Settlement/Curtailment of Benefit Plan. Prior to 2002, the Insurance Company provided a defined benefit pension plan for employees. The pension plan operated in an over funded status in recent years with continuing increases in administrative and actuarial costs. Consistent with business trends, more emphasis was placed on enhancing contributions to our 401(k) defined contribution plan. We decided in 2001 to terminate the pension plan. Regulations are explicit in handling the termination process and a pension plan actuary was retained to direct the process.
Our debt structure consists of surplus notes which carry a 7 percent interest rate and mature on September 30, 2007. At December 31, 2004 and December 31, 2003, there were approximately $2,890,000 and $5,264,000, respectively, of Series B Surplus Notes outstanding. During 2004 approximately $2,374,000 of surplus notes were converted into stock of the Company as part of the Conversion.
The Company has reviewed its deferred federal income tax assets for recoverability based on the availability of future taxable income when the deductible temporary differences are expected to reverse, and has determined, based on its recent loss experience, that it is more likely than not that sufficient taxable income may not exist in the periods of reversal. Accordingly, the Company has recorded a deferred tax asset valuation allowance for the entire net deferred tax asset. Once the Company has re-established a pattern of profitability, the deferred tax asset valuation allowance may be reduced upon evaluation of the availability of future taxable income.
During the years ended December 31, 2003 and 2002 other than temporary impairment losses on available for sale equity investments, amounting to $181,860 and $276,760, respectively, are included in net realized investment gains (losses) on investments in the statement of operations. There were no impairment losses in 2004.
2004, 2003 and 2002, respectively. The decline in 2004 is due to the fact that the quota share agreement was placed into runoff on December 31, 2003.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. At December 31, 2004, the Company had recoverables of $10,880,000. This balance was comprised of $1,486,000 for paid losses, $9,187,000 for unpaid losses and $207,000 in unearned premium ceded to the reinsurers. At December 31, 2003, the Company had recoverables of $16,986,000. This balance was comprised of $863,000 for paid losses, $7,742,000 for unpaid losses and $8,381,000 in unearned premium ceded to the reinsurers. The Company holds collateral in the form of letters of credit, trust accounts or funds withheld accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Services. At December 31, 2004, the Company has letters of credit available of approximately $1,662,000 from unauthorized reinsurers. The Company did not utilize any of the letters of credit during 2004. At December 31, 2004, the Company had 5 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 5 reinsurers accounts for 79% of the total recoverable.
Deferred policy acquisition costs and the related amortization charged to income were as follows:
In December 2002, approximately $2,673,000 million of Series A notes were converted into Series B notes at the request of the holders. Also in December 2002, additional notes, aggregating approximately $1,020,000, were purchased by agents and other private investors. During 2003, approximately $641,000 of Series B Surplus Notes were issued. In addition, holders of $930,000 of the Series A Surplus Notes converted their notes into Series B Surplus Notes. The balance of the Series A Surplus Notes, which approximated $804,000, was repaid on June 30, 2003. In conjunction with the Conversion which was completed on October 15, 2004 approximately $2,374,000 of Series B Surplus Notes were converted into stock of the Company. The table below reflects the transactions, in thousands, affecting the surplus notes balance.
On October 15, 2004, the Company granted NQSOs for the purchase of 39,500 shares to the directors, executive officers and key employees. The stock purchase price for those options will be $10.00, the offering price of the stock. The Company will not receive any payment for granting the options. The options shall vest 20% per year. The options may fully vest upon the death or disability of the optionee or a change in control of the Company. The grants will be exercisable for up to 10 years from the grant date.
The compensation cost that has been charged against income for the period from October 16, 2004 to December 31, 2004 was $7,916. The per share weighted-average fair value of options granted in 2004 was $4.81. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2004: dividend yield of 0%; expected volatility of 39.6%; risk-free interest rate of 3.85%, and an expected life of 7 years.