Commissions and other acquisition costs which vary with and are primarily related to the production of new business are deferred and amortized in a systematic manner based on the related contract revenues or gross profits as appropriate. Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. Deferred acquisition costs for traditional life insurance contracts are deferred to the extent deemed recoverable and amortized over the premium paying period of the related policies using assumptions consistent with those used in computing future policy benefit liabilities.
Other underwriting, insurance and acquisition expenses decreased 26.0% to $3,249,353 for the year ended December 31, 2010, a decrease of $1,141,889, compared to $4,391,242 for the year ended December 31, 2009. The decrease is primarily due to an approximate $479,000 decrease in loan losses and other operating expenses in the premium finance operations from 2009 to 2010 due to the significant reduction in the number of loans made and a close monitoring of the collectability of the outstanding premium finance loans. There were also decreases in office and other expenses and salaries and benefits of approximately $413,000 and $111,000, respectively, from 2009 to 2010 related to the closing of the FLAC operations in Topeka, Kansas during 2009 combined with a cost containment and control program throughout 2010. In addition, there was also a reduction in professional fees from 2009 to 2010 of approximately $131,000 related to completion of the conversion of FLAC systems and business evaluation during 2009 resulting in less 2010 usage of actuarial, finance and computer consultants combined with less use of outside legal resources throughout 2010.
We caution readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Statements using verbs such as "expect", "anticipate", "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent our beliefs concerning future levels of sales and redemptions of our products, investment spreads and yields or the earnings and profitability of our activities.
The Company’s liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on behalf of policyholders, where the timing and amount of payment depends on policyholder mortality or morbidity, less the present value of future net premiums. For life insurance and annuity products, expected mortality and morbidity is generally based on the Company’s historical experience or standard industry tables including a provision for the risk of adverse deviation. Interest rate assumptions are based on factors such as market conditions and expected investment returns. Although mortality, morbidity and interest rate assumptions are “locked-in” upon the issuance of new insurance with fixed and guaranteed terms, significant changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing premium deficiency reserves.
The Company’s decision to record an impairment loss is primarily based on whether the security’s fair value is likely to remain significantly below its book value in light of all the factors considered. Factors that are considered include the length of time the security’s fair value has been below its carrying amount, the severity of the decline in value, the credit worthiness of the issuer, and the coupon and/or dividend payment history of the issuer. The Company also assesses whether it intends to sell or whether it is more likely than not that it may be required to sell the security prior to its recovery in value.
The Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of December 31, 2010 and 2009 is summarized as follows: