(1) 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.
Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on a quarterly basis, we review existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior accident years. We use historical paid and incurred losses and accident year data to derive expected ultimate loss and loss adjustment expense ratios by line of business. We then apply these expected loss and loss adjustment expense ratios to earned premium to derive a reserve level for each line of business. In connection with the determination of the reserves, we also consider other specific factors such as recent weather-related losses, trends in historical paid losses, and legal and judicial trends with respect to theories of liability. Some of our business relates to coverage for short-term risks, and for these risks loss development is comparatively rapid and historical paid losses, adjusted for known variables, have been a reliable predictive measure of future losses for purposes of our reserving. Some of our business relates to longer-term risks, where the claims are slower to emerge and the estimate of damage is more difficult to predict. For these lines of business, more sophisticated actuarial methods, such as the Bornhuetter-Ferguson loss development methods (see “Methods” below) must be employed to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses.
The paid loss development method is mechanically identical to the incurred loss development method described above. The paid method does not rely on case reserves or claim reporting patterns in making projections.
For the workers’ compensation line of business we relied on an average of the incurred and paid Bornhuetter-Ferguson methods for accident years 2005 to 2009 and the paid loss development method for all prior years. This is different than the approach we took as of December 31, 2008. At December 31, 2008, we relied on the incurred Bornhuetter-Ferguson method for the most recent 6 accident years (2003 - 2008) and the incurred loss development method for all prior years. In the workers’ compensation line there are a lot of smaller partial payments over the claim settlement period (which can span several years). While case reserves and incurred losses provide good information, the paid method has more importance particularly when comparing our results to industry trends. Given the continued growth in the workers’ compensation line, we plan to rely more on paid indicators for the older accident years moving forward. Typically, the paid method will also provide a more conservative estimate of the ultimate loss which we feel is an important consideration in establishing our loss reserves.
Reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded at December 31, 2009.
The following table shows the activity in the loss and LAE reserve balances of the Company for the years ended December 31, 2009, 2008 and 2007, prepared in accordance with accounting principles generally accepted in the United States of America.
In 2007, the Company experienced favorable development on losses and LAE reserves for prior accident years of $4,132,000. 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.
The following table shows the development of our reserves for unpaid losses and LAE on a GAAP basis for each of the years ended December 31, from 1999 to 2009. The line in the table titled “Net liability for loss and LAE,” shows the initial reserves at the balance sheet date, including losses and LAE incurred but not reported. The portion of the table titled “Cumulative net paid as of,” shows the cumulative amounts subsequently paid as of successive years with respect to the reserve shown at the top of the table. The portion of the table titled “Re-estimated net liability as of:” shows the re-estimated amount of the previously reported liability for loss and LAE based on experience as of the end of each succeeding year. The estimates of liability for loss and LAE change as more information becomes available about the frequency and severity of claims for individual years. A redundancy (or deficiency) exists when the re-estimated amount of liability at each December 31 is less (or greater) than the prior liability estimate. The “Net cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years and does 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.
While the commercial segment, especially property driven accounts, continues to be hit hardest by the soft market, we were able to grow 6.0%. Growth was driven by commercial auto, up 26.7%, and workers compensation, up 32.9%. Contributing to the growth in workers compensation was a large premium audit charge to our largest account which was recorded in the fourth quarter. Businessowners (BOP) was up 0.1% while commercial multi-peril (CPP) was down 0.8%. Commercial in-force policy count continues to increase and was up 4.0% in 2009. We continue to focus on expanding our commercial segment. The current market conditions make this a challenge however we continue to write business which we feel is appropriately priced for the risk assumed. In 2010, we plan to add the commercial multi-peril product to our web based application system, which will make it easier for agents to quote and bind target market business with Fremont. Our experience has been that once our agents have the ability to quote and bind policies through Fremont Complete it makes the process much more efficient for them which leads to premium growth for us. In January 2010, we also added a seasoned commercial underwriter with over 30 years of industry experienced. We believe that by expanding our commercial book of business we can better diversify our risk profile.
Farm direct premiums written were up 7.7% driven by new business which was up 43.1% and renewals which were up 2.5%. The new business increase was impacted by a larger farm written during the first quarter of 2009. Direct premium written for the marine segment was basically flat (up 0.2%). Renewal premiums were up 4.8%, with new business premium down 21.7%. The flat marine volume is due to a competitive market place coupled with the Michigan economy. The farm in-force count was up slightly, at 0.7% and marine was down 0.7%.
The increase in net premiums earned is due to the overall increase in direct premiums earned of $6,435,000 offset by an increase of $406,000 in ceded premiums earned under the Company’s reinsurance agreements. The commercial segment experienced a decline in net premiums earned due to increased premiums ceded under our treaty reinsurance programs as a result of increased reinsurance costs associated with commercial products.
Gross investment income from the fixed portfolio declined during 2009 compared to 2008. As interest rates remained at very low levels in 2009 compared to historic averages, the portfolio duration was decreased in order to lower market value volatility in the event of future rising interest rates. The average portfolio duration was 4.42 in 2009, compared to 5.10 in 2008. With a very steep yield curve exhibited in the market, this tended to reduce the portfolio’s income. Additionally, in 2009 the Company realized a large portion of the unrealized gains in the portfolio by selling securities with market values considerably greater than their book values. This was the primary catalyst for the reduction of the portfolio’s tax-equivalent book yield from 4.72% at December 31, 2008 to 4.24% at December 31, 2009.
In 2009, the Company sold approximately $22.5 million in fixed maturity securities which generated realized gains of $795,000. Sales within the equity portfolio generated realized gains of $11,000 on sales of $1,280,000 in 2009. In 2008, the Company generated net realized gains on the sale of fixed maturity securities of approximately $82,000 and a net realized loss of $362,000 as a result of a write-down of a fixed maturity security determined to be other than temporarily impaired.
Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income items increased 4.7% to $644,000 in 2009 compared to $615,000 in 2008. The increase was driven by premium volume growth in 2009.
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, 2008 and 2007. The Company’s underwriting gain or loss consists of net premiums earned less loss and LAE and policy acquisition and other underwriting expenses. The Company’s underwriting performance is the most important factor in evaluating the overall results of operations given the fluctuations which can occur in loss and LAE due to weather related events as well as the uncertainties involved in the process of estimating reserves for losses and LAE. The underwriting results and the fluctuations in other revenue and expense items are discussed in greater detail below.
The commercial segment experienced a decrease in incurred loss and LAE of $1,038,000 in 2008. The decreases came from the following product lines: BOP ($150,000), CPP ($756,000), workers compensation ($85,000) and all others ($47,000). BOP and CPP were positively impacted by fewer fire related losses in 2008 coupled with redundant loss development on prior year claims. Workers compensation was also positively impacted by redundant development on prior years claims.
The decrease in investment income from equity securities is due to a decrease in ordinary dividend distributions received from the mutual funds held by the Company as compared to the prior year period. Investment income from cash and cash equivalents was higher during 2007 due to the fact that the Company held a higher level of cash equivalents in contemplation of paying off its surplus notes which took place in September 2007. Investment expenses are up as a result of an increase in general expenses associated with investment activities.
In 2008, the Company generated net realized gains on the sale of fixed maturity securities of approximately $82,000 and a net realized loss of $362,000 as a result of a write-down of a fixed maturity security determined to be other than temporarily impaired. Selling activity and net realized gains in the equity portfolio declined in 2008 as a result of the depressed market valuations. During 2007, the Company generated approximately $2,211,000 in equity realized gains as a result of rebalancing the equity portfolio and taking advantage of the unrealized market value appreciation.
The principal sources of funds for the 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 dividends paid to stockholders.
During 2009, capital expenditures increased $114,000 to $1,263,000. The majority of the Company’s capital expenditures were related to Fremont Complete, the Company’s web based rating platform. The focus has been to add the commercial package product line to the platform. Cash used in financing activities during 2009 amounted to $157,000 and consisted of shares repurchases of $274,000 and dividends to stockholders of $228,000 offset by proceeds from the issuance of stock of $345,000.
Cash flow provided by operations was $9,452,000 in 2008 compared to $4,303,000 in 2007, an increase of $5,149,000. During the year ended December 31, 2008 as compared to 2007 premiums collected increased $4,878,000 as a result of increased premium writings, net loss and LAE paid increased $716,000 while policy acquisition and other underwriting expenses paid decreased $592,000. Cash paid for income taxes increased $215,000 during 2008 compared to 2007. Other cash provided by operational activities increased $610,000 during the year ended December 31, 2008 compared to 2007.
The payment of dividends by the Insurance Company is subject to limitations imposed by the Michigan Insurance Code. The Insurance Company may not pay an extraordinary dividend unless it notifies the Insurance
Under current accounting standards, 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, 2009, the Company has NOL carryforwards of approximately $6,548,000 and an AMT credit carryforward of approximately $358,000. The AMT credit carryforward can be carried forward indefinitely. The NOL carryforward expires as follows:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fremont Michigan InsuraCorp, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements which include the accounts of FMIC and its wholly-owned subsidiary, FIC, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which vary in certain respects from statutory accounting practices followed in reporting to insurance regulatory authorities. See Note 12-Statutory Insurance Accounting Practices for additional information regarding statutory accounting practices. All significant intercompany transactions have been eliminated.
At December 31, 2009 and 2008, all of the Company’s investments are classified as available-for-sale and are those investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported as a component of accumulated other comprehensive income or loss until realized.
decline as a realized loss in the statement of operations. Any future increases in the market value of investments written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within stockholders’ equity.
Insurance premium revenue is recognized on a pro rata basis over the respective terms of the policies in-force and unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of the policies in-force. Generally, premiums are collected in advance of providing risk coverage, minimizing the Company’s exposure to credit risk. Premiums due from policyholders are net of an allowance for doubtful accounts of $43,034 and $58,678 at December 31, 2009 and 2008, respectively.
The components of and changes to accumulated other comprehensive income (loss) as of and for the years ended December 31, 2009, 2008, and 2007 were as follows:
Certain 2008 and 2007 amounts have been reclassified from the prior year financial statements to confirm to the 2009 presentation.
In April 2009, a new accounting standard was issued which amends the recognition guidance for other-than-temporary impairments (OTTI) of debt securities and expands the financial statement disclosures for OTTI on debt and equity securities. We adopted this new accounting standard in the second quarter of 2009.
In April 2009, a new accounting standard was issued related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Our adoption of this new accounting standard was effective April 1, 2009. The new accounting standard
reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The new accounting standard also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. The adoption did not impact our financial position or results of operations.
In April 2009, a new accounting standard was issued related to interim disclosures about fair value of financial instruments. The new accounting standard requires disclosing qualitative and quantitative information about the fair value of all financial instruments on a quarterly basis, including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The disclosures required by the new accounting standard were effective for the quarter ending June 30, 2009 and are included in Note 4-Fair Value Measurements to the unaudited consolidated financial statements.
In June 2009, a new accounting standard was issued related to Accounting Standards Codification™ and the hierarchy of Generally Accepted Accounting Principles. The new accounting standard establishes the Financial Accounting Standard Board Accounting Standard Codification™ (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States (U.S. GAAP). All guidance contained in the Codification carries an equal level of authority. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. On the effective date of this new accounting standard, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. The new accounting standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this new accounting standard did not have an impact on the Company’s results of operations or financial position.
In June 2009, a new accounting standard was issued related to the accounting for transfers of financial assets, which updates accounting for securitizations and special-purpose entities. The new accounting standard is a revision of previously issued accounting standards related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require additional information regarding financial asset transfers, including securitization transactions, and the presence of continuing exposure around the risks related to transferred financial assets. In addition, the new accounting standard removes the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The new accounting standard was effective January 1, 2010. We do not expect the implementation this new accounting standard to have a significant impact on our financial statements.
The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at December 31, 2009 and 2008 are as follows:
The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2009, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed investments may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net realized gains (losses) on investments for the years ended December 31, 2009, 2008 and 2007 are summarized as follows:
During the year ended December 31, 2008, other-than-temporary impairment losses on available-for-sale fixed maturity investments amounted to $362,000 and are included in net realized investment gains (losses) on investments in the consolidated statement of operations. There were no other-than-temporary impairment losses in 2009 or 2007.
The following table shows the composition of the fixed maturity securities in unrealized loss positions at December 31, 2009 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.
Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date, and establishes a framework to make the measurement of fair value more consistent and comparable. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”).
The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, are as follows:
The excess of loss program is the Company’s primary reinsurance coverage. For all lines of business covered by this treaty, the Company’s retention on any one risk in 2009 was $175,000 and in 2008 and 2007 was $150,000.
The Company utilizes facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce the Company’s net liability on individual risks. Coverage is determined on each individual risk. In 2009, the Company obtained coverage ranging from $100,000 up to $59,000,000 for certain commercial and farm properties it insured. In 2008, the Company obtained coverage ranging from $100,000 up to $18,900,000 for certain commercial properties it insured. The Company also purchased facultative reinsurance on certain casualty risks ranging from $1,000,000 to $3,000,000 for certain commercial umbrella policies. In 2007, the Company obtained coverage ranging from $1,200,000 up to $5,600,000 for certain commercial properties it insured.
unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations. As a result, the Company is subject to credit risk with respect to the obligations of its reinsurers. In order to minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors the economic characteristics of the reinsurers on an ongoing basis. All reinsurers are rated A- or better by A. M. Best Company. The Company has not experienced a collectibility problem with any reinsurer.
Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34 percent to income before federal income taxes. For the years ended December 31, 2009, 2008 and 2007, the reasons for these differences and the tax effects thereof, are as follows:
Deferred federal income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company’s management reviews both positive and negative evidence, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code Section 382 (“Section 382”), future income projections and the overall prospects of our business. As of December 31, 2009, the Company has net operating loss carryforwards of approximately $6,548,000, which begin to expire in 2010 and fully expire in 2021, and alternative minimum tax credits of approximately $358,000, which may be carried forward indefinitely. As a result of the demutualization of FIC in 2004 the aforementioned net operating losses are subject to certain “change in control” limitations under Section 382. The annual limitation on the utilization of the net operating losses is approximately $400,000. In addition to the net operating loss carryforwards, the Company’s alternative minimum tax credit carryforwards are also subject to the Section 382 limitation however these credit carryforwards have no expiration and can be carried forward indefinitely. Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that approximately $2,971,000 of net operating loss carryforwards will not be realized and therefore a valuation allowance of approximately $1,010,000 will be maintained for the deferred tax asset associated with these amounts. During the years ended December 31, 2009, 2008 and 2007, there were no changes in the deferred tax valuation allowance.
At December 31, 2009, computer equipment, including software includes $1,212,386 of capitalized costs related to software that has not yet been placed in-service. The Company expects to begin using the software in 2010 at which time it will begin depreciating the asset.
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, 2009, 2008 and 2007.
Up until September 2007, 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 was approximately $146,000. Interest expense on surplus notes held by related parties was approximately $97,000 in 2007.
At December 31, 2009, 2008 and 2007 the funded status of $1,819,308, $1,738,697 and $1,895,238, respectively, is recognized in the accompanying balance sheet as accrued expenses and other liabilities.
The Company uses a December 31 measurement date for its other postretirement plan. As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. At December 31, 2009, the Company’s expected future benefit payments are as follows:
The Company leased various vehicles under non-cancelable operating lease agreements. The vehicle lease agreements expired in 2009. Rental expense was approximately $3,000, $9,000 and $22,000 in 2009, 2008 and 2007, respectively.
As of December 31, 2009 and 2008, approximately $104,875,000 and $93,771,000, 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 Regulation (“OFIR”). 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 OFIR. 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 $3,694,000 in 2010 without prior approval. However, the OFIR has the authority to prohibit payment of any dividend.
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 $548,000, $545,000 and $526,000 in 2009, 2008 and 2007, 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.
A nonemployee director of the Company is a partner in a law firm. The Company has retained this law firm for certain legal matters in the past and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $138,000 in 2009, $69,000 in 2008 and $74,000 in 2007.
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 year ending December 31, 2007, the non-employee director holding a surplus note received director fees of $11,350.
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 year ending December 31, 2007 were approximately $40,000.
As previously noted, effective April 1, 2009, the Company changed its method for determining how certain expenses are assigned to its four major insurance lines. The table below reflects the impact of these changes on each of the affected statement lines:
The Company adopted the Fremont Michigan InsuraCorp, Inc. Stock-based Compensation Plan (the “2003 Plan”) in November of 2003 and the plan was subsequently approved by shareholders in May 2005. In February 2006 the Company adopted the Fremont Michigan InsuraCorp, Inc. Stock Incentive Plan of 2006 (the “2006 Plan”) and the plan was subsequently approved by shareholders in May 2006. Under both plans awards may include, among others, nonqualified stock options (“NQSOs”), restricted stock and stock appreciation rights.
Pursuant to the 2003 Plan, the Company is authorized to grant up to 88,796 shares. Pursuant to the 2006 Plan, the Company is authorized to grant up to 154,500 shares. Upon exercise of an option the Company issues new shares. Option awards under both plans are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest 20% per year and have a 10 year contractual term. The options may fully vest upon the death or disability of the optionee or a change in control of the Company as defined in the plans. Under both plans if awards should expire, become unexercisable or be forfeited for any reason without having been exercised or without becoming vested in full, the shares of common stock subject to those awards would be available for the grant of additional awards.
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 2009, 2008 and 2007. The expected volatility is based on historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payout. The expected term is an estimate based on expected behavior of the group of optionees. The risk free rate for the periods within the contractual life of the option is based on U.S. Treasury Strips in effect at the time of grant.
The weighted-average grant-date fair value of options granted in 2009, 2008 and 2007 was $10.30, $5.20 and $8.30, respectively. The total intrinsic value of options exercised in 2009, 2008 and 2007 was $41,966, $24,177 and $38,800, respectively.
A summary of the status of the Company’s nonvested options as of December 31, 2009 and changes during the year ended December 31, 2009 is presented below: