The following table sets forth selected financial data for the Company. The financial data for 2000 through 2003 reflects the results of operations and financial position of the Insurance Company. The financial data for 2004 reflects the consolidated results of operations and financial position of the Holding Company and the Insurance Company including the effects of the Conversion which occurred on October 15, 2004. You should read this data in conjunction with the Company’s consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this report.
(2) Interest expense increased during 2003 as a result of a change in the Insurance Company’s 2003 quota share reinsurance contract. The 2003 contract was structured on a funds withheld basis and required the Insurance Company to accrue interest at an annual rate of 2.5%.
(4) Effective November 30, 2001, the Insurance Company terminated the sponsored defined benefit plan. As of January 1, 2001, the Insurance Company had estimated that plan assets would exceed the projected benefit obligation as of the date of termination and a prepaid benefit cost was recorded. As a result of the termination of the Plan, during 2001, the Insurance Company recognized a curtailment gain of approximately $1,109,000 resulting in a prepaid benefit cost of $1,454,694 as of December 31, 2001.
(6) In addition to the items discussed in the preceding footnote the increase in total assets from December 31, 2002 to December 31, 2003 was also affected by an increase of approximately $4.0 million in amounts due from reinsurers. The increase in amounts due from reinsurers is a result of the effect of ceded amounts related to increases in loss and loss adjustment reserves as well as unearned premiums at December 31, 2003. Under the Insurance Company’s quota share reinsurance contract a percentage of its loss and loss adjustment reserves and unearned premiums are ceded to reinsurers.
(7) The increase in total liabilities from December 31, 2002 to December 31, 2003 is due to an increase in loss and loss adjustment reserves of $5.2 million as a result of the Insurance Company strengthening reserves primarily in the commercial segment, an increase in unearned premiums of $1.5 million which was driven by the growth in direct written premiums for the year ended December 31, 2003, a change in the payment terms under our 2003 quota share reinsurance contract which resulted in an increase in ceded premiums payable of $7.1 million as of December 31, 2003 and an increase in accrued expenses of $1.1 million which was a result of increased contingent commissions, an increase in the accrued benefit cost related to the postretirement health care benefit plan and increased accrued salaries and wages relating to the Insurance Company’s employee profit sharing plan.
(9) The expense ratio is the policy acquisition and other underwriting expenses in relation to net premium earned.
(10) 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.
(12) The ratio of net premiums written divided by ending statutory surplus.
The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included in this report, and the narrative under the “Business” heading contained in Item 1 of this report. The following discussion contains forward-looking information that involves risks and uncertainties. Actual results could differ significantly from these forward-looking statements. See “Forward-Looking Statements”.
Net written premium by major business segment for the years ended December 31 was as follows:
Investment Income. Net investment income, excluding net realized gains and losses, increased $144,000, or 17.6%, in 2004 to $959,000 from $815,000 in 2003. The rate of return on invested assets, including cash and cash equivalents, decreased to 2.4% in 2004 from 2.8% in 2003. The decline is attributable to a slight decrease in the yields earned on the portfolio coupled with the fact that the average invested asset balance was driven higher due to the purchase of additional securities in late October 2004 as a result of the stock proceeds of approximately $5,007,000. Gross investment income before investment expenses increased approximately $205,000 or 14.9% which is due to an increase in invested assets during 2004. Cash and invested assets grew to $45,950,000 as of December 31, 2004, from $34,782,000 as of December 31, 2003, an increase of $11,168,000 or 32.1%. The growth in invested assets was primarily due to net cash flow provided from operating activities of $6,779,000 coupled with the net cash proceeds of $5,181,000 from the stock offering which was completed on October 15, 2004. Gross investment expense increased $61,000 or 10.9% in 2004 compared to 2003.
Other Income, Net. Other income, net primarily includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items. Other income, net was approximately $232,000 in 2004 compared to $208,000 in 2003. The increase is primarily driven by increased direct written premiums during 2004.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses were approximately $9,309,000 for the year ended December 31, 2004 compared to $6,706,000 for the same period in 2003, an increase of $2,603,000 or 38.8%. The increase is driven primarily by a reduction in the ceding commission income component of deferred policy acquisition costs. Amortization of policy acquisition costs during the year ended December 31, 2004 and 2003 was $3,286,000 and $523,000, respectively, an increase of $2,763,000. The Insurance Company’s expense ratio, defined as policy acquisition and other underwriting expense as a percentage of net earned premiums, was 34.2% for the year ended December 31, 2004 compared to 37.1% for the same period in 2003. The decline in the expense ratio is due primarily to the increased net earned premiums as a result of the quota share contract runoff as well as continued efforts to limit the growth in other underwriting expenses.
