The calculations underlying the Bornhuetter-Ferguson expected loss projection method based on paid loss data are similar to the incurred Bornhuetter-Ferguson calculations with the exception that paid losses and unpaid percentages replace reported losses and unreported percentages.
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 predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort the historical development of losses. As noted below, the Company tends to rely more heavily on the incurred Bornhuetter-Ferguson method for its most recent accident years due to the smaller size of each line of business and the instability in incurred and paid amounts.
In estimating our loss reserves for the multi-peril lines of business (homeowners, farmowners and commercial) and the general liability line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2004 to 2007 and the incurred loss development for accident years prior to 2004.
For the workers’ compensation line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2002 to 2007 and the incurred loss development method for all prior years. Given the longer tail development of workers’ compensation claims and the fact that the Company’s workers’ compensation book of business is relatively small we placed more reliance on the incurred Bornhuetter-Ferguson method.
Each quarter, we review our loss reviews to ascertain whether new developments have occurred which would require adjustment to our ultimate loss estimates. The quarterly review involves roundtable discussion involving the claims and accounting departments. Discussion is generally focused on claims involving liability and those claims that involve significant judgment. Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on the Company’s results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.
The following table shows the activity in the loss and LAE reserve balances of the Company for the years ended December 31, 2007, 2006 and 2005, prepared in accordance with accounting principles generally accepted in the United States of America.
The following table shows the development of our reserves for unpaid losses and LAE on a GAAP basis for each of the years ended December 31, from 1997 to 2007. The line in the table titled “Net liability for loss and LAE,” shows the initial reserves at the balance sheet date, including losses incurred but not reported. The portion of the table titled “Cumulative net paid as of,” shows the cumulative amounts subsequently paid as of successive years with respect to the reserve shown at the top of the table. The portion of the table titled “Re-estimated net liability as of:” shows the re-estimated amount of the previously reported liability for loss and LAE based on experience as of the end of each succeeding year. The estimates of liability for loss and LAE change as more information becomes available about the frequency and severity of claims for individual years. A redundancy (or deficiency) exists when the re-estimated amount of liability at each December 31 is less (or greater) than the prior liability estimate. The “Net cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years and does
Investments. At December 31, 2007 and 2006, 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 any corresponding deferred tax asset valuation allowance, reported as a component of accumulated other comprehensive income or loss until realized.
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, 2007 and 2006. The Company’s underwriting gain or loss consists of net premiums earned less
Farm direct premiums written were up 1.8% with both new and renewal premiums up 19.6% and 1.6% respectively. Direct premiums written for the marine business increased 6.0% driven by renewal premiums which were up 6.5%. New business premium was down 0.9% driven by increased competition for Michigan boat business as well as the Michigan economy. In-force count for farm was flat while marine was up 4.3%.
The increase in net premiums earned is due to the overall increase in direct premiums earned of $4,860,000 offset by an increase of $1,336,000 in ceded premiums earned under the Company’s reinsurance agreements.
The farm segment experienced higher loss and LAE during 2007 as compared to 2006 due to an increase in losses attributable to the previously mentioned weather conditions as well as fire related losses. The marine segment experienced a slight drop in loss and LAE as well as the loss and LAE ratio. Despite an increase in the number of marine claims incurred during 2007 the severity of the claims reported actually declined in 2007.
higher in 2007 compared to 2006. Growth in invested assets, along with higher investment yields, were the main reasons for the increase in gross investment income.
Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items increased 13.0% to $471,000 in 2007 compared to $417,000 in 2006. The increase was driven by premium volume growth in 2007 and a decline in miscellaneous expenses experienced during 2007.
Federal Income Tax. During the year ended December 31, 2007 and 2006 the Company recorded income tax expense of approximately $2,036,000 and $3,466,000 respectively. The decrease is due to a decline in pre-tax income in 2007 compared to 2006. The effective tax rate for 2007 was 29.4% compared to 32.4% for 2006. The decrease in the effective tax rate is due to increased tax-exempt interest income received during 2007 compared to 2006 coupled with an increase in the provision to return variance recorded in 2007.
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.
