The statutory underwriting expense ratio shown in the table is calculated by dividing statutory underwriting expenses, which may differ from GAAP, by net premiums written. The GAAP underwriting expense ratio is calculated by dividing underwriting expenses, determined in accordance with GAAP, by net premiums earned.
reported and paid, and the average severity of reported and paid claims, as well as industry data. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Based on these quantitative as well as other qualitative factors, such as a review of current pricing and underwriting initiatives, an evaluation of reinsurance costs and retention levels, and the current reserving practices of the Company’s claims department, we select a “best estimate” of ultimate future losses, and then record this best estimate in the Company’s Consolidated Financial Statements. We receive an annual statement of opinion by an independent consulting actuary concerning the adequacy of our reserves, as required by insurance regulatory authorities.
When a claim is reported to us, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The process of estimating the case reserves reflects an informed judgment based upon insurance reserving practices appropriate for the relevant line of business and on the experience and knowledge of the estimator regarding the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. We also maintain reserves for claims incurred but not reported, commonly referred to as IBNR, to provide for future reporting of already incurred claims and development on reported claims. These two components, case reserves and the reserve for IBNR claims, constitute the liability for unpaid losses and loss adjustment expenses, and together represent our best estimate of the ultimate cost of settling our claims obligations. The estimation of the ultimate liability for unpaid losses and loss adjustment expenses is an inherently uncertain process and does not represent an exact calculation of that liability. Many internal and external factors can influence the estimation process, and even minor changes in assumptions regarding these factors can have a substantial impact on the projection of the ultimate liability.
potential severity, and the claims that are no longer being reported were the non-meritorious claims that were closed at little or no cost.
All of the above factors contribute to the variability inherent in estimating ultimate loss payments, especially since the effects of many of these variables cannot be directly quantified on a prospective basis. In accordance with standard actuarial practices, we use a variety of methods when making our reserve estimate projections. These methods include:
The various reserving methods described above produce a range of possible reserve amounts. The selection of the best estimate reserve within the range requires careful actuarial judgment and analysis of diagnostic statistics such as those described above. In an effort to better explain the inherent uncertainty in our net loss and loss adjustment expense reserves, we have developed a reasonable range of estimates around the net carried reserves as of December 31, 2009. The range is disclosed and explained in “- Financial Condition.”
The fair values of our investment securities are determined as follows. 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 quoted bid or ask prices are just a few of the observable inputs utilized. Prices determined by the model are then compared with prices provided by other pricing vendors and against prior prices to confirm that deviations are within tolerance thresholds. If the pricing vendors are unable 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).
We currently have only two securities in our available-for-sale investment portfolio that have Level 1 fair values. These securities are publicly traded equity securities with a total fair value of $18.0 million at December 31, 2009. We also have two available-for sale securities with Level 3 fair values, one of which 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 fair value of this security at December 31, 2009 was $4.0 million. The other security with a Level 3 fair value is valued based on the present value of expected cash flows associated with the security. The assumptions implicit in fair values based on the present value of cash flows, such as the discount rate, interest rate, and principal repayments, are deemed to be unobservable due to the structure and nature of this security. However, the resulting fair value of the security approximates its par value, which was $2.2 million at December 31, 2009. There were no material changes in the assumptions we used to determine the fair value of this security during the twelve months ended December 31, 2009. The rest of our available for sale fixed-income security portfolio, $198.9 million at December 31, 2009, consists of securities deemed to be Level 2.
We have made no adjustment to the fair value of our one Level 3 fair value security that is priced by a pricing vendor. Our other Level 3 fair value security is not priced by vendors, but rather is priced by us as described above.
We periodically review our investment portfolio for any potential credit quality or collection issues that may be indicative of an other than temporary impairment, or OTTI. Recent changes in GAAP have required us to modify the manner in which we conduct such evaluations with respects to our fixed-income securities. We must now positively affirm for all impaired securities, i.e., a security whose fair value is less than its amortized cost, that we do not intend to sell the security and that it is more likely than not that we will not be required to sell an impaired security before its entire amortized cost is recovered. Evaluating whether a security is more likely than not to be required to be sold before its full amortized cost is recovered requires judgment in assessing the reasons that a sale may be required, such as to maintain regulatory compliance or to meet liquidity needs, and the likelihood and timing of such events occurring. If both criteria cannot be positively affirmed, the security is deemed to be OTTI and must be written down to its fair value as of the end of the reporting period through a charge to income.
In determining if the full amortized cost of an impaired security is recoverable, we must make a best estimate of the present value of the security’s expected cash flows. In making our best estimate of the cash flows related to a particular security, we consider the following:
There have been no changes in the manner in which we evaluate equity securities for other than temporary impairments. Equity securities, if impaired, continue to be evaluated based on the following criteria.
Our ability and intent to retain the investment for a period of time sufficient to allow for an anticipated recovery in value;
The duration and extent to which the fair value has been less than cost;
The specific reasons that a security is in a significant unrealized loss position, including market conditions that could affect access to liquidity.
A portion of the coverage that physicians purchase under claims-made policies is for an additional death, disability and retirement, or DDR, insurance benefit. This DDR coverage provides coverage to the physician for any prior incidents occurring during the coverage period that are reported after their death, disability or retirement. The loss exposure associated with this product is known as extended reporting period claims. The reserve for extended reporting period claims coverage is recorded during the term of the original claims-made policy, based on the present value of future estimated benefits, including morbidity and mortality assumptions, less the present value of expected future premiums associated with this DDR coverage. The reserves for these claims fluctuate based on the number of physicians who are eligible for this coverage and their age. Any changes in the DDR reserves are reflected as an expense in the period in which we become aware that an adjustment is necessary. At December 31, 2009 and 2008, our recorded DDR reserves were $11.8 million and $13.0 million, respectively, which include a discount related to the present value calculation of approximately $3.2 million and $3.6 million, respectively.
Prior to 2006, a portion of the policyholder premium ceded to the reinsurers under our primary professional liability reinsurance contract was “swing-rated,” or experience rated, on a retrospective basis. These swing-rated contracts were subject to a minimum and maximum premium range to be paid to the reinsurers depending upon the extent of losses ultimately paid by the reinsurers. Under these treaties, we paid a provisional premium during the initial policy year, and recorded a liability that represented our best estimate of the additional premium due under the treaty based on the reinsurers’ expected ultimate experience under the treaty. As this estimated liability for future premium payments relied upon our ceded reserve estimates to project the reinsurers’ anticipated ultimate experience under the treaty, changes in our actuarially estimated ceded loss and loss adjustment expense reserves would also have an impact on the estimated liability for additional premiums. We have historically accrued the maximum premium under these treaties. However, recent claim trends have caused us to revise downward our estimate of the reinsurers’ ultimate experience under these treaties. As a result, we reduced our accrued ceded premiums during 2009 by approximately $1.1 million, the effect of which is a $1.1 million increase in both net premiums written and earned. At December 31, 2009 we had approximately $9.0 million of accrued ceded premiums under these treaties.
Our reinsurance treaties effective on or after January 1, 2006, although no longer swing-rated, do contain profit sharing provisions. In accordance with these provision, if the reinsurers’ experience under the treaties is favorable, that is the treaties are profitable from the reinsurers’ perspective, a percentage of the reinsurers’ profit would be due back to us. Our reinsurers’ experience under treaty years 2009, 2008 and 2007 indicated profits of $43,000, $110,000 and $78,000, respectively, as of December 31, 2009.
We commuted our 2005 medical professional liability reinsurance treaty agreement effective December 31, 2008. The $16.6 million of consideration under the commutation, consisting of $8.5 million in cash and the reduction of swing-rated premiums payable of $8.1 million, were recorded as a reduction of losses and loss adjustment expenses paid (thereby reducing losses and loss adjustment expenses incurred) during 2008. In connection with the commutation we released the reinsurers from their obligations under the treaty of $16.0 million (thereby increasing losses and loss adjustment expenses incurred in 2008). The net effect of the commutation was a decrease in losses and loss adjustment expenses in 2008 of $633,000.
We evaluate each of our ceded reinsurance contracts at inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At December 31, 2009 all ceded contracts are accounted for as risk transferring contracts.
We review the financial stability of all of our reinsurers each quarter. This review includes a ratings analysis, as well as the most recent financial information, of each reinsurer participating in a reinsurance contract. At December 31, 2009, there were no known issues with the financial solvency of our reinsurers or their ultimate ability to pay amounts due to us. If we determine that the ultimate ability of a reinsurer is uncertain, we would be required to recognize a reserve and a corresponding expense in the period in which the determination is made. Our reinsurance arrangements are discussed in more detail in “Item 1. Business - Medical Professional Liability Operations” and in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - 2009 Compared to 2008” and in Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this report.
previous year and the actual amounts per the filed tax returns. These “return to provision” differences are recorded as adjustments to income tax expense in the period in which they are identified. Return to provision adjustments for each of the three years ended December 31, 2009 were less than $50,000.
We are an insurance holding company whose financial performance is heavily dependent upon the results of operations of our insurance subsidiaries. Our insurance subsidiaries are property and casualty insurers that write medical professional liability insurance for physicians and other healthcare professionals throughout the United States, but principally in the Midwest and New Mexico. Prior to 2005, we also wrote workers’ compensation, health and personal lines and we continue to carry reserves relation to claims made under these policies as this business runs off. 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.
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, regardless of the year in which the incident giving rise to the claim occurred. 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.
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 measure is commonly referred to as “book value per share.” Book value per share is used in the property and casualty insurance industry as a means of evaluating the relationship between the book value per common share and the cost of a common share in the open market. It is used by management, investors and analysts to 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 decline in direct premiums written in 2009 was primarily the result of decreases in the average policy premiums, which decreased an average of 7% for policies that renewed in 2009. Our average in-force premium, which contemplates new business written and endorsements or changes in renewal policies, decreased 6.4% to approximately $12,520 at December 31, 2009, from $13,380 at December 31, 2008. The rate decreases instituted over the last two to three years have been in response to favorable claim trends noted in virtually all markets of the medical professional liability industry. As these favorable claim trends appear to be industry wide, other medical professional liability insurers lowered their rates in 2009 as well, increasing the overall level of price competition in the industry, particularly in our Michigan and Ohio markets.
Rate reductions in 2009 were partially offset by our strong retention ratio of 88% for the year. Our Illinois market was particularly strong in 2009 with a retention ratio of nearly 90% and several million dollars of new business premium. We ended 2009 with 8,821 insureds, down 2.7% from December 31, 2008.
Net premiums written as a percentage of direct premiums written increased in 2009 due to approximately $1.1 million of ceded premium credits on reinsurance treaties for years prior to 2005, which were experience rated. These reductions to ceded premiums were due to favorable ceded loss experience on these older accident years. Partially offsetting the ceded premium credits was a $0.5 million assessment by the Workers’ Compensation Reinsurance Association, a mandatory reinsurance facility run by the State of Minnesota, for premium deficits associated with prior years. Otherwise, the terms of our 2009 reinsurance treaty were very similar to those in the 2008 treaty, both in terms of coverage and premium rates. Our 2010 reinsurance treaty contains terms and rates that are similar to those of the treaty effective in 2009. As such, we anticipate that our net premiums written, as a percentage of direct, will remain at approximately 96%.
Net incurred loss and loss adjustment expenses, which we refer to collectively as losses, decreased in 2009. The decrease in losses was principally the result of increased favorable development on prior years’ loss reserves. However, current accident year losses also decreased despite increases in the accident year loss ratio. The increase in the accident year loss ratio for 2009 was principally the result of decreases in the average policy premium and the resulting decreases in net premiums earned, partially offset by the continued favorable claim trends that have resulted in the favorable development on prior years’ loss reserves.
As discussed in “- Critical Accounting Policies,” the effect of a change in either claims frequency or severity can introduce a great deal of variability in our reserve estimation process. We have a practice of being cautious with the assumptions we make concerning emerging trends in claim frequency and severity and do not immediately reflect the impact that any short-term declines in frequency may have on our ultimate losses. In addition, because the historical claims data we use to project future expected results covers more than 30 years, the impact of recent claims trends is often moderated by the substantial pool of historical data.
We anticipate that our underwriting expense ratio will continue at elevated levels, compared to historic norms, until the end of 2013 as we amortize the cost of the new system. If our premium volume continues to decrease, however, the underwriting expense ratio will continue to increase as there will be a lower premium base over which to spread certain fixed overhead and other costs. We believe that the new system will allow us to operate our business more efficiently, ultimately enabling us to reduce expenses in the future. For further discussion of the amortization expense relating to the system, see “-Other Assets” in Note 1 of the Notes to Consolidated Financial Statements.
Net realized losses of $0.5 million in 2009 were principally the result of a pre-tax charge of $4.5 million for the impairment of one of our equity investments. Due to a significant decline in the fair value of this investment during the fourth quarter of 2009, we believed it was necessary to write-down our carrying value of this investment to the current market value. This loss was partially offset by $3.8 million of gains that were realized as we restructured a portion of our portfolio at the end of 2009 when we made a $30.0 million investment in limited partnerships. The net realized losses reported in 2008 were principally attributable to a pre-tax impairment charge of $0.9 million on bonds that were subsequently sold. Partially offsetting the 2008 impairment charge were realized gains on bonds that were called during 2008.
In periods of declining written premiums, earned premiums typically decrease less than written premiums as a portion of the higher premium volume written in the prior year is recognized in the current year since premiums are earned over the policy term, which is typically 12 months. In addition, the timing of writings in a given year can affect the amount of premiums earned in that year. Net premiums written during the two-year period ended December 31, 2008 decreased 9.6% compared with net premiums written during the two-year period ended December 31, 2007. This decrease in net premiums written, combined with an increase in the percentage of premiums written in the fourth quarter of 2008, compared with the same period of 2007, accounts for the 10.5% decrease in net premiums earned in 2008 compared to 2007, which exceeds the decrease in net premiums written of 8.2% when comparing only the annual periods ended December 31, 2008 and 2007.
Of the $31.5 million of 2008 favorable prior year development, excluding the $0.6 million effect of the 2005 treaty year commutation, $33.4 million was attributable to medical professional liability reserves, partially offset by $1.9 million of unfavorable development on workers’ compensation reserves. This compares with $38.2 million of favorable development and $4.2 million of unfavorable development on medical professional liability and workers’ compensation loss reserves, respectively, in 2007.
Investment income decreased $6.6 million, or 15.3% in 2008. There were two primary factors driving the decrease in investment income. The first was the decline in short-term interest rates throughout 2008, which accounted for approximately $2.7 million of the decrease. The second factor was our continued purchase of tax-exempt securities in 2008. These securities replaced higher-yielding, taxable corporate and government agency securities that matured, were called, sold or paid down during 2008. Overall our pre-tax investment yield for 2008 was 4.38%, a decrease of 62 basis points compared to a yield of 5.00% for 2007.
Other expenses for the years ended December 31, 2008 and 2007 consisted of the following.
Based on historical trends, market and regulatory conditions and our current business plans, we believe that our existing resources and sources of funds, including possible dividend payments from our insurance subsidiaries to APCapital, will be sufficient to meet our short and long-term liquidity needs. However, these trends, conditions and plans are subject to change, and there can be no assurance that our available funds will be sufficient to meet our liquidity needs in the future. In addition, any acquisition or other extraordinary transaction we may pursue outside of the ordinary course of business could require that we raise additional capital.
APCapital’s only material assets are cash and the capital stock of American Physicians and Alpha Advisors. APCapital’s cash flow consists primarily of dividends and other permissible payments from American Physicians and investment earnings on funds held. During 2009, APCapital received dividends of $30.0 million in June and $15.0 million in December. The payment of dividends to APCapital by its insurance subsidiaries is subject to certain limitations imposed by applicable law. These limitations are described more fully in Note 19 of the Notes to Consolidated Financial Statements. Such cross-referenced information is incorporated herein by reference. The June 2009 dividend required and received regulatory approval as due to its timing it exceeded ordinary dividend limits imposed by the State of Michigan. In accordance with these limits, American Physicians could pay “ordinary” dividends to APCapital of approximately $40.0 million in 2010 without prior regulatory approval. On March 2, 2010, American Physicians requested and received permission from regulators to pay $10.0 million of extraordinary dividends to APCapital. This dividend was deemed extraordinary as a result of the timing, and not the amount. Without regulatory approval dividends otherwise could not have been paid until June 2010. It is our intent, pending regulatory approval, for American Physicians to pay APCapital a quarterly dividend of $10.0 million in June, September and December 2010, or $40.0 million in total during 2010. Although the $40.0 million total in 2010 falls within the ordinary dividend limits, the $10.0 million in both September and December 2010 would be extraordinary as a result of the timing.
We continued the repurchase of shares of our outstanding common stock in 2009. A total of 1,863,833 shares were repurchased in 2009 at a total cost of $56.1 million. See Note 12 of the Notes to Consolidated Financial Statements as well as “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for further details regarding our share repurchase plans. Such cross-referenced information is included herein by reference.
In addition to our share repurchases, APCapital typically pays a quarterly cash dividend. The cash dividend for the fourth quarter of 2009 was $0.09, up from the $0.0825 paid in each of the first three quarters of 2009. Cash dividends paid to shareholders totaled approximately $3.6 million for the year. On February 11, 2010, APCapital’s Board of Directors declared a first quarter cash dividend of $0.09 per share, payable on March 31, 2010 to shareholders of record on March 15, 2010, which is expected to result in a total cash payout of approximately $0.9 million.
The Board’s current intention is to continue to pay a comparable cash dividend on a quarterly basis for the foreseeable future. However, the payment of future dividends will depend on the availability of cash resources at APCapital, prevailing business and market conditions, our financial condition and results of operations, and such other factors as are deemed relevant by the Board of Directors.
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.”
In evaluating our financial condition, three factors are the most critical: first, the availability of adequate statutory capital and surplus to satisfy state regulators and to support our current A.M. Best rating, which currently stands at A- (Excellent); second, the adequacy of our reserves for unpaid loss and loss adjustment expenses; and lastly the quality of the assets in our investment portfolio.
insurance companies, such as ours, of 1:1 or lower. The Company’s Risk Based Capital and IRIS Ratios, other measures considered by regulators in evaluating the capital and surplus adequacy of our insurance subsidiaries are discussed under “Item 1. Business - Insurance Regulatory Matters.”
The following table shows various claim statistics and reserve averages for our medical professional liability line of business at or for the years ended December 31, 2009, 2008 and 2007.
The following table shows our net case, IBNR and total reserves at December 31, 2009, 2008 and 2007 for our medical professional liability line of business, as well as our net total reserves for our other lines of business that are in run-off.
uncertainty in our net loss and loss adjustment expense reserves, we have developed a reasonable range of estimates around the net carried reserves as of December 31, 2009, as shown below.
Our fixed-income investment security portfolio has historically consisted principally of high quality corporate, U.S. government agency, tax-exempt municipal and mortgage-backed securities. The following table shows the total fixed-income investment portfolio allocation of each of these different types of securities as of December 31, 2009 and 2008.
The following table shows the distribution of our fixed-income security portfolio by Standard & Poors’ (“S&P”) credit quality rating at December 31, 2009 and 2008.
Carrying value is fair value for available-for-sale securities and amortized cost for held-to-maturity securities.
Premiums receivable and unearned premiums at December 31, 2009 decreased 12.8% and 9.5%, respectively, from December 31, 2008. The decreases in premiums receivable and unearned premiums were relatively consistent with the 9.4% decrease in direct premiums written in 2009 compared to 2008.
We have formed two subsidiary statutory trusts for the purpose of issuing mandatorily redeemable trust preferred securities, referred to as “trust preferred securities.” The proceeds from the trust preferred securities that were issued were used by the trusts to purchase debentures issued by APCapital, which are shown as long-term debt in the Consolidated Balance Sheets included elsewhere in this report. APCapital used the amounts borrowed pursuant to these debentures to increase its available capital and has subsequently contributed substantially all of the proceeds to American Physicians to increase its statutory surplus. The debentures and the trust preferred securities have terms and maturities that mirror each other. In accordance with applicable accounting guidance, we have not consolidated these subsidiary trusts. APCapital has guaranteed that amounts paid to the trusts related to the debentures, will subsequently be remitted to the holders of the trust preferred securities. In accordance with the nature of the transactions, the amounts guaranteed by APCapital, are also recorded as liabilities in the Consolidated Financial Statements, as they represent obligations to the trusts, which are in turn obligated to the holders of the trust preferred securities. The obligations are more fully described in Note 9 of the Notes to Consolidated Financial Statements included elsewhere in this report, which description is incorporated herein by reference.
We are contractually obligated in accordance with various loan or borrowing agreements and operating leases as well as to our policyholders for insured events. The following table shows the nature and the timing of our contractual obligations as of December 31, 2009:
At December 31, 2009 we had no planned material capital expenditures or other commitments other than those disclosed in the table above. We are, however, contingently liable to fund certain infrastructure improvement assessments associated with our investment in a real estate limited liability company as disclosed in Note 18 of the Notes to Consolidated Financial Statements.
We have audited the accompanying consolidated balance sheets of American Physicians Capital, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Physicians Capital, Inc. and Subsidiaries at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of American Physicians Capital, Inc. (“APCapital”) and its wholly owned subsidiaries, Alpha Advisors, Inc. and American Physicians Assurance Corporation (“American Physicians”), and American Physicians wholly owned subsidiary, APSpecialty Insurance Corporation (“APSpecialty”). APCapital and its consolidated subsidiaries are referred to collectively herein as the Company. All significant intercompany accounts and transactions are eliminated in consolidation.
Effective September 1, 2009, Insurance Corporation of America, a wholly owned subsidiary of APCapital, was merged into American Physicians. The merger of these entities had no effect on the accompanying Consolidated Financial Statements.
The portion of internally developed software that had not been placed in service as of December 31, 2008, approximately $4.6 million, has been reclassified from property and equipment to other assets in the December 31, 2008 balance sheet to conform to the current year presentation and to enhance comparability.
The Company is principally engaged in the business of providing medical professional liability insurance to physicians and other health care providers. The Company previously provided workers’ compensation, health and personal and commercial insurance. Although the last of these policies expired in 2005, the Company continues to carry run-off reserves associated with these lines of business. Reserves for unpaid loss and loss adjustment expenses for these run-off lines of business comprised less than five-percent of total reserves at December 31, 2009 and 2008. During each of the years ended December 31, 2009, 2008 and 2007, the Company’s medical professional liability line of business accounted for 100% of its direct premiums written. As a result, the Company has determined in
accordance with the applicable GAAP accounting guidance that it has no reportable segments other than the consolidated operations of the Company.
The Company writes business throughout the United States of America, with an emphasis on markets in the Midwest, specifically the states of Illinois, Michigan and Ohio, as well as the state of New Mexico. These four states accounted for approximately 95% of the Company’s total medical professional liability direct premiums written for each of the years in the three year period ended December 31, 2009.
Investment income includes amortization of premium and accrual of discount on the yield-to-maturity method for both available-for-sale and held-to-maturity investments acquired at other than par value. Amortization for loan-backed, or mortgage-backed, securities is adjusted prospectively for changes in pre-payment speed assumptions. Pre-payment speed assumptions are updated at least quarterly and are based on the average of assumptions obtained from ten leading brokerage firms. Interest income is recognized when earned. Realized gains or losses on sales of investments are determined on a specific identification basis and are credited or charged to income.
The Company periodically reviews its fixed-income investment portfolio for any potential credit quality or collection issues that may be indicative of an other than temporary impairment, or OTTI. A security in an unrealized or unrecognized loss position, i.e., its fair value is less than its amortized cost, is impaired. In evaluating whether such an impairment is “other than temporary,” the Company must assess whether or not the amortized cost of the security, at the date of evaluation, is recoverable. In determining if the full amortized cost of an impaired security is recoverable, the Company must make a best estimate of the present value of the security’s expected cash flows. In making such cash flow estimates the Company must consider many factors, which include, but are not limited to: 1) the remaining payment terms of the security; 2) prepayment risk and speeds; 3) the financial condition of the issuer; 4) expected defaults; and 5) the value of any underlying collateral.
Other investments on the accompanying Consolidated Balance Sheets include limited partnerships, organized for the purpose of investing primarily in equity securities to provide long-term capital appreciation through a variety of strategies, investment real estate, an investment real estate limited partnership, non-marketable and marketable equity securities. Limited partnerships, organized for the purpose of investing, are carried at cost as the terms of the partnership agreements restrict the limited partners ability to influence the partnership’s operations, financial policies or management. Investment real estate is carried at the lesser of historical cost or at estimated fair market value based on recent sales or offers for similar properties. The real estate limited partnership is accounted for using the equity method. Non-marketable equity securities, which include the two business trusts described in Note 9, are also accounted for using the equity method. Marketable equity securities are classified as available-for-sale and carried at their fair value with any unrealized gains and losses reported, net of any related tax effects, as a component of accumulated other comprehensive income.
The Company’s ‘other investments’ are periodically reviewed to assess whether the decline in fair value is other than temporary. Marketable equity securities are deemed impaired if the current trading value of such securities is less than the Company’s cost basis. The evaluation of whether the impairment of an equity security is other than temporary is based on quantitative and qualitative factors such as (a) the duration and extent to which a security is impaired; (b) the financial condition, near-term and long-term earnings and cash flow prospects of the issuer; (c) relevant industry conditions and trends; (d) implications of rating agencies actions on the issuer’s ability to effectively access capital markets; (e) conditions specific to the issuer that may have caused the decline in fair value; and (f) the Company’s ability and intent to hold the security for a length of time sufficient to enable the recovery of the security’s fair value.
The estimated fair value of the real estate properties at December 31, 2009 exceeded the cost of such property, or the carrying value of the Company’s investment in the real estate limited partnership.
Other assets at December 31, 2009 and 2008, includes approximately $6.6 million and $8.2 million, respectively, of capitalized costs that were incurred in connection with the acquisition and development of a new claims, accounting and policy management system. Costs, including salaries and benefits of Company personnel, incurred in connection with the acquisition or development of the application were capitalized. Costs incurred in the planning and post-implementation stages, as well as costs associated with data migration were
Reinsurance premiums and losses related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reinsurance recoverables and prepaid reinsurance premiums are recorded as assets in the accompanying Consolidated Balance Sheets. Premiums ceded to other companies have been reported as a reduction of premium income. Reinsured losses are reported as a reduction of gross losses incurred. The reserve for unpaid losses and loss adjustment expenses is presented gross of recoverables from reinsurers.
The Company evaluates each ceded reinsurance contracts at inception to determine if there is sufficient risk transfer to allow the contract to be accounted for as reinsurance. At December 31, 2009, all ceded contracts were accounted for as risk transferring contracts.
The Company has not identified any material uncertain tax positions. As such, the disclosures required by GAAP pertaining to uncertain tax positions have been omitted.
See Note 11 for additional information regarding income taxes and the related accounting treatment.
Transfers and Servicing - Accounting for Transfers of Financial Assets (ASC Update No. 2009-16)
Effective for the Company’s interim and annual reporting periods beginning January 1, 2010, or for certain disclosures, January 1, 2011, new guidance from the FASB will require additional disclosures about transfers between the various levels of the fair value hierarchy, as well as activity in Level 3 fair value measurements. The new guidance also requires the disaggregation of asset and liability classes as well as the inputs and valuation techniques used to measure Level 2 fair value measurements as well as Level 3. The adoption of this new guidance will not have an impact on the Company’s financial position or results of operations. However, additional disclosure may be required.
To conform with Securities and Exchange Commission (“SEC”) requirements, the FASB repealed the requirement that SEC registrants disclose the date through which an evaluation of subsequent events has been conducted.
At December 31, 2009 there were a total of seven securities that were in an unrealized or unrecognized loss position. Six of these seven securities had total unrealized or unrecognized loss positions totaling $193,000 and their total fair value as a percentage of the total amortized cost was 98.7%. All six of these securities were investment
During 2008 the Company recorded OTTI losses of $858,000 on CIT bonds. The CIT bonds were subsequently sold for approximately the new cost basis. There were no OTTI losses recorded during 2007.
The components of pre-tax investment income and net realized gains for the years ended December 31, 2009, 2008 and 2007 were:
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:
Is there any news which would affect the price of the security?
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.
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 have been no significant changes in the assumptions used to value Level 3 fair value securities during the years ended December 31, 2009 or 2008.
The Company had no financial liabilities that it measured at fair value at December 31, 2009 or December 31, 2008.
The changes in the balances of Level 3 financial assets for the years ended December 31, 2009 and December 31, 2008, were as follows:
Held-to-maturity fixed-income securities - are recorded at amortized cost. However, the fair value of held-to-maturity securities is measured periodically 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. The fair values of held-to-maturity securities are determined using the same processes and procedures as described above for available-for-sale fixed-income securities. 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 December 31, 2009 and December 31, 2008, 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 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 December 31, 2009, none of the aforementioned non-financial assets and non-financial liabilities were included in the 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.
Changes in deferred policy acquisition costs for the years ended December 31, 2009, 2008 and 2007 are summarized as follows:
Depreciation expense associated with property and equipment for the years ended December 31, 2009, 2008, and 2007, was $779,000, $915,000 and $1.0 million, respectively.
adjustment expenses as of the preceding year end. Such changes in estimates, when they occur, are included in current period earnings.
Partially offsetting the favorable development on medical professional liability loss reserves was adverse development on the Company’s workers’ compensation loss reserves of $5.6 million, $1.9 million and $4.2 million during 2009, 2008 and 2007, respectively. The rate of workers’ compensation claim payments has not declined as quickly as projected and claims are being closed more slowly than anticipated.
Management believes that the estimate of the ultimate liability for unpaid losses and loss adjustment expenses at December 31, 2009, 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 Consolidated Balance Sheets.
The Debentures issued by APCapital mature in 2033 and bear interest at an annual rate equal to the three-month LIBOR plus 4.10% for the first trust issuance, and three-month LIBOR plus 4.20% for the second trust issuance, payable quarterly. In May 2008, these debentures became callable, and APCapital repaid $5.0 million of the outstanding $30.9 million obligation in August 2008. The Company did not make any principal payments in 2009. The interest rate is adjusted on a quarterly basis. The average interest rates of 4.7% (Trust II issuance) and 4.6% (Trust I issuance) resulted in interest expense of approximately $1.2 million for the year ended December 31, 2009. Interest expense for the years ended December 31, 2008 and 2007 was $2.1 million and $2.9 million, respectively. At December 31, 2009 and 2008, accrued interest payable to the trusts was approximately $133,000 and $190,000, respectively. APCapital has guaranteed that the payments made to the Trusts will be distributed by the Trusts to the holders of the TPS. As the amounts that could potentially be payable under the guarantees are recorded as liabilities by the Company, no additional liability related to these guarantees has been accrued.
The Debentures are unsecured obligations of the Company and are junior in the right of payment to all future senior indebtedness of the Company. The Company estimates that the fair value of the debentures approximates their carrying, or face value, as a result of the variable rate of interest paid by these securities.
The net effect of ceded losses and loss adjustment expenses on our net loss and loss adjustment expenses incurred for the years ended December 31, 2009 and 2008, was an increase of $15.4 million and $1.2 million, respectively. The December 31, 2008 effect on losses and loss adjustment expenses excludes incurred ceded loss and loss adjustment expenses of $633,000, which resulted from the commutation of the Company’s 2005 medical professional liability reinsurance treaty agreement. Losses and loss adjustment expenses incurred are net of ceded losses and loss adjustment expenses of $4.5 million for the year ended December 31, 2007.
