health and other               |                                |   | (633              | )      |      |   | (2,408  | )       |   |   | (2,488  | )       |   |   | (3,080  | )      
|                                   | Personal and commercial        |                                |   | (324              | )      |      |   | (862    | )       |   |   | (1,220  | )       |   |   | (3,460  | )      
|                                   | Corporate and investments      |                                |   | 10,424            |        |      |   | 7,630   |         |   |   | 30,236  |         |   |   | 29,569  |        
|                                   |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        
|                                   |                                | Total loss before income taxes |   | $                 | (2,996 | )    |   | $       | (55,044 | ) |   | $       | (12,619 | ) |   | $       | (42,244 | )
|                                   |                                |                                |   |                   |        |      |   |         |         |   |   |         |         |   |   |        

10



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##### Table of Contents








ITEM 2.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations


The following discussion and analysis should be
read in conjunction with the condensed consolidated financial
statements and the notes thereto included elsewhere in this
report and the Companys Annual Report on Form 10-K
for the year ended December 31, 2001. The following
discussion of our financial condition and results of operations
contains certain forward-looking statements related to our
anticipated future financial condition and operating results and
our current business plans. When we use any of the words
believes, expects,
anticipates, estimates or similar
expressions, we are making forward-looking statements. These
forward-looking statements represent our outlook only as of the
date of this report. While we believe that any forward
looking-statements we have made are reasonable, actual results
could differ materially since these statements are based on our
current expectations and are subject to risks and uncertainties.
These risks and uncertainties are detailed from time to time in
reports filed by the Company with the Securities and Exchange
Commission. See, for example, the disclosures in
Item  1 Business  Uncertainties
Relating to Forward-Looking Statements of the
Companys Annual Report on Form 10-K for the year
ended December 31, 2001, and in other reports filed by the
Company with the Securities and Exchange Commission. Other
factors not currently anticipated by management may also
materially and adversely affect the Companys financial
position and results of operations. The Company does not
undertake, and expressly disclaims any obligation to update or
alter its forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
applicable law.

We operate primarily in three insurance product
segments: Medical Professional Liability, Workers
Compensation and Health/ Other. Effective December 31,
2001, the Company exited the personal and commercial lines of
business. The personal and commercial insurance operating
segment will continue to generate income (loss) due to the
development of unpaid loss and loss adjustment expenses
associated with this segment. See Note 5 to the Notes to
Condensed Consolidated Financial Statements for further
information regarding the operating results of our business
segments.

