We own our office, located at 933 E. Main Street, Fremont, Michigan, which is a 30,000 square foot brick veneer building constructed in 1981. There is no mortgage indebtedness on the building. Management believes that the building is sufficient for the needs of the Company, both now and in the foreseeable future.
(2) The net loss and loss adjustment expense (LAE) ratio is the net loss and LAE in relation to net premium earned.
(3) The expense ratio is the policy acquisition and other underwriting expenses in relation to net premium earned.
In estimating our loss reserves for the multi-peril lines of business (homeowners, farmowners and commercial), as well as the personal and commercial auto liability lines of business and the general liability line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2006 to 2009 and the incurred loss development for accident years prior to 2006.
For the property lines of business including special property and personal and commercial auto physical damage we relied on the incurred Bornhuetter-Ferguson method for accident years 2007 to 2009 while the incurred loss development method was used for accident years prior to 2007.
Investments. 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.
When an equity security has a decline in value, where fair value is below cost, that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the 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.
In reviewing its fixed maturity securities for other than temporary impairment, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities market conditions, and analyst expectations, to reach its conclusions.
In reviewing its equity securities, which include common stock and mutual funds, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the individual investments held within the mutual fund, most current audit opinion, industry and securities market conditions, and analyst expectations to reach its conclusions. In addition to analyzing each individual security that has a fair value below cost, the Company also considers its intent and ability to hold a security until its fair value is equal to or greater than its cost.
The increase in net premiums written is due to the overall increase in direct premiums written of $5,974,000 offset by an increase of $342,000 in ceded premiums written under the Company’s reinsurance agreements. The commercial segment experienced a decline in net premiums written due to increased premiums ceded under our treaty reinsurance programs as a result of increased reinsurance costs associated with commercial products.
Amortization of deferred policy acquisition costs (“DAC”) increased 7.7% in 2009 as compared to 2008. The increase is a result of growth in earned premium volume. As a percentage of net premiums earned, DAC amortization decreased from 16.5% to 15.7% due to increased volume of personal automobile premium which pays a lower commission than other products as well as increased ceding commission. Other underwriting expenses increased $591,000 or 7.4% in 2009 compared to 2008. As a percentage of net premiums earned, other underwriting expenses decreased to 16.1% in 2009 compared to 16.9% in 2008. The decline is due to lower assessments from state mandated pools and associations, a decrease in depreciation expense and continued growth in net premiums earned.
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.
Federal Income Tax. During the years ended December 31, 2009 and 2008, the Company recorded income tax expense of approximately $1,818,000 and $1,577,000, respectively. The increase is due to growth in pre-tax income in 2009 compared to 2008. The effective tax rate for 2009 was 30.0% compared to 29.5 % in 2008.
While the Michigan market remained soft and very competitive in 2008 the Company continued to capitalize on the relationships that it has developed with its independent agents. Fremont’s ability to provide its agency force with a consistent, competitive and stable market for their preferred business led to our continued strong growth in 2008. Direct premiums written increased 12.8% in 2008 compared to 2007, with new business up 17.2% and renewal business up 13.0%. The personal segment experienced an increase of 15.4% in direct premiums written in 2008 driven by continued growth in personal auto and homeowners. The in-force policy count increased 11.5% during 2008 compared to 2007 for the personal segment.
Direct premiums written for personal auto increased 25.2% in 2008 with new business up 18.6% and renewal business up 26.5%. Personal auto’s in-force policy count increased 25.0% during 2008 compared to 2007. Personal auto growth continues to be driven by the ease of doing business with Fremont that agents experience via our proprietary web-based rating platform, coupled with several book of business transfers, account rounding of current Fremont homeowner business and a renewal retention ratio in the low 90’s. Homeowners direct premiums written grew by 8.6% in 2008. Homeowners new business increased 7.5% and renewals increased 8.8%. Homeowners in-force policy count increased 6.7% during 2008 compared to 2007. As with personal auto, results were driven by the ease of doing business, book transfers and retention in the low 90’s.
