e10vq

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

For the quarterly period ended September 30, 2009


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

For the transition period from to

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 October 31, 2009, was 10,301,106.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN PHYSICIANS CAPITAL, INC. AND SUBSIDIARIES

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


	September 30,		December 31,
	2009		2008
	(Unaudited)
Assets
Investments:
Fixed-income securities
Available-for-sale, at fair value	$	243,482	$	222,941
Held-to-maturity, at amortized cost		398,364		481,750
Other investments		27,206		24,320

Total investments		669,052		729,011

Cash and cash equivalents		145,020		101,637
Premiums receivable		31,588		34,024
Reinsurance recoverable		74,949		86,397
Deferred federal income taxes		15,342		18,573
Property and equipment, net of accumulated depreciation		8,186		8,678
Other assets		25,724		27,503

Total assets	$	969,861	$	1,005,823


Liabilities
Unpaid losses and loss adjustment expenses	$	625,036	$	644,396
Unearned premiums		55,665		55,984
Long-term debt		25,928		25,928
Other liabilities		18,906		25,478

Total liabilities		725,535		751,786

Commitments & Contingencies

Shareholders’ Equity
Common stock, no par value, 50,000,000 shares authorized: 10,424,706 and 11,749,069 shares outstanding at September 30, 2009 and December 31, 2008, respectively (Note 2)		—		—
Additional paid-in-capital		—		—
Retained earnings		231,514		246,173
Accumulated other comprehensive income:
Net unrealized appreciation on investments, net of deferred federal income taxes		12,812		7,864

Total shareholders’ equity		244,326		254,037

Total liabilities and shareholders’ equity	$	969,861	$	1,005,823

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						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net premiums written	$	33,344		$	36,257		$	85,453		$	93,931
Change in net unearned premiums		(5,084	)		(5,760	)		495			(367	)

Net premiums earned		28,260			30,497			85,948			93,564

Investment income		7,375			8,886			23,593			28,078
Net realized gains (losses)		3			22			3			(686	)
Other income		163			158			598			553

Total revenues and other income		35,801			39,563			110,142			121,509

Losses and loss adjustment expenses		14,684			16,537			43,409			50,402
Underwriting expenses		6,674			6,366			21,125			20,005
Investment expenses		255			234			794			737
Interest expense		317			509			1,046			1,752
General and administrative expenses		248			247			838			833
Other expenses		—			—			(40	)		—

Total expenses		22,178			23,893			67,172			73,729


Income before federal income taxes		13,623			15,670			42,970			47,780
Federal income tax expense		3,872			4,502			12,142			14,195


Net income	$	9,751		$	11,168		$	30,828		$	33,585


Net income — per common share (Note 4)
Basic	$	0.92		$	0.87		$	2.77		$	2.58
Diluted	$	0.91		$	0.85		$	2.73		$	2.53

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, 2008		11,749,069		$	—		$	246,173		$	7,864	$	254,037
Comprehensive income:
Net income								30,828					30,828
Other comprehensive income, net of taxes											4,948		4,948

Total comprehensive income, net of taxes													35,776

Options exercised		178,647			2,056								2,056
Amortization of unearned stock compensation, net of tax Shares tendered/netted in connection with option exercise		(99,733	)		(3,435	)		(4	)				(3,439	)
Cash dividends to shareholders, $0.2475 per share								(2,726	)				(2,726	)
Excess tax benefits from share-based awards					1,380								1,380
Fractional shares retired in connection with stock-split		(44	)		(1	)							(1	)
Purchase and retirement of common stock		(1,403,233	)					(42,757	)				(42,757	)


Balance, September 30, 2009		10,424,706		$	—		$	231,514		$	12,812	$	244,326


										Accumulated
				Additional						Other
	Shares			Paid-in			Retained			Comprehensive
	Outstanding			Capital			Earnings			Income		Total
Balance, December 31, 2007		13,503,653		$	—		$	257,502		$	6,055	$	263,557
Comprehensive income:
Net income								45,196					45,196
Other comprehensive income, net of taxes											1,809		1,809

Total comprehensive income, net of taxes													47,005

Options exercised		25,973			344								344
Amortization of unearned stock compensation, net of tax Shares tendered/netted in connection with option exercise		(1,931	)		(63	)							(63	)
Cash dividends to shareholders, $0.2275 per share								(3,813	)				(3,813	)
Excess tax benefits from share-based awards					164								164
Fair value compensation of share-based awards					44								44
Purchase and retirement of common stock		(1,778,627	)		(489	)		(52,712	)				(53,201	)


Balance, December 31, 2008		11,749,069		$	—		$	246,173		$	7,864	$	254,037

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						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Net income	$	9,751		$	11,168		$	30,828		$	33,585
Other comprehensive income (loss):
Unrealized appreciation (depreciation) on available-for-sale investment securities arising during the period		7,779			(2,125	)		8,453			(2,910	)
Amortization of net unrealized appreciation on held-to-maturity investment securities related to their transfer from the available-for-sale category		(281	)		(247	)		(840	)		(752	)
Adjustment for net realized gains (losses) on available-for-sale investment securities included in net income		—			8			—			(819	)

Other comprehensive income (loss) before tax		7,498			(2,364	)		7,613			(4,481	)
Deferred federal income tax expense (benefit)		2,625			(827	)		2,665			(1,568	)

Other comprehensive income (loss)		4,873			(1,537	)		4,948			(2,913	)

Comprehensive income	$	14,624		$	9,631		$	35,776		$	30,672

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)


	Nine Months Ended
	September 30,
	2009			2008
Cash flows from (for) operating activities
Net income	$	30,828		$	33,585
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		4,105			3,074
Net realized (gains) losses		(3	)		686
Deferred federal income taxes		566			1,522
Current federal income taxes		1,112			1,573
Excess tax benefits from share-based awards		(1,380	)		(136	)
Share-based compensation		—			44
Loss on equity method investees		108			85
Changes in:
Unpaid loss and loss adjustment expenses		(19,360	)		(11,381	)
Unearned premiums		(319	)		753
Other assets and liabilities		7,779			(4,069	)

Net cash from operating activities		23,436			25,736

Cash flows from (for) investing activities
Purchases
Available-for-sale — fixed income		(12,988	)		(21,255	)
Held-to-maturity — fixed income		—			(96,766	)
Other investments		(3,626	)		(3,607	)
Property and equipment		(162	)		(3,022	)
Proceeds from sales and maturities
Available-for-sale — fixed income		472			52,446
Held-to-maturity — fixed income		81,261			105,021
Other investments		—			150
Property and equipment		8			2
Other		49			5,846

Net cash from investing activities		65,014			38,815

Cash flows from (for) financing activities
Common stock repurchased		(42,757	)		(23,524	)
Excess tax benefits from share-based awards		1,380			136
Taxes paid in connection with net option exercise		(1,503	)		—
Change in payable for shares repurchased		420			(2,331	)
Repayment of long-term debt		—			(5,000	)
Cash dividends paid		(2,726	)		(2,915	)
Proceeds from stock options exercised		120			154
Other		(1	)		—

Net cash for financing activities		(45,067	)		(33,480	)


Net increase in cash and cash equivalents		43,383			31,071
Cash and cash equivalents, beginning of period		101,637			87,498

Cash and cash equivalents, end of period	$	145,020		$	118,569

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

American Physicians Capital, Inc. and Subsidiaries
Notes to unaudited Condensed Consolidated Financial Statements

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, Insurance Corporation of America, 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.

Effective September 1, 2009, Insurance Corporation of America was merged into American Physicians Assurance Corporation. The merger of these entities had no effect on the unaudited Condensed Consolidated Financial Statements.

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, 2008 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 nine-month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009. 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, 2008.

The Company has evaluated its activities and transactions for subsequent events, which may need to be recorded or disclosed, through the time of the filing of this Report on Form 10-Q on November 6, 2009.

Reclassifications

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.

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.

2. Stock Split

On June 23, 2009 the Company’s Board of Directors declared a four-for-three stock split of its common shares to shareholders of record as of the close of business on July 10, 2009. Shares resulting from the stock split were distributed to shareholders on July 31, 2009. 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 the stock split.