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

11



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##### Table of Contents



Summary Premium Volume by Product Segment and
Major Market

|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |       |       |        | 
|------------------------ | ------------------------------ | -------------------------------- | ------------------------------------ | ------------------------------- | ------ | ------ |  | ----- | ----- | ------ | - | ------ | ------ | ------ |  | ----- | ----- | ------ | - | ------- | ------ | ------- |  | ----- | ----- | ------ | - | ------ | ------ | ------- |  | ----- | ----- | ------ | 
|                         |                                |                                  |                                      |                                
|                         |                                | Three Months Ended September 30, |                                      | Nine Months Ended September 30,
|                         |                                |                                  |                                      |                                
|                         |                                |                                  |                                      |                                 |        |        |  |      
|                         |                                | 2002                             |                                      | 2001                            |        | 2002   |  | 2001 
|                         |                                |                                  |                                      |                                 |        |        |  |      
|                         |                                |                                  |                                      | % of                            |        |        |  | % of  |       |        |   | % of   |        |        |  | % of 
|                         |                                | Amount                           |                                      | Total                           |        | Amount |  | Total |       | Amount |   | Total  |        | Amount |  | Total
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |      
|                         |                                |                                 
|                         |                                | (dollars in thousands)          
|Direct premiums written: |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |       |      
|                         |                                | Michigan                         |                                      | $                               | 18,852 |        |  |       | 22.5% |        |   | $      | 16,203 |        |  |       | 24.5% |        |   | $       | 35,309 |         |  |       | 16.7% |        |   | $      | 30,309 |         |  |       | 17.9% |       
|                         |                                | Ohio                             |                                      |                                 | 11,502 |        |  |       | 13.7% |        |   |        | 7,203  |        |  |       | 10.9% |        |   |         | 27,621 |         |  |       | 13.1% |        |   |        | 17,973 |         |  |       | 10.6% |       
|                         |                                | Illinois                         |                                      |                                 | 15,180 |        |  |       | 18.1% |        |   |        | 9,181  |        |  |       | 13.9% |        |   |         | 29,207 |         |  |       | 13.8% |        |   |        | 17,597 |         |  |       | 10.4% |       
|                         |                                | Florida                          |                                      |                                 | 7,335  |        |  |       | 8.8%  |        |   |        | 6,798  |        |  |       | 10.3% |        |   |         | 19,233 |         |  |       | 9.1%  |        |   |        | 16,918 |         |  |       | 10.0% |       
|                         |                                | Kentucky                         |                                      |                                 | 3,116  |        |  |       | 3.7%  |        |   |        | 2,810  |        |  |       | 4.2%  |        |   |         | 13,129 |         |  |       | 6.2%  |        |   |        | 13,362 |         |  |       | 7.9%  |       
|                         |                                | New Mexico                       |                                      |                                 | 4,330  |        |  |       | 5.2%  |        |   |        | 3,199  |        |  |       | 4.8%  |        |   |         | 8,375  |         |  |       | 4.0%  |        |   |        | 7,076  |         |  |       | 4.2%  |       
|                         |                                | Nevada                           |                                      |                                 | 1,539  |        |  |       | 1.8%  |        |   |        | 965    |        |  |       | 1.5%  |        |   |         | 3,553  |         |  |       | 1.7%  |        |   |        | 1,850  |         |  |       | 1.1%  |       
|                         |                                | Other                            |                                      |                                 | 883    |        |  |       | 1.0%  |        |   |        | 77     |        |  |       | 0.1%  |        |   |         | 2,285  |         |  |       | 1.1%  |        |   |        | 976    |         |  |       | 0.5%  |       
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                |                                  | Total medical professional liability |                                 |        | 62,737 |  |       |       | 74.8%  |   |        |        | 46,436 |  |       |       | 70.2%  |   |         |        | 138,712 |  |       |       | 65.7%  |   |        |        | 106,061 |  |       |       | 62.6%  | 
|                         | Workers compensation          |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |       |      
|                         |                                | Minnesota                        |                                      |                                 | 5,344  |        |  |       | 6.4%  |        |   |        | 5,178  |        |  |       | 7.8%  |        |   |         | 25,483 |         |  |       | 12.1% |        |   |        | 23,279 |         |  |       | 13.8% |       
|                         |                                | Michigan                         |                                      |                                 | 3,232  |        |  |       | 3.9%  |        |   |        | 2,689  |        |  |       | 4.1%  |        |   |         | 9,663  |         |  |       | 4.6%  |        |   |        | 7,864  |         |  |       | 4.6%  |       
|                         |                                | Illinois                         |                                      |                                 | 3,326  |        |  |       | 4.0%  |        |   |        | 3,723  |        |  |       | 5.6%  |        |   |         | 7,869  |         |  |       | 3.7%  |        |   |        | 7,884  |         |  |       | 4.7%  |       
|                         |                                | Indiana                          |                                      |                                 | 2,376  |        |  |       | 2.8%  |        |   |        | 1,882  |        |  |       | 2.8%  |        |   |         | 5,748  |         |  |       | 2.7%  |        |   |        | 4,329  |         |  |       | 2.6%  |       
|                         |                                | Kentucky                         |                                      |                                 | 624    |        |  |       | 0.7%  |        |   |        | 745    |        |  |       | 1.1%  |        |   |         | 3,762  |         |  |       | 1.8%  |        |   |        | 2,542  |         |  |       | 1.5%  |       
|                         |                                | Iowa                             |                                      |                                 | 151    |        |  |       | 0.2%  |        |   |        | 366    |        |  |       | 0.6%  |        |   |         | 1,184  |         |  |       | 0.6%  |        |   |        | 3,837  |         |  |       | 2.3%  |       
|                         |                                | Other                            |                                      |                                 | 256    |        |  |       | 0.3%  |        |   |        | 352    |        |  |       | 0.5%  |        |   |         | 999    |         |  |       | 0.5%  |        |   |        | 834    |         |  |       | 0.5%  |       
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                |                                  | Total workers compensation          |                                 |        | 15,309 |  |       |       | 18.3%  |   |        |        | 14,935 |  |       |       | 22.5%  |   |         |        | 54,708  |  |       |       | 26.0%  |   |        |        | 50,569  |  |       |       | 30.0%  | 
|                         | Health and other               |                                  |                                      | 5,773                           |        |        |  | 6.9%  |       |        |   | 4,936  |        |        |  | 7.4%  |       |        |   | 17,118  |        |         |  | 8.1%  |       |        |   | 13,034 |        |         |  | 7.7%  |      
|                         | Personal and commercial        |                                  |                                      | (17                             | )      |        |  | 0.0%  |       |        |   | (50    | )      |        |  | -0.1% |       |        |   | 380     |        |         |  | 0.2%  |       |        |   | (501   | )      |         |  | -0.3% |      
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                |                                  | Total                                |                                 | $      | 83,802 |  |       |       | 100.0% |   |        | $      | 66,257 |  |       |       | 100.0% |   |         | $      | 210,918 |  |       |       | 100.0% |   |        | $      | 169,163 |  |       |       | 100.0% | 
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|Net premiums written:    |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability |                                  | $                                    | 54,842                          |        |        |  | 73.2% |       |        | $ | 38,072 |        |        |  | 67.0% |       |        | $ | 120,412 |        |         |  | 63.9% |       |        | $ | 90,839 |        |         |  | 60.9% |      
|                         | Workers compensation          |                                  |                                      | 14,603                          |        |        |  | 19.5% |       |        |   | 13,738 |        |        |  | 24.2% |       |        |   | 51,641  |        |         |  | 27.4% |       |        |   | 45,987 |        |         |  | 30.8% |      
|                         | Health and other               |                                  |                                      | 5,499                           |        |        |  | 7.3%  |       |        |   | 5,198  |        |        |  | 9.1%  |       |        |   | 16,860  |        |         |  | 9.0%  |       |        |   | 13,808 |        |         |  | 9.2%  |      
|                         | Personal and commercial        |                                  |                                      |                                |        |        |  | 0.0%  |       |        |   | (175   | )      |        |  | -0.3% |       |        |   | (590    | )      |         |  | -0.3% |       |        |   | (1,284 | )      |         |  | -0.9% |      
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                |                                  | Total                                |                                 | $      | 74,944 |  |       |       | 100.0% |   |        | $      | 56,833 |  |       |       | 100.0% |   |         | $      | 188,323 |  |       |       | 100.0% |   |        | $      | 149,350 |  |       |       | 100.0% | 
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|Net premiums earned:     |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         | Medical professional liability |                                  | $                                    | 40,089                          |        |        |  | 65.2% |       |        | $ | 29,261 |        |        |  | 59.8% |       |        | $ | 108,064 |        |         |  | 63.1% |       |        | $ | 88,418 |        |         |  | 59.9% |      
|                         | Workers compensation          |                                  |                                      | 15,833                          |        |        |  | 25.8% |       |        |   | 13,526 |        |        |  | 27.6% |       |        |   | 46,636  |        |         |  | 27.3% |       |        |   | 39,765 |        |         |  | 26.9% |      
|                         | Health and other               |                                  |                                      | 5,499                           |        |        |  | 9.0%  |       |        |   | 5,198  |        |        |  | 10.6% |       |        |   | 16,860  |        |         |  | 9.9%  |       |        |   | 13,808 |        |         |  | 9.4%  |      
|                         | Personal and commercial        |                                  |                                      |                                |        |        |  | 0.0%  |       |        |   | 980    |        |        |  | 2.0%  |       |        |   | (590    | )      |         |  | -0.3% |       |        |   | 5,566  |        |         |  | 3.8%  |      
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      
|                         |                                |                                  | Total                                |                                 | $      | 61,421 |  |       |       | 100.0% |   |        | $      | 48,965 |  |       |       | 100.0% |   |         | $      | 170,970 |  |       |       | 100.0% |   |        | $      | 147,557 |  |       |       | 100.0% | 
|                         |                                |                                  |                                      |                                 |        |        |  |       |       |        |   |        |        |        |  |       |       |        |   |         |        |         |  |       |       |        |   |        |        |         |  |      

