As of December 31, 2007 and December 31, 2006, we had no reserve for uncollectible reinsurance recoverables. We assessed the collectibility of our year-end receivables and believe all amounts are collectible based on currently available information.
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
In February 2007, the FASB issued SFAS No. 159, Establishing the Fair Value Option for Financial Assets and Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This statement applies to all entities and most of the provisions of this statement apply only to entities that elect the fair value option. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. An entity is prohibited from retroactively applying SFAS No. 159, unless it has chosen early adoption. SFAS No. 159 also applies to eligible items existing at November 15, 2007. We do not expect SFAS No. 159 to have a material impact on our results of operations or financial condition.
Quota share reinsurance for business produced through unaffiliated underwriting agencies is specific to each unaffiliated underwriting agency. We maintain control of the selection of reinsurers and the terms and conditions of reinsurance contracts.
Our losses, loss adjustment expense reserves and deposit liabilities of $227.9 million on a gross basis and $180.7 million on a net basis are our best estimates as of December 31, 2007. The analysis provided by our internal valuation methods indicated that their expected range for the ultimate liability for our losses and loss adjustment expense reserves, as of December 31, 2007, was between $200.2 million and $240.3 million on a gross basis and between $165.1 million and $195.8 million on a net basis.
(5) In 2007: $0.7 million premium write-offs. In 2006: $0.4 million of severance as a result of IT outsourcing; $0.8 million of Burr Ridge office move; $0.1 million of Michigan office lease termination; and $0.7 million of unsuccessful acquisition costs.
State insurance laws restrict the ability of our insurance company subsidiaries to declare stockholder dividends. Under the state laws, no dividends may be declared or paid at any time except out of earned, as distinguished from contributed, surplus. These subsidiaries may not make an “extraordinary dividend” until 30 days after the applicable commissioner of insurance has received notice of the intended dividend and has not objected in such time or until the commissioner has approved the payment of the extraordinary dividend within the 30-day period. In most states, an extraordinary dividend is defined as any dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10.0% of the insurance company’s surplus as of the preceding December 31 or the insurance company’s net income for the 12-month period ending the preceding December 31, in each case determined in accordance with statutory accounting practices. In addition, an insurance company’s remaining surplus after payment of a dividend or other distribution to stockholder affiliates must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs. In 2008, our
The following table illustrates the effect on our net income and net income per share if we had applied SFAS No. 123R to stock-based compensation for the year ended December 31, 2005 (in thousands, except per share amounts):
In December 2006, Michael V. Clegg, APLC, brought suit for damages for alleged breach of contract against USAgencies Insurance Company [sic] (USAgencies), a subsidiary of the Registrant, in the Nineteenth Judicial District Court of Louisiana. Plaintiff alleges that USAgencies breached a contract with Mr. Clegg’s law firm purportedly granting the firm exclusive rights to serve as counsel for USAgencies in the State of Louisiana for a period of two years commencing on December 15, 2005. In May 2007, judgment was entered in favor of USAgencies. Plaintiff has pursued an appeal of that judgment, and the appellate court heard oral arguments on February 12, 2008. The parties are awaiting the appellate court’s ruling.
From time to time, we and our subsidiaries are subject to random compliance audits from federal and state authorities regarding various operations within our business that involve collecting and remitting taxes in one form or another. In 2006, two of our owned underwriting agencies were subject to a sales and use tax audit conducted by the State of Texas. The examiner for the State of Texas completed his audit report and delivered an audit assessment asserting that, for the period from January 2002 to December 2005, we should have collected and remitted approximately $2.9 million in sales tax derived from claims services performed by our underwriting agencies for policies sold by these underwriting agencies and issued by an affiliated county mutual insurance company through a fronting arrangement. Our insurance companies reinsured 100% of these policies. The assessment included an additional $412,000 for accrued interest and penalty for a total assessment of $3.3 million. We believe that these services are not subject to sales tax and are vigorously contesting the assertions made by the state, and are exercising all available rights and remedies available to us. In October 2006, we responded to the assessment by filing petitions with the Comptroller of Public Accounts for the State of Texas requesting a re-determination of the tax due and a hearing to present written and oral evidence and legal arguments to contest the imposition of the asserted taxes. As a result of the timely filing of these petitions, an administrative appeal process has commenced and the date for payment is delayed until the completion of the appeal process. Such appeals routinely take up to three years and much longer for complex cases. As such, the outcome of this tax assessment will not be known for a commensurate amount of time. At this time, we are uncertain of the probability of the outcome of our appeal and therefore cannot reasonably estimate the ultimate liability. We have not made an accrual for this potential liability as of December 31, 2007.
The stock options outstanding and exercisable at December 31, 2007 had aggregate intrinsic values of zero as the aggregate exercise price was greater than the aggregate market value. Stock options exercised during 2007 and 2006 had an aggregate intrinsic value of $110,000 and $456,000, respectively.
As part of the terms of the acquisition of AIC and Insura, VIG has indemnified us for any losses due to uncollectible reinsurance related to reinsurance agreements entered into with unaffiliated reinsurers prior to December 31, 2003. As of December 31, 2007, all such unaffiliated reinsurers had A.M. Best ratings of “A-” or better.