The Company had reinsurance recoverables from the following reinsurers at December 31, 2009 and 2008:
Amounts due from reinsurers on the accompanying Consolidated Balance Sheets consisted of the following:
The provision for income taxes for the years ended December 31, 2009, 2008 and 2007, consists of:
At December 31, 2009 and 2008, the components of the net deferred federal income tax asset were as follows:
At December 31, 2009, the Company had approximately $678,000 and $33,000 of net operating loss carryforwards that if not used will expire in 2011 and 2010, respectively.
The Board of Directors has authorized the Company to purchase shares of its outstanding common stock under two separate plans. The Board of Directors has approved a series of authorizations to purchase shares of the Company’s outstanding common stock at the discretion of management (referred to as the “discretionary plan”). At December 31, 2009, approximately $16.0 million of the $25 million authorization made on February 7, 2008 remained available for repurchase under the discretionary plan, subject to limitations that may be imposed by applicable laws and regulations and the rules of the Nasdaq Global Select 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 resources and requirements. Shares repurchased under these discretionary authorizations during the years ended December 31, 2009, 2008 and 2007, as well as the total number of shares repurchased pursuant to prior authorizations under the discretionary plan are shown in the table below.
The Company’s Board has also authorized the repurchase of the Company’s common shares pursuant to a Rule 10b5-1 plan. At December 31, 2008, the Company had $26.8 million of its 2008 Rule 10b5-1 plan authorizations remaining that could be carried over into 2009. On June 23, October 2 and December 3, 2009 the Board authorized the repurchase of an additional $20 million, $10 million and $20 million of the Company’s common shares pursuant to the Rule 10b5-1 plan in 2009, as well as the rollover of any unused authorization into 2010. At December 31, 2009, the Company had $26.2 million of its 2009 Rule 10b5-1 plan authorizations remaining that could be carried over into 2010. The Rule 10b5-1 plan share repurchases are expected to continue until the authorizations are fully utilized, subject to conditions specified in the Rule 10b5-1 plan. However, the Company may terminate the plan at any time.
In December 2009, the Company invested a total of $30.0 million in and became a limited partner of Stilwell Value Partners I, L.P. ($7.5 million) (“SVP I”), Stilwell Value Partners VI, L.P. ($7.5 million) (“SVP VI”) and Stilwell Associates, L.P. ($15 million) (“SALP”) (collectively, the “Partnerships”). Mr. Joseph Stilwell, a director of the Company, is the managing member of Stilwell Value LLC, the general partner of each of the Partnerships. In addition, Mr. Stilwell and The General Partner are the beneficial owners of approximately 11.2% of the Company’s outstanding common shares that are owned by various limited partnerships of which Stilwell Value LLC is the
Limited partners in SVP I or SVP VI do not pay a management fee. However each of those Partnerships are obligated to pay or reimburse the General Partner, Stilwell Value LLC, for ordinary course overhead expenses incurred by the General Partner in an amount up to 1% of the total capital of such Partnership at the beginning of each year. These expenses are then allocated among the capital accounts of the limited partners.
Limited partners in SALP are obligated to pay the General Partner, Stilwell Value LLC, a management fee each calendar quarter, in advance, equal to 0.25% (an annualized rate of 1%) of each limited partner’s capital account at the start of business on the first day of such calendar quarter. Each Partnership is responsible for paying all other expenses incurred in connection with its activities (with such amounts allocated among the limited partners). In addition, an “Incentive Allocation” will be computed as of the close of each “Performance Period” as defined in the relevant partnership agreement. The Incentive Allocation will generally equal 20% of the amount of appreciation, if any, in the limited partner’s capital account (excluding the effects of decreases due to withdrawals, expenses and taxes) since the previous Incentive Allocation was made. Each limited partner’s Incentive Allocation will be debited to the limited partner’s capital account and simultaneously credited to the General Partner’s capital account.
The Company has subleased approximately 13,000 square feet of office space in Chicago, Illinois to an unrelated third party. The difference in the cash flows between the Company’s obligations for the subleased space, in accordance with the original lease terms, and the rent the Company will receive from the sublessor over the next five years has been discounted using an interest rate of approximately 6% to approximate the fair value of the liability incurred in connection with the contract termination. Other costs incurred in connection with the subleased space, such as broker commissions, were also included in the calculation of the original liability.
Certain costs associated with the original lease and subleases are variable. As additional information regarding these variable costs becomes available, the estimated future cash flows are adjusted to reflect the revised estimates. Any changes in the liability for contract termination costs associated with estimated cash flow adjustments are charged or credited to expense in the period the change in estimates are first known.
The Company offers benefits under certain defined contribution plans. In 2009, 2008 and 2007 the defined contribution plans provide for Company contributions of 5% of employee compensation, as defined in the plan, and a 100% match of employee contributions on the first 3% of contributions and 50% match on the next 2% of contributions. Employer contributions to the plans were approximately $977,000, $841,000, and $855,000 for 2009, 2008 and 2007, respectively.