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Summary Loss and Loss Adjustment Expense Data
by Product Segment

|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |        |        | 
|------------------------------------------------- | ------------------------------ | -------------------------------- | -------- | ------------------------------- | ------ | ------ |  | ----- | ------ | ------ |  | ----- | ------ | ------- |  | ----- | ------ | ------ |  | - | ------- | ------- |  |  | ------ | ------- |  | - | ------- | ------- |  |  | ------ | ------ | 
|                                                  |                                |                                  |          |                                
|                                                  |                                | Three Months Ended September 30, |          | Nine Months Ended September 30,
|                                                  |                                |                                  |          |                                
|                                                  |                                |                                  |          |                                 |        |        |  |      
|                                                  |                                | 2002                             |          | 2001                            |        | 2002   |  | 2001 
|                                                  |                                |                                  |          |                                 |        |        |  |      
|                                                  |                                |                                  |          | Loss                            |        |        |  | Loss  |        |        |  | Loss  |        |         |  | Loss 
|                                                  |                                | Amount                           |          | Ratio                           |        | Amount |  | Ratio |        | Amount |  | Ratio |        | Amount  |  | Ratio
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |      
|                                                  |                                |                                 
|                                                  |                                | (dollars in thousands)          
|Incurred losses and loss adjustment
    expenses: |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  | Medical professional liability |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |       
|                                                  |                                | Current year losses              |          | $                               | 44,656 |        |  |       | 111.4% |        |  | $     | 52,809 |         |  |       | 180.5% |        |  | $ | 122,451 |         |  |  | 113.3% |         |  | $ | 103,227 |         |  |  | 116.7% |       
|                                                  |                                | Prior year losses                |          |                                 | 1,500  |        |  |       |        |        |  |       | 20,025 |         |  |       |        |        |  |   | 4,000   |         |  |  |        |         |  |   | 20,000  |         |  |  |        |       
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  |                                |                                  | Total    |                                 | $      | 46,156 |  |       |        | 115.1% |  |       | $      | 72,834  |  |       |        | 248.9% |  |   | $       | 126,451 |  |  |        | 117.0%  |  |   | $       | 123,227 |  |  |        | 139.4% | 
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  | Workers compensation          |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |       
|                                                  |                                | Current year losses              |          | $                               | 11,808 |        |  |       | 74.6%  |        |  | $     | 15,021 |         |  |       | 111.1% |        |  | $ | 37,583  |         |  |  | 80.6%  |         |  | $ | 36,707  |         |  |  | 92.3%  |       
|                                                  |                                | Prior year losses                |          |                                 | (500   | )      |  |       |        |        |  |       | 4,400  |         |  |       |        |        |  |   | (2,000  | )       |  |  |        |         |  |   | 5,000   |         |  |  |        |       
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  |                                |                                  | Total    |                                 | $      | 11,308 |  |       |        | 71.4%  |  |       | $      | 19,421  |  |       |        | 143.6% |  |   | $       | 35,583  |  |  |        | 76.3%   |  |   | $       | 41,707  |  |  |        | 104.9% | 
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  | Health and other               |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |       
|                                                  |                                | Current year losses              |          | $                               | 5,140  |        |  |       | 93.5%  |        |  | $     | 6,549  |         |  |       | 126.0% |        |  | $ | 15,797  |         |  |  | 93.7%  |         |  | $ | 13,790  |         |  |  | 99.9%  |       
|                                                  |                                | Prior year losses                |          |                                 |       |        |  |       |        |        |  |       |       |         |  |       |        |        |  |   |        |         |  |  |        |         |  |   |        |         |  |  |        |       
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  |                                |                                  | Total    |                                 | $      | 5,140  |  |       |        | 93.5%  |  |       | $      | 6,549   |  |       |        | 126.0% |  |   | $       | 15,797  |  |  |        | 93.7%   |  |   | $       | 13,790  |  |  |        | 99.9%  | 
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  | Personal and commercial        |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |       
|                                                  |                                | Current year losses(1)           |          | $                               |       |        |  |       |        |        |  | $     | 2,041  |         |  |       | 208.3% |        |  | $ |        |         |  |  | 0.0%   |         |  | $ | 7,568   |         |  |  | 136.0% |       
|                                                  |                                | Prior year losses                |          |                                 | 324    |        |  |       |        |        |  |       | (394   | )       |  |       |        |        |  |   | 630     |         |  |  |        |         |  |   | 306     |         |  |  |        |       
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  |                                |                                  | Total(1) |                                 | $      | 324    |  |       |        |        |  |       | $      | 1,647   |  |       |        | 168.1% |  |   | $       | 630     |  |  |        | -106.8% |  |   | $       | 7,874   |  |  |        | 141.5% | 
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  | Total all segments             |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  |  |       
|                                                  |                                | Current year losses              |          | $                               | 61,604 |        |  |       | 100.3% |        |  | $     | 76,420 |         |  |       | 156.1% |        |  | $ | 175,831 |         |  |  | 102.8% |         |  | $ | 161,292 |         |  |  | 109.3% |       
|                                                  |                                | Prior year losses                |          |                                 | 1,324  |        |  |       |        |        |  |       | 24,031 |         |  |       |        |        |  |   | 2,630   |         |  |  |        |         |  |   | 25,306  |         |  |  |        |       
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 
|                                                  |                                |                                  | Total    |                                 | $      | 62,928 |  |       |        | 102.5% |  |       | $      | 100,451 |  |       |        | 205.1% |  |   | $       | 178,461 |  |  |        | 104.4%  |  |   | $       | 186,598 |  |  |        | 126.5% | 
|                                                  |                                |                                  |          |                                 |        |        |  |       |        |        |  |       |        |         |  |       |        |        |  |   |         |         |  |  |        |         |  |   |         |         |  | 




|      |                                                                                                                                                                     
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) = | The personal and commercial loss ratio for the
    three months ended September 30, 2002 is not applicable as
    there were no premiums earned during this quarter.

Results of Operations  Three and
Nine Months Ended September 30, 2002 Compared to the Three
and Nine Months Ended September 30, 2001

Medical
Professional Liability Insurance Operations

Medical professional liability direct premiums
written were $138.7 million for the nine months ended
September 30, 2002, an increase of $32.6 million, or 30.7%
compared to the same period of 2001. Direct premiums written for
the three months ended September 30, 2002 were
$62.7 million, an increase of $16.3 million, or 35.1%
compared to the three months ended September 30, 2001. The
increases in direct premiums written were primarily the result
of premium rate increases and reduced discounts instituted by
the Company in 2002. The Company is seeking regulatory approval
of additional rate increases.

In the second quarter of 2002, the Company
announced its intention to discontinue writing medical
professional liability insurance in Florida. Medical
professional liability direct written premiums in the state of
Florida for the year ended December 31, 2001 were
$26.7 million and the Company reported net loss and loss
adjustment expenses for that period of $33.9 million in
Florida. The Florida Department of Insurance has approved the
Companys plan to exit this market and in
October 2002, the Company began mailing out non-renewal
notices to medical professional liability policyholders in
Florida whose renewals would have been effective in
December 2002. Florida law requires the Company to offer
extended reporting coverage, commonly referred to as tail
policies, at the time of non-renewal. Tail policies
typically have written

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premiums of approximately two times the last
annual policy premium. The Company expects that some physicians
will opt for this extended reporting coverage, which will result
in additional direct written premiums in the fourth quarter of
2002 and part of 2003. The amount of these future premiums
cannot be reasonably estimated due to the uncertainty regarding
the number of physicians who will opt for the coverage. The
Company is exploring various reinsurance options with respects
to the premiums and risks associated with these extended
reporting coverages.


Medical professional liability net premiums
earned were $108.1 million for the nine months ended
September 30, 2002, an increase of $19.7 million, or
22.3% compared to the nine months ended September 30, 2001.
Net premiums earned for the three months ended
September 30, 2002 were $40.1 million, an increase of
$10.8 million, or 36.9% compared with the same three months
of 2001. As with the increases in direct premiums written, the
increases in net premiums earned were primarily due to premium
rate increases and reduced discounts instituted in 2002 as
policy counts were relatively flat. Net premiums earned for the
nine months ended September 30, 2002 have not grown as
rapidly as direct premiums written because much of the premiums
written at the higher rates in 2002, are yet to be earned.

Medical professional liability incurred loss and
loss adjustment expenses totaled $126.5 million for the
nine months ended September 30, 2002, an increase of
$3.3 million, or 2.7% compared to the nine months ended
September 30, 2001. For the three months ended
September 30, 2002, loss and loss adjustment expenses were
$46.2 million, a decrease of $26.6 million or 36.5%
compared to the three months ended September 30, 2001. The
incurred loss and loss adjustment expense ratio decreased to
117.0% for the nine months ended September 30, 2002, from
139.4% for the same period of 2001. For the three months ended
September 30, 2002 and 2001, the loss ratios were 115.1%
and 248.9%, respectively.

In the third quarter of 2001, a significant
reserve enhancement, approximately $20 million, was taken
related to prior year accident years, resulting in incurred loss
and loss adjustment expense ratios for the nine months and three
months ended September 30, 2001 of 139.4% and 248.9%,
respectively. Comparatively, the incurred loss and loss
adjustment expense ratios for the nine months and three months
ended September 30, 2002 of 117.0% and 115.1%,
respectively, included approximately $4.0 million and
$1.5 million, respectively, of adverse development on prior
accident years. On an accident year basis, the loss ratios for
the nine months and three months ended September 30, 2002 were
113.3% and 111.4%, respectively, compared to 116.7% and 180.5%,
respectively, for the same periods in 2001. The decreases in the
accident year loss ratios are the direct result of premium rate
increases, and reduced discounts instituted in 2002.

Medical professional liability underwriting
expenses were $20.5 million for the nine months ended
September 30, 2002, an increase of $2.7 million, or
15.2% compared to the same period of 2001. The underwriting
expense ratio was 19.0% for the nine months ended
September 30, 2002, compared to 20.1% for the same period
of 2001. Underwriting expenses were $7.4 million for the
quarter ended September 30, 2002, an increase of
$1.1 million, or 17.5% from the same nine months in 2001.
The underwriting ratio decreased to 18.4% for the third quarter
of 2002 from 21.6% for the same period in 2001. Commission
expense, a component of overall underwriting expense, for the
nine months and three months ended September 30, 2002 was
$10.3 million and $4.8 million, respectively, compared
with $6.8 million and $3.0 million for the same period
of 2001. The decreases in the medical professional liability
underwriting expense ratios were primarily the result of holding
underwriting salaries and other employee costs relatively
constant with the same period last year, while net earned
premiums increased 22.3% and 36.9% during the nine months and
three months ended September 30, 2002, respectively, as
compared with the same periods of 2001.

Workers
Compensation Insurance Operations

Workers compensation direct premiums
written were $54.7 million for the nine months ended
September 30, 2002, an increase of $4.1 million, or
8.1% compared to the same period of 2001. Direct premiums
written for the three months ended September 30, 2002 were
$15.3 million, an increase of $374,000, or 2.5% compared to
the three months ended September 30, 2001. The increases in
direct premiums written were primarily the result of premium
rate increases and reduced discounts, as well as policy growth
in Illinois and Kentucky. The Company is seeking regulatory
approval of additional rate increases. In June 2002, the

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Company filled several executive and management
positions in its workers compensation segment. These
positions were filled to improve the overall performance of this
segment, reduce risk exposures and improve profitability. We
expect to see growth in our workers compensation segment,
but not until at least 2003, as management is still implementing
its business plans for this segment. These business plans
include exiting certain high-risk specialties and poor
performing markets. In particular, management intends to
discontinue writing workers compensation insurance in
Kentucky and workers compensation insurance related to the
construction industry in all states. The Kentucky workers
compensation market and construction policies together accounted
for approximately $20 million in annual premium. Management
plans to replace these premiums with lower risk, more profitable
accounts.


Workers compensation net premiums earned
were $46.6 million for the nine months ended
September 30, 2002, an increase of $6.8 million, or
17.1% compared to the nine months ended September 30, 2001.
For the three months ended September 30, 2002,
workers compensation net premiums earned were
$15.8 million, an increase of $2.3 million, or 17.0%
compared to the three months ended September 30, 2001. Net
premiums earned increased more than direct premiums written due
to a change in one of the Companys reinsurance treaties
that resulted in decreased ceded premiums in 2002.

Workers compensation incurred loss and loss
adjustment expenses totaled $35.6 million for the nine
months ended September 30, 2002, a decrease of
$6.1 million, or 14.6% compared to the same period of 2001.
For the three months ended September 30, 2002, loss and
loss adjustment expenses were $11.3 million, a decrease of
$8.1 million, or 41.8% compared to the three months ended
September 30, 2001. The workers compensation incurred
loss and loss adjustment expense ratio decreased to 76.3% for
the nine months ended September 30, 2002, from 104.9% for
the same period of 2001. For the three-month periods ended
September 30, 2002 and 2001, the loss ratios were 71.4% and
143.6%, respectively. The decreasing loss ratios were due to an
overall pattern of increasing premium rates and reduced
discounts in all markets.

A significant workers compensation reserve
enhancement related to prior accident years, approximately
$5 million, was taken in the third quarter of 2001,
resulting in incurred loss and loss adjustment expense ratios
for the nine months and three months ended September 30,
2001 of 104.9% and 143.6%, respectively. Comparatively, the
incurred loss and loss adjustment expense ratios for the nine
months and three months ended September 30, 2002 of 76.3%
and 71.4%, respectively, included approximately
$2.0 million and $500,000, respectively, of favorable
development on prior accident years. On an accident year basis,
the loss and loss adjustment expense ratios for the nine months
and three months ended September 30, 2002 were 80.6% and
74.6%, respectively, compared to 92.3% and 111.1%, respectively,
for the same periods in 2001. The decreases in the loss and loss
adjustment expense ratios are the direct result of premium rate
increases, and reduced discounts in 2002.

Workers compensation underwriting expenses
were $11.3 million for the nine months ended
September 30, 2002, an increase of $601,000, or 5.6%
compared to the same period of 2001. The underwriting expense
ratio decreased to 24.3% for the nine months ended
September 30, 2002, from 27.0% for the same period of 2001.
Underwriting expenses were $3.6 million for the quarter
ended September 30, 2002, a decrease of $63,000, or 1.7%
from the same three months in 2001. The underwriting ratio
decreased to 22.5% for the third quarter of 2002 from 26.8% for
the same period in 2001. Commission expense for the nine months
and three months ended September 30, 2002 was
$4.6 million and $1.4 million, respectively, compared
to $3.4 million and $1.2 million during the same
periods of 2001. The decreases in the workers compensation
underwriting ratios resulted primarily from the 17.1% and 17.0%
growth in net premiums earned for the nine months and three
months ended September 30, 2002, respectively, as compared
with the nine months and three months ended September 30,
2001. Management expects that the workers compensation
underwriting expense ratio will increase in the near future due
to the hiring of several workers compensation executives
and managers as described above. However, management expects
that, eventually, the underwriting expense ratio should return,
approximately, to its present level.

15



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##### Table of Contents



Health Insurance
Operations

Health direct premiums written were
$17.1 million for the nine months ended September 30,
2002, an increase of $4.1 million, or 31.5% compared to the
same period of 2001. Direct premiums written for the three
months ended September 30, 2002 were $5.8 million, an
increase of $837,000, or 17.0% compared to the three months
ended September 30, 2001. All health direct premiums
written were exclusively related to our involvement with a
single preferred provider organization located in Western
Michigan. This coverage is provided as part of our long-term
strategic relationship with the physician organization that
sponsors this plan. The increases in direct premiums written are
the result of rate increases, of up to 25%, implemented in the
first nine months of 2002. Working with the plan sponsor, we are
continuing to implement rate increases and tighten underwriting
standards.

Health net premiums earned were
$16.9 million for the nine months ended September 30,
2002, an increase of $3.1 million, or 22.5% compared to the
nine months ended September 30, 2001. Net earned premiums
were $5.5 million for the three months ended
September 30, 2002, an increase of $301,000, or 5.8%
compared with the same three months in 2001. Health net premiums
earned increased less than direct premiums written due to a
change in reinsurance treaties that resulted in increased ceded
health premiums in 2002.

