UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-32057

American Physicians Capital, Inc.

(Exact name of registrant as specified in its charter)

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

1301 North Hagadorn Road, East Lansing, Michigan 48823

(Address of principal executive offices, including zip code)

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

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.

YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated Filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

YES o NO þ

The number of shares outstanding of the registrant’s common stock, no par value per share, as of July 31, 2010, was 9,323,087.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Income			4
Condensed Consolidated Statements of Shareholders’ Equity			5
Condensed Consolidated Statements of Comprehensive Income			6
Condensed Consolidated Statements of Cash Flows			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 4. Submission of Matters to a Vote of Security Holders			44
Item 6. Exhibits			44
Signatures			45
Exhibit Index			46
EX-10.59
EX-31.1
EX-31.2
EX-32.1
EX-99.1

PART I. FINANCIAL INFORMATION

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (In thousands, except share data)

		June 30,				December 31,
		2010				2009
		(Unaudited)
Assets
Investments:
Fixed-income securities
Available-for-sale, at fair value		$	263,083			$	205,073
Held-to-maturity, at amortized cost			328,728				368,851
Other investments			57,193				53,303
Total investments			649,004				627,227
Cash and cash equivalents			140,651				172,162
Premiums receivable			26,556				29,662
Reinsurance recoverable			63,754				63,283
Deferred federal income taxes			16,233				17,328
Property and equipment, net of accumulated depreciation			7,848				8,090
Other assets			26,114				26,762
Total assets		$	930,160			$	944,514
Liabilities
Unpaid losses and loss adjustment expenses		$	596,077			$	608,807
Unearned premiums			45,677				50,670
Long-term debt			25,928				25,928
Other liabilities			27,148				22,069
Total liabilities			694,830				707,474
Commitments & Contingencies
Shareholders’ Equity
Common stock, no par value, 50,000,000 shares authorized: 9,339,087 and 9,986,187 shares outstanding at June 30, 2010 and December 31, 2009, respectively			—				—
Additional paid-in-capital			—				—
Retained earnings			223,992				226,952
Accumulated other comprehensive income:
Net unrealized appreciation on investments, net of deferred federal income taxes			11,338				10,088
Total shareholders’ equity			235,330				237,040
Total liabilities and shareholders’ equity		$	930,160			$	944,514

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net premiums written		$	25,095			$	23,389			$	51,130			$	52,109
Change in net unearned premiums			4,293				4,993				4,953				5,579
Net premiums earned			29,388				28,382				56,083				57,688
Investment income			6,298				8,028				12,664				16,218
Net realized gains			—				—				326				—
Other income			282				212				531				435
Total revenues and other income			35,968				36,622				69,604				74,341
Losses and loss adjustment expenses			14,652				13,113				28,444				28,725
Underwriting expenses			7,042				7,319				13,669				14,451
Investment expenses			261				215				483				539
Interest expense			305				344				602				729
General and administrative expenses			1,138				327				1,457				590
Other expenses			—				(40	)			—				(40	)
Total expenses			23,398				21,278				44,655				44,994
Income before federal income taxes			12,570				15,344				24,949				29,347
Federal income tax expense			3,138				4,354				6,566				8,270
Net income		$	9,432			$	10,990			$	18,383			$	21,077
Net income — per common share
Basic		$	1.00			$	0.99			$	1.91			$	1.85
Diluted		$	0.98			$	0.97			$	1.88			$	1.82

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

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)
(In thousands, except share data)

														Accumulated
						Additional								Other
		Shares				Paid-in				Retained				Comprehensive
		Outstanding				Capital				Earnings				Income				Total
Balance, December 31, 2009			9,986,187			$	—			$	226,952			$	10,088			$	237,040
Comprehensive income:
Net income											18,383								18,383
Other comprehensive income, net of taxes															1,250				1,250
Total comprehensive income, net of taxes																			19,633
Quarterly cash dividends to shareholders, $0.09 per share											(1,723	)							(1,723	)
Purchase and retirement of common stock			(647,100	)			—				(19,620	)							(19,620	)
Balance, June 30, 2010			9,339,087			$	—			$	223,992			$	11,338			$	235,330

														Accumulated
						Additional								Other
		Shares				Paid-in				Retained				Comprehensive
		Outstanding				Capital				Earnings				Income				Total
Balance, December 31, 2008			11,749,069			$	—			$	246,173			$	7,864			$	254,037
Comprehensive income:
Net income											21,077								21,077
Other comprehensive income, net of taxes															74				74
Total comprehensive income, net of taxes																			21,151
Options exercised			178,647				2,056												2,056
Shares tendered/netted in connection with option exercise			(99,733	)			(3,384	)			—								(3,384	)
Quarterly cash dividends to shareholders, $0.0825 per share											(1,858	)							(1,858	)
Excess tax benefits from share-based awards							1,380												1,380
Purchase and retirement of common stock			(1,090,000	)			(52	)			(33,121	)							(33,173	)
Balance, June 30, 2009			10,737,983			$	—			$	232,271			$	7,938			$	240,209

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

American Physicians Capital, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income		$	9,432			$	10,990			$	18,383			$	21,077
Other comprehensive income:
Unrealized appreciation on available-for-sale investment securities arising during the period			1,454				4,452				2,330				673
Amortization of net unrealized appreciation on held-to-maturity investment securities related to their transfer from the available-for-sale category			(90	)			(256	)			(407	)			(559	)
Other comprehensive income before tax			1,364				4,196				1,923				114
Deferred federal income tax expense			478				1,469				673				40
Other comprehensive income			886				2,727				1,250				74
Comprehensive income		$	10,318			$	13,717			$	19,633			$	21,151