Farm direct premiums written were up 3.0% driven by renewal premiums which were up 4.8% as new business was down 5.2%. Direct premiums written for the marine business increased 3.8% driven by renewal premiums which were up 5.8%. New business premium was down 1.1% as competition for Michigan boat business remained very strong even with the poor economic factors facing Michigan. The in-force policy count for farm was up slightly, at 0.1% while marine was up 2.6%.
The farm segment experienced higher loss and LAE during 2008 as compared to 2007 due to an increase in losses attributable to weather conditions as well as fire related losses. The increase in loss and LAE in the marine segment is due to an increase in both frequency and severity experienced in 2008 compared to 2007.
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.
We believe that our existing cash and funds generated from operations will be sufficient to satisfy our financial requirements during the foreseeable future.
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, 2010, the Insurance Company can pay a non-extraordinary dividend of up to $3,694,000 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.
We have audited the accompanying consolidated balance sheets of Fremont Michigan InsuraCorp, Inc. as of December 31, 2009 and 2008 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. Our responsibility is to express an opinion on these financial statements based on our audits.
The fair value of shares issued for stock dividends of 25% or less is transferred from retained earnings to additional paid-in capital, to the extent of available retained earnings. No transfer is recorded for stock dividends or splits in excess of 25%. All share and per share amounts are retroactively adjusted for stock dividends and stock splits. On May 8, 2008, the Board of Directors declared a 3% stock dividend, which was paid on June 5, 2008.
Losses and loss adjustment expense (“LAE”) reserves represent the estimated liability for reported losses and loss adjustment expenses and actuarial estimates for incurred but not reported losses and loss adjustment expenses based upon the Company’s actual experience, assumptions and projections as to claims frequency, severity, inflationary trends and settlement payments. The reserve for losses and loss adjustment expenses is intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date. The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. The liability for losses and loss adjustment expenses is necessarily an estimate and while it is believed to be adequate, the ultimate liability could exceed or be less than such estimate. The anticipated recoverable salvage and subrogation at December 31, 2009 and 2008 was approximately $151,000 and $131,000, respectively.
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.
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 $921,098 $1,194,211 and $769,161 for the years ended December 31, 2009, 2008, and 2007, 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.
In 2006, a new accounting standard was issued which provided guidance for using fair value to measure assets and liabilities and enhanced disclosures about fair value measurements. The new accounting standard, which became effective for us on January 1, 2008 for financial assets and financial liabilities, applies whenever other accounting standards require, or permit, assets or liabilities to be measured at fair value. The accounting standard did not expand the use of fair value in any new circumstances and therefore, did not have an impact on our financial position, results of operations or cash flows. The accounting standard established a fair value hierarchy that prioritizes the observable and unobservable inputs to valuation techniques used to measure fair value into three levels. Quantitative and qualitative disclosures focus on the inputs used to measure fair value for
these measurements and the effect of these measurements in the financial statements. The required disclosures concerning inputs used to measure fair value are disclosed in Note 3-Fair Value Measurements. Effective January 1, 2009, the Company adopted the provisions of this accounting standard related to all non-financial assets and non-financial liabilities. This adoption did not have any impact on our consolidated financial statements.
In December 2007, a new accounting standard was issued which established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This new accounting standard also established disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard, which became effective for us on January 1, 2009, did not have a material impact on our consolidated financial statements.
In March 2008, a new accounting standard was issued which amended and expanded the disclosure requirements of a previously issued accounting standard related to the accounting for derivative instruments and hedging activities. The new accounting standard requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This new accounting standard, which became effective for us on January 1, 2009, did not affect our consolidated financial condition or results of operations, but may require additional disclosures if we enter into derivative and hedging activities.
This new accounting standard requires that companies record, as of the beginning of the interim period of adoption, a cumulative-effect adjustment to reclassify the noncredit component of a previously recognized OTTI loss from retained earnings to other comprehensive income if the company does not intend to sell the security and it is more-likely-than-not that the company will not be required to sell the security before recovery of its amortized cost basis. The adoption had no impact on our financial position or results of operations. We had no cumulative-effect adjustment upon adoption at the beginning of the second quarter.
