(2) The expense ratio is the policy acquisition and other underwriting expenses in relation to net premium earned.
Liabilities for Loss and Loss Adjustment Expenses. The liability for losses and loss adjustment expenses represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported. The amount of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and loss adjustment expenses are determined using historical information by line of insurance as adjusted to current conditions. Inflation is ordinarily implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.
The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these immature years, the amounts reported or paid may be small and unstable and therefore not
In 2010, the Company experienced favorable development of $1,714,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $917,000 while personal auto experienced adverse development of $486,000 and other personal segment products had redundant development of $62,000. The adverse development in personal auto was concentrated in accident years 2007, 2008 and 2009. In the commercial segment, commercial multi-peril had redundant development of $830,000 while workers compensation had redundant development of $281,000. Commercial auto experienced adverse development of $173,000. The farm segment experienced redundant development of $156,000 while the marine segment had redundant development of $127,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2010.
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, 2010 and 2009. 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.
While property driven commercial accounts continue to be among the hardest hit by the soft market, the Company was able to grow our commercial segment’s direct premiums written by 12.8%. All four products within our commercial segment experienced growth in direct premiums written in 2010: commercial auto up 25.3%, commercial package (CPP) up 18.8%, businessowners (BOP) up 4.7% and workers compensation up 3.7%, even with the cancellation of a $300,000 account in the fourth quarter. In August of 2010, we added the CPP product to our web based rating application system, which made it easier for agents to quote and bind target market business with Fremont. The commercial segments policy count continues to increase and was up 10.7% in 2010.
In 2010, the personal segment’s loss and LAE ratio increased 10.8 percentage points to 77.0%. The increase in the loss ratio was primarily due to a higher loss ratio in our personal auto product line as well as an increase in weather related losses. In 2010, personal auto generated a loss and LAE ratio of 87.6% compared to 66.7% in 2009. The increase is due to a jump in loss severity in personal auto casualty related losses. Homeowners experienced a loss ratio of 69.7% in 2010 compared to 68.7% in 2009. The increase was a result of weather related losses arising from storms which occurred in April and October of 2010.
The commercial segment’s loss and LAE ratio remained static as compared to 2009. Within the commercial segment, our workers compensation and businessowners product lines saw an improvement in their loss ratio in 2010 while the commercial auto and commercial package product lines had higher loss ratios in 2010. Commercial package was negatively affected by an increase in fire losses during 2010 while commercial auto experienced an increase in loss severity in 2010.
Amortization of deferred policy acquisition costs (“DAC”) increased 10.7% in 2010 as compared to 2009. The increase is a result of growth in earned premium volume. As a percentage of net premiums earned, DAC amortization was 15.8% in 2010 compared to 15.7% in 2009. Other underwriting expenses increased 8.8% in 2010 compared to 2009. As a percentage of net premiums earned, other underwriting expenses decreased to 15.9% in 2010 from 16.1% in 2009. The decline is due to spreading our operating expenses over a larger base of net premiums earned.
Gross investment income from the fixed portfolio was lower in 2010 than in 2009 as a result of the realized gains from the sale of securities. The low interest rates which persisted throughout most of 2010 provided an opportunity to sell appreciated securities and realize over $2.3 million in immediate gains. The proceeds from sales were then reinvested into the lower interest rate environment, reducing the portfolio tax-equivalent book yield from 4.24% to 3.01% in 2010 and leading to the lower investment income.
Cash and cash equivalents also produced lower income in 2010, as the Federal Reserve kept short-term interest rates anchored near zero for all of 2010. In addition, interest income from cash and cash equivalents in 2009 was affected by approximately $73,000 in interest received as a result of a settlement of a claim. Investment expenses are up as a result of an increase in general expenses associated with investment activities including management fees based on invested assets.
In 2010, the Company took the opportunity to realize the appreciation that had occurred throughout the year in both its fixed and equity portfolio. During 2010, the Company sold approximately $60.4 million in fixed maturity securities and approximately $15.3 million in equity securities generating gains noted in the table above. 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.
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, 2009 and 2008. 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.