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

American Physicians Capital, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

		Six Months Ended
		June 30,
		2010				2009
Cash flows from (for) operating activities
Net income		$	18,383			$	21,077
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			3,336				2,644
Net realized gains			(326	)			—
Deferred federal income taxes			422				997
Current federal income taxes			(657	)			812
Excess tax benefits from share-based awards			—				(1,380	)
(Income) loss on equity method investees			(100	)			71
Changes in:
Unpaid loss and loss adjustment expenses			(12,730	)			(8,599	)
Unearned premiums			(4,993	)			(5,607	)
Other assets and liabilities			(624	)			7,232
Net cash from operating activities			2,711				17,247
Cash flows from (for) investing activities
Purchases
Available-for-sale — fixed income			(72,374	)			(12,988	)
Held-to-maturity — fixed income			(23,004	)			—
Other investments			(2,097	)			(1,437	)
Property and equipment			(101	)			(132	)
Proceeds from sales and maturities
Available-for-sale — fixed income			14,019				452
Held-to-maturity — fixed income			61,876				69,013
Other			8,907				—
Net cash (for) from investing activities			(12,774	)			54,908
Cash flows from (for) financing activities
Common stock repurchased			(19,620	)			(33,173	)
Excess tax benefits from share-based awards			—				1,380
Taxes paid in connection with net option exercise			—				(1,448	)
Change in payable for shares repurchased			(105	)			266
Cash dividends paid			(1,723	)			(1,858	)
Proceeds from stock options exercised			—				120
Net cash for financing activities			(21,448	)			(34,713	)
Net (decrease) increase in cash and cash equivalents			(31,511	)			37,442
Cash and cash equivalents, beginning of period			172,162				101,637
Cash and cash equivalents, end of period		$	140,651				139,079

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

American Physicians Capital, Inc. and Subsidiaries

1. Significant Accounting Policies

Basis of Consolidation and Reporting

          The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of American Physicians Capital, Inc. (“APCapital”) and its wholly owned subsidiaries, APSpecialty Insurance Corporation, Alpha Advisors, Inc., and American Physicians Assurance Corporation (“American Physicians”). APCapital and its consolidated subsidiaries are referred to collectively herein as “the Company.” All significant intercompany accounts and transactions are eliminated in consolidation.

          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 (“U.S. GAAP” or “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 U.S. GAAP for complete financial statements. The December 31, 2009 Condensed Consolidated Balance Sheet of the Company presented in this Report on Form 10-Q was derived from audited 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 and six-month periods ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the annual consolidated financial statements, and notes thereto, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Use of Estimates

          The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

          The most significant estimates that are susceptible to significant change in the near-term relate to the determination of the liability for unpaid losses and loss adjustment expenses, the fair value of investments, including whether securities are other-than-temporarily impaired, revenue recognition, income taxes, reinsurance assets and liabilities, the reserve for extended reporting period claims and deferred policy acquisition costs. Although considerable judgment is inherent in these estimates, management believes that the current estimates are reasonable in all material respects. The estimates are reviewed regularly and adjusted as necessary. Adjustments related to changes in estimates are reflected in the Company’s results of operations, or other comprehensive income, in the period in which those estimates changed.

Nature of Business

          The Company is principally engaged in the business of providing medical professional liability insurance to physicians and other health care providers, with an emphasis on markets in the Midwest.

Stock Split

          Share and per share data, including dividends paid to shareholders, have been retroactively adjusted in these unaudited Condensed Consolidated Financial Statements and notes thereto to reflect a four-for-three stock split effective on July 31, 2009.

2. Effects of New Accounting Pronouncements

          Fair Value Measurements — In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires additional disclosures and clarifies some existing disclosure requirements about fair value measurement. ASU No. 2010-06 amends Codification Subtopic 820-10 to require a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. A reporting entity should present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, ASU No. 2010-06 clarifies the requirements of the existing disclosures. ASU No. 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of guidance effective for fiscal years beginning after December 15, 2009 did not have an impact on the Company’s financial position or results of operations. The Company has not had any transfers between Level 1 and Level 2 and therefore has not had to make any additional disclosures to comply with the new guidance. However, such disclosure may be required in future reporting periods.

3. Income Per Share

          The following table sets forth the details regarding the computation of basic and diluted net income per common share for each period presented:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Numerator for basic and diluted income per common share:
Net income		$	9,432			$	10,990			$	18,383			$	21,077
Denominator:
Denominator for basic income per common share — weighted average shares outstanding			9,476				11,108				9,633				11,380
Effect of dilutive stock options and awards			140				167				137				184
Denominator for diluted income per common share — adjusted weighted average shares outstanding			9,616				11,275				9,770				11,564
Net income — basic		$	1.00			$	0.99			$	1.91			$	1.85
Net income — diluted		$	0.98			$	0.97			$	1.88			$	1.82

          The diluted weighted average number of shares outstanding includes an incremental adjustment for the assumed exercise of dilutive stock options. During the three and six months ended June 30, 2010 and 2009 there were no stock options that were considered to be anti-dilutive.