Health incurred loss and loss adjustment expenses
totaled $15.8 million for the nine months ended
September 30, 2002, an increase of $2.0 million, or
14.5% compared to the nine months ended September 30, 2001.
The incurred loss and loss adjustment expense ratio decreased to
93.7% for the nine months ended September 30, 2002, from
99.9% for the same period of 2001. Incurred loss and loss
adjustment expenses for the three months ended
September 30, 2002 were $5.1 million, a decrease of
$1.4 million, or 21.5% compared to the same period of 2001.
The loss and loss adjustment expense ratios were 93.5% and
126.0%, respectively, for the three months ended September, 2002
and 2001. The decreases in the health loss ratios for the three
months and nine months ended September 30, 2002 as compared
to the same periods last year were primarily the result of
premium rate increases and tighter underwriting standards that
reduced the number and severity of reported claims.

Health underwriting expenses were
$3.6 million for the nine months ended September 30,
2002, an increase of $453,000, or 14.6% compared to the same
period of 2001. The health underwriting expense ratio decreased
to 21.1% for the nine months ended September 30, 2002 from
22.4% for the same period of 2001. For the three months ended
September 30, 2002, health underwriting expenses were
$1.0 million, a decrease of $69,000, or 6.5% compared to
the same three months of 2001. The health underwriting ratios
were 18.0% and 20.4%, respectively, for the three months ended
September 30, 2002 and 2001. Health commission expense for
the nine months and three months ended September 30, 2002
was $1.6 million and $409,000, respectively, compared to
$1.6 million and $537,000 during the same periods of 2001.
The decreases in the health underwriting ratios were primarily
due to holding underwriting salaries and employee benefit costs
relatively constant, while net premiums earned increased 22.5%
and 5.8% during the nine months and three months ended
September 30, 2002, respectively, compared with the same
periods of 2001.

Personal and
Commercial Lines Insurance Operations

Effective December 31, 2001, the Company
exited the personal and commercial lines of business with the
exception of a single alternative-risk-transfer program. Direct
premiums written associated with this program were $380,000 for
the nine months ended September 30, 2002. This program was
discontinued in the third quarter of 2002, resulting in returned
direct premiums written of $17,000 during the three months ended
September 30, 2002. These premiums and risk were 100% ceded
to a reinsurer. Direct written premiums for the nine and three
months ended September 30, 2001 represent premiums returned
to insureds of $501,000 and $50,000, respectively.

During the nine months ended September 30,
2002, the Company returned personal and commercial premiums of
$590,000. The returned premiums were the result of additional
premiums ceded in connection with one of the Companys
reinsurance treaties. There were no net premiums earned during
the three months

16



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##### Table of Contents



ended September 30, 2002. Personal and
commercial net premiums earned were $5.6 million and
$980,000, respectively, for the nine and three-month periods
ended September 30, 2001.


Personal and commercial incurred loss and loss
adjustment expenses totaled $630,000 for the nine months ended
September 30, 2002, a decrease of $7.3 million, or
92.4% compared to the nine months ended September 30, 2001.
Incurred loss and loss adjustment expenses for the three months
ended September 30, 2002 were $324,000, a decrease of
$1.3 million or 81.3% compared to the same period of 2001.
Incurred loss and loss adjustment expenses for the nine months
ended September 30, 2002, represent unfavorable development
on December 31, 2001 unpaid loss and loss adjustment
expenses as the Company is not retaining any risk related to new
personal and commercial business.

As previously discussed, there were no net
underwriting expenses associated with the personal and
commercial line of business during the nine months ended
September 30, 2002. Personal and commercial underwriting
expenses for the nine-month and three-month periods ended
September 30, 2001 were $1.2 million and $196,000,
respectively. The related underwriting ratios for the same
periods in 2001 were 20.7% and 20.0%, respectively.

Corporate,
Investments and Other

Investment income, excluding realized investment
losses, was $34.1 million for the nine months ended
September 30, 2002, a decrease of $2.3 million, or
6.3% compared to the nine months ended September 30, 2001.
Net realized losses were $678,000 and $2.5 million during
the nine-month periods ended September 30, 2002 and 2001,
respectively. Investment income, excluding realized investment
losses, for the three months ended September 30, 2002, was
$11.4 million, a decrease of $198,000, or 1.7% compared to
the same three months of 2001. The declines in investment income
were primarily the result of a lower interest rate environment
in 2002, compared to 2001. In addition, the Company spent
$27.4 million and $16.6 million to fund its share
repurchase program during the nine months and three months ended
September 30, 2002, respectively, which reduced the amount
of investment income earned during those periods as compared to
the same periods of 2001. The Company maintains a portfolio of
cash and short-term investments to meet operating cash needs and
to fund the Companys share repurchase program.

The average yield on the Companys
investment portfolio was 6.16% for the nine months ended
September 30, 2002 compared to 6.43% for the same period of
2001. The market value of the Companys fixed income
security portfolio is inversely related to interest rates;
therefore, as interest rates have declined, the market value of
the Companys fixed income security portfolio has
increased. Unrealized gains, net of deferred income taxes, on
the Companys investments were $25.0 million at
September 30, 2002, an increase of $19.2 million
compared to December 31, 2001.

Investment expenses were $2.1 million during
the nine months ended September 30, 2002 and $481,000
during the three months ended September 30, 2002. This
represents increases of $731,000, or 54.0% and $70,000, or
17.0%, respectively, compared to the same period during 2001.
The increases in investment expenses were primarily due to
increased depreciation expense on several of the Companys
investment real estate properties.

The Companys general and administrative
expenses decreased $247,000, or 15.9% to $1.3 million
during the nine months ended September 30, 2002 compared to
the prior year. General and administrative expenses for the
three months ended September 30, 2002 were $390,000, a
decrease of $228,000, or 36.9% compared to the same period of
2001. The decreases in general and administrative expenses were
primarily the result of the elimination of positions at the
Companys non-insurance subsidiaries.