During 2009, we continued to expand our market share in Michigan evidenced by a 9.8% increase in direct premiums written. The growth that we experienced in 2009 as well as over the last several years is a direct result of our continued focus on developing mutually beneficial relationships with our independent agents. We believe that we have the best and most profitable agencies representing us in the State of Michigan. The independent agent is on the front line when it comes to sending a policy to the Company. We continue to be very clear with our agents on the type of business that we want to write and we can be very selective in the type of business that we will accept from them. A component of that relationship is our ability to provide the agents with a consistent, competitive and stable market for their preferred business. In addition to strong agency relationships, our growth has also been positively affected by our Fremont Insurance Pure Michigan campaign which began in early 2009. The Pure Michigan campaign included print, billboard and television advertising. The campaign has increased Fremont Insurance’s brand awareness with Michigan consumers. We have found that Michigan consumers are more apt to do business with and in our case buy insurance from a carrier that is headquartered and solely focused on the Michigan consumer. We will continue to promote the fact that Fremont Insurance is Pure Michigan as we move into 2010.
Direct written premium was up 9.8%, with new business up 5.5% and renewal business up 10.7%. Personal auto continues to contribute to these results as planned. Direct premiums written for personal auto increased 15.5% with new business up 18.2% and renewal business up 15.0%. Growth in personal auto is driven by the ease of placing business with Fremont through our award winning web-based rating platform, Fremont Complete, coupled with several book of business transfers, account rounding of current homeowner business and a strong renewal retention ratio which is in the low 90s. Direct premiums written for the homeowners product was up 6.6%. Homeowner’s growth was driven by renewals which were up 8.1% offset by a decline in new business which was down 2.0%. Overall, personal lines direct premiums written was up 11.4%, with new business up 8.7% and renewals up 11.9%. In-force policy count increased 7.3% for the personal lines segment.
In 2009, the personal segment’s loss ratio dropped 2.9 percentage points to 66.2% compared to 69.1% in 2008. Items affecting the lower loss ratio include continued growth in net premiums earned, a decrease in loss severity in the personal auto line, redundant development on prior accident year losses in both the personal auto and homeowners lines offset by an increase in fire related losses experienced in 2009. During 2009, the personal segment’s net premium earned grew by 17.7% while incurred losses and LAE increased only 12.9%. The homeowners line contributed $1,753,000 to the increase in incurred losses and LAE for 2009 and was caused by increased fire related losses and to a lesser extent an increase in losses related to winter weather experienced during the first quarter of 2009.
The increase in income from the equity portfolio is due to higher dividend income as a result of the Company increasing its holdings of dividend paying common stocks. During the second quarter 2009, the Company began adding to its equity portfolio via purchases of common stocks and mutual funds. The increase in interest income from cash and cash equivalents was affected by approximately $73,000 in interest received in 2009 as a result of a settlement of a claim. Excluding this item, interest from cash and cash equivalents decreased
approximately $62,000 due to the lower yield environment in 2009. Investment expenses are up as a result of an increase in general expenses associated with investment activities including management fees based on invested assets.
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
Cash flow provided by operations was $5,245,000 in 2010 compared to $6,646,000 in 2009, a decrease of $1,401,000. During the year ended December 31, 2010 as compared to 2009 premiums collected increased $6,231,000 as a result of increased premium writings, net loss and LAE paid increased 3,362,000 while policy acquisition and other underwriting expenses paid increased $2,771,000. Cash paid for income taxes increased $1,549,000 during 2010 compared to 2009. Other cash used in operational activities decreased $50,000 during the year ended December 31, 2010 compared to 2009.
Cash flow provided by operations was $6,646,000 in 2009 compared to $9,452,000 in 2008, a decrease of $2,806,000. During the year ended December 31, 2009 as compared to 2008 premiums collected increased $5,391,000 as a result of increased premium writings, net loss and LAE paid increased $8,932,000 while policy acquisition and other underwriting expenses paid increased $1,440,000. Cash paid for income taxes decreased $2,239,000 during 2009 compared to 2008. Other cash used in operational activities increased $64,000 during the year ended December 31, 2009 compared to 2008.
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 Commissioner and he does not disapprove the payment. An extraordinary dividend includes any 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 ending December 31, 2011, the Insurance Company can pay a non-extraordinary dividend of up to $3,219,000 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
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, 2010, the Company has NOL carryforwards of approximately $5,782,000 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. as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. 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.
We conducted our audits 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
At December 31, 2010 and 2009, 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.