Demutualization Expense. Demutualization expenses related to the Conversion amounted to $302,000 and $175,000 for the years ended December 31, 2004 and 2003, respectively, and include the cost of engaging external accounting, actuarial, legal and other consultants to advise the Company in the demutualization process as well as the cost of printing and postage for communications with policyholders.
Federal Income Tax. Federal income tax expense was $78,000 and $35,000 for the years ended December 31 2004 and 2003, respectively. The Company’s effective tax rate was 4.9% and 13.4% in 2004 and 2003, respectively. The primary factors which cause the difference between the expected tax rate of 34% and the effective tax rate in both years include the change in the Company’s deferred tax asset valuation allowance, the dividends received deduction, nondeductible expenses and provision to return variances. The Company has recorded a deferred tax asset valuation allowance equal to 100% of the net deferred tax asset as of December 31, 2004 and 2003. Therefore, the net deferred income tax expense as a result of the net decrease in the Company’s net deferred tax asset is entirely offset by a corresponding decrease in the valuation allowance.
Net written premiums increased during 2003 as a result of growth in direct written premium offset by increases in ceded written premium. The Insurance Company ceded $18,755,000 in written premium during 2003 compared to $17,843,000 in 2002, an increase of $912,000, or 5.1%. As a percentage of direct written premium, ceded written premium decreased to 50.0% in 2003 from 52.3% in 2002. The decline was due primarily to better terms negotiated in the 2003 quota share contract which decreased the cost to the Insurance Company.
Net earned premium in 2003 was approximately $18,099,000, an increase of $1,673,000, or 10.2%, compared to $16,426,000 in 2002. Net earned premium by major business segment for the years ended December 31 was as follows:
The Insurance Company recorded a net realized investment loss of $32,000 for the year ended December 31, 2003, compared with a net realized investment loss of $196,000 for the year ended December 31, 2002. Included in the net realized loss for the year ended December 31, 2003 is an other than temporary impairment write-down on equity securities, which amounted to $182,000. The Insurance Company recorded net realized gains on sales of fixed maturity securities of $84,000 in 2003 compared to $83,000 in 2002. During 2003 the Company engaged an investment management consultant for the fixed maturity portfolio. Under the guidelines provided to the investment management consultant the fixed maturity portfolio experienced a rebalancing during 2003. The focus of the Company’s rebalancing was to improve credit quality, liquidity and diversification within the portfolio, to create a more stable income stream and to enhance long-term total return. Despite the Company’s intent and ability to hold fixed maturity securities until maturity, proceeds from the sale of fixed maturity securities increased during 2003 as a result of rebalancing the portfolio. Excluding the effect of the other than temporary impairment write-downs the Insurance Company recorded net realized gains on the sale of equity securities of $66,000 in 2003 compared to a net realized loss of $2,000 on the sale of equity securities in 2002 which is consistent with the improvement in the equity markets during 2003.
Total loss and LAE increased $734,000 or 6.9% during 2003. Despite the positive results achieved in the personal, farm and marine segments which collectively experienced a decrease of $2,813,000 or 30.2% in loss and LAE compared to 2002, the Insurance Company experienced a significant increase of $3,548,000 or 268.1% in loss and LAE in the commercial segment. As discussed above under Critical Accounting Policies-Liabilities for Loss and Loss Adjustment Expenses (LAE) the Insurance Company strengthened its reserves primarily in the commercial segment as a result of increased claim severity.