In accordance with the provisions of SFAS
No. 142, the Company did not record any amortization
expense during the nine months or three months ended
September 30, 2002. Amortization expense for the nine
months and three months ended September 30, 2001 were
$1.6 million and $533,000, respectively. See Effects
of New Accounting Pronouncements and Note 4 to the
Condensed Consolidated Financial Statements for further
discussion regarding amortization expense and the effect of SFAS
No. 142 on the Companys future operating results.

17



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##### Table of Contents



The Company recorded $4.4 million and
$1.0 million in federal income tax benefit for the nine
months and three months ended September 30, 2002,
respectively, compared to benefits of $15.0 million and
$19.2 million during the same periods in 2001, as a result
of losses in those periods. The effective tax rate was 35.0% for
the nine months and three months ended September 30, 2002,
compared to 35.5% and 34.9%, respectively, for the nine months
and three months ended September 30, 2001.

Net loss for the nine months ended
September 30, 2002 was $8.2 million on revenues of
$204.9 million compared to a net loss of $27.3 million
on revenues of $181.9 million for the nine months ended
September 30, 2001. Net loss for the third quarter of 2002
was $1.9 million on revenues of $72.8 million,
compared to net loss of $35.8 million on revenues of
$58.2 million for the third quarter of 2001. The decreases
in net loss were due primarily to increases in net premiums
earned which decreased the incurred loss and loss adjustment
expense and underwriting expense ratios for the nine months and
three months ended September 30, 2002 compared to the same
periods of 2001.

Liquidity, Capital Resources and Financial
Condition

The primary sources of our liquidity, on both a
short- and long-term basis, are funds provided by insurance
premiums collected, net investment income, recoveries from
reinsurance and proceeds from the maturity or sale of invested
assets. The primary uses of cash, on both a short- and long-term
basis, are losses, loss adjustment expenses, operating expenses,
reinsurance premiums and taxes.

APCapital itself is a holding company whose only
material assets are the capital stock of APAssurance and its
other subsidiaries and a portion of the net proceeds from the
stock offerings. APCapitals ongoing cash flow will consist
primarily of dividends and other permissible payments from its
subsidiaries and investment earnings on funds held. The payment
of dividends to APCapital by its insurance subsidiaries is
subject to limitations imposed by applicable law.

The Company is indebted to its President and
Chief Executive Officer (CEO) in the amount of
$8.0 million in connection with the purchase of
Stratton-Cheeseman Management Company. The indebtedness is due
in annual installments, without interest, over the next seven
years. Certain events, such as the termination, death or
disability of the President and CEO, could accelerate these
payments.

At September 30, 2002, the Company had no
material commitments for capital expenditures.

The Companys net cash flow generated by
operations was approximately $37.2 million for the nine
months ended September 30, 2002, compared to
$6.1 million provided by operations for the nine months
ended September 30, 2001. The improvement in cash flows
generated from operations was primarily the result of increased
premium rates.

At September 30, 2002, the Company had
$66.7 million of cash available and an investment portfolio
of $720.8 million. The portfolio includes
$24.0 million of bonds maturing in the next year to meet
short-term cash flow needs. On a long-term basis, fixed income
securities are purchased on a basis intended to provide adequate
cash flows from future maturities. As of September 30,
2002, $328 million of bonds mature in the next one to five
years and $274 million mature in the next five to ten
years. In addition, the Company has $2.5 million of
mortgage-backed securities that provide periodic principal
repayments.

Total assets increased $35.3 million to
$1,074.2 million at September 30, 2002, compared to
$1,038.9 million at December 31, 2001. The increase
was primarily attributable to cash flow generated from
operations and the increase in the market value of our fixed
income securities.

Loss and loss adjustment expense reserves
increased $31.3 million, or 5.2%, to $628.3 million at
September 30, 2002, from $597.0 million at
December 31, 2001. This increase was due to increased
writings in both the workers compensation and medical
professional liability lines.

The unearned premium reserve increased
$19.4 million, or 19.4%, to $119.5 million at
September 30, 2002, from $100.1 million at
December 31, 2001. The increase was primarily due to
premium rate increases in 2002.

18



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In March, July and November 2001,
May 2002 and twice in August 2002, APCapitals
Board of Directors authorized six separate programs to purchase
5% of its outstanding common stock, representing a total of
approximately 3,115,000 shares. The Companys purchase of
any of its shares is subject to limitations that may be imposed
by applicable securities laws and regulations and the rules of
the Nasdaq Stock Market. The timing of the purchases and the
number of shares to be bought at any one time depend on market
conditions and the Companys capital requirements. During
the quarter, the Company purchased 946,100 shares pursuant to
these authorizations, bringing the total number of shares
purchased pursuant to these authorizations to 2,924,270, at a
total cost of $52,707,000. As of September 30, 2002, the
Company has approximately 191,000 shares of its August 28,
2002 stock repurchase program remaining to be purchased. There
can be no assurance that the Company will repurchase the
remaining shares authorized to be purchased, or that any
additional repurchases will be authorized by the Companys
Board of Directors.

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

Significant Accounting Policies

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

The policies relating to unpaid losses and loss
adjustment expenses, investments, reinsurance and the reserve
for extended reporting period claims are those we believe to be
the most sensitive to estimates and judgments. They are more
fully described in Item 7 of our most recent Annual Report
on Form 10-K and in Note 1 to our consolidated financial
statements contained in that report. There have been no material
changes to these policies during the most recent quarter.

