American Physicians Capital (ACAP)

 

Our net cash flow provided by operations was approximately $28.9 million for the year ended December 31, 2009, compared to $41.4 million provided by operations in 2008 and $46.0 million in 2007. The decreases in operating cash flows are primarily attributable to declines in premiums received, as our direct premiums written have been decreasing, and investment income received, as a result of the declines in short-term interest rates and the increased allocation of our investment portfolio to lower-coupon tax-exempt securities. However, our loss and loss adjustment expense payments have also decreased in each of the last two years, which partially offset the decreases in premiums received and investment income collected.

 

At December 31, 2009, we had $172.2 million of cash and cash equivalents and approximately $205.1 million of available-for-sale fixed-income securities and $18.0 million of available-for-sale equity securities that could be sold 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 to meet future policyholder obligations and ongoing operational expenses. As of December 31, 2009, we had approximately $9.9 million, $74.5 million, $157.0 million and $18.1 million of held-to-maturity fixed-income securities that mature in the next years, one to five years, five to ten years and more than ten years, respectively. We also have approximately $109.3 million of mortgage-backed securities that provide periodic principal repayments. See Note 3 of the Notes to Consolidated Financial Statements for further information regarding the anticipated maturities of our fixed-income securities.

 

In December 2009 American Physicians, our primary insurance subsidiary, invested $30.0 million in limited partnerships, which were organized for the purpose of conducting investment activities. In accordance with the partnership agreements, we cannot request a cash withdraw from the partnerships until December, 2011, and even then the distribution of cash is subject to the approval of the general partner. These limited partnership investments are discussed more fully in “— Financial Condition, Investments.”

 

 

Our net cash flow from operations during the first quarter of 2009 was $14.3 million, an increase of $1.5 million compared to the first quarter of 2008. The increase was primarily the result of a $3.7 million decrease in loss and loss adjustment expense payments as well as the receipt of cash from reinsurers related to our commutation of our 2005 reinsurance treaty, which was effective December 31, 2008. Partially offsetting the increases in cash flows were decreases in premium receipts and investment income collected of $2.5 million and $0.5 million, respectively, as well as an increase in federal income taxes paid of $1.2 million.

 

The following table shows the composition of our net cash flows from operations for the quarters ended March 31, 2009 and 2008.

 

 

Our net cash flow provided by operations was approximately $41.4 million for the year ended December 31, 2008, compared to $46.0 million provided by operations in 2007 and $56.0 million in 2006. The following table shows the composition of our net cash flows from operations for the years ended December 31, 2008, 2007 and 2006.

 

 

The decrease in premiums received was the result of the decreases in our direct premiums written primarily due to rate decreases as previously discussed. Loss and loss adjustment expense payments have also been steadily decreasing as our inventory of open claims has decreased over the last several years. Cash from investment income decreased in 2008 compared to 2007 primarily as a result of a decrease in short-term interest rates, as well as an increase in the allocation of our portfolio to tax-exempt securities, which had a lower coupon rate than the investment securities they replaced. Income taxes paid in 2008 were relatively consistent with 2007 as the benefit of minimum tax credits utilized in 2007 was mostly offset by lower taxable income in 2008. Taxes paid in 2006 were less than 2007 or 2008 due partially to lower taxable income and the utilization of our remaining 2003 net operating loss carryforwards. We experienced net positive cash flows related to our reinsurance program in 2007 for the first time in several years. This was primarily due to changes in our reinsurance treaty in 2007 that reduced our premium cessions. The increase in cash from reinsurance of $4.0 million in 2008 compared to 2007 was related to the commutation of our 2005 reinsurance treaty. At December 31, 2008 we had received approximately $4.8 million of the $8.6 million due from reinsurers as a result of the commutation. All other operating cash flow categories have remained relatively consistent and stable over the three year period ended December 31, 2008.

 

We have no material planned expenditures for the acquisition of assets, or other expenditures in 2009 and beyond, other than expenses incurred in the normal course of operations and the remaining costs associated with the development and implementation of a new policy and claims system. The original projected cash outflow associated with the project was expected to be approximately $6.0 million. Through December 31, 2008 the total cost of the project had reached approximately $7.0 million, which represented substantially all of the costs associated with the project.

 

At December 31, 2008, we had $101.6 million of cash and cash equivalents and approximately $222.9 million of available-for-sale fixed-income securities and $19.4 million of available-for-sale equity securities that could be sold 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 to meet future policyholder obligations and ongoing operational expenses. As of December 31, 2008, we had approximately $74.5 million, $163.8 million and $88.4 million of held-to-maturity fixed-income securities that mature in the next one to five years, five to ten years and more than ten years, respectively. We also have approximately $150.8 million of mortgage-backed securities that provide periodic principal repayments. See Note 3 of the Notes to Consolidated Financial Statements for further information regarding the anticipated maturities of our fixed-income securities.

 

Our net cash flow from operations was $25.7 million during the nine months ended September 30, 2008, a decrease of $13.7 million compared to $39.4 million for the same period of 2007. The decrease in cash provided by operations was primarily the result of a $15.4 million decrease in premium receipts due to our declining premium volume, and a $3.6 million decrease in interest receipts from our investment portfolio, due to lower short-term interest rates and an increase in lower interest tax-exempt securities. Partially offsetting the decrease in cash from operations caused by the aforementioned items was an increase in cash from operations of $6.3 million as a result of fewer paid loss and loss adjustment expenses during the first nine months of 2008, compared with the same period a year ago.

 

At September 30, 2008, we had $118.6 million of cash and cash equivalents on hand to meet short-term cash flow needs. In addition, at September 30, 2008, we had $21.0 million of available-for-sale and held-to-maturity fixed-income securities that mature in the next year. On a longer-term basis, we attempt to match the projected payments of our claims obligations with the maturities of our long-term fixed-income security portfolio. Accordingly we have $180.9 million, $257.0 million, and $101.6 million of available-for-sale and held-to-maturity fixed-income securities that mature in the next one to five years, five to 10 years, and more than 10 years, respectively. In addition, we have $150.9 million of mortgage-backed securities that provide periodic principal repayments.