3. Effects of New Accounting Pronouncements

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codification (the “Codification”), which superseded all previously existing non-Securities and Exchange Commission accounting and reporting standards for non-governmental entities and became the single source of authoritative U.S. GAAP. The FASB will no longer issue new standards in the form of SFASs, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the changes in the Codification.

The Codification does not change U.S. GAAP. Accordingly, its adoption did not have an impact on the Company’s financial position, results of operations or liquidity. However, previous references to applicable accounting literature, via disclosures, may have changed to reflect the new applicable Codification section reference.

None of the Accounting Standards Updates issued by the FASB in 2009 are expected to have a material impact on the Company’s financial position, results of operations, liquidity or disclosures.

SFAS Nos. 167 and 166

In June 2009 the FASB issued Statement of Financial Accounting Standard (“SFAS”) Nos. 167 and 166, which change the way entities account for securitizations and special purpose entities. Both SFASs are effective for the Company beginning January 1, 2010. These SFASs have not formally been adopted as part of the Codification discussed above and consequently the discussion of these new SFASs will retain their references to the pre-Codification accounting standards literature until they are formally adopted as part of the Codification.

SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights, should be consolidated. Following the new guidance, the determination of whether a reporting entity is required to consolidate another entity is based on, among other factors, the entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s performance. In addition, additional disclosures about the reporting entity’s involvement with variable interest entities will be required. The Company has not yet assessed the impact that SFAS No. 167 may have on its financial position, results of operations, liquidity, or disclosures.

SFAS No. 166, “Accounting for Transfers of Financial Assets,” is a revision of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 166 will require additional information about transfers of financial assets, including securitization transactions, as well as where entities have a continuing exposure to the risks related to transferred financial assets to be disclosed. It also eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The adoption of SFAS No. 166 is not expected to have a material impact on the Company’s financial condition, results of operations or liquidity.

4. 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				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
	(In thousands, except per share data)
Numerator for basic and diluted income per common share:
Net income	$	9,751	$	11,168	$	30,828	$	33,585


Denominator:
Denominator for basic income per common share — weighted average shares outstanding		10,580		12,893		11,113		13,028
Effect of dilutive stock options and awards		170		259		180		262

Denominator for diluted income per common share — adjusted weighted average shares outstanding		10,750		13,152		11,293		13,290


Net income — basic	$	0.92	$	0.87	$	2.77	$	2.58
Net income — diluted	$	0.91	$	0.85	$	2.73	$	2.53

The diluted weighted average number of shares outstanding includes an incremental adjustment for the assumed exercise of dilutive stock options. 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. 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. During the three and nine months ended September 30, 2009 and 2008 there were no stock options that were considered to be anti-dilutive.

5. Investments

The composition of the Company’s available-for-sale investment security portfolio, including unrealized gains and losses, at September 30, 2009 and December 31, 2008 was as follows:


	September 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost/Cost		Gains		Losses			Fair Value
	(In thousands)
Available-for-sale
States and political subdivisions	$	148,986	$	11,020	$	—		$	160,006
Corporate securities		77,961		5,823		(385	)		83,399
Mortgage-backed securities		87		—		(10	)		77

Total fixed-income securities		227,034		16,843		(395	)		243,482
Equity securities (1)		19,631		2,356		(103	)		21,884

Total available-for-sale securities	$	246,665	$	19,199	$	(498	)	$	265,366


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost/Cost		Gains		Losses			Fair Value
	(In thousands)
Available-for-sale
States and political subdivisions	$	150,098	$	5,844	$	(20	)	$	155,922
Corporate securities		65,381		2,898		(1,339	)		66,940
Mortgage-backed securities		99		—		(20	)		79

Total fixed-income securities		215,578		8,742		(1,379	)		222,941
Equity securities (1)		16,515		2,885		—			19,400

Total available-for-sale securities	$	232,093	$	11,627	$	(1,379	)	$	242,341


(1)		Available-for-sale equity securities are included in “Other investments” on the accompanying unaudited Condensed Consolidated Balance Sheets.

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 September 30, 2009 and December 31, 2008. The carrying value at September 30, 2009 and December 31, 2008 includes approximately $1.0 million and $1.9 million 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. Accordingly, the amortized cost of held-to-maturity securities was $397.4 million and $479.9 million at September 30, 2009 and December 31, 2008, respectively. 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.


	September 30, 2009
			Gross		Gross
			Unrecognized		Unrecognized
	Carrying		Holding		Holding			Estimated
	Value		Gains		Losses			Fair Value
	(In thousands)
Held-to-maturity
U.S. government obligations	$	14,953	$	61	$	—		$	15,014
States and political subdivisions		225,629		14,268		—			239,897
Corporate securities		36,113		825		(137	)		36,801
Mortgage-backed securities		121,669		2,882		(7	)		124,544

Total held-to-maturity fixed-income securities	$	398,364	$	18,036	$	(144	)	$	416,256


	December 31, 2008
			Gross		Gross
			Unrecognized		Unrecognized
	Carrying		Holding		Holding			Estimated
	Value		Gains		Losses			Fair Value
	(In thousands)
Held-to-maturity
U.S. government obligations	$	64,458	$	676	$	—		$	65,134
States and political subdivisions		228,685		4,567		(291	)		232,961
Corporate securities		37,824		369		(409	)		37,784
Mortgage-backed securities		150,783		1,435		(755	)		151,463

Total held-to-maturity fixed-income securities	$	481,750	$	7,047	$	(1,455	)	$	487,342

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 September 30, 2009 and December 31, 2008, respectively.


	September 30, 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	$	3,966	$	(34	)	$	6,149	$	(351	)	$	10,115	$	(385	)
Mortgage-backed securities		—		—			77		(10	)		77		(10	)

Subtotal fixed-income securities		3,966		(34	)		6,226		(361	)		10,192		(395	)

Equity securities		6,405		(103	)		—		—			6,405		(103	)

Subtotal available-for-sale securities		10,371		(137	)		6,226		(361	)		16,597		(498	)

Held-to-maturity
Corporate securities	$	5,906	$	(137	)	$	—	$	—		$	5,906	$	(137	)
Mortgage-backed securities		1,074		(6	)		59		(1	)		1,133		(7	)

Subtotal held-to-maturity		6,980		(143	)		59		(1	)		7,039		(144	)


Total temporarily impaired securities	$	17,351	$	(280	)	$	6,285	$	(362	)	$	23,636	$	(642	)


	December 31, 2008
	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	$	3,168	$	(20	)	$	—	$	—		$	3,168	$	(20	)
Corporate securities		9,241		(1,359	)		—		—			9,241		(1,359	)

Subtotal available-for-sale		12,409		(1,379	)		—		—			12,409		(1,379	)

Held-to-maturity
States and political subdivisions		56,445		(291	)		—		—			56,445		(291	)
Corporate securities		14,244		(409	)		—		—			14,244		(409	)
Mortgage-backed securities		27,763		(558	)		10,480		(197	)		38,243		(755	)

Subtotal held-to-maturity		98,452		(1,258	)		10,480		(197	)		108,932		(1,455	)


Total temporarily impaired securities	$	110,861	$	(2,637	)	$	10,480	$	(197	)	$	121,341	$	(2,834	)

Unrealized or unrecognized losses for fixed-income securities included in the table above at September 30, 2009 pertain to 7 securities. The unrealized losses on equity securities pertain to a single equity position. None of these securities are in a substantial unrealized or unrecognized loss position, which the Company defines as a fair value that is less than 95% of the securities amortized cost, or a security whose amortized cost is less than $250,000. The Company does not intend to sell, nor is it more likely than not to be required to sell, those fixed-income securities in the tables above that were in an unrealized or unrecognized loss position at September 30, 2009. In addition, the Company expects to fully recover the amortized cost of such securities when they mature or are called.

The Company has not sold any securities during 2009. Proceeds on the sales of investments in bonds for the nine months ended September 30, 2008 totaled $11.1 million. Gross gains and losses of $23,000 and $0, respectively, were realized on these sales. The Company uses specific identification as the basis for determining cost for the purposes of computing realized gains and losses. An other than temporary impairment charge of $858,000 was taken during the first nine months of 2008 on one of the securities sold prior to its sale.