Certain executive officers, board members and employees have been granted options to purchase shares of APCapital common stock. All outstanding options vest in annual installments of 33%, 33% and 34% on the first through the third anniversaries, respectively, of the date of grant. All options expire on the tenth anniversary of the grant date.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted market price of the Company’s common stock for the options that were in-the-money at December 31, 2009. For the years ended December 31, 2009, 2008 and 2007, the total intrinsic value of options exercised was $5.2 million, $503,000, and $2.5 million, respectively, determined as of the date of option exercise.
In 2008 and 2007, the Company recognized compensation cost of $44,000 and $160,000, respectively, related to share-based payment arrangements. Such costs are included in the accompanying Consolidated Statements of
Income as either underwriting expense or loss adjustment expense. As all awards were fully vested in 2008, the Company had no compensation cost related to options or share awards in 2009, and no unrecognized compensation cost at December 31, 2009 related to non-vested share-based payment awards.
There were no stock options or other share-based awards granted during the three-year period ended December 31, 2009.
Diluted weighted average shares outstanding include an incremental adjustment to the number of shares outstanding for the assumed exercise of dilutive stock options and non-vested share awards. Stock options are considered dilutive when the average stock price during the period exceeds the exercise price and the assumed conversion of the options, using the treasury stock method produces an increased number of shares outstanding. Stock options with an exercise price that is higher than the average stock price during the period are excluded from the computation as their impact would be anti-dilutive. There were no stock options that were considered to be anti-dilutive, and therefore excluded from the calculation, during any of the three years ended December 31, 2009.
The Company participates in various guaranty associations in the states in which it writes business, which protect policyholders and claimants against losses due to insolvency of insurers. When an insolvency occurs, the associations are authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar years. The Company accrues not only for assessments billed, but also for its estimated portion of assessments for insolvent insurers that have not yet been billed by the state guaranty fund. Such estimates are based on a review of information obtained from state guaranty fund and other insurance related web sites. Assessments in recent years have been minor. However, the ultimate liability for future assessments is not known. Accordingly, the
In addition to obligations for operating leases, the Company is also obligated to fund certain infrastructure improvement assessments imposed by the City of East Lansing, Michigan in connection with the development of the area surrounding investment real estate owned by the Company. These assessments are due annually in the following amounts: 2010 - $107,000 and 2011 - $102,500. These, and other assessments, have also been imposed on a real estate LLC in which the Company has a 50% ownership stake in. In the event that the cash resources of the LLC are not sufficient to fund the assessment payments, the Company may be called upon to make a capital contribution to the LLC to cover 50% of the assessment payments. In such an event, the amounts that the Company may be required to fund are as follows: 2010 - $249,000; 2011 - $239,000 2012 - $137,500; 2013 - $132,000; and 2014 and thereafter - $363,000.
The Company was not subject to any litigation at December 31, 2009 other than routine litigation in the ordinary course of the Company’s business. Management does not expect these cases to have a material adverse effect on the Company’s financial condition or results of operations.
The following table sets forth the reported combined statutory surplus levels at December 31, 2009, 2008, and 2007 and the combined statutory net income for the years then ended for the Company’s American Physicians and APSpecialty insurance subsidiaries. Effective September 1, 2009, APCapital merged its subsidiary, Insurance Corporation of America, into American Physicians. The merger of these entities had no effect on the Consolidated Financial Statements. Note that because of the parent/subsidiary relationship between American Physicians and APSpecialty, APSpecialty’s surplus has been eliminated from the combined results to avoid double counting its effect.
The unaudited operating results by quarter for 2009 and 2008 are summarized below:
APCapital Trust II - a trust formed in Delaware for the purpose of issuing mandatorily redeemable trust preferred securities to institutional investors (Note 9).
APCapital has issued $30.9 million of floating rate junior subordinated deferrable interest debentures (“Debentures”) to subsidiary trusts. The trusts have issued mandatorily redeemable trust preferred securities that have terms that are essentially the same as the Debentures issued by APCapital, which are the only assets of the trusts. See Note 9 of the Notes to Consolidated Financial Statements for a description of the Debentures and the transactions in which they were issued. As of December 31, 2009, the outstanding balance of the debentures was $25.9 million.
APCapital received the following dividend payments from its American Physicians insurance subsidiary during 2009: $30 million in June and $15 million in December. Of the $45.0 million paid by American Physicians, the $30 million in June required and received prior regulatory approval as due to the timing of the payment it exceeded ordinary dividend limits imposed by the State of Michigan.
APCapital received the following dividends payment from its American Physicians insurance subsidiary during 2007: $13 million in March, $13 million in May, $6 million in July and $46.2 million in August. In addition, APCapital received a $3.8 million dividend payment from ICA in August 2007. Of the $46.2 million and $3.8 million paid by American Physicians and ICA, respectively, in August 2007, $40 million and $2.3 million, respectively, required and received prior regulatory approval as they exceeded ordinary dividend limits imposed by the State of Michigan.
Effective July 31, 2009, APCapital issued a four-for-three stock split of its common shares to shareholders of record as of the close of business on July 10, 2009. All share and per-share data, as well as share-based award information included in the Consolidated Financial Statement and Notes thereto or the Condensed Financial Information of the Registrant, has been retroactively adjusted to reflect the stock split.
The Board of Directors of the Company has authorized the Company to purchase shares of its outstanding common stock under two separate plans, the discretionary plan and a Rule 10b5-1 plan. For additional information on share repurchases, see Note 12 of the Notes to Consolidated Financial Statements.