At January 1, 2008, we adopted the recognition provisions of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” for our common stock portfolio. The net impact of the cumulative effect adjustment on January 1, 2008 increased retained earnings and reduced other comprehensive income by $11.2 million, net of tax, resulting in no effect on shareholders’ equity.
We have three primary sources of revenue. Our most significant source of revenue is generated by providing management services to the Exchange. The management fee is calculated as a percentage, not to exceed 25%, of the direct written premiums of the Property and Casualty Group. The Board of Directors establishes the rate at least annually and considers such factors as relative financial strength of the Exchange and Company and projected revenue streams. Our Board set the 2009 rate at 25%, its maximum level.
specific events that occurred affecting the issuer, including rating downgrades; and
Direct written premiums of the Property and Casualty Group increased 0.4% in 2008.
Management fee revenue is based upon the management fee rate, determined by our Board of Directors, and the direct written premiums of the Property and Casualty Group. Changes in the management fee rate can affect our revenue and net income significantly. The management fee rate was set at 25%, the maximum rate, for both 2008 and 2007. The management fee rate for 2009 has again been set at the maximum rate of 25% by our Board of Directors.
Premiums generated from new business increased 2.9%, to $412.8 million in 2008 from $401.0 million in 2007, which was 9.0% greater than the $368.0 million produced in 2006. New business policies in force grew 3.1% in 2008 and 6.4% in 2007. The year-over-year average premium per policy on new business decreased 0.2% to $860 in 2008 from $862 in 2007, which was 2.5% more than the average $841 in 2006.
A reduction of $2.7 million in employee benefit costs, primarily from investment losses on deferred compensation plan balances of participating executives.
Private passenger auto bonus - In July 2006, an incentive program was implemented that paid a $50 bonus to agents for each qualifying new private passenger auto policy issued. Effective June 1, 2008, a tiered payout structure was introduced. The new structure pays out between $50 and $200 per new private passenger auto policy based on the number of qualifying new private passenger auto policies placed by an agency each year. Additional commission expense of $3.2 million was recorded as a result of the new tiered bonus structure for 2008. If the tiered structure were in place for all of 2008, the program would have paid out an additional $0.7 million in 2008.
our ability and intent to hold the investment for a period of time sufficient to allow for a recovery in value.
The fixed maturities in Level 3 are primarily made up of securities in the financial services industry affected by the recent turmoil in the credit markets. The fair value of these securities is detailed as follows:
We had a $75 million line of credit with a bank that was increased to $100 million at June 30, 2008. This line of credit was set to expire on December 31, 2008, but was extended to December 31, 2009. There were no borrowings outstanding on the line of credit at December 31, 2008. In 2008, interest was charged on the line at the Federal Funds Rate plus 50 basis points and totaled $1.0 million for the twelve months ended December 31, 2008. Bonds
The components of changes to comprehensive (loss) income follow for the years ended December 31:
2007 curtailment and settlement gains resulted primarily from three retirees being paid in 2008.
The long-term incentive plan (LTIP) is a restricted stock award plan designed to reward executive, senior and regional vice presidents who can have a significant impact on our performance with long-term compensation that is settled in Class A Company stock.
The restricted stock awards are granted at the beginning of a three-year performance period. The maximum number of shares which may be earned under the plan by any single participant during any one calendar year is limited to 250,000 shares. The aggregate number of Class A common stock that may be issued pursuant to awards granted under the LTIP is 1.0 million shares. A liability is recorded and compensation expense is recognized ratably over the performance period. Stock awards are considered vested at the end of the performance period.
Our former president and chief executive officer resigned in August 2007. A Post-Employment Agreement (Agreement) was entered into in December 2007 which provided separation pay of $4.5 million that was paid on December 31, 2007. Our share of this payment was $2.9 million. Other deferred compensation and employee benefit obligations amounted to $0.6 million, of which our share was $0.4 million, and was paid in 2008. Long-term incentive plan awards of $2.8 million, of which our share was $1.7 million, were paid in 2008. The final LTIP performance period was paid in January 2009, of which our share was less than $0.1 million.
The Exchange has available a $75 million line of credit with a bank that expires on December 31, 2009. There were no borrowings under the line at December 31, 2008. Bonds with a fair value of $113.5 million were pledged as collateral on the line at December 31, 2008. These securities have no restrictions. The bank requires compliance with certain covenants, which include minimum statutory surplus and risk based capital ratios. The Exchange was in compliance with all bank covenants at December 31, 2008.