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 September 30, 2009, by contractual maturity, were:


	Estimated
	Fair Value
	(In thousands)
Available-for-sale
Less than one year	$	6,555
One to five years		181,185
Five to ten years		48,149
More than ten years		7,516
Mortgage-backed securities		77

Total available-for-sale	$	243,482


	Carrying		Estimated
	Value		Fair Value
	(In thousands)
Held-to-maturity
Less than one year	$	11,426	$	11,579
One to five years		68,003		71,242
Five to ten years		158,372		168,402
More than ten years		38,894		40,490
Mortgage-backed securities		121,669		124,543

Total held-to-maturity	$	398,364	$	416,256

6. 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 none of the pricing vendors are able to provide a current price for a security, a fair value must be 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 have been no significant changes in the assumptions used to value Level 3 fair value securities during either the three or nine months ended September 30, 2009 or 2008.

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 September 30, 2009 and December 31, 2008 were as follows:


	September 30, 2009
	Total		Level 1		Level 2		Level 3
Available-for-sale investments:	(in thousands)
Fixed-income securities	$	243,482	$	—	$	237,340	$	6,142
Equity securities (1)		21,884		21,884		—		—

Total	$	265,366	$	21,884	$	237,340	$	6,142


	December 31, 2008
	Total		Level 1		Level 2		Level 3
Available-for-sale investments:	(in thousands)
Fixed-income securities	$	222,941	$	—	$	216,722	$	6,219
Equity securities (1)		19,400		19,400		—		—

Total	$	242,341	$	19,400	$	216,722	$	6,219


(1)		Included in other investments on the accompanying unaudited Condensed Consolidated Balance Sheets.

The Company had no financial liabilities that it measured at fair value at September 30, 2009 or December 31, 2008.

The changes in the balances of Level 3 financial assets for the three and nine months ended September 30, 2009 and 2008 were as follows:


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Available-for-sale fixed-income securities	(in thousands)						(in thousands)
Beginning balance	$	6,145		$	6,724		$	6,219		$	6,911
Principal paydowns		(15	)		(313	)		(84	)		(523	)
Net unrealized appreciation included in other comprehensive income		12			(76	)		7			(53	)

Ending balance	$	6,142		$	6,335		$	6,142		$	6,335

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 September 30, 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 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 September 30, 2009 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, cash and cash equivalents, premiums receivable, reinsurance recoverable on paid losses, and long-term debt constitute financial instruments. With the exception of fixed-income securities classified as held-to-maturity, the carrying amounts of all financial instruments in the unaudited Condensed Consolidated Balance Sheets approximated their fair values at September 30, 2009 and December 31, 2008. The fair value of fixed-income held-to-maturity securities as of both dates is disclosed in Note 5.

7. Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid loss and loss adjustment expenses for the quarter ended September 30, 2009 and the year ended December 31, 2008 was as follows:


	Nine Months
	Ended			Year Ended
	September 30, 2009			December 31, 2008
	(in thousands)
Beginning balance, gross	$	644,396		$	664,117
Less, reinsurance recoverables		(81,546	)		(104,648	)

Net reserves, beginning balance		562,850			559,469

Incurred related to
Current year		70,585			97,490
Prior years		(27,176	)		(32,179	)

		43,409			65,311


Paid related to
Current year		(2,236	)		(3,012	)
Prior years		(52,720	)		(58,918	)

		(54,956	)		(61,930	)


Net reserves, ending balance		551,303			562,850
Plus, reinsurance recoverables		73,733			81,546

Ending balance, gross	$	625,036		$	644,396


Development as a % of beginning net reserves		-4.8	%		-5.8	%

Favorable development on prior years’ loss reserves was experienced during both the year ended December 31, 2008 and the nine months ended September 30, 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 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 nine months ended September 30, 2009 and the year ended December 31, 2008 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 open and paid claims has increased, the payments on claims that have been closed have been less than anticipated in the actuarial projections of loss reserves.

The Company believes that the estimate of the ultimate liability for unpaid losses and loss adjustment expenses at September 30, 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

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, 2008, 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.

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.

	•		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.

	•		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.

	•		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.

	•		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 you.

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

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 almost exclusively 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.

On June 23, 2009 our Board of Directors declared a four-for-three stock split of APCapital’s common shares to shareholders of record as of the close of business on July 10, 2009. Shares resulting from the stock split were distributed to shareholders on July 31, 2009. Share and per share data, including dividends paid to shareholders, have been retroactively adjusted in this Quarterly Report on Form 10-Q to reflect the stock split.

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 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 Nine Months Ended September 30, 2009 Compared to the Three and Nine Months Ended September 30.”

Net of Tax Investment Yield: We measure the performance of our investment portfolio through the use of both pre-tax and net of tax investment yields. Due to the federal income tax savings associated with state, municipal and other local government issued debt securities, and the attractive yields on these securities relative to Treasury securities with comparable durations, we have increased our allocation of the overall investment portfolio in tax-exempt securities in recent years. As higher-yielding corporate, U.S. Government agency and mortgage-backed securities have matured, been called or paid down in recent years, we have reinvested a substantial share of the proceeds in tax-exempt securities, which typically have a lower pre-tax yield. The use of net of tax investment yields allows us to monitor and measure investment performance on a more comparative basis by compensating for the lower pre-tax yields on tax-exempt securities, with the benefit of the additional federal income tax savings.

With the exception of considering the federal income tax attributable to investment income, the net of tax investment yield is calculated in the same manner as the investment yield, as described above. As with the investment yield, the use of the average month-end balances as the denominator in the net of tax investment yield calculation may produce slightly skewed results for asset classes that are subject to fluctuations within the month. Our calculation of net of tax investment yields, as with traditional investment yields, may differ from those employed by other companies, and therefore the comparability of these yields with those of other companies may be limited.

The following table shows the reconciliation of pre-tax investment yields and net of tax investment yields, in accordance with calculation described above. As a property and casualty

insurance company, federal income tax law limits the tax benefit of exempt interest income we may deduct to 85% of the exempt interest income.


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Pre-tax investment income	$	7,375		$	8,886		$	23,593		$	28,078
Less 85% of tax-exempt investment income		(3,057	)		(3,068	)		(9,217	)		(8,056	)

Taxable investment income		4,318			5,818			14,376			20,022

Federal statutory tax rate		35	%		35	%		35	%		35	%

Federal income tax expense	$	1,511		$	2,036		$	5,032		$	7,008


Pre-tax investment income¹	$	29,500		$	35,544		$	31,457		$	37,437
Federal income tax expense¹		(6,044	)		(8,144	)		(6,709	)		(9,344	)

Net of tax investment income	$	23,456		$	27,400		$	24,748		$	28,093


Average cash and invested assets	$	798,666		$	843,499		$	810,694		$	845,648

Pre-tax investment yield		3.69	%		4.21	%		3.88	%		4.43	%
Reducition in yield related to federal income tax expense		-0.76	%		-0.97	%		-0.83	%		-1.10	%

Net of tax investment yield		2.93	%		3.24	%		3.05	%		3.33	%


¹		These amounts represent corresponding amounts from the table immediately preceding, annualized to give effecty to a full year’s income.

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. With the exception of items noted below, there have been no material changes to these policies since the most recent year end.

Investments

The Company classifies all investment securities as either held-to-maturity or available-for-sale at the date of purchase based on the Company’s ability and intent to hold individual securities until they mature. In addition, on a periodic basis, the Company reviews its fixed-income and equity security portfolio for proper classification as trading, available-for-sale or held-to-maturity. Based on such a review in 2005, we transferred a significant portion of our fixed-income security portfolio from the available-for-sale category to the held-to-maturity category. Securities were transferred at their estimated fair value. Any unrealized gains or losses, net of taxes, at the date of transfer continue to be reported as a component of accumulated other comprehensive income, and are being amortized over the remaining life of the securities through other comprehensive income.

Available-for-sale fixed-income and equity securities are reported at their estimated fair value, with any unrealized gains and losses reported net of any related tax effects, as a component of accumulated other comprehensive income. Any change in the estimated fair value of available-for-sale investment securities during the period is reported as unrealized appreciation or depreciation, net of any related tax effects, in other comprehensive income. Held-to-maturity securities, other than those transferred to the held-to-maturity category as described above, are carried at amortized cost. Investment income includes amortization of premium and accrual of discount for both held-to-maturity and available for sale securities on the yield-to-maturity method if investments are acquired at other than par value.