When a fixed maturity security has a decline in value, where fair value is below amortized cost, an other than temporarily impaired (OTTI) write-down is triggered in circumstances where (1) the Company has the intent to sell the security, (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security before recovery, an OTTI write-down is recognized as a realized loss in the statement of operations equal to the difference between the security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-likely-than-not that the Company will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized as a realized loss in the statement of operations, and the amount related to all other factors, which is recognized in other comprehensive income.
Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method. Estimated useful lives are: building-35 years, computer equipment including software-3 to 5 years and furniture, fixtures and equipment-5 to 7 years. Software is capitalized and amortized on a straight-line method over the estimated useful life of the software, generally not exceeding 3 years. Maintenance, repairs and minor renewals are charged to expense as incurred. Depreciation expense was $1,007,024, $921,098 and $1,194,211 for the years ended December 31, 2010, 2009, and 2008, respectively. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Upon sale or retirement, the cost and related accumulated depreciation of assets disposed of are removed from the accounts; any resulting gain or loss is reflected in income.
The Company provides certain postretirement health care benefits for retired employees. The Company accrues service cost as incurred. The Company’s measurement date for plan assets and obligations is its fiscal year-end.
Certain 2008 amounts have been reclassified from the prior year financial statements to confirm to the 2010 presentation.
In January 2010, an update to the Accounting Standards Codification (ASC) was issued related to fair value measurements and disclosures. This ASC update provides for additional disclosure requirements to improve the
The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2010, 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 investment income for the years ended December 31, 2010, 2009 and 2008 is summarized as follows:
Net realized gains (losses) on investments for the years ended December 31, 2010, 2009 and 2008 are summarized as follows:
Sales of available-for-sale fixed maturities resulted in the following during the years ended December 31, 2010, 2009 and 2008:
The tables below show the total value of securities that were in an unrealized loss position as of December 31, 2010 and 2009 including the length of time they have been in an unrealized loss position. As of December 31, 2010 and 2009, unrealized losses, as shown in the following tables, were 1.8% and 2.0%, respectively of total invested assets including cash and cash equivalents.
The following table shows the composition of the fixed maturity securities in unrealized loss positions at December 31, 2010 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.
75% and 85% of amortized cost, 17 were trading between 86% and 95% of amortized cost and the remaining 20 were trading above 95% of amortized cost.
At December 31, 2010, fixed maturities with a fair value approximating $420,000 were on deposit with regulatory authorities, as required by law.
Accounting standards provide a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The hierarchy level assigned to each security in our available-for-sale portfolio is based on our
Valuations based on unadjusted quoted market prices in active markets for identical securities. The fair value of fixed maturity and equity securities included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market. The Level 1 category includes publicly traded equity securities and U.S. Government Treasury and Agency securities.
Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Company did not hold any available-for-sale investments on the measurement date that are classified in the Level 3 category.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
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 2010 and 2009 was $175,000 and in 2008 was $150,000.
The Company’s boiler and machinery quota share agreements are primarily an equipment breakdown endorsement to commercial and farm policies. The agreements are 100% quota share and the Company receives ceding commissions ranging from 32% to 35% on the premiums ceded. The agreements also include profit sharing provisions based on the profitability of the underlying underwriting performance of the business ceded. In 2008, the Company entered into a quota share agreement which covers employment practices liability which is an endorsement to commercial policies. The agreement is 100% quota share and the Company receives ceding commission of 35% on the premiums ceded.
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 2010, the Company obtained coverage up to $20,000,000 for certain commercial and farm properties it insured. 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 $5,000,000 for certain commercial umbrella policies.
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.
The Company receives a ceding commission in conjunction with certain reinsurance activities. These ceding commissions are offset against direct commission expense and were $453,193, $390,059 and $413,592 in 2010, 2009 and 2008, respectively.
The effect of reinsurance on premiums written and earned for the years ended December 31, 2010, 2009 and 2008, are as follows:
The effect of reinsurance on incurred losses and loss adjustment expenses for the years ended December 31, 2010, 2009 and 2008, 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, 2010, the Company has net operating loss carryforwards of approximately $5,782,000, which began expiring 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 a valuation allowance of $886,000 will be maintained for the deferred tax asset associated with these amounts. In 2010, $366,075 of net operating loss carryforwards expired. A full valuation allowance had been carried against the amount expected to expire. As a result of the expiration, the Company recorded a reduction to the valuation allowance of $124,466. During the years ended December 31, 2009 and 2008, there were no changes in the deferred tax valuation allowance.