4. Investments

          The composition of the Company’s available-for-sale investment security portfolio, including unrealized gains and losses, at June 30, 2010 and December 31, 2009 was as follows:

		June 30, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost/Cost				Gains				Losses				Fair Value
						(In thousands)
Available-for-sale
States and political subdivisions		$	207,862			$	11,055			$	(20	)		$	218,897
Corporate securities			42,179				2,016				(89	)			44,106
Mortgage-backed securities			75				5				—				80
Total fixed-income securities			250,116				13,076				(109	)			263,083
Equity securities (1)			17,704				4,070				—				21,774
Total available-for-sale securities		$	267,820			$	17,146			$	(109	)		$	284,857

		December 31, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Estimated
		Cost/Cost				Gains				Losses				Fair Value
						(In thousands)
Available-for-sale
States and political subdivisions		$	150,488			$	10,629			$	—			$	161,117
Corporate securities			42,173				2,117				(418	)			43,872
Mortgage-backed securities			82				2				—				84
Total fixed-income securities			192,743				12,748				(418	)			205,073
Equity securities (1)			15,607				2,377				—				17,984
Total available-for-sale securities		$	208,350			$	15,125			$	(418	)		$	223,057

          The following table shows the carrying value, gross unrecognized holding gains and losses, as well as the estimated fair value of the Company’s held-to-maturity fixed-income security portfolio as of June 30, 2010 and December 31, 2009. The carrying value at June 30, 2010 and December 31, 2009 includes approximately $406,000 and $813,000 of net unrealized gains, respectively, as a result of the transfer of certain securities from the available-for-sale to the held-to-maturity category in previous years. These net unrealized gains continue to be reported as a component of accumulated other comprehensive income in the accompanying unaudited Condensed Consolidated Balance Sheets, and will be amortized over the remaining life of the applicable securities through comprehensive income.

		June 30, 2010
						Gross				Gross
						Unrecognized				Unrecognized
		Carrying				Holding				Holding				Estimated
		Value				Gains				Losses				Fair Value
						(In thousands)
Held-to-maturity
States and political subdivisions		$	240,500			$	13,753			$	(2	)		$	254,251
Corporate securities			24,422				599				—				25,021
Mortgage-backed securities			63,806				1,468				(87	)			65,187
Total held-to-maturity fixed-income securities		$	328,728			$	15,820			$	(89	)		$	344,459

		December 31, 2009
						Gross				Gross
						Unrecognized				Unrecognized
		Carrying				Holding				Holding				Estimated
		Value				Gains				Losses				Fair Value
						(In thousands)
Held-to-maturity
States and political subdivisions		$	225,069			$	12,808			$	—			$	237,877
Corporate securities			34,467				646				(150	)			34,963
Mortgage-backed securities			109,315				2,219				(8	)			111,526
Total held-to-maturity fixed-income securities		$	368,851			$	15,673			$	(158	)		$	384,366

     The following tables show the Company’s gross, unrealized in the case of available-for-sale securities, or unrecognized for held-to-maturity securities, investment losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized or unrecognized loss position, at June 30, 2010 and December 31, 2009, respectively.

		June 30, 2010
		Less Than 12 Months								12 Months or More								Total
						Unrealized or								Unrealized or								Unrealized or
		Fair				Unrecognized				Fair				Unrecognized				Fair				Unrecognized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
										(In thousands)
Available-for-sale
States and political subdivisions		$	7,937			$	(21	)		$	—			$	—			$	7,937			$	(21	)
Corporate securities			6,445				(55	)			3,966				(33	)			10,411				(88	)
Subtotal available-for-sale			14,382				(76	)			3,966				(33	)			18,348				(109	)
Held-to-maturity
States and political subdivisions		$	4,611			$	(2	)		$	—			$	—			$	4,611			$	(2	)
Corporate securities			—				—				—				—				—				—
Mortgage-backed securities			11,795				(87	)			—				—				11,795				(87	)
Subtotal held-to-maturity			16,406				(89	)			—				—				16,406				(89	)
Total temporarily impaired securities		$	30,788			$	(165	)		$	3,966			$	(33	)		$	34,754			$	(198	)

		December 31, 2009
		Less Than 12 Months								12 Months or More								Total
						Unrealized or								Unrealized or								Unrealized or
		Fair				Unrecognized				Fair				Unrecognized				Fair				Unrecognized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
										(In thousands)
Available-for-sale
Corporate securities		$	—			$	—			$	10,082			$	(418	)		$	10,082			$	(418	)
Subtotal available-for-sale			—				—				10,082				(418	)			10,082				(418	)
Held-to-maturity
Corporate securities		$	—			$	—			$	5,890			$	(150	)		$	5,890			$	(150	)
Mortgage-backed securities			4,564				(8	)			—				—				4,564				(8	)
Subtotal held-to-maturity			4,564				(8	)			5,890				(150	)			10,454				(158	)
Total temporarily impaired securities		$	4,564			$	(8	)		$	15,972			$	(568	)		$	20,536			$	(576	)

          At June 30, 2010 there were a total of 12 securities that were in an unrealized or unrecognized loss position. Eleven of these securities were in an unrealized loss position for less than 12 months and had unrealized or unrecognized loss positions totaling $165,000. These securities are investment grade and there is no publicly available information indicating a concern with the issuer’s credit worthiness or liquidity. Accordingly, the Company’s analyses indicate that the amortized cost of these securities will be fully recovered. The Company has no plan to sell any of these and believes that its future cash flows will be adequate to meet ongoing operating needs without the sale of these securities. Accordingly, these 11 securities were not considered other than temporarily impaired at June 30, 2010.

          The last of these 12 securities has an unrealized loss of $33,000 at June 30, 2010 and has been in an unrealized loss position for more than 12 months. This security is a private placement security, and trades at less than amortized cost due to an illiquidity factor rather than concerns regarding the creditworthiness of the issuer. The Company does not plan to sell this security and believes that the

Company’s future cash flows will be adequate to meet its ongoing operating needs without the sale of the security. Accordingly, this security was not considered other than temporarily impaired at June 30, 2010.

          Although the Company did not sell any securities during the three and six months ended June 30, 2010 and 2009, the Company did recognize a realized gain of $326,000 related to the conversion of a bond for two new bonds of the same issuer during the first six months of 2010.

          The estimated fair value of fixed-income securities classified as available-for-sale and the carrying value and estimated fair value of fixed-income securities classified as held-to-maturity at June 30, 2010, by contractual maturity, were:

		Estimated
		Fair Value
		(In thousands)
Available-for-sale
Less than one year		$	6,638
One to five years			172,188
Five to ten years			15,481
More than ten years			68,696
Mortgage-backed securities			80
Total available-for-sale		$	263,083

		Carrying				Estimated
		Value				Fair Value
		(In thousands)
Held-to-maturity
Less than one year		$	12,681			$	12,935
One to five years			66,977				70,267
Five to ten years			150,976				160,517
More than ten years			34,288				35,554
Mortgage-backed securities			63,806				65,186
Total held-to-maturity		$	328,728			$	344,459

5. Fair Values

          Assets and liabilities reported in the financial statements at fair value are required to be classified according to a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

	•		Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
	•		Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data by correlation or other means.

•

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

          The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:

Valuation of Investments

          Fair values for the Company’s investment securities are obtained from a variety of independent pricing sources. Prices obtained from the various sources are then subjected to a series of tolerance and validation checks. If securities are traded in active markets, quoted prices are used to measure fair value (Level 1). If quoted prices are not available, prices are obtained from various independent pricing vendors based on pricing models that consider a variety of observable inputs (Level 2). Benchmark yields, prices for similar securities in active markets and non-binding bid or ask price quotes are just a few of the observable inputs utilized. If pricing vendors are not able to provide a current price for a security, a fair value is developed using alternative sources based on a variety of less objective assumptions and inputs (Level 3).

Investments Measured at Fair Value on a Recurring Basis

          Available-for-sale fixed-income securities - are recorded at fair value on a recurring basis. With the exception of U.S. Treasury securities, very few fixed-income securities are actively traded. Most fixed-income securities, such as government or agency mortgage-backed securities, tax-exempt municipal or state securities and corporate securities, are priced using a vendor’s pricing model and fall within Level 2 of the hierarchy.

          In determining the fair value of securities with a Level 2 fair value, the Company solicits prices from between four and ten pricing vendors or sources. Typically, each security type, e.g., corporate bonds, mortgage-backed securities or municipal bonds, has a preferred pricing vendor that specializes in that particular security type. In these cases, the preferred vendor price is typically used and the prices from other vendors are used to check the reasonableness of the preferred vendor’s price by making sure that all prices for a given security fall within a specified tolerance threshold. The tolerance threshold varies by security type. Our fixed-income securities with Level 2 fair value classifications principally consist of tax-exempt state and municipal securities, high-quality corporate securities and government-enterprise sponsored mortgage backed securities, which have tolerance thresholds of 2%, 5% and 10%, respectively. Thresholds are selected that are tight enough to ensure the reasonableness of the price used to determine fair value, while still allowing some tolerance for differences in assumptions used among the various vendors pricing models. As mortgage-backed securities are more sensitive to certain valuation model assumptions, such as anticipated interest rate movements and their related impact on principal repayments, the tolerance threshold for mortgage-backed securities is greater than for other security types where prepayment risk is not as significant.

          An algorithm is used to evaluate whether the various prices provided by vendors fall within the tolerance threshold. This algorithm looks for commonality among the various prices by evaluating them in order of a provider preference hierarchy, starting with the preferred pricing vendor. If the algorithm finds that there is commonality among the various vendors’ prices, the price from the highest level provider, in terms of the provider preference hierarchy, will be selected. The selected price is then

compared to that vendor’s price from the previous day as an added reasonableness check. If the price passes the previous day comparison check, it will become the final selected price used to determine the fair value of the Level 2 fair value security.

          If the algorithm does not indicate commonality, or an algorithm indicated price does not pass the previous day price comparison check, then the security is sent to an exception queue for manual review by an analyst. Such a review will consider the following, among other, factors:

	•		How are other sources, such as Bloomberg, pricing this security?
	•		What have been the historic prices of the security?
	•		Is there any news which would affect the price of the security?
	•		How are similar securities being priced?

          Based on the results of this review, either the preferred provider’s price will be selected, if it appears reasonable, or the price that represents the least change from the previous day’s price will be used. If the preferred provider’s price is not used, the analyst will send a confirmation to each vendor that provided a price and ask them to review their price to ensure that they are comfortable with assumptions used in the vendor’s pricing model. If a vendor indicates a change in assumptions, the process is repeated using the vendor’s new price. If the repeat of the tolerance threshold evaluation process indicates a change in the security’s price used to determine its fair value, the Company will adjust the security’s fair value prior to the issuance of the financial statements. Such adjustments are extremely rare.

          Prices provided by pricing vendors are based on proprietary pricing models, as described above, which produce an institutional bid evaluation. Institutional bid evaluations are an estimated price that a broker would pay for a security, typically in an institutional round lot. A bid evaluation is not a binding bid quote.

          The Company’s Level 2 fair value fixed-income securities are not actively traded. However, transactions involving these securities are frequent enough that their markets are deemed to be active. Accordingly, prices obtained from pricing vendors for Level 2 fair value fixed-income securities have not been adjusted by the Company as the prices provided by vendors appear to be based on current information that reflects orderly transactions.