The fair values of all 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. 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 $21.9 million at September 30, 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 September 30, 2009 was $4._ 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._ million at September 30, 2009. There were no material changes in the assumptions we used to determine the fair value of this security during the nine months ended September 30, 2009. The

rest of our available for sale fixed-income security portfolio, $237.3 million at September 30, 2009, consists of securities deemed to be Level 2.

The means and methods we use to select and validate the prices provided by pricing vendors are described in Note 6 of the Notes to unaudited Condensed Consolidated Financial Statements. Such cross-referenced information is included herein by reference.

With the exception of our two fixed-income securities with Level 3 fair values, we have determined that the markets for our other fixed-income securities are active. Accordingly, prices obtained from pricing vendors for our Level 2 fair value fixed-income securities have not been adjusted as the prices provided by vendors appear to be based on current information that reflects orderly transactions. The market for our Level 3 fair value securities, both of which are private placement securities, is inactive due to the nature of and restrictions associated with private placement securities. The determination of whether a market is inactive is made on a security-by-security basis using factors such as the following.

	•		Few recent transactions;

	•		Price quotations that are not based on current information;

	•		Significant increases in implied liquidity risk premiums and yields;

	•		Wide bid-ask spreads or a significant increase in bid-ask spreads;

	•		Significant decline or absence of a market for new issuances; and

	•		Little publicly released information

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.

Quarterly, we 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:

	•		The remaining payment terms of the security;

	•		Prepayment risk and speeds;

	•		The financial condition of the issuer;

	•		Expected defaults; and

	•		The value of any underlying collateral.

If an impaired security’s full amortized cost is not expected to be recovered, then the security is deemed to be OTTI and must be written down to its fair value as of the reporting date. The security’s amortized cost is written down for the portion of the OTTI due to credit losses, which is the difference between the original amortized cost of the security and the present value of its expected cash flows. This write down is charged to income and the new amortized cost basis of the security is accreted to par value as interest income. Any remaining difference between the security’s fair value and the present value of the expected cash flows is deemed to be the non-credit loss portion of the OTTI and is recognized in other comprehensive income, net of taxes, separately from unrealized gains and losses on available-for-sale securities. If the OTTI security is a held-to-maturity security, the non-credit loss portion of the OTTI is accreted from accumulated other comprehensive income to the new amortized cost basis of the security over its remaining life in a prospective manner. This accretion will increase the carrying value of the OTTI held-to-maturity security with no effect on income.

We have not recognized an OTTI charge in 2009 as a result of this change in evaluation methodology. We did, however, record an OTTI charge of $858,000 in 2008, related to the impairment of bonds whose decline in fair value was deemed to be other than temporary under the previous guidance for assessing OTTI.

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 financial condition, near-term and long-term earnings and cash flow prospects of the issuer, including relevant industry conditions and trends, and implications of rating agency actions; and

	•		The specific reasons that a security is in a significant unrealized loss position, including market conditions that could affect access to liquidity.

None of our equity security positions were deemed to be other than temporarily impaired during the nine months ended September 30, 2009 or 2008. We have one equity security that has been in a substantial unrealized loss position for most of 2009. However, at September 30, 2009 the fair value of this security had significantly recovered and our unrealized loss on this equity position was approximately $0.1 million on holdings of $6.5 million. The fair value recovery is attributable to the execution of many of the major restructuring initiatives identified by the issuer. However, as some of these initiatives are ongoing, we believe it is likely that the operating results and financial condition of the issuer will continue to improve in the future. In light of the potential for future improved financial results, and the recovery of the fair value of this security experienced so far in 2009, we do not believe that it was other than temporarily impaired at September 30, 2009.

Results of Operations — Three and Nine Months Ended September 30, 2009 Compared to the Three and Nine Months Ended September 30, 2008

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 nine-month periods ended September 30, 2009 and 2008.


	Three Months Ended
	September 30,						Change
	2009			2008			Dollar			Percentage⁽²⁾
				(dollars in thousands)
Direct premiums written	$	34,658		$	37,820		$	(3,162	)		-8.4	%

Net premiums written	$	33,344		$	36,257		$	(2,913	)		-8.0	%

Net premiums earned	$	28,260		$	30,497		$	(2,237	)		-7.3	%
Losses and loss adjustment expenses
Current year losses		23,549			24,085			(536	)		2.2	%
Prior year losses		(8,865	)		(7,548	)		(1,317	)		17.4	%

Total		14,684			16,537			(1,853	)		11.2	%
Underwriting expenses		6,674			6,366			308			-4.8	%

Total underwriting gain		6,902			7,594			(692	)		-9.1	%
Other revenue (expense) items
Investment income		7,375			8,886			(1,511	)		-17.0	%
Net realized losses		3			22			(19	)		86.4	%
Other income		163			158			5			3.2	%
Other expenses (1)		(820	)		(990	)		170			17.2	%

Total other revenue and expense items		6,721			8,076			(1,355	)		-16.8	%

Income before federal income taxes		13,623			15,670			(2,047	)		-13.1	%
Federal income tax expense		3,872			4,502			(630	)		14.0	%

Net income	$	9,751		$	11,168		$	(1,417	)		-12.7	%


Loss Ratio:
Accident year		83.3	%		79.0	%					4.3	%
Prior years		-31.3	%		-24.8	%					-6.5	%

Calendar year		52.0	%		54.2	%					-2.2	%
Underwriting expense ratio		23.6	%		20.9	%					2.7	%
Combined ratio		75.6	%		75.1	%					0.5	%
Pre-tax investment yield		3.69	%		4.21	%					-0.5	%
Return on beginning equity (annualized)		15.4	%		16.9	%					-1.5	%


(1)		Other expenses includes investment expenses, interest expense, general and administrative expenses and other expenses as reported in the unaudited Condensed Consolidated Statements of Income included elsewhere in this report.

(2)		The percentage change represents the items change relative to its impact on net income. A positive percentage change indicates a change in that line item representing an increase to net income, while a negative percentage change represents a decrease to net income.


	Nine Months Ended
	September 30,						Change
	2009			2008			Dollar			Percentage(2)
				(dollars in thousands)
Direct premiums written	$	89,025		$	97,935		$	(8,910	)		-9.1	%

Net premiums written	$	85,453		$	93,931		$	(8,478	)		-9.0	%

Net premiums earned	$	85,948		$	93,564		$	(7,616	)		-8.1	%
Losses and loss adjustment expenses
Current year losses		70,585			73,373			(2,788	)		3.8	%
Prior year losses		(27,176	)		(22,971	)		(4,205	)		18.3	%

Total		43,409			50,402			(6,993	)		13.9	%
Underwriting expenses		21,125			20,005			1,120			-5.6	%

Total underwriting gain		21,414			23,157			(1,743	)		-7.5	%
Other revenue (expense) items
Investment income		23,593			28,078			(4,485	)		-16.0	%
Net realized losses		3			(686	)		689			100.4	%
Other income		598			553			45			8.1	%
Other expenses (1)		(2,638	)		(3,322	)		684			20.6	%

Total other revenue and expense items		21,556			24,623			(3,067	)		-12.5	%

Income before federal income taxes		42,970			47,780			(4,810	)		-10.1	%
Federal income tax expense		12,142			14,195			(2,053	)		14.5	%

Net income	$	30,828		$	33,585		$	(2,757	)		-8.2	%


Loss Ratio:
Accident year		82.1	%		78.4	%					3.7	%
Prior years		-31.6	%		-24.5	%					-7.1	%

Calendar year		50.5	%		53.9	%					-3.4	%
Underwriting expense ratio		24.6	%		21.4	%					3.2	%
Combined ratio		75.1	%		75.3	%					-0.2	%
Pre-tax investment yield		3.88	%		4.43	%					-0.6	%
Return on beginning equity (annualized)		16.2	%		17.0	%					-0.8	%


(1)		Other expenses includes investment expenses, interest expense, general and administrative expenses and other expenses as reported in the unaudited Condensed Consolidated Statements of Income included elsewhere in this report.