Loss and LAE for the personal and farm segments continued to improve from the Insurance Company’s agency reorganization plan and its continued focus on its target market. During 2001 the Insurance Company began the reorganization of its agency force by terminating agency relationships with agencies that did not have a
The Insurance Company’s loss adjustment expense ratio declined to 11.6% in 2003 compared to 12.0% in 2002. The decreased percentage is due primarily to limiting the growth in net loss adjustment expense to 6.8% while net premiums earned grew 10.2% during 2003. During 2003 the Insurance Company was able to reduce its net legal and independent adjusting expense by 3.1% compared to 2002 by continuing to use internal adjusters for handling most claims as well as being proactive in our approach to liability cost management. During 2003 the Insurance Company added in-house legal counsel to our claims resources. Use of in-house counsel has reduced the Insurance Company’s reliance on outside counsel resulting in an associated savings in legal expenses.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses were approximately $6,706,000 in 2003 compared to $6,226,000 in 2002, an increase of $480,000 or 7.7%. The
Federal Income Tax. In 2003 the Company recognized federal income tax expense of approximately $35,000 compared to a federal income tax benefit of approximately $45,000 in 2002. Federal income tax expense increased in 2003 compared to 2002 primarily as a result of the Company generating pre-tax income in 2003 versus a pre-tax loss in 2002. Despite the fact that the Insurance Company has significant net operating loss
carryforwards the use of the loss carryforwards is limited when the Insurance Company is subject to Alternative Minimum Tax (AMT). As a result of these limitations, the Insurance Company incurred $35,000 of AMT in 2003 which represents the federal income tax expense for the year. In 2002, we filed a request for refund of 1998 and 2000 federal income taxes paid due to the suspension of the limitation on the use of AMT net operating losses for those years. The requested amount was $45,000. The IRS approved the request in 2003 and refunded the overpayment.
Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate primarily to the payment of losses and loss adjustment expenses. Our short and long term liquidity requirements vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate.
earnings coupled with non-cash charges to earnings including depreciation of $131,000, $182,000 with respect to other than temporary impairment of available for sale equity securities and $148,000 of net amortization of premiums on investments. The most significant item on the statement of cash flows which impacted cash flow from operations relates to premiums ceded payable. The increase in premiums ceded payable from December 31, 2002 to December 31, 2003 was approximately $7.1 million. The primary reason for the increase was a change in the multi line quota share agreement in 2003 as compared to the 2002 quota share agreement. The 2003 multi line quota share agreement was structured on a funds withheld basis whereby the Insurance Company retained the net cash balance consisting of ceded written premiums plus the ceding commission income less ceded losses and LAE. The 2002 quota share agreement was not structured on a funds withheld basis. On December 30, 2002 the existing quota share agreement was terminated on a cut-off basis and a new quota share agreement was put into place. As a result of the termination, the 2002 quota share reinsurers retained the earned premium and the associated liability relating to the ultimate losses incurred up through December 31, 2002. Upon termination of the 2002 agreement, the ceded unearned premium that had been paid to the reinsurers was returned to the Insurance Company and amounted to approximately $5.2 million. The cash received relating to ceded unearned premium resulted in no gain or loss to the Insurance Company. The unearned premium that was returned from the 2002 agreement was rolled forward to the 2003 agreement. Moreover, any losses incurred as of 12:01 a.m. December 31, 2002 were ceded to the new 2003 reinsurer. There were 4 reinsurers involved with the 2002 quota share reinsurance agreement. The 2003 quota share reinsurance agreement was with one reinsurer who was not a party to the 2002 agreement. The change from a non-funds withheld agreement in 2002 to a funds withheld agreement in 2003 is the main reason for the increase in the premiums ceded payable balance with the corresponding increase to cash and invested assets on the balance sheet as of December 31, 2003. Going forward from December 31, 2003 the ceded premium payable balance relating to the quota share agreement will be reduced as losses and LAE ceded to the quota share reinsurer are paid by the Insurance Company.
Cash flow provided by operations was $974,000 in 2002, compared to cash flow used in operations of $1,642,000 in 2001. The increase in cash flow from operations was impacted by an increase in earnings coupled with non-cash charges to earnings including depreciation of $141,000 and $277,000 with respect to other than temporary impairment of available for sale equity securities. Cash flow from operations was also positively affected by collections of amounts due from reinsurers that were outstanding at December 31, 2001. Net cash provided from investing activities during 2002 was $2,162,000 compared to $1,563,000 during 2001. The increase in cash from investing activities in 2002 is due primarily to fixed maturity securities which were sold at our discretion during December 2002 to take advantage of various realized gain positions or called by the issuer during December 2002. The proceeds from the sales and calls during December 2002 amounted to approximately $3.2 million which was not immediately reinvested as of December 31, 2002. Cash from financing activities provided $1,370,000 as a result of additional surplus notes issued during 2002.
dividend which, when taken together with other dividends paid within the preceding 12 months, exceeds the greater of 10% of the Insurance Company’s statutory policyholders’ surplus as of December 31 of the immediately preceding year or its statutory net income, excluding realized capital gains, for the 12-month period ending December 31 of the immediately preceding year. During the year ended December 31, 2005, the Insurance Company can pay a non-extraordinary dividend of up to $2,027,000 without prior approval from the Insurance Commissioner. In order to pay any dividends, the Insurance Company must be in a position to satisfy the requirement that the company continue to be safe, reliable and entitled to public confidence. Also, in the absence of approval of the Insurance Commissioner, dividends may only be paid from statutory earned surplus. Also, dividends may not exceed the amount of the Insurance Company’s statutory capital stock account in any one-year unless it meets certain other requirements.