Deferred policy acquisition costs and the related amortization were as follows:
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, 2010, 2009 and 2008.
Commercial auto experienced adverse development of $173,000. The farm segment experienced redundant development of $156,000 while the marine segment had redundant development of $127,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2010.
In 2009, the Company experienced favorable development of $2,336,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $760,000 while personal auto experienced redundant development of $853,000 and other personal segment products had redundant development of $8,000. In the commercial segment, commercial multi-peril had redundant development of $660,000 offset by adverse development in workers compensation of $129,000. The development experienced in the workers compensation line was concentrated in accident years 2003, 2005 and 2007. The farm segment experienced redundant development of $63,000 while the marine segment had redundant development of $121,000. The development which occurred in 2009 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 2009.
The discount rate assumption used to determine the benefit obligation was lowered from 5.82% to 5.28% as of December 31, 2010 to match the effective rate produced when matching the expected future benefit payments to the Citigroup Discount Pension Curve.
The Company leased various vehicles under non-cancelable operating lease agreements. The vehicle lease agreements expired in 2009. Rental expense was approximately $3,000 in 2009 and $9,000 in 2008.
As of December 31, 2010 and 2009, approximately $118,709,000 and $104,875,000, 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
FIC’s statutory capital and surplus at December 31, 2010 and 2009 and statutory net income for the years ended December 31, 2010, 2009 and 2008 are as follows:
The Company participates in the Property and Casualty Guaranty Association (“Association”) of the State of Michigan which protects policyholders and claimants against losses due to insolvency of insurers. When insolvency occurs, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. Assessments to date have not been significant; however, in the opinion of management, while uncertain, the liability for future assessments will not materially affect the financial condition or results of operations of the Company.
During 2005, the Company issued a $130,000 mortgage receivable to an agent of the Company. The note required a monthly payment, including interest at 8%, of $1,097, which is based on a 15 year amortization. The note included a 5 year balloon payment, which became due June 2010. In July 2010, the Company extended the note with the following terms: a monthly payment, including interest at 8%, of $1,100, which is based on a 15 year amortization. The note includes a 3 year balloon payment which becomes due in July 2013. During 2010, 2009 and 2008 the agent earned $60,188, $58,805 and $70,586, 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 required a monthly payment, including interest at 6%, of $1,003, which is based on a 20 year amortization. The note included a 5 year balloon payment, which became due January 2009. In January 2009, the Company
extended the note with the following terms: a monthly payment, including interest at 6%, of $849, which is based on a 20 year amortization. The note includes a 5 year balloon payment which becomes due in January 2014. During 2010, 2009 and 2008, the agent earned $112,291, $98,743 and $91,082, 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.
A nonemployee director of the Company was a principal in a law firm through May 31, 2010. The Company has retained this law firm for certain legal matters in the past. Legal fees paid by the Company to the law firm were approximately $218,000 in 2010, $138,000 in 2009 and $69,000 in 2008. On June 1, 2010, the nonemployee director became an employee of another law. The Company has retained this law firm for certain legal matter and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $88,000 in 2010.
During the quarter ended June 30, 2009, the Company completed its implementation of a new financial reporting system. The new system has expanded the Company’s capability in assigning expenses to a product line, a department or one of the major insurance lines. Prior to April 1, 2009, expenses were allocated to the four major insurance lines based on either net premiums earned or net losses incurred. Effective, April 1, 2009, expenses which are not directly assigned to a product line, a department or a major insurance line are allocated based on measurements including premiums, incurred losses or other departmental employee data. The underwriting gain (loss) by major insurance line would change if different methods were applied.
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 2010, 2009 and 2008. 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 expected term 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 2010, 2009 and 2008 was $10.15, $10.30 and $5.20, respectively. The total intrinsic value of options exercised in 2010, 2009 and 2008 was $160,333, $41,966 and $24,177, respectively.
As of December 31, 2010, there was $419,023 of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under both plans. That cost is expected to be recognized over a weighted average period of 3.4 years.
In 2010, the Company entered into a business loan agreement with a bank that allows the Company to borrow up to $7,000,000. Interest is charged at a variable rate equal to LIBOR (as defined in the agreement) plus two and one-half percentage points. The maturity date for this agreement is December 2, 2011. The agreement contains customary covenants with which the Company must comply. The Company is required to maintain an average daily collected cash balance of not less than $2,300,000. The Company has not had any borrowings under the agreement.