          The Company currently has two private placement fixed-income securities that currently have Level 3 fair value classifications. One of these securities is valued by a non-preferred pricing vendor using a pricing model as discussed above. However, due to a lack of comparable values from other pricing vendors with which to validate the fair value of this security, we have elected to classify the fair value of this security as a Level 3. The other security with a Level 3 fair value is valued based on the present values of cash flows and contemplates interest rate, principal repayment and other assumptions made by the Company. The resulting fair value of the security approximates its par value. There were no significant changes in the assumptions used to value Level 3 fair value securities during the six months ended June 30, 2010 or 2009.

          Available-for-sale equity securities - are recorded at fair value on a recurring basis. Our available-for-sale equity security portfolio consists of publicly traded common stocks. As such quoted market prices in active markets are available for these investments, and they are therefore included in the amounts disclosed in Level 1.

          Our financial assets with changes in fair value measured on a recurring basis at June 30, 2010 and December 31, 2009 were as follows:

		June 30, 2010
		Total				Level 1				Level 2				Level 3
						(in thousands)
Available-for-sale investments:
Fixed-income securities		$	263,083			$	—			$	256,960			$	6,123
Equity securities (1)			21,774				21,774				—				—
Total		$	284,857			$	21,774			$	256,960			$	6,123

		December 31, 2009
		Total				Level 1				Level 2				Level 3
						(in thousands)
Available-for-sale investments:
Fixed-income securities		$	205,073			$	—			$	198,947			$	6,126
Equity securities (1)			17,984				17,984				—				—
Total		$	223,057			$	17,984			$	198,947			$	6,126

          With the exception of a liability for contract termination costs, related to sub-leased real estate in Chicago, Illinois (the “sub-lease liability”), the Company had no financial liabilities that it measured at fair value at June 30, 2010 or December 31, 2009. The fair value of the sub-lease liability is the present value of the estimated future cash flows associated with the original lease expense, offset by sub-lease rental income for the sub-leased space. The discount rate used in the present value calculation is six-percent (6%). This liability is included in ‘Other Liabilities’ in in the Unaudited Condensed Consolidated Balance Sheets. Changes in the estimated fair value, as a result of changes in estimated net cash flows, are reported in ‘other expenses’ in the Unaudited Condensed Consolidated Statement of Income.

          The changes in the balances of Level 3 financial assets for the three- and six-month periods ended June 30, 2010 and 2009 were as follows:

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(in thousands)								(in thousands)
Available-for-sale fixed-income securities
Beginning balance		$	6,123			$	6,206			$	6,126			$	6,219
Principal paydowns			—				(53	)			(3	)			(69	)
Net unrealized appreciation included in other comprehensive income			—				(8	)			—				(5	)
Ending balance		$	6,123			$	6,145			$	6,123			$	6,145

Investment Measured at Fair Value on a Nonrecurring Basis

          Held-to-maturity fixed-income securities - are recorded at amortized cost. However, the fair value of held-to-maturity securities is measured periodically, following the processes and procedures described above for available-for-sale fixed-income securities, for purposes of evaluating whether any securities are other-than-temporarily impaired, as well as for purposes of disclosing the unrecognized holding gains and losses associated with the held-to-maturity investment security portfolio. Any other-than-temporarily impaired securities would be reported at the fair value used to measure the impairment in a table of nonrecurring assets and liabilities measured at fair value. At June 30, 2010 and December 31, 2009 the Company did not have any held-to-maturity fixed-income securities that were considered to be other-than-temporarily impaired. Accordingly, there are no disclosures concerning assets and liabilities measured at fair value on a nonrecurring basis.

Other Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

          Other non-financial assets that are measured at fair value on a nonrecurring basis for the purposes of determining impairment include such long-lived assets as property and equipment, internally developed software and investment real estate. The Company’s non-financial liabilities measured at fair value subsequent to initial recognition are limited to those liabilities associated with certain exit costs initiated in previous periods. Due to the nature of these assets and liabilities, inputs used to develop the fair value measurements will generally be based on unobservable inputs, and therefore most of these assets and liabilities would be classified as Level 3. However, recent purchase and/or sales activity with regard to real estate investments adjoining the property owned by the Company may qualify such investments for Level 2 classification. At June 30, 2010 none of the aforementioned non-financial assets and non-financial liabilities were included in the unaudited Condensed Consolidated Financial Statements at fair value in accordance with the fair value redetermination guidance applicable to such assets and liabilities. Therefore, there are no disclosures concerning non-financial assets and liabilities measured at fair value on a nonrecurring basis.

Fair Value of Financial Instruments

          The Company’s investment securities, limited partnership interests, cash and cash equivalents, premiums receivable, reinsurance recoverable on paid losses, and long-term debt are considered to be financial instruments. With the exception of fixed-income securities classified as held-to-maturity, and certain limited partnership interests, the carrying values, i.e., the amounts they are reported at in the financial statements, of all financial instruments in the unaudited Condensed Consolidated Balance Sheets approximated their fair values at June 30, 2010 and December 31, 2009. The fair value of fixed-income held-to-maturity securities as of both dates is disclosed in Note 4. The carrying amount and fair value of our limited partnership interests are shown in the table below.

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		Amount (1)				Value				Amount				Value
		(in thousands)								(in thousands)
Financial assets:
Stilwell Associates, L.P.		$	15,000			$	15,656			$	15,000			$	15,000
Stilwell Value Partners I, L.P.			7,500				7,375				7,500				7,500
Stilwell Value Partners VI, L.P.			7,500				7,129				7,500				7,500

6. Unpaid Losses and Loss Adjustment Expenses

          Activity in the liability for unpaid loss and loss adjustment expenses for the six months ended June 30, 2010 and the year ended December 31, 2009 was as follows:

		Six Months
		Ended				Year Ended
		June 30, 2010				December 31, 2009
		(in thousands)
Beginning balance, gross		$	608,807			$	644,396
Less, reinsurance recoverables			(62,315	)			(81,546	)
Net reserves, beginning balance			546,492				562,850
Incurred related to
Current year			44,841				94,121
Prior years			(16,397	)			(36,559	)
			28,444				57,562
Paid related to
Current year			(1,274	)			(3,733	)
Prior years			(36,971	)			(70,187	)
			(38,245	)			(73,920	)
Net reserves, ending balance			536,691				546,492
Plus, reinsurance recoverables			59,386				62,315
Ending balance, gross		$	596,077			$	608,807
Development, annualized, as a % of beginning net reserves			-6.0	%			-6.5	%

          Favorable development on prior years’ loss reserves was experienced during both the six months ended June 30, 2010 and the year ended December 31, 2009, as shown in the table above. Favorable development on prior years’ loss reserves during a given period represents changes in the estimate of the ultimate net liability for unpaid losses and loss adjustment expenses as of the preceding year end. Such changes in estimates, when they occur, are included in current period earnings.

          The favorable development experienced during the six months ended June 30, 2010 and the year ended December 31, 2009 was the result of continued better than expected trends in paid claim severity. The Company’s actuarial estimates of loss reserves include projections of higher severity in contemplation of medical loss cost inflation, higher reinsurance retention levels in recent years and a

general change in the composition of the outstanding claim inventory. While the severity of paid claims, i.e., the average payment per claim closed with a payment, has increased, such increases have been less than anticipated in the actuarial projections of ultimate losses. In addition, the historically low levels of reported claims in recent years would typically be indicative that those claims still being reported are of a more meritorious nature. Accordingly, the actuarial projection of ultimate losses includes an assumption that the percentage of claims closed in future periods with a payment should be increasing. However, the trend of increasing paid claim frequency has not materialized to the extent anticipated. As a result the actuarial projection of ultimate losses pertaining to prior accident years has decreased, resulting in positive prior year development during the six months ended June 30, 2010, and the year ended December 31, 2009.

          The Company believes that the estimate of the ultimate liability for unpaid losses and loss adjustment expenses at June 30, 2010 is reasonable and reflects the anticipated ultimate loss experience. However, it is possible that the Company’s actual incurred loss and loss adjustment expenses will not conform to the assumptions inherent in the estimation of the liability. Accordingly, it is reasonably possible that the ultimate settlement of losses and the related loss adjustment expenses may vary significantly from the estimated amounts included in the accompanying unaudited Condensed Consolidated Balance Sheets. However, the favorable development recorded during the six months ended June 30, 2010 is not necessarily indicative of the results to be expected for the year ended December 31, 2010.

7. Subsequent Events

          On July 7, 2010, The Doctors Company, a California-domiciled reciprocal inter-insurance exchange (“TDC”), and Red Hawk Acquisition Corp., a Michigan corporation and wholly owned subsidiary of TDC (“Merger Sub”), entered into an Agreement and Plan of Merger pursuant to which Merger Sub will merge with and into the Company and each share of common stock of the Company issued and outstanding immediately prior to the closing will be converted into the right to receive $41.50 in cash. The total consideration to be paid for outstanding shares will be approximately $386.0 million. The closing of the merger is subject to customary conditions, including, among others, (i) the approval of the merger by the holders of a majority in voting power of the outstanding common stock of the Company; (ii) the approval of the merger by the State of Michigan Office of Financial and Insurance Regulation; (iii) the receipt of antitrust approvals, or the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and (iv) the absence of any order or injunction prohibiting the consummation of the transaction.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the Notes thereto included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2009, particularly “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.” References to “we,” “our” and “us” are references to the Company. References to “APCapital” are references to the holding company, American Physicians Capital, Inc.

          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. In addition, when we discuss our future operating results or plans, or use words such as “will,” “should,” “likely,” “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements. These forward-looking statements represent our outlook only as of the date of this report.

          We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Factors that might cause such a difference include, without limitation, the risks and uncertainties discussed from time to time in this report and our other reports filed with the Securities and Exchange Commission, including those listed in our most recent Annual Report on Form 10-K under “Item 1A — Risk Factors,” and the following:

	•		Increased competition could adversely affect our ability to sell our products at premium rates we deem adequate, which may result in a decrease in premium volume.
	•		Our reserves for unpaid losses and loss adjustment expenses are based on estimates that may prove to be inadequate to cover our losses.
	•		Market illiquidity and volatility associated with the current financial crisis makes the fair values of our investments increasingly difficult to estimate, and may have other unforeseen consequences that we are currently unable to predict. An interruption or change in current marketing and agency relationships could reduce the amount of premium we are able to write.
	•		If we are unable to obtain or collect on ceded reinsurance, our results of operations and financial condition may be adversely affected.
	•		We cannot make any assurances that the proposed merger, which is subject to a number of conditions, will be consummated.

	•		Failure to complete the TDC merger would result in the incurrence of costs, the amounts of which could adversely impact our future business and financial results.
	•		Our common stock price and business prospects may be adversely affected if the merger is not completed.
	•		Our geographic concentration in certain Midwestern states and New Mexico ties our performance to the business, economic, regulatory and legislative conditions in those states.
	•		A downgrade in the A.M. Best Company rating of our primary insurance subsidiary could reduce the amount of business we are able to write.
	•		Changes in interest rates could adversely impact our results of operation, cash flows and financial condition.
	•		The unpredictability of court decisions could have a material impact on our operations.
	•		Our business could be adversely affected by the loss of one or more key employees.
	•		The insurance industry is subject to regulatory oversight that may impact the manner in which we operate our business, our ability to obtain future premium rate increases, the type and amount of our investments, the levels of capital and surplus deemed adequate to protect policyholder interests, or the ability of our insurance subsidiaries to pay dividends to the holding company.
	•		Our status as an insurance holding company with no direct operations could adversely affect our ability to meet our debt obligations and fund future cash dividends and share repurchases.
	•		Legislative or judicial changes in the tort system may have adverse or unintended consequences that could materially and adversely affect our results of operations and financial condition.
	•		Applicable law and various provisions in our articles and bylaws may prevent and discourage unsolicited attempts to acquire APCapital that you may believe are in your best interests or that might result in a substantial profit to our shareholders.

          Other factors not currently anticipated by management may also materially and adversely affect our financial position and results of operations. We do not undertake, and expressly disclaim, any obligation to update or alter our statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Overview of APCapital

          APCapital is an insurance holding company whose financial performance is heavily dependent upon the results of operations of our primary insurance subsidiar, American Physicians Assurance Corporation, or American Physicians. American Physicians and our other insurance subsidiary, APSpecialty Insurance Corporation, or APSpecialty, are property and casualty insurers that currently exclusively write medical professional liability insurance for physicians and other healthcare professionals, principally in the Midwest and New Mexico. As a property and casualty insurer, our profitability is primarily driven by our underwriting results, which are measured by subtracting incurred loss and loss adjustment expenses and underwriting expenses from net premiums earned. While our underwriting gain (loss) is a key performance indicator of our operations, it is not uncommon for a property and casualty insurer to generate an underwriting loss, yet earn a profit overall, because of the availability of investment income to offset the underwriting loss.

          An insurance company earns investment income on what is commonly referred to as the “float.” The float is money that we hold, in the form of investments, from premiums that we have collected. While a substantial portion of the premiums we collect will ultimately be used to make claim payments and to pay for claims adjustment expenses, the period that we hold the float prior to paying losses can extend over several years, especially with a long-tailed line of business such as medical professional liability. The key factors that determine the amount of investment income we are able to generate are the rate of return, or yield, on invested assets and the length of time we are able to hold the float. We focus on the after-tax yield of our investments, as significant tax savings can be realized on bonds that pay interest that is exempt from federal income taxes.

          For further information regarding the operations of our medical professional liability insurance business see “Item 1. Business — Medical Professional Liability Operations” of our most recent Annual Report on Form 10-K.

Pending Transaction

          On July 7, 2010, the Company, The Doctors Company, a California-domiciled reciprocal inter-insurance exchange (“TDC”), and Red Hawk Acquisition Corp., a Michigan corporation and wholly owned subsidiary of TDC (“Merger Sub”), entered into an Agreement and Plan of Merger pursuant to which Merger Sub will merge with and into the Company and each share of common stock of the Company issued and outstanding immediately prior to the closing will be converted into the right to receive $41.50 in cash. As discussed more fully in “Part II, Item 1A. Risk Factors — The Doctors Company Acquisition” of this Quarterly Report on Form 10-Q, the merger is expected to close in the fourth quarter of 2010 and is subject to customary closing conditions, including the receipt of regulatory approvals and approval by a majority of APCapital’s shareholders. It is possible these approvals will not be received or that the closing does not occur for some other reason.

Description of Ratios and Other Metrics Analyzed

          We measure our performance using several different ratios and other key metrics. These ratios and other metrics are calculated in accordance with accounting principles generally accepted in the United States of America, which we refer to as GAAP, and include:

     Underwriting Gain or Loss: This metric measures the overall profitability of our insurance underwriting operations. It is the gain or loss that remains after deducting net loss and loss adjustment expenses and underwriting expenses incurred from net premiums earned. We use this measure to evaluate the underwriting performance of our insurance operations in relation to peer companies.

     Loss Ratio: This ratio compares our losses and loss adjustment expenses incurred, net of reinsurance, to our net premiums earned, and indicates how much we expect to pay policyholders for claims and related settlement expenses compared to the amount of premiums we earn. The loss ratio uses all losses and loss adjustment expenses incurred in the current calendar year (i.e., related to all accident years). The lower the loss ratio percentage is, the more profitable our insurance business is, all other factors being equal.

     Underwriting Expense Ratio: This ratio compares our expenses to obtain new business and renew existing business, plus normal operating expenses, to our net premiums earned. The ratio is used to measure how efficient we are at obtaining business and managing our underwriting operations. The lower the percentage, the more efficient we are, all else being equal. Sometimes, however, a higher underwriting expense ratio can result in better business as more rigorous risk management and underwriting procedures may result in the non-renewal of higher risk accounts, which can in turn improve our loss ratio, and overall profitability. The determination of which expenses should be classified as underwriting expenses can vary from company to company. Accordingly, comparability of underwriting expense ratios among and between various companies may be limited.

     Combined Ratio: This ratio equals the sum of our loss ratio and underwriting expense ratio. The lower the percentage, the more profitable our insurance business is. This ratio excludes the effects of investment income. As the underwriting expense ratio is a component of the overall combined ratio, comparability between companies may be limited for the reasons discussed above.

     Investment Yield: Investment yield represents the average return on investments as determined by dividing investment income for the period, annualized if necessary, by the average ending monthly investment balance for the period. As we use average month ending balances, the yield for certain individual asset classes that are subject to fluctuations in a given month, such as cash and cash equivalents, may be skewed slightly. However, we believe that when calculated for the cash and invested asset portfolio in its entirety, the overall investment yield is an accurate and reliable measure for evaluating investment performance. Our calculation of investment yields may differ from those employed by other companies.

     Return on Equity: As a way of evaluating our capital management strategies we measure and monitor our return on equity, or ROE, in addition to our results of operations. We measure ROE as our

net income for the period, annualized if necessary, divided by our total shareholders’ equity as of the beginning of the year. Other companies sometimes calculate ROE by dividing annualized net income by an average of beginning and ending shareholders’ equity. Accordingly, the ROE percentage we provide may not be comparable with those provided by other companies. We use a modified version of ROE as the basis for determining performance-based compensation.

     Book Value per Share: We also track the net asset value per common share outstanding, which is calculated by dividing shareholders’ equity as of the end of the period by the total number of common shares outstanding at that date. This is commonly referred to as “book value per share” in the property and casualty insurance industry. Evaluating the relationship between the book value per common share and the cost of a common share in the open market helps us compare our stock value with that of our peers and to determine the relative premium that the market places on our stock and the stock of our peers.

          The above ratios and other financial measures, when calculated using our reported statutory results, will differ from the GAAP ratios as a result of differences in accounting between the statutory basis of accounting and GAAP. Additionally, the denominator for the underwriting expense ratio for GAAP is net premiums earned, compared to net premiums written for the statutory underwriting expense ratio.

          In addition to the above financial measures of operating performance and capital management, we also use certain non-financial measures to monitor our premium writings and price level changes. We measure policy retention by comparing the number of policies that were renewed during a given period with the number of policies that expired. This retention ratio helps us to measure our success at retaining insured accounts. We also monitor our insured physician count, which counts the number of doctor equivalents associated with all policies. For this purpose a corporation or ancillary health care provider on a policy is assigned a value of one doctor equivalent. When used in conjunction with the retention ratio, the insured physician count helps us to monitor the overall increase or decrease in insureds that comprise our premium base.

Non-GAAP Financial Measures

     Accident Year Loss Ratio: In addition to the loss ratio, which uses calendar year incurred losses as described above, we also use an accident year loss ratio, which is a non-GAAP financial measure, to evaluate our loss experience. The accident year loss ratio uses only those loss and loss adjustment expenses incurred that relate to the current accident year, and therefore excludes the effect of development on prior year loss reserves. We believe the accident year loss ratio is useful in evaluating our current underwriting performance, as it focuses on the relationship between premiums earned in the current year and losses incurred related to the exposure represented by the premiums earned in the current year related to those policies. As with the calendar year loss ratio, a lower accident year loss ratio indicates that the premiums currently being earned will result in a greater profit, all other factors being equal. Accident year loss ratios are reconciled to calendar loss ratios in the first two tables under “—Results of Operations — Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended June 30, 2009.”

Critical Accounting Policies

          The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the accompanying unaudited Condensed Consolidated Financial Statements and notes thereto. 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, or that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Adjustments related to changes in estimates are reflected in our results of operations in the period in which those estimates changed.

          Our “critical” accounting policies are those policies that we believe to be most sensitive to estimates and judgments. These policies are more fully described in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies” of our most recent Annual Report on Form 10-K. There have been no material changes to our critical accounting policies since the most recent year end.

Results of Operations ? Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended June 30, 2009

          The following tables show our underwriting results, as well as other revenue and expense items included in our unaudited Condensed Consolidated Statements of Income, for the three and six months ended June 30, 2010 and 2009.

		Three Months Ended
		June 30,								Change
		2010				2009				Dollar				Percentage(2)
						(dollars in thousands)
Direct premiums written		$	24,001			$	24,245			$	(244	)			-1.0	%
Net premiums written		$	25,095			$	23,389			$	1,706				7.3	%
Net premiums earned		$	29,388			$	28,382			$	1,006				3.5	%
Losses and loss adjustment expenses
Current year losses			22,928				23,200				(272	)			1.2	%
Prior year losses			(8,276	)			(10,087	)			1,811				-18.0	%
Total			14,652				13,113				1,539				-11.7	%
Underwriting expenses			7,042				7,319				(277	)			3.8	%
Total underwriting gain			7,694				7,950				(256	)			-3.2	%
Other revenue (expense) items
Investment income			6,298				8,028				(1,730	)			-21.5	%
Net realized gain			—				—				—				0.0	%
Other income			282				212				70				33.0	%
Other expenses (1)			(1,704	)			(846	)			(858	)			-101.4	%
Total other revenue and expense items			4,876				7,394				(2,518	)			-34.1	%
Income before federal income taxes			12,570				15,344				(2,774	)			-18.1	%
Federal income tax expense			3,138				4,354				(1,216	)			27.9	%
Net income		$	9,432			$	10,990			$	(1,558	)			-14.2	%
Loss Ratio:
Accident year			78.0	%			81.7	%							-3.7	%
Prior years			-28.1	%			-35.5	%							7.4	%
Calendar year			49.9	%			46.2	%							3.7	%
Underwriting expense ratio			24.0	%			25.8	%							-1.8	%
Combined ratio			73.9	%			72.0	%							1.9	%
Pre-tax investment yield			3.3	%			4.0	%							-0.7	%
Return on beginning equity (annualized)			15.9	%			17.3	%							-1.4	%