Gross investment income from fixed maturities increased $237,000 due primarily to an increase in invested assets within the fixed portfolio particularly in the area of tax-exempt securities. The Company invests in both taxable and tax-exempt fixed maturity securities. For 2006, the average assets in the taxable portfolio increased about 1% from 2005 levels, to just over $35 million. Income from this portion of the portfolio increased by 4%, however, as a result of higher interest rates which helped to push up the book yield. These effects combined to increase income from the taxable portfolio by about $70,000 over 2005 levels. The tax-exempt portfolio saw a more significant increase in both assets and income in 2006. The tax-exempt portfolio nearly doubled in size, averaging almost $9 million over the year and actually ending the year at over $13 million. Tax-exempt rates were fairly stable over time, but they allow the Company to capture a higher after-tax return than in the taxable portfolio. This increase in assets added over $160,000 in tax-exempt income when compared to 2005 levels.
Net realized gains from the portfolio for the years ended December 31 are as follows:
Interest Expense. Interest expense decreased approximately $81,000 to $228,000 in 2006 from $309,000 in 2005. The decrease is due to the decline in the balance of the quota share funds withheld account. The quota share agreement was commuted on March 31, 2006 thereby eliminating any future interest expense associated with this account.
the 2005 income tax benefit. The Company’s federal income tax expense excluding the effect of the change in the valuation allowance was $2,704,000 resulting in an effective tax rate of 34.1% for the year ended December 31, 2005.
We maintain investment and reinsurance programs that are intended to provide sufficient funds to meet our obligations without forced sales of investments. A portion of our investment portfolio is maintained in relatively short term and highly liquid assets, including mortgage-backed securities, which have shorter estimated durations, to ensure the availability of funds.
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, 2008, the Insurance Company can pay a non-extraordinary dividend of up to $3,371,000 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 loss and LAE reserves which are recorded as a liability 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, 2007 and the future periods in which such obligations are expected to be settled in cash. Additional information regarding these obligations is provided in 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.
The Company’s loss reserves do not have contractual maturity dates. However, based on historical payment patterns, the preceding table includes an estimate of when management expects the loss reserves to be paid. The timing of claim payments is subject to significant uncertainty. The Company maintains a portfolio of investments with varying maturities to provide adequate cash flows for the payment of claims.
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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fremont Michigan InsuraCorp, Inc. at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
Fremont Michigan InsuraCorp, Inc. and subsidiary (collectively, the “Company”) includes Fremont Michigan InsuraCorp, Inc. (“FMIC”) and its wholly owned subsidiary Fremont Insurance Company (“FIC”). FIC is a Michigan licensed property and casualty insurance carrier operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents.
On October 17, 2006, the Company’s Board of Directors approved a two-for-one stock split on its common stock which was accomplished through a stock dividend paid on November 17, 2006. All share and per share information has been retroactively adjusted to reflect the stock split.
At December 31, 2007 and 2006, 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 any corresponding deferred tax asset valuation allowance, reported as a component of accumulated other comprehensive income or loss until realized.
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, 2007 and 2006 was approximately $344,000 and $208,000, respectively.
The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations. The Company evaluated all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 became effective for the Company as of January 1, 2007. The adoption of the provisions of FIN 48 did not have a material impact on the consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Company does not expect the implementation of SFAS 159 to have a material impact on its consolidated financial statements.
In February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides.” This FSP provides conforming amendments to the illustrations in SFAS 87, 88, and 106 and to related staff implementation guides as a result of the issuance of SFAS 158. The conforming amendments made by this FSP are effective as of the effective dates of SFAS 158. The unaffected guidance that this FSP codifies into SFAS 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method. The Company does not expect the implementation of FSP No. FAS 158-1 to have a material impact on its consolidated financial statements.
The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2007, 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, 2007, 2006 and 2005 is summarized as follows:
Net realized gains (losses) on investments for the years ended December 31, 2007, 2006 and 2005 are summarized as follows:
There were no other-than-temporary impairment losses in 2007 or 2006. During the year ended December 31, 2005 other-than-temporary impairment losses on available-for-sale equity investments amounted to $98,774 which are included in net realized investment gains (losses) on investments in the consolidated statement of operations.
The following tables show the estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2007 and 2006.
At December 31, 2007, fixed maturities with a carrying value approximating $424,000 were on deposit with regulatory authorities, as required by law.
The excess of loss program is the Company’s primary reinsurance coverage. For all lines of business the Company’s retention on any one risk in 2007, 2006 and 2005 was $150,000.
The property excess of loss coverage provided up to $2,850,000 over the $150,000 retention.
The effect of the features in this agreement is to limit the reinsurers’ aggregate exposure to loss and thereby reduce the ultimate cost to the Company as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by the Company. While the Company does not receive pro-rata protection relative to the amount of premiums ceded, the amount of such protection is significant, as determined in accordance with guidance under GAAP.
In addition to ceding a significant portion of its risks to the reinsurer, the agreement also allows the Company to reduce its financial leverage and to realize immediate reimbursement for related upfront acquisition costs, thus adding to its financial capacity.
Effective March 31, 2006, the Company entered into a commutation agreement with respect to the 2003 multi line quota share agreement. As a result of this commutation, the funds withheld account liability was reduced by approximately $1,053,000 offset by an increase to the loss and loss adjustment expense liability of the same amount. No gain or loss was realized as a result of this commutation.
The Company utilizes facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce net liability on individual risks. Coverage is determined on each individual risk. In 2007, the Company obtained coverage ranging from $1,200,000 up to $5,600,000 for certain commercial properties it insured. In 2006, the Company obtained coverage ranging from $850,000 up to $4,000,000 for certain commercial properties it insured. In 2005, the Company obtained coverage for commercial properties it insured in excess of $1,000,000. During 2005 the range of coverage was from $100,000 up to $3,925,000.
Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse the Company for their share of losses, they do not discharge the primary liability of the Company. The Company remains liable for the ceded amount of reserves for unpaid losses and loss adjustment expenses and ceded unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations. As a result, the Company is subject to credit risk with respect to the obligations of its reinsurers. In order to minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors the economic characteristics of the reinsurers on an ongoing basis. All reinsurers are rated A- or better by A. M. Best Company. The Company has not experienced a collectibility problem with any reinsurer.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. At December 31, 2007 and 2006, 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 Services. At December 31, 2007, the Company had 6 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 6 reinsurers accounts for 86% of the total recoverable.
The effect of reinsurance on incurred losses and loss adjustment expenses for the years ended December 31, 2007, 2006 and 2005, are as follows:
Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34 percent to income before federal income taxes. For the years ended December 31, 2007, 2006 and 2005 the reasons for these differences and the tax effects thereof, are as follows:
Deferred federal income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company’s management reviews both positive and negative evidence, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code Section 382 (“Section 382”), future income projections and the overall prospects of our business. As of December 31, 2007, the Company has net operating loss carryforwards of approximately $7,348,000, which begin to expire in 2010 and fully expire in 2021, and alternative minimum tax credits of approximately $358,000, which may be carried forward indefinitely. As a result of the demutualization of FIC in 2004 the aforementioned net operating losses are subject to certain “change in control” limitations under Section 382. The annual limitation on the utilization of the net operating losses is approximately $400,000. In addition to the net operating loss carryforwards, the Company’s alternative minimum tax credit carryforwards are also subject to the Section 382 limitation however these credit carryforwards have no expiration and can be carried forward indefinitely. Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that approximately $2,971,000 of net operating loss carryforwards will not be realized and therefore a valuation allowance of approximately $1,010,000 will be maintained for the deferred tax asset associated with these amounts.
At December 31, 2007 and 2006, property and equipment consisted of the following:
year. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2005. As a result of the adverse development experienced during 2003 the Company has placed an emphasis on the claim reserving process to ensure that we are establishing adequate reserves reflecting our best estimate of the ultimate loss. The favorable development in 2005 was primarily in the homeowner and personal auto product lines. The homeowner’s line, which is the Company’s largest product line, experienced redundant development of approximately $1,904,000 primarily in the accident years of 2004, 2003 and 2002 as a result of lower than expected losses on both incurred but not reported and existing case reserves as of December 31, 2004. The personal auto line experienced redundant development of approximately $426,000 primarily in the 2004 accident year. The Company began writing personal auto policies in 1999. Given that this is a newer product line for the Company our initial ultimate loss estimates on undeveloped years are based more on estimated industry loss ratios as opposed to our actual historical loss ratios. As the 2004 accident year continues to develop the Company has experienced redundant development on settled claims which has resulted in a decrease in the ultimate loss ratio as compared to the ultimate ratio used at December 31, 2004.