The Company has a contractual obligation with respect to its outstanding surplus notes and loss and LAE reserves which are recorded as liabilities in our financial statements. In addition, the Company is contractually committed to make certain minimum lease payments for the use of equipment under operating lease agreements. The following table summarizes our significant contractual obligations and commitments as of December 31, 2004 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding surplus notes. Additional information regarding these obligations is provided in Note 9, Surplus Notes and Note 11, Lease Agreements to the financial statements of the Company. The table below does not include contractual obligations with respect to our employee benefit plans, which are described more fully in Note 10, Employee Retirement Plans to the Company’s financial statements.
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, 2004, the Insurance Company has a NOL carryforward of approximately $7,989,000 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 listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Fremont Michigan InsuraCorp, Inc. and its subsidiary (the “Company”) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
At December 31, 2004 and 2003, 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 and the corresponding deferred tax asset valuation allowance, reported as a component of accumulated other comprehensive income or loss until realized.
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 written, 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.
estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with respect to the individual reinsurer that participates in its ceded programs to minimize its exposure to significant losses from reinsurer insolvencies. The Company holds collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Services.
Policy acquisition costs, specifically commissions paid net of ceding commissions received, are deferred, subject to ultimate recoverability from future income, including investment income, and amortized to expense over the period in which the related premiums are earned.
Deferred equity offering costs at December 31, 2003 represent specific incremental costs, including external accounting, legal and underwriter’s fees, directly attributable to the stock offering which was completed on October 15, 2004.
Deferred federal income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123. This standard is effective for the Company as of July 1, 2005 and will apply to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. The Company will adopt the standard as of the effective date and believes it will not have a material effect on the consolidated financial statements as the Company already values stock options issued based upon an option-pricing model and recognizes the fair value as an expense over the period in which the options vest.
The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2004, 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.
Sales of available for sale fixed maturities resulted in the following during the years ended December 31, 2004, 2003 and 2002:
The fair values for available for sale fixed maturity and equity securities are based on quoted market prices, when available. If not available, fair values are based on values obtained from investment brokers.
The carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the note.
The excess of loss program is the Company’s primary reinsurance coverage. The Company’s retention on any one risk in 2004 and 2003 for all lines of business was $125,000. During 2002 the Company’s retention on any one risk for all lines of business, except for workers compensation, was $125,000. For workers compensation, the Company utilized a 70% quota share contract covering the first $1,000,000 during 2002. The excess of loss contract provided coverage above $1,000,000 for workers compensation during 2002.
There is an annual aggregate deductible feature in the amount of $400,000 that applies to the multi-line contract.
An additional workers compensation catastrophe excess of loss program provided an additional $5,000,000 in 2004, $3,000,000 in 2003 and $5,000,000 in 2002 of coverage to cover a catastrophic event.
The Company also utilized quota share reinsurance under agreements that provided coverage on all lines of business.
In 2002, the Company ceded 50% all premium and losses to reinsurers under the auto quota share agreement. The Company received a 30% commission on the premium ceded for this coverage in 2002.
In 2002, the Company utilized an umbrella quota share agreement that covered 95% of the first $2,000,000 of exposure with an individual special acceptance clause for risks over $2,000,000 up to $5,000,000. The Company received a 25% commission on the premium ceded.
During 2003, the Company’s multi line quota share agreement provided coverage for virtually all of the Company’s business. The Company ceded 45% of its premiums and losses on all business except boiler and machinery to the reinsurers. The agreement contained a “loss corridor” provision. Reimbursement stops on losses when the loss and LAE ratio on the premium ceded is between 60% and 74% and resumes when the ratio is between 74% and 82.5%. A loss and LAE ratio that exceeds 82.5% will trigger a “drop down coverage” feature that will reimburse the Company for 100% of the losses between the loss ratios of 60% to 65%. Reimbursement stops between the loss ratios of 65% to 74%. Payment resumes again when the loss ratios are 74% to 85%. Losses in excess of 85% are 100% retained by the Company. The Company received a 36% commission on the ceded premium. The agreement is structured on a funds withheld basis and requires the Company to accrue interest at an annual rate of approximately 2.5%. During 2004 and 2003, the Company recorded interest expense of approximately $150,000 and $181,000, respectively, on the funds withheld balance. The agreement provides that a profit commission will be retained by the Company upon commutation equal to the positive balance in the funds withheld account. During 2004 and 2003 the Company accrued profit commission based on the experience of the underlying business ceded under this agreement of $945,000 and $840,000, respectively. The profit commission reduces ceded written and earned premiums.
On December 31, 2003, the Company placed the agreement into runoff. Reinsurance coverage will continue on those covered policies in force as of December 31, 2003, until the underlying policies expire 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 its reinsurance activities. These ceding commissions are offset against direct commission expense and were $72,302, $5,340,326 and $4,239,768 in
The Company has net operating loss carryforwards of approximately $7,990,000, which begin to expire in 2009 and fully expire in 2021, and alternative minimum tax credits of approximately $358,000, which may be carried forward indefinitely.
In December of 2002, the Company began issuing Series B notes with an annual interest rate of 7.0 percent with principal due on September 30, 2007. Interest only shall be paid annually on March 15. Repayment of any principal or interest is subject to written authorization by the Commissioner of Insurance of the State of Michigan and approval by the Company’s board of directors.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to qualifying sponsors of retiree healthcare benefit plans. The Company has elected to defer accounting for the Act as it is currently evaluating the significance of the impact on the postretirement benefit obligation. Therefore, the valuation of the unfunded postretirement benefit obligation and the determination of the net postretirement benefit cost included in these financial statements do not reflect the effects of the Act on the plan.
Effective November 30, 2001, the Company terminated the sponsored defined benefit plan. As of January 1, 2001, the Company had estimated that plan assets would exceed the projected benefit obligation as of the date of termination and a prepaid pension asset was recorded.
As a result of the termination of the Plan, during 2001, the Company recognized a curtailment gain of approximately $1,109,000 resulting in a prepaid benefit cost of $1,454,694 as of December 31, 2001. During 2002, the Company recorded net periodic benefit income of approximately $138,000 and a $424,808 settlement loss. After giving effect to the 2002 net periodic benefit income and settlement loss, the remaining prepaid benefit cost was liquidated in August of 2002. In accordance with the terms of the liquidation, the Company received approximately $701,000 upon settlement. In addition to the net periodic income, the Company contributed approximately $293,000 to the Company’s 401(k) plan and approximately $175,000 was paid in excise taxes as a result of the settlement of the defined benefit plan. The impact of the net periodic benefit income, 401(k) contribution and excise taxes recorded during 2002, which approximated $330,000, is reflected within policy acquisition and other underwriting expenses in the 2002 statement of operations. The components of the net periodic benefit cost at December 31, 2002 are as follows:
support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has established risk-based capital (“RBC”) requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, each insurer must maintain its total capital and surplus above a calculated minimum threshold or take corrective measures to achieve that threshold. The Company has calculated its RBC level based on these requirements and has determined that it passed the RBC test and has capital and surplus in excess of the minimum threshold.
FIC’s statutory capital and surplus at December 31, 2004 and 2003 and statutory net income (loss) for the years ended December 31, 2004, 2003 and 2002 are as follows:
During 2003, the Company issued a $140,000 note 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 10 year amortization. The note includes a 5 year balloon payment, which becomes due January 2009. During 2004 and 2003, the agent earned $74,700 and $68,900, respectively, in regular and contingent 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.
Various agents of the Company participated in the surplus note offerings and held surplus notes during 2004 through the Conversion date and at December 31, 2003, 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, 2004, 2003 and 2002 agents holding surplus notes earned regular and profit sharing commissions of approximately $1,800,000, $1,830,000 and $1,482,000, respectively.
The Company has a stock-based compensation plan which is described below. The Company accounts for the fair value of its grants under the plan in accordance with FAS Statement No. 123. The Company adopted the Fremont Michigan InsuraCorp, Inc. Stock-based Compensation Plan (the “Plan”) in November of 2003. Awards may include, among others, nonqualified stock options (“NQSOs”), restricted stock and stock appreciation rights.
Earnings per share data reflects the net income for the period from October 16, 2004 through December 31, 2004, the period subsequent to the Conversion. Net income during this period was $902,711.