“We really dont understand why youre still around,” one investor said, echoing the sentiments of many of the large investors that spoke during the call.

Insurance rating analysts, while acknowledging AP Capitals current difficulties, seem to have a better opinion (compared to the investors) of the companys management and future prospects.

The medical malpractice insurer reported a third-quarter loss of $77.1 million, or $9.03 per share. For the nine months ended Sept. 30, the company lost $76.9 million, or $8.97 per share. In a statement, AP Capital noted that the loss includes a $43 million reserve increase ($28 million after taxes).

As a result of the earnings announcement, Oldwick, N.J.-based A.M. Best Company downgraded AP Capital to “B-double-plus” (very good) from “A-minus” (excellent).

Devin Inskeep, a financial analyst with Best, noted that the downgrade was mainly a reaction to AP Capitals reserve adequacy challenges. “In our view, the companys capital no longer supported an A-minus rating,” he added.

Mr. Inskeep said that Best will be meeting with AP Capitals management team in December to discuss the downgrade and the companys future plans.

“Our third-quarter analysis of loss reserves showed the business we wrote in prior years in Florida, Ohio and Kentucky continued to develop at a much higher level of severity than previously predicted,” Mr. Cheeseman said in the statement.

During the conference call, he noted that AP Capital exited the Florida malpractice marketplace in mid-2002 and is revamping underwriting practices in Ohio and Kentucky, including rate increases and no longer offering occurrence-type policies. He added that Michiganthe companys home state and where it first started writing malpractice insuranceis profitable, with a loss ratio in the low 70s.

But it became evident during the conference call that many of the large investors had lost confidence in Mr. Cheesemans leadership and no longer believed in his plans for turning the company around.

“The large shareholders want you to resign so that the competent people at the company can effect an orderly sale,” an investor said bluntly. “There are a number of competitors of yours that want to buy American Physicians Capital,” he said. “We think youre the wrong man to run the sale process.”

Mr. Cheeseman thanked the investor for his input, but did not directly address the resignation or sale issues. “There is a lot of anger and disappointment in the marketplace, most of it directed at me,” he admitted.

Shellie Stoddard, a director of insurance ratings for Standard & Poors in New York, while noting that the analyst community was “taken off guard” by the reserve increases, was somewhat surprised by the investment communitys reaction to the earnings announcement.

S&P is maintaining its AP Capital rating of “triple-B-plus” (good), with “credit watch negative.” She explained that this is an “investment grade” rating, albeit the weakest one.

“The company [AP Capital] has quality management for the medical malpractice line,” Ms. Stoddard said. She added that AP Capital president Kevin Clinton is generally viewed as someone with the ability to turn the company around. Ms. Stoddard indicated she is less familiar with Mr. Cheeseman, who she termed more of a “big picture guy.”

As the conference call questioning continued, it became evident that the investors were dismayed not only with AP Capitals financial results, but with Mr. Cheeseman personally.

One investor asked a question about the propriety of Mr. Cheesemans relationship with East Lansing, Mich.-based Stratton-Cheeseman Agency. That agency, in which Mr. Cheeseman has an ownership interest, is a major producer of malpractice business for AP Capital.

“If you go all the way back to when we went public, we acknowledged my ownership in the agency,” Mr. Cheeseman responded. “Most people felt it was a very advantageous thing.” He added that the agency is compensated at a “market commission rate” and that there is a “firewall” separating agency and company business.

Another asked Mr. Cheeseman about his seeming refusal to take any personal responsibility for the insurers financial condition. “Its almost as though youre observing a nature or weather phenomenon and saying, Boy, that looks really bad,” he remarked. “AP Capital is in the situation its in because of the decisions and the leadershipor lack of leadershipover the last several years.”

“We dont need to see a company thats being run like a carnival bumper car ride, and thats really how it feels.”

Nevertheless, Ms. Stoddard of S&P views AP Capitals current financial difficulties as “more of an industry phenomenon caused by the legal environment and general malpractice pricing trends in 2001 and before,” rather than a severe managerial problem.

A call was placed to company media director Ann Storberg to arrange interviews with AP Capital executives, but as of press time that call had not been returned.

On Nov. 21, AP Capital also announced that it has unwound its participation in an Oct. 29 trust preferred pool transaction, freeing up some $20.6 million from its balance sheet.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.