(2)		The percentage change represents the items change relative to its impact on net income. A positive percentage change indicates a change in that line item representing an increase to net income, while a negative percentage change represents a decrease to net income.

Overview

Net income for the three and nine months ended September 30, 2009 was down compared to the same periods of last year. The decreases in net income were primarily attributable to decreases in investment income and underwriting gains. These decreases in pre-tax income were partially offset by decreases in federal income tax expense.

Premiums Written and Earned

The following table shows our direct premiums written by major geographical market, as well as the relationship between direct and net premiums written, for the quarter and year-to-date periods ended September 30, 2009 and 2008.


	For the Three Months Ended September 30,												For the Nine Months Ended September 30,
							Change												Change
	2009			2008			Dollar			Percentage			2009			2008			Dollar			Percentage
				(dollars in thousands)												(dollars in thousands)
Direct premiums written
Michigan	$	13,149		$	14,030		$	(881	)		-6.3	%	$	30,701		$	33,279		$	(2,578	)		-7.7	%
Illinois		11,109			11,407			(298	)		-2.6	%		26,444			27,213			(769	)		-2.8	%
Ohio		4,122			5,093			(971	)		-19.1	%		14,072			17,370			(3,298	)		-19.0	%
New Mexico		4,888			5,207			(319	)		-6.1	%		13,075			14,231			(1,156	)		-8.1	%
Kentucky		840			809			31			3.8	%		3,227			3,520			(293	)		-8.3	%
Other		550			1,274			(724	)		-56.8	%		1,506			2,322			(816	)		-35.1	%

Total	$	34,658		$	37,820		$	(3,162	)		-8.4	%	$	89,025		$	97,935		$	(8,910	)		-9.1	%


Net premiums written	$	33,344		$	36,257		$	(2,913	)		-8.0	%	$	85,453		$	93,931		$	(8,478	)		-9.0	%


Ratio of net premiums written to direct		96.2	%		95.9	%					0.3	%		96.0	%		95.9	%					0.1	%

The medical professional liability insurance market remains highly competitive, which continues to place downward pressure on premium rates. As a result of premium rate decreases, our direct written premiums for both the quarter and year-to-date periods in 2009 were down from the same periods last year. Despite the competition in many of our core markets, we retained 88.2% of our insureds whose policies were up for renewal during the first nine months of 2009.

The rate decreases that we have recently taken have been in response to favorable claim trends noted in virtually all markets of the medical professional liability industry. These favorable claim trends have caused other carriers to decrease their rates as well, thus increasing overall competition in the industry. We anticipate that the medical professional liability insurance pricing environment will remain highly competitive in the near future with additional premium rate decreases likely. However, we plan to continue to adhere to our philosophy of underwriting discipline and adequate pricing in this soft market cycle.

The decreases in net premiums written for the quarter and year-to-date periods ended September 30, 2009, compared to the comparable periods of 2008, were almost identical with the decrease in direct premiums written. This was expected as the 2009 year reinsurance treaty terms are substantially the same as the terms of the 2008 year treaty.

Net premiums earned during the quarter and year-to-date periods ended September 30, 2009, compared with the same periods last year, decreased slightly less than net premiums written. This variability in earned premiums compared with premiums written is the result of the premium “earn out” or “lag”. Premiums are earned pro rata over the policy term, typically one year. This means that premiums earned during 2009 are based on premiums written not only during 2009, but the previous 12 months as well.

Loss and Loss Adjustment Expenses

Net incurred loss and loss adjustment expenses, which we refer to collectively as losses, for the third quarter and year-to-date periods of 2009 decreased $1.9 million and $7.0 million, respectively, compared with the same periods of 2008. The decreases in losses were 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 ratios due to the lower net premiums earned volume. The accident year loss ratio for the third quarter of 2009 was 83.3%, up from 79.0% in the third quarter of 2008 and 82.1% for the year-to-date 2009 period, compared with 78.4% during the nine months ended September 30, 2008. The increase in the accident year loss ratio was principally the result of premium rate decreases 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 below.

Reported claims for the three and nine months ended September 30, 2009 were 237 and 735, respectively, compared with 233 and 726 for the same periods last year. The average number of reported claims per quarter over the last 20 quarters was 282 as of September 30, 2009. While claims frequency continued to be at historically low levels, we believe that the downward trend has leveled off. Medical professional liability paid loss severity has increased slightly in recent quarters to $83,400 per claim closed with payment in the third quarter of 2009, compared with an average of $68,200 over the last 20 quarters. This recent increase in severity follows several years of stable paid loss severity. However, our paid loss severity remains lower than anticipated.

The favorable development on prior years’ loss reserves for the three and nine months ended September 30, 2009 increased by $1.3 million and $4.2 million, respectively, compared to the same periods a year ago. The increases in favorable development were primarily the result of continued favorable paid claim trends on our medical professional liability business, as discussed below, partially offset by an increase in severity experienced on our run-off workers’ compensation business.

Our actuarial estimates of reserves include projections of higher severity contemplating medical loss cost inflation, our higher reinsurance retention levels in recent years and a general change in the composition of our outstanding claims inventory. As the number of outstanding claims and frequency of non-meritorious claims have declined, we assumed the remaining claims would be more severe and have a higher likelihood of loss. While paid claim severity has increased slightly in recent quarters, it remains lower than anticipated given the decline in claim frequency. In addition, the impact of medical loss cost inflation and higher reinsurance levels have not been as severe as we anticipated. As a result of these less than expected severity trends, our actuarially projected ultimate losses for prior accident years have decreased.

We believe that our current loss reserve estimate represents our best estimate of the ultimate cost to settle our claims obligations as of September 30, 2009. However, should actual loss trends continue to develop more favorably than our prior estimates, we likely will experience additional favorable development in future periods. Historical favorable prior year development is not indicative of future operating results, as the amount, if any, and timing of future favorable development is contingent upon the continued emergence of the claim trends we have noted in recent years, as well as many other internal and external factors, including those discussed in our most recent Annual Report on Form 10-K.

Underwriting Expenses

Underwriting expenses and the underwriting expense ratios for the quarter and year-to-date periods of 2009 increased compared to the same periods last year. The increases in underwriting expenses were primarily attributable to the implementation of significant portions of our new policy and claims system in the fourth quarter of 2008 and first quarter of 2009. In addition to the amortization expense currently being recorded, we have discontinued the capitalization of salary and other benefit costs now that the development stage of the project is complete. We have also incurred approximately $0.6 million in 2009 of vendor and other contractor costs associated with the post-development phase of the project. We anticipate that our underwriting expense ratio will continue to be higher throughout the remainder of 2009 than the ratios we have historically reported. Underwriting expense ratios in future periods are expected to decrease slightly from the 2009 ratios as they will not bear the burden of the additional vendor costs as noted above. However, the underwriting expense ratio will likely 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.

Investment Income

Investment income was down for the third quarter and year-to-date periods of 2009 compared to the same periods a year ago. The decreases were primarily due to the historically low short-term interest rates during 2009, combined with an increase in our cash and cash equivalents position throughout 2009, compared to 2008. During 2009, $81.7 million of our fixed-income securities, having a weighted average annual yield of 5.81%, matured, were called or were paid down, The proceeds from these disposals, partially offset by the $42.7 million spent on share repurchases during 2009 remained principally in cash and cash equivalents at September 30, 2009. The proceeds from the maturity, call or pay down of higher-yielding corporate, government agency and mortgage-backed securities in 2008 were used to purchase lower-yielding tax-exempt bonds, which has also contributed to the decreases in investment income during 2009 compared to 2008.

Our pre-tax investment yield for the quarter and year-to-date periods in 2009 decreased 52 and 55 basis points to 3.69% and 3.88%, respectively, compared to the same periods last year. However, as a result of the additional tax savings associated with the increase in our tax-exempt investment income, our net of tax yield for the same periods decreased only 31 and 28 basis points, respectively, to 2.93% for the quarter and 3.05% for the nine months ended September 30, 2009. If short-term interest rates remain at the historically low levels seen since late 2008,

and we continue with our share-repurchase plan, it is likely that investment income will continue to moderately decline in future periods.

Net Realized Losses

We have had no net realized gains or losses on investments during 2009. The net realized losses reported for the year-to-date period of 2008 were principally attributable to a pre-tax impairment charge of $858,000 related to the OTTI of CIT Group bonds in the first quarter of 2008. We subsequently sold our CIT Group bonds early in the second quarter of 2008 for a small gain. Partially offsetting the impairment charge were realized gains on bonds that were called in the first nine months of 2008. Our review of our investment portfolio at September 30, 2009 indicated that none of the securities in our portfolio were other than temporarily impaired.

Other Expenses

The decreases in other expenses were the result of lower interest rates and a lower outstanding principal balance on our long-term debt. The average interest rate on the debt is 4.14% plus the three-month London Interbank Offered Rate (LIBOR). The LIBOR rate is reset quarterly in approximately the middle of February, May, August and November. In August 2008, we repaid $5 million of the outstanding $30.9 million principal.

Income Taxes

The effective tax rates for the quarter and year-to-date periods ended September 30, 2009 were 28.4% and 28.3%, respectively, down from 28.7% and 29.7% for the same periods of 2008. The decreases in the effective tax rates were attributable to the full effect of additional tax-exempt securities purchased in the first and second quarters of 2008.

Liquidity and Capital Resources

The primary sources of our liquidity, on both a short- and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurers and proceeds from the maturity or sale of invested assets and principal receipts from our mortgage-backed securities. The primary uses of cash, on both a short- and long-term basis, are losses, loss adjustment expenses, operating expenses, the acquisition of invested assets and fixed assets, reinsurance premiums, interest payments, taxes, the repayment of long-term debt, the payment of shareholder dividends, and the repurchase of shares of APCapital’s outstanding common stock.

Based on historical trends, economic, 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.

Parent Company

APCapital’s only material assets are cash and the capital stock of American Physicians and its other subsidiaries. APCapital’s cash flow consists primarily of dividends and other permissible payments from its subsidiaries and investment earnings on funds held. 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 included in our most recent Annual Report on Form 10-K. In June 2009, American Physicians obtained permission from the State of Michigan Office of Financial and Insurance Regulation to pay “extraordinary” dividends of $30 million to APCapital. The $30 million dividend, which was paid in June 2009, could not otherwise have been paid until September 2009. American Physicians may make additional ordinary dividends to APCapital of up to $18 million during the remainder of 2009. However, due to the limitations on the timing of ordinary dividend payments, the $18 million cannot be paid until December of 2009 without prior regulatory approval.

We paid a quarterly cash dividend of $0.0825 per common share at the end of each of the first three quarters of 2009. The third quarter dividend totaled approximately $0.9 million, bringing the year to date total to approximately $2.7 million. On October 29, 2009, the Board of Directors declared a fourth-quarter cash dividend of $0.09 per common share payable on December 31, 2009, to shareholders of record on December 11, 2009. Fourth quarter dividends are expected to result in a total cash payment of approximately $0.9 million.

The Board’s current intention is to pay a comparable cash dividend on a quarterly basis for the foreseeable future. However, the payment of future dividends will depend upon the availability of cash resources at APCapital, the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.

We continued to repurchase shares of our outstanding common stock during the first three quarters of 2009. A total of 1,403,233 shares were repurchased during 2009 at a cost of $42.8 million, or $30.47 per share. Part II Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds,” of this Report on Form 10-Q, contains additional details of our share repurchase programs, as well as the restrictions and limitations pertaining to any share repurchases. In addition to the share repurchase authorizations listed in Part II, Item 2 on October 2, 2009 the Company’s Board of Directors authorized an additional $10 million of the Company’s common shares pursuant to our Rule 10b5-1 plan. Our current intent is to continue with our share repurchase programs for the foreseeable future, subject to any restrictions and limitations imposed by law or contained in such programs, and the availability of cash resources.

APCapital has $25.9 million of outstanding long-term debt. The debt matures in 2033, but is callable, in whole or in part, by us at any time subject to certain notification requirements. The debt’s rate of interest is 4.14% plus the three-month LIBOR rate. We frequently evaluate our capital management strategies with the intention of providing the most value to APCapital shareholders and making prudent use of APCapital’s cash resources. Any decision to make early payments on the debt would be based on such evaluations, as well as changes in our available cash resources, capital needs and other relevant factors.

Consolidated

Our net cash flow from operations decreased during the nine months ended September 30, 2009 compared to the same period of 2008. The decrease was primarily the result of decreases in premium receipts and investment income collected of $3.5 million and $3.4 million, respectively. Partially offsetting the decreases in premium receipts and investment income collected was a $4.3 million decrease in loss and loss adjustment expense payments.

The following table shows the composition of our net cash flows from operations for the nine months ended September 30, 2009 and 2008.


	For the Nine Months Ended
	September 30,
	2009			2008
	(dollars in thousands)
Cash from (for):
Premiums received	$	89,446		$	92,967
Investment income collected		26,682			30,101
Loss and loss adjustment expenses paid		(47,958	)		(52,209	)
Commissions and other acquisition cost		(8,188	)		(9,064	)
Net reinsurance impact		1,026			18
Income taxes paid		(11,843	)		(11,236	)
Salaries and other employee costs		(16,292	)		(15,114	)
Other		(9,437	)		(9,727	)

Net cash flows from operations	$	23,436		$	25,736

At September 30, 2009, we had $21.2 million of cash at APCapital, and our insurance and other operating subsidiaries had $123.8 million of cash and cash equivalents on hand to meet short-term cash flow needs. In addition, we had $243.5 million of available-for-sale fixed-income securities that could be sold to generate cash. Our held-to-maturity fixed-income security portfolio includes $11.4 million, $68.0 million $158.4 million and $38.9 million of securities that mature in the next year, one to five years, five to 10 years, and more than 10 years, respectively. In addition, we have $121.7 million of mortgage-backed securities classified as held-to-maturity that provide periodic principal repayments.

Financial Condition

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 third, the quality of assets in our investment portfolio.

Statutory Capital and Surplus

Our statutory capital and surplus (collectively referred to herein as “surplus”) at September 30, 2009 was $206.3 million, which results in a net premium written to surplus ratio of 0.54:1 based on $111.6 million of net premiums written during the 12 months ended

September 30, 2009. In general, we believe that A.M. Best and state insurance regulators prefer to see a net premium written to surplus ratio for long-tailed casualty insurance companies, such as ours, of 1:1 or lower. Our net leverage ratio, which is the sum of the net premiums written and net liabilities divided by statutory surplus, was 3.6 at September 30, 2009. The net leverage ratio is used by regulators and rating agencies to measure a company’s combined exposure to pricing errors and errors in the estimation of its liabilities, net of reinsurance, in relation to its surplus. Generally, the industry considers a ratio of less than 6.0 acceptable for long-tailed casualty line carriers.

Reserves for Unpaid Losses and Loss Adjustment Expenses

Medical professional liability insurance is a long-tailed line of business, which means that claims may take several years from the date they are reported to us until the time at which they are either settled or closed. In addition, we also offer occurrence-based coverage in select markets, primarily Michigan and New Mexico. Occurrence-based policies offer coverage for insured events that occurred during the dates that a policy was in-force. This means that claims that have been incurred may not be reported to us until several years after the insured event has occurred. These claims, and their associated reserves, are referred to as incurred but not reported, or IBNR. IBNR reserves may also be recorded as part of the actuarial estimation of total reserves to cover any deficiency or redundancy in case reserves that may be indicated by the actuary’s analyses. Case reserves are established for open claims and represent management’s estimate of the ultimate net settlement cost of a claim, and the costs to investigate, defend and settle the claim, based on the current information available about a given claim.

The table below shows net case reserves, open claim counts, average net case reserves per open claim, net IBNR reserve and total net reserves for our medical professional liability line of business as of September 30, 2009 and December 31, 2008. Net reserves include direct and assumed reserves, reported as unpaid loss and loss adjustment expenses in the accompanying unaudited Condensed Consolidated Balance Sheets, reduced by the amount of ceded reserves, which are reported as a component of reinsurance recoverables in the balance sheet.


	September 30,		December 31,
	2009		2008		Change			% Change
	(In thousands, except claim and per claim data)
Net case reserves	$	236,206	$	236,093	$	113			0.0	%
Number of open claims		1,359		1,418		(59	)		-4.2	%
Average net case reserve per open claim	$	173,809	$	166,497	$	7,312			4.4	%
Net IBNR reserves	$	290,816	$	303,856	$	(13,040	)		-4.3	%
Total net reserves	$	527,022	$	539,949	$	(12,927	)		-2.4	%

The average net case reserve per open claim at September 30, 2009 increased compared with December 31, 2008. This increase was primarily the result of increases in case reserves pertaining to the 2008 accident year. However, claims associated with prior years continue to settle for less than expected, which along with decreases in our open and IBNR claim counts, has led to a reduction in IBNR reserves.

Our run-off workers’ compensation net reserves at September 30, 2009 were $23.7 million compared with $22.3 million at December 31, 2008. Workers’ compensation net reserves developed unfavorably in the first nine months of 2009 by $3.8 million. The increase in reserves and the adverse development were mostly the result of increases in the case reserves related to claims in Kentucky and Minnesota. These case reserve increases reflect an increase in claim severity that was not contemplated in our December 31, 2008 projection of ultimate losses and thus have resulted in adverse prior year development. Open workers compensation claims decreased to 181 at September 30, 2009 from 210 at December 31, 2008. Workers’ compensation, like medical professional liability, is a long-tailed line of business, and as a result, it will be several years until we settle all workers’ compensation claims.

Although considerable judgment is inherent in the estimation of net loss and loss adjustment expense reserves, we believe that our net reserves for unpaid losses and loss adjustment expenses are adequate. However, there can be no assurance that losses will not exceed the reserves we have recorded, or that we will not later determine that our reserve estimates were inadequate, as future trends related to the frequency and severity of claims, and other factors may develop differently than management has projected. The assumptions and methodologies used in estimating and establishing reserves for unpaid loss and loss adjustment expenses are continually reviewed and any adjustments are reflected as income or expense in the period in which the adjustment is made. Historically, such adjustments have not exceeded eight-percent (8%) of our recorded net reserves as of the beginning of the period, but such adjustments can materially and adversely affect our results of operations when they are made.

Activity in the net liability for unpaid losses and loss adjustment expenses for the nine months ended September 30, 2009 and year ended December 31, 2008 can be found in Note 7 of the Notes to unaudited Condensed Consolidated Financial Statements included elsewhere in this report. Such information is incorporated herein by reference.

Investments

Our fixed-income investment security portfolio consists principally of high quality corporate, government-sponsored 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 September 30, 2009 and December 31, 2008.


	September 30, 2009					December 31, 2008
	Carrying		% of			Carrying		% of
	Value (1)		Portfolio			Value (1)		Portfolio
U.S. government obligations	$	14,953		2.3	%	$	64,458		9.2	%
Tax-exempt municipal securities		384,551		59.9	%		383,547		54.4	%
Corporate securities		120,596		18.8	%		105,824		15.0	%
Mortgage-backed securities		121,746		19.0	%		150,862		21.4	%

Total fixed-income securities	$	641,846		100.0	%	$	704,691		100.0	%


(1)		Carrying value for available-for-sale securities is fair value, whereas held-to-maturity securities are carried at amortized cost.

Most of our tax-exempt municipal securities are insured. However, when purchasing municipal and other tax-exempt securities, we do not rely on the insurance, but rather focus on the credit worthiness of the underlying issuing authority. In addition, we purchase only “essential purpose” tax-exempt bonds. Essential purpose bonds are used to fund projects such as schools, water and sewer, road improvements as well as other necessary services. These bonds are often general obligations and are backed by the full taxing authority of the city, county or state, and have a very low historical rate of default. Our mortgage-backed securities are all issued by government sponsored enterprises, principally the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac. All of the Fannie Mae and Freddie Mac mortgage-backed securities consist of “conforming” mortgage loans that were issued prior to April 2005, are guaranteed by the issuing government-sponsored agency, and have support tranches designed to promote the predictability of principal repayment cash flows.

The following table shows the distribution of our fixed-income security portfolio by Standard & Poor’s (“S&P”) credit quality rating at September 30, 2009 and December 31, 2008.


	September 30, 2009					December 31, 2008
	Carrying		% of			Carrying		% of
	Value (1)		Total			Value (1)		Total
Rating
AAA	$	291,959		45.4	%	$	377,392		53.6	%
AA		248,693		38.7	%		234,543		33.3	%
A		66,627		10.4	%		63,723		9.0	%
BBB		22,276		3.5	%		22,812		3.2	%
BB		6,149		1.0	%		—		0.0	%

		635,704		99.0	%		698,470		99.1	%

Private Placement		6,142		1.0	%		6,221		0.9	%


Total	$	641,846		100.0	%	$	704,691		100.0	%

Average Rating	AA+					AA+


(1)		Carrying value is fair value for available-for-sale securities and amortized cost for held-to-maturity securities.

Non-investment grade securities, which we define as having an S&P credit quality rating of less than BBB, typically bear more credit risk than those of investment grade quality. The decrease in our AAA rated fixed-income securities was the result of the call of $49.5 million government agency issuer bonds during 2009. The proceeds from these calls were largely not reinvested as of September 30, 2009 and remain in cash. The increase in the BB category was the result of a downgrade of one of our corporate bonds. This bond holding is backed by collateral, the estimated fair value of which is in excess of our carrying value for the bonds. For additional information regarding the risks inherent in our fixed-income investment security portfolio see “Item 3, Quantitative and Qualitative Disclosures About Market Risk.” Exhibit 99.1, filed with this Quarterly Report on Form 10-Q, contains a detailed listing of our fixed-income security and cash equivalent investment holdings.

Other investments increased $2.9 million during the nine months ended September 30, 2009. This increase was primarily attributable to an increase in the fair value of one of our strategic equity security investments, which had previously been in a significant unrealized loss position. The fair value of this equity security has returned to approximately our original cost basis.

Other Significant Balance Sheet Items

Assets, other than our cash and invested assets, at September 30, 2009 decreased approximately $19.4 million from December 31, 2008. The principal components of this decrease were reinsurance recoverables $11.4 million, deferred federal income taxes, $3.2 million, premiums receivable $2.4 million and other assets $1.8 million. The decrease in reinsurance recoverables was due to a decrease in ceded IBNR reserves, as paid claim severity has emerged at lower than anticipated levels, as well as to the collection of the remaining $3.8 million due from reinsurers at December 31, 2008 related to the commutation of our 2005 reinsurance treaty. The decrease in deferred federal income taxes was primarily a result of an increase in the taxable temporary difference associated with the increase in unrealized gains on our investment securities. The premiums receivable decrease was the result of the decrease in our direct premiums written and the decrease in other assets was primarily the result of the amortization of internally developed software, which was placed in service during the fourth quarter of 2008 and first quarter of 2009.

Total liabilities at September 30, 2009 decreased $26.3 million when compared to December 31, 2008. The decrease was primarily due to the $19.4 million decrease in unpaid loss and loss adjustment expenses reserves and $6.6 million decrease in other liabilities. The decrease in unpaid loss and loss adjustment expenses was mostly the result of downward revisions in the estimated reserves associated with prior accident years as discussed in “–Results of Operations.” The decrease in other liabilities was the result of decreases in the accruals for bonus payouts and pension contributions, which were fully accrued at December 31, 2008 but only three-quarters accrued at September 30, 2009. Also contributing to the decrease in other liabilities was the payment of accrued invoices related to consultants and vendors assisting with the development of our new policy and claims system, as well as for corporate insurance policies, which renew in December each year.

Shareholders’ equity decreased $9.7 million from December 31, 2008 to $244.3 million at September 30, 2009. This decrease was the result of share repurchases, which totaled $42.8 million during the nine months ended September 30, 2009 and shareholder dividend payments of $2.7 million. Net income of $30.8 million, as well as a $4.9 million, net of tax, increase in unrealized appreciation on investments during the first nine months of 2009 partially offset the decreases in shareholders’ equity. Shares outstanding at September 30, 2009 were 10,424,706, a decrease of 1,324,363 from December 31, 2008, as a result of share repurchases, partially offset by the effect of employee stock option exercises. Book value per share increased 8.4% to $23.44 at September 30, 2009, from $21.62 at December 31, 2008.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2008. Except as described elsewhere in this report on Form 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the most recent fiscal year end.

Effects of New Accounting Pronouncements

The effects of new accounting pronouncements are described in Note 3 of the Notes to unaudited Condensed Consolidated Financial Statements included elsewhere in this report. Such information is incorporated herein by reference.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General

Market risk is the risk of loss due to adverse changes in market rates and prices. We invest primarily in fixed-income securities, which are interest-sensitive assets. Accordingly, in addition to the credit risk associated with such assets, the fair value of our fixed-income securities is exposed to a degree of risk associated with changes in the overall interest rate environment. Credit risk is the risk that the issuer will default on interest or principal payments, or both, which could prohibit us from recovering a portion or all of our original investment. Changes in the fair value of fixed-income securities are typically inversely related to changes in overall interest rates.

At September 30, 2009 the majority of our investment portfolio was invested in fixed-income security investments, as well as cash and cash equivalents. The fixed-income securities consisted primarily of U.S. government and agency bonds, high-quality corporate bonds, mortgage-backed securities and tax-exempt U.S. municipal bonds.

Qualitative Information About Market Risk

At September 30, 2009, 99.0% of our fixed-income portfolio, both available-for-sale and held-to-maturity, excluding approximately $6.1 million of private placement issues (which constitutes 1% of our fixed-income security portfolio), was considered investment grade. We consider fixed-income securities with a credit rating of BBB or higher to be investment grade. A table with the allocation of our fixed-income securities, by S&P credit quality rating, may be found in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Condition.” Non-investment grade securities are generally considered to be a greater credit risk.

We closely monitor the credit quality of the individual securities in our fixed-income portfolio to help manage credit risk. In addition, our investment guidelines limit our fixed-

income security holdings pertaining to any one issuer, other than U.S. Government and agency backed securities, to less than three-percent of statutory admitted assets, or five-percent of statutory surplus. In practice this has generally resulted in limiting such investments to approximately $6 million per issuer at our American Physicians subsidiary. We also diversify our holdings so that there is not a significant concentration in any one industry or geographical region.

Furthermore, we periodically review our investment portfolio for any potential credit quality or collection issues and for any equity securities whose decline in fair value is deemed to be other than temporary. As a result of these reviews, we have determined that none of our fixed-income or strategic equity security investments were other than temporarily impaired at September 30, 2009.

Held-to-maturity fixed-income securities are not carried at fair value on the balance sheet. As a result, changes in interest rates do not affect the carrying amount of these securities. However, 30.5%, or $121.7 million, of our held-to-maturity investment security portfolio consists of mortgage-backed securities. Mortgage-backed securities, unlike most other fixed-income securities, do not have a fixed maturity date as the individual underlying mortgages that comprise these securities may be prepaid without penalty. So, while the carrying value of these securities is not subject to fluctuations as a result of changes in interest rates, changes in interest rates could impact our cash flows as an increase in interest rates will slow principal payments, and a decrease in interest rates will typically accelerate principal payments. This variability in principal payments is known as prepayment risk.

Quantitative Information About Market Risk

Interest Rate Risk

At September 30, 2009, our available-for-sale fixed-income security portfolio was valued at $243.5 million and had an average modified duration of 2.99 years, compared to a portfolio valued at $222.9 million with an average modified duration of 3.43 years at December 31, 2008. The following tables show the effects of a hypothetical change in interest rates on the fair value and duration of our available-for-sale fixed-income security portfolio at September 30, 2009 and December 31, 2008. We have assumed an immediate increase or decrease of 1% or 2% in interest rate for illustrative purposes. You should not consider this assumption, or the values shown in the table, to be a prediction of actual future results.


	September 30, 2009							December 31, 2008
	Portfolio		Change in			Modified		Portfolio		Change in			Modified
Change in Rates	Value		Value			Duration		Value		Value			Duration
	(dollars in thousands)							(dollars in thousands)
+2%	$	230,036	$	(13,446	)		2.70	$	209,579	$	(13,362	)		3.22
+1%		236,458		(7,024	)		2.73		216,320		(6,621	)		3.16
0		243,482					2.99		222,941					3.43
-1%		251,058		7,576			3.06		231,609		8,668			3.50
-2%		257,983		14,501			3.13		239,957		17,016			3.57

Equity Price Risk

At September 30, 2009 the fair value of our available-for-sale equity securities was $21.9 million. These securities are subject to equity price risk, which is the potential for loss in fair value due to a decline in equity prices. The weighted average “Beta” of this group of securities was 0.74 at September 30, 2009. Beta measures the price sensitivity of an equity security, or group of equity securities, to a change in the broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10% the fair value of our equity securities would be expected to increase by 7.4% to $23.5 million based on the weighted average Beta. Conversely, a 10% decrease in the S&P 500 Index would result in an expected decrease of 7.4% in the fair value of our equity securities to $20.3 million. The selected hypothetical changes of plus or minus 10% assumed in this illustration are not intended to reflect what could be considered the best or worst case scenarios and are used for illustrative purposes only. In addition, Beta is calculated using historical information and does not take into account current or future changes in a company’s financial condition, results of operations or liquidity that may have an impact, either positive or negative, on the company’s stock price.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure material information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required financial disclosure. In designing and evaluating the disclosure controls and procedures, the Company recognized that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2009.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes in risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth the repurchases of common stock for the quarter ended September 30, 2009:


					Total Number
	Total				of Shares		Maximum Dollar
	Number of		Average		Repurchased as		Value of Shares that May Yet Be
	Shares		Price Paid		Part of Publicly		Repurchased Under the Plans or Programs
	Repurchased		per Share		Announced Plans		Discretionary Plan(a)		Rule 10b5-1 Plan (b)
For the month ended July 31, 2009		129,333	$	29.72		129,333	$	15,955,191	$	15,248,488
For the month ended August 31, 2009		76,100	$	32.09		76,100	$	15,955,191	$	12,806,384
For the month ended September 30, 2009		107,800	$	30.59		107,800	$	15,955,191	$	9,509,042
For the three months ended September 30, 2009		313,233	$	30.60		313,233	$	15,955,191	$	9,509,042


(a)		On February 7, 2008, the Board of Directors authorized the repurchase of additional common shares with a cost of up to $25 million at management’s discretion. The timing of the repurchases and the number of shares to be bought at any time depend on market conditions and the Company’s capital resources and requirements. The discretionary plan has no expiration date and may be terminated or discontinued at any time or from time to time.

(b)		On June 23, 2009, the Company’s Board authorized the repurchase of an additional $20 million of the Company’s common shares pursuant to the Rule 10b5-1 plan in 2009. In addition to the share repurchase authorizations outstanding at September 30, 2009, included in the table above, on October 2, 2009, the Company’s Board authorized an additional $10 million of the Company’s common shares pursuant to our Rule 10b5-1 plan, which is not included in the table above. The Rule 10b5-1 plan share repurchases will continue to be made pursuant to a formula in the plan, and the plan will expire when all of the allocated dollars in the plan have been used. The Company may terminate the Rule 10b5-1 plan at any time.

Item 6. Exhibits

Exhibits.

The Exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by reference.

EXHIBIT INDEX


Exhibit No.		Exhibit Description
3.1		Amended and Restated Bylaws, as amended October 29, 2009 (APCapital’s Current Report on Form 8-k dated November 5, 2009)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) under the Securities Exchange Act of 1934.

99.1		Fixed-Income Security Detail of American Physicians Capital, Inc. and Subsidiaries’ Investment Portfolio as of September 30, 2009.


	AMERICAN PHYSICIANS CAPITAL, INC.
	By:	/s/ R. Kevin Clinton
		R. Kevin Clinton
		Its: President and Chief Executive Officer

	By:	/s/ Frank H. Freund
		Frank H. Freund
		Its: Executive Vice President, Treasurer and Chief Financial Officer


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			21

Item 3. Quantitative and Qualitative Disclosures About Market Risk			42

Item 4. Controls and Procedures			44

PART II. OTHER INFORMATION

Item 1A. Risk Factors			46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46

Item 6. Exhibits			46

Signatures			47

Exhibit Index			48
EX-31.1
EX-31.2
EX-32.1
EX-99.1