In August 2009, new accounting guidance was issued for the fair value measurement of liabilities. The new guidance provides clarification, that in certain circumstances in which a quoted price in an active market for the identical liability is not available, a company is required to measure fair value using one or more of the following valuation techniques: the quoted price of the identical liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, and/or another valuation technique that is consistent with the principles of fair value measurements. The new guidance clarifies that a company is not required to include an adjustment for restrictions that prevent the transfer of the liability and if an adjustment is applied to the quoted price used in a valuation technique; the result is a Level 2 or 3 fair value measurement. The new guidance was effective for the company on October 1, 2009. The implementation of the new guidance did not have a significant impact on our financial statements.
In June 2009, new consolidation guidance was issued which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosure about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. We do not expect the adoption of this guidance to have a material impact on our financial statements.
Net investment income for the years ended December 31, 2009, 2008 and 2007 is summarized as follows:
Sales of available-for-sale fixed maturities resulted in the following during the years ended December 31, 2009, 2008 and 2007:
The tables below show the total value of securities that were in an unrealized loss position as of December 31, 2009 and 2008 including the length of time they have been in an unrealized loss position. As of December 31, 2009 and 2008, unrealized losses, as shown in the following tables, were 2.0% and 7.1%, respectively of total invested assets including cash and cash equivalents.
As of April 1, 2009, we adopted new accounting standards related to the recognition guidance for other-than-temporary impairments (OTTI) of debt securities and the financial statement disclosures for OTTI on debt and equity securities. Accordingly, any credit-related impairment related to fixed maturity securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net income, with the non-credit related impairment recognized in comprehensive income. Based on our analysis, our fixed maturity portfolio is of a high credit quality and we believe we will recover our amortized cost basis of our fixed maturity securities. The fixed maturity unrealized losses can primarily be attributed to changes in interest rates and corresponding spread widening as opposed to fundamental changes in the credit quality of the issuers of the securities. We continually monitor the credit quality of our fixed maturity investments to gauge the likelihood of principal and interest being collected.
As of December 31, 2009, the portfolio included 23 fixed maturity securities and 7 equity securities in an unrealized loss position for less than 12 months and 4 fixed maturity securities and 14 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, all twenty-seven were trading above 95% of amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities.
While all of these securities are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These securities have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these securities in addition to the fact that the Company has both the intent and ability to hold these securities until their recovery supports our view that these securities were not other-than-temporarily impaired.
As of December 31, 2008, the portfolio included 26 fixed maturity securities and 10 equity securities in an unrealized loss position for less than 12 months and 12 fixed maturity securities and 5 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, five were trading between 73% and 84% of amortized cost, twelve were trading between 85% and 94% of amortized cost and the remaining twenty-one were trading at or above 95% of amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities. During 2008, the Company wrote down a corporate bond as it deemed the security to be other than temporarily impaired. The impairment loss was $362,000 and is included in net realized investment losses in the consolidated statement of operations for the year ended December 31, 2008. Of the fifteen equity securities in an unrealized loss position, the range of market value to cost was from 37% up to 83%.
At December 31, 2009, fixed maturities with a fair value approximating $431,000 were on deposit with regulatory authorities, as required by law.
Our available-for-sale investment portfolio consists of fixed maturity and equity securities, and is recorded at fair value in the accompanying consolidated balance sheets. The change in the fair value of these investments, unless deemed to be other than temporarily impaired, is recorded as a component of other comprehensive income.
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 assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The three hierarchy levels are defined as follows:
Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of fixed maturity securities in the Level 2 category were based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information. The independent pricing service also monitors market indicators, industry and economic events. For broker-quoted only securities, quotes are obtained from market makers or broker-dealers that the Company recognizes to be market participants. The Level 2 category includes corporate bonds, municipal bonds, and mortgage-backed securities.
