(4) The sum of net losses, loss adjustment expenses and policy acquisition and other underwriting expenses divided by net premiums earned. A combined ratio of less than 100% means a company is making an underwriting profit.
(7) In 2005, the Company recorded a federal income tax benefit of $1,152,000 despite having pre-tax income of $7,930,000. The federal income tax benefit was due to the Company recognizing a $3,855,000 reduction in its deferred tax valuation allowance in 2005. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes.
We maintain incurred but not reported (“IBNR”) reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and payments made to date for reported claims.
For the property lines of business including special property and personal and commercial auto physical damage as well as the personal and commercial auto liability lines of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2005 to 2007 while the incurred loss development method was used for accident years prior to 2005.
In 2007, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $4,132,000 which represents 31.4% of the net loss and LAE reserves as of the beginning of the
year. The redundant development included $1,334,000 related to homeowners, $939,000 related to personal auto, $873,000 related to commercial multi-peril, $280,000 related to workers compensation, $281,000 related to farm while the remaining lines of business had redundant development of $425,000. The favorable development was concentrated in accident years 2004 through 2006 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2007.
In 2006, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $5,224,000 which represents 40.4% of the net loss and LAE reserves as of the beginning of the year. During 2006, all product lines experienced favorable development as follows: homeowners-$1,340,000, personal auto-$1,329,000, commercial multi-peril-$1,247,000, workers compensation-$715,000, farm-$379,000 while the remaining product lines had redundant development of $214,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2006. The favorable development was concentrated in accident years 2003 through 2005 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves.
In 2005, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,355,000 which represents 24.1% of the loss and LAE reserves as of the beginning of the year. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2005. As a result of the adverse development experienced during 2003 the Company has placed an emphasis on the claim reserving process to ensure that we are establishing adequate reserves reflecting our best estimate of the ultimate loss. The favorable development in 2005 was primarily in the homeowner and personal auto product lines. The homeowner’s line, which is the Company’s largest product line, experienced redundant development of approximately $1,904,000 primarily in the accident years of 2004, 2003 and 2002 as a result of lower than expected losses on both incurred but not reported and existing case reserves as of December 31, 2004. The personal auto line experienced redundant development of approximately $426,000 primarily in the 2004 accident year. The Company began writing personal auto policies in 1999. Given that this is a newer product line for the Company our initial ultimate loss estimates on undeveloped years are based more on estimated industry loss ratios as opposed to our actual historical loss ratios. As the 2004 accident year continues to develop, the Company has experienced redundant development on settled claims. This has resulted in a decrease in the ultimate loss ratio as compared to the ultimate ratio used at December 31, 2004.
not present accident year loss development. The portion of the table titled “Gross liability end of year” shows the impact of reinsurance for the years shown, reconciling the net reserves in the upper portion of the table to gross reserves. In evaluating the re-estimated liability and cumulative redundancy (deficiency), it should be noted that each data point includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Reinsurance. The Company accounts for reinsurance contracts under the provisions of Statement of Financial Accounting Standards (“SFAS”), No. 113, “Accounting and Reporting for Reinsurance on Short-Duration and Long-Duration Contracts.” Net premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets. Reinsurance assumed from other companies, including assumed premiums written and earned and losses and LAE, is accounted for in the same manner as direct insurance written.
Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31, 2007 and 2006.
Premiums. Direct premiums written by major business segment for the years ended December 31 was as follows:
While the market remained soft and very competitive in 2007, the relationships we have cultivated with our independent agents coupled with our ability to provide them a consistent, competitive and stable market for their preferred business led to the solid growth in direct premiums written during 2007. Direct premiums written grew 10.4%, with new business up 17.9% and renewal business up 8.5%. Personal auto continues to lead the growth in personal lines. Direct premiums written for personal auto increased 26.3% with new business up 15.2% and renewal business up 28.8%. Results were driven by the ease of placing personal auto business with Fremont through Fremont Complete-our web based rating system, several book of business transfers, a renewal retention ratio in the low nineties and an emphasis on agent cross-selling to current Fremont homeowner policyholders. Homeowners, which is the other major personal line of business, was up 5.0% with new business increasing 18.9% and renewal business increasing 2.9%. In 2007, the homeowner’s product line was added to Fremont Complete which made it easier to quote and issue new business for our agents. Overall, personal lines direct premium written was up 14.3%, with new business up 16.0% and renewals up 13.1%. In-force policy count increased 11.4% for the personal lines segment.
Despite soft market conditions in the industry, Fremont was able to generate growth of 1.9% in its commercial segment. The commercial growth was driven by commercial auto and workers compensation. New business grew 26.5%, with renewals down 4.3%, which is consistent with soft market conditions as companies look to retain profitable renewal business which in many instances means lower premiums on renewals. Commercial auto was up 20.2% while workers compensation was up 8.4%. Growth in these two lines was mitigated by a reduction in businessowners of 2.0% and a decrease in commercial package of 2.7%. Commercial in-force policy count was up 6.8%. The growth in commercial auto and workers compensation was due to a concerted effort by the commercial department to encourage agents to round out commercial accounts by adding commercial auto and workers compensation coverages. Furthermore, the commercial department focused on expanding it writings of low hazard mono-line workers compensation policies.
The increase in net premiums written is due to the overall increase in direct premiums written of $5,087,000 offset by an increase of $1,347,000 in ceded premiums written under the Company’s reinsurance agreements.
The personal segment experienced an increase in incurred loss and loss adjusting expense as well as the loss and LAE ratio driven by increased severity in the homeowner product line coupled with increased claim frequency in the personal auto line. Incurred losses for homeowners and personal auto increased $3,169,000 and $2,017,000, respectively, during 2007 compared to 2006. The homeowner line experienced increased loss severity as a result of snow, ice and water damage losses caused by the colder winter weather experienced during the first quarter 2007 and wind, hail and lightening damages sustained during the second and third quarters. Weather related losses increased approximately $2,245,000 during 2007 as compared to 2006. During the first quarter of 2007 Michigan experienced a more normalized winter weather pattern evidenced by consistent below-freezing temperatures and significant snow accumulation. During the first quarter of 2006 Michigan did not experience the consistent below freezing temperatures as those experienced in 2007 which resulted in lower claim severity in 2006. Weather patterns experienced during 2007 reflected more traditional weather activity typically experienced in Michigan. Although the Company did experience summer storm activity in 2006 it was not near the extent of storm activity experienced in 2007. Loss and LAE from personal auto increased due to increased claim frequency driven by volume growth in this line. The personal auto line’s direct premiums written increased 26.3% in 2007 compared to 2006. Furthermore, the majority of the increase in the incurred claim count for the personal segment was from increased personal auto claims particularly auto physical damage.
The increase in the commercial segment incurred loss and LAE and the related ratio was focused in the following product lines: businessowners ($647,000), workers compensation ($329,000) and commercial auto ($82,000). The increase in losses for the businessowners line was driven by weather related losses sustained during the first three quarters of 2007, several larger fire losses in 2007 as well as favorable development recorded in 2006. The increase in incurred losses and LAE in the workers compensation line was driven by favorable reserve development recorded in 2006.
Gross investment income from fixed maturities increased 9.0% over 2006, while income from cash and cash equivalents increased 80.4%. The increase in income from cash and cash equivalents was due to the fact that the Company had a larger portion of its invested assets placed in short-term securities over this time period compared to 2006 in contemplation of the surplus note repayment which occurred in September 2007. When income from cash and cash equivalents are combined with fixed maturities, gross investment income was 15.0%
Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our consolidated statements of income for the years ended December 31, 2006 and 2005. The Company’s underwriting gain or loss consists of net premiums earned less
Overall, direct premiums written were up 7.4% with new business premiums increasing 14.0% and renewal premiums up 6.7%. The total in-force policy count continues to grow and is up 7.4%. Direct premiums written for the personal segment increased 10.8% driven by growth in both new and renewal premium volume which increased 34.8% and 8.0%, respectively. Growth in the personal segment is driven by a combination of maintaining a high retention ratio, securing several agent books of business transfers and the roll-out of the Company’s web based rating platform-Fremont Complete for the personal auto line during the third quarter of 2006. The two largest product lines within the personal segment are personal auto and homeowners. Direct premiums written for the personal auto and homeowners product lines increased 24.0% and 4.2%, respectively, during 2006 compared to 2005. The total in-force policy count for the personal segment increased 9.0% driven by personal auto which was up 33.0%.
Farm direct premiums written increased 4.2% with both new and renewal premiums up 1.1% and 5.0%, respectively. The premium growth was driven by rate increases of approximately 3.7% in 2005 and 4.9% in 2006. Direct premiums written for the marine segment increased 7.5% driven by renewal premiums which were up 14.3%. New business premium volume was down 14.5% as a result of increased competition for Michigan boat business as well as the stagnant Michigan economy.
Net premiums written increased $751,000 due to a combination of normal volume growth, offset by an increase in current year ceded premiums written coupled with the impact from the quota share agreement in 2005. Net premiums written in 2005 included $1,400,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During 2005 the Company recognized $1,400,000 of profit commission under the quota share reinsurance agreement which reduced both ceded premiums written as well as ceded premiums earned and conversely increased both net premiums written and earned. Net premiums written for 2005 excluding the quota share impact would have been approximately $38,112,000 resulting in an increase of approximately $2,151,000 as compared to 2006. The change in net premiums written was affected by an increase of $3,353,000 due to the overall increase in direct premiums written offset by growth in ceded premiums written under the Company’s ongoing reinsurance agreements of approximately $1,202,000.
Loss and LAE decreased approximately $3,139,000 or 15.2% in 2006 as compared to 2005. The decrease is attributed to favorable development of $5,224,000 experienced during 2006 on prior years’ reserves compared to favorable development of $2,355,000 experienced during 2005. The increase in favorable development during 2006 is a result of downward development of individual case reserves and loss adjustment expense reserves. The loss and LAE ratio declined to 44.8% in 2006 compared to 53.4% in 2005.
The personal segment’s loss and LAE increased $332,000 or 2.7% which included an increase of $1,486,000 in personal auto offset by a $1,082,000 decrease in homeowners while other personal product lines experienced a decrease of $72,000. The increase in loss and LAE for personal auto is driven by continued growth in this product line. During 2006, direct premiums written for personal auto increased 24% while the claim count for personal auto claims increased 20%. The increased claim activity in personal auto was primarily from auto physical damage claims and is consistent with management’s expectations. Offsetting the increased loss and LAE from personal auto volume growth was favorable development of $1,071,000 experienced during 2006 primarily on accident years 2005, 2003 and 2001. The decrease in loss and LAE for homeowners is caused primarily by favorable loss development of $1,340,000 from accident years 2003 through 2005. The increase in the personal segment’s incurred claim count is driven primarily by personal auto which experienced a claim count increase of 510 during 2006 while the remaining claim count increase of 188 is from the homeowner product line. The loss and LAE ratio remained fairly consistent in 2006 at 49.3% compared to 50% in 2005 as a result of higher loss and LAE in personal auto offset by favorable loss development in both personal auto and homeowners.
The farm segment experienced a decline in incurred loss and LAE of $668,000 as well as a drop in its loss and LAE ratio from 56.1% in 2005 to 41.4% in 2006. The decrease in incurred loss and LAE was attributed to fewer fire related losses experienced in 2006 compared to 2005 as well as favorable reserve development. The marine segment, the Company’s smallest segment, experienced a decline in incurred loss and LAE of $418,000 and a decrease in its loss and LAE ratio from 77.3% in 2005 to 47.6% in 2006. The decreases are driven by a drop in claim severity.
Amortization of deferred policy acquisition costs increased $460,000 during 2006 due to the increase in premium volume as compared to the prior year. Items affecting the increase in other underwriting expenses include an increase of $144,000 in salaries and benefits, an increase of $179,000 in underwriting survey and inspection costs and an increase of $302,000 in depreciation driven primarily by capitalized costs associated with the Company’s web-based rating platform-Fremont Complete. The expense ratio, defined as the ratio of policy acquisition and other underwriting expenses to net premiums earned, increased to 34.6% from 32.3%. The increase in the ratio is driven by higher depreciation costs as well as higher underwriting survey and inspection costs. The increase in underwriting survey and inspection costs is due to the growth in the personal auto line. As part of the underwriting process the Company obtains motor vehicle records and prior loss history records in order to properly rate an auto policy. The Company utilizes several vendors to obtain this data and pays a transaction fee for obtaining the data. The increase is driven by the premium volume growth in personal auto of 24.0% in 2006.
Gross investment income from the equity portfolio decreased due to a decline in dividend income received on the portfolio. During 2005 and 2006 the Company liquidated its holdings in common and preferred stocks and shifted those investments into mutual funds. As a result of this shift the dividend income went down as the mutual funds held by the Company do not pay the regular dividends that had been traditionally paid by the common and preferred stocks historically held by the Company. The decline in investment income from the equity portfolio has been offset by an increase of $220,000 in net realized gains as a result of an increase in capital gains distribution paid by the mutual funds held by the Company. Gross investment income from cash and cash equivalents increased in 2006 due to a higher invested asset base coupled with increased yields during 2006. The increase in investment expenses is due to higher outside investment management fees as a result of the increase in invested assets coupled with increased internal costs allocated to managing the investment portfolio.
Federal Income Tax. During the year ended December 31, 2006 the Company recorded income tax expense of $3,466,000 resulting in an effective tax rate of 32.4%. Federal income taxes do not bear the usual relationship to pre-tax income primarily as a result of the effects of non-taxable investment income and other provision to return variances as well as the change to the deferred tax asset valuation allowance. During the year ended December 31, 2005 the Company recorded an income tax benefit of approximately $1,152,000 resulting in an effective tax rate of 14.5%. For 2005, federal income taxes did not bear the usual relationship to pre-tax income primarily as a result of the effects of the reduction of the deferred tax asset valuation allowance, non-taxable investment income and other provision to return variances. During the quarter ended September 30, 2005 the Company’s management reassessed the need for a full valuation allowance, and based on all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, concluded that a full valuation allowance was no longer necessary. As a result, the valuation allowance was reduced by approximately $3,855,000 which is reflected in
The principal sources of funds for the Insurance Company are insurance premiums, investment income and proceeds from the maturity and sale of invested assets. Funds are primarily used for the payment of claims, commissions, salaries and employee benefits, other operating expenses and surplus note service.
Cash flow provided by operations was $8,303,000 in 2006 compared to $6,745,000 in 2005, an increase of $1,558,000. During the year ended December 31, 2006 as compared to 2005 premiums collected increased $956,000 due to increased premium writings, net loss and LAE paid increased $503,000 while policy acquisition and other underwriting expenses paid decreased $179,000. During the year ended December 31, 2006, net cash used under the quota share funds withheld account was $39,000 while during the same period in 2005 net cash used was $1,827,000, a change of $1,787,000. Cash paid for income taxes increased $975,000 due to an increase in taxable income during 2006 compared to 2005. Other cash provided by operational activities increased $114,000 during the year ended December 31, 2006 compared to 2005.
Cash flow used in investing activities was $5,258,000 and $8,875,000 during the years ended December 31, 2006 and 2005, respectively, a decrease of $3,617,000. During 2006, net cash invested into the Company’s investment portfolio was $3,972,000 compared to $8,372,000 which was placed into the portfolio during 2005. At December 31, 2006, the Company was maintaining a higher cash and cash equivalent balance due to anticipated cash flow requirements during 2007, specifically the maturity of our surplus notes in September 2007 which amount to $2,890,000. As a result, the Company did not place as much cash into the investment portfolio during 2006 as compared to 2005. Despite the decrease in cash placed into the investment portfolio during 2006,
the Company invested approximately $1,302,000 in capital expenditures, the majority of which related to Fremont Complete, the Company’s web based rating platform. As of December 31, 2006, product lines that are available through Fremont Complete include personal auto and businessowners.
The Holding Company has no plans to pay dividends in the foreseeable future and cannot assure our stockholders that dividends will be paid in the future. The Holding Company’s principal source of cash available for payment of dividends is dividends from the Insurance Company. The annual future cash requirements of the Holding Company are not foreseen to be significant. They include director fees and other administrative expenses related to annual filings such as income tax returns and other compliance type filings. In October 2007, the Board of Directors of the Insurance Company declared an ordinary dividend of $150,000 payable to the Holding Company, its sole shareholder, on November 6, 2007. As of December 31, 2007 the Holding Company had a cash balance of approximately $175,000.
In accordance with FASB Statement No. 109, Accounting for Income Taxes, we may recognize certain tax assets whose realization depends upon generating future taxable income. These tax assets can only be realized through the generation of future taxable income and thereby utilizing the net operating loss (NOL) and Alternative Minimum Tax (AMT) credit carry-forwards we have available. At December 31, 2007, the Company has NOL carryforwards of approximately $7,348,000 and an AMT credit carryforward of approximately $358,000. The AMT credit carryforward can be carried forward indefinitely. The NOL carryforward expires as follows:
We have audited the accompanying consolidated balance sheets of Fremont Michigan InsuraCorp, Inc. and subsidiary (the Company) as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Discount or premium on loan-backed investments is amortized using anticipated prepayments with significant changes in anticipated prepayments accounted for retrospectively. Prepayment assumptions for loan-backed investments were obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate environment.
The Company presents other comprehensive income or loss as a component of stockholders’ equity on the consolidated statements of stockholders’ equity and comprehensive income. For the years ended December 31, 2007, 2006, and 2005 the components of other comprehensive income consisted of the following:
The Company files income tax returns in the U.S. federal jurisdiction. The Company is subject to U.S federal income tax examinations for all tax years from 1994 to the current year (with the exception of the 2002 tax year) due to the utilization of its net operating losses in current open tax years. The Company has not recently been examined by the Internal Revenue Service for any open tax year. It is the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company does not expect the implementation of SFAS 157 to have a material impact on its consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (SAB 110). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not expect the implementation of SAB 110 to have a material impact on its consolidated financial statements.
The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at December 31, 2007 and 2006 are as follows:
Sales of available-for-sale fixed maturities resulted in the following during the years ended December 31, 2007, 2006 and 2005:
As of December 31, 2006, the portfolio included 14 fixed maturity securities and 1 equity investment in an unrealized loss position for less than 12 months and 68 fixed maturity securities in an unrealized loss position for more than 12 months, none of which were trading below 90% of cost or amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by commercial credit rating companies are rated investment grade securities. While all of these securities are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These securities have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these securities support the view that these securities were not other-than-temporarily impaired.
The casualty and workers compensation excess of loss coverage provided up to $4,850,000 over the $150,000 retention.
An additional workers compensation catastrophe excess of loss program provided an additional $5,000,000 of coverage to cover a catastrophic event.
The Company had 3 layers of catastrophic excess of loss reinsurance providing coverage for up to $21,750,000 above a $1,250,000 retention in 2007 and $22,000,000 above a $1,000,000 retention in 2006 and 2005. The Company had an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would have lapsed after the second event, in which case the Company would have evaluated the need for a new contract for the remainder of a particular year. During 2007, 2006 and 2005 the coverage could be reinstated for a fee of 100% of the original premium.
On December 31, 2003, the Company placed the agreement into runoff. Reinsurance coverage continued on those covered policies in force as of December 31, 2003, until the underlying policies expired during 2004. As a result, the underlying reinsurance assets and liabilities will runoff, and any net funds under the agreement, less a 3.5% risk charge to the reinsurers, would be retained by the Company.
The Company receives a ceding commission in conjunction with certain reinsurance activities. These ceding commissions are offset against direct commission expense and were $180,158, $181,749, and $124,274 in 2007, 2006 and 2005, respectively.
The effect of reinsurance on premiums written and earned for the years ended December 31, 2007, 2006 and 2005, are as follows:
The following table shows the allocation of the change in the deferred tax valuation allowance for the years ended December 31, 2007, 2006 and 2005.
The Company assesses the recoverability of deferred policy acquisition costs against future expected underwriting income and reduces deferred policy acquisition costs if it appears that a premium deficiency may exist. There were no premium deficiencies at December 31, 2007, 2006 and 2005.
In 2005, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,355,000 which represents 24.1% of the net loss and LAE reserves as of the beginning of the
At December 31, 2006 the Company had surplus notes outstanding of approximately $2,890,000 which included approximately $1,955,000 of surplus notes held by related parties consisting of a non-employee director, agents of the Company and an investment broker who provided services to the Company. The notes, which matured and were repaid in September 2007, carried an annual interest rate of 7 percent. Interest expense on the surplus notes for 2007, 2006 and 2005 was approximately $146,000, $202,000 and $202,000, respectively. Interest expense on surplus notes held by related parties was approximately $97,000 in 2007, $137,000 in 2006, and $137,000 in 2005.
The Company has a defined contribution 401(k) plan covering substantially all employees meeting certain eligibility requirements. The 401(k) plan provides for matching contributions and /or profit sharing contributions as defined by the Board of Directors. Company contributions approximated $135,000 in 2007, $117,000 in 2006, and $103,000 in 2005.
As of December 31, 2007 and 2006, approximately $86,806,000 and $85,660,000, respectively, of consolidated assets represent assets of FIC that are subject to regulation and may not be transferred to FMIC in the form of dividends, loans or advances without the prior approval of the Michigan Office of Financial and Insurance Services (“OFIS”). Dividends paid by FIC are subject to limitations imposed by the Michigan Insurance Code (“Code”). Under the Code, FIC may pay dividends only from statutory earnings and capital and surplus. In addition, FIC may not declare an “extraordinary” dividend to its shareholders without the prior approval of OFIS. An extraordinary dividend or distribution is defined as a 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% of statutory capital and surplus as of December 31, of the preceding year or the statutory net income, excluding net realized investment gains, for the immediately preceding calendar year. Accordingly, FIC may pay dividends of approximately $3,371,000 in 2008 without prior approval. However, the OFIS has the authority to prohibit payment of any dividend.
During 2005, the Company issued a $130,000 mortgage receivable to an agent of the Company. The note requires a monthly payment, including interest at 8%, of $1,097, which is based on a 15 year amortization. The note includes a 5 year balloon payment, which becomes due June 2010. During 2007 and 2006 the agent earned $62,946 and $55,117, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.
During 2003, the Company issued a $140,000 mortgage receivable to an agent of the Company. The note requires a monthly payment, including interest at 6%, of $1,003, which is based on a 20 year amortization. The note includes a 5 year balloon payment, which becomes due January 2009. During 2007, 2006 and 2005, the agent earned $90,422, $73,292 and $72,800, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.
Three nonemployee directors of the Company are also owners of independent insurance agencies. These individuals are currently appointed as agents with and write insurance for the Company. The terms and conditions of the agency agreements between these agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays all agencies commissions on business produced. All agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by these agencies approximated $526,000, $484,000 and $487,000 in 2007, 2006 and 2005, respectively. The commission rates, including profit sharing commission opportunity, are the same as other agents of the Company. The agencies are independent agents and also write with regional and national insurers that may be competitors of the Company.
Various agents of the Company participated in the surplus note offerings and held surplus notes at December 31, 2006. The notes were paid in full in September 2007, as disclosed in Note 9-Surplus Notes. The terms and conditions of the agency agreements between the agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays the agencies commissions on business produced. The agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. For the years ending December 31, 2007, 2006 and 2005 agents holding surplus notes earned regular and profit sharing commissions of approximately $224,000, $223,000 and $236,000, respectively.
A non-employee director of the Company also participated in the surplus note offerings and held a surplus note at December 31, 2006. The note was paid in full in September 2007, as disclosed in Note 9-Surplus Notes. For the years ending December 31, 2007, 2006 and 2005, the non-employee director holding a surplus note received director fees of $11,350, $10,875 and $7,800, respectively.
The Company also paid investment commissions to a firm controlled by an individual who held a surplus note at December 31, 2006. The note was paid in full in September 2007. Total investment commissions paid during the years ending December 31, 2007, 2006 and 2005 were approximately $40,000, $30,000 and $20,000, respectively.
Since the weighted average shares for the quarters are calculated independent of the weighted average shares for the year, quarterly net income per share may not total to annual net income per share.