The Company provides certain postretirement health care benefits for retired employees. In December 2004 the Company’s board of directors approved an amendment to the plan effective December 31, 2004 which significantly reduced the number of eligible participants in the plan, discontinued future eligibility for all other employees and reduced the level of health care benefits for future retirees determined to be eligible as of December 31, 2004. The plan amendment resulted in a reduction to the accumulated projected benefit obligation at December 31, 2004 of $2,003,943 of which $486,915 reduced the unrecognized transition obligation while the remaining credit balance of $1,517,028 represents the unrecognized reduction to prior service cost as a result of the plan amendment. The balance of the unrecognized reduction to prior service cost will be amortized over 17.7 years which represents the average future lifetime of retirees and fully eligible active participants at the date of the amendment.
At December 31, 2007 and 2006 the funded status of 1,895,238 and $1,961,826, respectively, is recognized in the accompanying balance sheet as accrued expenses and other liabilities. At December 31, 2005 the accrued benefit cost of $2,746,417 is included in accrued expenses and other liabilities in the accompanying balance sheet.
The estimated prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $85,682 and $12,252, respectively.
The Company uses a December 31 measurement date for its other postretirement plan. As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. At December 31, 2007, the Company’s expected future benefit payments are as follows:
For measurement purposes as of December 31, 2007, 2006 and 2005 the annual rate of increase in the per capita cost of covered health care benefits assumed for the subsequent year was 8.0%, 8.5% and 9.0%, respectively. Each year the rate was assumed to decrease by 0.5% per year until the ultimate rate of 5.5% was reached. 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 leases various vehicles under non-cancelable operating lease agreements which began to expire in 2006 and continue to expire in 2007. Rental expense was approximately $22,000, $48,000 and $38,000 in 2007, 2006 and 2005, respectively.
FIC’s statutory capital and surplus at December 31, 2007 and 2006 and statutory net income (loss) for the years ended December 31, 2007, 2006 and 2005 are as follows:
A nonemployee director of the Company is a partner in a law firm. The Company has retained this law firm for certain legal matters in the past and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $74,000 in 2007, $35,000 in 2006 and $55,000 in 2005.
Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average dilutive share equivalents outstanding. The computation of basic and diluted earnings per share is as follows:
The Company has two stock-based compensation plans which are described below. The compensation cost for these plans that has been charged against income for the years ended December 31, 2007, 2006 and 2005 was $95,772, $43,867 and $37,391, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation was $32,562, $14,915 and $12,713 for the years ended December 31, 2007, 2006 and 2005, respectively.
Pursuant to the 2003 Plan, the Company is authorized to grant up to 86,210 shares. Pursuant to the 2006 Plan, the Company is authorized to grant up to 150,000 shares. Option awards under both plans are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest 20% per year and have a 10 year contractual term. The options may fully vest upon the death or disability of the optionee or a change in control of the Company as defined in the plans. Under both plans if awards should expire, become unexercisable or be forfeited for any reason without having been exercised or without becoming vested in full, the shares of common stock subject to those awards would be available for the grant of additional awards.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2007, 2006 and 2005. The expected volatility in 2007 is based on historical volatility of the Company’s stock. The expected volatilities in 2006 and 2005 are based on historical volatility of similar publicly traded entities following a comparable period in their
lives subsequent to their initial public offering. The expected term is an estimate based on expected behavior of the group of optionees. The risk free rate for the periods within the contractual life of the option is based on U.S. Treasury Strips in effect at the time of grant.
A summary of option activity under the plans as of December 31, 2007 and changes during the year then ended is presented below:
The weighted-average grant-date fair value of options granted in 2007, 2006 and 2005 was $8.30, $11.72 and $5.29, respectively. The total intrinsic value of options exercised in 2007 and 2006 was $38,800 and $17,370, respectively. No options were exercised during 2005.
A summary of the status of the Company’s nonvested options as of December 31, 2007 and changes during the year ended December 31, 2007 is presented below:
As of December 31, 2007, there was $343,385 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 3.8 years.
An unaudited summary of the Company's 2007 and 2006 quarterly performance is as follows: