S&P Affirms APA Ratings

November 29, 2004

Standard & Poor’s Rating Services has revised its outlook on Michigan-based American Physicians Assurance Corp. (APA) to stable from negative.

At the same time, Standard & Poor’s affirmed its ‘BBB-‘ counterparty credit and financial strength ratings on APA.

The revised outlook reflects APA’s improving operating performance in its core professional liability segment, strong capitalization, and good competitive position, offset by historically poor operating performance in the five years ended December 2003.

APA’s operating performance — as measured by consolidated GAAP pretax income of $13.1 million for the nine months ended Sept. 30, 2004 — is significantly improved from a $42.2 million pretax loss in the prior-year period. The consolidated GAAP medical liability segment underwriting result of 106.4% for the nine months ended Sept. 30, 2004, is a marked improvement over the prior year to date combined ratio of 155.7%. Prior-year reserve strengthening of $44.2 million constituted 37.2% of the year-to-date September 2003 medical liability combined ratio.

APA’s capital adequacy ratio of 145% as of Sept. 30, 2004, is considered strong. This improvement from 107% as of year-end 2003 is because of improved earnings and a $25 million cash contribution from the holding company, American Physicians Capital Inc. Although reserve indications from the company’s actuaries are positive, Standard & Poor’s believes that insufficient time has elapsed since September 2003’s material reserve strengthening to make a definitive statement of the adequacy of these reserves. Standard & Poor’s rating incorporates this concern by including the potential for a modest reserve charge in the capital adequacy calculation. Standard & Poor’s will continue to monitor reserve developments over the upcoming year.

Standard & Poor’s believes that APA’s competitive position is good. In addition to having a material market presence in Illinois, Michigan, Ohio, New Mexico, and Kentucky, the company’s competitive position is somewhat bolstered through the endorsement of more medical societies than any other carrier, which is perceived as a competitive advantage.

Although acknowledging significant pricing corrections and exits from unprofitable markets in both the medical malpractice and workers’ compensation and health segments, APA’s historical operating performance has been poor, as measured by AP Capital Group’s statutory combined ratio of 156.3% in 2001, 124.4% in 2002, and 136.1% in 2003. Although Standard & Poor’s believes that APA has markedly improved its underwriting and claims-management profile, given the long-tail nature of the medical liability line of business, the extent of this improvement is not fully measurable at this time.

Pretax earnings — unblemished by prior-year adverse development in the runoff workers’ comp and health lines of business — is expected to continue to improve, with medical liability combined ratio approaching 105% in 2004 and with further improvement in 2005. Capitalization, supported by good earnings somewhat offset by rate-driven premium growth, is expected to remain more than 140%. APA is expected to continue its pursuit of profitably underwritten business, with rate driven premium growth of about 10% through 2005.

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