Effects of New Accounting
Pronouncements

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

In accordance with the transitional guidance
given in SFAS No. 142, the Company has substantially
completed its initial impairment review required under SFAS
No. 142. Based on the preliminary results of the impairment
testing, the Company will likely write off the remaining
$2.1 million of goodwill associated with its health and
personal and commercial reporting units in the fourth quarter.
The adoption of SFAS No. 142 has had a significant impact
on the Companys 2002 operating results, as goodwill is no
longer being amortized. Amortization expense was
$1.6 million, or $0.09 per share, net of tax, for the nine
months ended September 30, 2001 and $533,000, or $0.03 per
share, net of tax, for the three months ended September 30,
2001. At September 30, 2002, goodwill totaled
$17.8 million, with accumulated amortization of
$3.9 million, or $13.9 million of goodwill on a net
basis.

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, effective
for fiscal years beginning after December 15, 2001.

19



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







ITEM 3.     Quantitative
and Qualitative Disclosures About Market Risk


General

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

As of September 30, 2002, the majority of
our investment portfolio was invested in fixed maturity
securities and short-term investments. The fixed maturity
securities primarily consisted of U.S. government and
agency bonds, high-quality corporate bonds, mortgage-backed
securities and tax-exempt U.S. municipal bonds.

Qualitative Information About Market
Risk

Investments in our portfolio have varying degrees
of risk. The primary market risk exposure to the fixed maturity
portfolio is interest rate risk, which is limited somewhat by
our management of duration. The distribution of maturities and
sector concentrations are monitored on a regular basis.

We regularly examine the quality distribution of
our investment portfolio for evidence of impairment. When a
security in our investment portfolio has a decline in market
value, which is other than temporary, we are required by GAAP to
reduce the carrying value of such security to its net realizable
value. All declines in market values of our investment
securities at September 30, 2002 were deemed to be
temporary with the exception of an investment in Frontier bonds,
which was written down $390,000 during 2002 and
$5.9 million during 2001.

Quantitative Information About Market
Risk

Our fixed income security portfolio was valued at
$681.9 million at September 30, 2002, and had an
average modified duration of 3.33 years. The following
table shows the effects of a change in interest rates on the
fair value and duration of our portfolio. We have assumed an
immediate increase or decrease of 1% or 2% in interest rate for
illustrative purposes. You should not consider this assumption
or the values shown in the table to be a prediction of actual
future results.

|                 |  |                       |       |            |  |          |       |   |  |  |      | 
|---------------- |  | --------------------- | ----- | ---------- |  | -------- | ----- | - |  |  | ---- | 
|                 |  | Portfolio             |       | Change     |  | Modified
|Changes in Rates |  | Value                 |       | in Value   |  | Duration
|                 |  |                       |       |            |  |         
|                 |  |                       |       | (in years)
|                 |  | (dollars in millions) |       |           
|+2%              |  | $                     | 632.8 |            |  | $        | (49.1 | ) |  |  | 3.41 | 
|+1%              |  |                       | 656.0 |            |  |          | (25.9 | ) |  |  | 3.51 | 
|0                |  |                       | 681.9 |            |  |          |      |   |  |  | 3.33 | 
|-1%              |  |                       | 705.4 |            |  |          | 23.5  |   |  |  | 3.43 | 
|-2%              |  |                       | 730.7 |            |  |          | 48.8  |   |  |  | 3.51 | 

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ITEM 4.     Controls
and Procedures


Within the 90 days prior to the date of this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures are effective to cause material information
required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934, to be
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange
Commissions rules and forms. There have been no
significant changes in the Companys internal controls or
in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its
evaluation.

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##### Table of Contents








PART II. OTHER INFORMATION







ITEM 6.     Exhibits
and Reports on Form 8-K


(a) Exhibits.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | 99.1 Certification by the Chief Executive
    Officer pursuant to 18 U.S.C. Section 1350.
|
| | 99.2 Certification by the Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350.

(b) Reports on Form 8-K

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

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SIGNATURES


Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.

Date: November 13, 2002



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



| |     |                         
| | --- | ------------------------
| | By: | /s/ WILLIAM B. CHEESEMAN

| |                                           
| | ------------------------------------------
| |                                           
| | William B. Cheeseman                      
| | Its: President and Chief Executive Officer



| |     |                    
| | --- | -------------------
| | By: | /s/ FRANK H. FREUND

| |                                          
| | -----------------------------------------
| |                                          
| | Frank H. Freund                          
| | Its: Executive Vice President, Treasurer,
| | Chief Financial Officer                  
| | and principal accounting officer         

23



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CERTIFICATION OF DISCLOSURE


I, William B. Cheeseman, President and Chief
Executive Officer of American Physicians Capital, Inc., certify
that:



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this quarterly report on
    Form 10-Q of American Physicians Capital, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this quarterly
    report does not contain any untrue statement of a material fact
    or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such
    statements were made, not misleading with respect to the period
    covered by this quarterly report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    quarterly report, fairly present in all material respects the
    financial position, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                    
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this quarterly report whether
    or not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

November 13, 2002



| |                                      
| | -------------------------------------
| | /s/ WILLIAM B. CHEESEMAN             
| |                                      
| | President and Chief Executive Officer
| | American Physicians Capital, Inc.    

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CERTIFICATION OF DISCLOSURE




| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | I, Frank H. Freund, Executive Vice President,
    Treasurer, Chief Financial Officer, and principal accounting
    officer of American Physicians Capital, Inc., certify that:                                                                                                                                                                       
|
| | 1. I have reviewed this quarterly report on
    Form 10-Q of American Physicians Capital, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. Based on my knowledge, this quarterly
    report does not contain any untrue statement of a material fact
    or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such
    statements were made, not misleading with respect to the period
    covered by this quarterly report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    quarterly report, fairly present in all material respects the
    financial position, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                    
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this quarterly report whether
    or not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

November 13, 2002



| |                                     
| | ------------------------------------
| | /s/ FRANK H. FREUND                 
| |                                     
| | Executive Vice President, Treasurer,
| | Chief Financial Officer and         
| | principal accounting officer        
| | American Physicians Capital, Inc.   

25



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EXHIBIT INDEX

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