The following table presents our available-for-sale investments measured at fair value on a recurring basis as of December 31, 2009 classified by the valuation hierarchy (as discussed above):
In 2009, the property excess of loss layers provided up to $2,825,000 of coverage over the $175,000 retention. In 2008 and 2007, the property excess of loss layers provided up to $2,850,000 of coverage over the $150,000 retention. In 2009, the casualty and workers compensation excess of loss layers provided up to $5,825,000 of coverage over the $175,000 retention. In 2008 and 2007, the casualty and workers compensation excess of loss layers provided up to $4,850,000 of coverage over the $150,000 retention. In 2009, an additional workers compensation catastrophe excess of loss layer provided an additional $4,000,000 of coverage to cover a catastrophic event. In 2008 and 2007, an additional workers compensation catastrophe excess of loss layer provided an additional $5,000,000 of coverage to cover a catastrophic event.
The Company’s catastrophe treaty has three layers which in total provided up to $24,750,000 of coverage above a $1,250,000 retention in 2009 and 2008 and $21,750,000 of coverage above a $1,250,000 retention in 2007. The Company has an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would have lapsed after the second event, in which case the Company would have evaluated the need for a new contract for the remainder of a particular year. During 2009, 2008 and 2007 the coverage could be reinstated for a fee of 100% of the original premium.
The Company receives a ceding commission in conjunction with certain reinsurance activities. These ceding commissions are offset against direct commission expense and were $390,059, $413,592 and $180,158 in 2009, 2008 and 2007, respectively.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. At December 31, 2009 and 2008, amounts recoverable from reinsurers consisted of the following:
The Company holds collateral in the form of letters of credit, trust accounts or funds withheld accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Regulation. At December 31, 2009, the Company had 7 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 7 reinsurers accounts for 92% of the total recoverable.
The effect of reinsurance on premiums written and earned for the years ended December 31, 2009, 2008 and 2007, are as follows:
The effect of reinsurance on incurred losses and loss adjustment expenses for the years ended December 31, 2009, 2008 and 2007, are as follows:
Based upon management’s assessment of all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, it has been determined that as of December 31, 2009 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the recorded net deferred tax asset.
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.
In 2008, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,722,000. The redundant development included $814,000 related to homeowners, $864,000 related to commercial multi-peril, $336,000 related to workers compensation, $179,000 related to farm, $204,000 relating to general liability while the remaining lines of business had redundant development of $325,000. The favorable development was concentrated in accident years 2005 through 2007 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 2008.
The discount rate assumption used to determine the benefit obligation was lowered from 6.3% to 5.82% as of December 31, 2009 to match the effective rate produced when matching the expected future benefit payments to the Citigroup Discount Pension Curve.
For measurement purposes as of December 31, 2009, 2008 and 2007 the annual rate of increase in the per capita cost of covered health care benefits assumed for the subsequent year was 8.0%, 9.0% and 8.0%, respectively. The rate was assumed to decrease to an ultimate rate of 5.0% in 2013. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage-point change in assumed health care cost trend rates would have the following effects:
The Company has a defined contribution 401(k) plan covering substantially all employees meeting certain eligibility requirements. The 401(k) plan provides for matching contributions and /or profit sharing contributions as defined by the Board of Directors. Company contributions approximated $147,000 in 2009, $150,000 in 2008 and $135,000 in 2007.
Certain regulations that affect the insurance industry are promulgated by the National Association of Insurance Commissioners (“NAIC”), which is an association of state insurance commissioners, regulators and 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, 2009 and 2008 and statutory net income for the years ended December 31, 2009, 2008 and 2007 are as follows:
During 2005, the Company issued a $130,000 mortgage receivable to an agent of the Company. The note requires a monthly payment, including interest at 8%, of $1,097, which is based on a 15 year amortization. The note includes a 5 year balloon payment, which becomes due June 2010. During 2009, 2008 and 2007 the agent earned $58,805, $70,586 and $62,946, 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 2009, 2008 and 2007, the agent earned $98,743, $91,082 and $90,422, 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.
Various agents of the Company participated in the surplus note offerings and held surplus notes at December 31, 2006. The notes were paid in full in September 2007, as disclosed in Note 9-Surplus Notes. The terms and conditions of the agency agreements between the agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays the agencies commissions on business produced. The agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. For the year ending December 31, 2007, agents holding surplus notes earned regular and profit sharing commissions of approximately $224,000.
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.
As of December 31, 2009, there was $367,595 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 3.5 years.